© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Services which do not impart technical know-how or transfer any knowledge, experience, or skills, cannot be taxed as royalty

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Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of GECF Asia Limited (the taxpayer) held that where services do not impart technical know-how or transfer of any knowledge, experience, or skill, such services will not fall within the definition of ‘royalty’ under Article 12 of the India-Thailand tax treaty. Since in the present case, lower authorities had not examined the nature of the service rendered by the taxpayer, the matter was remitted back to the Assessing Officer to examine the nature of services.

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Services which do not impart technical know-how or transfer any knowledge, experience, or skills, cannot be taxed as royalty

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Services which do not impart technical know-how or transfer any knowledge, experience, or skills, cannot be taxed as royalty 12 August 2014 Background Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of GECF Asia Limited 1 (the taxpayer) held that where services do not impart technical know-how or transfer of any knowledge, experience, or skill, such services will not fall within the definition of ‘royalty’ under Article 12 of the India-Thailand tax treaty (tax treaty). Since in the present case, lower authorities had not examined the nature of the service rendered by the taxpayer, the matter was remitted back to the Assessing Officer (AO) to examine the nature of services. Facts of the case  The taxpayer is a non–resident company incorporated in Thailand, engaged in the business of providing services to meet the needs of various GE Group companies. ______________ 1 GECF Asia Limited v. DIT (ITA no. 8922/Mum./2010) –Taxsutra.com  The taxpayer entered into a Master Service Agreement (MSA), 2005 with the GE Countrywide Consumer Financial Services Ltd. (GEMFSL), in terms of which the taxpayer is required to provide accounting and finance support services, human resources services, legal and compliance services, risk management services, quality consultation and training, sales and marketing, information technology and system support, and strategic management assistance.  During the year under consideration, the taxpayer has received payment from GEMFSL for providing the aforesaid services. Subsequently, the taxpayer also filed nil return of income claiming that income earned by it was in the nature of business income, and it cannot be taxed under Article 7 of the tax treaty in the absence of a Permanent Establishment (PE) as defined in Article 5 of the tax treaty.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The AO held that the payment received by the taxpayer was on account of business connection in India and, hence, taxable under the Income-tax Act, 1961 (the Act). He also held that services rendered by the taxpayer would also fall within the definition of Fees for Technical Services (FTS) under Section 9(1)(vii) of the Act. Alternatively, such services would also fall within the definition of ‘royalty’ under the Article 12(3) of the tax treaty and, hence, would be taxable in India.  The Dispute Resolution Panel (DRP) held that the payments received by the taxpayer are for providing industrial, commercial, or scientific experience and, hence, the receipts are taxable as ‘royalty’ defined under Article 12(3) of the tax treaty. Tribunal’s ruling  The OECD commentary on Article 12, has explained the term ‘industrial, commercial, or scientific’ experience. On a perusal of the same, it indicates that the royalty payment received as consideration for information concerning industrial, commercial, scientific experience alludes 2 to the concept of know-how. There is an element of imparting know- how to the other, so that the other person can use or has the right to use such know-how.  In the case of industrial, commercial, and scientific experience, if services are being rendered simply as an advisory or consultancy, then it cannot be termed as ‘royalty’, because the advisor or consultant is not imparting his skill or experience to the other, but rendering services from his own know-how and experience. All that he imparts is a conclusion or solution that draws from his own experience. Further, the difference between royalty and rendering services has been reiterated by the eminent author Klaus Vogel 3 .  The thin line of distinction which needs to be considered while rendering the services on account of information concerning industrial, commercial, and scientific experience is, whether there is any imparting of know-how or not. If there is no ‘alienation’ or the ‘use of’ or the ‘right to use of’ any know-how i.e., there is no imparting or transfer of any knowledge, experience or skill or know-how, then it cannot be termed as ‘royalty’. _________________________ 2 Alludes: refers briefly or indirectly 3 Klaus Vogel On Double Tax Convention  The services may have been rendered by a person from their own knowledge and experience but such a knowledge and experience had not been imparted to the other person as the person retains the experience and knowledge or know- how which was required to perform the services to clients. Hence, in such a case, it cannot be held that such services are in the nature of ‘royalty’.  Thus, if the services have been rendered de–hors the imparting of know-how or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article 12 of the tax treaty.  Since the lower authorities have not examined the nature of service rendered by the taxpayer, the matter was remitted back to the AO to examine the nature of services in line with the principles discussed above. If such services do not involve imparting of know-how or transfer of any knowledge, experience or skill, then it cannot be held to be taxable as ‘royalty’.  Since the issue of FTS was not the subject matter of dispute after the direction of the DRP, hence, the Tribunal did not express any opinion on FTS. Our comments In the era of globalisation and technology transfer, very often the courts have debated on an issue whether a particular payment could be characterised as a royalty payment. The Madhya Pradesh High Court in the case of HEG Ltd 4 had held that payment for all information concerning industrial or commercial ventures cannot be ‘royalty’ unless such information has some special features. Further, the Mumbai Tribunal in the case of Linde A.G. 5 had observed that the fees received for arranging or procuring equipments was not for imparting any information concerning industrial, commercial or scientific experience and therefore, it cannot be in the nature of royalty. The Mumbai Tribunal, in the present case has also held that services which do not impart technical know- how or transfer of any knowledge, experience or skill, does not fall within the definition of ‘royalty’ under the tax treaty. _______________ 4 CIT v. HEG Ltd [2003] 263 ITR 230 (MP) 5 Linde A.G. v. ITO [1997] 62 ITD 330 (Mum)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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