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2011 (11) TMI 483 - AT - Income TaxReceipts from marketing contributions and value added services (VAS) - treating the payment for Value Added Services (VAS) as Fees for Technical Services (FTS) - discrepancies in the income declaration - rate of tax - Nature of income received from Value added Services (VAS) - company incorporated as tax resident of UK - selling rough diamonds to worldwide Sightholders - expenditure on promotional activities - term know how - interpretation of the phrase royalty as payment for information concerning industrial commercial or scientific experience - HELD THAT - Discrepancy on account of marketing contribution - We find that as per invoice issued by Dimexon 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 installments 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. Rate of tax applicable to marketing contributions - The taxability 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%. 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. Nature of income received from Value added Services (VAS)- 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. Addition on account of VAS due to 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. Rate of tax - In our view 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. In the result appeal of the assessee is partly allowed.
Issues Involved:
1. Legal validity of the assessment proceedings. 2. Treatment of marketing contributions as royalty. 3. Addition of Rs. 1,29,51,000/- on account of marketing contributions. 4. Rate of tax applicable to marketing contributions. 5. Treatment of payment for Value Added Services (VAS) as Fees for Technical Services (FTS). 6. Addition of Rs. 3,65,89,942/- on account of VAS due to discrepancy in relation to four parties. 7. Rate of tax applicable to VAS receipts. 8. Rate of tax in relation to royalty income for use of Forevermark. 9. Credit for tax withheld on the addition of VAS receipts. 10. Charging of interest under section 234B of the Act. 11. Initiation of penalty proceedings under sections 271A and 271B. Detailed Analysis: 1. Legal Validity of the Assessment Proceedings: The assessee challenged the legal validity of the assessment proceedings on the ground that the notice issued under section 143(2) was barred by limitation. However, this ground was not pressed during the hearing and was dismissed as not pressed. 2. Treatment of Marketing Contributions as Royalty: The assessee argued that marketing contributions were reimbursements for expenses and not royalty. The AO and the Dispute Resolution Panel (DRP) treated these contributions as royalty under Explanation 2 to section 9(1)(vi) and Article 13 of the Indo-UK Tax Avoidance Agreement. The Tribunal dismissed the ground as not pressed due to lack of necessary details. 3. Addition of Rs. 1,29,51,000/- on Account of Marketing Contributions: The AO added Rs. 1,29,51,000/- due to a discrepancy with Dimexon Diamond Ltd. The Tribunal found discrepancies in the invoices and required verification to determine whether the amount was a payment received or made by the assessee and whether it related to the relevant assessment year. The matter was remanded to the AO for fresh verification. 4. Rate of Tax Applicable to Marketing Contributions: The AO applied a tax rate of 15% under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under domestic law as per section 115A(1). The Tribunal held that the tax rate of 10% was applicable, as the agreement was dated after 1.6.2005, and directed the AO to apply the 10% rate. 5. Treatment of Payment for Value Added Services (VAS) as Fees for Technical Services (FTS): The AO treated VAS payments as FTS under Explanation 2 to Section 9(1)(vii) and Article 13 of the Indo-UK Tax Treaty. The Tribunal examined the nature of VAS, which included supply planning tools, business sustainability services, and growth services. The Tribunal concluded that VAS payments were partly royalty under para 3(a) of Article 13 and partly FTS under para 4(a) due to the ancillary and subsidiary nature of the services. The AO was directed to tax the payments accordingly. 6. Addition of Rs. 3,65,89,942/- on Account of VAS Due to Discrepancy in Relation to Four Parties: The AO added Rs. 3,65,89,942/- due to discrepancies with four parties. The assessee explained the discrepancies due to different accounting methods. The Tribunal remanded the issue to the AO for verification of the claims with original documents. 7. Rate of Tax Applicable to VAS Receipts: The AO applied a 15% tax rate under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under section 115A(1). The Tribunal directed the AO to verify the date of the VAS agreement and apply the appropriate tax rate accordingly. 8. Rate of Tax in Relation to Royalty Income for Use of Forevermark: The AO applied a 15% tax rate under Article 13 of the Indo-UK Tax Treaty. The assessee argued for a 10% rate under section 115A(1). The Tribunal held that the concessional rate of 10% was applicable and allowed the ground in favor of the assessee. 9. Credit for Tax Withheld on the Addition of VAS Receipts: The AO did not grant credit for TDS on the added VAS receipts. The Tribunal directed the AO to give credit for TDS if the amounts were added in the fresh assessment. 10. Charging of Interest Under Section 234B of the Act: The AO charged interest for shortfall in advance tax payment. The Tribunal held that tax deductible at source should be reduced from the advance tax payable, even if not actually deducted, and directed the AO to recompute the interest accordingly. 11. Initiation of Penalty Proceedings Under Sections 271A and 271B: The assessee did not press these grounds, and they were dismissed as not pressed. Conclusion: The appeal was partly allowed, with several issues remanded to the AO for further verification and appropriate action based on the Tribunal's directions. The Tribunal emphasized the need for accurate verification of claims and adherence to applicable tax rates under both domestic law and the Indo-UK Tax Treaty.
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