9911796707
TMI Blog2013 (9) TMI 412X X X X Extracts X X X X X X X X Extracts X X X X ..... rejudice to Ground no.1, the AO erred in taxing the receipts from supply planning services at 15 per cent on gross basis as per Article 13 of the India-UK tax treaty instead of 10 per cent as per the provisions of sub- clause (BB) / (AA) of Clause (b)of sub-section (1) of section 15A of the Act. 3. The AO erred in treating the receipts from grading services as Royalty under para 3 of the Article 13 of India-UK tax treaty. Without prejudice to the above, the AO erred in holding that grading process tantamount to transfer of commercial experience under para 3 of article 13 of the India-UK tax treaty. Without prejudice to the above, based on the facts and circumstances of the case, the AO erred in holding that diamonds which are graded are also inscribed with the inscription and carry a trademark. 4. Without prejudice to Ground no.3, the AO erred in taxing the receipts from grading services at 15 percent on gross basis as per Article 13 the India-UK tax treaty instead of 10 percent as per the provisions of sub clause (AA) of clause (b) of sub-section (1) of section 115A of the Act. 5. The AO erred in treating the receipts from DTC Accredited Business Services as Fees for Technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see grouped the above mentioned grounds and stated that grounds 2, 4, 6 & 7 relates to the rate of tax of Rs 15% against the 10% favourable to the assessee on certain receipts namely, VAS receipts, Grading receipts, DTC Accredited Members receipts etc. Further, Ld Counsel for the assessee filed a copy of the order of the Tribunal for the AY 2007-2008 and mentioned that the said grounds stand covered by the said decision of the ITAT. Further, he mentioned that the AO/DRP erroneously applied the provisions of 115(1)(b)(AA/BB) of the Income Tax Act, 1961 when the tax rate of 10% as per the India-UK Tax Treaty, being beneficial to the assessee, should have been applied in view of the provisions of Article 13 of the said treaty with UK. In this regard, Ld Counsel brought our attention to para 10 of the order of the ITAT in ITA No.8831/M/2010 (2007-2008) dated 18.11.2011 and mentioned that the AO erroneously charged the tax @ 15% in respect of the Value Added Services (VAS), grading services, DTC Accredited Business Services as Fees for Technical Services and Royalty, income received from Forevermarket. In this regard, Ld Counsel read out the contents of para 10 of the order of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le under the domestic law. Further, the AO had applied both the provisions and had held that the marketing contribution was taxable as royalty both, under the domestic law as well as under the DTAA. This being the position, the rate which is beneficial to the assessee has to be applied under the provisions of section 90(2). It was submitted that rate as per domestic law was 10% as per sub clause (AA) of Clause (b) of section 115A(1). As per the said provision, any amount received by a non-resident from India as royalty as per agreement approved by Central Government on or after 1.6.2005 is taxable at 10%. In this case, it was pointed out that the agreement was dated 8.11.2005 and therefore, rate of 10% had to be applied. The Ld DR supported the order of the AO and placed reliance on the findings given in the assessment order. 6.2. We have perused the records and considered the matter carefully. The dispute is regarding the rate to be applied in case of marketing contribution which has been taxed by the AO as royalty. There is no dispute that the marketing contributions had been received by the assessee as per agreement dated 8.11.2005 a copy of which has been placed in the paper b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AO taxed the „market contributions‟ and „VAS receipts‟ in the AY 2007-08 applying the tax rate of 15% and for this, he relied on the provisions of Article-13 of India UK Tax Treaty. In the process, AO ignored the concessional rate of tax at 10% applicable under the provisions of sub clause (bb) of clause (b) of section 115A(1) of the Act. Subsequently, Hon‟ble ITAT undid the damage caused to the assessee on this issue of tax rate as can be seen from the paragraphs extracted above. Applying the same to the additions made in this AY 2009-10 on accounts of VAS receipts, grading receipts, DTC Accredited Business Services, receipts from Forevermarket etc, we find the grounds have to be decided in favour of the assessee. In principle, AO is under statutory obligation to apply the concessional tax rate as and when the additions if any are made in the assessment. Accordingly, the relevant conclusions of the AO/DRP are set aside and the said grounds 2, 4, 6 & 7 are allowed in favour of the assessee. Now we shall take up the rest of the grounds 1, 3, 5, 8. 9 to 10 in the succeeding paragraphs of this order. 9. Ground no.1 relates to taxability of "receipts fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty. 12. The VAS agreement is not relevant for the AY 2009-2010 and SPS agreement (DTC Sightholders Contract 2008-2011 (Supplier of Choice agreement) is the relevant one for the year under consideration. During the assessment proceedings, AO noticed only the assessee filed only Service Guide 2005 and not the proper „VAS Agreement -2005-08" and however, he passed the assessment order on 23.10.2011 relying on the said Service Guide 2005. Surprisingly, AO did not refer to the most relevant SPS Agreement - 2008-2011, which should have been actually relied. The „extracted portions from the said VAS agreement 2005-2008‟ appeared on page 4 of said assessment order witnesses the mistakes committed by the AO. Thus, the AO relied heavily on the VAS agreement - 2005-2008 instead of SPS agreement -2008 - 2011. Eventually, relying heavily on the said order of the Tribunal for the AY 2007- 08, AO came to the conclusion that the VAS receipts have to be considered as Fees for Technical Services-FTS and invoked the provisions of Explanation-2 to section 9(1)(vii) of the Act as well as the contents of para 4 of the Article 13 of India-UK Tax Treaty. In the process, the AO/DRP has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Ld Counsel that both these contracts are distinctly different in substance so far as the rendering of services and collection of the fees from the sightsholders are concerned. Therefore, AO has committed a mistake in relying on the VAS agreement 2005-2008 while making the assessment for the AY 2009-2010. In this regard, Sri Lohia categorically mentioned that the SPS agreement is filed before the AO and the DRP. Further, Ld Counsel also brought our attention to page 290 of the paper book and mentioned that this aspect was brought to the notice of the DRP by filing a write up on 6.9.2012, which was not considered by the DRP while issuing the statutory directions u/s 144C(5) of the Income Tax Act, 1961. Further, referring to the clauses pertaining to the SPS Agreement- 2008-2011, Ld Counsel labored before us to demonstrate that the services rendered by the assessee are not akin to the VAS services and they should not be considered as technical services/Royalty. Further, referring to clause 14(4) of the SPS agreement, Ld Counsel mentioned that the said agreement supersedes all the prior contracts if any. Therefore, VAS agreement 2005-08 relied upon on by the AO / DRP is unsustai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g-term growth in the diamond jewellery market..........." which has a connotation of commercial information and such information constitutes rendering of technical services. She also mentioned that this kind of information, constituting the intellectual property rights, is accessible only to the sightholders (page 22 of the paper book). Further, Ld DR relied on the contents of page 27, 42, 52 and 59 of the paper book and mentioned that the information offered by the assessee to the sightholders is classified information, it is subjected to verifications, monitoring and violation if any attracts liability clauses of the Agreement. Therefore, such information is not open to general public and therefore, it is exclusively for the sightholdlers‟ commercial purposes. In that sense, the services rendered constitute technical services and therefore, the fees collected by the assessee constitute FTS or royalty. Referring to page 73 of the paper book, Ld DR mentioned that the other services are also available to the sightholders indirectly by way of Extranet and avails assessee in a way "made available". Further, assessee took the support from the clauses relating to the KAM. Explaini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the expired VAS agreement -2005-2008 instead of analyzing the nature of the services in the light of the new contract i.e., Supplier of Choice contract 2008-2011 ie SPS agreement. The SPS agreement is substantially different in substance from that of the VAS Agreement- 2005-2008. If the services offered by relevant agreement are analyzed microscopically, they are distinctly different in so far as the Core Services and the Growth Services are concerned and SPS services which do not include Business Sustainability and Growth Services makes lot of difference. Considering the same, the conclusions drawn by the AO are consequentially erroneous and therefore, there is a need for re-visiting to the file of the AO. Similarly, the directions of the DRP, which were given without going into the written submissions and the relevant agreements of the assessee, constitute non-speaking in nature. Further, the order of the Tribunal dated 18.11.2011 (supra) for the AY 2007-2008 was also relied heavily by the AO ignoring the fact the Tribunal is decided the grounds based on an expired Sightholders‟ contract 2005-2008 ignoring the truth that same is inapplicable to the AY 2008-2011 und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders and contents of para 3 of page 4 of the assessment order witness these basis avoidable mistakes. There is no discussion either in the order of the AO or in the directions of the DRP to the nature of impugned SPS services or homologous nature of these services to the VAS services. If they are comparable to VAS services, how the other Core Services or Growth Services specified in the old contract are impliedly made available indirectly through the Extranet Services allowed under the new contract. It is also required that the revenue ought to have explained on the discontinued services since the old contract with the Sightholders. It is explained before us that the assessee stopped supplying services relating to marketing and growth related areas of the business. In our opinion, it is for the AO and the DRP to come to the fresh conclusions on a quality of services rendered by the assessee under the new contract and they constitute technical services for qualifying the provisions of Article 13 of the India UK Tax Treaty. As such Sri Lohia has not deliberated adequately on the technical nature of the impugned SPS services and they shall be dealt with before the AO during the remand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uo;inscription‟ services. As per the assessee, the earnings for inscription services (providing inscription of „trade mark‟ on the diamonds) are separately accounted and offered to tax. Regarding the grading services, it is the claim of the assessee by providing such services, it does not make available any know-how or process of grading to its Diamantaire. 23. The stand of the Revenue on this issue is that such services of grading of raw diamonds is of very high and intricate in nature and the issue of certifying is not of a routine nature as it involves VAS commercially. It is the assertion of the AO (para 8 of the assessment order is relevant here) that the assessee also renders services of inscription on the graded diamond items and it involves transfer of intellectual property rights / trade mark. Of course, this aspect was strongly opposed by the Ld Counsel mentioning that the impugned receipts have nothing do with inscription services. It is the claim of the assessee that the inscription services rendered are distinctly different from grading services and such inscription fees received from the inscription services are separately accounted and offered as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Further, Ld Counsel also brought our attention to the contents of the contract placed at page 175, 180, 202 of the paper book, which deals with the inscription and grading services. He also read out the definition of the grading services as provided in the contract. Finally, bringing our attention to the paper book page nos. 346 to 353 (these are invoices), Ld Counsel mentioned that the grading services are separately invoiced. Regarding the nature of the additional evidence of these papers, Ld Counsel mentioned that these facts were not requisitioned by the AO or the DRP, therefore, the same are not filed at the relevant point of time. Further, Ld Counsel filed a copy of the order of the Bombay High Court in the case of Diamond Services International vs. UOI and Ors. (304 ITR 201) (Bom.) and mentioned that grading services do not fall within the meaning of royalty under the Article 12 of the India-Singapore DTAA. Of course, he mentioned that this is a case of payer unlike the assessee who received the fees for grading services. Further, Ld Counsel mentioned that if the Tribunal is of the opinion that the matter requires re-examination in view of the additional evidences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inscription services or not. Accordingly, we set aside the order of the AO and the DRP on this issue and remand the matter to the files of the AO for fresh adjudication after considering the additional evidences and the decisions of the Bombay High Court in the case of Diamond Services International (P) Ltd (supra), wherein it was held that the grading fees paid by the assessee to Gemological Institute of America (GIA) for the activity of certification and grading of diamonds, do not fall within the expression "royalty" under Article 12 of DTAA. Accordingly, ground no.3 raised by the assessee is set aside and during the set aside proceedings, assessee shall be granted a reasonable opportunity to put forth its point of view. 28. Ground no. 5 relates to the treating of the "receipts from DTC Accredited Business Programme (DTC-ABP)" as FTS and royalty under Article 13 of the India-UK Tax Treaty. Relevant facts are that the assessee entered into a contract with DTC- Ex-Sightholders and the Accredited Business who ceased to be the sightholders of DTC as on 30.3.2008. As per the agreement of DTC-ABP, the assessee offers to its accredited business partners (i) to contact the DTC to disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o called „extended services of VAS‟ are erroneous and requires revisiting for fresh investigation and analysis. The services offered by the assessee are neither VAS services nor the extended VAS services. Ld Counsel also mentioned that the VAS services raised in ground 1 since set aside, these extended VAS should also be set aside and remanded to the AO for concerted decision on VAS-SPS services and also the extended VAS. 30. On the other hand, Ld DR relied on the order of the AO. 31. We have heard both the parties on the issue of treating of the receipts from DTC Accredited Business Programme (DTC-ABP) as FTS and royalty under Article 13 of the India-UK Tax Treaty. We find that the services rendered by the assessee are unconnected to the VAS/SPS services as discussed in ground no.1 of the appeal. On examining the arguments, we find that the adjudication of this ground has a bearing on the conclusion of the ground no.1 of the appeal. Considering the connection of issues and the conclusions on ground 1 and ground 5, we are of the opinion that this issue should also be remanded to the files of the AO for fresh adjudication. Accordingly, relevant conclusions of the AO /D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding levy of interest for shortfall in payment of advance tax. The advance tax payable under section 208 is required to be computed under section 209 and as per section 209(1)(d), the tax payable by the assessee has to be reduced by the amount of tax deductible or collectible at source. Therefore, once the tax is deductible, the same has to be reduced from tax even if the tax had not been actually deducted. In this case, additions had been made by AO on account f royalty and FTS which are subject to deduction of tax at source under section 195 of the Income Tax Act and therefore, the tax deductible in relation to the said income has to be reduced from the tax payable as advance tax even if no tax had been actually deducted. This view is supported by the decision of the Mumbai Bench of the Tribunal in the case of DIT (Intl. Taxation) vs. NGC Net Work Asia LLC (313 ITR 187) and in case of Jt. Director of Booz Allen & Hamilton Inc. (107 ITD 313). Respectfully following the said decisions, we hold that while computing advance tax payable for the purpose of computation of interest under section 234B tax deductible at source in relation to royalty and FTS will have to be reduced. The AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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