Adi Finechem Limited, Ahmedabad V. The ITO - II(Intl. Taxn.), Ahmedabad

ITA 595/AHD/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0719 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 15-06-2016
• Assessment Year: misc
• Appeal Filed On: 08-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALBINUS TIRKEY
• Keywords: Double taxation relief; Permanent establishment; Difference of opinion; Change of opinion
• Section: 206AA; 201(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH BEFORE: S H RI PRAMOD KUMAR , ACCOUNTANT MEMBER AND SHR I S. S. GODARA , JUDICIAL MEMBER ADI F INECHEM LTD., 1 ST FLOOR, 2, SIGMA CORPORATES, B/H HOF, SINDHU BHAVAN ROAD, OFF S.G. ROAD, AHMEDABAD - 380059 PAN: AA A CH5113Q (APPELLANT) VS THE ITO - II (INTL TAXN), 1 ST FLOOR, NAVJEEVAN BUILDING, AHMEDABAD - 380014 (RESPON DENT) REVENUE BY : S H RI ALB INUS TIRKEY , SR. D . R. ASSESSEE BY: S MT. URVASHI SHODHAN , A.R. DATE OF HEARING : 16 - 06 - 2 016 DATE OF PRONOUNCEMENT : 30 - 0 8 - 2 016 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS ASSESSEE S APPEAL FOR A.Y. 2011 - 12 , AR IS ES FROM ORDER OF THE CIT(A) - 13, AHMEDABAD DATED 01 - 12 - 2015 IN APPEAL NO. CIT(A) - 13/AHD/ 7 4/2014 - 15 , IN PROCEEDINGS UNDER SECTION 201(1) & 201(1A) OF THE INCO ME TAX ACT, 1961; IN SHORT THE ACT . I T A NO . 595 / A HD/20 16 A S S ESSMENT YEAR : 2011 - 12 I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 2 2. THE INSTANT APPEAL RAISES THE FOLLOWING SUBSTANTIVE GROUNDS: GENERAL 1.1 THE LEARNED CIT (A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE ORDER OF THE LEARNED A.O. WHEREBY THE LEARNED A.O. HAS TREATED PAYMENTS M ADE TO M/S ORTHODOX UNION AS PAYMENT OF ROYALTY LIABLE FOR DEDUCTION OF TAX AT SOURCE. 1.2 WITHOUT PREJUDICE TO THE ABOVE, THE FOLLOWING ARE THE GROUNDS OF APPEAL AGAINST TREATING THE PAYMENT MADE TO M/S ORTHODOX UNION AS ROYALTY AND LIABLE FOR DEDUCTION OF TAX BY THE LEARNED A.O. AND UPHELD BY THE LEARNED CIT(A). 2. PAYMENT TO M/S ORTHODOX UNION TREATED AS ROYALTY LIABLE FOR DEDUCTION OF TAX AT SOURCE : 2.1 THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT 'A.O HAS RIGHTLY TREATED SUCH PAYMENTS AS ROY ALTY PAYMENTS AND THEREFORE, THE TAX WAS REQUIRED TO BE DEDUCTED AS PER THE PROVISIONS OF SECTION 195 OF THE INCOME - TAX ACT, 1961'. IN THIS RESPECT HE OUGHT TO HAVE TAKEN INTO CONSIDERATION THE FACTS OF THE APPELLANT'S CASE, NATURE OF SERVICES PROVIDED BY M/S ORTHODOX UNION AS WELL AS SUPPORTING SUBMITTED TO HIM AND ALSO TO THE LEARNED A.O DURING ASSESSMENT PROCEEDINGS U/S. 201(1) & 201(1A). 2.2 THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THAT SERVICES RENDERED BY M/S. ORTHODOX UNION WAS FOR ISSUE OF KAS HRUTH CERTIFICATE FOR APPELLANT S PRODUCTS AND NOT FOR USE OF ANY TRADE MARK AND USE OF LOGO OF SERVICE PROVIDER I.E. OU IS TO MAIN SERVICES AND HENCE PAYMENTS MADE WAS NEITHER IN THE NATURE OF ROYALTY NOR IN THE NATURE OF FEES FOR TECHNICAL SERVICES. 2.3 THE LEARNED CIT (A) HAS ERRED IN HOLDING THAT A.O IS RIGHT IN CONCLUDING THAT TDS IS TO BE MADE AT THE RATE OF 20% AS PER SECTION 206AA AS PAN OF M/S ORTHODOX UNION IS NOT AVAILABLE. IN THIS RESPECT HE OUGHT TO HAVE TAKEN INTO CONSIDERATION THE D ECISION OF HON'BLE ITAT IN CASE OF DCIT (INTERNATIONAL TAXATION) VS SERUM INSTITUTE OF INDIA LIMITED (2015) 170 TTJ 0119 (PUNE). I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 3 3 . THE ASSESSEE COMPANY MANUFACTURES CHEMICALS. IT REMITTED THREE SUMS OF US$ 21120, US $9160, AND US $ 2600 EQUIVALENT TO RS. 9,42,163/ - , RS. 4,27,112/ - AND RS. 1,19,730/ - ; RESPECTIVELY ON 27 - 04 - 2010, 10 - 08 - 2008 AND 16 - 09 - 2010; ALL TO A US BA SED PAYEE M/S. ORTHODOX UNION WITHOUT WITHHOLDING ANY TAX U/S. 195 OF THE ACT. THE ASSESSING OFFICER ISSUED IT A SHOW CAUSE NOTI CE DATED 16 - 02 - 2016 SEEKING TO EFFECT RECOV ERY U/S. 201(1) AND201(1A) OF THE ACT THEREBY TREATING THE ABOVE PAYMENTS AS FEE FOR TECHNICAL SERVICES. 4 . THE ASSESSEE FILED ITS DETAILS REPLY ON 22 - 03 - 2012. IT PRODUCED THE RELEVANT KASHRUTH CERTIFICATE ISSUED BY ITS PAYEE CONTAINING A CAUTION NOTE THAT PLACING OU LOGO ON PRODUCTS NOT LISTED CONSTITUTES AN AUTHORIZED USE OF THE SYMBOL WHICH IS REGISTERED TRADEMARK . THIS MADE THE ASSESSING OFFICER TO FORM AN OPINION THAT THE IMPUGNED PAYMENTS AMOUNTED TO ROYALTY . HE ISSUED ANOTHER SHOW CAUSE NOTICE DATED 22 - 05 - 2012 QUOTING SECTIONS 201 AND 201(1A) FOR TREATING THE ABOVE PAYMENTS AS ROYALTY U/S. 9(1)(VI) EXPLANATION 2. HE FURTHER R ELIED UPON ARTICLE 12 OF THE IN D O - US DOUBLE TAXATION AVOIDANCE AGREEME NT AS WELL. THE ASSESSEE FILED ITS RESPONSE . WE FIND THAT THE ASSESSING OFFICER SUMMARIZED GIST THEREOF IN ASSESSMENT ORDER DATED 28 - 02 - 2014 AS FOLLOWS: - 5 . IN RESPONSE, THE ASSESSEE VIDE ITS LETTER DATED: 30/07/2014 MADE DETAILED SUBMIS SION, THE GIST OF THE SAME IS LISTED BELOW FOR EASY REFERENCE: THE COMPANY IS ENGAGED IN MANUFACTURE OF CHEMICALS. IN ORDER THAT QUALITY OF THE PRODUCTS MANUFACTURED BY THE COMPANY IS IN ACCORDANCE WITH CERTAIN SPECIFICATION, NORMALLY I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 4 CUSTOMERS REQUI RE A QUALITY CERTIFICATE KNOWN AS 'KASHRUTH CERTIFICATION' WHICH IS ISSUED BY M/S. ORTHODOX UNION, USA. BEFORE ISSUING SUCH CERTIFICATE, QUALIFIED PERSONS FROM ORTHODOX UNION VISITS COMPANY'S MANUFACTURING FACILITIES AS WELL AS MANUFACTURING FACILI TIES OF SUPPLIERS OF THE MAIN RAW MATERIALS REQUIRED FOR MANUFACTURE F THE FINISHED PRODUCTS. THE TECHNICAL PERSON OF THE ORTHODOX UNION CARRY OUT INSPECTION AND EVALUATION OF MANUFACTURING PROCESS / PARAMETERS AT DIFFERENT PLANTS AND THEREAFTER ISSU ED KASHRUTH CERTIFICATE. ORTHODOX UNION DOES NOT MAKE AVAILABLE ANY TECHNICAL KNOW OR THEY DO NOT PROVIDE ANY TECHNICAL SERVICES TO THE COMPANY. IT ISSUES CERTIFICATE AFTER VERIFYING THE EVOLUTION OF THE PRODUCT MANUFACTURED BY THE COMPANY. THIS CERT IFICATE IS OBTAINED PERIODICALLY. AMOUNT PAID TO ORTHODOX UNION, USA IS TOWARDS FEES FOR OBTAINING KASHRUTH CERTIFICATE, WHICH ENSURES QUALITY OF THE PRODUCTS MANUFACTURED BY THE COMPANY. THE COMPANY IS ONLY BENEFICIARY OF THE SERVICES BY WAY OF OBTAINING NECESSARY CERTIFICATION REQUIRED FOR QUALITY COMPLIANCE AND DO NOT RECEIVE DIRECTLY OR INDIRECTLY ANY TECHNICAL SERVICES AS DEFINED UNDER THE INCOME TAX ACT AND DTAA. THE CHANGE OF OPINION I.E. TO TREAT THIS REMITTANCE FORM BEING 'FTS' TO 'ROYALTY' IS OBJECTED. THE MEANING AND PURPOSE OF OBTAINING THE 'KASHRUTH' CERTIFICATE FROM M/S. ORTHODOX UNION, USA IS DESCRIBED IN DETAIL . THE CERTIFICATE IS ISSUED BY M/S. ORTHODOX UNION AFTER CARRYING OUT THE INSPECTION OF THE MANUFACTURING FACILITIES, WHEN THE PRODUCTS ARE IN CONFORMITY WITH JEWISH DIETARY LAWS, WHICH ARE USUALLY ASSOCIATED WITH JEWISH COOKING AN D ARE FREE FROM ANY PROHIBITED I NGREDIENTS. I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 5 THE PROCESS OF OBTAINING CERTIFICATE FROM M/S. ORTHODOX UNION IS JUST LIKE OBTAI NING CERTIFICATE FOR ISO 9000 OR OTHER SUCH STANDARDS FROM VARIOUS AGENCIES LIKE BVQ, TUV ETC.; WHEREBY CERTIFICATION AGENCY CARRY OUT INSPECTION OF VARIOUS BUSINESS PROCESS AND THEREAFTER ISSUES A CERTIFICATE, IF THE UNIT IS UP TO THEIR BENCHMARK. THESE C ERTIFICATION AGENCIES ALLOW THEM TO USE THEIR LOGO, SO THAT THE OUTSIDE WORLD CAME TO KNOW THAT THE UNIT IS COMPLIANT OF CERTAIN STANDARDS. THE CERTIFICATION AGENCY CERTIFIES AND ALLOWS THESE MANUFACTURING UNITS TO USE THEIR NAME, WHICH DO NOT AMOUNT TO USE OF TRADEMARK OF CERTIFYING AGENCY. RELIANCE IS PLACED UPON THE DECISION OF DELHI ITAT IN THE CASE OF M/S, NQA QUALITY SYSTEMS REGISTRAR LTD VS. DCIT 92 TTJ 946 (DEL). THE CAUTION NOTE, WHICH HAS BEEN CONSIDERED AS BASE FOR TREATING THE PAYMENT AS YOYALTY' NEEDS TO BE INTERPRETED IN ITS TRUE SENSE AND NOT VERY LIMITED SENSE. THE CAUTION NOTE ENSURES THAT THE MANUFACTURING UNIT IS ALLOWED TO USE THE TRADEMARK ON PRODUCTS LISTED IN SUCH INVOICE ONLY, IN ORDER TO CERTIFY THAT ONLY SUCH PRODUCTS ARE 'KOSHER'. THE INVOICES ARE SPECIFIC FOR PARTICULAR PRODUCTS. THE CERTIFICATE CLEARLY MENTIONS THAT THE SHIPPING OF SUCH PRODUCTS IN U APPROVED CARRIERS ONLY. AND, THE CERTIFICATE SO ISSUED IS VALID ONLY FOR CERTAIN PERIOD, WHICH IS RENE WED PERIODICALLY. THE U IS A LOGO TO BE USED BY END CUSTOMERS, WHEN THEY MARKET THEIR PRODUCTS MANUFACTURED BY USING OUR FINISHED PRODUCTS, BY WHICH THEY CAN CONVEY THAT THEIR PRODUCTS CONT AIN MATERIAL WHICH ARE 'KOSHER' . WE JUST SHOW THAT CER TIFICATE ISSUED BY M/S. ORTHODOX UNION TO THE CUSTOMERS AND DO NOT USE THE TRADEMARK ETC. ON OUR INVOICES. THUS, BY NO STRETCH OF IMAGINATION, THE PAYMENTS MADE TO M/S. ORTHODOX UNION CAN BE TREATED AS ROYALTY FOR USE OF TRADEMARK . I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 6 WE ARE MARKETING O UR PRODUCTS UNDER OUR OWN BRAND AND NOT UNDER BRAND OF ANY OTHER COMPANY / AGENCY. THE CERTIFICATE IS ISSUED PERIODICALLY AND THAT TOO AFTER INSPECTION OF OUR MANUFACTURING FACILITIES AS WELL AS OF OUR SUPPLIERS OF RAW MATERIAL. THUS, FOR ISSUANCE OF SUCH CERTIFICATE, THEY CHARGE, BASED ON TIME INVOLVED AND EXPENSES INCURRED. IT HAS NOTHING TO DO WITH QUANTITY MANUFACTURED OR SOLD BY US. THE PAYMENT OF ROYALTY IS LINKED EITHER TO QUANTUM OF PRODUCTION OR QU ANTITY SOLD USING THE TRADEMARK. M/S. ORTHODO X UNION IS TAX RESIDENT OF USA AND DO NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA. AS PER PROVISIONS OF THE ACT AS WELL AS THE INDIA - USA TREATY THE REMITTANCE SO MADE DO NOT FORM EITHER TEE FOR INCLUDED SERVICES' AND/OR 'ROYALTY', AND THUS NOT TAXABLE UN DER THE PROVISIONS OF THE TREATY. THE PROVISIONS OF SEC, 90(2) OF THE ACT WILL APPLY FOR THE PAYMENTS MADE TO M/S. ORTHODOX UNION, USA AND THEREFORE REMITTANCE MADE BEING NOT TAXABLE UNDER TREATY WILL NOT BE TAXABLE UNDER THE ACT. THUS, PROVISIONS OF SEC. 195 OF THE ACT ARE NOT APPLICABLE. 5 . THE ASSESSING OFFICER THEREAFTER PROCEEDED TO ANALYZE THE RELEVANT FACTS. HE OBSERVED THAT THE KOSHER FOODS IN QUESTION ARE FOODS CONFIRMING TO JEWISH CUSTOMARY LAW NOT CONTAINING ANY FORBIDDEN SUPPLEMEN T AS PER THEIR RITUALS FOLLOWED. HE OPINED THAT ASSESSEE S PAYEE M/S. ORTHODOX UNION IS ONE OF THE OLDEST ORTHODOX JEWIS H ORGANIZATION BEST KNOWN FOR KOSHER FOOD PREPARATION SUPERVISION SERVICE. AND THAT ITS SYMBOL IS FOUND ON LABELS OF MANY C OMMERCI AL A ND CONSUMER FOOD PRODUCTS. THIS UNION CERTIFIES MORE THAN 5 LACS PRODUCTS IN OVER 6000 PRODUCTION PLANTS LOCATED IN MORE THAN 80 COUNTRIES AROUND THE GLOBE. THIS BODY EMPLOYED SUPERVISORS AND RABBI CO - COORDINATORS FOR THIS PURPOSE. THE ASSESSING OFFIC ER WAS OF THE VIEW THAT ALL OF THEM WOULD ENSURE BY SUPERVISION PROCESS I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 7 THAT ALL CERTIFIED PRODUCTS WOULD ADHERE TO HALACHA (JEWISH LAW) IN BOTH INGREDIENTS AND PRODUCTION PROCESS. HE THEREAFTER CONSIDERED RELEVANT PROVISIONS IN THE ACT I.E. SECTION 4, 5 R.W.S. 9(1)(VI) OF THE ACT. LAST ONE OF THEM ENVISAGED APPLICATION OF DEEMING FICTION OF ANY INCOME TO HAVE ACCRUED OR ARISEN IN INDIA IN CASE OF FOREIGN PAYEES FROM A TRADEMARK. THE ASSESSING AUTHORITY TOOK INTO ACCOUNT ARTICLE 13(3) OF THE INDO - US DTAA PRESCRIBING DETAILS OF ITEMS COVERED BY THE ROYALTY CLAUSE TO BE ALSO INCLUDING CONSIDERATION PAID/RECEIVED FOR THE USE OF OR RIGHT TO USE ANY TRADEMARK. IT GATHERED NECESSARY INFORMATION FROM ASSESSEE S PAYEE S WEBSITES AS WELL. THE ASSESSING OFFICER O BSERVED THAT THE ABOVE STATED TRADEMARK IN QUESTION WAS SYMBOL OF ASSESSEE S PAYEE IN THE NATURE OF AN INTELLECTUAL PROPERTY INCREASING SALE OF THE CERTIFIED PRODUCTS IN QUESTION . HE ACCORDINGLY CONCLUDED THAT ASSESSEE S PAYMENTS HEREINABOVE WERE IN THE NA T URE OF ROYALTY AND ITS FAILURE IN NOT DEDUCTING ANY WITHHOLDING TAX THEREUPON CAN WITHIN THE FOUR CORNERS OF SECTION 195 OF THE ACT SO AS TO MAKE SECTION 201(1) AND 201(1A) EXIGIBLE. ALL THIS RESULTED IN THE IMPUGNED DEMAND OF RS. 5,86,097/ - BEING RAIS ED. 6 . THE CIT(A) CONFIRMS ASSESSING OFFICER S ACTION IN LOWER APPELLATE ORDER UNDER CHALLENGE. 7 . WE HAVE HEARD RIVAL SUBMISSIONS. THERE IS NO DISPUTE ABOUT THE FACT THAT THE ASSESSEE IS A PRODUCER OF FOOD ITEMS. THESE ARE KOSHER FOODS TO BE M ORE SPECIFIC. IT HAS REMITTED THE IMPUGNED I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 8 SUMS TO ITS USA BASED PAYEE WITHOUT DEDUCTING OR WITHHOLDING ANY DEBTS THEREUPON U/S. 195 OF THE ACT. THE ABOVE STATED PAYEE HAS RECEIVED THE IMPUGNED REMITTANCE FOR HAVING ISSUED LETTER OF CERTIFICATION. WE AS KED FOR A COPY THEREOF. THE ASSESSEE SUPPLIED THE SAME . THIS CERTIFICATE DECLARES AS SESSEE S PRODUCT(S) TO HAVE BEEN PREPARED UNDER THE SUPERVISION OF ITS PAYEE. THE SAME APPEARS TO HAVE BEEN ISSUED AT THE TIME OF BULK SHIPPING IN APPROVED CARRIERS. TH E CERTIFICATE FURTHER STIPULATES AN ACT OF PLACING ASSESSEE S PAYEE S LOGO ON NON - LISTED PRODUCTS TO CONSTITUTE AN UNAUTHORIZED USE OF SYMBOL OU WHICH IS STATED TO BE A FEDERALLY REGISTERED TRADEMARK. BOTH THE LOWER AUTHORITIES TREAT ASSESSEE S PAYMENT TO HAVE BEEN MADE FOR THE USE OF THE ABOVE LOGO/TRADEMARK. 8 . LEARNED AUTHORIZED REPRESENTATIVE AT THIS STATE SUBMITS THAT ASSESSEE IN THE INSTANT CASE HAS MADE THE IMPUGNED PAYMENT F OR OBTAINING KOSHER CERTIFICATE FROM ITS PAYEE TO THE EFFECT THAT IT S PRODUCTS CONFIRM TO JEWISH RITUALS AND NOT FOR THE USE OF THE LOGO IN QUESTION. THE REVENUE STRONGLY SUPPORTS THE IMPUGNED DEMAND AS MADE BY BOTH THE LOWER AUTHORITIES. 9 . WE HAVE GIV EN OUR THOUGHTFUL CONSIDERATION TO RIVAL CONTENTIONS. THERE CAN HARDLY BE ANY DISPUTE IN VIEW OF HON BLE APEX COURT JUDGMENT IN GE INDIA TECHNOLOGY CENTRE VS. CIT (2010) 327 ITR 456 (SC) THAT AN OBLIGATION TO DEDUCT WITHHOLDING TAX ARISES ONLY IN CASE WHEN THE PAYMENT TO A FOREIGN COMPANY IS CHAR G EABLE TO TAX IN INDIA. THE DISPUTE BETWEEN BOTH THE PARTIES BEFORE US IS QUA I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 9 TREATMENT OF ASSESSEE S REMITTANCES HEREINABOVE TO ITS US BASED PAYEES M/S. ORTHODOX UNION IN LIEU OF OBTAINING CERTIFICATION OF ITS PRODUCTS TO BE CONFIRMING TO JEWISH RITUALS THEREBY NOT INVOL VING ANY FORBIDDEN INGREDIENTS IN PREPARATION PROCEDURE. WE NOTICE FROM THE ABOVE STATED PAYEES CERTIFICATE THAT THE SAME CONTAINS A DECLARATION OF ASSESSEE S PRODUCTS HAVING QUALIFIED THE NECESSARY PROCEDURE SO AS TO BE CONSUMED AS KOSHER FOODS. WE DO N OT FIND ANYTHING MORE THAN THAT INDICATING SPECIFIC USAGE OF PAYEE S LOGO THEREIN EXCEPT THE ABOVE STATED STIPU LATION BARRING NON - DISPLAY OF OU LOGO ON UNLISTED PRODUCTS. THIS ST I PULATION IS A NE GATIVE CO VENANT FORBIDDING USE OF LOGO. THERE IS NO MATE RIAL ON RECORD BEFORE US THAT THE PAYEES IN QUESTION HAS IN ANY WAY RECEIVED THE IMPUGNED PAYMENTS FOR ANYTHING MORE THAN THAT OF ISSUING KOSHER CERTIFICATE. RATHER IT DOES NOT CHARGE ANY SUM FOR PERMITTING LOGO USAGE. THE INSTANT CASE IN THESE FACTS IS AN INSTANCE OF PAYMENTS MADE FOR CER TI FICATION PROCESS NOT INVOLVING ANY ROYALTY COMPONENT U/S. 9(1)(VI) OF THE ACT SO AS TO ATTRACT SECTION 195. WE FIND THAT HON BLE BOMBAY HIGH COURT IN (2007) 304 ITR 201 M/S. DIAMOND SERVICES INTERNATIONAL LTD. VS. UNI ON OF INDIA HAD AN OCCASION TO CONSIDER AN IDENTICAL QUESTION AS TO WHETHER A DIAMOND GRADING LAB CERTIFICATION PROCESS AMOUNTED TO FEE FOR TECHNICAL SERVICES OR ROYALTY UNDER THE PROVISIONS OF THE ACT OR NOT. THEIR LORDSHIPS NEGATED APPLICATION OF BOTH T HE TERMS AS FOLLOWS: - 8 . THE ISSUE FOR OUR CONSIDERATION IS WHETHER THE ISSUANCE OF GRADING REPORTS BY GIA CAN BE TERMED AS IMPARTATION OR GRANTING OF RIGHT TO USE INFORMATION OF A TECHNICAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE TO THE CLIENTS/CUSTOMERS W HO SEND THEIR DIAMONDS FOR I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 10 GRADING AND CERTIFICATION TO THE GIA LABORATORIES OUTSIDE INDIA. IN ORDER TO ANSWER THE ISSUE WE WILL HAVE TO CONSIDER THE DTAA BETWEEN THE REPUBLIC OF INDIA AND THE REPUBLIC OF SINGAPORE. THE RELEVANT CLAUSES FOR OUR CONSIDERATI ON IS ARTICLE 12. WE MAY REPRODUCE THE RELEVANT ARTICLES WHICH ARE NECESSARY FOR OUR CONSIDERATION. THE RELEVANT PORTION OF ARTICLE 12 READS AS UNDER: ARTICLE 12 - ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. ROYALTIES AND FEES FOR TECHNICAL SERVICES ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THA T OTHER STATE. 2. HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICAL SERVICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT CONTRACTING STATE, BUT IF THE RECIPIENT IS THE BENEFICIAL OWNER OF THE ROYALTIES OR F EES FOR TECHNICAL SERVICES, THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT. 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: (A) ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILM, OR FILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPE RIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT, PROPERTY OR INFORMATION; (B) ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, OTHER THAN PAYMENTS DERIVED BY AN ENTERPRISE FROM ACTIVITIES DESCRIBED IN PARA 4(B) OR 4(C) OF ARTICLE 8. 4. THE TERM 'FEES FOR TECHNICAL SERVICES' AS USED IN THIS ARTICLE MEANS PAYMENT OF ANY KIND TO ANY PERSON IN CONSIDERATION FOR SERVICES OF A MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE (INCLUDING THE P ROVISIONS OF SUCH SERVICES THROUGH TECHNICAL OR OTHER PERSONNEL) IF SO SUCH SERVICES: I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 11 (A) ARE ANCILLARY AND SUBSIDIARY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT, PROPERTY OR INFORMATION FOR WHICH A PAYMENT DESCRIBED IN PARA 3 IS RECEIVED; OR (B) MAKE AV AILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, 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 EX CLUDES 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 IT ACT , EXPLN. 2 OF SECTION 9(1)(VI) DEFINES 'ROYALTY' IS DEFINED AS UNDER: FOR THE PURPOSES OF THIS CLAUSE, ROYALTY MEANS CONSIDE RATION (INCLUDING ANY LUMP SUM 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 SC IENTIFIC 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, ARTIST OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; 10 ON A PERUSAL OF THE DEFINITION OF WHAT IS ROYALTY UNDER THE DTAA AND THE IT ACT , THE ISSUE WHICH WE ARE CALLED UPON TO ANSWER AS NOTED EARLIER IS WHETHER THE PAYMENT FOR GRADING CERTIFICATE ISSUED BY GIA FALLS WITHIN THE DEFINITION OF 'ROYALTY' IN ARTICLE 12(3) OF THE I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 12 DTAA BETWEEN INDIA AND SINGAPORE AND/OR WITHIN THE D EFINITION OF ROYALTY UNDER SECTION 9(1)(VI) OF THE IT ACT. 11 . THE GRADING REPORT BY GIA IS A STATEMENT OF FACT AS TO THE CHARACTERISTICS OF THE DIAMOND. DOES THIS REPORT AMOUNT TO TRANSFER OF ANY INDUS TRIAL OR COMMERCIAL EXPERIENCE OF GIA TO THE PETITIONER OR TO AN AGENT OF THE PETITIONER. THE REPORT GIVES THE ATTRIBUTES OF THE DIAMOND AND INCLUDES AN ANALYSIS OF THE DIAMOND'S DIMENSIONS, CLARITY, COLOUR, POLISH, SYMMETRY AND OTHER CHARACTERISTICS. THER E IS NOTHING ON RECORD BEFORE US TO SHOW THAT GIA THROUGH ITS GRADE REPORT 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 EXPERI ENCE 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 BEE N EXPLAINED AS 'KNOWLEDGE OR SKILL RESULTING FROM 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 H AS 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 V. BHAIYYA (1991) SUPP. 1 SCC 367 AS UNDER: NORMALLY WHEN WE TALK OF AN EXPERIENCE UNLESS THE CONTEXT OTHERWISE DEMANDS, IT SHOULD BE TAKEN AS EXPERIENCE AFTER ACQUIRING MINIMUM QUALIFICATIONS REQUIRED AND WILL, THEREFORE, NECESSARILY HAVE TO BE POSTERIO R 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 GIA. THERE IS ALSO NO TRANSFER OF ANY SKILL OR KN OWLEDGE OF GIA TO THE CUSTOMERS IN THE ISSUANCE OF GRADING REPORTS. THE PAYMENTS RECEIVED IS NOT THE ONE FOR THE USE OR THE RIGHT I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 13 TO USE EXPERIENCE, BUT IS INSTEAD ONE FOR THE APPLICATION OF EXPERIENCE TO A CERTAIN FACTUAL SITUATION I.E. GIA SHALL APPLY IT S 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 IN VEST THE PARTY MAKING PAYMENT WITH ANY RIGHT AS REGARDS THE USE OF THE CUMULATED EXPERIENCE OF GIA. THE PAYMENT IN QUESTION DOES NOT INVOLVE A PAYMENT FOR THE USE OR THE RIGHT TO USE THE INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE OF GIA. THE ACTIVITY OF GRADING OR CERTIFICATION IS MERELY THE APPLICATION OF THIS KNOWLEDGE/EXPERIENCE IN A PROFESSIONAL STREAM AS APPLICABLE TO A PARTICULAR DIAMOND OR SET OF DIAMONDS WHICH ARE OFFERED FOR CERTIFICATION OR GRADING. THE DEFINITION OF ROYALTY UNDER THE DTAA UN DER ARTICLE 12(3) AS DEFINED THEREIN, THAT USES THE EXPRESSION 'OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE'. THERE IS NO PARTING OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE BY GIA WHEN IT ISSUES THE GRADING CERTIFICATE. UNDER SUB - CLAUSE (4) THE PAYMENTS RECEIVED MUST BE IN CONSIDERATION FOR SERVICES OF MANAGERIAL, TECHNICAL OR CONSULTANCY NATURE. THAT COULD INCLUDE TO THE APPLICATION OR ENJ OYMENT OF THE RIGHT, PROPERTY OR INFORMATION. THIS IS NOT THE CASE HERE. NEITHER IS IT MAKING AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, ETC., TO ENABLE THE PERSON ACQUIRING THE SERVICE TO APPLY THE TECHNOLOGY CONTAINED THEREIN. 14. THE QUESTION TH AT REMAINS TO BE ANSWERED IS WHETHER THERE IS IMPARTING OF SPECIFIC EXPERIENCE BY GIA TO THE PERSON. IMPART IN WEBSTER'S ENCYCLOPAEDIC UNABRIDGED DICTIONARY HAS BEEN DEFINED 'TO GIVE, TO BESTOW; COMMUNICATE; TO GRANT A PART OR SHARE OF. IN OXFORD ENGLISH R EFERENCE DICTIONARY IT IS PRESCRIBED AS 'GIVE A SHARE OF (A THING)'. A PLAIN READING, THEREFORE, OF THE MEANING OF THE WORD 'IMPART' IMPLIES THAT IT MEANS TO GIVE, TO BESTOW, COMMUNICATE, TO GRANT A PART OR SHARE OF OR GIVE A SHARE OF A THING. CONSIDERING THAT THE TERM ROYALTY ENVISAGES GRANT OR SHARE OF INDUSTRIAL OR COMMERCIAL EXPERIENCE. IN OTHER WORDS THERE SHOULD BE A TRANSFER OF 'INDUSTRIAL OR COMMERCIAL EXPERIENCE' FROM ASSIGNOR TO THE ASSIGNEE FOR A I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 14 CONSIDERATION. THEREFORE, TO FALL WITHIN THE MEANI NG OF THE TERM ROYALTY UNDER ARTICLE 12 OF THE DTAA IT MUST ENVISAGE THE PERSON WHO IS THE OWNER OF ANY INTELLECTUAL PROPERTY RIGHT, DESIGNS, OR MODEL, PLAN, SECRET FORMULA OR PROCESS, ETC. TO RETAIN THE PROPERTY IN THEM AND PERMIT THE USE OR ALLOW THE RIGHT TO USE SUCH PATENTS, DESIGNS OR MODELS, PLANS, SECRET FORMULA, ETC. TO ANOTHER PERSON. WHERE THERE IS NO TRANSFER OF THE RIGHT TO USE, PAYMENT MADE CANNOT BE TREATED AS ROYALTY. TO BE CONSIDERED AS RO YALTY 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 TH E CONTRACT. 10 . WE KEEP IN MIND THE ABOVE EXTRACTED REASONING TO CONCLUDE THAT ASSESSEE S PAYEE HAS NOT RECEIVED THE IMPUGNED REMITTANCE ( S ) FOR HAVING PARTED WITH ANY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE IN FORMER S FAVOUR SO AS TO CONSTITUTE ANY ROYALTY U/S. 9(1)(VI) OF THE ACT. WE ACCORDINGLY DELETE THE IMPUGNED DEMAND RAISED BY BOTH THE LOWER AUTHORITIES U/S. 201(1) AND 201(1A) OF THE ACT. THE AS SESSEE S SOLE SUBSTANTIVE GROUND SUCCEEDS. WE MAKE IT CLEAR THAT ONCE IT IS HELD THAT THE ASSE SSEE S REMITTANCES DO NOT INVITE APPLICATION OF WITHHOLDING TAX PROVISION SINCE THE SAME ARE NOT CHARGEABLE TO TAX IN INDIA, INDO - US DTAA APPLICATION ASPECT IS RENDERED ACADEMIC. I.T.A NO. 595/ AHD/20 16 A.Y. 2011 - 12 PAGE NO ADI FINECHEM LTD. VS. ITO(INTL TAXN) 15 11 . THIS ASSESSEE S APPEAL IS ALLOWED. ORDER PR ONOUNCED IN THE OPEN C OUR T ON 30 - 08 - 201 6 SD/ - SD/ - ( PRAMOD K UMAR ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 30 /08 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,