TaxTMI 
TaxTMI 
2012 (5) TMI 175
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.... that the use of the aforesaid marks was for the purpose of advertising for soliciting registration from students, the benefit of which was to accrue to eCornell and, hence, no consideration could be deemed to have been paid for such trademarks, logos etc. 4. That the CITT(A) erred on facts and in law in contending that the appellant was granted limited, non-exclusive, non-transferable and non-sub-licensable right in connection with the offering and distribution of courses by eCornell and, hence, the payment for the same was in the nature of Royalty as per Article 12 of the DTAA between India and USA. 5. That the CITT(A) erred on facts and in law in confirming the action of the Assessing Officer in not holding that the payment proposed to be made was in the nature of "business profits" and in terms of Article 7 of the DTAA, in absence of a permanent establishment, the same was not taxable in India. 2. The relevant facts of the case are that the assessee made an application u/s 195(1) of the Income-tax Act, 1961 asking for Nil deduction of tax certificate. The payee i.e. the Tower Innovative Learning Solutions Inc. USA (hereinafter referred to as TILS) entered into an agree....
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....nse to the said query it was the plea of the assessee that HECL is not making any payments for the use of, or the right to use any copyright of literary, artistic, or scientific work and therefore the nature of income in the hands of TILS would not fall within the scope of Royalty. The contention put forth was that HECL was by and large only providing ancillary services to the payee as such HECL would provide infrastructure i.e. computers, broadband access, translation assistance, class room, VSAT connectivity etc. to the students in India to enable them to access the contents of the course on the website. HECL would also assist the registration process of the students and collect combined fees for the course content and the services/facilities offered by it to the students. 2.5 In the context of these facts it was pleaded that income received by eCornell from HECL through imparting of education does not fall in the ambit of Royalty under the DTAA. Elaborating further Clause 3(a) of Article 12 of DTAA between India and the US it was stated could be divided into three parts namely - * Consideration for use/right to use copyright of literary, artistic or scientific....
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....l marks in accordance with the terms of the agreement. Regarding the Clause on fees and payments it was mentioned that eCornell on the 12th of each month would invoice HECL for all course registrations processed via the registration site at the rates for such registrations of the said courses in the agreement. It was also mentioned that eCornell shall only be obligated to complete the registration process and release the material required by students to access the courses upon receipt of full payment from HECL. Under Clause 10 of the agreement it was stated that eCornell grants to HECL the limited right and licence to use the eCornell trademarks, service marks, logos and other corporate indicia for the purposes of advertising and promoting the courses. Further under clause 11.2 it was stated that the courses are subject to the warranty provisions of the N User agreement. eCornell does not warrant that the courses will meet affiliates that is HECL requirements or those of enrol students, or that the operation or views of any of the courses will be uninterrupted or error free. In exhibit G of the agreement which defines the roles and responsibilities of the two parties it is....
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....aph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (B) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. Therefore, generally defined Royalty is a payment made to the owners of certain types of rights by those who are permitted by the owners to exercise the rights. The rights concern are literary, musical or artistic copyrights, rights in invention and design, rights in mineral deposits, including oil and natural gas. Royalty is therefore thus a consideration for the transfer of all or any right (including granting of a license) in respect of copy....
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....ara 3 which reads as under:- "The assessee argued the issue at length and stated that the action of AO is not as per provisions of Article 12. It was submitted that the payment made by the assessee is not in consideration for the use of or the right to use any copyright of literary, artistic or scientific work, including inter alia for any patent, trademark, design or model or plan. The consideration is for imparting education remitted through the assessee to eCornell, therefore, it could not be regarded as Royalty in terms of Article 12 of DTAA. It was also submitted that the use of eCornell marks is merely incidental to the advertising for soliciting registration from students as benefit of which is to vest namely in eCornell. In such circumstances, there being no consideration paid for use of any trademark or eCornell marks by the appellant. In absence of any rationale and also the stipulation as to payment of any Royalty under the agreement between the parties, it would be inconceivable as to how the Assessing Officer could on the basis of his own whims and fancies attribute any part of payment towards use of trademark. It was further submitted that the payment made by the a....
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.... to page 30, Clause 7, Clause 9.3 of the Agreement and Exhibit 'A' at page 35 of the paper book which is a eCornell affiliation agreement containing sample of the course list. It was submitted that the assessee is an affiliate of eCornel and paper book page no.36 would show that the assessee as an affiliate had a specific territory assigned to it; page 37 it was submitted which is exhibit "C" would show that the assessee was required to provide infrastructure of the class room having approved furniture, fixtures, air-conditioning, signboard, personal computers, VSAT with transport capability and adequate back up in terms of UPS with requirements for 10% extra fees loaded with extra software etc. which were described as "Ancillary Services", pages 40 to 44 of the paper book were referred to which is a sample end-user agreement to be entered into by the individual students with eCornell. Attention was invited to page 45 of the paper book which laid down the 'Roles and Responsibilities' which were assigned to were to be discharged by the affiliate i.e. the assessee and e-Cornell under the Agreement. It was stated the Agreement entered into with TILS clearly defines the roles and respo....
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....sessee's case. This order it was submitted was confirmed by the Hon'ble Delhi High Court and is in DIT v. Sheraton International Inc. [2009] 313 ITR 267/178 Taxman 84 (Delhi), copy of the same is placed at pages 61 to 68. 7. The Ld. D.R. placed reliance upon the orders of the authorities below. Inviting attention to the facts on record it was submitted that in the case of the assessee a payment of 350 US Dollars has been fixed as registration charges per student and 2100 US Dollars is to be paid for the course material etc. and the assessee is charging Rs.1,65,000/- per student. It was argued that the assessee is able to charge only account of its association with eCornell and the fact that for the same copyrighted material of eCornell is being used is a matter of record. Specific attention was invited to Clause 10, 10.1 and 10.2. of the affiliate agreement it was argued that this demonstrates this fact. It was submitted that and the assessee is free to charge anything over and above 350 US Dollars per student and it is only on account of the use of the brand name of eCornell that the assessee is in a position to enhance the payment to be received from the students. It was his v....
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....anized and validly existing under the laws of the State of New York entered into agreement with Hughes Escorts Communications Ltd. (HECL) i.e. the assessee which is described as an "affiliate" which is stated to be a corporation which is duly organized and validly existing under the Indian Companies Act, 1956. The Affiliate Agreement it is stated includes the terms and conditions entered therein along with Exhibits "A" to "G" attached thereto. 8.3 e-Cornell is described as an e-learning company established and wholly owned by e-Cornell University described as one of the world's leading educational institutions which is stated to desire to distribute online courses stated in Exhibit "A" to legal residents and foreign nationals domiciled in the territory set forth in Exhibit B. e-Cornell has also been described as having authorized American Higher Education Incorporation, a Corporation duly organized and described to be validly existing under the laws of State of Delaware to seek affiliation in certain territories and to distribute courses. This eCornell Affiliation Agreement referred to as the agreement by the Assessing Officer and the CIT(A) further describes that the affiliate ....
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.... the Course(s) via a website developed, hosted, and maintained by or on behalf of, Affiliate (the "Registration Site"). Affiliate shall be solely responsible for collecting and processing all tuition fees for the Course(s); provided, however, that Affiliate shall charge a tuition fee of at least $350US per Course. The content and functionality of the Registration Site shall be mutually agreed upon by the parties in writing; provided, however, that the Registration Site may display eCornell Marks in accordance with the terms of this Agreement. The parties shall work together in good faith to integrate certain functions of the Registration Site with the distance learning platform used by eCornell to distribute the Course(s) so that eCornell receives all necessary enrolment information from the Registration Site regarding students and prospective students. Affiliate will host, or arrange for the hosting of, the Registration Site in a manner that provides ninety-nine and five-tenths percent (99.5%) Uptime during the Term. ("Uptime" means the absence of any interruption greater than sixty (60) seconds in the availability of the Course, other than due to scheduled maintenance, of which A....
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....mounts set forth in such invoices, in U.S. funds, within ten (10) business days of its receipt of each such invoice. Notwithstanding anything herein to the contrary, eCornell shall only be obligated to complete the registration process and release the materials required by students to access the Courses upon receipt of full payment from Affiliate. Manner of Payment. Any and all fees, charges or other payments to be made pursuant to the Agreement shall be made in United States dollars and shall be paid by wire transfer of immediately available funds or by such other method acceptable to eCornell in its sole discretion. Interest. Any and all fess, charges and other payments to be made pursuant to this Agreement that are not paid when due, and that remain outstanding for a period of ten (10) business days following Affiliate's receipt of written notice thereof, shall accrue interest at the rate of 1.5% per month, or the highest rate allowed by law, whichever is less. Non-refundable. Any and all fees, charges and other payments made pursuant to this Agreement to eCornell by Affiliate are non-refundable and shall not be returned or repaid to Affiliate under any circumstances." ....
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....of; provided, however, that eCornell may terminate this Agreement upon written notice if Affiliate fails to pay any invoice when due and such failure continues for a period of ten (10) business days following receipt of written notice thereof. Responsibilities Upon Termination. Upon the expiration or termination of this Agreement: (i) Affiliate shall immediately cease to process registrations for students wishing to enrol in the Course(s); (ii) each party shall follow reasonable instructions from the other party as to the time, place, and manner for return or destruction of the other party's Confidential Information (as defined below); (iii) all licenses granted pursuant to this Agreement (including the right to promote the Course(s) and to use the eCornell Marks) will immediately terminate and Affiliate shall cease to refer to itself as or use any materials, whether tangible or intangible, in which Affiliate is referred to as an ["authorized affiliate of eCornell,] (or any other designation permitted by this Agreement); (iv) Affiliate shall promptly return to eCornell all marketing and promotional materials, whether tangible or intangible, furnished by eCornell pursuant to this....
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....ttempt to register, whether in the Territory, [insert country of incorporation], or in any other nation, copyright in, or to register as a trademark, service mark, design patent, industrial design, or business designation, any of the eCornell Marks or derivations or adaptations thereof, or any word, symbol, or design that is similar to any of the eCornell Marks. eCornell shall have the right, but not the obligation, to seek and maintain registration of the eCornell Marks within the Territory and [insert country of incorporation]. Affiliate shall, at eCornell's expense, provide eCornell with any assistance and cooperation that eCornell may deem reasonably necessary to obtain or maintain such registration. 11. Representations and Warranties; Disclaimer; Limitations. 11.1 Affiliate. Affiliate, represents and warrants that: (a) it is a company duly organized, validly existing, and in good standing under the laws of India and has the power and authority to own its property and carry on its business as owned and carried on as of the Effective Date and as contemplated by this Agreement; (b) it has all requisite power, authority, and licenses to execute and deliver ....
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....rant that the course(s) will meet Affiliate's requirements or those of enrolled students, or that the operation or use of any of the course(s) will be uninterrupted or error free. WITHOUT LIMITING THE FOREGOING, ANY IMPLIED WARRANTIES, INCLUDING, WITHOUT LIMITATION, WARRANTEES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE EXPRESSLY EXCLUDED. Affiliate acknowledges and agrees that the modification or alteration of any course(s) and/or eCornell Mark by any entity other than eCornell or its designee will void the warranty for the applicable course(s) and/or eCornell Mark. 11.3 Limitation of Liability. EXCEPT FOR AFFILIATE'S INDEMNIFICATION OBLIGATIONS SET FORTH HEREIN, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, OR EXEMPLARY DAMAGES OR LOSS OF PROFITS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY ACTS OR OMISSIONS ASSOCIATED THEREWITH, WHETHER SUCH CLAIM IS BASED ON BREACH OF WARRANTY, CONTRACT, TORT OR ANY OTHER LEGAL THEORY AND REGARDLESS OF THE CAUSE OF SUCH LOSS OR DAMAGES OR WHETHER ANY OTHER REMEDY PROVIDED HEREIN FAILS." 8.6 Clauses 12 refers to Indemnification and 12.1 and 12.2 refer to....
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.... facilities (owned by HECL or franchised) and material provided by HECL to registered program participants for conduct of eCornell programs. Such an inspection can be conducted by eCornell officials; by giving 2 days written notice to HECL specifying their intention to do so." 8.7 The course rates are described in Exhibit "D" which is 350 US Dollars per course registration and a Course registration is defined as one seat registration for one person participating in a single e-Cornell course. 8.8 Exhibit "E" refers to the signatories to the agreement and Exhibit "F" is a Sample End-User agreement for individual students which sets out the privacy policy and the information eCornell collects, how it is used and how it protects the information so collected. Network use policy for eCornell students. The commitments from eCornell coupled with responsibilities of the students for respecting intellectual work and property of others where unauthorized use of software, programme code etc. is described as unacceptable and may be considered as a violation of state and federal law. It further refers to confidentiality of login ID which is described as a unique identifier which gives stud....
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.... making available to its students login ID and therefore grant access to course material, respond to queries, conduct exams, grant Certificates etc. for which purposes eCornell enters into a separate agreement (End-User Agreement) with the students directly. 8.11 The assessee on the other hand has undertaken/been assigned/has agreed to perform the role of marketing the courses; assist the registration process of students; collect combined fees for the course content and provide infrastructure namely computers, broadband access, VSAT connectivity etc. to the students so registered in order to enable them to access the contents of the course on the website by using the specific log-in ID numbers which are provided to the duly registered students by e-Cornell. On a careful consideration of the terms and conditions of the clauses of the Affiliation Agreement reproduced above; it is seen that at no point of time this material is available to the assessee. Under the agreement the assessee as per Exhibit 'G' is required to market and promote e-Cornell courses within its defined territory; and sales and cashiering of all End-User students perform functions for course registration. For f....
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.... is the only document which has to be taken into consideration for deciding the issue it is eminently clear that the assessee solicits enrolment by way of advertising, promoting and marketing the trademarks of eCornell granted to it for the limited use of marketing so as to solicit enrolment to the courses conducted by eCornell registration is granted by eCornell to the students subject to the fulfilment of necessary terms and conditions in regard to fees and Clause 7 of the agreement as discussed which is entered into by eCornell with the students demonstrates the fact that at no point of time assessee was in possession of any copyrighted material as it is exclusively to be accessed by the student using the log-in ID provided by eCornell the assessee is to provide the infrastructure as per the terms of the agreement which information a student can access from anywhere else also. A perusal of Exhibit F which is a sample end-user agreement shows that there is a privity of contract between the e-Cornell and the students and it is the students who receive right to access the course material provided by eCornell by using their specific log-in ID numbers which is the unique identifier w....
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.... and (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright or a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as conside....
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...., in any manner adversely affected. The said rights of the payer or respondent are fully safeguarded u/s 195(2)/ (3) and 195(7) of the Act. The only thing which is required to be done is to file an application for determination by the Assessing Officer that such sum would not be chargeable to tax in the case of the recipient, or for determination of appropriate proportion of such sum so chargeable, or for grant of certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income tax at any lower rate. On such determination, tax at the appropriate rate could be deducted at source. If no such application is filed income tax on such sum is to be deducted and it is the statutory obligation for the persons responsible for paying such "sum" to deduct tax before making the payment. On facts it is seen that for considering the nature of remittance whether falling in the category of royalty in terms of Article 12(3)(a) of the Indo-US DTAA it has no applicability as eminently an appropriate application has been made by the assessee which has been rejected by the Assessing Officer. 9.2 Revenue has also placed reliance on GE India Technology Centre....
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....at it is the dominant intention of the parties to the agreement which has to be considered and the composite agreement has to be considered so as to arrive at the broad objectives of the parties to the agreement. It has been argued that the various stipulations in the agreement which are entered into to protect business interest should not be read in isolation as they would not change the essence of the agreement and in the facts of that case the finding has been arrived at on the basis of broad objective of the agreements between the parties which has been held to be for the purpose of sharing the revenue and it was not to hire the premises provided by the assessee. In facts of the present case it is stated that the principle laid down in the said order that it is the dominant purpose of the assessee and eCornell to pool their resources to earn profit which is to be taken into consideration. It is seen that considering the facts the Co-ordinate Bench has followed the well-settled legal principles namely that an agreement has to be read as a whole to arrive at the dominant object so as to gauge the intention of the parties to the agreement which has to be the sole basis for decidin....
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....edited to a bank account. In lieu of the user of the trademark, trade name and course material the assessee received an amount equal to 25% of net value earned from the operations. Apart from this, the assessee supplied stationery etc. to the franchisees at the rates fixed in this behalf by it. In the year under consideration the assessee had credited net fees of Rs.27,37,56,334/- to the profit and loss account. Further, the assessee had debited a sum of Rs.6,38,64,018/- under the head 'Franchisee payments' under the head 'Admn. & other exp.' The question was whether the payments are in the nature of payments to contractors or sub-contractors for carrying out any work (including supply of labour for carrying out any work) in pursuance of the contracts. Considering the provisions of S.194C and the agreement entered into by the assessee licensor and the operator of the study centre the licensee the Coordinate Bench held that what is material is the content of the agreement. From a perusal of the same the Coordinate Bench concluded that it emerges that the licensee may not be doing any work for the assessee even within the wider meaning of the term 'work' as understood in common parla....