TaxTMI 
TaxTMI 
2022 (10) TMI 1104
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome of Rs. 22,89,835/- earned by the Appellant from its Associated Enterprise i.e. Springer Nature India Private Limited ("SNIPL"/ earlier known as Springer (India) Private Limited) for sale of books and journals to third party customers as fee for technical services ("FTS") under Article 12 of India-Germany Double Taxation Avoidance Agreement ("DTAA") and the Act. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs. 16,67,83,110/- made by the Ld. AO by treating the subscription fee collected by the Appellant from third party customers (i.e. Informatics Publishing P. Ltd. and ZS Associates India Private Limited) on behalf of Springer Nature Group's affiliated publisher entities for sale of online books and journals in India as "royalty" income under Article 12 of the DTAA and the Act. 4. That on the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 234A and section 234B of the Act. 5. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1 )(c) of the Act for furnish....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness. The Appellant acted as a commissionaire for its affiliated publisher entities, i.e., owners of books and/ or journals within the Springer Group. 1.2. During the year, by virtue of the Commissionaire Agreement dated 02 January 2013 entered with Springer India Private Limited (SIPL), the Appellant was appointed as a non-exclusive sales representative on a global basis to promote, grant and distribute the products of SIPL, and to fulfill the needs and requirements of SIPL's customers. In accordance with the Agreement, the Appellant received 'commission' of INR 24,84,114 (being 10% of the net revenue amount) during the AY 2013-14. Copy of Commissionaire Agreement is attached at Pages 84 to 100 of the paper book. 1.3. As per the terms of the Commissionaire Agreement, the Appellant, inter-alia, provided following services to SIPL in accordance with SIPL's terms and conditions (refer Article 3 of the Agreement attached at Page 85 of the paper book): * Customer service * Order handling * Address maintenance * Stock keeping and inventory management * Invoicing * Delivery (physical as well as online access) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....35 earned by the Appellant from its Associated Enterprise, i.e., Springer Nature India Private Limited ['SNIPL'/ earlier known as Springer (India) Private Limited ('SIPL')] for sale of books and journals to third party customers as fees for technical services ('FTS') under Article 12 of the India-Germany Double Taxation Avoidance Agreement ('DTAA') and the Act. 2.1. It is at the outset submitted that the impugned issue stands decided in favour of the Appellant by the order of this Hon'ble Tribunal in the case of group entity namely Springer Verlag GmbH for AY 2014-15 and 2015-16 (ITA Nos. 434 and 3826/Del/2019). In the said case, Springer Verlag GmbH, in accordance with the similar Commissionaire Agreement, had received commission income which was held to be in the nature of FTS by the CIT(A). While adjudicating the appeal filed by said group entity, the Hon'ble Tribunal vide its order dated 23 August 2022 held that mere provision of support services cannot be treated as managerial services and therefore, the commission received by a global non-exclusive sales representative is not managerial services and the same is not taxable as FTS under Indo-Germany DTAA. 2.2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....resentative of SIPL (enlisted in Article 3 of the commissionaire agreement) clearly shows that the said services are not in the nature of FTS. The same has also been appreciated by the CIT(A) while deleting a part-addition of INR 1,94,279/- wherein the CIT(A) itself clearly held that 'commission' income is in the nature of business income which is not taxable in India in the absence of a permanent establishment ('PE') in India (refer para 6.5 on page no. 36 of CIT(A) order). 2.7. Therefore, applying the same rationale to the balance commission income of INR 22,89,835 should also not be taxable in India being in the nature of business income. 2.8. In view of the above, it is submitted that the commission income earned by the Appellant cannot be characterised as FTS, both under the Act and the DTAA as (i) complete documentary evidences have been filed before the lower authorities and (ii) the Hon'ble Tribunal, on identical facts, in the case of Springer Verlag GmbH (group entity) has held that the commission received by a global non¬exclusive sales representative is not taxable as FTS under Indo-Germany DTAA. Ground No. 3 - That on the facts and circums....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the case of Engineering Analysis Centre of Excellence (P.) Ltd. [2021] 432 ITR 471 (SC) has upheld the principle that income from sale of copyrighted articles should not be taxed as royalty either under the Act or the DTAA if there is no transfer of copyright. The Hon'ble Supreme Court held that since the license granted to distributors and end users does not create any interest or right in the software, grant of license would not amount to "use of or right to use" of copyright and, hence, it would not qualify as royalty. The Court further observed that it is a sine qua non that there must be a transfer of all or any rights in a copyright by way of license or otherwise which was not present. 3.5 Furthermore, it may be noted that the DTAA requires that the payment can be held to be 'Royalty' only when there is "use" or 'right to use1 of a 'process'. In this regard, it is submitted that the subscription of e-journals in the instant case cannot be held to be "use of process" or "information concerning industrial, commercial or scientific experience" because the end users do not have any access to the source code. What is available merely for their use are the e-journals ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....taxable as royalty under the Act as well as under the Tax Treaty. 3.10 Without prejudice to the above, it is respectfully submitted the Appellant was collecting subscription fee from third-party end customers only on behalf of affiliated publisher entity and the same under no circumstances be treated as income in the hands of the Appellant. It is a well-established principle of law that what can be taxed is the 'real income' and not any notional/ hypothetical income. Reliance in this regard is placed on the following judicial precedents: * E. D. Sassoon & Co. vs CIT: [1954] 26 ITR 27 (SC) * CIT v. Ashokbhai Chimanbhai: [1965] 56 ITR 42 (SC) * CIT v. Hindustan Housing and Land Development Trust Ltd.: [1986] 161 ITR 524 (SC) * CIT v. Shoorji Vallabhdas & Co.: [1962] 46 ITR 144 (SC) * Godhra Electricity Company V CIT: [1997] 225 ITR 746 (SC) * CIT vs. Excel Industries Ltd.: (2013) 358 ITR 295 (SC) Ground No. 4: Interest charged under section 234A and 234B of the Act 4.1 This ground is consequential in nature. Ground No. 5: Penalty proceedings initiated under section 271(l)(c) of the Act ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....yment should be a consideration for rendering of any managerial services. The ld. CIT(A) was of the firm belief that the assessee was involved in rendition of managerial services to SIPL and, therefore, the commission received for such services is in the nature of FTS. 11. Interestingly, the concept of FTS is not present in the OECD Model Convention. However, it finds mention in the UN Model Convention wherein Article 12A grants the source country a primary right to tax such fee from technical services. In fact, the Commentary to the UN Model Convention lays down clear guidance in respect of the meaning of the term 'managerial services' which is evident from the following extract: "63. The ordinary meaning of the term "management" involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services would be fees for technical services within the meaning of para....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc." It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager." Reference can be also made to the decision of the Authority for Advance Rulings in In Re: Intertek Testing Services India Private Limited, [2008] 307 ITR 418, wherein it was elucidated:- "First, about the connotation of the term "managerial". The adjective "managerial" relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people‟s activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, "management" includes the act of managing by direction, or regulation o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the non-residents‟ representations and acts, only when there was a written and signed authorization issued by the respondent-assessee in favour of the non-resident. Thus, the respondent-assessee dictated and directed the non-resident. The Commissioner of Income Tax (Appeals) has also dealt with quantification of the commission and as per clause 4, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent-assessee received in terms of the purchase contract or order, in addition to a pre-determined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent-assessee. 17. The Revenue, which is the appellant before us, has not placedcopy of the agreement to contend that the aforesaid claus....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the term "consultancy services"? This Court in Bharti Cellular Limited and Others (supra) had referred to the term "consultancy services" in the following words:- "14. Similarly, the word "consultancy" has been defined in the said Dictionary as "the work or position of a consultant; a department of consultants." "Consultant" itself has been defined, inter alia, as "a person who gives professional advice or services in a specialized field." It is obvious that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as "ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action". It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant." The AAR in the case of In Re: P.No. 28 of 1999, reported as [1999] 242 ITR 208 had observed:- "By technical services....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Limited (supra) is clearly distinguishable as in the said case the nonresident consultant had to perform several services in the nature of attending meetings on mutually agreeable dates and providing advice and counseling, which were in the nature of consultancy services as they entailed support from a product team, compliance with all legal and administrative formalities, including registration and marketing strategy, creation of entry into new markets, development and distribution channels, etc. The work being rendered was in the nature of services as a consultant to the Indian assessee. It included an element of advice and was certainly recommendatory in nature. 24. The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- "Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ware available to that client. For example, the mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. Managerial services 43. The Group considers that services of a managerial nature are services rendered in performing management functions. The Group did not attempt to give a definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not. 44. The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....view them in water tight compartments, but in the present case this issue or differentiation is again not relevant." 13. Similarly, the Authority for Advance Rulings in Intertek Testing Services India [P] Ltd 307 ITR 418 has observed as under: "As pointed out by the Supreme Court in R. Dalmia vs. CIT 1977 CTR (SC) 130 : (1977) 106 ITR 895 (SC), 'management' includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business. Seemingly, some services can be classified either under managerial or some other head. In such a situation, the test to be applied is whether they are predominantly managerial in nature. Whatever services are enumerated under the head "Administrative management" cannot automatically be brought within the purview of the managerial services. In fact, many of them may not appropriately fall under managerial services. To give some examples, the maintenance of trade marks register and arranging renewals, preparation and distribution of brochures and other promotional material, maintenance of central claims register or providing professional t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt agency to requisition the services from various other Intertek groups subsidiaries and, therefore, the ITM, UK presumably passes on the amount charged to various other entities, while retaining at the most, the mark-up charge of 7.5 per cent. In the absence of the applicant furnishing any details of services actually rendered by ITM, UK, it is submitted that a conclusion cannot be drawn that the UK company is the real beneficial owner. It appears that the omission on the part of the applicant in spelling out the details of the actual services received by it from the payee of the fee i.e. ITM, UK has given scope for this argument. The argument is evidently based on certain assumptions. It is not proper to proceed on the assumption that the ITM, UK is incapable of rendering any technical or consultancy services and that its role is merely that of a conduit, in the absence of definite material leading to such inference. The omission on the part of the applicant in furnishing the details of actual services cannot be stretched too far. On the basis of the facts appearing on the record, it is not possible to arrive at a finding in this proceeding that the beneficial owner of fee is so....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ca [Proprietary] Ltd 67 ITR (T) 520. The relevant findings read as under: "16. We may herein observe, that a similar view had earlier been arrived at by the ITAT, Mumbai, in the case of Yashraj Film Pvt. Ltd. Vs. ITO (IT) (2012) 231 ITR (T) 125 (Mum.). On a perusal of the facts involved in the aforementioned case, it emerges that the Tribunal had observed that as the services rendered by the nonresident service providers for making logistic arrangements were in the nature of commercial services, thus, the same cannot be treated as managerial, technical or consultancy services within the meaning given in Explanation 2 to Sec. 9(1)(vii) of the Act. In the aforementioned case, the assessee had made payments to various overseas services providers belonging to U.K, Poland, Brazil, Canada & Australia for services availed in connection with the shooting of different films. The services rendered by the aforementioned nonresident service providers included arranging for extras, arranging for the security, arranging for locations, arranging for the accommodations for the cast and crew, arranging for necessary permissions from local authorities, arranging for makeup of the stars, arr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... service providers by providing line production services to the assessee, viz. providing line producer, local crew, stunt services, transport etc. would not qualify as "FTS" under the Act. We find that in the present case, the A.O/DRP had declined to rely on the aforesaid rulings of the AAR, for the reasons viz. (i) that as per Sec. 245S, the advance ruling is pronounced on the basis of facts of a particular case and hence, it is binding on only the applicant in respect of the transactions in relation to which advance ruling was sought; and (ii). that the ruling was rendered by the Hon‟ble AAR in context of different DTAA‟s, as against that involved in the case of the assessee. We have deliberated at length on the aforesaid observations of the lower authorities and are unable to persuade ourselves to accept the same. We find that though it is an admitted fact that an P a g e | 16 ITA No. 1732/Mum/2016 AY 2012-13 M/s Endemol South Africa Vs. DCIT (IT),Circle-2(2)(1) "advance rulings‟ having been rendered on the basis of the facts of a particular case, thus, would only be binding on the applicant, and that too in respect of the transactions in relation to which the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed simplicity without there being any planning part involved in the execution and also the evaluation of the performance. In the absence of any ITA No.2426/Mum/2010 M/s.UPS SCS (Asia) Limited. 6 specific definition of the phrase "managerial services" as used in section 9(1)(vii) defining the "fees for technical services", it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the assessee has received commission as per the Commissionaire Agreement with SIPL which is nothing but export commission/sales commission, which has been treated as FTS. 20. Similar quarrel was considered by the Hon'ble Jurisdictional High Court of Delhi in the case of Hero Motocorp Ltd 394 ITR 403. The relevant findings read as under: 20. In this context, the Court concurs with the following findings of the ITAT: "Therefore, by export agreement, the assessee has not been transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL, by way of export agreement, has not rendered any managerial, technical or consultancy services . In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia)." 21. Similarly, the Hon'ble Madras High Court in the case of Farida Leather Company 238 Taxmann.com 473....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x v. Kikani Exports Pvt. Ltd.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- ... the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted. 16. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed." 22. In light of the above, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the impugned addition. Ground Nos. 1 to 5 in Assessment Year 2014-15 and Ground No. 1 to 3 in Assessment Year 2015-16 are allowed." 12. Respectfully following the same reasoning, we set aside the fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he database / scientific knowledge available at the server of SIPL, therefore, what the subscriber is paying is in fact, for 'royalty'. The appellant is getting is a part of it (Royalty) and therefore, the character does not change in the hands of the appellant. 7.13 It is noted that the subscription/renewal of subscription paid by the Indian customer was not for purchase of any copyrighted article, in classic sense. Therefore, what the author (or copyright holder) gets is for the knowledge shared by the author (or the copyright holder). Although the appellant has contested that it is not the owner of the journals (software). However, it is the appellant who raises invoice on the customer. Therefore, the appellant is getting "royalty"; may be the appellant retains a part of it, only. The definition of the "Royalty" is not dependent on the status of the receiver. If the appellant is not the owner, it is certainly collecting on behalf of the owner. Therefore, the receipt, per se, is covered in the definition of "Royalty". Hence, I find no infirmity in the action AO in terms of taxing gross receipt as "Royalty", Of course, the entire receipt may not be income of the appellant....