TaxTMI 
TaxTMI 
2008 (7) TMI 8
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....Facts: Briefly stated, the applicant, a foreign company incorporated and based in Singapore, offers a full range of real estate services to its local and international clients. As stated in the statement of facts, Cushman & Wakefield India Pvt. Ltd.(in short, CWI) is, a wholly owned subsidiary of Cushman & Wakefield Mauritius, which, in turn, is a subsidiary of Cushman & Wakefield, Asia. The applicant is, as per averment, engaged in the business of rendering services in connection with acquisition, sales and dealings in real estate and other services such as advisory & research facilities management, project management etc. in the field of real estate. The applicant states that it has also developed certain international client relationships and in accordance with the global policy, various offices provide referral services to other Cushman and Wakefield (C&W) offices, wherein one C&W Office would refer client to other C&W office, depending on the requirements of the clients. In respect of such referrals, as per the applicant, each serving C&W Company is liable to pay a 'referral fee' to referring group company in accordance with the international fees sharing rules of C&W group....
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....ive, whether the whole or any part (if yes what proportion) of referral fee could be attributed to India in terms of explanation to Section 9(1)(i) of the Act and would constitute income accruing or arising in India? v. If the referral fee is held to be taxable, whether the same can be classified as Royalty under section 9(1)(vi), fee for technical services under section 9(1)(vii), or "income from business or profession" under the Act read with the Double Taxation Avoidance Agreement between India and Singapore and what is the rate of tax applicable? vi. Whether the applicant can be said to have a Permanent Establishment in India in having regard to the provisions of the Double Taxation Avoidance Agreement between India and Singapore by virtue of its agreement with Cushman & Wakefield India Pvt. Ltd.? vii. If the answer to 6 above is in affirmative, whether the whole or any part thereof (if so what part) can be attributed to the Permanent Establishment? 4. While commenting on the a....
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....ting correspondences with two foreign customers - one relating to Symantec transaction and another relating to Thomson transaction. Subsequently, by way of additional facts, the applicant also furnished correspondence relating to Perot systems, a multi-national company, relating to a property transaction in Pune, India. Brief Arguments - Revenue's 9. Commenting on the documents/correspondences in the shape of e-mails relating to the transactions as referred to above, the representative of the Revenue contended that the applicant has not been able to furnish clear and specific documents, other than a few cryptic e-mails, which can go to establish or even demonstrate the rendition of any 'referral service' to CWI. In respect of Symantec transaction, the applicant has stated that the client referral has been made by one Ms Melissa Rouse who, on close scrutiny, has turned out to be an employee of an entity incorporated in Washington. Regarding the Thomson transaction, even the cryptic e-mails have not been filed and the revenue has contended that much confusion persists about the Perot systems transaction also. It is the CWI w....
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....prises', the representative of the revenue has also stated that the 'arm's length character' of the payment, made to the applicant, merits to be looked into by the Transfer Pricing Officer. Brief submissions - Applicant's Counsel 13. Dispelling the doubts relating to the facts raised by the revenue, the learned counsel for the applicant has argued that Symantec transaction should not be disbelieved, because Ms. Melissa Rouse had referred the transaction on behalf of the applicant in consonance with the management norms of the Global client solution Team. An affidavit to this effect has also been filed by one Mr. Ashpreet Chaudhary, Managing Director of CWS. Similarly, about the Thomson Transaction and the Perot Systems transactions, it has been submitted that these transactions should also not be eyed with suspicion because the message of the 'referral' having been made clearly floats to the surface from the communications. However, there are situations which give way to oral references also and Thomson's is one such. 14. The Revenue's allegation regarding non-rendition of any referral serv....
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....n consonance with section 9(1)(vii)(b), Explanation[2], read with Article 12(4) of the DTAA, because the applicant does not 'make available' technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology contained therein. It has finally been summed up that the referral fee would, in fact, be governed by the provisions of Article 7 (business profits) of the DTAA between India and Singapore, and the same is taxable as 'business profits' in Singapore only, as there is no Permanent Establishment (PE) in India, as defined in Article 5 of the Treaty. 16. Assailing the stand of the Revenue about the taxability of referral fees received by applicant as royalty income, the learned counsel has tried to drive the point home that by no stretch of imagination, the receipt can be characterized as royalty, as it is not a consideration for 'imparting of any information concerning technical, industrial or commercial or scientific knowledge, experience or skill' as laid down in section 9(1)(vi) read with Explanation 2(iv) of the Act. It is also not royalty as per the definition given in Art....
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....nt in appropriate proceedings. Incidentally, both the applicant's representative and the revenue's representative have also desired the ruling to be given in the set of facts available. 19. Taking up, first, the contention regarding the application being hit by the provisions of the proviso (iii) to section 245R(2) of the Act, we are of the view that the argument of the revenue, bereft of any substantial material, does not inspire credence. This is apart from the question whether at this stage, after the application has been allowed u/s 245R(2) of the Act, it is open to the Revenue to raise such objection. The substantial payment of tax by CWS in Singapore on the same income and the absence of patent improbability in the applicant's version from its business point of view are the other factors that persuade us not to reopen the order passed under S.245-R(2) of the Act. 20. Though in the application several questions relating to the taxability of amount of 'referral fee' have been raised, the rival contentions of the parties give rise to the following points for determination:- (a) Whether t....
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.... or arises in India. An income is said to accrue or arise at the location where the services or activities for earning the income have been rendered or the contract which gives rise to such income has been entered into. In this case, no activity except that of reportedly making a 'referral' from Singapore to CWI has been done in India. Even the contract agreement has been entered into in Singapore. The referral fee has neither been received in India nor does it accrue or arise in India. Hence, it is beyond the purview of section 5 of the Act. This takes us to section 9 of the Act which elucidates the expression 'Income deemed to accrue or arise in India'. 23. Section 9(1)(i) of the Act reads as follows:- "9. Income deemed to accrue or arise in India (1) The following income shall be deemed to accrue or arise in India :- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through transfer of a capital asset situate in India. [Explanation 1]- For the purp....
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....in India. In fact, an important aspect to be considered here is that whether the applicant has 'business connection' in India. Explanation 2, inserted w.e.f. 1.4.2004 has defined the business connection which has been extracted above. The said Explanation contains an inclusive definition; it brings in the business activities, specified in clauses (a) to (c) referred to above, within the fold of business connection which has to be understood in its ordinary meaning. On the facts of the case, it may, unhesitatedly, be concluded that none of the business activities in the aforementioned clauses is carried out by the applicant in India. The newly added Explanation 2 is, therefore, of no assistance in comprehending the meaning of the expression 'business connection', as no precise definition has been attempted. However, the phraseology 'business connection' has been the subject matter of judicial decisions and the Supreme Court in the case of CIT vs. R.D. Agarwal & Co. (1965) 56 I.T.R. 20 observed as follows:- 'A business connection … involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in ....
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....come by way of royalty payable by - (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by, such person in India or for the purposes of making or earning any income from any source in India. Explanation 1- xxx xxx xxx Explanation 2 For the purposes of this clause "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any inform....
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....e commercial nature would not make it a royalty. That cannot be the exclusive base or foundation. Some sort of expertise or skill is required. The aforesaid factor would be the requisite one. We are not inclined to accept the submission of Mr. Arya that every information if it concerns the industries or commercial venture would be a royalty. That would tantamount to state the law quite broadly. That does not seem to be the purpose of the statute or that of the treaty." 27. Outlining the underlying basic requirement for commercial information to be considered as royalty, the OECD model Convention and Commentary, 2005 has observed as under: "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, 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 capa....
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.... (T.R.Ramanatha Aiyar's) refers to it as follows:- A trade mark means a registered mark or a mark used in relation to goods for the purpose of indicating, or so as to indicate a connection in course of trade between the goods and some persons having the rights, either as proprietor or as registered user to use the mark…." When the above definition of trademark is placed against the definition of royalty arising out of the use of 'trademark', as contained in clauses of Explanation 2 to section 9(1)(vi) of the Act, it emerges that the recipient of the consideration, should be either the owner of the 'trademark' or registered holder of the 'trademark'. There should also exist a connection in course of trade between the payer and the recipient. Mere having the name 'Cushman & Wakefield' for the Indian associate enterprise will not make it royalty income, as no 'trademark' or brand name of the applicant can be said to have been allowed to be used by the applicant which bears the same trade name. The applicant is not the owner of the "trademark ", ("Cushman & Wakefield"), as stated by the learned counsel of the applicant and it is not the specific case of the Revenue ....
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....xx xxx xxx (b) xxx xxx xxx 4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. " xxx xxx xxx 31. The gist of the provision, quoted above, is that income shall be deemed to accrue or arise in India under section 9(1)(vii) of the Act by way of FTS, if it is paid by the persons specified in the sub-clauses (a)....
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....f the Act nor royalty income under section 9(1)(vi) of the Act nor FTS under section 9(1)(vii) read with Article 12(4)(b) of the Treaty. Needless to say, it is business income in the hands of the applicant and is taxable in Singapore only as the applicant has no P.E. in India. 33. The last point relates to the deduction of tax at source under section 195 of the Act. The applicant's contention is that if the referral fee paid/payable is not chargeable to tax under the Act, no deduction of tax can be made under section 195 of the Act. Here, it would be apt to refer to section 195 of the Act, which is in the following terms:- Section 195(1) of the Act "Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head salaries) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :" A plain r....