Subscription fees for access to segmented scientific database held to be royalty under section 9(1)(iv)/(vi) and Article 13(3) DTAA

ITAT Delhi (AT) held against the assessee, finding that subscription fees for access to a segmented, web-compiled scientific database constituted royalty. The licence was non-transferable, non-sublicensable and prohibited creation of derivative works, permitting limited downloading for permitted computers only. On these facts the information/knowledge accessed was supplied under a licence and thus fell within the domestic definition of royalty under section 9(1)(iv) and (vi) and article 13(3) of the DTAA with the U.K., making the fees taxable.

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Issues Involved:
1. Whether the subscription fees paid by the assessee to Wood Mackenzie (WM) constitute royalty under section 9(1)(vi) of the Income-tax Act and article 13(3) of the Double Taxation Avoidance Agreement (DTAA) with the U.K.
2. Whether the information accessed by the assessee through the subscription is of a general nature or specialized technical consultancy.

Issue-wise Detailed Analysis:

1. Nature of Subscription Fees as Royalty:

The primary issue is whether the subscription fees paid by the assessee to WM constitute royalty under section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The assessee argued that the subscription fees are not in the nature of royalty as WM is not imparting any specialized information, knowledge, or skill from its experience. Instead, the information is general and concerns the commercial aspects of the upstream sector of various countries.

However, the Revenue contended that the payment is for technical consultancy, as the oil and natural gas sector is specialized and requires specific training and access through passwords provided by WM. The Revenue emphasized that the nature of the payment and the specialized access granted to the assessee indicate that it is not merely general information but technical consultancy.

2. Analysis of Agreement and Information Accessed:

The Tribunal analyzed the agreement between the assessee and WM, noting that WM granted a non-transferable license to the assessee for downloading information from its website. The agreement restricted the use of this information to the assessee and prohibited sub-licensing or sharing with unauthorized persons. The Tribunal highlighted that the user names and passwords provided to the assessee were considered trade secrets and proprietary information of WM, indicating the specialized nature of the information.

The Tribunal further noted that the information accessed by the assessee was not available to the general public and required specific training and access through an agreement. The restrictive clauses in the agreement, which prohibited the disclosure and distribution of the information to unauthorized persons, reinforced the specialized nature of the information.

3. Legal Provisions and Definitions:

The Tribunal referred to section 9(1)(vi) of the Income-tax Act, which defines royalty as consideration for the transfer of all or any rights in respect of a patent, invention, model, design, secret formula or process, or for imparting any information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill. The Tribunal also referred to article 13(3) of the DTAA with the U.K., which defines royalties as payments for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including information concerning industrial, commercial, or scientific experience.

The Tribunal concluded that the subscription fees paid by the assessee to WM fall within the definition of royalty under both section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The Tribunal emphasized that the information accessed by the assessee was specialized and technical, not general, and required specific training and access through an agreement.

4. Case Laws and Comparisons:

The Tribunal distinguished the present case from other cases cited by the assessee, such as Wipro Ltd. v. ITO and Dun and Bradstreet Espana S.A., In re, where the information provided was publicly available and only compiled by the respective entities. In contrast, the information accessed by the assessee in the present case was specialized, proprietary, and restricted to specific users under the terms of the agreement.

Conclusion:

The Tribunal held that the subscription fees paid by the assessee to WM constitute royalty for information concerning industrial, commercial, or scientific experience and are taxable under section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals of the assessee.

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