Royalty characterisation of subscription revenue and limits on treaty attribution where no permanent establishment is admitted

Subscription revenue from access to an integrated commercial system, software, equipment and connectivity was characterised as royalty under the Income-tax Act and the India-United Kingdom tax treaty because the payment was for use and right to use commercial equipment and an information-processing facility. Once so characterised, attribution under Article 13(6) was not available where the non-resident maintained that no permanent establishment existed in India. The note also records that section 234B interest is not chargeable on a non-resident payee where tax was deductible at source by the payer and no contrary binding authority displaced that principle.

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Issues: (i) whether the subscription revenue received from Indian subscribers was taxable as royalty under the Income-tax Act and the India-United Kingdom tax treaty, and whether Article 13(6) could be invoked to compute the income attributable to a permanent establishment; (ii) whether interest under section 234B was chargeable on the assessee.

Issue (i): whether the subscription revenue received from Indian subscribers was taxable as royalty under the Income-tax Act and the India-United Kingdom tax treaty, and whether Article 13(6) could be invoked to compute the income attributable to a permanent establishment.

Analysis: The subscription charges had already been examined in the assessee's own case for earlier years on substantially similar facts. The same contractual arrangement showed that the Indian subscribers were granted access to an integrated system, software, equipment and connectivity for commercial use, and the payment was for use and right to use such commercial equipment and information-processing system. On that basis, the receipt was held to fall within royalty under the treaty. Once the receipt was characterised as royalty, the question of attribution under Article 13(6) did not arise, because that paragraph could be applied only where the existence of a permanent establishment was not in dispute. The assessee had maintained that it had no permanent establishment in India, so Article 13(6) was not attracted.

Conclusion: The subscription revenue was taxable as royalty, and Article 13(6) could not be invoked; the finding was against the assessee.

Issue (ii): whether interest under section 234B was chargeable on the assessee.

Analysis: The direction deleting interest under section 234B was based on the principle that where tax was deductible at source by the payer, failure by the payer could not result in interest liability on the non-resident payee. No contrary binding authority was brought to dislodge that view, and the proviso to section 209(1)(d) did not warrant interference on the facts considered by the Tribunal.

Conclusion: Interest under section 234B was not chargeable; the finding was in favour of the assessee.

Final Conclusion: The assessee's challenge to the characterisation of the income failed, while the Revenue's challenge to deletion of interest under section 234B also failed, leaving the common order undisturbed.

Ratio Decidendi: Where the contractual arrangement grants subscribers access to an integrated commercial system and the payment is for use and right to use such equipment and related information-processing facility, the receipt is taxable as royalty; Article 13(6) of the treaty is not attracted unless the existence of a permanent establishment is not in dispute, and section 234B interest cannot be imposed on the non-resident payee where tax was deductible at source by the payer.

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