Facts:
The taxpayer was an American company, which was a resident of USA (“USCo”). USCo was acting as a communicating interface between its Group entities and multinational clients. To ensure work of international standards that would meet client’s expectations, USCo had set up a team of persons to coordinate between a Group entity and a client.
USCo incurred expenditure on providing the coordination services. Hence, it charged the Group entities for these services. Further, it also provided need-based business development and managerial assistance to Group entities. During the year, USCo provided certain assistance to a Group entity in India (“ICo”) and received consideration thereof, which was split into creative fees, database costs and coordination fees. USCo contended that the consideration was in the nature of business profits under Article 7 of India-USA DTAA, and since USCo did not have a PE in India, the consideration was not chargeable to tax in India.
However, the AO concluded that the consideration was in the nature of royalties and was chargeable to tax @15% under India-USA DTAA.
The CIT(A) held that client coordination fees were in the nature of business profits, which, in absence of PE in India, were not chargeable to tax in India. As regards the creative fees and the database costs, he held that they were in the nature of FIS and accordingly, were chargeable to the tax in India. While the taxpayer accepted the findings of CIT(A), the tax department appealed to Tribunal against the order of CIT(A).
Held
The Tribunal observed and held as follows.
(i) The Tribunal concurred with the finding of the CIT(A) that USCo maintained communication channel between ICo and the clients. These services did not involve consideration for use of, or right to use, any of the specified terms in Article 12(3) of India-USA DTAA. Hence, the consideration was not royalties but business profits. As USCo did not have a PE in India, the question of taxability of consideration did not arise.
(ii) In terms of Article 12(2)(b) of India-USA DTAA, royalties (under Article 12(3)) and FIS (under Article 12(4)) are chargeable to tax @10%. However, payments for the creative fees and the database costs were neither royalties as defined in Article 12(3)(b) nor the services were ancillary or subsidiary to enjoyment of property. Hence rate of 10% was not applicable. As there was nothing on record to indicate that the rate specified under Article 12(2)(b) was applicable, rate specified under Article 12(2)(a)(ii) was applicable. Hence, the creative fees and the database costs were chargeable to tax @15%.
