Income Tax Appellate Tribunal - Mumbai
Van Oord Dredging And Marine ... vs Dcit (It) 4(3)(1), Mumbai on 10 November, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
"L" Bench, Mumbai
Before S/Shri B.R. Baskaran (AM) & Sandeep Gosain (JM)
S.A. No. 476/Mum/2017 arising out of
I.T.A. No. 6141/Mum/2017 (Assessment Year 2014-15)
S.A. No. 477/Mum/2017 arising out of
I.T.A. No. 6140/Mum/2017 (Assessment Year 2013-14)
I.T.A. No. 6140/Mum/2017 (Assessment Year 2013-14)
I.T.A. No. 6141/Mum/2017 (Assessment Year 2014-15)
Van Oord Dredging and DCIT (I T)-4(3)(1)
Marine Contractors BV Vs. 16 t h Floor
201, 2 n d Floor, Central Plaza Air India Building
166 CST Road, Kalina Nariman Point
Mumbai-400 098. Mumbai-400 021.
(Appellant) (Respondent)
Assessee by Shri Nishant Thakkar &
Ms. Jamin Amalsadvala
Department by Shri M.V. Rajguru
Date of Hearing 10.11.2017
Date of Pronouncement 10.11.2017
ORDER
Per B.R. Baskaran (AM) :-
The stay applications and appeals filed by the assessee pertain to assessment year 2013-14 and 2014-15. The appeals are directed against the orders passed by the assessing officer in conformity with the directions issued by Ld Dispute Resolution Panel (DRP).
2. At the time of hearing of stay applications, the Ld A.R demonstrated that the issue contested in both the appeals are covered by the order passed by the co-ordinate bench of Tribunal in the assessee's own case relating to assessment year 2009-10 in ITA No.7589/Mum/2012 dated 07-10-2016. The Ld D.R also agreed with the said submission. Accordingly, with the concurrence of both the parties, the appeals were also taken up for hearing. The solitary issue contested in these two appeals is whether the assessing 2 V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V officer was right in law in assessing the "management service fee" received by the assessee in both the years as Royalty.
3. The assessee is a company incorporated in Netherlands and is eligible for benefits of Indo-Netherland DTAA. The assessee is engaged in the business of dredging, i.e., it undertakes capital dredging, maintenance of dredging projects and other dredging related activities. The assessee entered into a "Service agreement" on 01-04-2004 with "Van Oord India Private Limited (VOIPL) under which it has provided certain assistance and support on continuous basis in the field of personnel and organisation, operation support, quality, health, safety and environment, designated personnel offshore, information technology, estimation and engineering, marketing and administrative services in connection with the operations of their business of marine construction and related activities. The payment received by the assessee from VOIPL was treated as royalty by the assessing officer in both the years, whereas the assessee claimed the same as managerial services, as it did not make available any technical knowledge, experience, skill, know-how or process. The AO did not accept the contentions of the assessee and accordingly assessed the payments received by the assessee as royalty in both the years.
4. In assessment year 2009-10, the ITAT, vide its order dated 07-10-2016 passed in ITA No.7589/Mum/2012, had held that identical payments received by it under the very same agreement cannot be treated as royalty. The assessee relied upon the order passed by the Tribunal in its objections filed before Ld DRP. However, the Ld DRP did not incline to follow the order passed by the Tribunal on the reasoning that the revenue has challenged the order passed by the Tribunal by filing appeal before the Hon'ble High Court of Bombay. Accordingly the Ld DRP confirmed the order passed by the AO in both the years. Accordingly the AO passed the final assessment order assessing the impugned receipts as royalty in both the years. Aggrieved, the assessee has filed these appeals and also the stay applications.
3V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V
5. We heard the parties and perused the record. We notice that the assessing officer had made identical disallowance in assessment year 2009-10 and the Tribunal, vide its order referred supra, has held that none of the services provided by the assessee in the terms of "service agreement" falls under the scope and ambit of "royalty" as defined in Article 12(4) of the DTAA. For the sake of convenience, we extract below the operative portion of the order passed by the co-ordinate bench of Tribunal in AY 2009-10:-
14. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material referred and relied upon before us. The first issue for our adjudication is, whether the fees received by the assessee from its Indian entity, VIOPL for management and support services is to be treated as "royalty" under Article 12(4) of India-Netherland-DTAA or not. The entire gamut of facts and nature of services provided by the assessee to VOIPL in the terms of service agreement dated 1st April, 2004 has already been discussed above elaborately. The revenue's case is that, the VOIPL is completely dependent on assessee (VODMC) for its experience in industrial, commercial and scientific field. The Indian entity is engaged in highly technical business of dredging activities for which it requires the information and experience of the VODMC right from the pre-bidding stage till the post project completion stage. Thus, the payment received by the assessee-firm for rendering such kind of services falls within the realm and ambit of 'royalty' as defined in para (4) of Article 12 of the DTAA. The relevant definition of 'royalty' as given in Article 12(4) of India-Netherlands-DTAA reads as under:-
"The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark design or model, pan secret formula or process, or for information concerning industrial, commercial or scientific experience".
Here, the main emphasis of the Revenue is on the term "for information concerning industrial, commercial or scientific experience". This term mainly alludes to concept of use of or right to use of providing of "knowhow", where one party agrees to impart the information on knowhow concerning industrial, commercial or scientific experience to the other. OECD in its commentary has explained these terms in para 11 in the following manner:-
4V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V "The classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to the concept of "know-how". Various specialized bodies and authors have formulated definitions of know-how. The words "payments ... for information concerning industrial, commercial or scientific experience" are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to un-divulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and form the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as result of performing services at the request of the payer;
In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof.
This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7.
The need to distinguish these two types of payments, i.e. payments for the supply of know-how and payments for the provision of services, sometimes gives rise to practical difficulties. The following criteria are relevant for the purpose of making that distinction:
Contracts for the supply of know-how concern information of the kind described in paragraph 11 that already exists or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information.
In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the u se, by that supplier, of special knowledge, skill and expertise but 5 V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V not the transfer of such special knowledge, skill or expertise to the other party.
In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to subcontractors for the performance of similar services.
Examples of payments which should therefore not be considered to be received as consideration for the provision of know-how but, rather, for the provision of services, include:
- payments obtained as consideration for after-sales service;
- payments for services rendered by a seller to the purchaser under a warranty;
- payments for pure technical assistance;
- payments for a list of potential customers, when such a list is developed specifically for the payer out of generally available information (a) payment for the confidential list of customers to which the payee has provided a particular product or service would, however, constitute a payment for know-how as it would relate to the commercial experience of the payee in dealing with these customers),
- payments for an opinion given by an engineer, an advocate or an accountant, and
- payments for advice provided electronically, for electronic communications with technicians or for accessing, through computer networks, a trouble-shooting database such as a database that provides users of software non=confidential information in response to frequently asked questions or common problems arise frequently"
From the above clarification, it can be ostensibly inferred that, to qualify as payment towards information concerning industrial, commercial or scientific experience, person must provide knowhow to the recipient, that is, a strong emphasis has been given to concept of "knowhow". There is an element of imparting of knowhow to the other so that other can use or has right to use such 'knowhow'. In case of industrial, commercial or 6 V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V scientific experience, if services are being rendered simply as an advisory or consultancy then it cannot be reckoned as "royalty" because the advisory or assistance does not connotes imparting of the skill or experience to other albeit the person is rendering the services from his own knowhow and what he is imparting is his conclusion based on his own skill and experience. The imparting of 'knowhow' envisages that the recipient should be able to make use of such knowhow independently on its own account without recourse of the provider of the knowhow in future. For being regarded as "royalty" there has to be alienation or use of or right to use of any knowhow and without any transfer of any knowledge, experience or skill, it cannot be termed as "royalty". In the case of GECC Asia Ltd. vs. DDIT (supra) had occasion to deal with the term "information concerning to industrial, commercial or scientific experience" and after referring to various commentaries, observed and held as under:
"The royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the correct of knowhow. There is an element of imparting of knowhow to the other, so that the other person can use or has right to use such knowhow. In case of industrial, commercial and scientific experience, if services are being rendered simply as an advisory or consultancy, then it cannot be termed as "royalty", because the advisor or consultant is not imparting his skill or experience to other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience. The eminent author Klaus Vogel I his book "Klaus Vogel On Double Tax Convention" has reiterated this view on differenced between royalty and rendering of services. The thin line distinction which is to be taken into consideration while rendering the services on account of information concerning industrial, commercial and scientific experience is, whether there is any imparting of knowhow or not. If there is no "alienation" or the "use of" or the "right to use of" any knowhow, then it cannot be termed as "royalty". The services may have been rendered by a person from own knowledge and experience but such a knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. Hence, in such a case, it cannot be held that such services are in nature of "royalty". Thus, in principle we hold that if the services have been rendered de-hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article -12. .... If such services do not involve imparting of 7 V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V knowhow or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as royalty"
15. Thus, what we have to see is, whether the various services provided by assessee to VOIPL can be reckoned as providing of any kind of imparting of knowhow or information concerning industrial, commercial or scientific experience or not. As highlighted above, with regard to various streams of services like providing of information technology; operational support; marketing; quality, health, safety and environment; estimating and engineering; and personal and organization, administration and legal services, there is no imparting of any kind of knowledge, skill or experience by way of information concerning industrial, commercial or scientific which is made available to VOIPL. For instance, information technology services are provided for use of group companies' computer system where IT teams providing manual general information without providing any information or method to design or create a computer system. It is mainly kind of help desk and trouble-shooting services which are required on regular basis.
For operational support system also, it mainly provides for check-list for project plans, safety work and inspection plans etc. Similarly, for marketing, the assessee provides for emarketing through its website and maintaining it, printing and publishing brochures which can be distributed to its potential clients. It also helps VOIPL to obtain the certificate of approval from the concerned organizations and obtained the contracts on the regular basis. Regarding quality health and safety environment services, the assessee merely conducts internal audits on regular intervals so that proper adherence to such quality standard and procedures are valid/ should remain valid. Similarly, in the estimating an engineering services and other services also, the assessee is mainly providing tender process, helping and preparing (estimates) and bids and plan consisting in local performance and other guarantees to the client of VOIPL etc. For rendering of these services, there is no element of imparting of any "knowhow" or there is transfer of any knowledge, skill or experience. Thus, in our opinion, none of the services provided by the assessee in the term of "service agreement" falls within the scope and ambit of "royalty" as defined in Article 12(4) of the DTAA.
6. The co-ordinate bench of Tribunal has dealt with the payment received by the assessee pursuant to the agreement dated 01-04-2004. In the years under consideration also, the assessee received payments pursuant to very same agreement. The Ld A.R submitted that there is no change in facts between both the years. Before us, the revenue could not bring any material in order to compel us not to follow the order passed by the co-ordinate bench in AY 2009- 8 V a n O or d D r e dg i n g an d M ar i n e C o n tr a c to r s B V
10. Since a particular view has already been taken by the Tribunal on identical payments received by the assessee, following the same, we hold that the payments received by the assessee in terms of "service agreement dated 01-04- 2004" do not fall under the definition of "royalty" as defined in Article 12(4) of India-Netherlands DTAA. Accordingly we set aside the order passed by the assessing officer in both the years on this issue.
7. Since we have disposed of the appeals filed by the assessee, the stay applications shall become infructuous. Accordingly we dismiss them as infructuous.
8. In the result, both the appeals of the assessee are allowed and the stay applications are dismissed.
Order has been pronounced in the Court on 10.11.2017.
SD/- SD/-
(SANDEEP GOSAIN) (B.R.BASKARAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated : 10/11/2017
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT
5. DR, ITAT, Mumbai
6. Guard File.
BY ORDER,
//True Copy//
(Dy./Asstt. Registrar)
PS ITAT, Mumbai