Payments received by a non-resident for Value Added Services (VAS) is partly treated as ‘Royalty’ and partly as ‘Fees for Technical Services’ under India-UK tax treaty

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).