2023 (12) TMI 1339 - AT - Income Tax

Taxability of income in India - services rendered for providing Supply Planning Services (SPS) - Royalty /FTS under the India UK DTAA - services falls within the purview of royalty under Article 13(3) of India-UK DTAA and crediting services and DTC accreditation business as FTS under Article 13(4) or not? - HELD THAT - From the perusal of the services, it is seen that what has been provided is intention to offer whereby assessee communicates in advance to every sight holder the aggregate value of each Box it intends to make available to the sight holder during the selling period. It also undertakes to use its reasonable efforts to ensure that, insofar as practicable, there is consistency as to the size, type, quality and colour of diamonds contained in each box in any category that it supplies during the intention to offer period. This is purely service for providing diamonds to the sight holders and such service cannot be held that some kind of technical service is being provided by the assessee on this under Article 13 of DTAA or there is any managerial, technical or consultancy services even under the provision of section 9(1)(vii) of the Act. Provision of extranet, it only accelerates efficiencies in the intention to offer process and provides a platform for sharing DTC information, propriety content plus tailored access to each sightholder to their own specific business information and processes via secured web-based, informationsharing and business platform. It is merely for providing information and there is no element of making available technical services and therefore, we are unable to appreciate as to how these can be treated as FTS. In so far as the provision of key account management, it is a kind of main point of contact between sightholder and assessee and assists in managing that relationship and to provide support in planning the intention to offer and delivery schedules. This account is related to supply of diamonds and nothing to do with providing any technical services. So far as maintaining integrity of supplier of choice, assessee has engaged an organization to verify the accuracy of the information contained in sightholder submissions and information supplied or ought to be supplied by sightholders during the term of the contract. Thus, this has nothing to trigger FTS clause of DTAA. Accordingly, the finding and observation of ld. CIT (A) is upheld. Accordingly, this issue is decided in favour of the assessee. Receipts being fees for SPS not falling under the purview of royalty under Article 13(4) - The receipt of SPS fees by the assessee cannot be said to be falling in the definition of Royalty by virtue of information concerning industrial, commercial or scientific experience as the information is provided based on experience and not for imparting of experience. However, with regard to taxability of supply planning services under Article 13(4)(a), for use of brand Nakshatra or Forevermark to promote sale of branded diamond products, it has been stated that the Nakshatra brand which was owned by assessee from which it has earned royalty income, earlier was sold in AY 2008-09. Thus, this payment cannot be held in the nature of FTS or royalty. Albeit this is business income for assessee in India. However, if assessee does not have a PE in India, therefore, in the absence of PE, the receipts from supply planning services cannot be taxable in India. Receipts being receipts/ fees received for grading services as business income of assessee and not as royalty - We find that this issue stands covered by the decision of the Hon ble Jurisdictional High Court in the case of Diamond Services International (P) Ltd. 2007 (12) TMI 182 - BOMBAY HIGH COURT and also it has been brought on record that assessee's group company, Forevermark Limited, also a tax resident of UK. The Tribunal for A.Y.2013-14 has held that grading services rendered by it is not taxable as royalty. Thus, we upheld the order of the ld. CIT(A) that grading services do not fall within the ambit of royalty as per Article 13. Receipts/ fees received from DTC Accredited Business Programme (DTC-ABP) as not falling within the purview of royalty or FTS under the Indo - UK Treaty - AO in his draft assessment order treating the receipts from DTCABP as an extension of Value Added Services and accordingly, taxed the same as FTS and royalty under Article 13 which has been confirmed by the DRP also - HELD THAT - We agree with the submissions with the ld. Counsel that once it is not a registered trademark, it does not have a sign or logo and it is not owned by the assessee, there is no question of taxing the same as royalty. Further, it cannot be held to be taxable as FTS also under Article 13 because there is no make available technical knowledge under this programme. Accordingly, order of the ld. CIT (A) is upheld and the grounds raised by the Revenue are dismissed. It has been stated that in the appeals for A.Yrs. 2010-11 to 2012-13 have exactly similar issue under consideration with similar facts. However, they are assessee s appeal, since post assessment order assessee has preferred DRP route and accordingly, the order of the AO has been upheld. Accordingly, our finding given in the A.Y.2009-10 will apply mutatis mutandis for these years also.

Summary

Issues Involved:
1. Taxability of Supply Planning Services (SPS) under the Indo-UK DTAA.
2. Classification of grading services as business income or royalty.
3. Classification of receipts from DTC Accredited Business Programme (DTC-ABP) as royalty or Fees for Technical Services (FTS).
4. Determination of the applicable tax rate for various receipts.
5. Credit for taxes deducted at source.
6. Charging of interest under sections 234A, 234B, and 234D of the Income Tax Act.
7. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Taxability of Supply Planning Services (SPS) under the Indo-UK DTAA:
The main issue was whether the services rendered for providing SPS fall within the purview of "royalty" under Article 13(3) and FTS under Article 13(4) of the Indo-UK DTAA. The Tribunal noted the differences between the SOC contracts for 2005-2008 and 2008-2011, emphasizing that the scope of services under the latter was more restricted. The Tribunal concluded that the SPS provided under the 2008-2011 contract did not make available technical knowledge, experience, skill, know-how, or processes to the recipients. Therefore, these services did not qualify as FTS or royalty under the DTAA. The Tribunal upheld the CIT(A)'s finding that the SPS receipts were not taxable in India in the absence of a Permanent Establishment (PE).

2. Classification of grading services as business income or royalty:
The Tribunal examined whether the receipts for grading services should be treated as business income or royalty. The CIT(A) held that grading services do not provide the use or right to use any copyright, artistic or scientific work, patent, trademark, or design. Relying on the Bombay High Court decision in Diamond Services International (P) Ltd., the Tribunal agreed that grading services could not be taxed as royalty under the Indo-UK DTAA. Consequently, these receipts were considered business income and not taxable in the absence of a PE in India.

3. Classification of receipts from DTC Accredited Business Programme (DTC-ABP) as royalty or FTS:
The Tribunal addressed whether the receipts from the DTC-ABP should be classified as royalty or FTS. The CIT(A) observed that the fees charged under the DTC-ABP were not for the use or right to use any copyright, artistic or scientific work, patent, trademark, or design. The Tribunal upheld the CIT(A)'s view that the DTC-ABP services were not taxable as royalty or FTS under the Indo-UK DTAA. In the absence of a PE in India, these receipts were not taxable.

4. Determination of the applicable tax rate for various receipts:
The Tribunal noted that the issue of the applicable tax rate was an alternative ground, relevant only if the services were held taxable as FTS or royalty. Since the Tribunal concluded that the services were not taxable as FTS or royalty, this issue became academic and was not addressed further.

5. Credit for taxes deducted at source:
The Tribunal did not provide a detailed analysis of this issue in the judgment. However, it is generally understood that the credit for taxes deducted at source should be granted based on the actual amount deducted and claimed by the assessee in their return of income.

6. Charging of interest under sections 234A, 234B, and 234D of the Income Tax Act:
The Tribunal did not provide a detailed analysis of this issue in the judgment. The charging of interest under these sections typically depends on the specifics of the case, such as the timing of filing the return and the payment of taxes.

7. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act:
The Tribunal did not provide a detailed analysis of this issue in the judgment. Penalty proceedings under section 271(1)(c) are generally initiated for concealment of income or furnishing inaccurate particulars of income.

Conclusion:
The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeals, concluding that the services provided under the SPS, grading services, and DTC-ABP were not taxable as FTS or royalty under the Indo-UK DTAA. The Tribunal emphasized the importance of examining the specific terms and scope of the contracts in question, rather than relying on assumptions or previous agreements. The detailed analysis provided by the Tribunal underscores the need for a careful and nuanced approach in determining the taxability of international transactions.