IT APPEAL NOS. 1901 TO 1903 (MUM.) OF 2010
[ASSESSMENT YEARS 2004-05 TO 2006-07]

B.R. BASKARAN, ACCOUNTANT MEMBER 
AND AMIT SHUKLA, JUDICIAL MEMBER

ORDER

The order of the Bench was delivered by

B.R. Baskaran, Accountant Member - All the three appeals filed by the assessee are directed against the three separate orders dated 11.1.2010 passed by Ld CIT(A)-10, Mumbai for the assessment years 2004-05, 2005-06 and 2007-08. Since the issues urged in these appeals are identical in nature, these appeals were heard together and are being disposed of by this common order, for the sake of convenience.

2. In all the three years, the assessee is challenging the decision of Ld CIT(A) in holding that the consideration received by the assessee, which are in the nature of reimbursement of expenses along with a mark up of 10%, is taxable in India both as "royalty" and "Fee for included services" in equal proportion.

3. The facts relating to the case are stated in brief. The assessee herein is a tax resident of USA. It belongs to AC Nielson Group, which is one of the world's leading business, management & market research companies. The AC Neilson group also offers other marketing information services tailored to the needs of industries like pharmaceuticals, financial services, telecommunications etc. The AC Neilson group is represented in India through its two legal entities viz., M/s ACNielson Org-Marg Private Ltd ("ACNOM") for customized research services & retail measurement services and M/s ACNielson Research Services Pvt Ltd ("ACNRS") for customized market research services. The assessee herein entered into a General Service Agreement (GSA) in the year 2003 with both the Indian entities cited above. The nature of services to be provided are described as under in the agreement:—

"Group Services and Regional Group Services, as they may be amended from time to time , include but are not limited to :

For providing the services enumerated above, the assessee herein is compensated by the Indian entities cited above. According to the assessee, it received amounts from the above said Indian entities at the rates computed at Cost plus 10% mark up. According to GSA agreement, there will not be any mark up in respect of third party expenses. Thus, the mark up of 10% is charged in respect of costs incurred by the assessee company only.

3.1 The assessee company claimed that the amounts received by it from the Indian entities cited above are not taxable under the Indian Income tax Act. In this connection, it appended following notes in the return of Income filed by it :

'Notes
"(1) The assessee has entered into a General Service Agreement with ACNeilsen Research Services Pvt. Ltd. and ACNeilsen Org.-Marg Pvt. Ltd. for rendering of services prescribed in such agreement. The assessee has received a sum of Rs.77,679,163/- towards reimbursement of expenses which is inclusive of a Mark-up of 10%. The assessee is a tax resident of USA and thereby the provisions of Indo-USA Tax Treaty would be applicable. The assessee also holds Tax Residency Certificate issued by the Tax Authorities of USA.

The reimbursement of expenses received by the assessee cannot be termed as "Royalties or fees for included services" under Article 12 of the Indo-USA.

The reimbursement of expenses received by the Assessee cannot be termed as "Royalties or fees for included services" under Article 12 of the Indo-USA Tax Treaty. Since reimbursement of expenses is not covered by Article 12 of the Indo -USA Tax Treaty, Article 7 dealing with business income merits examination.

However, the assessee is not having a permanent establishment in India as defined in Article 5 of the Indo-USA Tax Treaty and therefore its income is not taxable in India by virtue of Article 7 of the Indo-USA Tax Treaty. In view of the above, the Mark-up of 10% on the reimbursement of expense would also be not taxable'.

3.2 However, the AO did not agree with the contentions of the assessee. The view expressed by the AO in AY 2004-05 are discussed hereunder. The AO noticed that the assessee company calls for certain copyrighted products from the US Company, viz., Questionnaires etc to do the job for the client. Further the assessee company also gets the benefit of on-going research conducted and also the research products of US company in the field of financial management, HR management etc. He further observed that the products supplied by US company are copyright protected and they are provided for non-exclusive usage by the assessee herein for the purposes for which they are provided. In this connection, the AO referred to certain definitions given under Copyright Act, 1957. The AO further referred to the decision rendered in the case ofE.P.W.Da Costa v. Union of India [1980] 121 ITR 751 (Delhi) and accordingly came to the conclusion that the information so provided is not mere data but a scientific knowledge. The AO, by placing reliance on the following decisions, came to the conclusion that the payments received by the assessee company would fall in the category of "royalty".

Accordingly, the AO held that the impugned receipts are taxable as Royalty within the meaning of sec. 9(1)(vi) of the Income tax Act, 1961 and also under Article 12 of the DTAA entered between India and USA. The conclusion reached by the AO is extracted below:—

"The non-resident company is getting consideration for parting with copyright protected information meant for commercial, scientific and industrial use. The essence of the matter is that the US company conducts market research in these areas and prepares questionnaires, diagrams, charts, tables etc. These "products" are then flashed to group companies including the Assessee company. As and when there is a client with the Assessee company, Assessee company can order for such product from US company. US company will provide hard copy or soft copy for a consideration"

Accordingly, the AO assessed the impugned receipts as "Royalty" in assessment year 2004-05.

3.3 However, in assessment years 2005-06 and 2006-07, the AO took the view that the consideration received by the assessee is both in the nature of "royalty" and "Fees for included services" within the meaning of Article 12 of the DTAA entered between India and USA. Accordingly, he apportioned the consideration in equal proportion between "royalty" and "fee for included services" and accordingly assessed the same in the hands of the assessee herein.

4. In the appeal filed, the Ld CIT(A) affirmed the view taken by the AO in AY 2005-06 and 2006-07 that the consideration received by the assessee is both in the nature of "Royalty" and "Fees for included services". Accordingly, the Ld CIT(A) modified the order passed by AO for AY 2004-05 and directed him to assess the consideration both as "Royalty" and "Fees for included services" in equal proportion.

5. Aggrieved, the assessee has filed these three appeals before us.

6. We have heard the rival contentions and perused the record. From the arguments advanced by both the parties, we notice that there is no dispute between the parties with regard to the fact that the question taxability of the consideration received by the assessee needs to be examined in terms of DTAA entered between India and USA. However, from the discussions made supra, it may be noticed that the assessing officer has proceeded to examine the taxability of the impugned consideration by referring to the provisions of sec. 9(1)(vi) of the Income tax Act, Copyright Act and certain decisions rendered in some other context. In fact, the AO took the view that the entire consideration is taxable as "Royalty" in AY 2004-05, but changed his view in the subsequent two years. In respect of the assessment year 2004-05 also, the assessing officer has furnished a remand report before the Ld CIT(A), wherein he had suggested that the impugned receipt is required to be treated as both "Royalty" and "Fees for included services".

6.1 The Ld CIT(A) has, however, tried to examine the nature of receipt in terms of Indo-US treaty, but he again ended with confusion by expressing different views. For the sake of convenience, we extract below the observations made by the Ld CIT(A) in his order passed for assessment year 2004-05:-

'1.3.3. Whether the nature of GSA services as mentioned in para 1.2.0. above, rendered by the appellant would fall under the Royalty'/ fees for included services' the definition royalty needs to be examined. The royalty is defined under Article 12(3) of India-US DTAA as follows:

"3. The term "royalty" as used in this article means:

1.3.4 It is seen that the definition of royalty includes literary work. This word is defined under section 2(o) of Copy Right Act as "literary work" includes computer programmes, tables and compilations including computer databases "copyright" means the exclusive right subject to the provisions of this Act, to do or authorize the doing of any of the following acts in respect of a work or any substantial part thereof ..."

The above receipts by the appellant from the Indian companies are towards rendering of services can be termed towards use of copyright of a literary, artistic, or a scientific work. The appellant company has provided information of a copyright protected work to the Indian companies to issue copies of the work not being copies already in circulation, and computer programme. It cannot therefore ruled out that the appellant company is providing secret information in market research data which are being used by the Indian therefore the payment received is towards Information concerning industrial, commercial or scientific experience, which would fall under Article 12(3) (a) of the India-USA DTAA. Reliance is placed on recent decision of Delhi High Court in DR Hutarew & Partner (I) Pvt Ltd. vs. ITO Ward-10(4), New Delhi (ITA NO. 2797/De1/2004) (AY-2001-02) (dtd 5.9.2008) wherein Held, since the non-resident was providing a client-oriented specific technical solution after analyzing data with the aid of high-end software, it cannot be equated with any other general services provided by any service provider. Then an explanation has been appended to clause (vii) of section 9(1) of the Act with retrospective effect that if services have been used by the assessee within India, then it is immaterial whether the nonresident has a residence or place of business or business connection in India as the sum paid to non-resident would be included in the income, which will be deemed to have accrued to the non-resident. And it will be subject to TDS provisions - Assessee's appeal dismissed. This ratio of this decision is squarely applicable in the case of assessee as the appellant.

1.3.5. During the Assessment Year under consideration, the GSA expenses charged to Indian companies comprised of the following broad expense-heads, which has been recovered from the Indian companies:

1.3.6. The perusal of invoices raised by the appellant showed that these are raised on account of services rendered in market research, regional expenses, allocation, VNU services BV charges and MMI charges. This manifest that such activity and nature of services as enumerated in Article 2(2) of GSA would be clearly in the nature of information concerning scientific, commercial and marketing. Therefore, these would be covered under the definition of Royalty/fees for included services under Article 12 of India-US DTAAT.'

7. Before us, the Ld A.R vehemently argued that the consideration received by the assessee will not fall within the meaning of either "Royalty" or "Fees for included services". The contentions of Ld A.R are summarized below:-The Appellants arguments against the impugned Order passed by the CIT(A) are as under:

"Arguments on payments not being in the nature of Royalty:

Arguments on payments not being in the nature of "fees for included services"

8. The expressions "Royalty" and "Fees for included services" have been given distinct meaning in the Indo US treaty. We have already noticed that the tax authorities were not able to come to a conclusion as to whether the consideration received by the assessee company would fall within the meaning of "Royalty" or "Fees for included services", even though there are plethora of case laws explaining both the terms. Hence, from the foregoing discussions, we are of the view that the tax authorities have not examined the impugned issue in proper perspective, i.e., the matter has not been examined in the context of Indo-US treaty by considering the meaning of various terms used therein. As stated earlier, the meaning to be ascribed to various terms used in the treaty has been the bone of contention in various case laws and we notice that the tax authorities have not considered the applicable case laws. Under these circumstances, we are of the view that the impugned matter requires fresh examination at the end of the assessing officer. When we expressed our view to both the parties, they also accepted the fact that the matter has not been examined by the tax authorities in proper perspective and accordingly agreed that the matter requires fresh consideration at the end of the assessing officer.

9. Accordingly, we set aside the orders passed by Ld CIT(A) in all the three years and restore the matter to the file of the assessing officer with the direction to examine the issue afresh by duly considering the submissions made by the assessee, relevant case laws and take appropriate decision in accordance with the law.

10. In the result, all the appeals filed by the assessee are treated as allowed for statistical purposes.

The order pronounced in the open court on the 8th August, 2014.