TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 153
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....e circumstances of the case and in law, the learned CIT(A) erred in holding that the amount received by the assessee from its Indian associated enterprise under the Regional Service Agreement (RSA) does not constitute royalty income taxable under section 9(1)(vi) of the Income-tax Act, 1961. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding that such amount is not royalty within the meaning of clause 3(a) of Article 12 of the India-Singapore Double Taxation Avoidance Agreement (DTAA), ignoring the fact that the services rendered involve information concerning industrial, commercial or scientific experience. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in relying on the decision of the Hon'ble ITAT, Mumbai Bench in Van Oord Dredging & Marine Contractors BV v. DCIT (111 Taxmann 163), which has not attained finality before the Hon'ble Bombay High Court, and in further relying on other ITAT decisions without appreciating their distinguishable facts. 3. The Revenue, through these appeals, seeks to restore the additions made by the Assessing Officer treating the receipts o....
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.... with a nominal markup. The officer, however, held that such consideration represented royalty income, being in the nature of payments for imparting or making available information concerning industrial, commercial or scientific experience, and hence, taxable in India under section 9(1)(vi) and Article 12(4) of the DTAA. 9. The learned CIT(A), on appeal, found that the AO had mechanically invoked the royalty clause without appreciating the true character of the transaction. After an extensive analysis of the agreement and the OECD Commentary, the CIT(A) concluded that the arrangement was one of provision of services, not transfer of know-how, since the assessee merely applied its organisational expertise through regional teams and did not impart any secret, proprietary, or reproducible information to BCD India. The CIT(A)'s order tabulated the detailed nature of services under the RSA, classifying them under nine broad heads Finance, Account Management, Human Resources, Supplier Relations, Technology, Performance & Quality Solutions, Contact Centre Solutions, Country Operations, and General Administration each of which involved recurring, operational functions executed by the as....
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....Resources: Entails administrative support for payroll, recruitment, and employee-data management. These are routine HR functions carried out by the regional HR cell on behalf of participating entities. * Supplier Relations: Involves regional negotiations with airlines, hotels, and travel partners to obtain uniform commercial terms. The benefit lies in group-level economies of scale, not in the transfer of any proprietary negotiation technique or algorithm. * Technology: Relates to IT infrastructure management, implementation support, and supervision of regional software tools. The agreement explicitly prohibits BCD India from sub-licensing or using any underlying intellectual property; ownership of all software and technology remains with the group headquarters. * Performance Solutions and Quality Consultancy: Includes monitoring of operational metrics, benchmarking, and process-improvement recommendations. The assessee's specialists conduct such analyses themselves; BCD India receives only results and suggestions, not any methodology or tool. * Contact Centre Solutions: Concerned with oversight of the regional call-centre network, capacity plann....
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....h clarified that when expertise is used by the provider itself in executing the work, there is no imparting of know-how but only performance of services. This, the CIT(A) noted, applies on all fours to the present case. The ld. CIT(A) also cited GECF Asia Ltd. v. DIT (ITA No. 3524/Mum/2014), wherein accounting, finance, HR, and IT support rendered by a Singapore entity to its Indian affiliate were held not to constitute royalty, the Tribunal observing that the foreign company "merely utilised its accumulated experience to discharge managerial functions; nothing was transmitted to the recipient which could enable independent replication." The parallel was found apt to the assessee's functions under the RSA. 17. In light of these principles, the CIT(A) reasoned that the Assessing Officer's reliance on the mere improvement of BCD India's efficiency as indicative of imparting experience is misplaced. Improvement is a natural consequence of any service rendered by a specialised agency; it cannot, by itself, convert a service fee into royalty. The existence of benefit is not synonymous with transfer of know-how. What matters is whether there is an alienation of proprietary information....
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.... of the work, utilising his expertise himself to produce results for the recipient. 22. The practical import of this distinction is that the presence of expertise on the provider's part is not decisive; rather, it is the mode of exploitation that governs tax characterisation. If the knowledge remains embedded in the provider and is merely used by him to perform a task, the income is from services. If, however, the knowledge or experience is transmitted such that the recipient can thereafter deploy it independently, the income assumes the character of royalty. 23. This demarcation was luminously elucidated in the decision of the coordinate Bench in Van Oord Dredging & Marine Contractors BV v. DCIT (111 Taxmann 163, Mumbai), where the Tribunal observed that "the test of imparting is the touchstone" if the foreign entity continues to use its own industrial and commercial experience to render services, no imparting occurs. The Bench explained that the essence of royalty lies in alienation, not in application. Unless the recipient obtains a corpus of information or experience that can be independently replicated, the payment cannot be treated as royalty. 24. Applying the above ....
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.... or process. The payments thus fail to satisfy the twin conditions of Article 12(4) there is neither a right to use any intangible property nor any transfer of industrial, commercial, or scientific experience. The receipts are therefore not taxable in India as royalty either under the Act or under the Treaty. The distinction between imparting and applying experience is not merely semantic but fundamental to the architecture of international tax law. As the OECD Commentary illustrates, where a foreign enterprise uses its own skill and technical experience to perform tasks such as providing after-sales services, warranty support, technical assistance, consultancy, or advice the income is business profit. The recipient gains the fruit of the service, not the seed of knowledge. It is only when the seed itself a proprietary, secret corpus of experience is passed for independent cultivation by the recipient that the consideration assumes the colour of royalty. 28. Viewed thus, the present RSA is emblematic of an applied service model. The assessee's regional personnel remain engaged throughout the year, coordinating client accounts, negotiating supplier contracts, maintaining IT syste....
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....align with group-wide systems also fails to establish royalty character. Uniformity within a multinational group is an administrative necessity, not an intellectual-property licence. The parent or regional hub invariably oversees compliance, yet that oversight remains an attribute of group management, not an asset transfer. The consideration paid for such stewardship is thus rightly treated as service income. Furthermore, the cost-plus basis of remuneration demonstrates the economic substance of the arrangement. Royalties are typically linked to revenue exploitation, a percentage of turnover, profit, or usage, reflecting the commercialisation of an intangible. Here, the charge is confined to actual cost of services, periodically reconciled. Such a structure is antithetical to the notion of royalty, which presupposes exploitation rather than reimbursement. 33. In assessing whether the "imparting of information" limb of section 9(1)(vi) is attracted, it is well settled law that deeming fictions must be strictly construed. The expression "imparting" cannot be diluted to include every instance where experience is utilised. The Legislature intended to tax transfers of technology and ....
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....roneous premise. It is also significant that the Revenue has, in earlier assessment years, consistently accepted the identical arrangement as constituting non-royalty service income. No fresh material or change in law has been demonstrated before us to justify a departure from that settled position. The principle of consistency, a cardinal facet of fiscal certainty, obliges the Department to maintain uniformity where facts and circumstances remain unchanged. 37. The Revenue's argument that the CIT(A) erred in relying upon Van Oord on the ground that the decision is under challenge before the High Court is equally untenable. Unless stayed, a coordinate Bench decision binds the Tribunal by judicial discipline. Moreover, Van Oord itself rests on well-settled interpretive principles and has since been affirmed and followed in a number of subsequent rulings, including GE Energy Parts Inc. and GECF Asia Ltd. The CIT(A)'s reliance was thus fully justified. 38. In sum, the nature of consideration under the RSA being a cost-shared reimbursement with minimal markup for continuous regional stewardship bears no resemblance to a royalty or technical-service payment. The income arises from....