TMI Blog2009 (7) TMI 1241X X X X Extracts X X X X X X X X Extracts X X X X ..... INGH, MEMBER A.V. Sonde and Sampath Raghunathan for the Applicant Sanjeev Sharma for the Respondent ORDER P.V. Reddi, Chairman. This application is filed under section 245Q(1) of the Income-tax Act, 1961 (for short the Act ). The applicant (referred to hereinafter as FactSet ) is a company incorporated in USA and is non-resident for the purpose of Income-tax Act. 1.1 The following facts are stated in the application and in the written submissions filed: The applicant maintains a database which is located outside India and which contains the financial and economic information including fundamental data of a large number of companies worldwide. The customers of the applicant are mostly financial intermediaries and investment banks which have the need for such data. The databases contain the published information collated, stored and displayed in an organized manner by FactSet, though the information contained in the database is available in public domain. The applicant, however, through its database enables the customer to retrieve this publicly available information within a shorter span of time and in a focused manner. The database maintains histor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia will be required to withhold taxes under section 195 of the Act on subscription fees paid to the applicant? 4.Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of section 139 of the Act with respect to the subscription fees? 3. Broadly, the contention of the applicant is that no tax liable to be paid on the subscription fees received from the customers in India as it does not constitute royalty or fees for technical services either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between India and USA. Moreover, as the applicant does not have Permanent Establishment (PE) in India, the subscription fees cannot be taxed as business income in view of Article 7 of India-USA Treaty. 4. Let us now notice the material terms of MCL Agreement. The applicant is the Licensor and the Licensee is the subscriber/customer. Clause 1.a declares that the licensor grants to the licensee limited, non-exclusive, non-transferable rights to use the software, hardware, consulting services and databases . As regards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y also be noticed: Clause 2.d: Licensor represents and Licensee acknowledges that the Service and its component parts were developed, compiled, prepared, revised, selected and arranged by Licensor, its Suppliers or their respective affiliates through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, money and originality and that they constitute valuable intellectual property and trade secrets of Licensor and its Suppliers. At Licensor s expense and reasonable request, Licensee agrees to co-operate with Licensor and its Suppliers to protect the proprietary rights in the software and databases during the terms of this Agreement. 4.4 Coming to the other clauses, the fees is payable within 30 days of receiving the invoice failing which the Licensor may suspend the licensee s access (vide clause 4). The initial term of the agreement is as set forth in Schedule (A) and thereafter the agreement can be renewed for successive one year periods (vide clause 5). Clause 5.c stipulates that upon termination of the agreement, licensee will cease using all the licensed material, return any licensor hardware upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eipts cannot be taxed as business income. It is, therefore, submitted that neither under the Act not the Treaty, the tax liability can be fastened on the applicant. Consequently, the subscribers are under no obligation to deduct the tax. 6. The learned Departmental Representative has endeavoured to bring the fee received by the applicant into more than one limb of the royalty definition, as explained later. Further, it is contended, on the basis of the information furnished in the rejoinder of the applicant that an agency PE may be existing in India and therefore the income attributable to PE might become taxable as business income, even if it is not royalty. 7. Most of the focus was on royalty provision contained in the Act and in the DTAA and the main and substantial question argued was whether the fee received by the applicant could be brought within any of the limbs of royalty definition. Section 9(1)(vi) of the Act brings the income by way of royalty within the ambit of deemed income. Explanation 2 to clause (vi) of section 9(1) defines royalty as follows: Explanation 2 - For the purposes of this clause royalty means consideration (including any lump sum co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) of Article 8. 8. The first question is whether the amounts received by the applicant constitute consideration for the transfer of any rights in respect of the copyright or for the use or right to use any copyright of a literary/scientific work. 8.1 The expression copyright is not defined in the Income-tax Act. It must be understood in accordance with the law governing copyright in India viz., Copyright Act, 1957. In State of Madras v. Ganon Dunkrley Co. AIR 1958 SC 560, the Supreme Court held that the expression sale of goods in Entry 48 of List II (VIIth Schedule) of the Government of India Act is a nomen juris and shall be construed in its legal sense. The legal sense can only be what it has in the law relating to sale of goods and therefore the said expression shall bear the same meaning as it has in Indian Sale of Goods Act. Looking at the Treaty, we have Article 2.2 which clarifies how the undefined terms shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial matters of Companies and similar entities. What the appellant does is to collect and collate the said information/data which is available in public domain and put them all in one place in a proper format so that the customer (licensee) can have easy and quick access to this publicly available information. The applicant has to bestow its effort, experience and expertise to present the information/data in a focused manner so as facilitate easy and convenient reference to the user. For this purpose, the applicant is called upon to do collation, analysis, indexing and noting wherever necessary. These value additions are the product of the applicant s efforts and skills and they are outside the public domain. In that sense, the data base is the intellectual property of the applicant and copyright attaches to it; but, the question is whether in making this centralized data available to the customer-licensee for a consideration, can it be said that any rights which the applicant has as a holder of copyright in database are being parted in favour of the customer? The answer, in our view, must be in the negative. No proprietary right and no exclusive right which the applicant has, has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itting the customer to store and use the data in the computer for its internal business purpose, nothing is done to confer the exclusive right to the customer. Such access is provided to any person who subscribes, subject to limitations. The copyright of the applicant has not been assigned or otherwise transferred so as to enable the subscriber to have certain exclusive rights over the applicant s works. In SBI v. Collector of Customs 2000 (115) ELT 597, the Supreme Court held that Countrywide use of the software and reproduction of software are two different things and licence fee for countrywide use cannot be considered as the charges for the right to reproduce the imported goods . That was also a case in which the property in the software remained with the supplier - a foreign company and the licence fee was payable by SBI for using the software in a limited way at its own centers for a limited period. 9.2 Then, the Departmental Representative has argued that the data can be rearranged according to the needs of the subscriber and therefore it amounts to adaptation. But, that is not the adaptation contemplated by sub-clause (vi) of section 14(a) of Copyright Act read with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch arrangements include licenses to reproduce and distribute to the public software incorporating the copyrighted program, or to modify and publicly display the program. In these circumstances, the payments are for the right to use the copyright in the program (i.e., to exploit the rights that would otherwise be the sole prerogative of the copyright holder.) 10.2 There is useful discussion on this aspect under the heads Data retrieval and Delivery of exclusive or other high value data in the OECD Commentary on the Treaty characterization issues arising from e-Commerce . Though the dissertation is on the question whether similar income shall be classified as business income or technical fee, what is stated therein would be equally relevant in considering the royalty issue. The relevant passages are worth quoting: Category 15: Data retrieval Definition .-The provider makes a repository of information available for customers to search and retrieve. The principal value to customers is the ability to search and extract a specific item of data from amongst a vast collection of widely available data. 27. Analysis and conclusions.-The payment arising from this type of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005] 272 ITR 991 seems to support the applicant s contention. There also, the Business Information Reports (BIRs) providing factual information on various aspects relating to various business concerns was electronically made available to the subscribers and they were to be used for internal purposes only in order to make informed business decisions. The data was compiled in a standard digital format. The information collected and made available to the customer was available in public domain. It was held that there was no use or right to use any copyright or literary or scientific work or any patent trade-mark, or imparting of information concerning commercial experience, and therefore, the payment did not fall under the category of royalty . It was observed : . . . If a group of companies collects information about the historical places and places of interest for tourists in each country and all informations are maintained on a central computer which is accessible to each constituent of the group in each country, can a supply of such information electronically on payment of price be treated as royalty or fee for technical services? We think not. (p. 113) 10.4 The Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -how has been explained thus: 11. 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. On such definition, given by the Association des Bureaux pour la Protection de la Propriete Industrielle (ANBPPI), states that know-how is all the undivulged technical information, whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process, directly and under the same conditions; inasmuch as it is derived from experience, know-how represents what a manufacturer cannot know from mere examination of the product and mere knowledge of the progress of technique. 11.1 In the know-how contract, one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. 11.2 The same passage has been quoted by Prof. Klaus Vogel in his treatise on Double Taxation Convention (3rd Edition, page 782). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn our attention to the ITAT decision in Wipro Ltd. s case ( supra) in a similar matter concerning subscription to database of a web-based publishing house abroad in terms of user licence granted to the subscriber. The revenue s contention that the fee paid by licensee was in the nature of royalty was rejected. The distinction between transfer of rights in the copyright and authorizing use of copyrighted article was stressed. Moreover, it was held that the clause in Article 12(3)(a) of DTAA information concerning industrial, commercial or scientific experience was not applicable. 11.5 The learned DR faintly suggested that it can also be brought within the purview of equipment royalty i.e., use or right to use any industrial, commercial or scientific equipment. It is submitted that the server which maintains database is being used by customers as a point of inter-face. We do not think that the consideration is paid by the licensee for the use of equipment. The consideration is for availing of the facility of accessing the data/information collected and collated by the applicant. 12. The income by way of subscription fee having been held to be not in the nature of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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