, `'
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" BENCH, MUMBAI
. . , , ,
BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND
SHRI AMIT SHUKLA, JUDICIAL MEMBER
. / ITA no. 8922/Mum./2010
( / Assessment Year : 200708)
GECF Asia Limited
C/o KPMG, Lodha Excelus
................. /
Apollo Mills Compound
N.M. Joshi Marg, Mahalaxmi Appellant
Mumbai 400 011
v/s
Dy. Director of Income Tax
................... /
International Taxation3(1)
Mumbai Respondent
./ Permanent Account Number AACCG7103P
/ Assessee by : Mr. Rajan Vora
/ Revenue by : Mr. Ajay Kumar Shrivastava
/ /
Date of Hearing 25.06.2014 Date of Order 06.08.2014
/ ORDER
, /
PER AMIT SHUKLA, J.M.
The present appeal has been preferred by the assessee,
challenging the impugned final assessment order dated 14th October
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2010, passed by the learned Dy. Director of Income Tax (International
Taxation) [for short "the learned DDIT(I.T)"], Mumbai, in pursuance of
the direction given by the Dispute Resolution PanelI (DRP), Mumbai,
for the assessment year 20708. The assessee has raised following
grounds of appeal:
"1. The Assessing Officer and the DRP erred in determining the
income of the assessee at ` 3,83,62,648, as against NIL income
returned by the assessee and thereby erred in determining the
tax liability at ` 2,27,50,035.
2. On the facts and in the circumstances of the case and in law
the learned Assessing Officer erred in confirming the proposed
addition of ` 3,83,62,648, being the amount received by the
appellant for services rendered under the Master Service
Agreement, 2005 to GE Money Financial Services Ltd. as being in
the nature of royalty income and hence, taxable in India.
On the facts and in the circumstances of the case and in law the
learned Assessing Officer erred in initiating and the DRP has
erred in upholding the initiation of penalty proceedings under
section 274 r/w section 271(1)(c) of the Act."
2. Facts in brief: The assessee is a nonresident company
incorporated in Thailand and is a tax resident of Thailand. Accordingly,
it has claimed treaty benefit under the IndiaThailand DTAA. The
assessee company is engaged in the business of providing services to
meet the needs of various G.E. Group companies. It has entered into
Master Agreement, 2005 with the G.E. Countrywide Consumer Financial
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Services Ltd. (GEMFSL), wherein the assessee is required to provide
following Services:
Accounting and Finance Support Services
Human Resources Services
Legal and Compliance Services
Risk Management Services
Quality Consultation and Training
Sales and Marketing
Information Technology and System Support
Strategic Management Assistance
3. During the year, the assessee has received an amount of ` 3.84
crores from GEMFSL under the Master Service Agreement for providing
the aforesaid services. In the return of income filed for the assessment
year 200708, the assessee had shown its income at "nil" on the
ground that the income accrued to the assessee qualifies as business
income and the same cannot be taxed under Article7 as the assessee
has no Permanent Establishment (P.E) in India as defined in Article5
of IndiaThailand DTAA. In the draft assessment order, the Assessing
Officer held that consideration received by the assessee from the
provisions of services from outside India to GEMFSL is on account of
business connection in India and, hence, taxable under the domestic
law i.e., Indian Income Tax Act. He also held that services rendered by
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the assessee would also fall within the definition of "fees for technical
services" as envisaged under section 9(1)(vii) of the Act and, hence,
the same is taxable in India. Alternatively, he held that the services
rendered by the assessee would also fall within the definition of
"royalty" under the Article12(3) of the treaty and, hence, would be
taxable in India. Against the said draft assessment order, the assessee
filed its objection before the DRP and also the copy of tax residency
certificate issued by the Thailand tax authorities. The DRP directed the
Assessing Officer to tax the receipts from the services rendered by the
assessee as "royalty" under Article12(3) of the DTAA, without giving
any opinion or direction on non taxability as business connection in
India or Fees for Technical Services (for short "FTS"). The DRP quoted
the conclusion of the Assessing Officer in the following manner:
"From the above definition it can be seen that the term Royalty
includes not only the right to use any copyright payments,
trademark, design or any industrial, commercial or scientific
equipments. The definition specifically includes any payment for
information concerning the industrial, commercial or scientific
experience. The use of word experience indicates that the
intention of the legislature is to cover any fees paid to any
consultant for providing any advice based on his experience, i.e.,
the knowledge, knowhow and expertise that he has gained over
the years. In the assessee's as per Schedule4 of the Master
Service Agreement 2005, clearly indicates that the payments
made to the assessee are for consultancy services provided by
the Chief Executive Officer, CIO, Legal Service Team, Group Risk
Team, Finance Team, etc. In other words one can say that the
payments made to the assessee company is for the information /
advice given by the aforesaid people/team. These people / team
are specialists in their subject matter and have years of
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experience in the industrial, commercial or scientific fields.
Therefore, it is held that the payments made to the assessee
company are for providing industrial, commercial or scientific
experience and, hence, the receipts are taxed as Royalty in the
assessee's hands."
4. Thereafter, the DRP confirmed the aforesaid conclusion of the
Assessing Officer and directed the Assessing Officer to tax such
payment as royalty after giving following directions:
"The assessee has also claimed the benefit of IndoThailand
DTAA and has submitted a copy of TRC placed in the paper
bookI, is seen that the arguments of the A.O. shall be
applicable even in the case of the definition as given in article
12(3) of IndoThailand DTAA. The ground of objection,
therefore, deserve to be dismissed."
The A.O. is therefore directed to examine the Tax Residence
Certificate and in case the assessee is liable to tax in Thailand
the beneficial rate as IndoThailand DTAA shall be applicable."
5. Accordingly, the Assessing Officer, in pursuance of such direction
held that the payments received by the assessee are for providing
industrial, commercial or scientific experience and, hence, the receipts
are taxable as "royalty" within the meaning of Article12(3) of the
IndoThailand DTAA and tax the said receipts @ 15%.
6. Before us, the learned Counsel, Shri Rajan Vora, on behalf of the
assessee, submitted that the IndiaThailand tax treaty does not have
any separate Article for FTS and, accordingly, the income from the
services rendered by the assessee would be governed by Article 7.
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Since the assessee does not have any P.E. within the meaning of
Article5, therefore, the said receipts cannot be taxed in India. The fact
that the assessee does not have a P.E., has not been disputed by the
Assessing Officer. He also pointed out that in the assessment year
200607, the Assessing Officer had taxed the similar receipts from
GEMFSL as being in the nature of FTS under the Act, however, in the
first appeal, the learned Commissioner (Appeals) held that in the
absence of any FTS clause under the India Thailand treaty and in the
absence of P.E. of the assessee in India, the said receipts could not be
taxable in India. Thereafter, no further appeal has been preferred by
the Department. Regarding taxability of the said receipt as "royalty"
under the Article12, he submitted that the services rendered by the
assessee are not in respect of the "use of" or the right to use of any
patent, invention, model, design, secret, formula, process or
trademark, etc., as defined in Para3 of Article12. It will also not fall
under imparting of any information concerning technical, industrial,
commercial or scientific knowledge or experience or skill, because there
is no transfer of any knowledge, skill, or experience. He further
referred and relied upon Para11 of OECD commentary on Article12,
wherein the term "industrial, commercial and scientific experience" has
been explained. He specifically drew our attention to Para11.2 and
11.3 of the commentary. He submitted that the crucial point to see is,
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whether such services fall within the ambit of "royalty" or whether
there is any imparting of knowhow. If knowhow has not been
transferred then the services rendered on account of industrial,
commercial and scientific cannot be held as royalty. In support of his
contention, he strongly relied upon the following case laws:
1. M/s. McKinsey & Co. (Thailand) v/s DDIT, ITA
no.7624/Mum./2010, order dated 10th July 2013
2. DDIT v/s Preroy AG, [2010] 39 SOT 187 (Mum.)
3. Diamond Services International Pvt. Ltd. v/s UOI & Ors.,
[2008] 304 ITR 201 (Bom.)
4. JDIT v/s Harvard Medical International, USA, [2012] 13 ITR
(Trib.) 623 (Mum.)
5. Spice Telecom v/s ITO, [2008] 113 TTJ 502 (Bang.)
6. KPMG India Pvt. Ltd., v/s DCIT, [2012] 17 ITR (Trib.) 569
(Mum.)
7. Bharati AXA General Insurance Co. Ltd. In re, [2010] 326
ITR 477 (AAR)
8. Anapharn Inc., In re, [2008] 305 ITR 394 (AAR)
9. Kotak Mahindra Primus Ltd. v/s DDIT, [2006] 105 TTJ 578
(Mum.)
10. DDIT(IT) v/s Euro RSCG Worldwide Inc. [2013] 153 TTJ 378
(Mum.).
7. The learned Departmental Representative, on the other hand,
submitted that, whether the services rendered by the assessee are in
the nature of "royalty" depends upon the terms and conditions of the
agreement and the nature of transactions. All the services which have
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been enumerated in the agreement can only be rendered by a person
of an experience in various fields. He also drew our attention to certain
services like accounting and final support services for which lot of
experience is required and not only that, while rendering such services,
there is parting of knowhow also. The services rendered by the
assessee fall within the ambit of giving information concerning
industrial, commercial or scientific experience as appearing in Para 3 of
Article12. He also referred to Para11.6 of OECD commentary, which
deals with the practically of the situations in the contracts which cover
both knowhow and the provisions of technical assistance. If one part of
the services fall within the ambit of imparting of knowhow and other
part falls within the services, then it should be construed as royalty
only. In the case of assessee also, some of the services can be
classified as "royalty".
8. We have heard the rival submissions and perused the impugned
order and the material placed on record. The assessee has been
rendering various services, as highlighted above, to foreign G.E. Group
companies and in India to GEMFSL. Admittedly, the assessee does not
have a P.E. in India and, therefore, if any receipt which is to be taxed,
would be in accordance with Article7, only and in that case, the same
will not be taxable in India. The only issue of dispute which remains to
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be adjudicated after the direction of the DRP is, whether the payment
received by the assessee in lieu of services rendered to GEMFSl is
taxable as "royalty" under Article12(3) or not. If it is a "royalty", then
the same would be taxable in India as per the rates prescribed under
the treaty. Article12(3), under IndiaThailand Tax DTAA reads as
under:
"Article12(3)
The term "royalties" as used in this article means payments
of any kind received as a consideration for the alienation or
the use of, or the right to use, any copyright of literary,
artistic or scientific work (including cinematograph films,
phonographic records and films or tapes for radio or
television broadcasting), any patent, trade mark, design or
model, plan, secret formula or process, or for the use of, or
the right to use industrial, commercial or scientific
equipment, or for information concerning industrial,
commercial or scientific experience."
9. The Revenue's case is that the services rendered by the assessee
are in the nature "of information concerning industrial, commercial or
scientific experience". The OECD commentary on model convention on
Article12, has explained the term "industrial, commercial or scientific"
experience in the following manner:
11. In classifying as royalties payments received as consideration
for information concerning industrial, commercial or scientific
experience, paragraph 2 alludes to the concept of "know-how".
Various specialist bodies and authors have formulated definitions
of know-how which do not differ intrinsically. One such definition,
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given by the ''Association des Bureaux pour la Protection de la
Propriete Industrielle" (ANBPPI), states that "know-how is all the
undivulged technical information, whether capable of being
patented or not, that is necessary for the industrial reproduction
of a product or process, directly and under the same conditions;
inasmuch as it is derived from experience, knowhow represents
what a manufacturer cannot know from mere examination of the
product and mere knowledge of the progress of technique".
11.1 In the know-how contract, one of the parties agrees to
impart to the other, so that he can use them for his own account,
his special knowledge and experience which remain
unrevealed to the public. It is recognised that the grantor is not
required to play any part himself in the application of the
formulas granted to the licensee and that he does not guarantee
the result thereof.
11.2 This type of contract thus differs from contracts for the
provision of services, in which one of the parties undertakes to
use the customary skills of his calling to execute work himself for
the other party. Payments made under the latter
contracts generally fall under Article 7.
11.3 The need to distinguish these two types of payments, i.e.
payments for the supply of know-how and payments for the
provision of services, sometimes gives rise to practical difficulties.
The following criteria are relevant for the purpose of making that
distinction:
Contracts for the supply of know-how concern
information of the kind described in paragraph 11 that
already exists or concern the supply of that type of
information after its development or creation and
include specific provisions concerning the
confidentiality of that information.
In the case of contracts for the provision of services, the supplier
undertakes to perform services which may require the use, by
that supplier, of special knowledge, skill and expertise but not the
transfer of such special knowledge skill or expertise to the other
party.
In most cases involving the supply of know-how, there would
generally be very little more which needs to be done by the
supplier under the contract other than to supply existing
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information or reproduce existing material. On the other hand, a
contract for the performance of services would, in the majority of
cases, involve a very much greater level of expenditure by the
supplier in order to perform his contractual obligations. For
instance, the supplier, depending on the nature of the services to
be rendered, may have to incur salaries and wages for employees
engaged in researching, designing, testing, drawing and other
associated activities or payments to sub-contractors for the
performance of similar services.
11.4 Examples of payments which should therefore not be
considered to be received as consideration for the provision of
know-how but, rather, for the provision of services, include:
payments obtained as consideration for after-sales service
payments for services rendered by a seller to the purchaser
under a guarantee, payments for pure technical assistance,
payments for an opinion given by an engineer, an advocate
or an accountant, and
payments for advice provided electronically, for electronic
communications with technicians or for accessing, through
computer networks, a trouble-shooting database such as a
database that provides users of software with non-
confidential information in response t frequently asked
questions or common problems that arise frequently.
"emphasis supplied".
10. From the above, it can be gathered that the royalty payment
received as consideration for information concerning industrial,
commercial, scientific experience alludes to the concept of knowhow.
There is an element of imparting of knowhow to the other, so that the
other person can use or has right to use such knowhow. In case of
industrial, commercial and scientific experience, if services are being
rendered simply as an advisory or consultancy, then it cannot be
termed as "royalty", because the advisor or consultant is not imparting
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his skill or experience to other, but rendering his services from his own
knowhow and experience. All that he imparts is a conclusion or solution
that draws from his own experience. The eminent author Klaus Vogel in
his book "Klaus Vogel On Double Tax Convention" has reiterated this
view on difference between royalty and rendering of services in the
following manner:
"Imparting of experience: Whenever the term "royalties" relates
to payments in respect of experience (knowhow) the condition
for applying art.12 is that the remuneration is being paid for
"imparting" such knowhow.... In contrast, the criterion used to
distinguish the provisions of knowhow from rendering advisory
services is the concept of imparting. An advisor or consultant,
rather than imparting this experience, uses it himself (BFH
BStBI.II 235 (1971); Minister des Relations exterieures,
Reponses a M. Bockel, 36 Dr. Fisc. Commn. 1956 (1984). All
that he imparts is a conclusion that he draws interalia from his
own experience. His obligation to observe secrets, or even his
own interest in retaining his "means of production' will already
prevent a consultant from imparting his experience. In contrast
to a person using his own know=how in providing advisory
services, a grantor of knowhow has nothing to do with the use,
the recipient makes of it."
11. The thin line distinction which is to be taken into consideration
while rendering the services on account of information concerning
industrial, commercial and scientific experience is, whether there is any
imparting of knowhow or not. If there is no "alienation" or the "use of"
or the "right to use of" any knowhow i.e., there is no imparting or
transfer of any knowledge, experience or skill or knowhow, then it
cannot be termed as "royalty". The services may have been rendered
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by a person from own knowledge and experience but such a knowledge
and experience has not been imparted to the other person as the
person retains the experience and knowledge or knowhow with himself,
which are required to perform the services to its clients. Hence, in such
a case, it cannot be held that such services are in nature of "royalty".
Thus, in principle we hold that if the services have been rendered de
hors the imparting of knowhow or transfer of any knowledge,
experience or skill, then such services will not fall within the ambit of
Article12. Since neither the Assessing Officer nor the DRP has
examined the nature of service rendered by the assessee from this
angle therefore, we are of the opinion that the matter should be
restored back to the file of the Assessing Officer to examine the nature
of services in line of the principles discussed above. If such services do
not involve imparting of knowhow or transfer of any knowledge,
experience or skill, then it cannot be held to be taxable as royalty.
Since the issue of FTS is not the subject matter of dispute after the
direction of the DRP, hence, we are not expressing any opinion on FTS.
Thus, ground no.1 and 2, are treated as partly allowed for statistical
purposes.
12. Ground no.3, relates to initiation of penalty proceedings under
section 271(1)(c), which is not only premature but has also become
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infructuous in view of our findings given above. Consequently, ground
no.3, is dismissed as infructuous.
13.
13. In the result, assessee's appeal is partly allowed.
6th August 2014
Order pronounced in the open Court on 6th August 2014
Sd/- Sd/-
. .
B.R. BASKARAN AMIT SHUKLA
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 6th August 2014
/ Copy of the order forwarded to:
(1) / The Assessee;
(2) / The Revenue;
(3) () / The CIT(A);
(4) / The CIT, Mumbai City concerned;
(5) , , / The DR, ITAT, Mumbai;
(6) / Guard file.
/ True Copy
/ By Order
. / Pradeep J. Chowdhury
/ Sr. Private Secretary
/ / (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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