DY. DIRECTOR OF I-TAX (INT. TAX)-4(2), MUMBAI v. M/S. LAXMI DIAMOND, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL 'L' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 6981/MUM/2008 (ASSESSMENT YEAR: 2007-09) DCIT (INTERNATIONAL TAXATION)-4(1) M/S. LAXMI DIAMO ND 133 SCINDIA HOUSE BALLARD PIER 415/416 PRASAD CHA MBERS MUMBAI 400004 VS. OPERA HOUSE MUMBAI 400004 PAN - AAAFL 0408 R APPELLANT RESPONDENT APPELLANT BY: SHRI NARENDER SINGH RESPONDENT BY: SHRI K.A. VAIDYALINGAN O R D E R PER B. RAMAKOTAIAH A.M. THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE CIT(A) XXXIII MUMBAI DATED 22.08.2008 IN WHICH THE REVENUE HAS RA ISED THE FOLLOWING GROUND: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE 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 T HE NATURE OF BUSINESS RECEIPT OF THE RECIPIENT WHEN THE ENTIR E PAYMENT IS INEXTRICABLY LINKED AND ARISES BY A SINGLE AGREEMEN T AND IS PART AND PARCEL OF THE SAME AGREEMENT AND IS INDIVISIBLE . 2. AT THE OUTSET THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ON SIMILAR FACTS THE ITAT IN ITA NO. 6980/MUM/2008 FOR THE A.Y. 2007-08 IN THE CASE OF M/S NAVIN GEMS SISTER CONCERN HAS DI SMISSED THE REVENUE APPEAL AND THE FACTS ARE SIMILAR IN THE PRESENT CA SE. 3. THE LEARNED D.R. HOWEVER OBJECTED TO AND SUBMITTE D THAT THE CIT(A) HAS ERRED IN HOLDING THAT THERE IS NO PE FOR PART O F SERVICE AND ARBITRARILY FIXED THE RATIO AT 50%. 4. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS A REGISTERED PARTNERSHIP FIRM AND ENGAGED IN THE BUSINESS OF MAN UFACTURING AND EXPORT OF CUT AND POLISHED DIAMONDS. IT IS A SIGHT HOLDER S OF DTC LONDON. THE ASSESSEE APPLIED FOR ISSUE OF NIL DEDUCTION CERTIFI CATE U/S. 195 OF THE INCOME- ITA NO. 6981/MUM/2008 M/S. LAXMI DIAMOND 2 TAX ACT 1961 (THE ACT) BEFORE THE ADIT IN RESPECT OF PAYMENT TO DTC FOR VALUE ADDED SERVICES RENDERED FOR F.Y. 2006-07. TH E ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE VALUE ADDED S ERVICES (VAS) RENDERED BY DTC WILL NOT COME UNDER THE PURVIEW OF FEES FOR TEC HNICAL SERVICES AS CONTEMPLATED UNDER DOUBLE TAXATION AGREEMENT BETWEE N INDIA AND U.K. 5. THE ASSESSING OFFICER HOWEVER DID NOT AGREE WITH THE ASSESSEES CONTENTION. ACCORDING TO THE ASSESSING OFFICER THE ASSESSEE IS GETTING VARIOUS SERVICES FROM DTC LIKE CONTINUOUS SUPPLY OF ROUGH DIAMONDS AND ADVANCE INFORMATION REGARDING QUALITY OF DIAMONDS. DTC IS ALSO PROVIDING INFORMATION THROUGH ITS WEBSITE ABOUT DIAMONDS SUP PLIERS AND VERIFICATION OF CREDENTIALS OF SUPPLIERS AT THE INSTANCE OF ASSE SSEE. THE ASSESSING OFFICER THEREFORE HELD ALL THESE ARE IN NATURE OF TECHNICAL SERVICES. THE ASSESSING OFFICER WAS OF THE VIEW THAT TECHNICAL SE RVICE DOES NOT MEAN THAT SERVICES SHOULD ONLY BE IN THE NATURE OF SOFTWARE/ HARDWARE OR SOMETHING INVOLVING TECHNOLOGY. ACCORDING TO HIM SERVICES RE LATING TO PROCURING THE RIGHT QUALITY AND QUANTITY OF MATERIAL FOR MANUFACT URING ETC. IS ALSO TECHNICAL SERVICES. HE OBSERVED THAT IN THE ASSESS EES CASE THE TECHNICAL SERVICES RENDERED ARE RELATED TO PROCUREMENT OF ROU GH DIAMONDS WITHOUT ANY INTERRUPTION AND ALSO ENSURING THE QUALITY AND QUAN TITY OF THE DIAMONDS. THE ASSESSING OFFICER WAS OF THE OPINION THAT QUANT ITY AND QUALITY OF DIAMONDS IS A BUSINESS TECHNIQUE WHICH CAN BE ACQUI RED THROUGH SPECIALIZED KNOWLEDGE WHICH DTC HAS PASSED ON TO TH E ASSESSEE. IN VIEW OF THIS THE ASSESSING OFFICER HELD THAT THE SERVICES R ENDERED BY THE DTC ARE IN THE NATURE OF TECHNICAL SERVICES AND LIABLE TO TAX AT 15% AS PER THE ARTICLE 13 OF DTAA. 6. 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 DIAMONDS DURING CONTRACT PERIOD WHICH IS PRESENTLY TWO AND A HALF YEARS. SUCH ASSURANCE ENABLE SIGHT HOLDER TO PLAN ITS PROD UCTION SCHEDULE IN A MORE STABLE MANNER. INTENTION TO OFFER SERVICE IS INFORMING SIX MONTHS ADVANCE THE SIGHT HOLDER ABOUT QUANTITY VALUE AND TYPE OF DIAMONDS THAT WOULD BE SOLD TO THEM SO THAT THEY CAN PLAN THE AFF AIRS BETTER. AS REGARDS CONSISTENCY OF BOXES THE SIGHT HOLDERS ARE SHOWN VA RIOUS QUALITIES OF ROUGH ITA NO. 6981/MUM/2008 M/S. LAXMI DIAMOND 3 DIAMONDS IN DIFFERENT BOXES ON SIGHT DATE IN LONDON UK BEFORE SUPPLY DATE. THIS SERVICE IS DTCS COMMITMENT TO MAINTAIN QUALIT Y OF SUPPLY AS PER STANDARD BOXES. THIS IS AN ASSURANCE THAT THE QUAL ITY OF GOODS WOULD NOT VARY MATERIALLY FROM BOXES SHOWN. THE ASSESSEE FUR THER SUBMITTED THAT SIGHT HOLDERS CAN LOGIN AT THE WEBSITE OF THE DTC A ND HAVE ACCESS TO INFORMATION ABOUT DIAMOND MARKET LIKE LATEST MARKET TREND DEMAND CONSUMER PREFERENCE ACROSS VARIOUS COUNTRIES WORLD OVER. UNDER THIS SERVICE THE SIGHT HOLDER GETS NEWS ABOUT THE FAIR EXHIBITIONS PRODUCT LAUNCH ETC. IT ALSO ENABLES SIGHT HOLDER TO PUT CE RTAIN INFORMATION ABOUT ITS BUSINESS PRODUCTS ETC. ON THIS SITE. IT WAS SUBMI TTED THAT DTC SELECTS THE BUYER OF GOODS BY CONDUCTING SUPPLIES OF CHOICE (SO C) PROGRAMME. 7. 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 THA T THOUGH THE DEFINITION OF FEES FOR TECHNICAL SERVICES PROVIDED IN SECTION 9 OF THE ACT MAY BE WIDE ENOUGH TO COVER WITHIN ITS SCOPE SERVICES PROVIDED BY DTC TO THE ASSESSEE AS PER ARTICLE 13(4)(C) OF DTAA BETWEEN INDIA AND UK WHICH OVERRIDE PROVISIONS OF SECTION 9 OF THE ACT FEES FOR ANY SERVICES IN O RDER TO BE TAXED AS FEES FOR TECHNICAL SERVICES REQUIRE THAT SUCH SERVICES PROV IDER SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE EXPERIENCE SKILL KNOW-HOW OR PROCESSES OR CONSIST OF THE DEVELOPMENT TRANSFER OF A TECHNICAL PLAN OR TEC HNICAL DESIGN TO THE RECIPIENT OF SERVICE. IT WAS FURTHER SUBMITTED THA T THE EXPRESSION FEES FOR INCLUDED SERVICES USED IN ARTICLE 12 OF INDO-USA D TAA AND THE EXTRACT OF THE MEMORANDUM ATTACHED TO INDO-USA DTAA WHICH EXPLAINS THE TERM FEES FOR INCLUDED SERVICES IS EQUALLY APPLICABLE AND WORTH CONSIDERING. 8. THE ASSESSEE AGAIN SUBMITTED THAT ON THE SAME AND I DENTICAL FACTS AND CONSIDERING LEGAL PROVISIONS THE LEARNED ADIT HAS ISSUED NIL DEDUCTION CERTIFICATE IN RESPONSE TO THE ASSESSEES APPLICATI ON U/S. 195(2) OF THE ACT FOR THE F.Y. 2005-06. IT WAS SUBMITTED THAT THERE IS N O CHANGE EITHER IN FACTS OR IN LAW SINCE THEN SO AS TO TAKE A DIFFERENT STAND O N THE PART OF THE LEARNED ADIT. IT WAS FURTHER SUBMITTED THAT IN VIEW OF TH E 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 ITA NO. 6981/MUM/2008 M/S. LAXMI DIAMOND 4 SKILLS KNOW-HOW OR PROCESSES TO THE ASSESSEE AND H ENCE THE PAYMENTS MADE BY THE ASSESSEE CANNOT BE TERMED AS FEES FOR TECHN ICAL SERVICES. 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 A MBIT 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 VS. JDIT (2009) 14 SOT 307 (MUM) WER E RELIED UPON. IT WAS FURTHER SUBMITTED THAT IN THE INSTANT CASE DTC DOES NOT HAVE A PE IN INDIA AND NO PART OF IMPUGNED SERVICE IS RENDERED I N INDIA AND THEREFORE FEES PAID FOR THE SAME IS NOT TAXABLE IN INDIA. TH E PAYMENT MADE BY THE ASSESSEE TO DTC FOR VAS CANNOT BE TAXED IN INDIA AS BUSINESS INCOME IN ITS HANDS IN THE ABSENCE OF A PE IN INDIA. IT WAS 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 O F THE PROVISIONS OF DTAA BETWEEN INDIA AND UK THE SERVICES ARE RENDERED OUT SIDE INDIA AND DTC DOES NOT HAVE A PE IN INDIA. 9. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE TH E LEARNED CIT(A) HELD THAT 50% OF THE VAS PAYMENT IS TOWARDS ROYALTY /FEES FOR TECHNICAL SERVICES AND THE BALANCE 50% IS TOWARDS BUSINESS RE CEIPTS. HE ACCORDINGLY ALLOWED PART RELIEF TO THE ASSESSEE. AGGRIEVED WIT H SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 10. AFTER HEARING THE LEARNED COUNSEL AND LEARNED D.R. WE FIND THAT THE LEARNED CIT(A) HAS CONSIDERED THE ARGUMENTS OF THE LEARNED COUNSEL AND HELD THAT 50% OF THE VAS TOWARDS ROYALTY/FEES BY GI VING A FINDING AS UNDER:- 17. I HAVE GONE THROUGH THE DETAILS OF VALUE ADDED SERVICES (VAS). THE APPELLANT HAS AVAILED VAS FROM DTC FOR WHICH PAYMEN T HAS BEEN MADE. THE ISSUE TO BE DECIDED HERE IS WHETHER THE PAYMENT MADE BY THE APPELLANT TO DTC FOR AVAILING VAS WILL COME WITHIN THE PURVIEW OF ROYALTY/FEES FOR TECHNICAL SERVICES AS DEFINED IN S ECTION 9 OF THE INCOME TAX ACT AND DTAA. DTC PROVIDES CORE SERVICES AND GR OWTH SERVICES. EVENTHOUGH IT IS MENTIONED THAT GROWTH SERVICES ARE NOT CHARGEABLE THE APPELLANT HAS MADE THE PAYMENT FOR AVAILING VAS. TH E APPELLANT CANNOT AVAIL GROWTH SERVICES WITHOUT MAKING PAYMENT FOR VA S. IN VIEW OF THIS I HOLD THAT DTC IS ALSO CHARGING FOR GROWTH SERVICES INDIRECTLY. FROM THE HIGHLIGHTED PORTIONS OF THE GROWTH SERVICES MENTION ED IN EARLIER PARAS CLEARLY BRING OUT THE FACT THAT DTC IS PASSING ON I TS OWN COMMERCIAL EXPERIENCE TO THE APPELLANT FOR A PAYMENT. DTC IS A WORLD RENOWNED ITA NO. 6981/MUM/2008 M/S. LAXMI DIAMOND 5 ENTERPRISE IN DIAMOND TRADE AND IT HAS ACQUIRED GRE AT EXPERTISE IN DIAMOND TRADE. BY CHARGING FOR VAS DTC HAS PASSED ON ITS OWN COMMERCIAL EXPERIENCE AND EXPERTISE TO SIGHT HOLDER S. APART FROM THAT THE SIGHT HOLDERS ARE ALSO ALLOWED TO USE THE INTRANET OWNED BY DTC. THE APPELLANT CAN MAINTAIN ITS OWN MY DTC AREA IN THE INTRANET. THIS AMOUNTS TO ALLOWING THE APPELLANT TO USE THE COMMER CIAL/SCIENTIFIC EQUIPMENT I.E. THE INTRANET AND THE SERVER OF THE D TC. IN VIEW OF THIS I HOLD THAT THE APPELLANT IS MAKING PAYMENT FOR USE OF DTC S OWN COMMERCIAL EXPERIENCE AND ALSO FOR USING THE SCIENTIFIC/COMMER CIAL EQUIPMENT OWNED BY THE DTC. AT THE SAME TIME IT IS ALSO SEEN THAT CERTAIN SERVICES CONTINUITY OF SUPPLY INTENTION TO OFFER 9ITO) CONSISTENCY OF BOXES SOC INTEGRITY PROVISION OF KEY ACCOUNT MANAGER ARE NOT COMING WITHIN THE PURVIEW OF TECHNICAL SERVICES AS CONTEMPLATED U NDER THE INDIA-UK TREATY. THESE ARE PURELY BUSINESS RECEIPTS AND IT C AN 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. 11. THE FINDINGS OF THE CIT(A) WERE UPHELD BY THE ITAT IN THE ABOVE REFERRED CASE OF M/S NAVIN GEMS IN ITA NO 6980/MUM/ 2008 DT.17-02- 2010 AS UNDER: - 10. THE LEARNED DR COULD NOT CONTROVERT THE FINDIN GS GIVEN BY THE CIT(A). FURTHER THE SUBMISSION OF THE LEARNED COUNSEL FOR T HE ASSESSEE BEFORE THE CIT(A) AS WELL AS BEFORE US THAT DTC HAS NO PE IN I NDIA THAT NO PART OF SERVICES 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 LEARNED DR AGAINST THE FINDINGS OF THE CIT(A) AND CONSIDERING THE FINDINGS GIVEN BY THE CI T(A) AS REASONABLE WE ARE NOT INCLINED TO INTERFERE IN THE SAME. ACCORDI NGLY THE SAME IS UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 12. RESPECTFULLY FOLLOWING THE SAME SINCE THE FACTS AR E SIMILAR WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). ACCORDINGLY THE ORDER IS UPHELD AND REVENUE GROUND IS REJECTED. 13. IN THE RESULT APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH APRIL 2010. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 5 TH APRIL 2010 ITA NO. 6981/MUM/2008 M/S. LAXMI DIAMOND 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXIII MUMBAI 4. THE DIT (INTERNATIONAL TAXATION) MUMBAI 5. THE DR L BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.