2009 (6) TMI 28 - AAR - Income Tax

Tax Authority: FactSet subscription fees not taxable in India as 'royalty'

The Authority ruled that the subscription fees received by FactSet are not taxable in India as 'royalty' under either the Income-tax Act, 1961, or the ... Royalty - use of or right to use copyright - transfer of rights in copyright - copyright (computer database as literary work) - imparting of information / know-how (information concerning commercial experience) - permanent establishment (agency PE) - business profits (Article 7 DTAA) - withholding tax under section 195 - filing obligation under section 139Royalty - use of or right to use copyright - transfer of rights in copyright - copyright (computer database as literary work) - Subscription fees paid to FactSet do not constitute 'royalty' under Explanation 2 to Section 9(1)(vi) of the Income-tax Act or under Article 12 of the India-USA DTAA. - HELD THAT: - The applicant's database is a 'literary work' under copyright law (computer programmes/databases included) but the licence granted to subscribers is non-exclusive and confined to access and internal use; no exclusive proprietary rights in the copyright (reproduction, distribution, adaptation or assignment) are conveyed. The Agreement contains express restrictions preventing copying, redistribution or commercial exploitation by the licensee; the consideration is for a facility to view and retrieve compiled public-domain information with value-added collation and indexing, not for transfer of copyright rights. The Tribunal's reasoning relied on the distinction between granting access/use of a copyrighted work and granting rights to exploit the copyright, supported by OECD commentary and earlier rulings (including Dun & Bradstreet), and rejected characterization as transfer/use of know how or imparting of the supplier's undisclosed experience. Hence the receipts cannot be taxed as royalty under the statutory or treaty definitions. [Paras 8, 9, 10, 11]Subscription fees are not royalty.Permanent establishment (agency PE) - business profits (Article 7 DTAA) - On the facts stated by the applicant, no permanent establishment exists in India and therefore the subscription fees are not taxable as business profits in India; however the Authority left open the question of agency PE for departmental enquiry. - HELD THAT: - Article 7 permits taxation of business profits only to the extent attributable to a PE. The applicant's primary position (no operations or agents in India authorised to conclude contracts) precludes a PE on the present record. The rejoinder disclosed activities of group entities in India (marketing/support/back-end work) raising a factual issue about possible agency PE. The Authority declined to undertake further fact-finding in the advance ruling proceeding, invited the Department to investigate the existence and, if found, the attribution of profits to any agency PE. Thus the matter of whether an agency PE exists was not finally adjudicated on the merits and remains open to verification by the Department. [Paras 12, 13]Not taxable as business income on the facts before the Authority; question of agency PE left open for departmental enquiry.Withholding tax under section 195 - permanent establishment (agency PE) - Indian customers are not required to withhold tax under section 195 on subscription fees paid to FactSet unless the Department, after enquiry, finds the existence of a PE in India. - HELD THAT: - Obligation to withhold under section 195 arises only if the payment is chargeable to tax in India. Given the Authority's conclusion that the subscription fees are not royalty and that, on the declared facts, no PE exists in India, there is no present obligation on Indian customers to deduct tax. This position is qualified by the Authority's reservation that a departmental finding of an agency PE would alter the withholding position. [Paras 12, 13]No withholding required at present; withholding may become necessary if a PE is subsequently found.Filing obligation under section 139 - royalty - permanent establishment (agency PE) - FactSet is not presently obliged to file an Indian tax return under Section 139 in respect of the subscription fees on the facts stated (no royalty and no PE). - HELD THAT: - Filing obligation would follow taxable income in India. Having held that the receipts are not royalty and that, on the material before the Authority, no PE exists in India, the Authority concluded there is no present requirement for the applicant to file a return under Section 139 in respect of those receipts. This conclusion is likewise subject to change if the Department establishes the existence of a taxable PE and attributable income. [Paras 13]No obligation to file under Section 139 on the facts before the Authority.Final Conclusion: The Authority ruled that the subscription fees received by FactSet are not 'royalty' under the Income tax Act or the India-USA DTAA; on the facts disclosed there is no permanent establishment in India and hence no taxation as business profits, no present withholding obligation on Indian customers under section 195, and no filing obligation under section 139 - subject to the Department's right to enquire into and determine the existence, and if any, the profit attribution of an agency PE. Issues Involved:1. Taxability of subscription fees under the Income-tax Act, 1961.2. Taxability of subscription fees 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.Detailed Analysis:1. Taxability of Subscription Fees under the Income-tax Act, 1961:The applicant argued that the subscription fees do not constitute 'royalty' or 'fees for technical services' under the Income-tax Act, 1961. The Authority examined the Master Client License Agreement (MCLA) and noted that FactSet grants limited, non-exclusive, non-transferable rights to use its databases and software tools. The proprietary rights, including intellectual property rights, remain with FactSet. The subscription fees were considered for accessing the database rather than transferring any rights in respect of copyright. The Authority concluded that the subscription fees do not fall within the scope of clause (v) of Explanation 2 to Section 9(1) of the Act, as no rights in the copyright were transferred to the customers.2. Taxability of Subscription Fees under the DTAA between India and the USA:The DTAA defines 'royalty' similarly to the Income-tax Act, focusing on the use or right to use any copyright. The Authority determined that the subscription fees do not involve the use or right to use any copyright of a literary or scientific work. The fees were for accessing the database for internal purposes, without transferring any exclusive rights associated with the copyright. The Authority referenced the OECD Commentary and previous rulings, including Dun & Bradstreet Espana, S.A., to support its conclusion that the fees are not 'royalty' under the DTAA.3. Obligation of Indian Customers to Withhold Taxes under Section 195 of the Act:Since the subscription fees were not considered 'royalty' and there was no permanent establishment (PE) in India based on the facts presented, the Authority ruled that the customers in India are not required to withhold taxes under section 195 of the Act. However, the Authority left it open for the Department to investigate the existence of an agency PE in India.4. Requirement for the Applicant to File a Tax Return in India under Section 139 of the Act:Given the findings that the subscription fees are not 'royalty' and there is no PE in India, the Authority concluded that the applicant is not required to file a tax return in India under Section 139 of the Act. This conclusion is contingent on the Department not finding an agency PE upon further investigation.Conclusion:The Authority ruled that the subscription fees received by FactSet are not taxable in India as 'royalty' under either the Income-tax Act, 1961, or the DTAA between India and the USA. Consequently, Indian customers are not required to withhold taxes on these fees, and the applicant is not obligated to file a tax return in India, provided there is no PE. The ruling is subject to the Department's investigation into the existence of an agency PE.