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TMI Blog2019 (12) TMI 1523X X X X Extracts X X X X X X X X Extracts X X X X ..... at the software and content development and customisation of services and testing of products were to be carried out by the applicant in India. Applying the logic of CIT v. Havells India Ltd. [ 2012 (5) TMI 449 - DELHI HIGH COURT] to our facts we conclude that the source of premium payment is based in India as all value-added activities are located in India. The case of the applicant does not fall under the second limb of exclusion under section 9(1)(vi)(b). Thus, under the Income-tax Act, the payments are taxable as royalty in the hands of VIVO under the deeming provisions of section 9. The applicant has kept a database, nurtured by commercial experience, relating to its mobile services which was being made available to the applicant and this valuable right has been shared with the applicant on exclusive basis and this is clearly in the nature of commercial information and experience which is shared with the applicant and the consideration paid is thus covered under article 12(3) of the treaty. Since we have held that the payments are in the nature of royalty, we are not commenting on the pleas raised by either side for inclusion/exclusion of premium payment as fee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he telecom operator in Brazil. 3. The applicant has sought ruling on the following questions : (a) Whether, based on the facts and circumstances of the case, particularly in view of the fact that the payment pertains to business proposed to be carried out outside India, the proposed payments of ₹ 12.70 million by the applicant to VIVO for the grant of exclusive right to offer ring back tone Services to VIVO's customers in Brazil would be considered to be received or deemed to be received in India ? (b) Whether, based on the facts and circumstances of the case, the proposed payments of ₹ 12.70 million by the applicant to VIVO would be considered to accrue or arise in India, or considered to be deemed to accrue or arise in India as : (i) Business Income. If yes, would it be taxable even in the absence of a business connection ? (ii) Royalties ? (iii) Fees for technical services ? (c) If the answer to the above questions are positive, would the amount payable by the applicant be considered to be taxable in India under the provisions of the India-Brazil Tax Treaty as : (i) Business profits. If yes, would it be taxable even in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , commercial or scientific knowledge, experience or skill so that the payment would be considered to fall under the definition of royalties and the same may be considered to fall in the exception contained in section 9(1)(vi)(b), and therefore the same is not taxable in India. Attention is invited to the provisions of section 9(1)(vi)(b) which provides that to the extent the payment is made by a resident in respect of any right, property or information used or services utilized for the purposes of making or earning any income from any source outside India, the same will not be considered as royalties deemed to accrue or arise in India. It is argued that payment was made for the purpose of earning income from source outside India, i. e., the revenue stream from customers in Brazil and thus it is covered under second limb of exclusion under section 9(1)(vi)(b). 6.5 It is averred that the amount also cannot be treated as fees for technical services as the amount paid/payable towards fees for technical services (amount paid by the applicant to VIVO) by a resident, i. e., the applicant will be deemed to accrue or arise in India unless it is established that the applicant utilizes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able. 6.10 The learned authorised representative explains that the definition of royalty under the India-Brazil tax treaty is similar to the definition of royalty under the Act, the extract of which is given below : (3) The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinema tography films, films or tapes for television or radio broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment or for information concerning industrial, commercial or scientific experience. 6.11 It is submitted that in order for the payments to be taxable as royalty , the payment has to be towards the right to use any of the rights specified in the definition of the term royalty (i.e. the right to use a copy right, patent etc.) under the relevant tax treaty. 6.12 The learned authorised representative thereafter has presented the following table to conclude that the grant of right to deploy ring back tone servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not taxable in India under the Act, the same may not be considered as taxable in India. 6.14 Lastly, it is argued that the business profits would be taxable in India only if VIVO has a permanent establishment (PE) in India through which it carries out activities in India. As per article 5 of the India-Brazil tax treaty, a permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carried on. A fixed place of business includes a place of management, a branch, office, factory, warehouse, a farm, etc. Further, to conclude that a fixed place permanent establishment exists, an overseas entity must have a right to the work place whether legally or otherwise or should carry on its business through a fixed place in India. 6.15 It is stated that VIVO does not have a permanent establishment in India and accordingly in its absence, the consideration would not be tax able as business profits in India. Thus, the payments made to VIVO are not taxable as business profits under the India-Brazil tax treaty. 6.16 The learned authorised representative concludes the arguments by emphasizing that the payment made by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the payer (page 467 of 371 ITR) : 22. The principal provision is clause (b) of section 9(1)(vii) of the Act. The said provision carves out an exception. The exception carved out in the latter part of clause (b) applies to a situation when fee is payable in respect of services utilized for business or profession carried out by an Indian payer outside India or for the purpose of making or earning of income by the Indian assessee, i. e., the payer, for the purpose of making or earning any income from a source outside India. On a studied scrutiny of the said clause, it becomes clear that it lays down the principle what is basically known as the 'source rule', that is, income of the recipient to be charged or chargeable in the country where the source of payment is located, to clarify, where the payer is located. The clause further mandates and requires that the services should be utilized in India. Department's submissions 7. The Department has contended that the payment of ₹ 12.70 million by M/s. On Mobile Global Ltd. to VIVO Brazil is chargeable to tax under section 5(2)(b) of the Income-tax Act, 1961 as subsequent to the agreement the rights an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant can be termed for rendering technical, consultancy services and is therefore chargeable under section 9(1)(vii) of the Income-tax Act, 1961 as fees for technical services and though contended by the applicant, the provisions of section 9(1)(vi)(b) of the Income-tax Act providing for an exception, is not applicable to the case of the assessee, in the given facts of its case. 7.4 The Revenue submits that the applicant-company is the owner of the platform as well as the know-how for rendering of ring back tone ser vices with technical characteristics and functionalities and the applicant- company has utilized the information/rights provided by VIVO following provision of ring back tone services in India ; as it carried out all the functions for the purpose used its assets including IP and undertook all risk for the purpose. Therefore, the income earned consequent and subsequent to the agreement between the applicant-company and VIVO, following pro vision of ring back tone services to customers of VIVO is from services rendered in India, by the applicant-company. Any service rendered by the subsidiary company is a support service for the applicant-company, like acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be used for this purpose. The server has to be deployed at the location of the telecom operator. - Such hardware and software are not licensed to the telecom operator. The telecom operator has no rights over the hardware and the software, which remain the exclusive property of the applicant. The product intellectual property remains with the applicant. - The telecom operator and/or the applicant then sources content to be used as ring back tone from independent third parties for a fee. Such a payment of fee to the owner of the content enables the applicant to offer the content as ring back tone for use by the telecom operator's end user. The content is customized by the applicant for use as an ring back tone using the applicant's software and resources and is then deployed on the server located at the site of the telecom operator. - The end customer makes a request for the ring back tone via a text massage. - The telecom operator's switch/exchange conveys the request to the applicant's server. - The applicant's server recognizes the content requested for and sends the requested content to the end user, through the telecom opera tor&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices-RBT', with technical characteristics and functionalities that differ from one another, classifying them as 'value added services-VAS', pursuant to the definition provided in section 1 below : (v) The company was awarded by the RFP (request for proposal) process launched by VIVO as the provider of the ring back tones services ; (vi) The company has full acknowledgment that one of the conditions of the RFP (request for proposal) process launched by VIVO relates to the fact that the ring back tones services shall be provided by a Brazilian subsidiary ; (vii) In order to fulfil the requests of the RFP (request for proposal) the company has already started the process of incorporating its subsidiary in Brazil ('On Mobile Brazil'), process that shall be concluded up to 30(thirty) days from the execution date of this agreement, and it is now provided that On Mobile Brazil, jointly with the company, will also be entitled to the rights and obligations set forth herein, except for the obligation to execute the payment of the premium defined on clause 12.2 below, which represents an exclusive obligation of the company. . . . 1. Definitions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s failure to comply with its contractual obligation with the content provider. 5.3 VIVO shall be responsible for sourcing content for the ring back tone services that are suitable for the targeted audience, and for avoiding to provide content which is illegal or violates any applicable laws, and shall provide it to the company in the format specified by the company, along with the metadata pertaining to the content. 5.5 Company shall be responsible for the management of each and every content provided by VIVO to the company for the ring back tone services under the terms of the present agreement. . . . 7. Obligations and responsibilities of company 7.14 To develop and maintain constantly and regularly updated and/or modify, at its sole expenses, the ring back tones services that will be made available to the customers of VIVO, using for that purpose the information pertaining to the knowledge and experience related to its customers. . . . 7.1.21 To transfer to VIVO and/or a new company that VIVO may indicate, the whole database obtained through the ring back tones services in the event of termination, whether justified or not, of this agreement and the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sales of content on a gross revenue up to ₹ 261,315,000 (two hundred and sixty-one million, three hundred and fifteen thousand reais) ; 12.3.2 Revenue share of 20 per cent. (twenty per cent.) of the total net earning received by VIVO, from subscriptions of the ring back tones services and sales of content on a gross revenue from ₹ 231,315,001(two hundred and thirty-one million, three hundred and fifteen thousand and one reais) up to ₹ 609,735,000 (six hundred and nine million, seven hundred and thirty-five thousand reais) ; 12.3.3 Revenue-share of 15 per cent. (fifteen per cent.) of the total net earnings received by VIVO, from subscriptions of the ring back tones services and sales of content on the gross revenues above ₹ 609,735,001 (six hundred and nine million, seven hundred and thirty- five thousand and one reais). . . 8.8 In the statement of relevant facts annexed to the application before the Authority for Advance Ruling, it is stated as under : Background of the one-time upfront payment by the applicant to VIVO VIVO is an established telecom operator in Brazil. It has developed a large customer base in Brazil over many ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India. . . Explanation 2 : For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head 'Capital gains') for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, indus trial, commercial or scientific kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sharing of confidential and exclusive right and information and at the time of payment the said right or information was not used by the applicant and the said information resides in the server of VIVO but in view of Explanation 5, the said payment in the hands of VIVO would give rise to royalty as characterised in Explanation 2(iv). The premium paid thus is squarely covered under Explanations 2 and 5. 8.14 The only question now remaining to be answered is whether the said payment is covered under the exclusion clauses under section 9(1)(vi)(b). The applicant insists that its case is covered under exclusions provided under section 9(1)(vi)(b). The exemption is available to a resident person who is paying royalty in respect to any right, property or information used or services utilized for the purposes of a business or profession carried on by a person outside India or for the purposes of making or earning any income from any source outside India. Admittedly there is no business or profession carried out by the applicant in Brazil prior to signing of the partnership agreement. 8.15 As per the partnership agreement, the entry into the Brazilian market is consequent to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomer makes a request for ring back tones via a text message and then VIVO's exchange conveys the request to the applicant's server. The applicant's server recognises the request and sends the requested content through VIVO's exchange to the customer. 8.18 Therefore, only when the product/services are developed and delivered to VIVO as per VIVO's satisfaction and the customers subscribe to these products, VIVO may get additional revenue from these value added products or may attract new customers and at that point of time the revenue is shared with the applicant and that revenue is admittedly the business income of the applicant which has been offered for taxation by the applicant in India. 8.19 The customers of VIVO continue to be the source of income for VIVO. The customers are never the customers of the applicant. Even after providing value added products, they are still customers of VIVO. Before providing any services, no new source can be said to be created for the applicant. VIVO cannot be receiving payment from its own source for sharing its own database/information. The payment of premium is anterior to creation of the so-called new source fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come have been approved by the Supreme Court in CIT v. Lady Kanchanbai [1970] 77 ITR 123 (SC). The location or situs of a source of income is another aspect. The third aspect is the accrual of the income. Though it is true, as held by Kania C. J., speaking for a Constitution Bench of the Supreme Court in CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC) at page 479, that the place where the source of income is located may not necessarily be the place where the income also accrues, that question is not material in the present case because herein we are concerned only with the question as to the location of the source. The real question is whether the export sales proceeds received from goods manufactured and exported from India constitute a source inside or outside India. To decide the same we have to take a pragmatic and a practical view and not approach the question from a theoretical perspective. Section 9(1)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e because of the sales of the products and if necessary a bifurcation of the income should be made on this basis and that portion of the income which is attributable to the export sales should qualify for the second exception. This argument is only a limb of the main contention that the income arises from the export sales and the source of the income is located outside India. We have already expressed our difficulty in accepting that argument. It is true that the profits arise both from the manufacturing activity and from the sale. There are several authorities dealing with this question in the context of cases where an assessee had its manufacturing facility in British India but sold the goods outside British India. In such cases, it has been held that the profits arose both from manufacture and the sales and that part of the profit which arises from sales outside British India would be exempt from tax : See Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC) and CIT v. Ahmedbhai Umarbhai and Co. [1950] 18 ITR 472 (SC). But these cases are not of any assistance to the assessee in the pre sent case since the contention here is that the source of income is the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing activity and concluding of the export contract from India that will determine the source of income. Further the assessee needs to specifically demonstrate that the technical ser vices were utilised in a business carried on outside India in order to fall under the exception. 8.23 Though the decision quoted (supra) was in the context of fee for technical services under section 9(1)(vii)(b), we are in agreement with the logic of the hon'ble High Court of Delhi, as the provisions are parimateria with section 9(1)(vi)(b) and thus relevant in the case before us. 8.24 The applicant has its expertise and software professionals working in India on ring back tone services. The Revenue had sought some clarification from the applicant on the nature of services provided by the applicant and in its reply dated April 19, 2012, the following relevant replies were offered by the applicant are reproduced below : 12. How ring back tone services are deployed by OGL (applicant). Further provide the following information : 12.1 The place where the software development and customization has taken place (ans) : The software development and customization is undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or scientific equipment, or for information concerning industrial, commercial or scientific experience. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated therein, and the right of property in respect of which the royalties are paid is effectively connected with such permanent establishment. In such cases the provisions of Article 7 shall apply. 5. Royalties shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the obligation to pay the royalties was incurred, and such royalties are borne by such permanent establishment, then such royalties shall be deemed to arise in the State in which the permanent establishment is situated. 6. Where, by reason of a special relationship betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sated therefor with a sum of ₹ 12,700,000 (twelve million and seven hundred thousand reais). 8.31 From the above, it is clear that the applicant has kept a database, nurtured by commercial experience, relating to its mobile services which was being made available to the applicant and this valuable right has been shared with the applicant on exclusive basis and this is clearly in the nature of commercial information and experience which is shared with the applicant and the consideration paid is thus covered under article 12(3) of the treaty. 8.32 The case law relied upon by the applicant are distinguished below : - In the case of Aktiengesellschaft relied on by the applicant, the receipts for special engineering services were held to be exempt under the proviso to section 9(1)(vi) as the amount was paid under a pre- 1976 agreement. Further in that case royalty was paid out of export sales. In the instant case the premium is paid the source of which lies in India. Hence the decision does not help the applicant. - In the case of Titan Industries Ltd. v. ITO, the assessee-company was engaged in the manufacture of watches and was selling the same under its pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r technical services, it would not be chargeable to tax. The view was endorsed by the hon'ble High Court. In that case the contention of the applicant was that no foreign technician was deputed to work in India. In our case, no business is carried on by the applicant at the time of making the premium payment and the income earning activity is located in India therefore the facts are clearly distinguishable. - In GVK Industries v. ITO, the assessee-company was incorporated for the purpose of setting up a 235 MW gas based power project. With the intention to utilize the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie-up the required loan, the assessee sought services of a consultant and eventually entered into an agreement with NRC, a Switzerland based company. With the advice of NRC, the assessee-company approached the Industrial Development Bank of India (IDBI) acting as the lead financier for its rupee loan requirement and for a part of its foreign currency loan requirement it approached International Finance Corporation (IFC), Washington DC, USA. After successful rendering of services, the NRC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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