Services such as accounting and legal support, sales and marketing, human resource services etc rendered from own knowledge and experience without imparting the know-how/experience to the other person does not constitute royalty under the India-Thailand Double Taxation Avoidance Agreement (DTAA ).
Facts:
The Taxpayer, a Thailand tax resident, entered into a master agreement with Indian company (I Co) to provide various services such as accounting and finance support, legal and compliance services, sales and marketing services, etc.
The Taxpayer filed NIL return for the relevant assessment year on the ground that the income accrued to him on account of above services qualifies as business income and the same cannot be taxed under Article 7 of India–Thailand DTAA in the absence of a Permanent Establishment (PE) in India.
The Tax Authority, in its draft order, held that the fee received by the taxpayer from I Co qualifies as fees for technical services (FTS) under the Income-tax Act, 1961 (Act) and alternatively such fee would also fall within the definition of “royalty” under the India – Thailand DTAA . Thus such income would be taxable in India.
Aggrieved, the Taxpayer filed its objections before the Dispute resolution panel (DRP). However, the DRP also concluded that the fee received by the Taxpayer is for providing industrial, commercial or scientific experience and, hence, the fee constituted “Royalty” under the DTAA , and hence it would be taxable in India. Aggrieved the Taxpayer appealed to the Tribunal.
Held:
Royalty is defined under India-Thailand DTAA to include payments of any kind received as a consideration for the use of, or the right to use, information concerning industrial, commercial or scientific experience. Consideration for information concerning industrial, commercial, scientific experience to be regarded as royalty should allude to the concept of knowhow. There should be an element of imparting of know-how to the other, so that the other person can use or has right to use such knowhow.
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 other, but rendering his services from his own knowhow and experience. All that he imparts is a conclusion or solution that draws from his own experience.
If there is no “alienation” or the “use of” or the “right to use of” any knowhow i.e., there is no imparting or transfer of any knowledge, experience or skill or knowhow, then it cannot be termed as “royalty”.
The services may have been rendered by a person from own knowledge and experience but such knowledge and experience has not been imparted to the other person as the person retains the experience and knowledge or knowhow with himself, which are required to perform the services to its clients. In principle, if the services have been rendered de– hors the imparting of knowhow or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of royalty.
Accordingly, the matter was restored back to Tax Authority to examine the nature of services based on the above principles.
