2014 (9) TMI 605 - AT - Income Tax

Determination of income Royalty under Article 12(3), Indo-Thailand Tax DTAA - Whether the payment received by the assessee in lieu of services rendered to GEMFSl is taxable as royalty under Article 12(3) or not Held that - The royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes to the concept 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 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 i.e., there is no imparting or transfer of any knowledge, experience or skill or 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 - it cannot be held that such services are in nature of royalty - 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 - Since neither the AO nor the DRP has examined the nature of service rendered by the assessee from this angle therefore, the matter should be restored back to the file of the AO to examine the nature of services Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of the income of the assessee.
2. Taxability of the amount received under the Master Service Agreement as royalty.
3. Initiation of penalty proceedings under section 274 read with section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Determination of the Income of the Assessee:
The assessee, a non-resident company incorporated in Thailand, challenged the assessment order determining its income at Rs. 3,83,62,648 against NIL income returned by the assessee. The Assessing Officer and the Dispute Resolution Panel (DRP) determined the tax liability at Rs. 2,27,50,035. The assessee claimed treaty benefits under the India-Thailand DTAA, arguing that the income qualifies as business income and is not taxable in India due to the absence of a Permanent Establishment (P.E.) in India as defined in Article-5 of the DTAA.

2. Taxability of the Amount Received as Royalty:
The core issue was whether the Rs. 3.84 crores received under the Master Service Agreement for various services provided to GE Money Financial Services Ltd. (GEMFSL) constitutes "royalty" under Article-12(3) of the India-Thailand DTAA. The Assessing Officer initially held that the income is taxable under domestic law as business connection and alternatively as "fees for technical services" (FTS) under section 9(1)(vii) of the Act. The DRP upheld the taxation under the "royalty" clause without addressing the business connection or FTS claims.

The assessee argued that the services rendered did not involve the "use of" or the "right to use" any intellectual property or imparting of any technical, industrial, commercial, or scientific knowledge, skill, or experience. They cited several case laws and the OECD commentary to support that the services provided were advisory in nature and did not constitute royalty.

The Tribunal analyzed the OECD commentary and legal precedents, emphasizing the distinction between imparting know-how and rendering services. It concluded that if the services rendered do not involve imparting or transferring knowledge, experience, or skill, they cannot be classified as royalty. The case was remanded to the Assessing Officer for re-examination of the nature of services provided by the assessee in light of this principle.

3. Initiation of Penalty Proceedings:
The initiation of penalty proceedings under section 271(1)(c) was deemed premature and infructuous in light of the Tribunal's findings. Consequently, this ground of appeal was dismissed.

Conclusion:
The Tribunal partly allowed the appeal, directing the Assessing Officer to re-examine the nature of the services to determine if they qualify as royalty. The penalty proceedings were dismissed as premature. The judgment emphasizes the importance of distinguishing between advisory services and imparting know-how for tax purposes under international tax treaties.