India-UK DTAA royalty and FTS test: commercial services, grading work, and programme receipts were held non-taxable

Under Article 13 of the India-UK DTAA and section 9, supply planning receipts were held not to be royalty or fees for technical services because the activities were limited to commercial information exchange, extranet communication, and account coordination, without making available technical knowledge or using protected commercial rights. Grading receipts for diamond examination, testing, and certification were also held not to be royalty, as the service provider did not transfer any copyright, trademark, process, or know-how to the customer. Receipts under the DTC Accredited Business Programme were likewise held not taxable as royalty or fees for technical services, since no intellectual property right or make-available element was established.

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Issues: (i) Whether receipts from supply planning services under the 2008-2011 contract were taxable as royalty or fees for technical services under Article 13 of the India-UK DTAA and section 9 of the Income-tax Act. (ii) Whether receipts from grading services were taxable as royalty or taxable only as business income. (iii) Whether receipts from the DTC Accredited Business Programme were taxable as royalty or fees for technical services.

Issue (i): Whether receipts from supply planning services under the 2008-2011 contract were taxable as royalty or fees for technical services under Article 13 of the India-UK DTAA and section 9 of the Income-tax Act.

Analysis: The supply planning services under the later contract were found to be materially different from the earlier value-added services arrangement. The services were confined to intention-to-offer communication, consistency of boxes, extranet access, key account management, and integrity verification. These activities were held to be only informational and commercial in nature, and did not amount to managerial, technical, or consultancy services. The services also did not make available technical knowledge, experience, skill, know-how, or processes to the recipient. The use of extranet was treated as a communication platform, not as a technical service. The consideration was also held not to be royalty, since the arrangement involved sharing basic commercial information about intended supplies and not the use of, or right to use, any plan, trademark, or industrial or commercial experience in the relevant treaty sense.

Conclusion: The receipts from supply planning services were held not taxable as royalty or fees for technical services, and the issue was decided in favour of the assessee.

Issue (ii): Whether receipts from grading services were taxable as royalty or taxable only as business income.

Analysis: The grading activity consisted of examination, testing, certification, and issuance of grading reports for diamonds. It was held that the activity did not involve granting any right to use copyright, trademark, design, process, or other intellectual property. The service provider used its own expertise to render the grading service, but did not impart or transfer that expertise to the customer. The activity was therefore not royalty within the treaty definition. The receipts were treated as consideration for services and, in the absence of a permanent establishment, not taxable in India as royalty.

Conclusion: The receipts from grading services were held not to be royalty and the issue was decided in favour of the assessee.

Issue (iii): Whether receipts from the DTC Accredited Business Programme were taxable as royalty or fees for technical services.

Analysis: The programme was held to be neither a transfer of any intellectual property right nor a grant of use of any trademark, logo, or registered sign. The record also showed that no logo or signature was designed for the programme and that the name alone could not be treated as royalty. The services rendered under the programme did not make available technical knowledge, skill, or know-how, and therefore did not satisfy the treaty test for fees for technical services. In the absence of a permanent establishment, the receipts were not chargeable to tax in India.

Conclusion: The receipts from the DTC Accredited Business Programme were held not taxable as royalty or fees for technical services, and the issue was decided in favour of the assessee.

Final Conclusion: The taxability additions based on royalty and fees for technical services were not sustained, and the connected rate and consequential grounds did not survive independently.

Ratio Decidendi: Under Article 13 of the India-UK DTAA, services are taxable as fees for technical services only if they involve technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes to the recipient, and payments are taxable as royalty only where there is use of, or the right to use, protected intellectual property or commercial experience in the treaty sense.

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