TaxTMI 
TaxTMI 
2022 (10) TMI 1104
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....ociated 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 furnishing of inaccurate particulars and concealment of income. Each of the above gro....
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....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) * Debtor management services (e.g. collect outstanding invoices) * Subscription management * Return copies processing 1.4. The Ld. AO in the assessment order dated 04 May....
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....ices ('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. It is submitted that in the present case, the Appellant was appointed as a non-exclusive sales representative/ distributor of SIPL, and thus, received commission for promoting and distributing SIPL's products. As evident from the Commissionaire Agreement, the service....
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.... 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 circumstances of the case and in law, the Ld. CIT(A) erred in upholding the addition of INR 166,783,110 made by the Ld. AO by treating the subscription fee collected by the Appellant from third party customers (i.e. Informatics Publishing Private Limited and ZS Associates India Private Limited) on behalf of Springer Nature ....
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....d 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 as such and not the process embedded in it. All the intellectual property rights and other rights relating to the same at all times are the exclusive property of the Appellant/group entities. Several processes may be involved in providing the e-journals but what the customer uses are the journals as such and not the process, which are involved into it....
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.... 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 5.1 There shall be no levy of penalty if the aforesaid grounds are decided in favour of the Appellant. 5.2 Further, it is well-settled law that where two views are possible and the Ld. AO differed with the view taken by the Appellant, penalty should not be leviable. 5.3 Further, the Hon'ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. vs. CIT (322 ITR 158) (SC) has held that merely because the claim of the assessee is not accepted by the revenue, that by itself would not attract penalty under section 271(l)(c)." 9. Ld. CIT DR opposed these submissio....
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....g 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 paragraph 3. Similarly, payments made to a consultant for advice related to the management of an enterprise (or of the business of an enterprise) would be fees for technical services. " 12. The Hon'ble Jurisdictional High Court in the case of Panalfa Autoelektrik Ltd 227 Taxman 351, in relation to "Managerial, technical and consultancy services", has observed as under: "14. The expressions "managerial, technical and consultancy services" have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word "services‟ to understand and appreci....
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....07 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 or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business." 15. The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinising the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever. This is clear from the facts as recorded by the Commissioner of Income Tax (Appeals), which have been affirmed by the Tribunal. The Commissioner of Income Tax (Appeals) has quoted excerpt....
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....eement 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 clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question. 18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communications Ltd. and Anr. Vs. Deputy Commissioner of Income Tax and Ors. (2001) 251 ITR 53 (Mad), the word "technical‟ has been interpreted in the following manner:- "Thus while stating that "technical service" would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute "technical" service to render it "technical service". The meaning of the word "technica....
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....rom 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, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it." 21. The word "consultant‟ refers to a person, who is consulted and who advises or from whom information is sought. In Black‟s Law Dictionary, Eighth Edition, the word "consultation‟ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there sh....
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....t 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 special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not. 40. The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering on-line gambling services through the internet). 41. In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or cre....
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....ing) 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 that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client‟s business, managing the supplier‟s business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, "consultancy services" refer to ....
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....nder 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 tax advice, are not predominantly managerial services. Yet, they were included under the head "Administrative management". To give few instances of managerial services, we may make mention of coordination of public relations issues and audit services and advice on global income-tax policies. Arrangement and coordination of global insurance can perhaps fall under this category, though in the absence of details, we do not want to express firm view. Another point we would like to clarify is that from the nomenclature used in the invoice i.e. 'management fee', it cannot be inferred that all the services under the agreement rendered to the applicant are managerial services. The label given in the invoice is not important, much less decisive. In fact, the expression 'management fee' is not found in the agreement. It is described in the agreement as service charge or fee and the same description is given in the application also. In the note,....
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....plicant 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 someone else. 17. In view of the foregoing discussion, the first question defies a precise answer-either in the affirmative or negative. Many of the services catalogued in the agreement and in the note are technical/consultancy services which do not 'make available' technical knowledge, experience etc. and therefore do not fall within the ambit of cl. (c) of art. 13.4. But, some of them satisfy the test of making available 'technical knowledge' etc. and therefore taxable as FTS under art. 13.4 of Treaty. There are also services which can be categorized as managerial. There are some which do not fall under either of the three categories. We have given sufficient indication of all such services, on a broad analysis. 17.1 It is made clear that nothing in this ruling shall preclude the concerned IT authorities to determine the cost of services etc. on arm's length basis by taking resort to the provisions of s. 92 of IT Act, 1961. 18. 2nd Question : As in....
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....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, arranging for insurance cover etc. The Tribunal after deliberating on the nature of the aforementioned services concluded, that as the same were purely commercial services falling in the category of logistic arrangement services, thus, the consideration received as regards rendering of such services would constitute business profits of the said overseas service providers. It was further observed, that as the said service providers had no Permanent Establishment (P.E) in India during the year under consideration, hence the business profits were not taxable in India in their hands as per Article 7 of the respective tax treaties between India and the abovementioned countries. We have deliberated at length on the facts involved in the case before us, and find that the nature of services rendered P a g e | 15 ITA No. 1732/Mum/2016 AY 2012-13 M/s Endemol South Africa Vs. DCIT (IT),Circle-2(2)(1) by the overseas service providers in the aforementioned case of Yashraj Films Pvt. Ltd.(supra) are some....
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....8223; 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 same was obtained, however, such ruling would still have a persuasive value in respect of other parties as well and accordingly, may be relied upon by the authority itself or by the applicant/department. We find that our aforesaid view is fortified by the judgment of the Hon‟ble Supreme Court in the case of Columbia Sportswear Company Vs. DIT, Bangalore (2012) 346 ITR 161 (SC). We are further of the considered view, that though the lower authorities had declined to take cognizance of the observations of the Hon‟ble AAR on the ground that the "tax treaties" involved in the said case were different as against that involved in the present case, however, there is no mention of any such material fact which could persuade us to conclude that the definition of "FTS" in the said respective tax treaties would be absolutely unworkable, and hence could not be applied in the case before us. We thus, are of the considered view, that the lower authorities had erred in failing to appreciate that th....
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.... 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 goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, `managing' encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word `managing' is wider in scope than the word `executing'. Rather the later is embedded in the former and not vice versa. 8. Adverting to the facts of the instant case it is observed that the as....
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....a)." 21. Similarly, the Hon'ble Madras High Court in the case of Farida Leather Company 238 Taxmann.com 473 has held as under: "11. In the instant case, it is seen, admittedly that the non-resident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of f....
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....ully following the same reasoning, we set aside the findings of Ld.CIT(A) and direct the AO to delete the addition. Thus, Ground No.2 raised by the assessee is allowed. 13. Now, coming the Ground No.3 raised by the assessee against the addition of Rs.16,67,83,110/- in respect of subscription fee collected from third party customers. 14. Ld. Counsel for the assessee submitted that the issue is covered by the judgement of Hon'ble Supreme Court rendered in the case of Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT [2021] 432 ITR 471 (SC). Ld. Counsel for the assessee reiterated the submissions as made in the written synopsis. Ld.CIT(A) in respect of addition of Rs. 16,67,83,110/- on account of subscription fee received from third party customers, has decided the issue by observing as under:- 7.10 "The software as it is seen in the present context can be classified as a process and therefore applicability of the judgement is not direct is this case. A clam of softwares are basically classifiable as a "process" or plan and the consideration of the same is certainly consideration for a process as included in the definition of Royalty in the DTAA. The term process used her....
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....nt. It has to be receipt minus allowable deductions. Therefore, the appellant cannot wash away its hands by simply saying that it retains a part of it, only. If the appellant is paying a part of it to SIPL, the same is liable to be allowed as deduction, provided other conditions of eligibility are fulfilled. As mentioned above, 3CEB report of SIPL does not reflect any part this receipt. Hence, prima-facie, there is no case of allowing deduction. It is not the case of the appellant that the appellant made any specific claim (by way of filing return of income or revised return of income) for allowing deduction against this receipt and AO denied such claim. 7.14 Therefore, although this ground (No. 3) of the appeal is partly allowed, in principle, however, as the appellant is not entitled for any relief." 15. There is no dispute with regard to the fact that the AO made addition. The AO treated the commission income as "Royalty". This view of the AO is confirmed by the Ld.CIT(A). However, it is not the case of the Revenue that there was transfer of copyright by the assessee by the judgement of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. V....