2007 (12) TMI 182 - HC - Income Tax

Petitioner, foreign company, non-resident - petitioner receives diamond grading & certification charges from Indian customers - Petitioner applied to AO to grant a certificate u/s 197(1) to receive impugned charges from customers without deduction of tax at source, which was denied by AO since there is no transfer of technical skill etc. by petitioner & fees received do not fall within the expression royalty the action of AO in refusing the certificate u/s 195 was not in jurisdiction

Issues Involved:
1. Whether the issuance of grading reports by GIA constitutes impartation or granting of the right to use information of technical, commercial, or scientific experience.
2. Whether the payments for grading certificates issued by GIA fall within the definition of "Royalty" under Article 12(3) of the DTAA between India and Singapore and/or Section 9(1)(vi) of the Income Tax Act.

Detailed Analysis:

Issue 1: Impartation or Granting of Right to Use Information
The primary issue is whether the issuance of grading reports by GIA can be termed as impartation or granting of the right to use information of a technical, commercial, or scientific experience to the clients/customers who send their diamonds for grading and certification to the GIA Laboratories outside India.

The court examined the nature of the grading reports issued by GIA. It was noted that the grading report by GIA is a statement of fact as to the characteristics of the diamond, including an analysis of the diamond's dimensions, clarity, color, polish, symmetry, and other characteristics. The court emphasized that there is no transfer of any industrial or commercial experience of GIA to the petitioner or to an agent of the petitioner. The report merely provides the attributes of the diamond without transferring any technical knowledge, skill, or commercial experience to the customers.

The court referred to various dictionary definitions of "experience" and concluded that the term implies a cumulation of knowledge and observation gathered over a period of time. The court also cited the judicial interpretation of "experience" by the Supreme Court in Shesharao Jangluji Bagde vs. Bhaiyya s/o Govindro Karale, which states that experience should be taken as experience after acquiring minimum qualifications required.

The court concluded that the grading certificate issued by GIA does not involve any transfer of commercial interest or skill to the party paying for the service. The payment received is for the application of GIA's experience to a certain factual situation, i.e., determining the true features of the diamonds submitted by the clients.

Issue 2: Definition of "Royalty"
The second issue is whether the payments for grading certificates issued by GIA fall within the definition of "Royalty" under Article 12(3) of the DTAA between India and Singapore and/or Section 9(1)(vi) of the Income Tax Act.

The court analyzed the relevant clauses of the DTAA and the Income Tax Act. Article 12 of the DTAA defines "royalties" as payments received as consideration for the use of or the right to use any industrial, commercial, or scientific experience. Similarly, Section 9(1)(vi) of the Income Tax Act defines "royalty" as consideration for the imparting of any information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill.

The court observed that the grading certificate issued by GIA does not involve any transfer of the right to use GIA's industrial, commercial, or scientific experience. The activity of grading or certification is merely the application of GIA's knowledge/experience to a particular diamond or set of diamonds. The court emphasized that there is no parting of information concerning industrial, commercial, or scientific experience by GIA when it issues the grading certificate.

The court further clarified that to be considered as royalty, the payment must be for the use or the right to use the industrial, commercial, or scientific experience. In this case, the payment is for the application of GIA's expertise to the diamonds submitted by the clients, not for the use or right to use GIA's experience.

The court concluded that the payments received by GIA for grading certificates do not fall within the definition of "Royalty" under Article 12(3) of the DTAA or Section 9(1)(vi) of the Income Tax Act. Consequently, the action of the respondents in refusing the certificate under Section 195 of the Income Tax Act was without jurisdiction.

Conclusion:
The court set aside the impugned orders and directed the respondent to issue the certificate as applied for by the petitioners. The rule was made absolute in terms of prayer clauses (a), (b), and (c), with no order as to costs.

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