TaxTMI 
TaxTMI 
2023 (12) TMI 1339
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....17/11/2016 & 14/10/2015 respectively. 2. In all the appeals of the assessee similar grounds and issues have been raised, therefore, same were heard together and are being disposed of by way of this consolidated order. For the sake of ready reference, grounds raised in all the years are as under:- ITA No.6509/Mum/2016 (A.Y.2009-10) "1. Whether on the facts and in circumstances of the case the learned CIT(A) erred in holding that the services rendered under the SPS as not falling within the purview of Royalty under para 3(a) and FTS under para 4(a) and para 4(c) of the Indo - UK Treaty. The learned CIT(A) has held that the SOC contract (2005-2008) and SOC contract (2008-11) are separate whereas the assessing officer has brought out in the order that the services rendered before and after the two sets of agreement were one and the same. 2. Whether on the facts and in circumstances of the case the learned CIT(A) erred in holding that the services rendered under the SPS as not falling within the purview of Royalty under para 3(a) and FTS under para 4(a) and para 4(c) of the Indo - UK Treaty despite the fact that the assessee during the assessment proceedings as w....
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....udice to the above, based on the facts and circumstances of the case, the learned Assessing Officer erred in holding that diamonds which are graded are also inscribed with the inscription and carry a trademark. 4. Without prejudice to Ground No 3, the learned Assessing Officer erred in taxing the receipts from grading services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (AA) of clause (b) of sub-section (1) of section 115A of the Act. 5. The learned Assessing Officer erred in treating the receipts from DTC Accredited Business Services as Fees for Technical Services and Royalty under Article 13 of the India-UK tax treaty. 6. Without prejudice to Ground No 5, the learned Assessing Officer erred in taxing the receipts from DTC accredited business services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (BB)/ (AA) of clause (b) of sub-section (1) of section 115A of the Act. 7. The learned Assessing Officer erred in applying the tax rate of 15 per cent to royalty income received....
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....section 271(1)(c) of the Act. ITA No.5734/Mum/2015 (A.Y.2012-13) 1. The learned Assessing Officer erred in treating the receipts from Supply Planning Services ('SPS') as Fees for Technical Services ('FTS") under Explanation 2 to section 9(1)(vil) as well as under para 4 of the India- UK tax treaty and Royalty under para 3 of Article 13 of the India-UK tax treaty 2 Without prejudice to Ground No 1, the learned Assessing Officer erred in taxing the receipts from SPS at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub clause (BB)/ (AA) of clause (b) of subsection (1) of section 115A of the Act. 3. The learned Assessing Officer erred in granting credit for taxes deducted at source of Rs 117,554,727 as against Rs 122,782,473 claimed in the return of Income. 4. The learned Assessing Officer erred in charging interest under section 234B of the Act. 5. The learned Assessing Officer erred in law and on facts in initiating penalty proceedings under section 271(1)(c) of the Act. ITA No.1833/Mum/2017 (A.Y/2013-14) 1 The learned Assessing Officer err....
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.... for AY 2009-10 on 31/03/2011 declaring a total income of Rs 28,74,473/- being income earned from providing inscription services offered as royalty. In this case, earlier in the first round, the Tribunal has remanded this issue to the AO to decide in light of new agreement of SPS and not based on the earlier agreement as both stood at the different footing. 5. During the course of original assessment proceedings for AY 2009-10, AO passed the draft assessment order dated 30/12/2011 u/s. 143(3) read with section 144C(1) of the Act by making the following additions to the total income of assessee. Sr. No. Particulars Amount (Rs.) 1 Receipts from SPS taxable as fees for technical services ('FTS") and/ or royalty under Article 13 of the DTAA between India and UK 1,02,62,21,488 2 Receipts from grading services taxable as Royalty under Article 13 of the DTAA between India and UK 4,00,703 3 Receipts from DTC-ABP taxable as FTS and/ or royalty under Article 13 of the DTAA between India and UK 54,35,104 Total 1,03,20,57,295 6. Assessee filed objections before the Dispute Resolution Panel ('DRP') against the draft assessmen....
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....appropriate SPS agreement 2008-2011 for the AY 2009-10. The fact is that the Revenue Authorities have not examined the issues and not made the additions of this magnitude in the light of the correct contract with Sightholders. It is surprising to notice despite the supply of the relevant contract 2008-2011 to the AO, the relevant assessment order refers to the provisions of the old contract with Sightholders and contents of para 3 of page 4 of the assessment order witness these basis avoidable mistakes. There is no discussion either in the order of the AO or in the directions of the DRP to the nature of impugned SPS services or homologous nature of these services to the VAS services. If they are comparable to VAS services, how the other Core Services or Growth Services specified in the old contract are impliedly made available indirectly through Extranet Services allowed under the new contract. It is also required that the revenue ought to have explained on the discontinued services since the old contract with the Sightholders. It is explained before us that the assessee stopped supplying services relating to marketing and growth related areas of the business. In our opinion, it is....
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....hich get graded and inscribed carry a trademark and accordingly, it is taxable as royalty. 25. Regarding receipts on account of DTC Accredited Business services, the assessee has received a sum of Rs.54,35,104/- under the DTC-ABP which was created in 2008 for entities who were former sightholders and they did not qualify such holders for the year 2008-2011 contract. Since, these former sightholders wanted to maintain business relationship with the assessee, they had entered into a DTC-ABP agreement with the assessee to qualify as DTC accredited business partners. The assessee has claimed that receipts of these services are not taxable. However, the ld. AO held that the receipts are taxable both as FTS and royalty under Article 13, because assessee has been sharing experience which enables the recipient to use it for its business purposes. The "make available" element is embedded in sharing of experience. Further DTC-ABP is an extension of value added services which is also taxable as FTS. Thus, all the elements of FTS and royalty stands satisfied. 26. The ld. CIT (A) on the issue of service rendered on SPS held that Tribunal in A.Y.2009-10 had clearly observed that scope of s....
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.... "Salaries" Similarly, royalty payable to non-resident for services utilized in a business carried on in India or for the purpose of making or earning any income from any source in India is taxable as income of the non-resident in India. The term royalty has been defined in Explanation-2 to section 9(1)(vi) which among other things includes any payment for the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. 3.15. Further, for taxability of the sum as royalty or FTS under the provisions of Income tax, it is not necessary that the non-resident should have a place of business in India or to have rendered any services from India. It has been made clear in the Explanation to section 9(2) inserted by the Finance Act, 2010 with retrospective effect from 1.6.1976 as per which the income is chargeable in India whether or not, the non resident is rendering services in India, or has a place of business or business connection in India. Under the provisions of treaty also, royalty and FIS are chargeable to tax in the hands of non resident whether or not he has any Permanent Establishment (PE) in India. Therefore, t....
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....t of the gross amount of such royalties or fees for technical services in all other cases, and for technical services, and (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purposes of this Article, the term "royalties" means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, 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 income derived by an enterprise of a Contracting Sta....
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....assessee was not transferring the technical knowledge, skill, experience etc but was only imparting the information concerning commercial experience. Therefore, in our view, provisions of para 4(c) will not be applicable." 3.18. It would be pertinent to note that the SoC contract 2005- 2008 was the subject matter of the verdict of the Hon'ble Tribunal for AY 2007-08. The Hon'ble Tribunal's decision on the services not making available any technical knowledge, expertise and skill could be extended to the SoC contract 2008-2011 since the scope of services under the old contract encompasses the scope of services under the new contract. While the Appellant has entered into a separate contract from the year 2008 for providing a particular set of services called as supply planning services, the nature of services is such that it is similar to the core services (excluding business sustainability services) provided by the Appellant under the SoC contract 2005-2008. 3.19. Since the Appellant was only imparting information concerning future supplies and not transferring any technical knowledge, skill, etc, in my view, the provisions of para 4(c) should not be ap....
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....ices, the assessee was providing supply planning tool services and business sustainability services. Supply planning tool services basically consisted of advance information given by the assessee to Sightholders regarding nature, quality and other parameters of diamonds it intended to make available over selling period of two and a half years. Normally, a trader does not charge for giving information about goods it intends to sell. However, in this case, providing such information well in advance requires in depth experience in marketing of diamonds so as to know future marketing trends. The assessee was using its global marketing experience to provide such information which was commercial in nature to the Sightholders so that they could plan their trading schedules accordingly. Therefore, in case the assessee was charging for such information, the payment has to be considered as royalty for providing information of commercial nature based on experience. However, the Hon'ble Tribunal was of the view that the real charge was for providing various marketing information through Extranet and as part of Business Sustainability and growth services and personal services provided in re....
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....eipts from supply planning services should not fall under the ambit of royalty under para 3(a). 3.26. The Hon'ble Tribunal had in AY 2007-08 further held that value added services should be taxed as FTS under para 4(a) being payment attributable to the services rendered by the KAM, through workshops, etc which were ancillary and subsidiary to application or enjoyment of the information, or as payment for marketing consultancy services which were ancillary and subsidiary to the application or enjoyment of Nakshatra brand or Forevermark. 3.27. The Appellant has pointed out that it had sold the Nakshatra brand in AY 2008- 09 and has offered the same to tax as long term capital gains. Hence, during the year under comsideration, the Appellant had not earned any royalty income on application or enjoyment of the Nakshatra brand. 3.28. Further, the Appellant has also argued that if the payment fails to fall within the purview of royalty, the payment of services cannot be considered as FTS, terming them to be ancillary and subsidiary. Hence, given that the services under the old contract which the Hon'ble Tribunal had construed to be in the nature of royal....
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....he same as royalty should not arise. It has further been noted that the Appellant has not provided use or right to use any copyright, artistic or scientific work, patent, trademark, design, model or plan. 5.11. In the course of appellant proceedings the appellant filed a sample copy of Appendix 'B' which is DTC Accreditation Guideline for using the term "DTC Accredited Business" In the said Guidelines, it has been specifically provided that "Importantly, describing your company as a DTC Accredited Business should not mislead, confuse or misinterpret the relationship your business has with De Beers or any De Beers group company or any division thereof Usage of the term must only and precisely be used in connection with the name or logo of the specific company contracted to be a DTC Accredited Business. If the name of this company changes, you should inform a member of the De Beers BPP team. Please note: There is no logo or "signature" designed for DTC Accredited Businesses." Thus, it is noted that the fees charged by the Appellant for "DTC Accredited Business Programme" is not for use or right to use any copyright, artistic or scientific work, pate....
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....assessee has earned income from provision of value added services and sightholder used to receive core service as defined under the contract. Further, assessee also offered an option to service recipients to avail growth services which are providing free of cost. Thereafter, SOC contract for 2008-2011, the supply planning services consisted of intention to offer and maintaining integrity of supplier of his choice. The scope of services under the old associated agreement 2005-08 was as under:- 2.8.1. Core services (integral to the intention to offer or the ITO) Core services encompassed supply planning and business sustainability Supply planning tools were those capabilities derived from the DTC's unmatched regularity of assortment and consistency of supply along with its superior sales planning services, such as the Intention to Offer (ITO) and extended SoC contract period. These services aimed to offer Sightholders a stable platform to achieve clear differentiation in their operational planning and downstream commitments. Supply planning tools were chargeable services (by way of the Service fee) and consisted of • Continuity of Supply â....
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....ween Sightholder and DBUK and assists in managing that relationship. The KAM manages and provide support in planning the ITOs and delivery schedules. 2.9.2. Maintaining integrity of Supplier of Choice DBUK has engaged with an organization to verify the accuracy of the information contained in Sightholder submissions and information supplied or ought to be supplied by Sightholders during the term of the contract 2.10. A chart summarising the scope of services in both the agreements was also submitted before the Hon'ble ITAT (at page 204 to 207 of factual paper book of AY 2009-10) Fee arrangement under both the contracts: 2.11. Under the SoC contract 2005-08, DBUK charged a fee of USD 1,80,000 plus a percentage of the incremental rough purchase whereas, under the SoC contract 2008-11, DBUK charged a fee of 1.5% for every USD of boxes of diamonds purchased by the relevant sightholders. 212. In view of the above, your Honours shall appreciate that the nature of services rendered under the SoC contract 2008-2011 has considerably reduced than that of the services rendered under the SoC contract 2005-08. Year wise break-up of VAS/ ....
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....d its Sightholders relevant to the subject matter hereof to the exclusion of all other terms and representations whether express or implied, written or oral. Nothing in this Policy Statement (or arrangements entered into under it) shall constitute a partnership, agency or franchise arrangement between the DTC and any Sightholder (or any member of their respective groups) 34. Further, the learned DR has submitted that assessee in its clarification has mentioned that there is no service guide at the time of publishing policy statement whereas as mentioned on page 59 of SoC agreement 2008-11, the service guide is to be published from time to time Therefore, DBUK has not given any statement on whether after publishing policy statement if there is any service guide or not. 35. In this regard, ld. Counsel submitted that there is no such service guide even after publishing the policy statement and in fact as pointed out above in terms of para 14.4 of SPS contract 2008-11, this policy statement constitutes the entire agreement between the DTC and its sightholders. 36. We agree with Ld. Counsel that the approach of the ld. AO in deciding this issue holding that there is no differen....
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....dy held that there is distinguishing between the SOC contract (2005-08 and 2008-11) is not some kind of an afterthought because same was submitted before the AO and ld. DRP at the first instance. The Tribunal in its earlier order dated 04/09/2013 at para 18 has already held that SOC agreement 2008-11 was filed by the assessee before the AO at the relevant point of time. Thus, the difference in both the agreements cannot be an afterthought and both the authorities should have considered the new agreement before passing the order. Accordingly, this ground is rejected. 39. Now, coming to the issue raised in Ground No.3 holding the receipts of Rs.102,62,21,488/-, being fees for SPS not falling under the purview of royalty under Article 13(4). We have already held that scope of services rendered by assessee in VAS agreement 2005-08 and SOC agreement 2008-11 were entirely different. In A.Y.2007-08, the Tribunal held that VAS is to be taxable only on account of the following reasons:- "Under para 3(a) of Article 13-on account of payment for various types of information of commercial nature acquired based on experience provided to Sightholders in the form of extranet services, ....
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...., For the sake of ready reference, the relevant para reads as under:- "7.20 Thus, in view of the decisions of the Tribunal mentioned above, for taxability of a sum as FTS, under para 4(c) of article13 of the Indo UK Treaty, the payment should not only for rendering of technical or consultancy services but such services should also make available technical knowledge, experience, etc. which can be used by the recipient on its own. The consultancy services have been interpreted as technical consultancy. However, the word "technical" is not used only in relation to technology. It also refers to practical skills, experience acquired in a particular activity. Thus consultancy based on practical skills, experience will also be covered but for application of para 4(c), such skills, knowledge, experience etc. should be made available to the recipient who could apply the same independently. In the present, case the assessee is providing information which is of the nature of commercial information based on its experience. The assessee was not transferring the technical knowledge, skill, experience etc. but was only imparting the information concerning commercial experience. Therefore....
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....xtranet is merely a platform to provide information to the sightholder. It is nothing but a website that that allows controlled access to partners, vendors and suppliers or an authorised set of customers normally to a subset of the information accessible from an organization's intranet. Thus, no technical service was provided to sightholders for providing access to the extranet. Thus, this reason given by the AO is rejected. 45. Regarding taxability under Article 13(3), i.e., Royalty, it has been submitted that assessee communicates in advance to every sightholders the aggregate value of each Box it intends to make available to the sightholders during the selling period, categorized by box and by sight (referred to as Intention to Offer). It mainly consists of provision of consistency of boxes, provision of extranet, provision of key account manager. Now, whether intention to offer amounts to 'Plan' and thereby, covered in the scope of Royalty as held by the AO, the submission of the ld. DR was that assessee providing such information well in advance based on its in-depth experience and therefore, such information helps to understand future marketing trends which ena....
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....vice Fee are reproduced as under for ease of reference: 2.1. The DTC will provide the Services to Sightholders on the terms and conditions set out therein..... 2.2. The services offered by the DTC and as set out in Appendix A may be varied by the DTC from time to time in its sole and absolute discretion. 2.3. Sightholders shall pay the Service Fee for the Services. The Service Fee relates to the ITO and will comprise a flat rate charge calculated, separately for each Sight at each Sight location, with regard to the aggregate price of boxes purchased by the relevant Sightholder (or Sightholder group member) at each Sight at each such Sight location during the relevant 12 month Selling period Thus, fees earned for providing SPS services can not be treated as fees earned through the use of logo/ trademark which can be held to chargeable to tax as royalty. 48. The ld. DR has also contended that the service fees is also for the use of trademark Sightholders and/or DTC Sightholder' cannot be accepted because selection of a person as 'Sightholder of DTC' is a competitive process wherein following criterion need to be satisfied by the person concer....
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....een discussed, wherein it was observed and hold as under:- "11. The thin line distinction which is to be taken into consideration while rendering the services on account of information concerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no "alienation" or the "use of" or the "right to use of any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as "royalty" The services may have been rendered by a person from own knowledge and experience but such a knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. Hence, in such a case, it cannot be held that such services are in nature of "royalty" Thus, in principle we hold that if the services have been rendered de hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article-12...." 51. The Hon"ble Jurisdictional High Court in the case of Diamond Services Inter....
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....ia. 54. Lastly with regard to ground No.4 that ld. CIT(A) has erred in holding receipts of Rs.4,00,703/- being receipts/ fees received for grading services as business income of assessee and not as royalty. The Tribunal has set aside this issue to the AO after considering additional evidences and the decision of the Hon"ble Bombay High Court in the case of Diamond Services International (P) Ltd vs UOI & ORS (304 ITR 201) wherein it was held that the grading fees paid by the assessee to GIA for the activity of certification and grading of diamonds, do not fall within the expression of "royalty" under Article 12 of DTAA. 55. Before us and also before the CIT (A), it has been explained that grading is the process of examination and testing of an eligible diamond to determine and report its characteristics according to the industry and Forevermark standards. Diamonds are graded based on its colour, clarity, cut and carat as under:- 5.7.1 Colour The finest white diamonds (as opposed to fancy coloured diamonds) should be as close to colourless as possible. Colour grading as defined by the Gemological Institute of America (GIA) is classified by letters of the alpha....
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....y good, good and fair to poor. To examine the cut of the stone, it is positioned precisely in a high precision instrument that will measure the variations in its optical behavior when rotated through 360 degrees. During this rotation, the Instrument captures hundreds of different measurements that, combined, build a picture of the stone's symmetry and the uniformity and intensity of its reflective capabilities. In addition to the optical testing, DBUK also undertakes accurate physical measurements to define the proportions of the stone. The proportions are derived from a set of universally accepted measurements involving both lengths and angles. 5.7.4. Carat Carat refers to the weight of a diamond. Each carat is divided into one hundred points and is equivalent to 0.2 grams, a measurement adopted in the United States in 1913 and now universally accepted. Stone are measured under hermetically sealed conditions using a digital weighing device accurate to five decimal places. Its result is thus far more reliable than any measurement performed by diamond jewellers. 5.8. Based on the examination of the diamond on above factors, DBUK issue....
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....till, AO has taxed the receipts from DTC-ABP as FTS and royalty and has not elaborated how it can fall within both the clauses i.e. DTC-ABP as FTS and at the same time royalty. Before us, it has been submitted that the DTC-ABP was created in 2008 for entities who were former Sightholders and they did not qualify as Sightholders during the year 2008. Since such former Sightholders wanted to maintain business relationship with DBUK, they entered into a DTC-ABP agreement with DBUK to qualify as DTC Accredited Business partners. The benefits of the DTC-ABP were as follows: (i). Accredited business partner of DBUK would get a chance once in a year to meet DBUK (Account Manager) to discuss commercial and industrial matters of public nature. (ii) Through DTC-ABP, DBUK provides support materials to assist in promotion of business of Accredited business partners. Such support materials include display cards for trade shows and events, certificate for accreditation for display in offices etc. (iii) Accredited business partner would be entitled to apply to be Forevermark Diamantaire under a separate agreement (iv) Accredited business partner would be entitl....