TaxTMI 
TaxTMI 
2019 (12) TMI 1523
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.... intelligence, knowledge and experience related to VIVO's customers and the applicant-company made one-time upfront payment of Reais (Rs.) 12.70 million (Twelve million and seven hundred thousand Reais) to VIVO as premium for the grant of the exclusive right to offer the ring back tone services to VIVO's customers for a period of five years. The agreement also specifies the revenue share at agreed percentage to be paid by VIVO to the applicant in respect of ring back tone services that the applicant would provide to VIVO. 2. The applicant has filed an application before the Authority for Advance Rulings (Income-tax), New Delhi on December 9, 2010, seeking a ruling on the applicability of withholding tax provisions of the Income-tax Act, 1961, relating to one-time premium paid by the applicant-company to the telecom operator in Brazil. 3. The applicant has sought ruling on the following questions : "(a) Whether, based on the facts and circumstances of the case, particularly in view of the fact that the payment pertains to business proposed to be carried out outside India, the proposed payments of Rs. 12.70 million by the applicant to VIVO for the grant of excl....
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.... by such person outside India or for the purposes of making or earning any income from any source outside India. - It is taxable as fees for technical services, payable by a person who is resident in India except where the fees are payable in respect of services utilized in 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. 6.3 It is asserted that VIVO does not carry on any business activities in India and has no permanent establishment in India so no business income deems to accrue or arise in India. 6.4 It is stated that even if the right in relation to access to user data base of VIVO would fall under clause (iv) of Explanation 2 to section 9(1)(vi) which pertains to "the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill" so that the payment would be considered to fall under the definition of royalties and the same may be considered to fall in the exception contained in section 9(1)(vi)(b), and therefore the same is not taxable in India. Attention is invited to the provisions of section 9(1)(vi)(b) wh....
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....nt has a business connection in India or whether the services are rendered in India would be irrelevant to examine. In the present context, the applicant submits that it does not have a business connection in India and also that the income is not considered as fees for technical services since it is used by the applicant for earning income from a source outside India. Therefore, the applicant respectfully submits that the provisions of the Explanation to section 9(2) would not apply. 6.9 The learned authorised representative mentions that section 90 of the Act provides that the provisions of the Act or the provisions of the double taxation avoidance agreement, whichever is more beneficial to the assessee can be applied. In the instant case, VIVO being tax residents of the Brazil, the provisions of the India-Brazil tax treaty would be applicable. 6.10 The learned authorised representative explains that the definition of royalty under the India-Brazil tax treaty is similar to the definition of royalty under the Act, the extract of which is given below : "(3) The term 'royalties' as used in this article means payments of any kind received as a consideration for ....
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....uires the right to deploy the ring back tone services in Brazil along with access to customer databases. This right is not in the nature of managerial, administrative, scientific or technical in nature, though it may be considered as consultancy in nature. Thus, the applicant submits that the fees could be considered as "fees for technical services" in accordance with the provisions of the India-Brazil tax treaty. However, as per section 90, the provisions of the Act or the Tax treaty, whichever is more beneficial to the applicant shall apply and since the payment is not taxable in India under the Act, the same may not be considered as taxable in India. 6.14 Lastly, it is argued that the business profits would be taxable in India only if VIVO has a permanent establishment (PE) in India through which it carries out activities in India. As per article 5 of the India-Brazil tax treaty, a permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. A fixed place of business includes a place of management, a branch, office, factory, warehouse, a farm, etc. Further, to conclude that a fixed place permanent establi....
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.... in India in the payee's hands by the Bangalore Tribunal. - The decision in the case of DIT v. Lufthansa Cargo India [2015] 375 ITR 85 (Delhi) ; [2015] 60 taxmann.com 187 (Delhi), held that the predominant activity being wet-lease of aircrafts to a foreign company and the expenses being incurred for earning income abroad, the source would be said to be outside India. - In the case of GVK Industries Ltd. v. ITO [2015] 371 ITR 453 (SC) ; [2015] 54 taxmann.com 347 (SC) attention was drawn to the following para of the decision to observe that the source would be the payer (page 467 of 371 ITR) : "22. The principal provision is clause (b) of section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee, i. e., the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down....
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....ued or arisen in India and further that the source of the income is not in Brazil but in India. The applicant's contention that the royalty payment of Rs. 12.7 million was for the purpose of earning income outside India ; could therefore only mean that the applicant is contending that its income earned in subsequent years out of the agreement and after acquisition of rights for providing ring back tone services are from a source outside India. 7.3 Again, without prejudice to the above two views, it has been further stressed that the payment made by the applicant can be termed for rendering technical, consultancy services and is therefore chargeable under section 9(1)(vii) of the Income-tax Act, 1961 as fees for technical services and though contended by the applicant, the provisions of section 9(1)(vi)(b) of the Income-tax Act providing for an exception, is not applicable to the case of the assessee, in the given facts of its case. 7.4 The Revenue submits that the applicant-company is the owner of the platform as well as the know-how for rendering of ring back tone ser vices with technical characteristics and functionalities and the applicant- company has utilized the inf....
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.... voicemail, voice short messaging service and missed call alerts which enable subscribers to personalise their mobile phones and thereby enhance user experience. 8.2 The following is a brief description of the business model followed by the applicant for rendering ring back tone services to its telecom operator customers : - The applicant and the telecom operator enter into a contract for providing "integrated services" to the end user of the telecom operator. - The applicant owns the hardware (server) and the software plat form to be used for this purpose. The server has to be deployed at the location of the telecom operator. - Such hardware and software are not licensed to the telecom operator. The telecom operator has no rights over the hardware and the software, which remain the exclusive property of the applicant. The product intellectual property remains with the applicant. - The telecom operator and/or the applicant then sources content to be used as ring back tone from independent third parties for a fee. Such a payment of fee to the owner of the content enables the applicant to offer the content as ring back tone for use by the teleco....
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....ian territory ; (ii) The parties intend to offer to the customer, solutions for integration to the means of access to computing systems of their own, or of third-parties, through mobile devices, by means of available wireless technologies, available and allowed in mobile telephony ; (iii) VIVO is interested in rendering to its customers the services offered by the company called 'ring back tones-RBT', pursuant to the provisions of this agreement ; (iv) The company is the owner of the platform as well as the know- how for the rendering of 'ring back tones services-RBT', with technical characteristics and functionalities that differ from one another, classifying them as 'value added services-VAS', pursuant to the definition provided in section 1 below : (v) The company was awarded by the RFP (request for proposal) process launched by VIVO as the provider of the "ring back tones" services ; (vi) The company has full acknowledgment that one of the conditions of the RFP (request for proposal) process launched by VIVO relates to the fact that the ring back tones services shall be provided by a Brazilian subsidiary ; ....
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.... pursuant to the regulations from ANATEL (National Telecommunications Agency) and the prevailing laws. . . 5.1 VIVO shall decide, in its sole discretion, what content to provide to its customers as part of the ring back tones services. 5.1.1. VIVO shall make its best efforts to provide the best, latest, and most popular available music content in the formats specified by the company. 5.2 VIVO shall be responsible for the quality, legal title and rights of use of the content supplied and shall indemnify and hold harmless the company from any claims, damages and costs arising from not properly licensed content or arisen from VIVO's failure to comply with its contractual obligation with the content provider. 5.3 VIVO shall be responsible for sourcing content for the ring back tone services that are suitable for the targeted audience, and for avoiding to provide content which is illegal or violates any applicable laws, and shall provide it to the company in the format specified by the company, along with the metadata pertaining to the content. 5.5 Company shall be responsible for the management of each and every content provided by VIVO ....
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.... second instalment or up to December 31, 2010 ; and 12.2.4 25 per cent. (twenty-five per cent.) to be paid not later than 3 (three) months from the date of payment of the third instalment or up to December 31, 2010. 12.3 For provision of the rendering of services subjected to this agreement, over the several technologies in which VIVO makes its data products and services available, the company shall be entitled to a percentage, as revenue share, of the net amounts (taxes excluded) collected by VIVO, according to the model described below : 12.3.1 Revenue-share of 25 per cent. (twenty-five per cent.) of the total net earnings received by VIVO, from subscriptions of the ring back tones services and sales of content on a gross revenue up to Rs. 261,315,000 (two hundred and sixty-one million, three hundred and fifteen thousand reais) ; 12.3.2 Revenue share of 20 per cent. (twenty per cent.) of the total net earning received by VIVO, from subscriptions of the ring back tones services and sales of content on a gross revenue from Rs. 231,315,001(two hundred and thirty-one million, three hundred and fifteen thousand and one reais) up to Rs. 609,735,000 (....
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.... view that no income has accrued or arisen in India for non-resident VIVO. Thus section 5 of the Income-tax Act is not applicable here. 8.11 Coming to the deeming fiction under section 9, for the sake of clarity section 9(1)(vi)(b) and relevant Explanations 2 and 5 are reproduced below : Section 9(1)(vi) reads as under- ". . . (vi) income 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 utilised 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 utilised 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 2 : For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding an....
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.... and is covered under clause (iv) of Explanation 2 to section 9(1)(vi)(b) and falls under the category of royalty payment. 8.13 The insertion of Explanation 5 under section 9(1)(vi) by the Finance Act, 2012, with retrospective effect from June 1, 1976 has clarified and amplified the scope of royalty to suggest that royalty includes consideration in respect of any right, property or information, whether the said right, property or information is with the payer or is directly used by the payer or whether or not the location of said right, property or information is in India. The said Explanation came into the statute after the filing of the Authority for Advance Rulings application by the applicant. The premium is certainly in relation to sharing of confidential and exclusive right and information and at the time of payment the said right or information was not used by the applicant and the said information resides in the server of VIVO but in view of Explanation 5, the said payment in the hands of VIVO would give rise to royalty as characterised in Explanation 2(iv). The premium paid thus is squarely covered under Explanations 2 and 5. 8.14 The only question now remaining to b....
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....plicant fails to provide the desired product/services, the partnership agreement can be terminated and in terms of para 13.2 of the agreement, the applicant will lose the right to sum already paid in this regard. The relevant para is reproduced below : "13.2 When termination of the agreement arises from VIVO due to the breach of obligations of this agreement by the company, the company : 13.2.1 Shall lose the right to any sum already paid to VIVO, at any title, with respect to this agreement and its attachments." 8.17 The business model of the applicant is that VIVO provides the content to be used for ring back tone services. The content is customised by the applicant and then deployed on the servers of VIVO. The end customer makes a request for ring back tones via a text message and then VIVO's exchange conveys the request to the applicant's server. The applicant's server recognises the request and sends the requested content through VIVO's exchange to the customer. 8.18 Therefore, only when the product/services are developed and delivered to VIVO as per VIVO's satisfaction and the customers subscribe to these products, VIVO may get addi....
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.... Amrit Kunwar v. CIT [1946] 14 ITR 561 (All) [FB], a decision of the Full Bench of the Allahabad High Court. A source of income was described by R. S. Pathak J. (as he then was) in the following words in Seth Shiv Prasad v. CIT [1972] 84 ITR 15 (All) at page 18 : 'A source of income, therefore, may be described as the spring or fount from which a clearly defined channel of income flows. It is that which by its nature and incidents constitutes a distinct and separate origin of income, capable of consideration as such in isolation from other sources of income, and which by the manner of dealing adopted by the assessee can be treated so.' The observations of the Judicial Committee (supra) as to what is a source of income have been approved by the Supreme Court in CIT v. Lady Kanchanbai [1970] 77 ITR 123 (SC). The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania C. J., speaking for a Constitution Bench of the Supreme Court in CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be....
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....t is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. Therefore, we cannot also approve of the Tribunal's conclusion in paragraph 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the section. Mr. Vohra, learned counsel for the assessee, however, contended that income arose not only from the manufacturing activity but also arose because of the sales of the products and if necessary a bifurcation of the income should be made on this basis and that portion of the income which is attributable to the export sales should qualify for the second exception. This argument is only a limb of the main contention that the income arises from the export sales and the source of the income is located outside India. We have already expressed our difficulty in accepting that argum....
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....s condition is not satisfied in the present case. 20. The assessee's case does not even fall under the first exception, since in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilised in a business carried on outside India. 21. The meaning of the term source of income in section 9(1)(vi)/ (vii) of the Act has been a subject matter of dispute since over some time. In keeping with few other judicial precedents, the hon'ble Delhi High Court has laid down that it is not the payer of income but the location of the manufacturing activity and concluding of the export contract from India that will determine the source of income. Further the assessee needs to specifically demonstrate that the technical ser vices were utilised in a business carried on outside India in order to fall under the exception." 8.23 Though the decision quoted (supra) was in the context of fee for technical services under section 9(1)(vii)(b), we are in agreem....
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.... which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties the tax so charged shall not exceed : (a) 25 per cent. of the gross amount of the royalties arising from the use or the right to use trade marks ; (b) 15 per cent. of the gross amount of the royalties in all other cases. 3. The term 'royalties' as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinema tography films, films or tapes for television or radio 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. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, and the right of p....
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.... the statement of relevant facts annexed to the application before the Authority for Advance Rulings, it is stated as under : "Background of the one-time upfront payment by the applicant to VIVO VIVO is an established telecom operator in Brazil. It has developed a large customer base in Brazil over many years after spending large sums of money on acquiring customers. VIVO was already providing mobile value added services such as ring back tone services to its customers in Brazil prior to entering into agreement with the applicant. Under the agreement, VIVO has granted exclusive right of providing ring back tone services to its sub scribers on its network to the applicant for a period of five years and in consideration for exercising such restraint on itself has agreed to be compensated therefor with a sum of Rs. 12,700,000 (twelve million and seven hundred thousand reais)." 8.31 From the above, it is clear that the applicant has kept a database, nurtured by commercial experience, relating to its mobile services which was being made available to the applicant and this valuable right has been shared with the applicant on exclusive basis and this is clear....
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....tables (components) in workshops abroad. The assessee did not deduct tax at source on such payments. The Assessing Officer held that such payments were in the nature of "fees for technical services" as defined in Explanation 2 to section 9(1)(vii)(b) and were, therefore, chargeable to tax on which tax should have been deducted at source under section 195(1). The Tribunal held that the sources from which the assessee has earned income are therefore outside India as the income earning activity is situated outside India. It is towards this income earning activity that the payments for repairs have been made outside India. The payments therefore fall within the purview of the exclusionary clause of section 9(1)(vii)(b). Thus, even assuming that the payments for such maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax. The view was endorsed by the hon'ble High Court. In that case the contention of the applicant was that no foreign technician was deputed to work in India. In our case, no business is carried on by the applicant at the time of making the premium payment and the income earning activity is located in India therefore th....