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Income Tax Appellate Tribunal, DELHI “D” BENCH: NEW DELHI
Before: SHRI SHAMIM YAHYA & SHRI KUL BHARAT
ORDER
PER KUL BHARAT, JM :
The present appeal filed by the assessee for the assessment year 2013- 14 is directed against the order of Ld. CIT(A)-23, New Delhi dated 22.01.2019.
The assessee has raised following grounds of appeal- 1. “That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in assessing the total income of the Appellant for the relevant AY at Rs. 16,90,72,945/- as against the returned income of NIL filed by the Appellant.
2. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in recharacterizing the commission income of Rs. 22,89,835/- earned by the Appellant from its Associated Enterprise i.e. Springer Nature India Private Limited (“SNIPL”/ earlier known as Springer (India) Private Limited) for sale of books and journals to third party customers as fee for technical services (“FTS”) under Article 12 of India-Germany Double Taxation Avoidance Agreement (“DTAA”) and the Act.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in upholding the addition of Rs. 16,67,83,110/- made by the Ld. AO by treating the subscription fee collected by the Appellant from third party customers (i.e. Informatics Publishing P. Ltd. and ZS Associates India Private Limited) on behalf of Springer Nature Group’s affiliated publisher entities for sale of online books and journals in India as “royalty” income under Article 12 of the DTAA and the Act.
4. That on the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 234A and section 234B of the Act.
That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 271(1 )(c) of the Act for furnishing of inaccurate particulars and concealment of income. Each of the above grounds are independent and without prejudice to the other grounds of appeal
preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.” BRIEF FACTS OF THE CASE
3. Brief facts of the case are that the assessee filed its return of income on 31.03.2015 declaring total income at Rs.NIL. The case was selected for scrutiny assessment under CASS and the assessment was framed u/s 143(3)/144C(3)(a) of the Income Tax Act, 1961 (“the Act”) vide order dated 04.05.2016. Thereby, the Assessing Officer (“AO”) made addition treating the entire receipt of Rs.19,55,52,728/- as “Royalty” u/s 9(1)(vi) of the Act and 2 | P a g e brought it to tax as “Royalty” taxable @ 10% under the India Germany Double Taxation Avoidance Agreement (“DTAA”).
4. Aggrieved against this, the assessee preferred appeal before Ld.CIT(A), who partly allowed the appeal of the assessee. Thereby, Ld.CIT(A) confirmed the view of the AO by treating it as “Royalty”. However, Ld.CIT(A) gave relief of Rs.2,62,85,504/- to the assessee by observing that as per related party disclosure, the equal amount has been shown as receipt from the assessee under the head “subscription income” outside India.
5. Aggrieved against the order of Ld.CIT(A), the assessee is in appeal before this Tribunal.
6. Ground No.1 raised by the assessee is general in nature, needs no separate adjudication.
Ground No.4 raised by the assessee is against levy of interest u/s 234A 7. and 234B of the Act, are consequential and Ground No.5 is premature, hence dismissed.
8. Apropos to remaining grounds i.e. Ground Nos. 2 and 3, Ld. Counsel for the assessee submitted that the issues are squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in the Group Company. He further reiterated the submissions made in the written submissions, the same are reproduced as under:-
1.1. “The Appellant is a Company incorporated under the German laws and is a tax resident of Germany. During the subject year, the Appellant was a part of Springer Group, which was engaged in the 3 | P a g e business of publishing of books and journals in the field of research, education, and professional business. The Appellant acted as a commissionaire for its affiliated publisher entities, i.e., owners of books and/ or journals within the Springer Group. 1.2. During the year, by virtue of the Commissionaire Agreement dated 02 January 2013 entered with Springer India Private Limited (SIPL), the Appellant was appointed as a non-exclusive sales representative on a global basis to promote, grant and distribute the products of SIPL, and to fulfill the needs and requirements of SIPL’s customers. In accordance with the Agreement, the Appellant received ‘commission’ of INR 24,84,114 (being 10% of the net revenue amount) during the AY 2013-14. Copy of Commissionaire Agreement is attached at Pages 84 to 100 of the paper book. 1.3. As per the terms of the Commissionaire Agreement, the Appellant, inter-alia, provided following services to SIPL in accordance with SIPL’s terms and conditions (refer Article 3 of the Agreement attached at Page 85 of the paper book): • Customer service • Order handling • Address maintenance • Stock keeping and inventory management • Invoicing • Delivery (physical as well as online access) • Debtor management services (e.g. collect outstanding invoices) • Subscription management • Return copies processing 1.4. The Ld. AO in the assessment order dated 04 May 2016 held that the commission of INR 24,84,114 paid by SIPL to the Appellant and the subscription fees of INR 16,67,83,110 received by the Appellant from third party customers on behalf of Springer group entities are both in the nature of royalty both under section 9(l)(vi) of the Income Tax Act (‘the Act’) as well as under Article 12 of the India-Germany Double Taxation Avoidance Agreement (‘DTAA’). Further, the Ld. AO also made an addition of INR 2,62,85,204 by treating the amount received by the Appellant from sale of online journals from third party customers on behalf of SIPL as royalty [Refer Page 32 of the Final Assessment order]. 1.5. Aggrieved by the order of the Ld. AO, the Appellant preferred an appeal before the Ld. Commissioner of Income Tax (Appeals) [‘CIT(A)’]. The CIT(A), vide its order dated 22 January 2019 granted partial relief to the Appellant by holding as under: a) Negated the approach followed by the Ld. AO and held that commission is not taxable as royalty. Instead, the CIT(A) held that the commission received by the Appellant is for provision of managerial services and thus, taxable as fees for technical services (“FTS”). Further, out of the total receipts of INR 24,84,114, the CIT(A) deleted the addition to the extent of INR 1,94,279/- and confirmed the balance addition as FTS. [Relevant findings @ Page 35 to 36 of the CIT(A) Order] b) Confirmed the action of the Ld. AO in treating subscription fees of INR 16,67,83,110 received by the Appellant as royalty. [Relevant findings @ Page 37 to 42 of the CIT(A) Order] c) Deleted the addition of INR 2,62,85,204/- in respect of sale of online journal and books which had been treated as royalty income by the Ld. AO. [Relevant findings @ Page 42 to 43 of the CIT(A) Order] 1.6. Aggrieved by the order of the Hon’ble CIT(A), the Appellant has preferred the present appeal before this Hon’ble Tribunal.
2. Appellant’s plea before the Hon’ble Tribunal: Ground No. 1- General in nature Ground No. 2 - That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in recharacterizing the commission income of INR 22,89,835 earned by the Appellant from its Associated Enterprise, i.e., Springer Nature India Private Limited [‘SNIPL’/ earlier known as Springer (India) Private Limited (‘SIPL’)] for sale of books and journals to third party customers as fees for technical services (‘FTS’) under Article 12 of the India-Germany Double Taxation Avoidance Agreement (‘DTAA’) and the Act. 2.1. It is at the outset submitted that the impugned issue stands decided in favour of the Appellant by the order of this Hon’ble Tribunal in the case of group entity namely Springer Verlag GmbH for AY 2014-15 and 2015-16 (ITA Nos. 434 and 3826/Del/2019). In the said case, Springer Verlag GmbH, in accordance with the similar Commissionaire Agreement, had received commission income which was held to be in the nature of FTS by the CIT(A). While adjudicating the appeal filed by said group entity, the Hon’ble Tribunal vide its order dated 23 August 2022 held that mere provision of support services cannot be treated as managerial services and therefore, the commission received by a global non-exclusive sales representative is not managerial services and the same is not taxable as FTS under Indo-Germany DTAA. 2.2. It is submitted that in the present case, the Appellant was appointed as a non-exclusive sales representative/ distributor of SIPL, and thus, received commission for promoting and distributing SIPL’s products. As evident from the Commissionaire Agreement, the services provided by the Appellant were in respect of customer and sales support. Further, the Appellant does not even have any legal title in the products of SIPL and SIPL has sole and exclusive rights in all trademarks and trade names in the abovementioned products sold by the Appellant on behalf of SIPL (refer Art. 2 of Commissionaire Agreement on page no. 85 of the paperbook). 2.3. In accordance with the terms of the Commissionaire Agreement, the Appellant provided various services for SIPL which included customer service, order handling, address maintenance, stock-keeping etc. (Refer Article 3 of the Commissionaire Agreement). In lieu of such services rendered, the Appellant received ‘commission’ income amounting to INR 24,84,114 (being 10% of the net revenue as per Article 4 of the Commissionaire Agreement). Further, copy of invoices amounting to EURO 36,392.80 (equivalent to INR 24,84,114) raised by the Appellant on SIPL are attached at pages 29 to 83 of the paperbook. 2.4. It is submitted that the copy of commissionaire agreement along with invoices were duly filed by the Appellant before the Ld. AO as well as Ld. CIT(A). However, the Ld. CIT(A), in gross ignorance of the contemporaneous documentary evidences filed by the Appellant, held that the Appellant had not discharged its onus to disclose necessary facts regarding the nature of receipts. Further, the CIT(A) proceeded to treat the commission income of INR 22,89,835 of the Appellant as FTS. 2.5. It is humbly submitted that the conclusions of CIT(A) are factually as well as legally incorrect. While holding the commission income as FTS, the Ld. CIT(A) even failed to mention the limb under which the services rendered by the Appellant qualifies as FTS under DTAA i.e. whether the services are in the nature of managerial, technical or consultancy. Further, the Ld. CIT(A) failed to appreciate that 7 | P a g e
the Appellant had duly discharged its onus by placing on record all the documentary evidences (i.e. commissionaire agreement and invoices). 2.6. Further, a perusal of services provided by the Appellant as a sales representative of SIPL (enlisted in Article 3 of the commissionaire agreement) clearly shows that the said services are not in the nature of FTS. The same has also been appreciated by the CIT(A) while deleting a part-addition of INR 1,94,279/- wherein the CIT(A) itself clearly held that ‘commission’ income is in the nature of business income which is not taxable in India in the absence of a permanent establishment (‘PE’) in India (refer para 6.5 on page no. 36 of CIT(A) order). 2.7. Therefore, applying the same rationale to the balance commission income of INR 22,89,835 should also not be taxable in India being in the nature of business income. 2.8. In view of the above, it is submitted that the commission income earned by the Appellant cannot be characterised as FTS, both under the Act and the DTAA as (i) complete documentary evidences have been filed before the lower authorities and (ii) the Hon’ble Tribunal, on identical facts, in the case of Springer Verlag GmbH (group entity) has held that the commission received by a global non¬exclusive sales representative is not taxable as FTS under Indo-Germany DTAA. Ground No. 3 - That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in upholding the addition of INR 166,783,110 made by the Ld. AO by treating the subscription fee collected by the Appellant from third party customers (i.e. Informatics Publishing Private Limited and ZS Associates India Private Limited) on behalf of Springer Nature Group’s affiliated publisher entities for sale of online books and journals in India as ‘royalty’ income under Article 12 of the DTAA and the Act. 3.1 It is at the outset submitted that the issue stands covered by the decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [2021] 432 ITR 471. The same has been discussed in detail in succeeding paragraphs. 3.2 During the subject year, by virtue of the Commissionaire Agreement entered into by the Appellant with Springer Group’s affiliated publisher entity, the Appellant collected subscription fee amounting to INR 16,67,83,110 from third- party end customers, i.e. Informatics Publishing P. Ltd. and ZS Associates India P. Ltd. in India. The aforesaid subscription fee was collected by the Appellant on behalf of affiliated publisher entity and was reflected in Form 26AS of the Appellant for the subject year (refer page nos. 117-120 of the paperbook). 3.3 As per the terms of the Commissionaire agreement entered between the Appellant and Springer Group’s affiliated publisher entity, the Appellant inter-alia provides subscription management services. The Appellant merely collects prepayment of subscription fee from third-party end customers on behalf of Springer Group’s affiliated publisher entity for whom the Appellant is merely acting as a Commissionaire agent. Subsequently, the Appellant on a monthly basis allocates the entire subscription fee collected from the customers to the Springer Group’s affiliated publisher entity (refer Art. 4 of commissionaire agreement on page nos. 85-86 of the paperbook). Therefore, such subscription fee collected by the Appellant from customers on behalf of Springer Group’s affiliated group entity is not the income of the Appellant.
3.4 It is submitted that the subscription fees collected by the Appellant from third party end customer is with respect to e- journals which are copyrighted articles. There is no transfer of ‘copyright’ or ‘right to use’ by the Appellant. The Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [2021] 432 ITR 471 (SC) has upheld the principle that income from sale of copyrighted articles should not be taxed as royalty either under the Act or the DTAA if there is no transfer of copyright. The Hon’ble Supreme Court held that since the license granted to distributors and end users does not create any interest or right in the software, grant of license would not amount to "use of or right to use" of copyright and, hence, it would not qualify as royalty. The Court further observed that it is a sine qua non that there must be a transfer of all or any rights in a copyright by way of license or otherwise which was not present. 3.5 Furthermore, it may be noted that the DTAA requires that the payment can be held to be ‘Royalty’ only when there is "use" or 'right to use1 of a ‘process’. In this regard, it is submitted that the subscription of e-journals in the instant case cannot be held to be "use of process" or "information concerning industrial, commercial or scientific experience" because the end users do not have any access to the source code. What is available merely for their use are the e-journals as such and not the process embedded in it. All the intellectual property rights and other rights relating to the same at all times are the exclusive property of the Appellant/group entities. Several processes may be involved in providing the e-journals but what the customer uses are the journals as such and not the process, which are involved into it. 3.6 Reliance in this regard is placed on the following judicial precedents:
• Datamine International Ltd. v. Addl. DIT (International Taxation) 158ITD 84 (Delhi ITAT) • ADIT (IT) v. Baan Global BV [2016] 71 taxmann.com 213 (Mumbai ITAT) • Shell Information Technology International BV (80 taxmann.com 64) (Mumbai ITAT) • ADIT (IT) v. First Advantage (P.) Ltd. [2017] 163 ITD 165 (Mumbai ITAT) • Black Duck Software Inc. [2017] 86 taxmann.com 62 (Delhi ITAT) 3.7 Additionally, the Appellant places reliance on following judicial decisions, wherein it has been held that there is no transfer of copyright in case of providing subscription of e- products/ online database: • American Chemical Society vs. ACIT (ITA No. 1030/ Mum/ 2021) (Mumbai ITAT) • Elsevier BV, In re [2021] 432 ITR 251 (AAR - Mumbai) • Dow Jones & Company Inc. v. ACIT (ITA No. 7364/ DEL/ 2018) (Delhi ITAT) • Elsevier Information Systems GmbH: [2019] 106 taxmann.com 401 (Mumbai) • Me Kinsey Knowledge Centre India (P.) Ltd.: [2018] 92 taxmann.com 226 (Del.) • Welspun Corporation Ltd.: (2017) 77 taxmann.com 165 (Ahem.) • Factiva Ltd v. DCIT (ITA No. 6455/ Mumbai/ 2018) 3.8 The Appellant hereby also places reliance on the following judicial decisions wherein it has been held that subscription fee does not qualify as imparting of any secret or 11 | P a g e confidential information concerning technical, industrial, commercial or scientific knowledge, experience or skill: • Elsevier BV, In re [2021] 432 ITR 251 (AAR - Mumbai) • HEG Ltd. (2003) 263 ITR 230 (MP) • Dun and Bradstreet Information Services India P. Ltd. (2012) 338 ITR 95 (Bom.) • GVK Oil & Gas Ltd. (2016) 68 taxmann.com 134 (Hyd.) • Factset Research Systems Inc. (2009) 317 ITR 169 (AAR) 3.9 Applying the same principle to the facts of the present case, it is submitted that the subscription fees collected by the Appellant is not taxable as royalty under the Act as well as under the Tax Treaty. 3.10 Without prejudice to the above, it is respectfully submitted the Appellant was collecting subscription fee from third-party end customers only on behalf of affiliated publisher entity and the same under no circumstances be treated as income in the hands of the Appellant. It is a well-established principle of law that what can be taxed is the ‘real income’ and not any notional/ hypothetical income. Reliance in this regard is placed on the following judicial precedents: • E. D. Sassoon & Co. vs CIT: [1954] 26 ITR 27 (SC) • CIT v. Ashokbhai Chimanbhai: [1965] 56 ITR 42 (SC) • CIT v. Hindustan Housing and Land Development Trust Ltd.: [1986] 161 ITR 524 (SC) • CIT v. Shoorji Vallabhdas & Co.: [1962] 46 ITR 144 (SC) • Godhra Electricity Company V CIT: [1997] 225 ITR 746 (SC) • CIT vs. Excel Industries Ltd.: (2013) 358 ITR 295 (SC) 12 | P a g e Ground No. 4: Interest charged under section 234A and 234B of the Act 4.1 This ground is consequential in nature. Ground No. 5: Penalty proceedings initiated under section 271(l)(c) of the Act 5.1 There shall be no levy of penalty if the aforesaid grounds are decided in favour of the Appellant. 5.2 Further, it is well-settled law that where two views are possible and the Ld. AO differed with the view taken by the Appellant, penalty should not be leviable. 5.3 Further, the Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. vs. CIT (322 ITR 158) (SC) has held that merely because the claim of the assessee is not accepted by the revenue, that by itself would not attract penalty under section 271(l)(c).”
Ld. CIT DR opposed these submissions and supported the orders of the authorities below.
We have heard the rival submissions of the parties before us. Apropos to Ground Nos. 2 & 3, the contention of the assessee is that both issues are covered in favour of the assessee by the decision of Co-ordinate Bench of this Tribunal. We find that in respect of Ground No.2, the Ld.CIT(A) has given his finding in para 6.5 reproduced hereunder for the sake of clarity and effective adjudication:-
6.5. “The appellant has not discharged its onus to disclose the necessary facts which could throw light on the nature the receipt under consideration. No doubt, necessary facts to establish the nature of the receipt are in the appellant’s personal knowledge. If major part of the receipt (Rs.22,89,835/-) is for “production and editorial charges”, the receipt could be categorized as Fee for Technical Services (FTS). Therefore, the addition regarding this portion (Rs.22,89,835/-) is confirmed. As far as service charges of Rs.1,94,279/- are concerned, it has been represented that these are service charges for sale of Indian Journals. Therefore, this amount is business income. It is not the case of the AO that the appellant has permanent establishment (PE), in India. Therefore, addition to this extent (Rs.1,94,279/-) is deleted. As a result, this Ground (No2.) of the appeal is partly allowed.”
11. We find that the identical issue was raised before the Co-ordinate Bench of the Tribunal in the case of M/s. Springer Verlag GmbH vs DCIT in & 3826/Del/2019 [Assessment Years 2014-15 & 2015-16] vide order dated 23.08.2022 and considering the various case laws, the Co-ordinate Bench of the Tribunal has decided the issue by observing as under:-
10. “In our considered view, to construe any payment as FTS, payment should be a consideration for rendering of any managerial services. The ld. CIT(A) was of the firm belief that the assessee was involved in rendition of managerial services to SIPL and, therefore, the commission received for such services is in the nature of FTS.
Interestingly, the concept of FTS is not present in the OECD Model Convention. However, it finds mention in the UN Model Convention wherein Article 12A grants the source country a primary right to tax such fee from technical services. In fact, the Commentary to the UN Model Convention lays down clear guidance in respect of the meaning of the term ‘managerial services’ which is evident from the following extract: “63. The ordinary meaning of the term “management” involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or 14 | P a g e organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services would be fees for technical services within the meaning of paragraph 3. Similarly, payments made to a consultant for advice related to the management of an enterprise (or of the business of an enterprise) would be fees for technical services. ”
12. The Hon'ble Jurisdictional High Court in the case of Panalfa Autoelektrik Ltd 227 Taxman 351, in relation to “Managerial, technical and consultancy services”, has observed as under: “14. The expressions "managerial, technical and consultancy services" have not been defined either under the Act or under the General Clauses Act, 1897. The said terms have to be read together with the word „services‟ to understand and appreciate their purport and meaning. We have to examine the general or common usage of these words or expressions, how they are interpreted and understood by the persons engaged in business and by the common man who is aware and understands the said terms. The expression "management services" was elucidated upon by this Court in J.K. (Bombay) Limited versus CBDT and Another, [1979] 118 ITR 312 in the following terms:- "6. It may be asked whether management is not a technical service. According to an Article on "Management Sciences", in 14 Encyclopaedia Britannica 747, the management in organizations include at least the following: "(a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead toward the goals,
(b) getting the organization to adopt the policies, (c) scrutinizing the effectiveness of the policies that are adopted, (d) initiating steps to change policies when they are judged to be less effective than they ought to be." Management thus pervades all organizations. Traditionally administration was distinguished from management, but it is now recognised that management has a role even in civil services. According to the Fontana Dictionary of Modern Thought, page 366, management was traditionally identified with the running of business. Therefore, management as a process is practiced throughout every organization from top management through middle management to operational management." Recently this Court in CIT versus Bharti Cellular Limited and Others, [2009] 319 ITR 139 had observed:- "The word "manager" has been defined, inter alia, as: "a person whose office it is to manage an organization, business establishment, or public institution, or part of one; a person with the primarily executive or supervisory function within an organization, etc., a person controlling the activities of a person or team in sports, entertainment, etc." It is, therefore, clear that a managerial service would be one which pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager." Reference can be also made to the decision of the Authority for Advance Rulings in In Re: Intertek Testing Services India Private Limited, [2008] 307 ITR 418, wherein it was elucidated:-
"First, about the connotation of the term "managerial". The adjective "managerial relates to manager or management. Manager is a person who manages an industry or business or who deals with administration or a person who organizes other people‟s activity [New Shorter Oxford Dictionary]. As pointed out by the Supreme Court in R. Dalmia v. CIT [1977] 106 ITR 895, management" includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business."
15. The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the nonresident to the respondent-assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinising the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever. This is clear from the facts as recorded by the Commissioner of Income Tax (Appeals), which have been affirmed by the Tribunal. The Commissioner of Income Tax (Appeals) has quoted excerpts of the agreement between the respondent-assessee, who has been described as „PAL‟, and the non-resident, who has been described as „AGENTA‟. The relevant portions thereof read as under:- "2. Appointment (1) PAL hereby appoint AGENTA as its commission agent for sale of its products within the territory to the purchaser(s) during the terms of this agreement, subject to and in accordance with terms and conditions set out herein and AGENTA agrees to and accepts the same. (2) It is agreed by and between the parties that AGENTA‟S representations and acts on behalf and for PAL viz-a-viz any third party shall be legally binding on PAL only when the same are authorized by virtue of a written and signed authorization executed by PAL in favour of AGENTA. 17 | P a g e XXXXX 4. Commission (a) PAL agrees and AGENTA accepts that the amount of commission payable to it shall be the difference between consideration which PAL receives in terms of the purchase contract/order form the purchaser(s) and the pre determined guaranteed consideration settled and agreed between the parties, as described in Annexure 1 annexed hereto; (b) The parties agree that all the taxes applicable and required to be deducted in India to the transaction contemplated herein at the date of execution of this agreement and at any time in future during the terms of this agreement shall be deducted from the commission (as described herein above) before the same is paid and transferred to the bank account of AGENTA (herein referred to as the commission payable)"
16. The non-resident, it is clear was appointed as a commission agent for sale of products within the territories specified and subject to and in accordance with the terms set out, which the non-resident accepted. The non-resident, therefore, was acting as an agent for procuring orders and not rendering managerial advice or management services. Further, the respondent-assessee was legally bound with the non-residents‟ representations and acts, only when there was a written and signed authorization issued by the respondent-assessee in favour of the non-resident. Thus, the respondent-assessee dictated and directed the non-resident. The Commissioner of Income Tax (Appeals) has also dealt with quantification of the commission and as per clause 4, the commission payable was the difference between the price stipulated in the agreement and the consideration that the respondent- assessee received in terms of the purchase contract or order, in addition to a pre-determined guarantee consideration. Again, an indication contra to the contention that the non-resident was providing management service to the respondent-assessee.
17. The Revenue, which is the appellant before us, has not placedcopy of the agreement to contend that the aforesaid clauses do not represent the true nature of the transaction. The Assessing Officer in his order had not bothered to refer and to examine the relevant clauses, which certainly was not the right way to deal with the issue and question.
18. It would be incongruous to hold that the non-resident was providing technical services. To quote from Skycell Communications Ltd. and Anr. Vs. Deputy Commissioner of Income Tax and Ors. (2001) 251 ITR 53 (Mad), the word „technical‟ has been interpreted in the following manner:- "Thus while stating that "technical service" would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute "technical" service to render it "technical service". The meaning of the word "technical” as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques: technical terms (especially of a book or article) requiring special knowledge to be understood: a technical report. 2. of involving, or concerned with applied and industrial sciences: an important technical achievement. 3. resulting from mechanical failure: a technical fault 4 according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty. Having regard to the fact that the term is required to be understood in the context in which it is used, "fee for technical services" could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with "technical" is "involving or concerning applied and industrial science"."
The said term was also interpreted by this Court in case of Bharti Cellular Limited and Others (supra) where emphasis was laid on the element of human intervention, but we are not concerned with the said aspect in the present case. The non-resident had not undertaken or performed "technical services", where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences (see paragraph 24 below).
20. The moot question and issue is whether the non-resident was providing consultancy services. In other words, what do you mean by the term "consultancy services"? This Court in Bharti Cellular Limited and Others (supra) had referred to the term "consultancy services" in the following words:- "14. Similarly, the word "consultancy" has been defined in the said Dictionary as "the work or position of a consultant; a department of consultants." "Consultant" itself has been defined, inter alia, as "a person who gives professional advice or services in a specialized field." It is obvious that the word "consultant" is a derivative of the word "consult" which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as "ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action". It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant." The AAR in the case of In Re: P.No. 28 of 1999, reported as [1999] 242 ITR 208 had observed:-
By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context advisory services. The category of technical and consultancy services are to some extent overlapping because a consultancy service could also be technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it.
21. The word „consultant‟ refers to a person, who is consulted andwho advises or from whom information is sought. In Black‟s Law Dictionary, Eighth Edition, the word „consultation‟ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the nonresident to the resident Indian payer.
In the present, case commission paid for arranging of export sales and recovery of payments cannot be regarded as consultancy service rendered by the non-resident. The non-resident had not rendered any consultation or advice to the respondent-assessee. The non-resident no doubt had acquired skill and expertise in the field of marketing and sale of automobile products, but in the facts, as notice by the Tribunal and the Commissioner of Income Tax (Appeals), the non-resident did not act as a consultant, who advised or rendered any counseling services. The skill, business acumen and knowledge acquired by the non-resident were for his own benefit and use. The non-resident procured orders on the basis of the said knowledge, information and expertise to secure "their" commission. It is a case of self-use and benefit, and not giving advice or consultation to the respondent-assessee on any field, including how to procure export orders, how to market their products, procure payments etc. The respondent-assessee upon receipt of export orders, manufactured the required articles/goods and then the goods produced were exported. There was no element of consultation or advise rendered by the nonresident to the respondent-assessee.
Decision in the case of M/s Wallace Pharmaceuticals Private Limited (supra) is clearly distinguishable as in the said case the non- resident consultant had to perform several services in the nature of attending meetings on mutually agreeable dates and providing advice and counseling, which were in the nature of consultancy services as they entailed support from a product team, compliance with all legal and administrative formalities, including registration and marketing strategy, creation of entry into new markets, development and distribution channels, etc. The work being rendered was in the nature of services as a consultant to the Indian assessee. It included an element of advice and was certainly recommendatory in nature.
The OECD Report on e-commerce titled, Tax Treaty Characterisation Issues arising from e-commerce: Report to Working Party No.1 of the OECD Committee on Fiscal Affairs dated 01st February 2001, has elucidated:- "Technical services 39. For the Group, services are of technical nature when special skills or knowledge related to a technical field are required for the provision of such services. Whilst techniques related to applied science or craftsmanship would generally correspond to such special skills or knowledge, the provision of knowledge acquired in fields such as arts or human sciences would not. As an illustration, whilst the provisions of engineering services would be of a technical nature, the services of a psychologist would not.
The fact that technology is used in providing a service is not indicative of whether the service is of a technical nature. Similarly, the delivery of a service via technological means does not make the service technical. This is especially important in the e-commerce environment as the technology underlying the internet is often used to provide services that are not, themselves, technical (e.g. offering on-line gambling services through the internet).
In that respect, it is crucial to determine at what point the special skill or knowledge is used. Special skill or knowledge may be used in developing or creating inputs to a service business. The fee for the provision of a service will not be a technical fee, however, unless that special skill or knowledge is required when the service is provided to the customer. For example, special skill or knowledge will be required to develop software and data used in a computer game that would subsequently be used in carrying on the business of allowing consumers to play this game on the internet for a fee. Similarly, special skill or knowledge is used to create a troubleshooting database that customers will pay to access over the Internet. In these examples, however, the relevant special skill or knowledge is not used when providing the service for which the fee is paid, i.e. allowing the consumer to play the computer game or consult the troubleshooting database. 42. Many categories of e-commerce transactions similarly involve the provision of the use of, or access to, data and software (see, for example, categories 7, 8, 9, 11, 13, 15, 16, 20 and 21 in annex 2). The service of making such data and software, or functionality of that data or software, available for a fee is not, however, a service of a technical nature. The fact that the development of the necessary data and software might itself require substantial technical skills is irrelevant as the service provided to the client is not the development of that data and software (which may well be done by someone other than the supplier) but rather the service of making the data and software available to that client. For example, the mere provision of access to a troubleshooting database would not require more than having available such a database and the necessary software to access it. A payment relating to the provision of such access would not, therefore, relate to a service of a technical nature. Managerial services 43. The Group considers that services of a managerial nature are services rendered in performing management functions. The Group did not attempt to give a definition of management for that purpose but noted that this term should receive its normal business meaning. Thus, it would involve functions related to how a business is run as opposed to functions involved in carrying on that business. As an illustration, whilst the functions of hiring and training commercial agents would relate to management, the functions performed by these agents (i.e. selling) would not.
The comments in paragraphs 40 to 42 above are also relevant for the purposes of distinguishing managerial services from the service of making data and software (even if related to management), or functionality of that data or software, available for a fee. The fact that this data and software could be used by the customer in performing management functions or that the development of the necessary data and software, and the management of the business of providing it to customers, might itself require substantial management expertise is irrelevant as the service provided to the client is neither managing the client‟s business, managing the supplier‟s business nor developing that data and software (which may well be done by someone other than the supplier) but rather making the software and data available to that client. The mere provision of access to such data and software does not require more than having available such a database and the necessary software. A payment relating to the provision of such access would not, therefore, relate to a service of a managerial nature. Consultancy services 45. For the Group, "consultancy services" refer to services constituting in the provision of advice by someone, such as a professional, who has special qualifications allowing him to do so. It was recognised that this type of services overlapped the categories of technical and managerial services to the extent that the latter types of services could well be provided by a consultant." We broadly agree with the aforesaid observations. However, in the case of selling agents, we add a note of caution that taxability would depend upon the nature of the character of services rendered and in a given factual matrix, the services rendered may possibly fall in the category of consultancy services. Paragraphs 41 and 42 do not emanate for consideration in the present case, and effect thereof can be examined in an appropriate case [However, see Commissioner of Income Tax vs. Estel Communication P. Ltd. (2009) 318 ITR 185 (Del) and Skycell Communications Ltd. (supra)].
Thus, the technical services consists of services of technical nature, when special skills or knowledge relating to technical field are required for their provision, managerial services are rendered for performing management functions and consultancy services relate to provision of advice by someone having special qualification that allow him to do so. In the present case, the aforesaid requisites and required necessities are not satisfied. Indeed, technical, managerial and consultancy services may overlap and it would not be proper to view them in water tight compartments, but in the present case this issue or differentiation is again not relevant.”
13. Similarly, the Authority for Advance Rulings in Intertek Testing Services India [P] Ltd 307 ITR 418 has observed as under:
“As pointed out by the Supreme Court in R. Dalmia vs. CIT 1977 CTR (SC) 130 : (1977) 106 ITR 895 (SC), ‘management’ includes the act of managing by direction, or regulation or superintendence. Thus, managerial service essentially involves controlling, directing or administering the business. Seemingly, some services can be classified either under managerial or some other head. In such a situation, the test to be applied is whether they are predominantly managerial in nature. Whatever services are enumerated under the head "Administrative management" cannot automatically be brought within the purview of the managerial services. In fact, many of them may not appropriately fall under managerial services. To give some examples, the maintenance of trade marks register and arranging renewals, preparation and distribution of brochures and other promotional material, maintenance of central claims register or providing professional tax advice, are not predominantly managerial services. Yet, they were included under the head "Administrative management". To give few instances of managerial services, we may make mention of coordination of public relations issues and audit services and advice on global income-tax policies. Arrangement and coordination of global insurance can perhaps fall under this category, though in the absence of details, we do not want to express firm view. Another point we would like to clarify is that from the nomenclature used in the invoice i.e. ‘management fee’, it cannot be inferred that all the services under the agreement rendered to the applicant are managerial services. The label given in the invoice is not important, much less decisive. In fact, the expression ‘management fee’ is not found in the agreement. It is described in the agreement as service charge or fee and the same description is given in the application also. In the note, the applicant stated that management charges relate to ‘support services’. Support services are not necessarily equivalent to services of managerial nature.
14.1 Keeping the above observations in view, the classification of services as managerial may have to be undertaken in an appropriate proceeding.
There are certain services which may not come under either technical or consultancy or managerial. At any rate, a doubt arises in regard to their classification in the absence of sufficient particulars. For instance, preparation and circulation of business sector reports, negotiation of discounts and best service levels in procurement policies especially income-tax hardware and services and coordination of audit services, fall within such doubtful category.
16. A contention has been raised by the counsel for the Revenue that the recipient of FTS shall be the beneficial owner of fees and if the non-resident entity which ostensibly receives the fee is a mere conduit for the other related companies and the amount received by it is simply made over to those companies, then no benefit can be sought from art.13 of the Treaty. If the beneficial owner is someone other than the immediate recipient of fee, the legal position has to be examined in light of the relevant Treaties governing the country of residence of the real and beneficial owner. It is argued that the ITM, UK acts as a coordinating or central point agency to requisition the services from various other Intertek groups subsidiaries and, therefore, the ITM, UK presumably passes on the amount charged to various other entities, while retaining at the most, the mark-up charge of 7.5 per cent. In the absence of the applicant furnishing any details of services actually rendered by ITM, UK, it is submitted that a conclusion cannot be drawn that the UK company is the real beneficial owner. It appears that the omission on the part of the applicant in spelling out the details of the actual services received by it from the payee of the fee i.e. ITM, UK has given scope for this argument. The argument is evidently based on certain assumptions. It is not proper to proceed on the assumption that the ITM, UK is incapable of rendering any technical or consultancy services and that its role is merely that of a conduit, in the absence of definite material leading to such inference. The omission on the part of the applicant in furnishing the details of actual services cannot be stretched too far. On the basis of the facts appearing on the record, it is not possible to arrive at a finding in this proceeding that the beneficial owner of fee is someone else.
17. In view of the foregoing discussion, the first question defies a precise answer-either in the affirmative or negative. Many of the services catalogued in the agreement and in the note are technical/consultancy services which do not ‘make available’ technical knowledge, experience etc. and therefore do not fall within the ambit of cl. (c) of art. 13.4. But, some of them satisfy the test of making available ‘technical knowledge’ etc. and therefore taxable as FTS under art. 13.4 of Treaty. There are also services which can be categorized as managerial. There are some which do not fall under either of the three categories. We have given sufficient indication of all such services, on a broad analysis. 17.1 It is made clear that nothing in this ruling shall preclude the concerned IT authorities to determine the cost of services etc. on arm’s length basis by taking resort to the provisions of s. 92 of IT Act, 1961. 18. 2nd Question : As indicated earlier, while discussing question No. 1, it is not possible to hold, on the basis of the material placed before this Authority, that all the services rendered do not fall under FTS and that the entirety of service fee charged to the applicant does not constitute the income of ITM, UK under the Treaty. There is some grey area in respect of certain services, as pointed out in the course of discussion supra. However, we have interpreted art.13(4)(c) of the Treaty and laid down the principle. We have also indicated broadly whether in relation to the listed services, the said provision is attracted. Further, we have attempted at the classification of various 28 | P a g e services by giving examples. It is for the applicant to approach the competent authority to determine the issue of TDS by filing an application under s. 195 of IT Act. It is settled law that any order passed under s. 195 is tentative and the rights of the payee or recipient are not thereby adversely affected [vide Transmission Corporation of AP Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC)]. To what extent and at what rate the tax deduction has to be made by the applicant will be determined by the appropriate authority expeditiously in the light of the principles laid down and observations made in this ruling.”
14. Similar view was taken by the co-ordinate bench at Mumbai in the case of Endemol South Africa [Proprietary] Ltd 67 ITR (T) 520. The relevant findings read as under: “16. We may herein observe, that a similar view had earlier been arrived at by the ITAT, Mumbai, in the case of Yashraj Film Pvt. Ltd. Vs. ITO (IT) (2012) 231 ITR (T) 125 (Mum.). On a perusal of the facts involved in the aforementioned case, it emerges that the Tribunal had observed that as the services rendered by the nonresident service providers for making logistic arrangements were in the nature of commercial services, thus, the same cannot be treated as managerial, technical or consultancy services within the meaning given in Explanation 2 to Sec. 9(1)(vii) of the Act. In the aforementioned case, the assessee had made payments to various overseas services providers belonging to U.K, Poland, Brazil, Canada & Australia for services availed in connection with the shooting of different films. The services rendered by the aforementioned nonresident service providers included arranging for extras, arranging for the security, arranging for locations, arranging for the accommodations for the cast and crew, arranging for necessary permissions from local authorities, arranging for makeup of the stars, arranging for insurance cover etc. The Tribunal after deliberating on the nature of the aforementioned services concluded, that as the same were purely commercial services falling in the category of logistic arrangement services, thus, the consideration received as regards rendering of such services would constitute business profits of the said overseas service providers. It was further observed, that as the said service providers had no Permanent Establishment (P.E) in India during the year under consideration, hence the business profits were not taxable in India in their hands as per Article 7 of the respective tax treaties between India and the abovementioned countries. We have deliberated at length on the facts involved in the case before us, and find that the nature of services rendered P a g e | 15 AY 2012-13 M/s Endemol South Africa Vs. DCIT (IT),Circle-2(2)(1) by the overseas service providers in the aforementioned case of Yashraj Films Pvt. Ltd.(supra) are somewhat similarly placed and rather overlapping to some extent, as in comparison to the services rendered by the assessee in the case before us. In terms of our aforesaid observations, we find that our view that the services rendered by the assessee are administrative services and not in the nature of managerial, technical or consultancy services, also stands fortified by the aforesaid order of the coordinate bench of the Tribunal. We thus, in the backdrop of our aforesaid deliberations, and finding ourselves to be in agreement with the view taken by the Tribunal in the aforesaid case viz. Yashraj Films Pvt. Ltd. (supra), herein conclude that the consideration received by the assessee for rendering of the services to Endemol India Pvt. Ltd. cannot be held as "FTS".
17. Still further, we also find that the issue of taxability of amount received outside India for rendering Line production services to the assessee company viz. Endemol India Pvt. Ltd, had also been considered and decided by the Hon‟ble Authority for Advance Ruling (for short „AAR‟), vide its rulings rendered in the case of Endemol Argentina (Non-resident) [AAR No. 1082 of 2011; dated 13.12.2013] and Utopia Films (Non-resident) [AAR No. 1081 and 1082 of 2011; dated 19.02.2014]. In the aforementioned rulings, it was observed, that the consideration received outside India by the concerned overseas service providers by providing line production services to the assessee, viz. providing line producer, local crew, stunt services, transport etc. would not qualify as "FTS" under the Act. We find that in the present case, the A.O/DRP had declined to rely on the aforesaid rulings of the AAR, for the reasons viz. (i) that as per Sec. 245S, the advance ruling is pronounced on the basis of facts of a particular case and hence, it is binding on only the applicant in respect of the transactions in relation to which advance ruling was sought; and (ii). that the ruling was rendered by the Hon‟ble AAR in context of different DTAA‟s, as against that involved in the case of the assessee. We have deliberated at length on the aforesaid observations of the lower authorities and are unable to persuade ourselves to accept the same. We find that though it is an admitted fact that an P a g e | 16 AY 2012-13 M/s Endemol South Africa Vs. DCIT (IT),Circle-2(2)(1) „advance rulings‟ having been rendered on the basis of the facts of a particular case, thus, would only be binding on the applicant, and that too in respect of the transactions in relation to which the same was obtained, however, such ruling would still have a persuasive value in respect of other parties as well and accordingly, may be relied upon by the authority itself or by the applicant/department. We find that our aforesaid view is fortified by the judgment of the Hon‟ble Supreme Court in the case of Columbia Sportswear Company Vs. DIT, Bangalore (2012) 346 ITR 161 (SC). We are further of the considered view, that though the lower authorities had declined to take cognizance of the observations of the Hon‟ble AAR on the ground that the “tax treaties” involved in the said case were different as against that involved in the present case, however, there is no mention of any such material fact which could persuade us to conclude that the definition of "FTS" in the said respective tax treaties would be absolutely unworkable, and hence could not be applied in the case before us. We thus, are of the considered view, that the lower authorities had erred in failing to appreciate that the ruling rendered by the Hon‟ble AAR in the case of Endemol Argentina and Utopia Films, though was not binding, but did have a persuasive value while adjudicating the issue under consideration. Be that as it may, we are not impressed by the outright scrapping by the lower authorities of the aforesaid rulings rendered by the Hon’ble AAR in context of taxability of Line production services provided by the overseas service providers viz. (i). Endemol Argentina (Nonresident); and (ii). Utopia Films (Non-resident) to the assessee company viz. Endemol India Pvt. Ltd. However, we are of the considered view, that as we have already observed that the services rendered by the assessee to Endemol India Pvt. Ltd. Are not in the nature of a managerial, technical or consultancy services, therefore, we refrain from further adverting to and adjudicating upon the observations arrived at by the A.O/DRP in context of the rulings of the Hon‟ble AAR.
15. In the aforementioned judgment, the co-ordinate bench has negated both, royalty and FTS.
Similarly, the co-ordinate bench at Mumbai in the case of UPS SCS [Asia] Limited order dated 22.02.2012 has held as under: “7. First we will consider the ambit of `managerial services’ to test whether the instant services can qualify to be so called. Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect 32 | P a g e is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed simplicity without there being any planning part involved in the execution and also the evaluation of the performance. In the absence of any M/s.UPS SCS (Asia) Limited. 6 specific definition of the phrase “managerial services” as used in section 9(1)(vii) defining the “fees for technical services”, it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. For instance, if goods are to be loaded and some worker is instructed to place the goods on a carrier in a particular manner, the act of the worker in placing the goods in the prescribed manner, cannot be described as managing the goods. It is a simple direction given to the worker who has to execute it in the way prescribed. It is quite natural that some sort of application of mind is required in each and every aspect of the work done. As in the above example when the worker will lift the goods, he is expected to be vigilant in picking up the goods moving towards the carrier and then placing them. This act of the worker cannot be described as managing the goods because he simply followed the direction given to him. On the other hand, `managing’ encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word `managing’ is wider in scope than the word `executing’. Rather the later is embedded in the former and not vice versa.
Adverting to the facts of the instant case it is observed that the assessee performed freight and logistics services outside India in respect of consignments originating from India undertaken to be delivered by Menlo India. The role of the assessee in the entire transaction was to perform only the destination services outside India by unloading and loading of consignment, custom clearance and transportation to the ultimate customer. In our considered opinion, it is too much to categorize such restricted services as managerial services. We, therefore, jettison this contention raised on behalf of the Revenue.”
17. A perusal of the aforementioned judgments of the Hon'ble High Court and co-ordinate benches show that managerial services entail the element of management of the business of the service recipient in a substantial manner. In our view, mere provision of support services cannot be labeled as managerial services. Hiring of outside parties to receive support in respect of the operational aspects of a business cannot qualify as managerial services unless the service provider lays down policies or executes such policies by managing the personnel of the service recipient.
18. In light of the afore-stated judgments, we do not find any merit in the findings of the ld. CIT(A) by treating the commission as ‘managerial service’ under the India Germany DTAA.
19. There is no dispute that the assessee has received commission as per the Commissionaire Agreement with SIPL which is nothing but export commission/sales commission, which has been treated as FTS.
Similar quarrel was considered by the Hon'ble Jurisdictional High Court of Delhi in the case of Hero Motocorp Ltd 394 ITR 403. The relevant findings read as under: 20. In this context, the Court concurs with the following findings of the ITAT: "Therefore, by export agreement, the assessee has not been transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL, by way of export agreement, has 34 | P a g e not rendered any managerial, technical or consultancy services . In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia)."
Similarly, the Hon'ble Madras High Court in the case of Farida Leather Company 238 Taxmann.com 473 has held as under: “11. In the instant case, it is seen, admittedly that the non-resident agents were only procuring orders abroad and following up payments with buyers. No other services are rendered other than the above. Sourcing orders abroad, for which payments have been made directly to the non-residents abroad, does not involve any technical knowledge or assistance in technical operations or other support in respect of any other technical matters. It also does not require any contribution of technical knowledge, experience, expertise, skill or technical know-how of the processes involved or consist in the development and transfer of a technical plan or design. The parties merely source the prospective buyers for effecting sales by the assessee, and is analogous to a land or a house / real estate agent / broker, who will be involved in merely identifying the right property for the prospective buyer / seller and once he completes the deal, he gets the commission. Thus, by no stretch of imagination, it cannot be said that the transaction partakes the character of fees for technical services as explained in the context of Section 9 (1) (vii) of the Act.
As the non-residents were not providing any technical services to the assessee, as held above and as held by the Commissioner of Income Tax (Appeals), the commission payment made to them does not fall into the category of fees of technical services and therefore, explanation (2) to Section 9 (1) (vii) of the Act, as invoked by the 35 | P a g e Assessing Officer, has no application to the facts of the assessee's case.
In this case, the commission payments to the non-resident agents are not taxable in India, as the agents are remaining outside, services are rendered abroad and payments are also made abroad.
The contention of the learned counsel for the Revenue is that the Tribunal ought not to have relied upon the decision reported in G.E.India Technology's case, cited supra, in view of insertion of Explanation 4 to Section 9 (1) (i) of the Act with corresponding introduction of Explanation 2 to Section 195 (1) of the Act, both by the Finance Act, 2012, with retrospective effect from 01.04.1962.
15. The issue raised in this case has been the subject matter of the decision, in the recent case, reported in (2014) 369 I.T.R. 96 (Mad) (Commissioner of Income Tax v. Kikani Exports Pvt. Ltd.) wherein the contention of the Revenue has been rejected and assessee has been upheld and the relevant observation reads as under:- ... the services rendered by the non-resident agent could at best be called as a service for completion of the export commitment and would not fall within the definition of "fees for technical services" and, therefore, section 9 was not applicable and, consequently, section 195 did not come into play. Therefore, the disallowance made by the Assessing Officer towards export commission paid by the assessee to the non-resident was rightly deleted.
16. When the transaction does not attract the provisions of Section 9 of the Act, then there is no question of applying Explanation 4 to Section 9 of the Act. Therefore, the Revenue has no case and the Tax Case Appeal is liable to be dismissed.”
22. In light of the above, we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the impugned addition. Ground Nos. 1 to 5 in Assessment Year 2014-15 and Ground No. 1 to 3 in Assessment Year 2015-16 are allowed.”
12. Respectfully following the same reasoning, we set aside the findings of Ld.CIT(A) and direct the AO to delete the addition. Thus, Ground No.2 raised by the assessee is allowed.
13. Now, coming the Ground No.3 raised by the assessee against the addition of Rs.16,67,83,110/- in respect of subscription fee collected from third party customers.
14. Ld. Counsel for the assessee submitted that the issue is covered by the judgement of Hon’ble Supreme Court rendered in the case of Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT [2021] 432 ITR 471 (SC). Ld. Counsel for the assessee reiterated the submissions as made in the written synopsis. Ld.CIT(A) in respect of addition of Rs. 16,67,83,110/- on account of subscription fee received from third party customers, has decided the issue by observing as under:-
7.10 “The software as it is seen in the present context can be classified as a process and therefore applicability of the judgement is not direct is this case. A clam of softwares are basically classifiable as a "process" or plan and the consideration of the same is certainly consideration for a process as included in the definition of Royalty in the DTAA. The term process used here is not in the context of the manner of writing a computer program. The Delhi Tribunal had discussed the classification of process related to software royalty by stating the source code was not transferred therefore there is no royalty as the process was not shared. The journals under consideration do share an information concerning industrial, commercial or scientific experience and therefore, the consideration thereof is taxable as “Royalty". 7.11 Therefore, it is difficult to accept the appellant's basic premises that i) what has been claimed to have been sold, is a simple sale transaction. (In fact, it is like allowing excess to a software platform which in turn allows access the database / scientific knowledge available at the server of SIPL), ii) this income has arisen because of services rendered outside India. (The sale has taken place in India and certainly the services have been utilized in India, and the payment has also been made in India) iii) It is a simple commission from selling the books. (The appellant has been providing multidisciplinary services). 7.12 Since, the basic transaction is like allowing excess to a software platform which in turn allows access the database / scientific knowledge available at the server of SIPL, therefore, what the subscriber is paying is in fact, for ‘royalty’. The appellant is getting is a part of it (Royalty) and therefore, the character does not change in the hands of the appellant. 7.13 It is noted that the subscription/renewal of subscription paid by the Indian customer was not for purchase of any copyrighted article, in classic sense. Therefore, what the author (or copyright holder) gets is for the knowledge shared by the author (or the copyright holder). Although the appellant has contested that it is not the owner of the journals (software). However, it is the appellant who raises invoice on the customer. Therefore, the appellant is getting "royalty”; may be the appellant retains a part of it, only. The definition of the "Royalty” is not dependent on the status of the receiver. If the appellant is not the owner, it is certainly collecting on behalf of the owner. Therefore, the receipt, per se, is covered in the definition of "Royalty". Hence, I find no infirmity in the action AO in terms of taxing gross receipt as 38 | P a g e
, Of course, the entire receipt may not be income of the appellant. It has to be receipt minus allowable deductions. Therefore, the appellant cannot wash away its hands by simply saying that it retains a part of it, only. If the appellant is paying a part of it to SIPL, the same is liable to be allowed as deduction, provided other conditions of eligibility are fulfilled. As mentioned above, 3CEB report of SIPL does not reflect any part this receipt. Hence, prima-facie, there is no case of allowing deduction. It is not the case of the appellant that the appellant made any specific claim (by way of filing return of income or revised return of income) for allowing deduction against this receipt and AO denied such claim. 7.14 Therefore, although this ground (No. 3) of the appeal is partly allowed, in principle, however, as the appellant is not entitled for any relief.
15. There is no dispute with regard to the fact that the AO made addition. The AO treated the commission income as “Royalty”. This view of the AO is confirmed by the Ld.CIT(A). However, it is not the case of the Revenue that there was transfer of copyright by the assessee by the judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT (supra). The Hon’ble Supreme Court has examined the issue elaborately held as under:-
“Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgement.” 16. Ld. CIT DR opposed these submissions and supported the orders of the authorities below.
We have heard the rival submissions of the parties before us. Therefore, respectfully following the judgement of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. Vs CIT (supra), we hereby direct the AO to delete the addition. Thus, Ground No.3 raised by the assessee is allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 14th October, 2022.