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TMI Blog2018 (8) TMI 2091X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in upholding the said disallowance by invoking the provisions of the Act notwithstanding the favourable provisions of the India-Philippines Double Taxation Avoidance Agreement ('DTAA'). * Without prejudice to the above, the learned CIT(A) has erroneously interpreted the master service agreement between the Appellant and the Service Provider and has erred in holding that the payment made to the Service Provider is in the nature of Royalty and thereby liable to tax in India as per Article 13 of India Philippines DTAA. * Without prejudice to the above, the learned CIT(A) has incorrectly placed reliance upon the decision of the Hon'ble Tribunal reported in ABB FZ-LLC [2017] 83 taxmann.com 86 to hold that the Service Provider has a Permanent Establishment in India. The Learned CIT(A) has failed to appreciating that the fact pattern and the applicable tax treaty of the Appellant's case is not similar to that of judicial precedent relied upon." 3. The assessee is a company engaged in the business of development of computer software. During the previous year, the assessee made a payment of Rs.56,60,370 to M/s. Startpoint Technologies Inc. ["Startpoint"], which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6) wherein it was held that in the absence of provision in the DTAA to tax Fees for Technical Services, the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India. 2. Bangalore ITAT in the case of IBM India Private Limited [I.T.(IT)A Nos. 489 to 498/Bang/2013] wherein similar decision was rendered in the context of payments to IBM Philippines, for providing services in the course of its business and it was held that Article 7 of India-Philippines DTAA in the absence of a specific Article dealing with 'FTS' would apply and further, in the absence of a PE of IBMPhilippines in India, the said payments would not be chargeable to tax in India and consequently not liable for TDS u/s 195 of the Act. The Assessee further placed reliance on We further place reliance on the following judicial pronouncements in which it has been held that in the absence of any article on FTS, any such fee received will be governed by the Article on 'Business Profits' and in the absence of a PE in India, such income will not be liable to tax in India: * Bangkok Glass Industry Co. Ltd v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heat in the game b. Sexually Explicit Events - An event that contains sexually explicit words/wordings. c. Racism / Insults - Events that contain abusive behavior towards members of another race. - Any kind of insult (to person, place, and religion) can be considered as invalid events. d. Others - Events that are related to webcam viewing. - Underage user (12 below). - MSM, Yahoo and other instant messenger chat facilities other than Yoville." 9. In the light of the above nature of work to be performed by Startpoint as per the agreement, the Assessee submitted that 'Royalty' is defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961 (Act) as follows:- i) the transfer of all or any rights (Including the granting of a license) 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 impa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the assessee. He referred to certain clauses in the agreement for rendering the services between the assessee and Startpoint and came to the conclusion that payment by the assessee to Startpoint was in the nature of royalties. The following were the conclusions of the CIT(Appeals) in this regard:- "10.1 Perusal of the master service agreement shows that clause 3 of the agreement is on ownership and intellectual property rights and some of the relevant clauses read as under: 3.1 Deliverables. Service Provider agrees to deliver in writing all work (including any creative artwork. which includes without limitation. art. materials comprising such art, photographs. and graphic designs), ideas, presentations, designs, drawings, reports. notes, works of authorship, methodologies. charts, knowledge hoses. surveys, software or other items made, analyses, test results. manuals. developed or reduced to practice, in all formats, in performance of the services (collectively, "deliverables") provided all undisputed payments due and owning to the Service Provider have been made in fill. Service Provider acknowledges and agrees it will not use the Deliverables except ac necessary to pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Zynga and identified in the applicable statement of Work. 3.4 Third Party Materials. To the extent that any materials licensed from third parties are included in the Deliverables and which must be identified in writing in the statement of work (Third party materials), zynga shall not own such Third Party Materials and service provider shall obtain at no cost to Zynga (or as otherwise expressly agreed in writing), a license to use such Third Party Materials as incorporated in the Deliverables. Zynga agrees to comply with all license restrictions and other applicable terms of any third party agreement applicable to the Third Party Materials that are disclosed by Service Provider to Zynga in the Statement of work. 3. 5 Moral Rights. Service Provider also hereby irrevocable transfers and assigns to Zynga, and agrees to irrevocably transfer and assign to Zynga, and waives and agrees never to assert, any and all Moral Rights (as defined below) that Service Provider nary have in or with respect to any Deliverable, during and after the term of this Agreement. "Moral Rights" means any rights to claim authorship of any Deliverable, to object to or prevent the modification or destruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is or becomes part of the public domain through no fault of the Receiving Party or that the Disclosure. The Receiving Party agrees to hold all Confidential Information in strict confidence, 170t 10 use it in any way, commercially or otherwise, except in performing the Services, and not to disclose it to others. 10.2 From the above it is very clear that the service provider M/s. Stratpoint Technologies Inc transfers and assigns to the appellant all right, title and interest in deliverables resulting from services provided by Stratpoint including worldwide patent rights, copyright rights, trade secret rights, know-how and all other intellectual property rights. As per clause 3.3, Stratpoint grants a license to copy, distribute, use and modify the service provider materials. Clause 3.5 for transfer of all moral rights with respect to any deliverable. Moral right has been defined as any right to claim authorship of any deliverable, to object to or prevent the modification or destruction of any deliverable, to withdraw from circulation or control the publication or distribution of any deliverable and any similar right. All the related rights as defined in clause 3.6 have also been gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said cases that a payment in the nature of FTS made to Philippines tax resident in the absence of a PE of such tax resident of Philippines in India, income is not chargeable to tax in India supports the plea of the assessee in this regard. We therefore hold that the sum in question cannot be taxed as FTS in India. Consequently, there was no obligation in the part of assessee to deduct tax at source u/s. 195 of the Act. Consequently, there cannot be any disallowance u/s. 40(a)(ia) of the Act. 16. As far as the question whether the sum in question can be classified as 'royalty' within the meaning of Article 13 of DTAA, we find that the definition of the term of 'royalty' under Article 13(3) of the DTAA is as follows:- "the term "royalties" 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 cinematograph films, or films or tapes used for radio or television 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, comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assigns or transfers any industrial or commercial experience to its customers. Therefore, the question would be whether the grading report would amount to any transfer of any experience by GIA to the clients. The term "experience" is not defined either under the Act or under the DTAA and consequently we shall have to consider the normal dictionary meaning. The expression "experience" in "The Oxford English Reference Dictionary has been explained as "Knoweldge or skill resulting from actual observation of or practical acquaintance with facts or events." In "The Chambers Dictionary the expression "experience" has been explained as "Knowledge or practical wisdom gained from what one has observed, encountered or undergone". In Webster's Encyclopedic Unabridged Dictionary "experience" is explained as "The process or fact of personally observing, encountering or undergoing something." As per the dictionary meaning of the term "experience" it is clear that "experience" is a cumulation of knowledge and observation gathered over a period of time. Term "experience" has also been judicially interpreted by the Supreme Court in Shesharao Bagde vs. Bhaiyya reported in (1991) Supp. 1 SCC 367 as ..... 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