Where the assessee, a resident of Singapore, received consideration from Indian customers for grading and certification reports of diamonds and the AO took the view in s. 197 proceedings that the income was taxable as “royalty” on the ground that there was transfer of commercial experience in the shape of the diamond grading report, HELD
(i) The grading report was a statement of fact as to the characteristics of the diamond and did not amount to transfer of any industrial or commercial experience or transfer of any skill or knowledge to the customers. The payments were not for the use or the right to use experience but for the application of experience to a certain factual situation. Meaning of the terms “experience”, “use” and “impart” considered in detail;
(ii) The term “royalty” in Article 12 of the DTAA envisages a person who is the owner of any intellectual property right etc. who retains the property in them and permits the use or allows the right to use such right etc. to another person. Where there is no transfer of the right to use, payment made cannot be treated as royalty. If such person merely uses his experience and technical know-how for a consideration without parting with that information, it is not royalty;
(iii) Article 12(3)(a) of the DTAA is a tax liability and has to be interpreted on the settled principles of interpretation of taxation provisions – tax can be charged only if the activity sought to be taxed falls squarely within the taxing entry and not on inferences;
(iv) Accordingly the action of the AO in refusing to issue the certificate u/s 197 was without jurisdiction.