Consideration for imparting information

Font Size

Print

Feedback

Email

Discuss

• Discount UK Shopping

Related Articles

India Inc for quicker, flawless GST roll-outTax on perks to be effective from April 2009‘GST regime to boost foreign trade’Dual petroleum tax to boost industry

: Where a foreign company or a non-resident merely imparts information, a question arises whether the consideration earned would be taxed as royalty or business income.

This point was considered by the Authority for Advance Rulings (AAR). A foreign company (CWS) was 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. It had developed certain international client relationships and, in accordance with global policy, various offices provided referral services to other offices of CW depending on the requirements of the clients.

In respect of such referrals, each serving CW company was liable to pay a "referral fee". Under an agreement entered in Singapore with CWI, an Indian company (which was a wholly owned Indian company of CW of Mauritius), the applicant (CWS) was obliged to refer/commend potential customers desirous of obtaining real estate consultancy and associated services in India to CWI. The Indian company would pay to the applicant (CWS) a percentage of the amount charged by it on the referred customers after it had realised in full the amount from the customers.

The revenue contended that the payments received as referral fee by the applicant were taxable as royalty, being payment made for imparting information regarding commercial knowledge or experience. The AAR observed that an analysis of clause (iv) of Explanation 2 indicates providing information, "concerning commercial experience" and does not mean providing "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 were being made available to CWI whenever a prospective customer was introduced.

Outlining the underlying basic requirement for commercial information to be considered as royalty, the OECD Model Convention and Commentary, 2005 has laid down that 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.