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TMI Blog2007 (12) TMI 182X X X X Extracts X X X X X X X X Extracts X X X X ..... rect' wherein it proposed to build an international network of drop-off and shipment points to assist the maximum number of clients in moving their goods to the GIA Laboratory in a safe, expedient and cost-effective way. GIA grades the diamonds and issues a certificate stating the properties such as colour, crate, etc., of the diamonds. World-wide, the certificates issued by GIA are regarded as evidence of the quality of the diamonds. 3. Indian customers interested in having diamonds graded by GIA are able to drop their stones off at the most convenient authorized "Lab Direct" consolidator/participants, who provide prompt and secure transportation to and from one of GIA's Laboratory located in USA. The role of participants/consolidators is to merely arrange the shipment of diamonds and the insurance of diamonds in transit. The entire service of the grading and certification reports for diamonds and other articles are performed from the GIA laboratories situated in USA. International Diamonds Limited, Hong Kong (IDL) has been appointed by the GIA as its non-exclusive programme participant of the Lab Direct Programme. IDL has appointed the petitioner as a sub-participant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities indicate that this is a transfer of commercial experience in the shape "Diamond Grading Report" with respect to a particular diamond and is covered by definition of "Royalty within the meaning of Explanation 2(iv) of Section 9(1)(vi) and Article 12 of the DTAA between India and Singapore. and accordingly passed the consequential order. According to the petitioners the impugned order dated 13th November, 2006 was only valid upto 31st March, 1997 and was in fact passed close to the end of the Financial Year of 2006-2007. The petitioners believed that the order may be reviewed at the time of adjudicating its application for grant a certificate under Section 197(1) of the Act for the financial year ending on 31st March, 2008. 5. The petitioners on 30th March, 2007 filed an application before the respondent No.2 for grant of a certificate under Section 197(1) of the Act to receive Diamond grading and certificate charges from the Indian customers without deduction of tax at source for the financial year ending on 31st March, 2008. The petitioners appeared before the respondent No.2 and also filed a written submission. The petitioner also appeared before the respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd applies gemological knowledge to ensure public trust in gem and jewellery. GIA after repeated garding and examination by a minimum of 4 highly trained and experienced diamond graders and gemologist, who independently examine such diamonds, issues the grading report. The preliminary grader gives the opinion about the diamond's clarity, polish and symmetry, and then plot necessary clarity, characteristic on the diagram most representative of the diamond shape and faceting style which is selected from a database of hundreds of digitally stored diagrams. Second grader performs independently the above steps and depending upon the various parameters as well as grading opinion agreement, the diamonds are finally graded. All these activities, it is stated, show that this is a transfer of commercial experience in the shape of diamond grading report in respect of particular diamond and is covered under the definition of royalty within the meaning of explanation 2(iv) below Section 9(vi) and Article 12 of DTAA between India and Singapore. It is, therefore, contended that the order passed by the respondent No.2 does not suffer from any illegality and consequently the petition ought to be di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person." 9. Under the Income Tax Act, Explanation 2 of Section 9(1)(vi) defines "Royalty" is defined as under:- "For the purposes of this clause, royalty means consideration (including any lump slum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains) for (iv) the imparting of any information concerning technical, industrial commercial or scientific knowledge, experience or skill; (iva) the use of right to use industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; (v) the transfer of all or any rights (including the granting of license) in respect of any copyright, literary, art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless the context otherwise demands, it should be taken as experience after acquiring minimum qualifications required and will, therefore, necessarily have to be posterior to the acquisition of the qualification." 12. The grading certificate which is issued does not involve any transfer of commercial interest to the party paying or getting the right to use the experience of G.I.A. There is also no transfer of any skill or knowledge of GIA to the customers in the issuance of grading reports. The payments received is not the one for the use or the right to use experience, but is instead one for the application of experience to a certain factual situation i.e. GIA shall apply its expertise to the diamonds submitted by the clients and determine its true feature. 13. For that purpose we may consider the expression "use" as defined in various dictionaries. In the Oxford English Reference Dictionary it is defined as "Exploit for one's own ends, Employ, apply. In Chambers Dictionary it is defined to mean "Use to employ for some purpose. Apply to one's own purpose. The act so employing, using or putting into service. The nature of the transaction between GIA and its client does not inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be treated as royalty. To be considered as royalty normally the following factors should be present in the transaction:- (a) There should be a consideration for use or transfer of right to use; (b) The payment shall be towards grant or share for acquiring inter-alia information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information; (c) Such use or right to use of such property or information shall be for the stipulated period in accordance with the terms of the contract." 15. Article 12(3)(a) of the DTAA is a tax liability and as per has to be interpreted on the said principles of interpretation of taxation provisions as explained in A.V. Fernandez vs. The State of Kerala, AIR 1957 SC 657:- (a) tax can be charged only if the activity sought to be taxed falls squarely within the taxing entry; (b) a tax cannot be imposed by presumption, inference or conjecture, but must be imposed only as per the specific language of the taxing entry. (c) each word used in a taxing provision must be given effect to. 16. Learned Counsel for both parties had submitted some orders of the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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