IN THE ITAT
Spice Telecom
v.
Income-tax Officer*, (TDS)-1,
GOPAL CHOWDHURY, JUDICIAL MEMBER
AND N. L. KALRA, ACCOUNTANT MEMBER
IT APPEAL NO. 932 (BANG.) OF 2002
[Assessment year 2001-02]
February 3, 2006
Section 194J, read with sections 9 and 201, of the
Income-tax Act, 1961 - Deduction of tax at source - Technical services fees -
Assessment year 2001-02 - Assessee had entered into an agreement with a
non-resident company (Mauritious based) for obtaining expertise and training on
technological aspects of mobile telephony business and also for obtaining
advice and assistance on operational and financial aspects of business -
Assessee was not deducting tax at source (TDS) on payments made for obtaining
such advice and assistance on operational and financial aspects of business and
one of such payments related to Liaison with legal and financial advisors and
negotiations with vendors and financial institutions for extension of vendor
loans and indication of long-term project finance - Department held that
payment relating to liaison with legal and financial advisors represented fees
for technical services as per provisions of section 9(1)(vii) and royalty as
per section 9(1)(vi) and, therefore, assessee was required to deduct tax at
source on such payment - Whether payment relating to liaison with legal and
financial and legal advisors was payment purely for services, i.e., technical
services, as for obtaining information on such aspect assessee needed
continuous advice and assistance from supplier but since payment for technical
services was not covered under DTAA between India and Mauritius, no tax was
required to be deducted at source on such payment - Held, yes - Whether
aforesaid payment could not be considered as royalty as for rendering such
service one was not imparting information concerning technical, industrial,
commercial or scientific knowledge, experience or skill - Held, yes
Circulars and notification:
Circular No. 23 dated 23-7-1969 and Circular No. 786.
FACTS
The
assessee-company executed licence agreement with the Department of
Telecommunication, Government of India to design, construct, install, operate,
manage and maintain mobile cellular telecommunication system to provide
cellular telecommunication services in the States of Karnataka and
The assessee’s
contention was that the aforesaid services on which TDS was not deducted could
be considered as technical service but since DTAA between
On appeal:
HELD
The title of
the agreement showed that the assessee (sic) was to get technical services as
well as services for operating the system. To carryout all the activities as
mentioned in the licence agreement, the assessee required expertise in
technical field as well as in administrative, accounting and finance field. Expertise in technical field is not gained
through experience only but is also attained through research and
invention. However, expertise in
administrative field, accounting field and finance field is gained through
experience. Such experience gained can
be utilized for giving advice or assistance. [
In the
know-how contract, one of the parties agrees to impart to the other, so that he
can use them for his own account, his special knowledge and experience which
remain unrevealed to the public. It is
recognized that the grantor is not required to play any part himself in the
application of the formulas granted to the licence (sic) and that he does not
guarantee the result thereof. [
In the
contract for provision of services, one of the parties undertakes to use the
customary skills of his calling to execute work himself for
the other party. [
In most cases
involving the supply of know-how, there would generally be very little more
which needs to be done by supplier under the contract other than to supply
existing information or reproduce existing material. On the other hand, a contract for the
performance of service would, in majority of the cases, involve a very much
greater level of expenditure by the supplier in order to perform his
contractual obligations. [
In the instant
case, the only material available and relied on by the Assessing officer was
the description contained in the invoices. Since the Assessing Officer had not
attempted to obtain the gist of actual advice and assistance obtained from the
description contained in the invoices, it was clear that for providing the
information or services, the assessee needed continuous assistance and advice
from the supplier. In respect of
technical fields, the assessee only needed the transfer of know-how and
knowledge. [
One should
ascertain the character of payment in view of the legal meaning of know-how and
not just because in the agreement some information or advice is categorized as
know-how. The same should not be
concluded as know-how. Every information
based on experience cannot be know-how. As regard, the item liaison with legal
and financial advisors; it was clear that such payment was purely for services. Since payment for technical services was not
covered under DTAA between India and Mauritius, hence no TDS was required as
provisions of DTAA would prevail as per decision of the Supreme Court in the
case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR
706. Such payments in no way could be
considered as royalty as for rendering such service one is not imparting
information concerning technical, industrial, commercial or scientific
knowledge, experience or skill. [
Hence, it was
held that no tax was required to be deducted at source in respect of payment
relating to liaison with legal and financial advisors and negotiations with
vendors and financial institutions for extension of the vendor loans and
syndication of the long-term project finance. [
In respect of
remaining items, the Tribunal could not decide the issue in absence of details
of information as received by the assessee, whether information provided was
secret based on experience or skill?
Another aspect which was to be considered as to whether the consideration
paid was for information which was of perpetual or extended use. If the non-resident company was providing
support on the basis of facts and information collected by the assessee and
thereby suggesting ways and means with the aim of providing support to develop
specified areas relevant to marketing and financial areas, then consideration
paid may not be termed as royalty.
Hence, on the deduction of tax at source in respect of payment for
following item, namely ‘providing continuous support in connection with
developing sales distribution channels, promoting brand awareness, customer
care programs, formulating marketing strategies, monitoring pricing strategies,
billing systems and credit controls to improve operational efficiency and
profitability,’ the matter was to be restored back to the file of ITO (TDS). [