TaxTMI 
TaxTMI 
2011 (11) TMI 483
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....ively which has been disputed in this appeal. The addition has also been made by the AO on account of factual discrepancies in the income declared by the assessee. There are also disputes regarding rate of tax. The specific disputes raised by the assessee have been dealt with in the succeeding paras. 3. The first dispute is regarding the legal validity of the assessment proceedings which has been challenged on the ground that the notice issued under section 143(2) was barred by limitation. However, the ld. AR for the assessee did not press this ground at the time of hearing of the appeal. This ground is, therefore, dismissed as not pressed. 4. The second dispute is regarding treating the marketing contribution by the AO as royalty. The assessee had explained to the AO that marketing contributions paid by the Sightholders was nothing but reimbursement of expenses incurred by the assessee and therefore, there was no income element involved. The AO, however did not accept the contentions raised. It was observed by him that contributions had been received by the assessee for use of design, process or trade mark for processing of rough diamonds and therefore, the same was royalty ....
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....ntioned as Dimexon Diamond Ltd. and, therefore, assessee was payer and the said party was payee. It was argued that on this ground also, amount could not be assessed as income. The ld. DR on the other hand submitted that the claim of the assessee required verification. 5.2 We have perused the records and considered the matter carefully. The dispute is regarding the addition of USD 3,00,000 lacs (Rs. 1,29,51,000/-) being the discrepancy on account of marketing contribution in relation to the party, Dimexon Diamond Ltd. The said discrepancy was found by AO on verification with Dimexon Diamond Ltd. The case of the assessee is that payment did not relate to Assessment Year 2007-08 as the invoice placed at page-184 of the paper book is dated 23.2.2006. It has also been submitted that the said amount was paid by the assessee to Dimexon Diamond Ltd. and, therefore, could not be assessed as income of the assessee. We have perused carefully the relevant papers placed in the paper book. We find that as per invoice issued by Dimexon Diamond Ltd. placed at page-184 of the paper book, the marketing contribution has been shown at USD 3,00,000 as per invoice dated 23.2.2006. However, the detai....
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....as not taxable under DTAA, the same cannot be taxed even if the same was taxable under the domestic law. Further, the AO had applied both the provisions and had held that the marketing contribution was taxable as royalty both, under the domestic law as well as under the DTAA. This being the position, the rate which is beneficial to the assessee has to be applied under the provisions of section 90(2). It was also submitted that rate as per domestic law was 10% as per sub clause (AA) of clause (b) of Section 115A(1). As per the said provision, any amount received by a non-resident from India as royalty as per agreement approved by Central Government on or after 1.6.2005 is taxable at 10%. In this case, it was pointed out that the agreement was dated 8.11.2005 and therefore, rate of 10% had to be applied. The ld. DR supported the order of the AO and placed reliance on the findings given in the assessment order. 6.2 We have perused the records and considered the matter carefully. The dispute is regarding rate of tax to be applied in case of marketing contribution which has been taxed by the AO as royalty. There is no dispute that the marketing contributions had been received by the ....
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....ugh diamonds. (ii) Communication to the sight holders, the aggregate level and nature of goods, the assessee intends to make available during the selling period. (iii) Communication of consistent parameters as at size, colour and grading of diamonds. (iv) The provision of Sightholders' Extranet Service which provides a secure web based information sharing and business platform linking DTC with Sightholders, Sightholders group companies and their appointed brokers. It offers access to DTC information, proprietary (third party) content plus tailored access for each Sightholder to their own business specific information and processes in response to Sightholders feed back and request. (v) Provision for independent third party verification of 10% of, Sightholders profile material for increasing all stake holders confidence in the validity and veracity of process. (vi) Provision of Key Account Manager (KAM) allows dedicated time with KAM who is the main point of contact between the Sightholders and DTC. KAM assists Sightholder in service selection process and provides access to value added services. KAM forms the link with the DTC marketing gl....
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....RP also observed that the VAS were ancillary and subsidiary to the application or enjoyment of right of the assessee in the brand used by the sightholders the payment for which was royalty in terms of para 3(a) of indo UK Tax Treaty and therefore its nature was that of fees for technical services. DRP accordingly held that AO was justified in treating the VAS as fees for technical services. The AO in the final order observed that the assessee was providing technical services and, therefore, payment received was FTS as per Explanation-2 to Section-9(1)(vii). The AO also observed that the payment was for rendering of technical services which made available technical knowledge, experience, skill, know-how etc. to the sightholders and therefore, was taxable as FTS as per para 4(c) of Article-13 of India UK Tax Treaty. Aggrieved by the decision of AO, the assessee is in appeal before the Tribunal. 7.4 Before us, the ld. Authorised Representative submitted that the DRP had held that the payment was taxable as FTS under para 4(a) of Article 13 of India UK tax treaty as services were ancillary and subsidiary to royalty payment under para 3(a). However, AO had applied the provisions of p....
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....lated to sale of rough diamonds were ancillary to the marketing contribution which was to promote sale of rough diamonds and therefore provisions of para 4(a) were applicable and payment had to be taxed as fees for technical services. As regards the applicability of para 4(c) which had been applied by the AO, it was submitted that growth services and business sustainability services of the core services were covered under para 4(c) and therefore were taxable as FTS under para 4(c). 7.7 In reply, ld. AR for the assessee submitted that marketing contribution by sightholders was to promote licenced products as per para 4 of the agreement and at page-5 of the agreement, product had been defined to be jewellery pieces incorporating no stones other than diamonds, designed and manufactured by the Sightholders. Marketing contribution which had been taxed as royalty was to promote Nakshatra Brand of jewellery and had no relation to rough diamonds. Thus, royalty was in relation to jewellery brands and, therefore, the VAS payment which related to sale of rough diamonds, was not ancillary or subsidiary to royalty payment. The ld. Authorised Representative further submitted that the agreemen....
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.... to consider the said para as same will be within the subject matter of appeal. The ld. DR pointed out that there were several judgments including the judgment of Hon'ble Supreme Court in which the decision of the Tribunal to allow the claim under some other provision had been upheld. It was also pointed out that even the DRP had held that payment was for services in relation to royalty payment under para 3(a). The ld. AR thereafter agreed and proceeded to advance arguments on the applicability of para 3(a) of the Article 13 also. 7.9 It was submitted by the ld. AR that the provisions of para 3(a) of Article-13 were not applicable to the facts of the present case. In this context, he referred to the Commentary on OECD model convention in which the definition of royalty as per para-2 of Article-12 of the said convention was exactly the same as in the case of Indo-UK Treaty applicable in the present case. As per the said commentary, royalty as consideration for information concerning industrial, commercial and scientific experience alluded to the concept of knowhow which could be used by the recipient on his own and supplier was not required to take any part. The relevant portion ....
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....unal was not correct in discarding commentary of OECD and of Klaus - Vogel on the ground that it was not safe to rely on such commentaries. Reference was also made to the decision of Mumbai Bench of the Tribunal in the case of Dy. DIT v. Preroy AG [2010] 39 SOT 187. In that case, assessee was a consultant in the matter related to strategic issues in respect of establishing joint ventures, technology transfers and related matters. The assessee had entered into strategic consulting agreement with an Indian Company which wanted to avail services provided by the assessee. The AO taxed the payment for such services as royalty under Article 12(3) of Indo-Swiss agreement as payment for information concerning industrial, commercial and scientific experience which was not upheld by the Tribunal. The Tribunal had referred to the OECD model commentary and observed that such commentaries are useful, reliable and legally acceptable basis for interpreting treaties. As per interpretation given in the said commentary, the royalty alluded to the concept of knowhow and, therefore, the Tribunal held that the payment to be taxed as royalty should be made for imparting knowhow to the service recipient ....
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....ed to the OECD commentary of 2005 which had since been revised in 2008 in which there is change in the definition of "know how". In the 2005 commentary, "know how" was defined as un-divulged technical information but in 2008 commentary, "know how" is referred as un- divulged information of any industrial, commercial or scientific nature arising from previous experience. Thus know how was nothing but any information of industrial, commercial or scientific nature arising from previous experience. The word "know how" therefore, could not be restricted to only technical information or information concerning any technology or technical knowledge. The relevant para-11 of 2008 commentary referred to by the ld. DR is reproduced below as ready reference. "In classifying as royalty payments received as consideration for information concerning industrial, commercial or scientific experience, para-2 is referring to concept of know how. Various specialized bodies and authors have formulated definition of know how. The words "payment [...] for information concerning industrial, commercial or scientific experience" are used in the context of transfer of certain information that they have not b....
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....vided to Sightholders on the basis that it shall be kept confidential. The information contained in the Service Guide which was confidential and which was provided to Sightholders by the assessee was commercial information which had been acquired by the assessee admittedly on the basis of past experience. Therefore payment for such information was clearly covered by the definition of royalty as per para 3(a) of Article -13 of Indo UK Treaty. Further, the information was being used by Sightholders on their own in their businesses and in case of any clarification or any help they could have assistance of KAM. She referred to para 7(c) of the VAS Service Guide placed at page 104 of the paper book in which it was clearly mentioned that Sightholders were to make their own independent evaluation of all market and business initiatives and other matters in respect of which value added services had been provided. It was thus clear that Sightholders were required to independently evaluate and make use of information without recourse to the assessee. The assessee was providing the information through the Extranet and also through the KEM who was the contact point with DTC to give any clarific....
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....ry compared to the 2005 commentary but para 11.1 remained the same in both the commentaries. As per para 11.1, the recipient was required to use know how on his own and the granter was not required to play any part. Para-11.2 was also the same as per which the know how contracts were different from the contract for provision of services. In this case, it was pointed out that the assessee was rendering services and was not just imparting know how. The ld. AR also pointed out that information and expertise contained in supply planning tool services was not of high magnitude and rather involved actual rendering of the services by the assessee. It was submitted that it was business sustainability services or growth services which involved marketing information etc. based on experience for which the assessee was not charging any fees. It was also submitted that ld. DR was not correct in stating that the payment was for all services whether core or growth. It was pointed out that the agreement clearly provided that payment was only for supply planning tool services and other services were paid for by the assessee itself. The revenue authorities were not entitled to change the terms of ag....
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.... consider any other argument connected with the ground even if not considered by the lower authorities as held by Hon'ble Supreme Court in case of Hukumchand Mills Ltd. v. CIT [1967] 63 ITR 232. In case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710 (SC), the dispute before the Tribunal was regarding disallowance of development rebate. The Tribunal confirmed the disallowance. However it allowed the claim as current repair as all facts were already on record. The Hon'ble Supreme Court upheld the order of the Tribunal holding that subject matter of appeal remained the same irrespective of the fact whether the allowance was permissible on another ground under some other provision. Therefore, in case the claim has been disallowed under a particular provision which is not found to be correct but the disallowance is justified under some other provision, it will be within the jurisdiction of the Tribunal to consider the same. In any case, the ld. AR fairly conceded the position and did not advance any further arguments on the issue and was agreeable to consider the other provisions. 7.15 Article-13 of Indo-UK Tax Treaty contains the provisions for taxability of sums paid as....
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....s income in the hands of the non-resident, the payment under the provisions of treaty can be taxed in India only if the non resident has PE in India. There is no dispute that the assessee has no PE in India. Further, for taxability of any sum in India, it has first to be found taxable under the provisions of Income tax Act. In case, the sum is not found taxable under any of the provisions of the Income tax, the same cannot be taxed at all and in that case it will not be necessary to go into the provisions of the treaty. However, if the sum is found taxable under the provisions of Income tax Act, it is further required to be seen whether any exemption is available under the Treaty. If the sum is not found taxable under the treaty, the same cannot be taxed at all in India. 7.17 In the present case, the ld. AR for the assessee has not disputed that the payment for VAS received by the assessee will be chargeable to tax in India. Therefore, it is required to be examined whether the payment is taxable under the provisions of the Treaty. The relevant portion of Article-13 of Indo-UK Tax Treaty which contains provisions for taxability of a sum as royalty and FTS is reproduced below as r....
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....ical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or (c) make available technical knowledge, experience, skill, know-how or processes, or consist of the deve1opnent and transfer of a technical plan or technical design. 7.18 The AO had taxed the payment for VAS under para 4(c) of the Article-13 which relates to payment for rendering any technical or consultancy services which make available technical knowledge, expertise, skill, know how or process or consists of development and transfer of a technical plan or technical design. The scope of applicability of para 4(c) has been examined by the Tribunal in several cases. In case of Raymond Ltd. (supra). The Tribunal held that f....
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....perience etc. It was, therefore, held that the provisions of para 4(b) of Article-12 of Indo US Treaty were not applicable and therefore the payment could not be considered as fees for included services. 7.20 Thus, in view of the decisions of the Tribunal mentioned above, for taxability of a sum as FTS, under para 4(c) of article-13 of Indo UK Treaty, the payment should not only for rendering of technical or consultancy services but such services should also make available technical knowledge, experience etc. which can be used by the recipient on its own. The consultancy services have been interpreted as technical consultancy. However, the word "technical" is not used only in relation to technology. It also refers to practical skills, experience acquired in a particular activity. Thus consultancy based on practical skills, experience will also be covered but for application of para 4(c), such skills, knowledge, experience etc. should be made available to the recipient who could apply the same independently. In the present, case the assessee is providing information which is of the nature of commercial information based on its experience. The assessee was not transferring the tec....
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....ery and Forevermark for polished diamonds which it had allowed to be used by the Sightholders on payment of royalty. This was obviously to generate demand for rough diamonds by promoting sale of finished diamond products. VASs were, therefore, not limited to sale of rough diamonds only. This is clear from the letter of July 2005 of the assessee addressed to all Sightholders in connection with VAS (placed at page-78 of the paper book ), in which the assessee refers to growth of diamond jewellery. The assessee in the said letter also mentions that VAS was one of the mechanism to ensure future profitability, in the ever increasing competitive market of the Sightholders, who were dealing not only in rough diamonds but also in various value added diamond products. Further, page-80 of the Service Guide clearly mentions that VASs offered potential for value generation to Sightholders and diamond jewellery market as a whole. This is also clear from the Business Sustainability Services, which provided information on consumer demands and on consumer confidence building. The consumers are concerned with diamond products and not rough diamonds and, therefore, such information is aimed at promo....
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.... intended to make available over selling period of two and a half years. Normally, a trader does not charge for giving information about goods it intends to sell. However, in this case, providing such information well in advance requires in depth experience in marketing of diamonds so as to know future marketing trends. The assessee was using its global marketing experience to provide such information which was commercial in nature to the Sightholders so that they could plan their trading schedules accordingly. Therefore, in case the assessee was charging for such information, the payment has to be considered as royalty for providing information of commercial nature based on experience. However, in our view, the real charge was for providing various marketing information through Extranet and as part of Business Sustainability and growth services and personal services provided in relation thereto as mentioned in the preceding para. The assessee provided access to DTC information on Extranet about its global marketing programme. Such information was useful in selling of diamonds and other finished products by Sightholders. As part of supply planning tool services, the Sightholders co....
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....publish or otherwise reveal any of the Confidential Information to any third party except with the prior written consent of the DTC." 7.25 The ld. A.R for the assessee agreed that the services provided by the assessee were informative and consultative. He also agreed that the said information had been provided by the assessee to the Sightholders based on its extensive experience. However, his objection to the treatment of payment for such services as royalty was that the assessee was charging only for supply planning tool services and the information contained in such services was not of high degree. The bulk of useful information being provided was as per business sustainability services or growth services which were not charged by the assessee. It has also been argued by him that the assessee was providing services and not only information. The ld. AR has further argued that the royalty as payment for information concerning industrial, commercial or scientific experience alluded to the concept of know-how as per interpretation given in OCED Commentary. But in the case of the assessee, there was no transfer of know-how. 7.26 We first deal with the objection of the ld. A.R th....
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....971] 82 ITR 540. No doubt, it is true that agreement is with the Sightholders who are not related but the provisions in the agreement to show that payment was only for supply planning tool services does not adversely affect Sightholders because upon making payment, they are entitled to avail all services. So long as the Sightholders are entitled for all the services, the manner in which the agreement is drafted makes no difference to them. The assessee has however tried to take tax advantage by showing the payment only against supply planning tool services when in fact the payment is for all the services. The assessee has tried to devise methods with a view to evade taxes which is clear from the documents found during the survey containing correspondence between the assessee and its tax consultant which has been referred to by the AO at page-6 of the assessment order and which is reproduced below as ready reference:- "1. Treatment of the payment to DTC as a reimbursement of expenditure is the preferable route to follow from a Indian tax point of view. Page 49 Payment towards reimbursement of actual marketing expenditure in respect of the Nakshtra Campaign. = Yes, nomenc....
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.... The ld. Authorised Representative has placed reliance on the OECD Model and it has been explained in OECD Model Commentary, that royalty payment received as consideration for information concerning industrial, commercial or scientific experience alludes to the concept of know-how. In, OECD Model Commentary (2005) the term "know how" was defined as un-divulged technical information whether capable of being patented or not which is derived from experience. The word "technical" cannot be considered only in relation to some technology. It also relates to practical skill of a particular activity as per the Oxford dictionary. Therefore, in relation to any commercial activity, the word technical information has to be understood as information relating to practical skill of the subject. This may be the reason that in OECD Commentary (2008) the word technical has been dropped and the term 'know-how' has been defined as undivulged information of industrial, commercial or scientific nature arising from previous experience which has practical application in the operation of an enterprise. Thus, even adopting the OECD model interpretation, any information of industrial, commercial or scientifi....
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....t for the various types of information as discussed earlier was clearly covered by the provisions of para 3(a) as royalty. Therefore, the service provided by KAM and through workshops and personal meetings has to be considered as fees for technical services as per para 4(a) of the Article-13. The DRP has also considered the application of para 4(a) in relation to royalty payment under para-3(a) but omitted to consider that royalty received by the assessee was not only for use of Nakshatra Brand of jewellery but also for providing various types of commercial information acquired by the assessee based on its experience. 7.30 The ld. AR also argued that various information provided by the assessee was current information obtained while performing services. The information of industrial, commercial or scientific nature payment for which is to be considered as royalty must arise from previous experience and should not be new information obtained as a result of performing services at the request of the payer as per the interpretation adopted in OECD Commentary (2008). In this case, the various types of information of commercial nature provided by the assessee as pointed out earlier wa....
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....ation provided by the assessee is considered as current information obtained during the course of actual rendering of services, such services will obviously be marketing consultancy provided by the assessee which have to be considered as ancillary and subsidiary to application or enjoyment of Nakshatra brand or Forevermark as the aim of the assessee was to promote sale of branded diamond products in order to raise demand for rough diamonds. The nature of payment in that case will be FTS as per para 4(a) of Article-13. Such arguments support the finding of DRP. Thus the payment in either case will be taxable. 7.31 In view of the fore-going discussion and for the reasons given earlier, we are of the view that the payment for VAS received by the assessee has to be considered partly as royalty under para 3(a) of Article-13 being the payment for various types of information of commercial nature acquired based on experience provided to Sightholders and partly as FTS under para 4(a) being the payment attributable to the services rendered by the KAM or through workshops, etc. which were ancillary and subsidiary to application or enjoyment of the information, or as FTS being payment for ....
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.... both the cases. The discrepancy was only for the March quarter which had been shown by the assessee in the next Financial Year. It was also submitted that the assessee had filed reconciliation which is placed at page-107 of the paper book and is reproduced below :- Sr. No. Name of the Sightholders VAS fees invoiced to the Sightholders as per Annexure 1 of our submissions dated 19.11.2009 VAS fees as per the information furnished by the sightholders u/s.133(6) of the Act (copies provided to DBUK) (USD) (USD) 1. Asian Star Company Limited 645,824.48 671,090.97 314,913.48 671,090.96 398,091.54 2. Ratilal Becharial & Sons 1,924,335.56 1,924,510.00 3. K.P. Sanghvi & Sons 795,879.44 867,277.03 795,879.44 867,277.03 656,133.34 4. Jewelex 718,559 842,649 5. Blue Star 1,103,737.00 1,070,346.78 8.2 The ld. AR explained that the first item in case of Asian Star Company Ltd. of USD 6,45,824.48 included USD 3,30,911 shown by Sightholders in the earlier year for January to March 2006 and therefore only USD 3,14,913.48 was shown by them in Assessment Year 2007-08. There was no discrep....
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....ollowed by the assessee which has been accepted by the department in the earlier year. However the claims of the assessee in relation to the discrepancies need verification with respect to original documents such as invoices etc. We, therefore, restore this issue to the file of the AO for passing a fresh order after necessary verification in the light of the observations made above and after allowing opportunity of hearing to the assessee. 9. In the ground No. 7, the assessee has raised an alternate plea that the AO had added USD 3,30,911 on account of VAS which had already been taxed in the Assessment Year 2006-07. However at the time of hearing of the appeal the ld. AR did not press this ground of appeal and, therefore, the ground is dismissed as not pressed. 10. The dispute raised in ground No. 8 is regarding the rate of tax of 15% applied by the AO to the VAS receipts which had been treated by him as fees for technical services. The AO has applied rate of 15% under provisions of Article-13 of India UK Tax Treaty. The ld. Authorised Representative for the assessee submitted that concessional rate of 10% is required to be applied under the provisions of sub clause (BB) of c....
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.... is found that the amount has to be added this year, AO will give credit to TDS in relation to those additions. We order accordingly. 13. Ground No. 11 is regarding charging of interest under section 234B of the Act. The interest has been levied for shortfall in payment of advance tax. The ld. A.R for the assessee argued that additions had been made on account of royalty and FTS in respect of which tax was deductible at source under the provisions of law and therefore, even though no tax was deducted, such income cannot be the basis for levy of interest as tax deductible on such income has to be reduced from the advance tax payable. Ld. DR on the other hand, placed reliance on the orders of authorities below. 13.1 We have perused the records and considered the matter carefully. The dispute is regarding levy of interest for shortfall in payment of advance tax. The advance tax payable under section 208 is required to be computed under section 209 and as per section 209(1)(d), the tax payable by the assessee has to be reduced by the amount of tax deductible or collectible at source. Therefore, once the tax is deductible, the same has to be reduced from tax even if the tax had no....