DY. DIRECTOR OF I-TAX (INT. TAX)-4(2), MUMBAI V. M/S. NAVIN GEMS, MUMBAI

ITA 6980/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7620 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 25-11-2009
• Assessment Year: misc
• Appeal Filed On: 08-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G GURUSAMY
• Assessee Lawyers: R MURLIDHAR
• Keywords: Business income; Double taxation relief; Set aside
• Section: 195

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI R.K. PANDA, AM & SMT. ASHA VIJAYARAGHAVAN, JM I.T.A. NO. 6980/MUM/2008 (ASSESSMENT YEAR 2007-08) DY. DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-4(2), 133, SCINDIA HOUSE, BALLARD PIER, MUMBAI-400 038 VS. M/S. NAVIN GEMS 1703, PANCHRATNA OPERA HOUSE MUMBAI-400 004 PAN: AAAFN1675Q APPELLANT RESPONDENT APPELLANT BY: MR. G. GURUSAMY RESPONDENT BY: MR. R. MURLIDHAR O R D E R DATE OF HEARING: 11.02.2010 DATE OF ORDER: 17.02.2010 PER R.K. PANDA, AM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER DATED 22 ND AUGUST, 2008 OF THE CIT(A)-XXXIII, MUMBAI RELATING TO ASSESSMENT YEAR 2007-08. 2. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT 50% OF THE PAYMENT IS IN THE NATURE OF TECHNICAL SERVICES AND THE BALANCE 50% IS IN THE NATURE OF BUSINESS RECEIPT OF THE RECIPIENT, WHEN THE ENTIRE PAYMENT IS INEXTRICABLY LINKED AND ARISES BY A SINGLE AGREEMENT AND IS PART AND PARCEL OF THE SAME AGREEMENT AND IS INDIVISIBLE. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CIT(A), MUMBAI ON THE ABOVE GROUNDS BE SET ASIDE AND THE ORDER OF THE ASSESSING OFFICER BE RESTORED. I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 2 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A REGISTERED PARTNERSHIP FIRM AND ENGAGED IN THE BUSI NESS OF MANUFACTURING AND EXPORT OF CUT AND POLISHED DIAMON DS. IT IS A SIGHT HOLDERS OF DTC, LONDON. THE ASSESSEE APPLIED FOR ISSUE OF NIL DEDUCTION CERTIFICATE U/S. 195 OF THE INCOME- TAX ACT, 1961 (THE ACT) BEFORE THE ADIT IN RESPECT OF PAYMENT TO DTC FOR VALUE ADDED SERVICES RENDERED FO R F.Y. 2006-07. THE ASSESSEE SUBMITTED BEFORE THE ASSESSI NG OFFICER THAT THE VALUE ADDED SERVICES (VAS) RENDERE D BY DTC WILL NOT COME UNDER THE PURVIEW OF FEES FOR TEC HNICAL SERVICES AS CONTEMPLATED UNDER DOUBLE TAXATION AGREEMENT BETWEEN INDIA AND U.K. 4. THE ASSESSING OFFICER, HOWEVER, DID NOT AGREE WITH THE ASSESSEES CONTENTION. ACCORDING TO THE ASSESS ING OFFICER THE ASSESSEE IS GETTING VARIOUS SERVICES FR OM DTC LIKE CONTINUOUS SUPPLY OF ROUND DIAMONDS AND ADVANC E INFORMATION REGARDING QUALITY OF DIAMONDS. DTC IS ALSO PROVIDING INFORMATION THROUGH ITS WEBSITE ABOUT DIA MONDS, SUPPLIERS AND VERIFICATION OF CREDENTIALS OF SUPPLI ERS AT INSTANCE OF ASSESSEE. THE ASSESSING OFFICER, THERE FORE, HELD ALL THESE ARE IN NATURE OF TECHNICAL SERVICES. THE ASSESSING OFFICER WAS OF THE VIEW THAT TECHNICAL SERVICE DOES NOT MEAN THAT SERVICES SHOULD ONLY BE IN THE NATURE OF SOFTW ARE/ HARDWARE OR SOMETHING INVOLVING TECHNOLOGY. ACCORD ING TO HIM SERVICES RELATING TO PROCURING THE RIGHT QUALIT Y AND QUANTITY OF MATERIAL FOR MANUFACTURING ETC., IS ALS O TECHNICAL SERVICES. HE OBSERVED THAT IN THE ASSESS EES CASE THE TECHNICAL SERVICES RENDERED ARE RELATED TO PROC UREMENT OF ROUGH DIAMONDS WITHOUT ANY INTERRUPTION AND ALSO ENSURING THE QUALITY AND QUANTITY OF THE DIAMONDS. THE ASSESSING OFFICER WAS OF THE OPINION THAT QUANTITY AND QUALITY OF DIAMONDS IS A BUSINESS TECHNIQUE WHICH C AN BE I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 3 ACQUIRED THROUGH SPECIALIZED KNOWLEDGE OF WHICH DTC HAS PASSED TO THE ASSESSEE. IN VIEW OF THIS THE ASSESS ING OFFICER HELD THAT THE SERVICES RENDERED BY THE DTC ARE IN THE NATURE OF TECHNICAL SERVICES AND LIABLE TO TAX AT 15% AS PER THE ARTICLE 13 OF DTAA. 5. BEFORE THE CIT(A) IT WAS SUBMITTED THAT CONTINUITY OF SUPPLY SERVICE IS IN THE NATURE OF ASSURANCE BY DTC OF CONTINUITY IN SUPPLY OF ROUGH DIAMOND DURING CONTRA CT PERIOD WHICH IS PRESENTLY TWO AND A HALF YEARS. SU CH ASSURANCE ENABLE SIGHT HOLDER TO PLAN ITS PRODUCTIO N SCHEDULE IN A MORE STABLE MANNER. INTENTION TO OFF ER SERVICE IS INFORMING SIX MONTHS ADVANCE THE SIGHT H OLDER ABOUT QUANTITY, VALUE AND TYPE OF DIAMONDS THAT WOU LD BE SOLD TO THEM SO THAT THEY CAN PLAN THE AFFAIRS BETT ER. AS REGARDS CONSISTENCY OF BOXES THE SIGHT HOLDERS ARE SOWN VARIOUS QUALITIES OF ROUGH DIAMONDS IN DIFFERENT BO XES ON SIGHT DATE IN LONDON, UK, BEFORE SUPPLY DATE. THIS SERVICE IS DTCS COMMITMENT TO MAINTAIN QUALITY OF SUPPLY A S PER STANDARD BOXES. THIS IS AN ASSURANCE THAT THE QUAL ITY OF GOODS WOULD NOT VARY MATERIALLY FROM BOXES SHOWN. THE ASSESSEE FURTHER SUBMITTED THAT SIGHT HOLDERS CAN L OGIN AT THE WEBSITE OF THE DTC AND HAVE ACCESS TO INFORMATI ON ABOUT DIAMOND MARKET LIKE LATEST MARKET TREND, DEMA ND, CONSUMER PREFERENCE ACROSS VARIOUS COUNTRIES WORLD OVER. UNDER THIS SERVICE, THE SIGHT HOLDER GETS NEWS ABOU T THE FAIR, EXHIBITIONS, PRODUCT LAUNCH ETC. IT ALSO ENA BLES SIGHT HOLDER TO PUT CERTAIN INFORMATION ABOUT ITS BUSINES S, PRODUCTS ETC. ON THIS SITE. IT WAS SUBMITTED THAT DTC SELECTS THE BUYER OF GOODS BY CONDUCTING SUPPLIES O F CHOICE (SOC) PROGRAMME. I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 4 6. IT WAS SUBMITTED THAT THE SERVICE PROVISIONS OF KEY ACCOUNT MANAGER IS DESIGNATING A PERSON WHO ACTS AS COMMUNICATION LINK BETWEEN THE SIGHT HOLDER AND DTC . THE ASSESSEE FURTHER SUBMITTED THAT THOUGH THE DEFI NITION OF FEES FOR TECHNICAL SERVICES PROVIDED IN SECTIO N 9 OF THE ACT MAY BE WIDE ENOUGH TO COVER WITHIN ITS SCOPE, S ERVICES PROVIDED BY DTC TO THE ASSESSEE, AS PER ARTICLE 13( 4)(C) OF DTAA BETWEEN INDIA AND UK, WHICH OVERRIDE PROVISION S OF SECTION 9 OF THE ACT, FEES FOR ANY SERVICES IN ORDE R TO BE TAXED AS FEES FOR TECHNICAL SERVICES REQUIRE THAT SUCH SERVICES PROVIDER SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW OR PROCESSES , OR CONSIST OF THE DEVELOPMENT TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN TO THE RECIPIENT OF SERVICE. IT W AS FURTHER SUBMITTED THAT THE EXPRESSION FEES FOR INCLUDED SE RVICES USED IN ARTICLE 12 OF INDO-USA DTAA AND THE EXTRACT OF THE MEMORANDUM ATTACHED TO INDO-USA DTAA WHICH EXPLAINS THE TERM FEES FOR INCLUDED SERVICES IS EQUALLY AP PLICABLE AND WORTH CONSIDERING. 7. THE ASSESSEE AGAIN SUBMITTED THAT ON THE SAME AND IDENTICAL FACTS AND CONSIDERING LEGAL PROVISIONS, T HE LEARNED ADIT HAS ISSUED NIL DEDUCTION CERTIFICATE IN RESP ONSE TO THE ASSESSEES APPLICATION U/S. 195(2) OF THE ACT F OR THE F.Y. 2005-06. IT WAS SUBMITTED THAT THERE IS NO CHANGE EITHER IN FACTS OR IN LAW SINCE THEN SO AS TO TAKE A DIFFE RENT STAND ON THE PART OF THE LEARNED ADIT. IT WAS FURTHER S UBMITTED THAT IN VIEW OF THE ABOVE AND CONSIDERING RELEVANT ARTICLES OF DTAA BETWEEN INDIA AND UK, THE SERVICES RENDERED BY DTC DO NOT RESULT IN MAKING AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILLS, KNOW-HOW OR PROCESSE S TO THE ASSESSEE AND HENCE THE PAYMENTS MADE BY THE ASSESSEE CANNOT BE TERMED AS FEES FOR TECHNICAL SE RVICES. I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 5 THE NATURE OF SERVICES RENDERED BY DTC IS A SORT OF ASSURANCE OR IN THE NATURE OF MARKET INFORMATION. THE SERVICES CANNOT FALL WITHIN THE AMBIT OF FEES FOR TECHNICAL SERVICES AS DEFINED IN ARTICLE 13(4) OF THE INDO-U K TREATY. ON THIS POINT THE DECISIONS OF THE ITAT IN THE CASE OF RAYMOND LTD. (80 TTJ 120/86 ITD 91 (MUM) AND BPCL V S. JDIT (2009) 14 SOT 307 (MUM) WERE RELIED UPON. IT WAS FURTHER SUBMITTED THAT IN THE INSTANT CASE, DTC DOE S NOT HAVE A PE IN INDIA AND NO PART OF IMPUGNED SERVICE IS RENDERED IN INDIA AND, THEREFORE, FEES PAID FOR THE SAME IS NOT TAXABLE IN INDIA. THE PAYMENT MADE BY THE ASSE SSEE TO DTC FOR VAS CANNOT BE TAXED IN INDIA AS BUSINESS IN COME IN ITS HANDS IN THE ABSENCE OF A PE IN INDIA. IT W AS ALSO SUBMITTED THAT THE FEES PAID FOR SERVICES RENDERED BY DTC IS NOT LIABLE TO TAX BECAUSE THE FEES PAID ARE NOT FOR TECHNICAL SERVICES WITHIN THE MEANING OF THE PROVIS IONS OF DTAA BETWEEN INDIA AND UK, THE SERVICES ARE RENDERE D OUTSIDE INDIA AND DTC DOES NOT HAVE A PE IN INDIA. 8. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE, THE LEARNED CIT(A) HELD THAT 50% OF THE VAS PAYMENT IS TOWARDS ROYALTY/FEES FOR TECHNICAL SERVICES AND THE BALANCE 50% IS TOWARDS BUSINESS RECEIPTS. HE ACCORDINGLY AL LOWED PART RELIEF TO THE ASSESSEE. AGGRIEVED WITH SUCH O RDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 9. AFTER HEARING BOTH THE SIDES, WE FIND THE LEARNED CIT(A) AFTER GOING THROUGH THE VALUE ADDED SERVICE (VAS) RENDERED TO THE ASSESSEE BY DTC HAS CONSIDERED 50% OF THE VAS AS TOWARDS ROYALTY/FEES FOR TECHNICAL SERVICES BY HOLDING AS UNDER: I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 6 I HAVE GONE THROUGH THE DETAILS OF VALUE ADDED SERVICES (VAS). THE ASSESSEE HAS AVAILED VAS FROM DTC FOR WHICH PAYMENT HAS BEEN MADE. THE ISSUE TO BE DECIDED HERE IS WHETHER THE PAYMENT MADE BY THE ASSESSEE TO DTC FOR AVAILING VAS WILL COME WITHIN THE PURVIEW OF ROYALTY/ FEES FOR TECHNICAL SERVICES AS DEFINED IN SECTION 9 OF THE INCOME TAX ACT AND DTAA. DTC PROVIDES CORE SERVICES AND GROWTH SERVICES. EVEN THOUGH IT IS MENTIONED THAT GROWTH SERVICES ARE NOT CHARGEABLE, THE ASSESSEE HAS MADE THE PAYMENT FOR AVAILING VAS. THE ASSESSEE CANNOT AVAIL GROWTH SERVICE WITHOUT MAKING PAYMENT FOR VAS. IN VIEW OF THIS I HOLD THAT DTC IS ALSO CHARGING FOR GROWTH SERVICES INDIRECTLY. FROM THE HIGHLIGHTED PORTIONS OF THE GROWTH SERVICES MENTIONED IN EARLIER PARAS CLEARLY BRINGS OUT THE FACT THAT DTC IS PASSING ON ITS OWN COMMERCIAL EXPERIENCE TO THE ASSESSEE FOR A PAYMENT. DTC IS A WORLD RENOWNED ENTERPRISE IN DIAMOND TRADE AND IT HAS ACQUIRED GREAT EXPERTISE IN DIAMOND TRADE. BY CHARGING FOR VAS, DTC HAS PASSED ON ITS OWN COMMERCIAL EXPERIENCE AND EXPERTISE TO SIGHT HOLDERS. APART FROM THAT, THE SIGHT HOLDERS ARE ALSO ALLOWED TO USE THE INTRANET OWNED BY DTC. THE ASSESSEE CAN MAINTAIN ITS OWN MY DTC AREA IN THE INTRANET. THIS AMOUNTS TO ALLOWING THE ASSESSEE TO USE THE COMMERCIAL/ SCIENTIFIC EQUIPMENT I.E., THE INTRANET AND THE SERVER OF THE DTC. IN VIEW OF THIS I HOLD THAT THE ASSESSEE IS MAKING PAYMENT FOR USE OF DTCS OWN COMMERCIAL EXPERIENCE AND ALSO FOR USING THE SCIENTIFIC/COMMERCIAL EQUIPMENT OWNED BY THE DTC. AT THE SAME TIME, IT IS ALSO SEEN THAT CERTAIN SERVICES CONTINUITY OF SUPPLY, INTENTION TO OFFER (ITO), CONSISTENCY OF BOXES, SOC INTEGRITY PROVISION OF KEY ACCOUNT MANAGER ARE NOT COMING WITHIN THE PURVIEW OF TECHNICAL SERVICES AS CONTEMPLATED UNDER THE INDIA-UK TREATY. THESE ARE PURELY BUSINESS RECEIPTS AND IT CAN BE ASSESSED IN INDIA ONLY IF THE DTC IS HAVING PE IN INDIA. CONSIDERING ALL THE ABOVE, I HOLD THAT 50% OF THE VAS PAYMENT IS TOWARDS ROYALTY/FEES FOR TECHNICAL SERVICES AND ANOTHER 50% IS TOWARDS BUSINESS RECEIPTS. I.T.A. NO. 6980/MUM/2008 M/S. NAVIN GEMS =================== 7 10. THE LEARNED DR COULD NOT CONTROVERT THE FINDINGS GIVEN BY THE CIT(A). FURTHER THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE THE CIT(A) AS WELL AS BEFORE US THAT DTC HAS NO PE IN INDIA, THAT NO PART OF SER VICES IS RENDERED IN INDIA AND THAT THE ADIT HAD ISSUED NIL DEDUCTION CERTIFICATE IN RESPONSE TO APPLICATION U/ S. 195(2) FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR UNDER IDENTICAL FACTS AND CIRCUMSTANCES COULD NOT BE CONTROVERTED BY THE LEARNED DR. IN ABSENCE OF ANY DISTINGUISHABLE FEATURE BROUGHT ON RECORD BY THE LE ARNED DR AGAINST THE FINDINGS OF THE CIT(A) AND CONSIDERI NG THE FINDINGS GIVEN BY THE CIT(A) AS REASONABLE, WE ARE NOT INCLINED TO INTERFERE IN THE SAME. ACCORDINGLY THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISM ISSED. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 17 TH FEBRUARY, 2010. SD/- (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/- (R.K. PANDA) ACCOUNTANT MEMBER MUMBAI, DATED 17 TH FEBRUARY, 2010 COPY TO: (1) THE APPELLANT, (2) THE RESPONDENT, (3) THE CIT(A)-XXXIII, MUMBAI, (4) THE ADIT-3(2), MUMBAI, (5) THE DR, L BENCH, ITAT, MUMBAI. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI TPRAO