2020 (2) TMI 1482 - AAR - Income Tax

Characterization of income - receipt by the applicant from the Indian subscribers and customers for e-books/e-journals/e-articles -TDS u/s 195 - Whether taxable as Royalty as per section 9(1)(vi) and article 12 of the Double Tax Avoidance Agreement (the DTAA) or as business income under section 28 of the Act and article 7 of the DTAA between India and Netherlands - HELD THAT - One has to first appreciate that it is scientific experience of the recipient of any consideration and not the scientific experiences contained in the goods or services transferred by payee. In the present case the applicant is compiling and collating books articles or journals relating to science but the applicant are not transferring any scientific experience to the subscriber. The OECD commentary suggests that the work scientific experience is to be construed as non-copyrighted know how. It is also noticed that India does not seem to have any observation or reservation on above referred paras of OECD commentary. However on positions on article 12 of the commentary India does not agree with the interpretation that information concerning industrial commercial or scientific experience is confined only to previous experience. Assimilating the facts of the case with the views offered in OECD commentary and India position thereon we are of the view that there is no transfer of any know-how or previous or new experience to subscriber. Hence the third limb of the definition thus does not apply to the applicant and the receipt by the applicant from the Indian subscribers and customers for e-books/e-journals/e-articles is not taxable as Royalty as per article 12 of the Double Tax Avoidance Agreement (the DTAA) but is in the nature of business income. Ruling - 1. The receipt by the applicant from the Indian subscribers and customers for e-books/e-journals/e-articles is not taxable as Royalty as per article 12 of the Double Tax Avoidance Agreement (the DTAA) but is in the nature of Business Income . 2. The Assessing Officer may ascertain whether permanent establishment (PE) exists in India or not. 3. The Indian subscribers are not required to withhold any tax on the payment made to the applicant under section 195 of the Act.

Summary

Issues Involved:
1. Taxability of receipts from Indian subscribers and customers for e-books/e-journals/e-articles as 'Royalty' or 'Business Income'.
2. Taxability under Article 7 of the DTAA in the absence of a Permanent Establishment (PE) in India.
3. Requirement for Indian subscribers to withhold tax under Section 195 of the Income-tax Act.

Detailed Analysis:

1. Taxability of Receipts as 'Royalty' or 'Business Income':

Applicant's Contentions:
- The applicant argued that the receipts should be considered as 'business income' and not 'royalty'. According to Section 9(1)(vi) of the Income-tax Act and Article 12 of the DTAA, 'royalty' involves the transfer of rights in respect of intellectual property.
- The applicant contended that their transactions (pay per view and subscription agreements) do not transfer any proprietary rights to the Indian customers. The customers merely get access to copyrighted content for personal use, similar to purchasing a physical book.
- Cited cases like Dun and Bradstreet Espana S.A., ABC Ltd., and Factset Research Systems Inc. to support their argument that the transactions are akin to purchasing a copyrighted article and not the use of copyright.

Department's Contentions:
- The Department argued that the receipts should be classified as 'royalty' under both the Income-tax Act and the India-Netherlands DTAA. They emphasized that the definition of 'royalty' includes payments for the use of scientific knowledge and intellectual property.
- Cited cases like CIT v. Synopsis International Old Ltd. and CIT v. Wipro Ltd. to argue that the payments for accessing the database amount to 'royalty' as they involve the use of copyrighted material and scientific knowledge.

Ruling:
- The Authority ruled that the receipts from Indian subscribers and customers are not taxable as 'royalty' under Article 12 of the DTAA but are in the nature of 'business income'. The transactions were likened to purchasing books from a bookstore, where no copyright is transferred to the customer.
- The Authority referred to the OECD commentary on 'scientific experience' and concluded that the applicant is not transferring any scientific experience to the subscribers.

2. Taxability under Article 7 of the DTAA in the Absence of a Permanent Establishment (PE):

Applicant's Contentions:
- The applicant argued that even if the receipts are considered as 'business income', they would not be taxable in India in the absence of a PE, as per Article 7 of the DTAA.

Ruling:
- The Authority noted that the existence of a PE is a fact-specific determination, which can vary from year to year. The Assessing Officer is best suited to ascertain whether a PE exists in India and determine the profit attributable to it.

3. Requirement for Indian Subscribers to Withhold Tax under Section 195:

Applicant's Contentions:
- The applicant argued that if the receipts are not taxable in India, the Indian subscribers should not be required to withhold tax under Section 195 of the Income-tax Act.

Ruling:
- The Authority concluded that since the receipts are not taxable as 'royalty' but as 'business income', and in the absence of a PE, the Indian subscribers are not required to withhold any tax on the payments made to the applicant under Section 195.

Conclusion:
1. The receipts from Indian subscribers and customers for e-books/e-journals/e-articles are not taxable as 'royalty' but as 'business income' under Article 12 of the DTAA.
2. The Assessing Officer should ascertain the existence of a PE in India.
3. Indian subscribers are not required to withhold tax under Section 195 of the Income-tax Act.