2022 (3) TMI 1019 - AT - Income Tax

Tribunal rules revenue from online database not royalty income under India USA DTAA

The Tribunal ruled in favor of the assessee in appeals concerning the taxation of revenue from an online database as royalty income under the India USA ... Income accrued In India - Royalty receipts - taxation of the revenue from online database of text journals and books as royalty income under the provisions of Article 12 of the India USA Double Taxation Avoidance Agreement [DTAA] - beneficial provisions of the tax treaty to see whether the contention of the assessee that the alleged revenue is not royalty income - HELD THAT:- On an understanding of the entire factual matrix of the business of the assessee shows that there is no transfer of legal title in the copy righted article as the same rests with the assessee. The user has no authority to reproduce the data in any material form to make any translation in the data or to make adaptation in the data. The end user cannot be said to have acquired a copyright or right to use the copyright in the data. In our considered view, for determining whether or not a payment is for use of copy right, it is important to distinguish between “a payment for right to use copy right in a program” and “right to use program itself”. In the case in hand, the revenue derived by the assessee from granting limited access to its data base is akin to sale of book, wherein purchaser does not acquire any right to exploit the underlying copyright. When the purchaser reads the book, he only enjoys the content. Similarly, user of the data base does not receive the right to exploit the copyright in the database, he only enjoys the product in the normal course of his business. Facts on record show that the appellant is granting access to its data base. Transaction under consideration is for provision of accessing data base of the assessee. Hence the same cannot be considered as royalty under Article 12 of the India USA - DTAA. While taxing the revenue as royalty, the Assessing Officer has relied upon the decision of the AAR in the case of Skillsoft Ireland Limited wherein the AAR has followed the decision of the Hon'ble Karnataka High Court in the case of Synopsis International Ltd. [2013 (2) TMI 448 - KARNATAKA HIGH COURT] - we set aside the findings of the ld. CIT(A) and direct the Assessing Officer to delete the impugned addition. Appeal of assessee allowed. Issues:Taxation of revenue from online database as royalty income under India USA DTAA.Analysis:The appeals were filed against separate orders of CIT(A) for different assessment years. The common grievance in both appeals related to taxing revenue from online database as royalty income under India USA DTAA. The Tribunal heard both appeals together due to common underlying facts. The crucial issue was whether the revenue from the online database constituted royalty income under Article 12 of the India USA DTAA.The Tribunal considered the definition of 'Royalty' under Article 12 of the Tax Treaty, which includes payments for the use of copyright in literary, artistic, or scientific works. It was emphasized that payments allowing the use or acquisition of copyright in such works fall under the definition of royalty. The Tribunal distinguished between payments for the right to use copyright and the right to use the copyrighted article, highlighting that mere access to data does not grant the user the right to exploit the underlying copyright.The Tribunal analyzed the business model of the assessee, an entity incorporated in the USA, which provided access to data with value additions like analysis and indexing for a fee. It was observed that there was no transfer of legal title in the copyrighted article to the user, who could not reproduce or adapt the data. The Tribunal likened the transaction to the sale of a book, where the purchaser enjoys the content without acquiring rights to exploit the copyright.In the judgment, the Tribunal referenced the decision of the Hon'ble Supreme Court in a similar case, where it was concluded that the distribution agreements did not create any interest or right amounting to the use of copyright. Consequently, the Tribunal set aside the findings of the CIT(A) and directed the Assessing Officer to delete the addition of revenue as royalty income. Both appeals of the assessee were allowed based on the judgment of the Supreme Court.In conclusion, the Tribunal's decision was in favor of the assessee, ruling that the revenue from the online database did not constitute royalty income under the India USA DTAA. The judgment provided a detailed analysis of the definition of royalty, distinguishing between the right to use copyright and the use of the copyrighted article, ultimately leading to the deletion of the addition of revenue as royalty income.