TMI Blog2006 (11) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of a particular software, which the applicant is entitled to use. The applicant has to pay licence fee for the software to the said non-resident company. It has been categorically stated by the applicant that Conversagent , the non-resident company does not have any establishment or office in India, and therefore, the payments received by the non-resident (Conversagent) from the applicant, for allowing the applicant to download and use the software are covered under article 7 of the Double Taxation Avoidance Agreement with USA (i.e., business profits), which are not chargeable to tax in India. On these facts the applicant has sought ruling of the Authority on the following question : Whether periodical payments made to the non-resident person, having no office/establishment in India, in connection with the use of software developed by him on internet are subject to tax deduction at source under the Double Taxation Avoidance Agreement with the USA ? 2. The jurisdictional Commissioner in his comments has stated as under : As per copy of agreement between the assessee-company and Conversagent Inc, New York, royalty payment for the licence shall be paid of 10000 US dol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net on payment of some fee, hence this is a normal business covered under article 7 of the USA-Indo Double Taxation Avoidance Agreement. Further since the non-resident does not have any establishment/ branch in India in terms of article 7 of the US-Indo Double Taxation Avoidance Agreement, payments made to him are, in our opinion, not liable to deduction of tax at source. 4. During the course of oral hearing, Shri Naveen Modi, C.A., counsel for the applicant, has pleaded that the payments received by the Conversagent for allowing the applicant company to download and use the software, are covered under article 7 of the Double Taxation Avoidance Agreement (DTAA) with USA which is not chargeable to tax in India since the nonresident company does not have a permanent establishment or a branch in India, and in view of this position payments made to the non-resident are not chargeable to tax in India. At this point of time during the hearing, counsel's attention was drawn to the licence agreement with Conversagent, which states that the licence is granted only to produce and distribute interactive agents by using the software on the server platform of Conversagent for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05, the assignor transfers all its rights and liabilities under the Conversagent agreement to the assignee. 2. The assignee will have the right to use the Buddyscript and Smarterchild technologies under the same terms and conditions as were applicable to the assignor. 3. The assignee will directly pay all the software licence fees under the Conversagent agreement to Conversagent Inc. as per the invoices raised by them from time to time. 9. Prior to this the applicant had entered into a service agreement with the parent company on March 15, 2005, for providing technical development services to IMT Labs A/S. For the purposes the applicant needs to use Smarterchild software, made by using Buddyscript technology (a scripting language) ; both of which are developed and owned by Conversagent. Accordingly the rights and obligations under the Licence Agreement have been assigned to the applicant by the parent company. Some of the important clauses of the Licence agreement are extracted below : Licence Agreement . . . . 1. Grant of Licence. (a) . . . . (X) The software that is currently used by Conversagent for its 'Smarterchild' application for the sole purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugust 2, 2006. 5. Hosting fees. (a) Conversagent shall provide free hosting for interactive agents created by the licensee until September 30, 2004. Thereafter, if requested by the licensee, Conversagent shall host interactive agents for the licensee in accordance with the then applicable rate card of the licensee. Attached as exhibit B hereto is the current rate card of Conversagent for such host ing. Conversagent warrants that such hosting fees will not be increased prior to July 1, 2006. (b) . . . 6. Obligations of Conversagent. (a) . . . (b) After the effective date, Conversagent will, at the request of the licensee, at such times as reasonably requested by the licensee, provide one qualified staff member to assist the licensee with the transfer of technical information to the licensee as contemplated by this agreement ; provided, however, that such services shall not exceed an aggregate of 16 working hours and all such assistance shall be effected at Conversagent's premises. (c) . . . . (d) After the effective date, Conversagent shall provide the licensee e-mail support not to exceed 4 hours per month. 7. Confidentiality. (a) . . . . . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial 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) or 3 of article 8. 4. For the purposes of this article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or 11. From the above it is seen that the term royalties as used in sub-clause (b) of para. (3) of article 12 means payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. As already stated, the Smarterchild application (software) on the Conversagent Server platform is scientific equipment, licensed to be used for commercial purposes. Therefore, payments made for producing and hosting interactive agent applications ('interactive agents') ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head 'Salaries'. 13. After carefully reading the above provisions we find that meaning of the term royalty as used in Explanation 2 to clause (vi) of sub-section (1) of section 9, is at par with the term royalties as used in article 12(3)(b) of the Double Taxation Avoidance Agreement. The term fees for technical services as used in Explanation 2 of clause (vii) of sub-section (1) of section 9, is at par with the term fees for included services as used in article 12(4)(a) of the Double Taxation Avoidance Agreement. In view of this position, the payments being made by the applicant (a resident), to Conversagent (a non-resident), are chargeable to tax in India, under article 12 of the Double Taxation Avoidance Agreement as also under section 9 of the Act. 14. Inasmuch as we have concluded that the periodical payments made by the applicant to the Conversagent are in the nature of Royalties and fees for included services and taxable under article 12 of the Double Taxation Avoidance Agreement, the said payments cannot, therefore, be treated as business income. 15. Before parting with the issue, it may be stated that reliance placed by the applicant's coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onth shall be $10,000 (U.S.), and there is no provision for downloading or sale of the software as per the licence agreement. The facts being entirely different, reliance is misplaced on the decision of Dun and Bradstreet Espana S.A. [2005] 272 ITR 99 (AAR), and of no help to the applicant. 16. We shall now deal with the scope of section 195 of the Act. It will be useful to read the relevant portion of sub-section (1) of section 195 of the Act : 195. Other sums.-(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries') shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct Income-tax thereon at the rates in force. 17. A plain reading of the sub-section shows that any person responsible for paying to a foreign company (i) any interest ; or (ii) any other sum chargeable under the provisions of the Act (except salary) is required to deduct Income-tax ..... 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