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Issues: (i) Whether subscription fees received for access to the database constituted royalty under the Income-tax Act, 1961 and the India-USA DTAA; (ii) whether, in the absence of taxable income in India, the Indian customers were required to withhold tax; (iii) whether the applicant was required to file a return in India.
Issue (i): Whether subscription fees received for access to the database constituted royalty under the Income-tax Act, 1961 and the India-USA DTAA.
Analysis: The database was held to be a copyrighted literary work, but the subscribers received only a limited, non-exclusive right to access and use the database for internal purposes. No exclusive right in the copyright, no right of reproduction for commercial exploitation, no adaptation right, and no transfer of any proprietary copyright interest was conferred. The payment was for access to a facility and not for the use of, or right to use, copyright, nor for imparting any know-how or commercial experience. The same reasoning applied under both the domestic definition of royalty and the treaty definition.
Conclusion: The subscription fee did not constitute royalty and was not taxable in India on that basis; the conclusion was in favour of the assessee.
Issue (ii): Whether, in the absence of taxable income in India, the Indian customers were required to withhold tax.
Analysis: Since the subscription fee was held not to be royalty, tax withholding would arise only if the revenue established the existence of a permanent establishment in India and consequential taxability of business profits. On the facts placed before the Authority, no permanent establishment was found to exist, though the question was left open for departmental enquiry.
Conclusion: The Indian customers were not required to withhold tax on the subscription fee on the facts then before the Authority; the conclusion was in favour of the assessee.
Issue (iii): Whether the applicant was required to file a return in India.
Analysis: In the absence of royalty income and on the finding that no permanent establishment existed on the facts stated, there was no present obligation to file a return in India in relation to the subscription receipts.
Conclusion: The applicant was not required to file a return in India on the facts as found; the conclusion was in favour of the assessee.
Final Conclusion: The subscription receipts were held outside the royalty charge under both the Act and the treaty, and in the absence of a permanent establishment on the facts before the Authority, the ancillary withholding and return-filing obligations did not arise.
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