Case Law Details

Case Name : De Beers UK Limited Vs. Dy. Commissioner of Income Tax (Intl. Taxation)-1(2) (ITAT Mumbai)
Appeal Number : ITA No. 8831/Mum/2010
Date of Judgement/Order : 18/11/2011
Related Assessment Year : 2007- 08
Courts : All ITAT (4327) ITAT Mumbai (1438)

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De Beers UK Limited Vs. DCIT (ITAT Mumbai)- The Tribunal held that the payment for VAS has to be considered partly as royalty under para 3(a) of Article 13 of the tax treaty being the payment for various types of information of commercial nature acquired based on past experience and partly as FTS under para 4(a) of Article 13 of the tax treaty being the payment attributable to the services rendered by the Key Account Manager (KAM) or through workshops, etc. which were ancillary and subsidiary to application or enjoyment of the information or being payment for marketing consultancy services which were ancillary and subsidiary to the application or enjoyment of brand.

The Tribunal also made an important observation that the consultancy service needs to be interpreted as ‘technical consultancy’. However, the word ‘technical’ is not used only in relation to technology. It refers to practical skills, experience acquired in a particular activity. Thus consultancy based on practical skills, experience would also get covered within the meaning of FTS clause under Article 13(4) of the tax treaty if the same make available knowledge, skills, experience, etc, to the recipient of services.

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI

ITA No. 8831/Mum/2010- Assessment Year :2007-08

De Beers UK Limited

Vs.

Dy. Commissioner of Income tax (Intl. Taxation)-1(2)

Date of pronouncement : 18th November, 2011

ORDER

Per RAJENDRA SINGH (AM).

This appeal by the assessee is directed against the order dated 12.10.10 of the AO under section 143(3) r.w.s. 144C(13) of the Income tax Act passed as per direction of Dispute Resolution Panel-1 (DRP). The assessee in this appeal has raised disputes on 13 different grounds.

2. The assessee company who is incorporated as tax resident of UK was involved in selling rough diamonds to worldwide Sight-holders. The assessee was also incurring expenditure on promotional activities for which Sight-holders had been charged as marketing contribution. Besides, the assessee was also providing value added services to the Sight holders. The AO taxed the receipts from marketing contributions and value added services as royalty and fees for technical services respectively which has been disputed in this appeal. The addition has also been made by the AO on account of factual discrepancies in the income declared by the assessee. There are also disputes regarding rate of tax. The specific disputes raised by the assessee have been dealt with in the succeeding paras.

3. The first dispute is regarding the legal validity of the assessment proceedings which has been challenged on the ground that the notice issued under section 143(2) was barred by limitation. However, the ld. AR for the assessee did not press this ground at the time of hearing of the appeal. This ground is, therefore, dismissed as not pressed.
4. The second dispute is regarding treating the marketing contribution by the AO as royalty. The assessee had explained to the AO that marketing contributions paid by the Sight-holders was nothing but reimbursement of expenses incurred by the assessee and therefore, there was no income element involved. The AO, however did not accept the contentions raised. It was observed by him that contributions had been received by the assessee for use of design, process or trade mark for processing of rough diamonds and therefore, the same was royalty as defined in the Explanation 2 to section (9)(1)(vi). The AO also held that payment was royalty under para‑ 3(a) of Article-13 of Indo UK Tax Avoidance Agreement as the same was for the use of design, process or trade mark. He, therefore, proposed to treat the same as royalty income. The assessee filed objections before the Dispute Resolution Panel (DRP) who held that Sight-holders were using Nakshatra Brand of the assessee for their business for which payments had been made by them and, therefore, the action of the AO treating the same as royalty was upheld. The AO thus assessed the income as royalty. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.

 4.1 We have heard both the parties in the matter. The ld. AR for the assessee reiterated the earlier contentions that the marketing contribution was not royalty. However, it was submitted that, for want of necessary details, the assessee did not want to pursue the matter and the ground was accordingly not pressed. We, therefore, dismiss the ground No.2 of the assessee as not pressed.

5. Ground No. 3 is regarding addition of Rs. 1,29,51,000/- made by the AO on account of marketing contributions. The AO had verified the income on account of marketing contributions shown by the assessee with Sight-holders and found discrepancy of USD 3,00,000 (Rs.1,29,51,000/-) in relation to Dimexon Diamond Ltd., a Sight-holder, on the basis of information received from the said party under section 133(6). The assessee had declared the total marketing contribution of Rs. 12,51,76,997/-. The AO, therefore, added the sum of Rs. 1,29,51,000/- on account of discrepancy with Dimexon Diamond Ltd. and assessed the total marketing contribution of Rs. 13,81,27,997/- as royalty. Aggrieved by the said decision, assessee is in appeal before the Tribunal.

5.1 Before us, the ld. AR for the assessee submitted that the payment of USD 3,00,000 related to Assessment Year 2006-07 and not to Assessment Year 2007-08. He referred to invoices issued by Dimexon Diamond Ltd. placed at page-184 of the paper book which was dated 23.2.2006 which related to Assessment Year 2006-07. It was also submitted that USD 3,00,000 lacs was payment made by the assessee and not a receipt and, therefore, could not be taxed in its name. It was pointed out that in the invoice dated 23.2.2006, the name of the beneficiaries was clearly mentioned as Dim-exon Diamond Ltd. and, therefore, assessee was payer and the said party was payee. It was argued that on this ground also, amount could not be assessed as income. The ld. DR on the other hand submitted that the claim of the assessee required verification.

5.2 We have perused the records and considered the matter carefully. The dispute is regarding the addition of USD 3,00,000 lacs (Rs. 1,29,51,000/-) being the discrepancy on account of marketing contribution in relation to the party, Dim-exon Diamond Ltd. The said discrepancy was found by AO on verification with Dim-exon Diamond Ltd. The case of the assessee is that payment did not relate to Assessment Year 2007-08 as the invoice placed at page-184 of the paper book is dated 23.2.2006. It has also been submitted that the said amount was paid by the assessee to Dim-exon Diamond Ltd. and, therefore, could not be assessed as income of the assessee. We have perused carefully the relevant papers placed in the paper book. We find that as per invoice issued by Dim-exon Diamond Ltd. placed at page-184 of the paper book, the marketing contribution has been shown at USD 3,00,000 as per invoice dated 23.2.2006. However, the details of payment have also been given at page-183 of the paper book which shows payments made to Diamond Trading Co. i.e. assessee, towards certification charges and marketing initiative which includes payment of USD 3,00,000 lacs as per invoice dated 22.4.2006. This invoice date is relevant to Assessment Year 2007-08 and it describes the amount as paid to the assessee whereas the ld. AR claimed that the amount had been paid by the assessee. We also note from the letter dated 19.5.2005 of DTC (the assessee ) placed at page 185- 186 of paper book as per which assessee had offered financial support of USD 3,00,000 lacs in instalments to the Sightholders. But the payment under consideration is a single transaction of USD 3 lacs. Thus there are discrepancies which are required to be verified. It is required to be seen whether the amount in question was payment received by assessee or payment made by assessee and whether the same related to Assessment Year 2007-08. We, therefore, set aside the order of AO on this point and restore the matter back to him for passing a fresh order after necessary verification and after allowing opportunity of hearing to the assessee.

6. The dispute raised in ground No. 4 is regarding the rate of tax applicable to marketing contributions which have been assessed by the AO as royalty. The AO has applied rate of 15% as per Article-13 of India UK Tax Treaty. The assessee objected to the rate of 15% proposed by the AO before DRP who observed that it was not clear whether the assessee had opted for domestic law or the treaty. It was also observed that in the objections raised, the assessee had mentioned that AO erred in not treating the marketing contribution as royalty under Article-13 of India UK Tax Treaty, and, therefore, if the royalty was being considered by the assessee under DTAA, then the rate of DTAA would apply as assessee could not be allowed to apply the law in a piecemeal manner. DRP, therefore, upheld the rate of 15% being proposed by the AO as per DTAA. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.

6.1. Before us, the ld. AR for the assessee submitted that tax-ability of a sum had to be considered under domestic law as well as under DTAA because in case a particular sum was not taxable under domestic law, it cannot be taxed even if the same was taxable under DTAA. Similarly, if the sum was not taxable under DTAA, the same cannot be taxed even if the same was taxable under the domestic law. Further, the AO had applied both the provisions and had held that the marketing contribution was taxable as royalty both, under the domestic law as well as under the DTAA. This being the position, the rate which is beneficial to the assessee has to be applied under the provisions of section 90(2). It was also submitted that rate as per domestic law was 10% as per sub clause (AA) of clause (b) of Section 115A(1). As per the said provision, any amount received by a non-resident from India as royalty as per agreement approved by Central Government on or after 1.6.2005 is taxable at 10%. In this case, it was pointed out that the agreement was dated 8.11.2005 and therefore, rate of 10% had to be applied. The ld. DR supported the order of the AO and placed reliance on the findings given in the assessment order.

6.2 We have perused the records and considered the matter carefully. The dispute is regarding rate of tax to be applied in case of marketing contribution which has been taxed by the AO as royalty. There is no dispute that the marketing contributions had been received by the assessee as per agreement dated 8.11.1005 a copy of which has been placed in the paper book at pages 1-22. The AO had treated the marketing contribution as royalty both under the provisions of domestic law as well as under DTAA which is clear from the assessment order. The tax-ability of income from international transactions has to be considered, both under the domestic law as well as under DTAA because the assessee would be entitled to the benefits of the treaty only if the sum is taxable under the domestic law. In case, the sum is not taxable either under the domestic law or under the DTAA, it cannot be taxed at all. If the amount has been found taxable under both the provisions, the assessee will be entitled to the beneficial rate of tax under the provisions of section 90(2). Since in this case, the marketing contribution has been received in terms of agreement dated 8.11.2005 which is obviously after 1.6.2005, the tax rate of 10% is applicable under the provisions of sub clause (AA) of clause (b) of Section 115A(1) of the domestic law. We, therefore, hold that the marketing contributions assessed by the AO as royalty will be taxed @ 10%.

7. The dispute raised in Ground No. 5 is regarding the order of AO treating the payment for Value Added Services (VAS) as Fees for Technical Services (FTS). The AO noted that the assessee in addition to selling rough diamond was also providing various Value Added Services (VAS). The copy of the service guide for VAS has been placed at pages 75 to 107 of the paper book. As per the agreement, the assessee was providing core services and growth services. The core services had two components viz. supply planning tools and business sustainability services. Supply planning tool is claimed to be on payment basis whereas the business sustainability services was paid for by the assessee. The assessee was also providing growth services on request which were not chargeable. The supply planning tools details of which have been placed at pages 81-82 of the paper book was regarding information given by the assessee to sight-holders about the nature and quantity of goods it intended to sell and access to DTC information through Extra-net services, etc. The supply plant tool services can be summed up as under:-

(i) Provision of extended contract period of two and a half years to maintain continued and steady supply of rough diamonds.

(ii) Communication to the sight holders, the aggregate level and nature of goods, the assessee intends to make available during the selling period.

(iii) Communication of consistent parameters as at size, colour and grading of diamonds.

(iv) The provision of Sight-holders’ Extra-net Service which provides a secure web based information sharing and business platform linking DTC with Sight-holders, Sight-holders group companies and their appointed brokers. It offers access to DTC information, proprietary (third party) content plus tailored access for each Sight-holder to their own business specific information  and processes in response to Sight-holders feed back and request.

(v) Provision for independent third party verification of 10% of, Sight-holders profile material for increasing all stake holders confidence in the validity and veracity of process.

(vi) Provision of Key Account Manager(KAM) allows dedicated time with KAM who is the main point of contact between the Sight-holders and DTC. KAM assists Sight-holder in service selection process and provides access to value added services. KAM forms the link with the DTC marketing globally, plans the ITO and develops annual plan services with Sight-holders.

7.1 The Business Sustainability Services included the following:-

(i) annual consumer demands updates which is made available by the assessee on Sightholders’ Extranet.(para 2.1.2.1)

(ii) Bi-annual consumer confidence updates which is made available on Sight holders’ Extranet to provide Sight holders with knowledge of DTC’s consumer confidence programmes and enable Sight holders to align activities behind this initiative. These programmes focus on maintaining the mystique and integrity of documents. This includes information on:

(a) Research and Plannings;

(b) Natural Marketing;

(c) Trade Education;

(d) Detection Equipment and

(e) Disclosure.(para 2.1.2.2)

7.2 The assessee is also providing growth services some of which are summed up as under:-

(i) Annual one day seminar giving over view of markets (para 2.2.1.1)

(ii) Annual local market workshop giving information on new market opportunities.(Para 2.2.1.2)

(iii) Informal meetings with senior local market team members. It makes available to the sight holder latest local market information. It also covers relevant DTC marketing programme details (Para 2.2.1.3)

(iv) Information as to how to customise DTC marketing material (Para 2.2.1.6)

(v) Guidance workshop on recruiting marketing personnel,(para 2.2.3.3.5) etc.

7.3 The AO observed that the assessee had developed sight-holders’ Extra-net services which were technical in nature. The assessee had advanced technology standardization method and effective net communication, through Extra-net services. The assessee had granted access to all these technological systems for which compensation was received. The assessee was thus providing technical services to the sight-holders for their commercial purposes and the amount charged as VAS was nothing but fees for technical services within the meaning of Explanation-2 to Section ­9(1)(vii) and also under Article-13 of India UK Tax Treaty. The assessee disputed the proposed addition of AO and raised objections before DRP. The DRP after necessary examination and after hearing the assessee observed that even though services were rendered from outside, the same were taxable in India in view of the Explanation introduced in section 9 by the finance Act 2010, w.e.f. 1.6.1976. DRP also observed that the VAS were ancillary and subsidiary to the application or enjoyment of right of the assessee in the brand used by the sight holders the payment for which was royalty in terms of para 3(a) of indo UK Tax Treaty and therefore its nature was that of fees for technical services. DRP accordingly held that AO was justified in treating the VAS as fees for technical services. The AO in the final order observed that the assessee was providing technical services and, therefore, payment received was FTS as per Explanation-2 to Section ­9(1)(vii). The AO also observed that the payment was for rendering of technical services which made available technical knowledge, experience, skill, know-how etc. to the sight-holders and therefore, was taxable as FTS as per para 4(c) of Article-13 of India UK Tax Treaty. Aggrieved by the decision of AO, the assessee is in appeal before the Tribunal.

7.4 Before us, the ld. Authorized Representative submitted that the DRP had held that the payment was taxable as FTS under para 4(a) of Article 13 of India UK tax treaty as services were ancillary and subsidiary to royalty payment under para 3(a). However, AO had applied the provisions of para­ 4(c) of Article -13 of the Treaty which was not permitted as AO was bound to follow the direction of DRP. It was also submitted that even provisions of para 4(c) were not applicable as these related to payment for rendering any technical or consultancy services which made available technical knowledge, experience, skill etc. For applicability of para 4(c), the technical knowledge etc. should be made available to the payer who can use it himself without recourse to performer of the services and it should remain with the person utilizing the services even after rendering of services has come to an end. Reliance for this proposition was placed on the decision of the Tribunal in the case of Raymond Ltd. vs. DCIT (86 ITD 791). He also placed reliance on the following judgements in support of the plea that provisions of para 4(c) of Part-13 were not applicable.

i) 92 TTJ 946(Del.) NAQ Quality Systems Register Ltd. vs. DCIT;

ii) 80 TTJ 806(Cal.) in the case of C.E.S.C Ltd. vs. DCIT;

iii) 6 SOT 186(Mum.) McKinsey And Co., Inc (Phillipines) vs. ADIT;

iv) 131 TTJ 29 in the case of ADIT (Intl. taxation) Vs. Bureau Veritas

v) Order dated 16.5.2011 of AAR in AAR No.883 of 2010 in case of RR Donnley India Outsource Pvt. Ltd.

7.5 The ld. Authorised Representative also argued that the provisions of para 4(a) of article 13 of the Treaty were applicable when technical or consultancy services were ancillary or subsidiary to the application or enjoyment of the right or property etc., for which royalty had been paid under para 3(a) of Article-13. In this case, royalty had been considered as payment by the assessee for use of Nakshatra Brand whereas the services had been rendered by the assessee in connection with sale of rough diamonds. Thus, the service even if technical in nature could not be related to the payment of royalty and, therefore, the same could not be taxed under para 4(a).

7.6 The ld. DR on the other hand argued that the VAS were ancillary to the services for payment of royalty under para 3(a) of Article-13. She referred to agreement dated 8.11.2005 regarding marketing contribution to point out that the marketing campaign was to promote licensed products which were the rough diamonds. It was pointed out that, VAS which related to sale of rough diamonds were ancillary to the marketing contribution which was to promote sale of rough diamonds and therefore provisions of para 4(a) were applicable and payment had to be taxed as fees for technical services. As regards the applicability of para 4(c) which had been applied by the AO, it was submitted that growth services and business sustainability services of the core services were covered under para 4(c) and therefore were taxable as FTS under para 4(c).

7.7 In reply, ld. AR for the assessee submitted that marketing contribution by sight holders was to promote licensed products as per para 4 of the agreement and at page-5 of the agreement, product had been defined to be jewellery pieces incorporating no stones other than diamonds, designed and manufactured by the Sight holders. Marketing contribution which had been taxed as royalty was to promote Nakshatra Brand of jewellery and had no relation to rough diamonds. Thus, royalty was in relation to jewellery brands and, therefore, the VAS payment which related to sale of rough diamonds, was not ancillary or subsidiary to royalty payment. The ld. Authorized Representative further submitted that the agreement for Forever mark, was to use the said mark on polished diamonds and, therefore, royalty for use of Forever mark also did not relate to rough diamonds. Thus both the types of royalties related either to polished diamonds and diamond jewellery and not rough diamonds in relation to which VAS had been provided. As regards the argument of ld. DR that growth services and business sustainability services were covered under para 4(c), the ld. AR pointed out that the agreement placed in the paper book clearly showed that business sustainability services and growth services were not charged by the company and therefore tax ability of any sum on this account did not arise. It was also pointed out that, even the AO had discussed only the core services and not the growth services in the order. It was argued that the supply planning tool services for which payments had been made only provided information on continuity of supply, communication of aggregate level and nature of goods the assessee intended to sell, communication on parameters of goods, access to sight-holders profile to a third party, providing  communication channel through the Key Accounts Manager and providing information on the assessee’s consumer confidence programmes. There were informative services which did not contain any technology which could be independently applied by the recipient. It was accordingly argued that the VAS payments could not be taxed either under para 4(a) or para 4(c) of the Article-13 of Indo-UK Tax Treaty.

7.8 The Bench at the time of processing the case for order, realized that, for understanding the true nature of payment for VAS, it was necessary to consider the applicability of para 3(a) of Article 13, which provided for taxation of any payment for information concerning industrial, commercial and scientific experience as royalty as all the relevant facts for application of para 3(a) were already on record. The case was accordingly heard again.

7.8. The ld. A.R for the assessee argued that para 3(a) had not been applied either by AO or by the DRP and, therefore, could not be considered at this stage. However, it was brought to the notice of ld. A.R that subject matter of dispute was tax ability of payment for value added services and, in case, such payment was found to be taxable under some other para of the same Article, it will be within the jurisdiction of the Tribunal to consider the said para as same will be within the subject matter of appeal. The ld. DR pointed out that there were several judgements including the judgement of Honorable Supreme Court in which the decision of the Tribunal to allow the claim under some other provision had been upheld. It was also pointed out that even the DRP had held that payment was for services in relation to royalty payment under para 3(a). The ld. AR thereafter agreed and proceeded to advance arguments on the applicability of para 3(a) of the Article 13 also.

7.9 It was submitted by the ld. AR that the provisions of para 3(a) of Article-13 were not applicable to the facts of the present case. In this context, he referred to the Commentary on OECD model convention in which the definition of royalty as per para-2 of Article-12 of the said convention was exactly the same as in the case of Indo- UK Treaty applicable in the present case. As per the said commentary, royalty as consideration for information concerning industrial, commercial and scientific experience alluded to the concept of know-how which could be used by the recipient on his own and supplier was not required to take any part. The relevant portion of the said commentary referred to by the ld. AR is reproduced below as a ready reference:-

“In classifying as royalty payments received as consideration for information concerning industrial, commercial or scientific experience, para 2 alludes to the concept of know how. Various specialist bodies and authors have formulated definitions of know how which do not differ intrinsically. One such definition given by the “Association, – des Bureaux pour law Protection – d law Propriete Industrielle” (ALBPPI) states that “know how” is all undivulged technical information whether capable of being patented or not, that is necessary for the individual reproduction of a product or process, directly and under the same conditions; in as much as it derives from experience, know-how represents what a manufacturer can know from mere examination of the product and mere knowledge of progress of techniques.”

7.10 It was also submitted that in the UN model convention also, the definition of royalty was exactly the same and in which interpretation given in OECD model convention has been followed. Thus as per the OECD model convention, the royalty was payment for transfer of knowhow based on experience which could be used by recipient on his own. But in the present case assessee was also rendering services, and, therefore, payment could not be considered as royalty. It was pointed out that there were several judgments in support of the proposition that interpretation of identical terms given in the international model conventions has to be followed by the Indian tax authorities.

7.10.1 Ld. A.R referred to the judgement of Honourable Delhi High Court in the case of Asian Satellite Telecommunication Company Ltd. vs. DIT(332 ITR 340) to argue that interpretation of the term royalty given in OECD model convention has to be followed as definition of royalty in the domestic as well as in the Indo- UK Treaty was identical to that in the OECD model. It was pointed out that the Honorable High Court in the said case had referred to several judgements of Honorable Supreme Court in which it was emphasized that well settled internationally accepted meaning placed on identical and similar terms employed in various DTAA should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Act. The Hon’ble High Court accordingly held that the Tribunal was not correct in discarding commentary of OECD and of Klaus – Vogel on the ground that it was not safe to rely on such commentaries. Reference was also made to the decision of Mumbai Bench of the Tribunal in the case of DDIT vs. Preroy AG (39 SOT 187). In that case, assessee was a consultant in the matter related to strategic issues in respect of establishing joint ventures, technology transfers and related matters. The assessee had entered into strategic consulting agreement with an Indian Company which wanted to avail services provided by the assessee. The AO taxed the payment for such services as royalty under Article 12(3) of Indo-Swiss agreement as payment for information concerning industrial, commercial and scientific experience which was not upheld by the Tribunal. The Tribunal had referred to the OECD model commentary and observed that such commentaries are useful,reliable and legally acceptable basis for interpreting treaties. As per interpretation given in the said commentary, the royalty alluded to the concept of know how and, therefore, the Tribunal held that the payment to be taxed as royalty should be made for imparting know how to the service recipient which the recipient should be able to use on his own. In this case the consultant was providing services by using his skills and experience to execute certain work for the recipient. There was no transfer or sharing of information concerning experience. It was, therefore, held that the payment could not be taxed as royalty.

7.10.2 Ld. A.R also referred to the judgement of Authority for Advance Ruling (AAR) in case of Anapharm Inc.(305 ITR 394) and in case of Cushman & Wakefield PTE Ltd. (305 ITR 208). In case of Anapharm Inc.(supra), the assessee a resident of Canada was conducting bio equivalence test using his experience and skill and was providing only final reports to its clients. It was held that the assessee was not providing any information concerning industrial, commercial or scientific experience but was itself providing services using its knowledge and skill, and therefore, payment was not royalty. Similarly in case of Cushman & Wakefield PTE Ltd.(supra), the assessee,a Singapore based Company, was referring or recommending potential customers desirous of obtaining real estate consultancy and associated services, to Indian companies. The AAR held that the payment was for introducing customers and not for imparting any know-how and, therefore, it was not royalty. It was further submitted that payment for collecting data, analyzing it and making its data base for providing information on suitable candidates to the recruitment agencies was not payment for information concerning industrial, commercial or scientific experience and therefore not royalty as held by AAR in case of Real Resourcing Limited (322 ITR 558).

7.11 The ld. DR on the other hand argued that the provisions of para (3a) of Article 13 as per which any payment for information concerning industrial, commercial or scientific experience is taxable as royalty were applicable in the case of the assessee. It was submitted that there was no dispute that definition of royalty in the OECD Model as well as in the Indo UK Treaty was identical and therefore the OECD commentary giving interpretation of the term royalty could not be rejected. However, it was pointed out that the perception of OECD itself was changing as to the meaning of the word “know how”. Ld. DR referred to the OECD commentary of 2005 which had since been revised in 2008 in which there is change in the definition of “know how”. In the 2005 commentary, “know how” was defined as un-divulged technical information but in 2008 commentary, “know how” is referred as un- divulged information of any industrial, commercial or scientific nature arising from previous experience. Thus know how was nothing but any information of industrial, commercial or scientific nature arising from previous experience. The word “know how” therefore, could not be restricted to only technical information or information concerning any technology or technical knowledge. The relevant para-11 of 2008 commentary referred to by the ld. DR is reproduced below as ready reference.

“In classifying as royalty payments received as consideration for information concerning industrial, commercial or scientific experience, para-2 is referring to concept of know how. Various specialised bodies and authors have formulated definition of know how. The words “payment […] for information concerning industrial, commercial or scientific experience” are used in the context of transfer of certain information that they have not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to un-divulged information of industrial, commercial or scientific nature arising from previous experience which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived. Since definition relates to information concerning previous experience, the Article does not apply to new information obtained as a result of performing services at the request of payer.”

7.11.1 She also referred to the meaning of the term “know how” given in the book “Law of Copyright & Industrial Designs’ by P. Narayanan in which it was mentioned that “know how” indicated the way in which a skilled man does his job and is an expression of his individual skill and experience. She also referred to the meaning of the term “know how” as per “Advanced Law Lexicon” the Law Dictionary in which the meaning of “know how” was given as under :-

(i) Knowledge, experience and skills  including technical management, scientific and financial.

(ii) information, practical knowledge, techniques and skill required to achieve some ‘practical end specially in industry or technology. Know how is considered as intangible property in which rights may be brought and sold.”

It was pointed out that the dictionary meaning of the term know how was similar to the term meaning of the term given in OECD commentary as per which any un-divulged information of industrial, commercial or scientific nature arising from previous experience has to be considered as know how.

7.11.2 In the present case it was pointed out that the assessee was supplying  rough diamonds to Worldwide Sight-holders. The assessee was providing core and growth services to the Sight-holders. The services provided as per Service Guide were nothing but commercial information given by the assessee which were based on its past experience in marketing and supply of diamonds. She referred to page-80 of Service Guide placed on record in which it was clearly mentioned that all VAS were carefully chosen and evaluated and were based on DTC’s unparalleled experience in selling and marketing of gem diamonds. Further , page 77 of the Service Guide clearly mentioned  that the information contained  in the Service Guide was confidential information and was provided to Sight holders on the basis that it shall be kept confidential. The information contained in the Service Guide which was confidential and which was provided to Sight holders by the assessee was commercial information which had been acquired by the assessee admittedly on the basis of past experience. Therefore payment for such information was clearly covered by the definition of royalty as per para 3(a) of Article -13 of Indo UK Treaty. Further, the information was being used by Sight-holders on their own in their businesses and in case of any clarification or any help they could have assistance of KAM. She referred to para 7(c) of the VAS Service Guide placed at page 104 of the paper book in which it was clearly mentioned that Sight-holders were to make their own independent evaluation of all market and business initiatives and other matters in respect of which value added services had been provided. It was thus clear that Sight-holders were required to independently evaluate and make use of information without recourse to the assessee. The assessee was providing the information through the Extra-net and also through the KEM who was the contact point with DTC to give any clarification and assistance for the use of value added services.

7.11.3. The ld. DR further argued that the claim of the assessee that it was only charging for supply planning tools service of the core services was not correct. She referred to para-6 of the service guide at page-103 of the paper book to point out that the payment for VAS was fixed as a percentage of rough diamonds purchased. The payment consisted of a fixed fees of USD 180,000 plus a percentage of incremental purchases. The payment had therefore no relationship with any particular service rendered. Once the payment was made, the Sight-holders were entitled to both core as well as growth services. It was not a case that in case no payment was made, the Sight-holders would be entitled to business sustainability services or growth services, free of charge. Therefore, payment has to be considered against all the services whether core services or growth services made available to Sight-holders. Accordingly, it was argued that all the services must be taken into account while deciding the nature of payment and applicability of relevant para of Article-13 of India UK Treaty. It was pointed out that under the core services, the assessee was providing information to clients regarding its supply schedule which enabled the clients to plan operations and investment and market details. The assessee provided information relating to market developments which enabled the clients to devise local marketing strategies. Further, the information provided by the assessee was not readily usable by the customers who were required to further modify them and apply according to the requirement of business. The payment for such information which was based on experience had therefore to be considered as royalty. The ld. DR further submitted that the information made available to the clients, was based on the experience and knowledge of the assessee acquired over a period of time which the customers could themselves use without recourse to the assessee and therefore, these could also be considered as fees for technical services under para 4(c) of Article-13 as the assessee could be considered as providing consultancy services which made available knowledge and experience to the Sight-holders.

7.12 In reply, the ld. AR for the assessee submitted that though there was some change in language used in para-11 of 2008 OECD commentary compared to the 2005 commentary but para 11.1 remained the same in both the commentaries. As per para 11.1, the recipient was required to use know how on his own and the granter was not required to play any part. Para-11.2 was also the same as per which the know how contracts were different from the contract for provision of services. In this case, it was pointed out that the assessee was rendering services and was not just imparting know how. The ld. AR also pointed out that information and expertise contained in supply planning tool services was not of high magnitude and rather involved actual rendering of the services by the assessee. It was submitted that it was business sustainability services or growth services which involved marketing information etc. based on experience for which the assessee was not charging any fees. It was also submitted that ld. DR was not correct in stating that the payment was for all services whether core or growth. It was pointed out that the agreement clearly provided that payment was only for supply planning tool services and other services were paid for by the assessee itself. The revenue authorities were not entitled to change the terms of agreement or challenge the reasonableness of any payment as the payee was not related. He placed reliance on the judgement of Honorable Supreme Court in the case of S.A. Builders (288 ITR 01) and the judgement of Honorable High Court of Delhi in case of D.S. Bist and Sons vs. CIT (149 ITR 276). It was accordingly submitted that the VAS payment could not be considered as royalty under para 3(a).

7.13 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding nature of income received by the assessee from Value added Services (VAS) provided to Worldwide Sight holders (WSH). The assessee is incorporated as tax resident of UK and, therefore, is a non resident in India. The assessee was selling rough diamonds to several Worldwide Sight holders. The assessee was also providing VAS to the Sight holders details of which have been given in para-7 to 7.2 earlier. The AO took the view that the payment received for the VAS was of the nature of fees for technical services both under the provisions of Income tax Act and under the provisions of Article-13 of India UK Tax Treaty and therefore taxable in India. On a reference made by the AO, the DRP directed the AO to tax the payment as Fee for Technical Services (FTS) under the provisions of para 4(a) of Article-13 of the Treaty. The AO, however, in the final order taxed the payment as FTS under para 4(c) of the Treaty. The assessee has raised the dispute that AO was not correct in taxing the payment as FTS under para 4(c). Both the parties were heard at length and thereafter the case was again fixed for hearing as the Bench was of the view that the case required further arguments regarding applicability of provisions of other paras of Article-13. It was pointed out to the ld. AR that if the payment was found taxable under some other para, the same could also be considered by the Tribunal as it will be within the subject matter of the appeal. Initially, the ld. AR for the assessee objected to consider the provisions of other paras of the Article which were not applied by the lower authorities. However the ld. AR finally agreed that the provisions of other paras could also be considered.

7.14 It would be pertinent to point out here that power of Tribunal while dealing with an appeal are quite wide. It could also consider any other argument connected with the ground even if not considered by the lower authorities as held by Honourable Supreme Court in case of Hukumchand Mills Ltd. (63 ITR 232). In case of CIT vs. Mahalakshmi Textile Mills Ltd. [1967] (66 ITR 710), the dispute before the Tribunal was regarding dis-allowance of development rebate. The Tribunal confirmed the dis allowance. However it allowed the claim as current repair as all facts were already on record. The Honourable Supreme Court upheld the order of the Tribunal holding that subject matter of appeal remained the same irrespective of the fact whether the allowance was permissible on another ground under some other provision. Therefore, in case the claim has been disallowed under a particular provision which is not found to be correct but the dis-allowance is justified under some other provision, it will be within the jurisdiction of the Tribunal to consider the same. In any case, the ld. AR fairly conceded the position and did not advance any further arguments on the issue and was agreeable to consider the other provisions.

7.15 Article-13 of Indo-UK Tax Treaty contains the provisions for tax-ability of sums paid as “royalty” and “fees for technical services”(FTS). The same terms have been used in the Income tax Act also, though the definition of the term “royalty” and FTS is not exactly the same under the provisions of  the domestic Act and the Treaty. Under the provisions of section 9(1)(vii), any sum payable as fees for technical services to any non resident is taxable as income of non resident in India if the services for which the payment has been made has been utilised in a business or profession carried on by the payer in India or for the purpose of making or earning any income from any source in India. The term “fees for technical services” has been defined in the Explanation-2 to section 9(1)(vii) to mean any consideration (including lump-sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient which would be income of the recipient chargeable under the head “Salaries”. Similarly, royalty payable to non resident for services utilised 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.

7.16 Further, for tax-ability 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 for 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 FTS are chargeable to tax in the hands of non resident whether or not he has any Permanent Establishment (PE) in India. Therefore, the nature of income is of great significance while considering tax ability because in case the payment is considered as business income in the hands of the non-resident, the payment under the provisions of treaty can be taxed in India only if the non resident has PE in India. There is no dispute that the assesse has no PE in India. Further, for tax ability of any sum in India, it has first to be found taxable under the provisions of Income tax Act. In case, the sum is not found taxable under any of the provisions of the Income tax, the same cannot be taxed at all and in that case it will not be necessary to go into the provisions of the treaty. However, if the sum is found taxable under the provisions of Income tax Act, it is further required to be seen whether any exemption is available under the Treaty.    If the sum is not found taxable under the treaty, the same cannot be taxed at all in India.

7.17 In the present case, the ld. AR for the assessee has not disputed that the payment for VAS received by the assessee will be chargeable to tax in India. Therefore, it is required to be examined whether the payment is taxable under the provisions of the Treaty. The relevant portion of Article-13 of Indo-UK Tax Treaty which contains provisions for taxability of a sum as royalty and FTS is reproduced below as ready reference.

ARTICLE 13- 1. Royalties and fees for technical arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed:

(a) in the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraphs 4(a) and (c) of this Article,—

(i)  during the first five years for which this Convention has effect;

(aa) 15 per cent of the gross amount of such royalties or fees for technical services when the payer of the royalties or fees for technical services is the Government of the first-mentioned Contracting State or a political sub-division of that State, and

(bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and

(ii)  during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and

(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, comrercia1 or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.

4 For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term ” fees for technical services” means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which:

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or

(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received; or

(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the deve1opnent and transfer of a technical plan or technical design.

7.18 The AO had taxed the payment for VAS under para 4(c) of the Article-13 which relates to payment for rendering any technical or consultancy services which make available technical knowledge, expertise, skill, know how or process or consists of development and transfer of a technical plan or technical design. The scope of applicability of para 4(c) has been examined by the Tribunal in several cases. In case of Raymond Ltd. vs. DCIT ( 86 ITD 791). The Tribunal held that for applicability of para 4(c), the technical knowledge etc. must be made available to the payer who can use the same himself without recourse to performer of the services. It was also held that technical knowledge, expertise, skill etc. must remain with the person utilizing the services even if rendering of the services has come to an end. In case of NAQ Quality System Register Ltd. vs. DCIT (92 TTJ 946), the Tribunal held that definition of FTS as per para 4(c) was pari-material with the definition of fees for included services as per para 4(b) of Article-12 of Indo US Treaty. The Tribunal noted that in case of Indo US Treaty, an MOU had been attached to the DTAA which explained that technical services meant services requiring expertise in technology. It also explained that consultancy services which were not of technical nature could not be included under para 4(b). The Tribunal, therefore, held that definition of FTS as per para 4(c) of Article-13 of Indo US Treaty had to be assigned the same meaning as fee for included service as per para 4(b) of Article-12 of Indo US Treaty. In that case, the services rendered involved assessment surveillance for the purpose of ISO Certification. The Tribunal held that the payment was not FTS under para 4(c) of Article 13 of Indo UK Treaty.

7.19 In the case of CESC Ltd. vs. DCIT (80 TTJ 806) also, the Tribunal held that definition of FTS as per para 4(c) of Article-13 of Indo UK Treaty has to be assigned the same meaning as fees for included services as per para 4(b) of Article-12 of Indo US Treaty. In that case, role of non-resident technical advisor was to review or to give opinion on the project. It was held that expressing opinion or reviewing details of the project without any role in design and development of the project did not amount to making technology available in the sense that recipient of services was entitled to apply technology and therefore it was held that payment was not taxable as FTS. Similarly, in case of Mckinsey & Co. Inc. Phillipines vs. ADIT (6 SOT 186), it was held that non technical consultancy service was not to be covered under the provisions of para 4(b) of Article-12 of Indo US Treaty. In that case, the Tribunal noted that the payment made to the NRI Company was for geographical data and information which was in the nature of commercial and industrial information. The assessee was not making available technical knowledge, experience etc. It was, therefore, held that the provisions of para 4(b) of Article-12 of Indo US Treaty were not applicable and therefore the payment could not be considered as fees for included services.

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 article-13 of 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, in our view, provisions of para 4(c) will not be applicable.

7.21 The Dispute Resolution Panel (DRP) has applied the provisions of para­ 4(a) of the Article-13 read with para 3(a) as per which any payment for technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of right, property or information for which payment described in para 3(a) is received, is fees for technical services (FTS). The DRP has held that VAS payments were for services which were subsidiary/ancillary to the payment of royalty under para 3(a) for application or enjoyment of right of the assessee in the brands used by the Sight-holders and, therefore, it should be treated as fees for technical services under para 4(a) of the said Article. It may be pointed out here that the assessee had collected marketing contributions from Sight-holders which has been assessed by the authorities below as royalty and which has also been accepted by the assessee as mentioned earlier. The ld. DR initially argued that marketing contribution was for the marketing campaign to promote licenced products which were rough diamonds. The VASs as per ld. DR were to promote sale of rough diamonds and, therefore, these were subsidiary and ancillary to the payment of royalty as marketing contribution and were thus covered as fees for technical services under para 4(a) of the Article. The ld. AR has however rightly pointed that page 5 of the Nakshatra Agreement clearly provided that licenced products were jewellery pieces incorporating diamonds designed and manufactured by Sight-holders. The marketing contribution which has been taxed as royalty was thus to promote “Nakshatra” brand of jewellery and not for sale of rough diamonds. The assessee had also received royalty for use of “Forever-mark” which related to sale of polished diamonds. Thus royalty received by the assessee as marketing contribution was not in relation to sale of rough diamonds.

7.22 It will be pertinent to point out here that VASs were not in relation to sale of rough diamonds only. Though the assessee was selling rough diamonds, it had taken various measures for growth of finished diamond products and diamond industry as a whole. It had acquired the Nakshatra brand of diamond jewellery and Forever mark for polished diamonds which it had allowed to be used by the Sight-holders on payment of royalty. This was obviously to generate demand for rough diamonds by promoting sale of finished diamond products. VASs were, therefore, not limited to sale of rough diamonds only. This is clear from the letter of July 2005 of the assessee addressed to all Sight-holders in connection with VAS (placed at page-78 of the paper book ), in which the assessee refers to growth of diamond jewellery. The assessee in the said letter also mentions that VAS was one of the mechanism to ensure future profitability, in the ever increasing competitive market of the Sight-holders, who were dealing not only in rough diamonds but also in various value added diamond products. Further, page-80 of the Service Guide clearly mentions that VASs offered potential for value generation to Sight-holders and diamond jewellery market as a whole. This is also clear from the Business Sustainability Services, which provided information on consumer demands and on consumer confidence building. The consumers are concerned with diamond products and not rough diamonds and, therefore, such information is aimed at promoting sale of finished diamond products. Demand for diamond is reflected through sales of diamond products. The marketing experience of the assessee in diamonds is, therefore, useful in marketing of diamond products as underlying theme in these products is the diamond. The assessee was selling rough diamonds without making any value addition to it. The VASs were, aimed at promoting sale of diamond products by the Sight-holders, which were value added products. The VASs, in our view, can be split in two components. The first component related to various marketing information provided by the assessee to the Sight-holders, which was in the nature of commercial information developed by the assessee based on its past experience and in respect of which the assessee was holding copyright and intellectual property rights. The second component comprises of the services through KAM as part of the supply planning tool services and assistance if any provided through workshops and personal meetings as part of growth services, which were ancillary and subsidiary to the marketing information provided to the Sight-holders. Such services could also be considered as ancillary and subsidiary to application or enjoyment of brands as these were aimed at promoting sale of branded jewellery and finished diamonds also. Therefore, the finding of the DRP that VASs were covered under para 4(a) of the treaty is not without any basis.

7.23 However, the DRP overlooked the fact that the definition of royalty under para 3(a) also included any payment for information concerning industrial, commercial or scientific experience. A careful perusal of VAS Service Guide shows that the assessee was providing various types of commercial information relating to selling of rough diamonds and finished diamond products. The VAS service guide also provided that information provided by the assessee which was confidential in nature was based on its experience. The summary of various services have been given in para-7 to  7.2 earlier.  The services have been placed in two categories i.e. core services and growth services. Under the core services, 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 Sight-holders 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, in our view, the real charge was for providing various marketing information through Extra-net and as part of Business Sustainability and growth services and personal services provided in relation thereto as mentioned in the-preceding para. The assessee provided access to  DTC information on Extra-net about its global marketing programme. Such information was useful in selling of diamonds and other finished products by Sight-holders. As part of supply planning tool services, the Sight-holders could also seek assistance from the KAM who formed the link with DTC marketing globally and also provided assistance in service selection. As part  of business sustainability services, the assessee was providing information on consumer demands on annual basis and also bi-annual consumer confidence updates. Such information on consumer demand and on building consumer confidence was useful to Sight-holders in selling of diamonds and diamond products. Similarly, as part of growth services details of which have been summarised in para 7.2 earlier, the assessee was providing information and assistance to Sight-holders in relation to marketing of products through annual seminars and workshops and through personal meetings with the managers. The various information being provided by the assessee in the name of core and growth services were based on its wide experience, the assessee had in selling of diamonds. This is clear from VAS service guide placed on record in which at page 80 of the paper book it has been mentioned as under:-

“All the Value Added Services have been carefully chosen and evaluated. They are based on DTC’s unparalleled and extensive experience in selling and marketing Gem Diamonds.”

7.24 The various types of information provided by the assessee to the Sightholders in the form of VAS was not a routine information given by a trader, but confidential information of commercial nature developed by the assessee based on its own extensive experience in marketing of diamonds. The information was protected by intellectual property rights belonging to the assessee which had been provided to the Sightholders with the condition that the same would be kept confidential. It is clear from the relevant para of VAS service guide at page 77, which is reproduced below as ready reference:-

“The content of the Value Added Services programme provided by The Diamond Trading Company Limited (the “DTC”) is protected by copyright and other intellectual property rights these intellectual property rights are owned by the DTC. The information contained within this Service Guide 2005 (“Confidential Information’) is proprietary and confidential to the DTC; it is provided to Sight-holders on the basis that it shall be kept confidential and used only in relation to their business while participating in the DTC Value Added Services programme. Sight-holders shall not disclose, publish or otherwise reveal any of the Confidential Information to any third party except with the prior written consent of the DTC.”

7.25 The ld. A.R for the assessee agreed that the services provided by the assessee were informative and consultative. He also agreed that the said information had been provided by the assessee to the Sight-holders based on its extensive experience. However, his objection to the treatment of payment for such services as royalty was that the assessee was charging only for supply planning tool services and the information contained in such services was not of high degree. The bulk of useful information being provided was as per business sustainability services or growth services which were not charged by the assessee. It has also been argued by him that the assessee was providing services and not only information. The ld. AR has further argued that the royalty as payment for information concerning industrial, commercial or scientific experience alluded to the concept of know-how as per interpretation given in OCED Commentary. But in the case of the assessee, there was no transfer of know-how.

7.26 We first deal with the objection of the ld. A.R that the payment was only for supply planning tool services. It has been argued that the agreement clearly provided that only supply planning tools services were charged and other services were paid for by the assessee. It has also been argued that the agreement has to be read as it exists and the revenue authorities are not entitled to change the terms of the agreement or interpret it in a different manner. However, on careful perusal of VAS Service Guide, we are unable to accept the arguments advanced. The payment in our view is not only for supply planning tools services but also for other services. The ld. D.R has rightly pointed out that Sight-holders are entitled to business sustainability services and growth services only if the payment has been made by the Sight-holders and the payment as mentioned in para 6 of the service guide placed at page 103 of the paper book was not based on any particular service rendered. The payment by Sight-holders consists of fixed fees of US $ 1,80,000 plus a percentage of incremental purchases. The ld. AR has not controverted the submissions made by the ld. DR on this point. It is not the case that the Sight-holder would be entitled to business sustainability services and growth services free of charge even if he had not made any payment for VAS. In case no payment has been made, he is not entitled for any service. However, if the payment has been made, he has access to all the services. In fact business sustainability services are also available on Extra-net to which the Sight-holders had access as part of supply planning tool services. Thus even if charge was only for supply planning tool services, the business sustainability services were covered by the charge. Merely because the agreement mentions that the payment is only for supply planning tool services, it cannot be accepted that the other services were free of charge. It is a settled legal position that it is not the form but the substance of transaction which is relevant and the agreement has to be considered as a whole in understanding the true nature of transactions. It is true that an authority cannot re-write the agreement but the authorities are entitled to look into the entire surrounding circumstances to come to a conclusion about any factual situation. This view is supported by the judgement of the Honourable Supreme Court in the case of D.P. More (82 ITR 540). No doubt, it is true that agreement is with the Sight holders who are not related but the provisions in the agreement to show that payment was only for supply planning tool services does not adversely affect Sight-holders because upon making payment, they are entitled to avail all services. So long as the Sight-holders are entitled for all the services, the manner in which the agreement is drafted makes no difference to them. The assessee has however tried to take tax advantage by showing the payment only against supply planning tool services when in fact the payment is for all the services. The assessee has tried to devise methods with a view to evade taxes which is clear from the documents found during the survey containing correspondence between the assessee and its tax consultant which has been referred to by the AO at page-6 of the assessment order and which is reproduced below as ready reference:-

“1. -Treatment of the payment to DTC as a reimbursement of expenditure is the preferable route to follow from a Indian tax point of view.

Page 49 Payment towards reimbursement of actual marketing expenditure in respect of the Nakshtra Campaign. = Yes, nomenclature of the wording is right and will have to add only the year of invoice i.e., 2005, as the case may be and send us revised invoice with this wording for the year 2005.

Page 50 (4th line on wards) As the invoiced amounts are based on agreed figures per the contracts, and not the actual amount of expenditure, we are only able to provide this information retrospectively.

In addition to the supporting documentation, the narrative on the invoice would have to be amended and l can confirm that we are able to this.

If the preferred treatment of “reimbursement of expenditure” cannot apply, the next route would be to treat the payment as a ‘Royalty’.

2. You are happy for the narrative on the invoice to be amended and reissued for 2005. Would the following wording be acceptable. “Payment towards reimbursement of actual marketing expenditure in respect of the Nakashtra Campaign.”

7.27 The assessee had therefore been trying to hide the true nature of transactions by changing the narrative of the transactions in consultation with the tax consultant to evade taxes. It was trying to change the nomenclature of marketing contributions received by it to “reimbursement of expenditure” as there will be no element of income involved in the reimbursement of expenditure. During the course of hearing of the appeal also, the ld. AR tried to argue that marketing contribution was reimbursement of expenditure and therefore not taxable. However, ultimately he agreed for its tax ability as royalty and the ground raised by the assessee on this point was not pressed. In case of VAS also, the assessee has tried to hide the true nature of payment by showing it as payment for supply tool services only though in substance the payment is for business sustainability, growth and other services also. Therefore, for the detailed reasons given earlier, we hold that VAS payment was not only for supply tool services but for other services also.

7.28 We now come to the interpretation of the phrase royalty as payment for information concerning industrial, commercial or scientific experience. Such phrase has been interpreted in the OECD Model DTAA Commentaries. As discussed earlier, it is a settled legal position that internationally acceptable meaning placed on identical and similar terms employed in various DTAA Commentaries have to be followed. The ld. Authorised Representative has placed reliance on the OECD Model and it has been explained in OECD Model Commentary, that royalty payment received as consideration for information concerning industrial, commercial or scientific experience alludes to the concept of know-how. In, OECD Model Commentary (2005) the term “know how” was defined as un-divulged technical information whether capable of being patented or not which is derived from experience. The word “technical” cannot be considered only in relation to some technology. It also relates to practical skill of a particular activity as per the Oxford dictionary. Therefore, in relation to any commercial activity, the word technical information has to be understood as information relating to practical skill of the subject. This may be the reason that in OECD Commentary (2008) the word technical has been dropped and the term ‘know-how’ has been defined as undivulged information of industrial, commercial or scientific nature arising from previous experience which has practical application in the operation of an enterprise. Thus, even adopting the OECD model interpretation, any information of industrial, commercial or scientific nature arising from past experience which is a confidential information whether patented or not has to be considered as know-how. We have already pointed out earlier that the information being provided by the assessee to the Sightholders is confidential and protected information which is based on extensive experience of the assessee in selling of diamonds. Therefore, it has to be considered as know-how and payment for such information has to be considered as royalty.

7.29 The Ld. Authorised Representative raised no objection to adopting the interpretation in OECD Commentary (2008). However, he pointed out that para-11.1 of the 2008 Commentary provided that recipient was required to use know-how on his own and grantor was not required to play any part. Further, para-11.2 provided that know-how contracts were different from contract for service. It has been submitted that the assessee in this case was providing services through the KAM and it was not only a case of information being provided but also case of services being rendered. We, however, note that para-7(c) of VAS service guide placed at page 104 of the paper book clearly mentions that Sight-holders are to make their own independent evaluation of all marketing and business initiatives in respect of Value Added Services (VAS). Thus the Sight-holders were required to independently evaluate and make use of information contained in the Service Guide. The KAM is the point of contact with the Sight-holders, which provides access to Value Added Services and DTC Global Marketing, which is also available on Extra-net to which the Sight-holders had access. The role of KAM was thus to provide various information and clarifications on personal contact and to provide assistance in service selection to the Sight-holders’ specific business requirement on request basis. He had no role in application or utilisation of the information which the Sight-holders had to perform on their own. The service provided by the KAM was of the nature of consultancy which was ancillary and subsidiary to the application or enjoyment of the information or the brands for which the payment was received by the assessee. The assistance provided through workshops and personal meetings as part of growth services was also consultancy service which was ancillary and subsidiary to marketing information or brands provided by the assessee. The payment for the various types of information as discussed earlier was clearly covered by the provisions of para 3(a) as royalty. Therefore, the service provided by KAM and through workshops and personal meetings has to be considered as fees for technical services as per para 4(a) of the Article-13. The DRP has also considered the application of para 4(a) in relation to royalty payment under para-3(a) but omitted to consider that royalty received by the assessee was not only for use of Nakshatra Brand of jewellery but also for providing various types of commercial information acquired by the assessee based on its experience.

7.30 The ld. AR also argued that various information provided by the assessee was current information obtained while performing services. The information of industrial, commercial or scientific nature payment for which is to be considered as royalty must arise from previous experience and should not be new information obtained as a result of performing services at the request of the payer as per the interpretation adopted in OECD Commentary (2008). In this case, the various types of information of commercial nature provided by the assessee as pointed out earlier was based on its past experience.  This has been clearly mentioned in the VAS Service Guide. It was not current information obtained as a result of performing any services. The various judgements relied upon by the ld. AR which have been discussed in para 7.10.2 earlier are the cases in which information had been gathered during the course of actual performing of the services. For instance, in the case of Annapharm Inc (supra), the assessee was conducting bio equivalence tests using experience and skill and was providing final reports to the client. The information contained in the reports was held as current information obtained while performing services and, therefore, could not be considered as information arising from past experience. In case of Real Resourcing Limited (supra), the assessee was collecting data and making data base of suitable candidates for submitting the same to the recruitment agencies. The information or data base was therefore considered as information gathered during the course of actual rendering of the service which was to provide suitable candidates to the recruitment agency. The payment was therefore considered for rendering services and not for information acquired based on past experience. The case of the assessee is different. In this case the various types of information being provided by the assessee to the Sight-holders was not the information gathered by the assessee during the course of performing any services but the information of commercial nature arising from past experience. As per OECD Commentary (2008), payment for any information which is undivulged and confidential of industrial, commercial or scientific nature arising from previous experience has to be considered as royalty. The Sight Holders to whom the information was being provided had to independently evaluate and use the information for their own specific business requirements. The only service which was being provided by the assessee was through the KAM and the assistance provided through workshops, personal meetings as part of growth services. Such services were ancillary and subsidiary to the application or enjoyment of the information or brands provided by the assessee and have to be considered as fees for technical services under para 4(a) of Article-13 as held earlier. We may point out here that in case, as argued by the ld. AR, the various marketing information provided by the assessee is considered as current information obtained during the course of actual rendering of services, such services will obviously be marketing consultancy provided by the assessee which have to be considered as ancillary and subsidiary to application or enjoyment of Nakshatra brand or Forever mark as the aim of the assessee was to promote sale of branded diamond products in order to raise demand for rough diamonds. The nature of payment in that case will be FTS as per para 4(a) of Article-13. Such arguments support the finding of DRP. Thus the payment in either case will be taxable.

7.31 In view of the fore-going discussion and for the reasons given earlier, we are of the view that the payment for VAS received by the assessee has to be considered partly as royalty under para 3(a) of Article-13 being the payment for various types of information of commercial nature acquired based on experience provided to Sightholders and partly as FTS under para 4(a) being the payment attributable to the services rendered by the KAM or through workshops, etc. which were ancillary and subsidiary to application or enjoyment of the information, or as FTS being payment for marketing consultancy services which were ancillary and subsidiary to the application or enjoyment of Nakshatra Brand or Forevermark. The AO will tax the payments as royalty and FTS accordingly. As the tax rate is the same for taxation of royalty and FTS, attribution of the payment towards royalty and FTS is not necessary.

8. Ground No. 6 is regarding addition of Rs.3,65,89,942/- on account of VAS due to discrepancy in relation to four parties. The assessee had shown VAS receipts of Rs.1,45,22,44,070/-. The AO on verification with the parties found that the assessee had shown less receipts to the tune of Rs.3,65,89,942/- in relation to four Sight-holders as per details given below:-

Sr. No.

Name of sightholder

Payments
shown by
Assessee
(USD)

Payment
shown by
sightholder
(USD)

Difference
(USD)

1 Asian Star Company

1,316,915

1,384,096

67,181

Limited
2 Ratilal Becharial & Sons

1,924,336

1,924,510

174

3 K.P. Sanghvi & Sons

1,663,156

2,319,290

656,133

4 Jewelex

718,559

842,649

124,090

Tota/

847,578

i.e. INR
36,589,942
(converted
at 43.17)

The AO also observed that the assessee had claimed credit of TDS in respect of VAS payments which could be allowed only if corresponding income was shown as per provisions of section 199. He therefore added the sum of Rs. 3,65,89,942/- on account of VAS income which was assessed at Rs. 1,48,88,34,012/-. The assessee has disputed the decision of the AO before the Tribunal.

8.1 Before us, the ld. Authorised Representative for the assessee submitted that in terms of agreement with sight-holders, the assessee was raising invoice twice in a year i.e. in the months of June and December of the relevant year. The assessee was showing income as accrued only when the invoice was raised. Thus the income for the period January to March 2006 was shown in the income for the Financial Year 2006-07 whereas the party may have shown the income from January to march 2006 in Financial Year 2005-06. Similar was the position in relation to January to March 2007 quarter. The income for the period July 2006 to December 2006 was shown in the income of Financial Year 2006-07 as invoice was raised in December 2006. The same income had been shown by the sight-holders also because the said period fell within the same Financial Year in both the cases. The discrepancy was only for the March quarter which had been shown by the assessee in the next Financial Year. It was also submitted that the assessee had filed reconciliation which is placed at page-107 of the paper book and is reproduced below :-

Sr. No. Name of the Sightholders

VAS fees invoiced to
the Sightholders as
per Annexure 1 of our submissions dated

VAS fees as per the
information furnished
by the sigholders
u/s. 133(6) of the Act

19.11.2009

(copies provided to

DBUK)

(USD)

(USD)

1

Asian Star Company

645,824.48

314,913.48

Limited

671,090.97

671,090.96

398,091.54

2

Ratilal Becharial & Sons

1,924,335.56

1,924,510.00

3

K.P. Sanghvi & Sons

795,879.44

795,879.44

867,277.03

867,277.03

656,133.34

4

Jewelex

718,559

842,649

5

Blue Star

1,103,737.00

1,070,346.78

8.2 The ld. AR explained that the first item in case of Asian Star Company Ltd. of USD 6,45,824.48 included USD 3,30,911 shown by Sight-holders in the earlier year for January to March 2006 and therefore only USD 3, 14,913.48 was shown by them in Assessment Year 2007-08. There was no discrepancy in the second item because that related to invoice raised in December 2006 as the period fell in the same Financial Year for both the parties. The third item of USD 3,98,091.54 was the income shown by sight-holders for the period January to march 2007 which had been shown by the assessee in the next financial year which was the reason for the discrepancy. Similarly, in case of K.P. Sanghvi & Sons, the discrepancy was only in relation to third item which was the income which related to the period January to March 2007 which had been shown by the assessee in the next year. Similar was the position in relation to the other parties. It was  also pointed out that the assessee had followed the same method of accounting in the earlier years which had been accepted by the department. It was accordingly requested that the same system may be allowed this year  also.  The ld. AR however pointed out that the assessee had changed the system from Assessment Year 2008-09. The ld. Departmental Representative on the other hand placed reliance on the order of the AO and submitted that the claims made by the assessee required verification.

8.3 We have perused the records and considered the matter carefully. The dispute is regarding addition of Rs. 3,65,89,942/- to the VAS receipts on account of discrepancies with the four parties as mentioned earlier which had shown more payments than the receipts declared by the assessee. The discrepancy had been explained by the assessee due to difference in method of accounting followed by the two parties. It has been claimed that the assessee was raising invoices only twice a year i.e. in the months of June and December of the relevant year i.e. on six monthly basis and, therefore, the receipts of last quarter of the previous year were accounted in the current year whereas the concerned party had shown the said income in the earlier year which was the reason for discrepancy. There was no discrepancy in respect of invoices raised for the period July to December because the period fell in the same financial year for both the parties. The assessee had filed a reconciliation statement which has been placed at page-107 of the paper book . It has also been claimed that the assessee had been following the same method regularly in the earlier year which had been accepted. Therefore, in our view, it will not be appropriate to reject the method followed by the assessee which has been accepted by the department in the earlier year. However the claims of the assessee in relation to the discrepancies need verification with respect to original documents such as invoices etc. We, therefore, restore this issue to the file of the AO for passing a fresh order after necessary verification in the light of the observations made above and after allowing opportunity of hearing to the assessee.

9. In the ground No. 7, the assessee has raised an alternate plea that the AO had added USD 3,30,911 on account of VAS which had already been taxed in the Assessment Year 2006-07. However at the time of hearing of the appeal the ld. AR did not press this ground of appeal and, therefore, the ground is dismissed as not pressed.

10. The dispute raised in ground No.8 is regarding the rate of tax of 15% applied by the AO to the VAS receipts which had been treated by him as fees for technical services. The AO has applied rate of 15% under provisions of Article-13 of India UK Tax Treaty. The ld. Authorised Representative for the assessee submitted that concessional rate of 10% is required to be applied under the provisions of sub clause (BB) of clause(b) of section 115A(1) as the VAS agreement had been entered into by the assessee with the sight-holders in July 2005 which was after 1.6.2005 as mentioned in sub clause (bb). The arguments of the assessee are similar to the arguments advanced in case of royalty dealt with in the ground No. 4 earlier. In view of our decision in para 6.2 of this order, concessional rate of 10% has to be applied if the agreement had been entered after 1.6.2005. It may however be noted that the assessee has not filed the copy of VAS Agreement. It had filed only the VAS Service Guide which contained the summary of the agreement. The date of agreement, therefore, requires verification. The AO will levy the tax at appropriate rate after verification of the conditions prescribed in section 115A(1). We order accordingly.
11. Ground No. 9 is regarding rate of tax in relation to royalty income for use of Forever mark. The assessee in terms of agreement dated 11.8.2005, a copy of which has been placed in the paper book had granted license to use the Forever mark on eligible polished diamonds on payment basis. The payment has been treated by the assessee as royalty and offered to tax. The dispute in this ground is only in relation to rate of tax. The AO applied the rate of 15% under the provisions of Article-13 of India UK Tax Treaty. The claim of the assessee is that concessional rate of 10% has to be applied under domestic law as per provisions of sub clause (AA) of Clause (b) of section 115A(1) as agreement had been entered into after 1.6.2005. The issue is identical to the issue raised in Ground No.4 regarding tax rate in case of market contribution assessed by AO as royalty. For the reasons given vide para 6.2 of this order, we hold that concessional rate of 10% has to be applied in case of the assessee. Accordingly ground No.9 is allowed in favour of the assessee.
12. Ground No. 10 is regarding not granting credit for tax withheld on the addition of VAS receipts in accordance with provisions of section 199. The AO had made certain additions as mentioned in the ground No.6 but had not given credit of TDS in relation to those additions. It was submitted by the ld. AR that since amounts had been added, credit for taxes deducted should be given. We have already set aside the issue of addition raised in Ground No.6 to the file of the AO. In case in the fresh assessment, it is found that the amount has to be added this year, AO will give credit to TDS in relation to those additions. We order accordingly.
13. Ground No. 11 is regarding charging of interest under section 234B of the Act. The interest has been levied for shortfall in payment of advance tax. The ld. A.R for the assessee argued that additions had been made on account of royalty and FTS in respect of which tax was deductible at source under the provisions of law and therefore, even though no tax was deducted, such income cannot be the basis for levy of interest as tax deductible on such income has to be reduced from the advance tax payable. Ld. DR on the other hand, placed reliance on the orders of authorities below.

13.1 We have perused the records and considered the matter carefully. The dispute is regarding levy of interest for shortfall in payment of advance tax. The advance tax payable under section 208 is required to be computed under section 209 and as per section 209(1)(d), the tax payable by the assessee has to be reduced by the amount of tax deductible or collectable at source. Therefore, once the tax is deductible, the same has to be reduced from tax even if the tax had not been actually deducted. In this case, additions had been made by AO on account of royalty and FTS which are subject to deduction of tax at source under section 195 of the Income Tax Act and therefore, the tax deductible in relation to the said income has to be reduced from the tax payable as advance tax even if no tax had been actually deducted. This view is supported by the decision of the Mumbai Bench of Tribunal in case of DIT (Intl. Taxation) vs. NGC Net Work Asia LLC (313 ITR 187) and in case of Jt. Director of Booz Allen & Hamilton Inc.(107 ITD 313). Respectfully following the said decisions we hold that while computing advance tax payable for the purpose of computation of interest under section 234B tax deductible at source in relation to royalty and FTS will have to be reduced. The AO is directed to act accordingly.

14. Ground No. 12 and 13 are regarding initiation of penalty proceedings under section 271A and 271B. The ld. AR for the assessee did not press these grounds as the same were not maintainable. These grounds are therefore dismissed as not pressed.

15 . In the result appeal of the assessee is partly allowed.

Order pronounced in the open court on 18.11.2011.

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