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2010 (4) TMI 867 - AT - Income TaxStrategic consulting services - Nature of royalty or scientific experience - DTA between Switzerland and India - payment of fees taxable in India or not - The assessee is a company incorporated in Switzerland and is a non-resident. It is engaged in the business of providing strategic consulting services. The assessee entered into agreement with Stock Traders (P.) Ltd. (STPL) an Indian company engaged in the business of financing and making investments. The assessee received fees as payments for the services rendered to STPL. The assessee claimed that the fees were not taxable in India. CIT(A) held that receipts by the assessee from STPL cannot be brought to tax and that they are not in nature of royalty or fees for technical services within the meaning of Article 12(3) or 12(4)( b )( ii ) of DTAA between India and Switzerland. As, the assessee does not have PE in India; and therefore, business income cannot be taxed in India. HELD THAT - We have also gone through the material available on record regarding nature of services rendered by the assessee to STPL. Descriptions of services rendered by the assessee are given in invoices raised by the assessee on STPL. It is clear from these documents that what are provided by the assessee, was only strategic consulting. The Memorandum of understanding is a tool to understand as to what meaning was intended to be conveyed in the DTAA between countries. Since the wording of Article 12(4)( b ) of the treaty and Article 12(4)( b ) of the DTAA between India and US are identical, the MOU to the Indo-US treaty can be looked into to see what meaning India and Switzerland would have contemplated in the treaty. The law is settled that a DTAA with one country can be compared with the DTA with another country in case of ambiguity and in order to understand the true scope and meaning of the concerned DTA. The Karnataka High Court in the case of A.E.G. Telefunken v. CIT 1998 (3) TMI 107 - KARNATAKA HIGH COURT compared the DTA with German Democratic Republic with the DTA with Finland towards this end. the Tribunal in the case of Raymond Ltd. v. Dy. CIT 2002 (4) TMI 891 - ITAT MUMBAI had to deal with a case payment of commission by an Indian company to a non-resident in connection with Public Issue of Global Depository Receipts (GDR) for services rendered outside India. The question before the Tribunal was whether the commission so paid can be said to be Fees for included services i.e., Fees for Technical Services under Article 13(4)( c ) of the Indo-UK DTAA which is the same as that of Article 12(4)( b ) of the treaty between India and Switzerland. After considering Article 12(4)( b ) of the Indo-US DTAA which are similar to Article 12(4)( b ) of the treaty between India and Switzerland , and after referring to the Memorandum of understanding to the Indo-US DTAA. We have already described nature of services rendered by the assessee to STPL. It is clear from the nature of service that nothing is made available to STPL by the assessee. Technical knowledge, experience, skill continues to remain with the assessee even after conclusion of the agreement to render services between the assessee and STPL. Services are not made available to STPL by the assessee for its future use or utilization on reasonably permanent basis. It is also significant to mention that with effect from 1-4-2001, definition of term fees for included services have undergone a change and it is wide enough to cover to technical managerial or consultancy services. Thereafter, the assessee has offered for the purpose of taxation the receipts from STPL. Therefore, We do not find any grounds of interfere with the order of learned CIT(A) on this issue. Nature of receipts - HELD THAT - It is clear from that consideration for information concerning industrial, commercial and scientific experience is to be regarded as royalty, only if it is received from imparting know-how. However, providing strategic consulting services, which may entail the use of technical skills and commercial experience by a strategic consultant, does not amount to know-how being imparted to the buyer of the strategic consulting services. We have already seen the nature of services rendered by the assessee. The assessee was only rendering consultancy services. The assessee did not impart any know-how to STPL. The assessee retained the experience required to perform the services. Therefore, the receipts in question cannot be said to be in the nature of royalty. In the result, all the appeals by the revenue are dismissed.
Issues Involved:
1. Whether the consideration received by the assessee for rendering strategic consulting services is in the nature of royalty under Article 12(3) of the India-Swiss Treaty. 2. Whether the consideration received by the assessee for rendering strategic consulting services constitutes fees for included services under Article 12(4)(b)(ii) of the India-Swiss Treaty. 3. Whether the assessee has a Permanent Establishment (PE) in India, thereby making its business income taxable in India. Issue-wise Detailed Analysis: 1. Nature of Consideration as Royalty: The revenue argued that the fees received by the assessee should be classified as royalty under Article 12(3) of the India-Swiss Treaty, asserting that the services provided involved scientific experience. The Tribunal, however, concluded that the consideration received by the assessee does not fit the definition of royalty under Article 12(3). The Tribunal referred to the OECD commentary and Klaus Vogel's interpretation, which emphasize that royalty payments pertain to the imparting of know-how. The Tribunal found that the services rendered by the assessee were advisory in nature and did not involve imparting any know-how to the recipient. The assessee used its own experience to provide consultancy services without transferring any technical knowledge or experience to the client, thus, the receipts could not be classified as royalty. 2. Consideration as Fees for Included Services: The Tribunal examined whether the fees could be classified as fees for included services under Article 12(4)(b)(ii) of the India-Swiss Treaty. The Memorandum of Understanding (MOU) to the Indo-US DTAA, which has identical wording to the India-Swiss Treaty, was used to interpret the term "fees for included services." According to the MOU, for services to be considered as included services, they must make available technical knowledge, experience, skill, know-how, or processes to the recipient. The Tribunal found that the strategic consulting services provided by the assessee did not make any technology or technical knowledge available to STPL. The services rendered were strategic and advisory, with no transfer of technical skills or knowledge that STPL could use independently in the future. Therefore, the fees could not be classified as fees for included services. 3. Permanent Establishment (PE) in India: The Tribunal noted that the CIT(A) had concluded that the assessee did not have a PE in India, and this finding was not challenged by the revenue. As a result, the issue of whether the assessee's business income could be taxed in India did not arise for consideration in these appeals. Conclusion: The Tribunal dismissed all the appeals by the revenue, holding that the consideration received by the assessee for rendering strategic consulting services to STPL was neither in the nature of royalty nor fees for included services under the India-Swiss Treaty. Additionally, the assessee did not have a PE in India, and thus, its business income was not taxable in India.
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