Rao Ranvijay Singh, (Member):— The application under section 245Q(1) of the Income-tax Act, 1961 (in short “the Act”) has been filed by M/s. Cushman & Wakefield (S) Pte. Ltd., Singapore (in short, CWS), seeking advance ruling from the Authority on the questions mentioned therein.
2. Briefly stated, the applicant, a foreign company incorporated and based in Singapore, offers a full range of real estate services to its local and international clients. As stated in the statement of facts, Cushman & Wakefield India Pvt. Ltd. (in short, “the CWI”) is a wholly owned subsidiary of Cushman & Wakefield, Mauritius, which, in turn, is a subsidiary of Cushman & Wakefield, Asia. The applicant is, as per averment, engaged in the business of rendering services in connection with acquisition, sales and dealings in real estate and other services such as advisory and research facilities management, project management, etc., in the field of real estate. The applicant states that it has also developed certain international client relationships and in accordance with the global policy, various offices provide referral services to other Cushman & Wakefield (CW) offices, wherein one CW office would refer clients to other CW office, depending on the requirements of the clients. In respect of such referrals, as per the applicant, each serving CW company is liable to pay a “referral fee” to the referring group company in accordance with the international fees sharing rules of the CW group. In consonance with this very general policy, the applicant entered into an agreement dated January 1, 2005, with CWI, as per which, the applicant CWS shall refer/recommend potential customers, desirous of obtaining real estate consultancy and associated services in India, to CWI. As per the terms of the agreement, CWI will pay the applicant a percentage of the amount charged by the applicant (CWS) on the referred customers as referral commission after it (CWI) has realized in full the amount from the customers. Further, withholding tax on the referral commission paid, has to be deducted by CWI. As mentioned in the statement of facts, the applicant is neither involved in persuading the customers to avail of the services of CWI, nor in negotiating or collecting fees charged by CWI from the customers referred to by CWS. It has further been stated that they (CWS) simply refer the potential customers for real estate transactions and give some details (locations, etc.) about the property in question. Placed in the above factual matrix and in relation to the tax liability of the amount of referral fees/commission received or to be received from CWI, the applicant has sought rulings from the Authority on the following questions:
(i) Whether the referral fee received by Cushman & Wakefield (S) Pte. Ltd. (the applicant) from Cushman & Wakefield India Pvt. Ltd. in terms of the referral agreement dated January 1, 2005, is liable to be taxed in India in accordance with the provisions of the Income-tax Act, 1961 (“the Act”), read with the Double Taxation Avoidance Agreement between India and Singapore?
(ii) Whether the referral fee received by Cushman & Wakefield (S) Pte. Ltd. from Cushman & Wakefield India Pvt. Ltd. in terms of the referral agreement dated January 1, 2005, is liable for deduction of tax at source in the hands of the payer?
(iii) Whether the applicant can be said to have a business connection in India under the provisions of section 9(1)(i) of the Indian Income-tax Act (“the Act”) by virtue of its agreement with Cushman & Wakefield India Pvt. Ltd.?
(iv) If the answer to question No. (iii) above is in the affirmative, whether the whole or any part (if yes what proportion) of the referral fee could be attributed to India in terms of the Explanation to section 9(1)(i) of the Act and would constitute income accruing or arising in India?
(v) If the referral fee is held to be taxable, whether the same can be classified as royalty under section 9(1)(vi), fee for technical services under section 9(1)(vii), or “income from business or profession” under the Act read with the Double Taxation Avoidance Agreement between India and Singapore and what is the rate of tax applicable?
(vi) Whether the applicant can be said to have a permanent establishment in India having regard to the provisions of the Double Taxation Avoidance Agreement between India and Singapore by virtue of its agreement with Cushman & Wakefield India Pvt. Ltd.?
(vii) If the answer to question No. (vi) above is in the affirmative, whether the whole or any part thereof (if so what part) can be attributed to the permanent establishment?
3. While commenting on the admissibility of the application, the Director of Income-tax (International Taxation), New Delhi, has submitted that for want of sufficient and material facts, they are not in a position to take any stand on the characterization of income received by the applicant and the consequential tax liability thereof.
4. The Authority examined the application and the relevant facts stated in the application and allowed the application as maintainable under section 245R(2) of the Act and left it open to the applicant to file any additional facts/details in view of the comments of the Revenue.
5. In the course of hearing of the case, the representative of the Revenue, stressed the fact that the payment of fees by CWI to the Singapore entity (CWS) tantamounts to diverting a sizeable chunk of income in the garb of so-called “referral commission”. As further contended, the applicant has also not furnished details of the transactions with various clients on which referral commission has reportedly been paid.
6. The applicant's representative, on the other hand, refuted with equal vehemence that the “referral” has undeniably been made by the applicant either through e-mail or even telephonically and the “referral fee” received by the applicant is not taxable either under section 5(2) of the Act or under section 9(1)(i), 9(1)(vi) or 9(1)(vii) of the Act. In other words, it has been argued that the said receipt is neither royalty nor fees for technical services. Since there is no “business connection”, section 9(1)(i) of the Act cannot also be pressed into service. Learned counsel for the applicant, however, submitted that, at best, the said receipt may be regarded as business profits in consonance with article 7 of the Double Taxation Avoidance Agreement (in short “the DTAA”) between India and Singapore ([1994] 209 ITR (St.) 1) and in the absence of any permanent establishment (PE) of the applicant (CWS) in India, the said fee is taxable only in Singapore as business income.
7. The Authority, however, directed the applicant to file relevant documents representing correspondence with some of its customers, which are typical of other transactions. In response, the applicant filed documents representing correspondence with two foreign customers—one relating to Symantec transaction and another relating to Thomson transaction. Subsequently, by way of additional facts, the applicant also furnished correspondence relating to Perot Systems, a multi-national company, relating to a property transaction in Pune, India.
Brief arguments—Revenue's
8. Commenting on the documents/correspondence in the shape of e-mails relating to the transactions as referred to above, the representative of the Revenue contended that the applicant has not been able to furnish clear and specific documents, other than a few cryptic e-mails, which can go to establish or even demonstrate the rendition of any “referral service” to CWI. In respect of the Symantec transaction, the applicant has stated that the client referral has been made by one Ms. Melissa Rouse who, on close scrutiny, has turned out to be an employee of an entity incorporated in Washington. Regarding the Thomson transaction, even the cryptic e-mails have not been filed and the Revenue has contended that much confusion persists about the Perot Systems transaction also. It is the CWI which seems to have interacted with its clients and provided services to them on its own and only the copies of e-mails seem to have been marked to CWS, presumably to keep them (CWS) informed of the goings-on, contends the Revenue's representative.
9. Arguing further, the Revenue has contended that the smokescreen of so-called references has been raised by way of a collusive arrangement between CWS (the applicant) and CWI and the business purpose of the payment of hefty “referral fee” at 30 per cent cannot be justified by any yardstick. Thus, in the absence of any independent evidence of the rendition of services by CWS, the payment of referral fee at 30 per cent of the gross fee, is prima facie, designed for the avoidance of income-tax in India and consequently, the application itself merits to be rejected in consonance with proviso (iii) to section 245R(2) of the Act.
10. Mr. Sanjeev Sharma, who argued the case on behalf of the Revenue, initially tried to rope in the referral fee receipt under all the heads of income, that is, business income, royalty income and also income by way of fees for technical services. However, subsequently, in: course of oral as well written submissions, the Revenue contended that the referral fee receipt, in the given set of facts, can be termed as royalty income in consonance with the provisions of section 9(1)(vi) of the Act read with Explanation 2(iv) thereto. It has been emphasized that “commercial information” is being given by the applicant (CWS) to the Indian associate enterprise (CWI) and is thus squarely covered by the definition of royalty as given in clause (iv) of Explanation 2 to section 9(1)(vi) of the Act. Mr. Sharma also referred to the more or less identical definition of royalty as per article 12 of the DTAA to strengthen his point that it is in the nature of royalty income as defined under section 9(1)(vi), Explanation 2(iv) of the Act, read with article 12 of the DTAA. It has further been emphasized that the payments (referral fees) are apparently for the use of or the right to use commercial information as well as for the use of or right to use the “trade mark”, (i.e, “Cushman & Wakefield”) by CWI. As such, it can be termed as “brand royalty” also.
11. Since the applicant and CWI are “associate enterprises”, the representative of the Revenue has also stated that the “arm's length character” of the payment, made to the applicant, merits to be looked into by the Transfer Pricing Officer.
Brief submission—Applicant's counsel
12. Dispelling the doubts relating to the facts raised by the Revenue, the learned counsel for the applicant has argued that the Symantec transaction should not be disbelieved, because Ms. Melissa Rouse had referred the transaction on behalf of the applicant in consonance with the management norms of the global client solution team. An affidavit to this effect has also been filed by one Mr. Ashpreet Chaudhary, Managing Director of CWS. Similarly, about the Thomson transaction and the Perot Systems transactions, it has been submitted that these transactions should also not be eyed with suspicion because the message of the “referral” having been made clearly floats to the surface from the communications. However, there are situations which give way to oral references also and Thomson's is one such.
13. The Revenue's allegation regarding non-rendition of any referral service by CWS has also been stoutly disputed by learned counsel for the applicant. The referral has, as argued, paved the way for substantial gain of income to CWI who have offered the same to tax. Papers have also been filed to indicate the fact that the referral fee received by the applicant is liable to tax in Singapore. Besides, the raising of invoices by CWI, indicating payments of referral fee, has also been confirmed by the Revenue, contends learned counsel. It has, accordingly been emphasized that the transaction relating to the payment and receipt of the referral fee cannot be regarded as a collusive arrangement designed, prima facie, for the avoidance of income tax. Being a normal business transaction between two separate legal entities, i.e, CWS and CWI, the transaction cannot be hit by the provisions of section 245R(2)(iii) of the Act. According to the learned counsel, once the application has been allowed as maintainable under section 245R(2) of the Act, the Revenue cannot, at this stage, press the provisions contained in proviso (iii) to section 245R(2) of the Act into service for the rejection of the application. Reliance in this regard has been placed on the decisions of this Authority in the case of Dljmb Mauritius Investment Company v. Commissioner Of Income-Tax, [1997] 228 ITR 268, and also in the case reported in Advance Ruling P. No. 10 of 1996, In re, [1997] 224 ITR 473.
14. In annexure IV of the application, the applicant has contended that, in the set of facts as narrated in the application, the referral fee received is neither taxable under section 5(2)(b) of the Act nor under section 9(1)(i) of the Act. In fact, it is beyond the scope of section 5 of the Act in the sense that the referral fee is neither received in India nor is deemed to be received in India by the applicant or on its behalf. Besides, it is neither deemed to accrue/arise to the applicant in India. In the present case, the applicant has neither done any activity in India which may give rise to such income nor has the contract, giving rise to such income, been entered into in India. The referral receipt is even not covered under section 9(1)(i) of the Act, as there is no “business connection”;— a prerequisite for being taxed as business income under section 9(1)(i) of the Act. Further, it is not “fees for technical services” (in short “the FTS”) in consonance with section 9(1)(vii)(b), Explanation 2, read with article 12(4) of the DTAA, because the applicant does not “make available” technical knowledge, experience, skill, know-how or processes which enables the person acquiring the services to apply the technology contained therein. It has finally been summed up that the referral fee would, in fact, be governed by the provisions of article 7 (business profits) of the DTAA between India and Singapore, and the same is taxable as “business profits” in Singapore only, as there is no permanent establishment (PE) in India, as defined in article 5 of the Treaty.
15. Assailing the stand of the Revenue about the taxability of referral fees received by the applicant as royalty income, the learned counsel has tried to drive the point home that by no stretch of imagination, the receipt can be characterized as royalty, as it is not a consideration for “imparting of any information concerning technical, industrial or commercial or scientific knowledge, experience or skill” as laid down in section 9(1)(vi) read with Explanation 2(iv) of the Act. It is also not royalty as per the definition given in article 12(3) of the DTAA between India and Singapore. To buttress her arguments, learned counsel led us through the provisions of section 9(1)(vi), Explanation 2, and also to the relevant provisions of article 12(3) of the Treaty. Reliance has been placed on the decisions in the case of Commissioner Of Income-Tax v. Heg Ltd., [1999] 263 ITR 230 (MP) and in the case of Ceat International, S.A. v. Commissioner Of Income Tax, [1999] 237 ITR 859 (Bom). In support of her contentions, Ms. Anita Sumanth also placed reliance on the OECD Commentary to the effect that the said receipt of the referral fee cannot be termed “royalty”. As contended, the applicant simply refers to some potential customers, desirous of obtaining real estate services in India, to CWI and it is left to the volition of the referred potential customers to avail of either the services of CWI or to knock at the doorstep of other Indian companies. The referral fee, on the other hand, is received in the wake of normal business transactions and can, at best, be characterized as “business income”, which is liable to be taxed in Singapore only in the absence of a permanent establishment in India. Further, if the referral fees received itself is not charge able to tax in India, learned counsel has argued that recourse to section 195 of the Act for tax deduction at source on the payment made is also not required.
16. At the outset, we would like to state that there have emerged serious disputes on the facts between the Revenue and the applicant. It is made clear that this Authority is not concerned with the justifiability of payment by CWI, a resident company, which is not seeking ruling before us. The issue of allowability or otherwise of expenditure in the hands of CWI does not arise here. Similarly, whether or not the impugned transaction between the related parties is at arm's length is also an issue which cannot be decided by us. The Assessing Officer can, however, examine both these issues as per law.
17. As such, we are left with no option but to give ruling on the set of facts as presented by the applicant before us. We make it clear that we are deciding the legal issue on the basis that referral as pleaded by the applicant factually took place. However, the Revenue is at liberty, if they are able to lay their hands on certain other material facts, to take the same into account in appropriate proceedings. Incidentally, both the applicant's representative and the Revenue's representative have also desired the ruling to be given in the set of facts available.
18. Taking up, first, the contention regarding the application being hit by the provisions of the proviso (iii) to section 245R(2) of the Act, we are of the view that the argument of the Revenue, bereft of any substantial material, does not inspire credence. This is apart from the question whether at this stage, after the application has been allowed under section 245R(2) of the Act, it is open to the Revenue to raise such objection. The substantial payment of tax by CWS in Singapore on the same income and the absence of patent improbability in the applicant's version from its business point of view are the other factors that persuade us not to reopen the order passed under section 245R(2) of the Act.
19. Though in the application several questions relating to the taxability of amount of “referral fee” have been raised, the rival contentions of the parties give rise to the following points for determination:
(a) Whether the referral fee received by the applicant from GAT can be characterized as business income, or income by way of royalty, or income by way of fees for technical services (FTS) as per section 9(1)(i), 9(1)(vi) and 9(1)(vii) of the Act read with the DTAA?
(b) Whether the applicant has a permanent establishment in India and if so, what part of income of the applicant can be attributed to such permanent establishment?
(c) Whether any tax is liable to be deducted by CWI from the payment of referral fee to the applicant and, if so, at what rate?
20. It will be appropriate, in the first instance, to examine whether the receipt (referral fee) is taxable or otherwise under section 5(2) and section 9(1)(i) of the Act. To appreciate the point at issue, it will be quite befitting to extract section 5 of the Act:
“5. Scope of total income.—(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) and (c) …
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(c) accrues or arises or is deemed to accrue or arise to him in India during such year.”
21. The above provision clearly states that the total income of a non-resident includes all income, from whatever source derived, which is received or is deemed to be received in India by or on behalf of such person. (Ref. clause (a) to section 5(2) of the Act above). The import of clause (b) is that the total income of a non-resident includes all income, from whatever source derived, which accrues or arises or is deemed to accrue or arise to him in India during any previous year. In the instant case, the referral fee remitted to CWS by the Indian company is neither received nor is deemed to be received in India. The fee is being received in Singapore only. Similarly, it cannot be said that it accrues or arises in India. An income is said to accrue or arise at the location where the services or activities for earning the income have been rendered or the contract which gives rise to such income has been entered into. In this case, no activity except that of reportedly making a “referral” from Singapore to CWI has been done in India. Even the contract agreement has been entered into in Singapore. The referral fee has neither been received in India nor does it accrue or arise in India. Hence, it is beyond the purview of section 5 of the Act. This takes us to section 9 of the Act which elucidates the expression “Income deemed to accrue or arise in India”.
22. Section 9(1)(i) of the Act reads as follows:
“9. Income deemed to accrue or arise in India.—(1) The following income shall be deemed to accrue or arise in India—
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India:
Explanation 1.—For the purposes of this clause—
(a) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;
Clauses (b), (c) and (d)—
Explanation 2.—For the removal of doubts, it is hereby declared that ‘business connection’ shall include any business activity carried out through a person who, acting on behalf of the non-resident,—
(a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or
(b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
(c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident.”
23. A plain reading of the provision of section 9(1)(i) extracted above shows that all income accruing or arising, whether directly or indirectly, inter alia, through or from any “business connection” in India shall be deemed to accrue or arise in India. Explanation 1(a) above indicates that for the purpose of the abovementioned clause, in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India, shall be only such part of the income, as is reasonably attributable to the operations carried out in India. In other words, in the provision referred to above, it must be shown that (i) the applicant has “business connection” in India, and (ii) income accrues or arises (whether directly or indirectly) from such “business connection” in India. In such a situation, Explanation 1(a) limits the quantum of taxable income deemed to accrue or arise only to such part of the income as is reasonably attributable to the business operations carried out in India. In fact, an important aspect to be considered here is whether the applicant has “business connection” in India. Explanation 2, inserted with effect from April 1, 2004, has defined the business connection which has been extracted above. The said Explanation contains an inclusive definition; it brings in the business activities, specified in clauses (a) to (c) referred to above, within the fold of business connection which has to be understood in its ordinary meaning. On the facts of the case, it may, unhesitatedly, be concluded that none of the business activities in the aforementioned clauses is carried out by the applicant in India. The newly added Explanation 2 is, therefore, of no assistance in comprehending the meaning of the expression “business connection”, as no precise definition has been attempted. However, the phraseology “business connection” has been the subject-matter of judicial decisions and the Supreme Court in the case of CIT v. R.D Aggarwal and Co., [1965] 56 ITR 20 observed as follows (headnote):
“Business connection ….involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection …. The expression ‘business connection’ postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the taxable territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity.”
24. Based on the above touchstones, it emerges that, in the instant case, there does not exist a real and intimate relation between the trading activities carried on outside India by a non-resident (the applicant) and the activities in India which contributed to the earning of income. As stated, the applicant does not have any activities in India except that of making a referral to an Indian associate company (CWI) from Singapore. Besides, it has also been emphasized that it is the prerogative of the prospective customer to decide whether it wants to avail of the services of CWI or not. So also, the CWI is not bound to enter into a deal with the referred customer. Thus, there is “no business connection” in India in the case of the applicant under section 9(1)(i) of the Act. Since the pre-conditions of the deemed income under section 9(1)(i) read with Explanation 2 of the Act are not satisfied, it is superfluous to refer to articles 7 and 5 of the DTAA because it is well-settled that if no obligation exists under the Act, the Treaty does not create any additional charge for taxation of income in question. We also find that the Revenue has not pleaded that the applicant has a permanent establishment in India.
25. Now, taking up the plea of the Revenue that the referral fees, placed in the given set of facts, can be termed as royalty in consonance with the provisions of clause (iv) of Explanation 2 to section 9(1)(vi) of the Act, we think it will be quite relevant to revert to the provisions in section 9(1) of the Act, which read as follows:
“9. Income deemed to accrue or arise in India.—(1) The following income shall be deemed to accrue or arise in India.—
(ii) to (v) …..
(vi) income by way of royalty payable by—
(a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the royalty is payable in respect of, any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.—
Explanation 1.—….
Explanation 2.—For the purposes of this clause ‘royalty’ means consideration (including any lump sum consideration but excluding any consideration which would be income of the recipient chargeable under the head ‘Capital gains’) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).”
26. Based on the above definition of royalty as embedded in Explanation 2 to section 9(1)(vi) of the Act, the Revenue, as already noted, has placed reliance, firstly, on clause (iv) of Explanation 2 above and has contended that the payments received as referral fee by the applicant are taxable as royalties, being payments made for imparting information regarding commercial knowledge or experience. To our mind, such an argument goes in a tangent way. An analysis of clause (iv) of Explanation 2 above indicates providing information, “concerning commercial experience” and does not mean providing “bald commercial information”. Except a bald suggestion in the course of arguments on behalf of the Revenue, there is nothing to show that the applicant has kept a database, nurtured by commercial experience, relating to real estate services which was being made available to CWI whenever a prospective customer was introduced. At this juncture, it will be quite appropriate to quote the observations of the Madhya Pradesh High Court in the case of HEG Ltd., [2003] 263 ITR 230 which are as follows:
“That apart we have already indicated that every information would not have the status of royalty. There are various kinds of categories of information. Solely because an entry is of the commercial nature would not make it a royalty. That cannot be the exclusive base or foundation. Some sort of expertise or skill is required. The aforesaid factor would be the requisite one. We are not inclined to accept the submission of Mr. Arya that every information if it concerns the industries or commercial venture would be a royalty. That would be tantamount to stating the law quite broadly. That does not seem to be the purpose of the statute or that of the Treaty.”
27. Outlining the underlying basic requirement for commercial information to be considered as royalty, the OECD Model Convention and Commentary, 2005 has observed as under:
“In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 alludes to the concept of ‘know-how’. Various specialist bodies and authors have formulated definitions of know-how which do not differ intrinsically. One such definition, given by the ‘Association des Bureaux pour la Protection de la Propriete Industrielle’ (ANBPPI), states that ‘know-how’ is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique.”
28. Further, in the Memorandum to the Indo-US Treaty in the context of article 12(3), containing identical wordings, relating to “consideration for information concerning industrial, commercial or scientific experience”, the following observation has been made:
“The term ‘information concerning industrial, commercial, or scientific experience’ alludes to the concept of know-how and means information that is not publicly available and that cannot be known from mere examination of a product and mere knowledge of the progress of technique. As provided in the Commentaries on the articles of the OECD Model Convention (paragraph 12 of article 12 Comm.) : ‘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’.”
29. From the above discussion, the inescapable inference is that consideration for information concerning industrial, commercial and scientific experience can be regarded as royalty only if it is received for imparting know-how and the like. As such, the referral fee received by the applicant from the Indian company (CWI) for introducing customers is not royalty income. Besides, there is no intellectual property involved and there is no question of sharing commercial experience or skills with CWI. It is a mere reference for which certain amount of fee (whether commercially justifiable or not) is being received. Therefore, the consideration for the referral, reportedly having been made, does not answer the description of “royalty” under clause (iv) of Explanation 2 to section 9(1)(vi) of the Act.
30. The Revenue's contention that the said payment is evidently for the use of “trade mark” (Cushman & Wakefield) by CWI is a mere conjecture and does not have any convincing basis. In common parlance the phraseology “trade mark” means a “symbol” or a “logo” chosen to represent a company or a product. The Advanced Law Lexicon (T.R Ramanatha Aiyar's) refers to it as follows:
“A trade mark means a registered mark or a mark used in relation to goods for the purpose of indicating, or so as to indicate a connection in course of trade between the goods and some persons having the rights, either as proprietor or as registered user to use the mark…”
31. When the above definition of trade mark is placed against the definition of royalty arising out of the use of “trade mark”, as contained in clauses of Explanation 2 to section 9(1)(vi) of the Act, it emerges that the recipient of the consideration, should be either the owner of the “trade mark” or registered holder of the “trade mark”. There should also exist a connection in the course of trade between the payer and the recipient. Merely having the name “Cushman & Wakefield” for the Indian associate enterprise will not make it royalty income, as no “trade mark” or brand name of the applicant can be said to have been allowed to be used by the applicant which bears the same trade name. The applicant is not the owner of the “trademark”, (“Cushman & Wakefield”), as stated by learned counsel for the applicant and it is not the specific case of the Revenue that the applicant alone is entitled to use that name or mark. Hence it would be far-fetched to describe the payment in question as a consideration for use of “trade mark” falling within the scope of clause (iii) of Explanation 2. The plea of the Revenue about the “brand” royalty has thus no legal foundation in the given set of facts.
32. We shall now proceed to consider the question whether the receipt of referral fee is income by way of FTS within the ambit of section 9(1)(vii) read with article 12(4) of the DTAA. For the sake of convenience, it would be quite relevant to extract these provisions which read as follows:
“9.(1) The following income shall be deemed to accrue or arise in India— ….
(vii) income by way of fees for technical services payable by—
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :….
Explanation 2.—For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provisions of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’”
“Article 12 : Royalties and fees for technical services.—1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State….
4. The term ‘fees for technical services’ as used in this article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or
(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.”
33. The gist of the provision, quoted above, is that income shall be deemed to accrue or arise in India under section 9(1)(vii) of the Act by way of FTS, if it is paid by the persons specified in sub-clauses (a) to (c). Here, we are concerned with sub-clause (b) of the above clause (vii), which provides that where FTS is paid by a person who is a resident in India, the income shall be deemed to accrue or arise in India. It excludes, from the deeming provision of FTS, such fees which are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India. In the instant case, this exception is not attracted. An attempt has been made by the learned Departmental representative to bring the referral fee within the description of managerial or consultancy services falling within the scope of Explanation 2 to section 9(1)(vii). There is no need to go into the merits of this contention. Assuming that managerial or consultancy services are involved in the present case, as the applicant has sought benefit of the Treaty we have to see whether such payments are FTS as per article 12(4)(b) of the Treaty, which lays down that services of such managerial, technical or consultancy nature can be FTS only if such services “make available” technical knowledge, experience, skill, know-how or processes, which enables the person obtaining the services to apply the technology contained therein. In the instant case, no expertise, or know-how has been “made available” to CWI by reason of rendering service of the said description. We are of the view that transmission of the technical knowledge, experience, skill, etc., from the person rendering the services to the person utilizing the same is contemplated by the article. Further, some sort of durability or permanency of the result of “rendering of services” is also envisaged which will remain at the disposal of the person utilizing the services. Thus, in the instant case, the “know how” or the technical knowledge or commercial experiences, etc., cannot be said to have been “made available” to the Indian company (CWI) merely by reason of customer referral. Consequently, it emerges that the referral fee paid by the Indian company is not FTS as per the phraseology “make available” used in article 12(4)(b) of the Treaty.
34. Placed in the backdrop of the factual as well as legal matrix, the referral fee is neither business income under section 9(1)(i) of the Act nor royalty income under section 9(1)(vi) of the Act nor FTS under section 9(1)(vii) read with article 12(4)(b) of the Treaty. Needless to say, it is business income in the hands of the applicant and is taxable in Singapore only as the applicant has no permanent establishment in India.
35. The last point relates to the deduction of tax at source under section 195 of the Act. The applicant's contention is that if the referral fee paid/payable is not chargeable to tax under the Act, no deduction of tax can be made under section 195 of the Act. Here, it would be apt to refer to section 195 of the Act, which is in the following terms:
“Section 195(1) of the Act
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries’) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :”
36. A plain reading of the above provision shows that it imposes an obligation on every person paying to a non-resident or to a foreign company, inter alia, interest or any sum chargeable under the provisions (not being income chargeable under the head “Salaries”), to deduct income-tax thereon at the rates in force at the time of the payment thereof, in cash or by the issue of a cheque or draft or any other mode. It is thus obvious that the obligation to deduct income-tax at source arises when the income is either interest or any other sum chargeable under the provisions of the Act. In the preceding paras, we have come to the conclusion that the impugned receipt of referral fee is not chargeable to tax under the provisions of the Act or under the provisions of the Treaty on the basis of facts stated in the application. If that be so, section 195 of the Act will not be attracted. In the light of the above discussion, we rule on questions as under:
Question No. (1)
That on the facts and in the circumstances of the case the receipt on account of the referral fee arising to the applicant would not be taxable in India having regard to the provisions of the Act and the provisions of the DTAA either under the head business income, or royalty income or income by way of FTS.
Question No. (2)
On the facts and circumstances of the case and in view of ruling on question No. (1) above, the payer is not required to withhold any tax under section 195 of the Act, while making remittance to the applicant.
Question No. (3)
On the facts and in the circumstances of the case, the applicant does not have a “business connection” in India under the provisions of the Act.
Question No. (4)
In view of ruling on question No. (3) above, this question, being academic, requires no ruling.
Question No. (5)
This question requires no ruling in view of ruling on question No. (1) above.
Question No. (6)
On the facts available in the application, the applicant does not have a permanent establishment in India.
Question No. (7)
In view of ruling on Question No. (6) above, this question requires no ruling.
37. Pronounced by the Authority on this 4th day of July 2008.