2009 (7) TMI 1241 - AAR - Income Tax

US Company's Subscription Fees Not Taxable as Royalty in India; No Withholding Required

Factset Research Systems Inc., In re

The Authority ruled that the subscription fees received by the US-based company are not taxable as 'royalty' under the Income-tax Act or the Double ... Whether, on the facts and circumstances of the case, FactSet Research Systems Inc. (‘FactSet’ or ‘the applicant’) will not be taxable in India under the Income-tax Act, 1961, with respect to the subscription fees? Whether, on the facts and circumstances of the case, the applicant will not be taxable under the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of United States of America with respect to the subscription fees? Whether, on the facts and circumstances of the case, if the applicant is not taxable in India for the subscription fees, its customers in India will be required to withhold taxes under section 195 of the Act on subscription fees paid to the applicant? 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 fee? Issues Involved:1. Taxability of subscription fees under the Income-tax Act, 1961.2. Taxability under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.3. Obligation of Indian customers to withhold taxes under section 195 of the Act.4. Requirement for the applicant to file a tax return in India under section 139 of the Act.Issue-wise Detailed Analysis:1. Taxability of Subscription Fees under the Income-tax Act, 1961:The applicant, a US-based company, provides access to various databases containing financial and economic information. The primary question is whether the subscription fees received by the applicant constitute 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961. The applicant contends that the subscription fees do not constitute 'royalty' as defined in the Act because no transfer of copyright or rights in respect of copyright is involved. The database is a copyrighted literary work, but the license granted to customers is non-exclusive and does not transfer any proprietary or exclusive rights. The customers only have the right to access and use the data for internal purposes. The Authority concluded that the subscription fees do not fall within the scope of clause (v) of Explanation 2 to section 9(1)(vi) of the Act, as no rights in the copyright are transferred to the customers.2. Taxability under the DTAA between India and the USA:The DTAA between India and the USA defines 'royalty' similarly to the Income-tax Act. The applicant argues that the subscription fees do not constitute 'royalty' under the DTAA because the customers do not acquire any rights in the copyright. The Authority agreed, stating that the term 'use' of copyright in the DTAA implies exploitation of the copyright, which is not the case here. The customers only have access to the database for internal use without any rights to reproduce, distribute, or publicly exhibit the data. Therefore, the subscription fees are not taxable as 'royalty' under the DTAA.3. Obligation of Indian Customers to Withhold Taxes under Section 195 of the Act:Given that the subscription fees are not taxable as 'royalty' under either the Income-tax Act or the DTAA, the next question is whether Indian customers are required to withhold taxes under section 195 of the Act. The Authority concluded that the customers are not required to withhold taxes until and unless the Department finds the existence of a Permanent Establishment (PE) after due enquiry.4. Requirement for the Applicant to File a Tax Return in India under Section 139 of the Act:The final issue is whether the applicant is required to file a tax return in India if the subscription fees are not taxable. The Authority concluded that there is no obligation for the applicant to file a tax return in India, given that the subscription fees are not considered 'royalty' and there is no PE based on the facts stated by the applicant.Conclusion:The Authority ruled that the subscription fees received by the applicant are not taxable as 'royalty' under the Income-tax Act or the DTAA. Consequently, Indian customers are not required to withhold taxes under section 195, and the applicant is not obligated to file a tax return in India. However, the Department may conduct an enquiry to determine the existence of a PE, which could affect the taxability of the subscription fees as business income.