Income Tax Appellate Tribunal - Bangalore
Spice Telecom vs Income Tax Officer on 3 February, 2006
Equivalent citations: (2008)113TTJ(BANG)502
ORDER
N.L. Kalra, A.M.
1.The assessee has filed the appeal against, the order of learned CIT(A)-V, Bangalore, dt. 28th Feb., 2002.
2. The grievanee of the appellant is that learned CIT(A) has erred in confirming the order of ITO (TDS) by holding that payments made to nonresident companies were either royalty or fee for technical service as against payments for advice and assistance as contended by the appellant and, hence, such payments were liable for deduction of tax at source.
3. The assessee contended before the ITO that if is making payments to DCIL in respect of services which can be classified with two major heads:
(a) Provision of expertise and training on the technological aspects of the mobile telephony business.
(b) Provision of advisory and support services as operational and financial aspects of the business.
3.1 The appellant has deducted tax at source in respect of payment for services provided under Category A but: has not deducted tax at source in respect of payments for services under Category B. It was submitted that services under Category B can be considered as technical service but. Indo Mauritius treaty does not cover technical service. It was further argued that services were performed outside India and hence, TDS is not to be made as per Circular No. 23, dt. 23rd July, 1969 and Circular No. 786 1(2000) 158 CTR (St) 61 J. The AC) obtained the copy of invoice and details of payments on which tax was not. deducted at source were described as under:
(a) Liason with legal and financial advisors and negotiations with vendors and financial institutions for extension of the vendor loans and indication of long-term project finance at Rs. 2.5 lakhs per month.
(b) Providing continuous support in connection with developing sales distribution channels, promoting brand awareness, customer care programme, formulating marketing strategy, monitoring pricing strategies, billing systems and credit controls to improve operational efficiency and profitability at Rs. 2,93,750 per month.
The learned AO mentioned that the. assessee entered into technical agreement for successfully providing cellular communications services in the States of Karanataka and Punjab. As per agreement, the assessee wanted full transfer of the Distacom know-how and right to use Distacom intellectual property rights. Distacom know-how as defined in the agreement as under:
Distacom know-how means all of the knowledge, skill and experience of the Distacom Group in the design, construction, installation, management, operation marketing, accounting and finance required for the provision of cellular telecommunication services.
3.2 As per AO, the provisions of IT Act will be applicable on the issue on which DTAA is silent. The services rendered in respect of payment of which tax was not deducted at source were held as technical services and, hence, such payments were held as taxable in India" as per Section 9(l)(vti) of the IT Act.
3.3 Royalty is defined in DTAA and as per this definition, payments received for services rendered can be termed as royalty. It was therefore, held that appellant was required to deduct tax at source and accordingly demand was created under Sections. 201(1) and 201 (1A) of the IT Act.
3.4 Learned CIT(A) upheld the finding of the AO and gave the following reasons for concluding that the appellant should have deducted tax at source:
(a) The payments made for advice and assistance will represent fees for technical services as per provisions of Section 9(1) (vii) and royalty as per Section 9(l)(vi) in terms of definition of know-how contained in the agreement itself.
(b) The description of services rendered is included in the definition of Distacom know-how as provided in agreement.
(c) Royalty as defined in Clause (iv) of Explanation to Section 9(1)(vi) includes the consideration paid for the imparting of any information, concerning technical, industrial commercial or scientific knowledge, experience and skill. The payments in this case relate to imparting of information concerning knowledge, experience and skill through the services rendered in respect of the commercial aspects of the project. Hence, payments are royalty.
(d) As per Clause 12 of the DTAA, royalties may be taxed in the Contracting State in which they arise and, according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of royalties. Royalty as defined in this article includes consideration for the use of information concerning industrial, commercial or scientific experience. Since payments represented consideration for information imparted by the non-resident company concerning its commercial experience relating to the project though the services rendered by it pertaining to this field.
(e) Since payments are held as royalty hence, are taxable in Contracting State as per Article 12(2) of DTAA.
4. During the course of proceedings before us, the learned Authorised Representative has filed paper book containing 38 pages and brief summary of contents in 7 pages. The brief contentions are as under:
(i) The payments for 'advice and assistance' are payments for services. Such payments are distinct, from payments for know-how and intellectual property rights.
(ii) Payments for services may be taxable either as--
(a) business income.
(b) professional income.
(c) royalty income.
(d) fees for technical services.
(iii) Business and professional income of a non-resident company is taxable in India, if it has a PE in India or a fixed base in India.
(iv) Services may be taxed as royalty income if they are referable to the 'know-how' that is imparted. Paras 11, 11.1 to 11.4 of the Commentary on OECD Model Tax Conventions deal with the circumstances under which "services income" maybe classified as royalties. In the present case, no such characteristics are satisfied.
(v) Payments for services rendered and work done are not royalties unless the services are ancillary to, or part and parcel of enabling relevant technology, information, know-how, copyright, machinery or equipment to be transferred or used.
(vi) The treaty definition of royalty does not include payments for knowledge and skill but limits it to payment for experience. Payment for all types of experience is not royalty. Payments for imparting knowledge based on experience including that of a teacher, trainer, opinion of a lawyer, doctor are not royalty.
(vii) Payment for experience will be royalty if it has some intrinsic property value-Kirloskar Oil Engines Ltd. v. Dy. CIT (2002) 76 TTJ (Pune) 646.
Experience may constitute royalty if it is one's own experience in the realm of industrial, commercial and scientific and not a compilation of somebody else experience-Wipro Ltd. v. ITO, Bangalore Bench in ITA Nos. 152 to 154/Bang/2004, dt. 30th Dec, 2004 [reported at (2005) 92 TTJ (Bang) 796-Ed.]. In the present case payment is not for experience mentioned above.
(viii) Payments are for services of a very routine nature and hence, cannot be considered as fees for technical services. Reliance placed on decisions in Linde A.G. v. ITO (1997) 59 TTJ (Mumbai) 169 : (1997) 62 ITD 330 (Mumbai); Asstt. CAT v. P.N. Writer & Co. (2005) 98 TTJ (Mumbai) 595 : (2005) 94 ITD 446 (Mumbai) and CIT v. MEG Ltd. . Even if it is assumed that it is fees for technical services then treaty between India and Mauritius does not have a specific article dealing with "Fees for technical services". Under such circumstances payments will be governed under Clause 7 of the agreement dealing with business income. Reference to decision of AAR in Tekniskil (Sendirian) Berhard, In re . Know how as defined in the agreement cannot be equated with the definition of know-how as defined and understood in law. Reference made to CIT v. Panipat Woollen & General Mills Co. Ltd. and Union of India vs. Gosalia Shipping (P) Ltd. .
5. Learned Departmental Representative has also filed a paper book containing six pages. The submissions in brief are as under:
(i) Technical and operating services as defined in agreement means the transfer of Distacom know-how, the grant of a non-exclusive, nontransferable licence to use the Distacom intellectual property rights in India and the provision of certain advice and assistance, more fully described in Schedule I, required for construction, installation, management, operation, maintenance, marketing, accounting and finance of mobile cellular telecommunication networks in India.
(ii) Schedule 1 included the following services:
(a) Implanting system followed by Distacom world-wide like production, planning, commercial, finance and customer services.
(b) Establishing a corporate culture consisting with Distacoms worldwide policies both in terms of quality and service.
(c) Controlling and improving the operating and transmission cost and service reliability.
(d) Providing high customer value and quality service.
(e) Developing and growing the subscriber base.
(f) Providing a wide range of value added service.
(g) Developing brand name awareness and marketing strategy including advertising and promotion etc.
(iii) Services mentioned in Schedule I of the agreement covered the billed items. Hence, as per agreement, the services were treated as know-how.
(iv) Know-how is not defined in DTAA, know-how was defined in Section 109 (now omitted) in Explanation to Clause (ib) as under:
Explanation- In this clause and in Sub-clause (3) of Clause. (iii), the expression "provision of technical know-how" means--
(a) the transfer of all or any rights (including granting of a licence) in respect of a patent, invention, model, design, secret formula or process or similar property.
(b) the implanting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or similar property.
(c) The case of....
(d) The imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill.
(v) In the instant case, the appellant has paid consideration for receiving specialised knowledge and such knowledge as mentioned in the bills is covered by the definition of know-how as given in Expln. (iv) above,
(vi) Know-how can take the form of advice and assistance. In respect of lump sum paid it is for the making available the imparting of the know-how both as recorded in the drawings and other data and as conveyed by direct instruction, advice or information.
(vii) Payments made for the services rendered for developing sales and marketing network, financial systems and control, for availing long-term loans by negotiating with financial institutions, etc. These works can only be executed by person having industrial and commercial experience and skill in mobile communication field. Assessee has acquired this experience from Distacom in the form of services and also in the form of advice and assistance.
(viii) Appellant has paid for the information concerning industrial and commercial skill and experience of Distacom. The ratio laid down by this Bench in Wipro case (supra) is not applicable.
6. We have heard both the parties. The appellant company executed licence agreement with Department of Telecommunication, Government of India to design, construct, instal, operate, manage and maintain mobile cellular telecommunications systems to provide cellular telecommunication services in the States of Karnataka and Punjab. For this purpose, the appellant company entered into an agreement known as technical services and operating agreement. The title of the agreement shows that the agreement was to get technical services as well as services for operating the system. Under the agreement, the appellant got right to use Distacom know-how and Distacom intellectual property rights and also got right for advice and assistance as set out in Schedule I of the agreement. To carry out all the activities as mentioned in the licence agreement, the appellant company required to expertise in technical field as well as in administrative, accounting and finance field. Expertise in technical field is not gained through experience only but is also attained through research and invention. However, expertise in administrative field, accounting field and finance field is gained through experience. Such experience gained can be utilised for giving advice or assistance.
6.1 Contracts of know-how and services have been distinguished as under in OECD Model Tax Convention.
6.2 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 recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licencee and that he does not guarantee the result thereof.
6.3 In the contract for provision of services, one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party.
6.4 In most cases involving the supply of know-how, there would generally be very little more which needs to be done by supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of service would, in majority of the cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations.
6.5 In the present case, the only material available and relied on by the AO is the description contained in the invoices. Such descriptions are:
(a) Liaison with legal and financial advisors and negotiations with vendors and financial institutions for extension of the vendor loans and syndication of the long-term project finance,
(b) Providing continuous support in connection with developing sales distribution channels, promoting brand awareness, customer care programs, formulating marketing strategies monitoring pricing strategies billing systems and credit controls to improve operational efficiency and profitability.
Since the AO has not attempted to obtain the gist of actual advice and assistance obtained from the description given above, it is clear that for providing the information or services billed as above, the appellant needed continuous assistance and advice from the supplier. In respect of technical fields, the appellant only needed the transfer of know-how and knowledge.
6.6 As per the agreement, the amount was to be paid as base fee plus bonus, if any. The bifurcation for different activities is as per invoice. The Revenue is mainly relying on the definition of know-how as mentioned in the agreement. The learned Authorised Representative has drawn our attention to the following observation of the Supreme Court in the case of Union of India v. Gosalia Shipping (P) Ltd. (supra):
It is true that one cannot place over reliance on the form which the parties give to their agreement or on the label which they attach to the payment due from one to the other. One must have regard to the substance of the matter of a payment is something other than what, by a clever device of drafting it is made to appear.
Hence, we should ascertain the character of payment in view of the legal meaning of know-how and not just because in the agreement some information or advice is categorised as know-how. The same should not be concluded as know-how. Every information based on experience cannot be know-how. The learned M.P. High Court in the case of CIT v. HEG Ltd. (supra) observed:
That apart, we have already indicated that every information would not have the status of royalty. There are various kinds of categories of information. Solely because an entry is of commercial nature would not make a royalty.
This Bench in the cases of payments of softwares has held that such payments are for procurement of information i.e. data but these payments are not royalty. Now when we consider item--Liason with legal and financial advisors; it is clear that such payment is purely for services. Since payment for technical services is not covered under DTAA, hence no TDS is required as provisions of DTAA will prevail as per decision of the Supreme Court in the case of- Union of India v. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC). Such payments in no way can be considered as royalty as for rendering such service one is not imparting information concerning technical, industrial, commercial or scientific knowledge, experience or skill.
6.7 Hence, we have no hesitation, to hold that no tax was required to be deducted at source in respect of payment relating to following:
Liason with legal and financial advisors and negotiations with vendors and financial institutions for extension of the vendor loans and syndication of the long-term project finance.
6.7.1 In respect of remaining items, we are not in a position to decide the issue in absence of details of information as received by the appellant, whether information provided is. secret based on experience or skill ? Another aspect which is to be considered as to whether the consideration paid is for information which is of perpetual or extended use. If the nonresident company is providing support on the basis of facts and information collected by appellant and thereby suggesting ways and means with the aim of providing support to develop specified areas relevant to marketing and financial areas, then consideration paid may not be termed as royalty. Hence, on the deduction of tax at source in respect of payment for following item, the matter is restored back on the file of learned ITO (TDS):
Providing continuous support in connection with developing sales distribution channels, promoting brand awareness, customer care programs, formulating marketing strategies, monitoring pricing strategies, billing systems and credit controls to improve operational efficiency and profitability.
7. In the result the appeal is treated as partly allowed.