2023 (4) TMI 273 - AT - Income Tax

Non-resident entity's online database income not royalty under tax treaty

M/s. Uptodate Inc. Versus DCIT, Circle-3 (1) (1), Intl. Taxation, New Delhi

M/s. Uptodate Inc. Versus DCIT, Circle-3 (1) (1), Intl. Taxation, New Delhi - [2023] 105 ITR (Trib) 707 (ITAT [Del]) Issues Involved:1. Whether the amount received by the assessee for allowing access to an online database of journals and books constitutes royalty under section 9(1)(vi) of the Income-tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).Issue-wise Detailed Analysis:1. Nature of Amount Received as Royalty:The core issue revolves around whether the amount received by the assessee, a non-resident corporate entity incorporated in the USA, for providing access to an online database of journals and books, qualifies as royalty. The assessee argued that the amount received does not constitute royalty because no copyright or license was transferred to the customers. The Assessing Officer, however, concluded that the amount received was royalty under section 9(1)(vi) of the Income-tax Act and Article 12(3) of the India-USA DTAA, relying on the decision of the Karnataka High Court in CIT Vs. Samsung Electronics Pvt. Ltd.2. Assessee's Argument:The assessee contended that the database comprises information available in the public domain, and by providing access to this database, no copyright or license was transferred. The payments received were merely for accessing the data, not for any rights to use the copyright. The assessee further argued that the decision of the Karnataka High Court in Samsung Electronics was reversed by the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd., which should be considered.3. Department's Argument:The Departmental Representative argued that the subscription fees received by the assessee for allowing access to the online database amounted to royalty, as it involved transferring the use or right to use the copyright created by the assessee in the database. The representative relied on the decision of the Karnataka High Court in Samsung Electronics and another decision in Gartner Ireland Ltd. Vs. DCIT.4. Tribunal's Analysis:The Tribunal examined the facts and noted that the assessee collates data from the public domain and creates a user-friendly database. The subscription agreement restricts customers from copying, reproducing, or modifying the contents, and all intellectual property rights remain with the assessee. The Tribunal referred to Article 12(3) of the India-USA DTAA, which defines royalties, and concluded that the payments received by the assessee did not fall within this definition. The Tribunal emphasized that the assessee did not transfer any copyright or right to use any industrial, commercial, or scientific equipment.5. Relevant Case Laws and Decisions:The Tribunal considered the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which reversed the Karnataka High Court's decision in Samsung Electronics. The Tribunal also referred to similar cases, including Ovid Technology Inc. Vs. DCIT, where it was held that granting access to a database does not constitute royalty under Article 12 of the India-USA DTAA.6. Conclusion:The Tribunal concluded that the amount received by the assessee for allowing access to the online database does not constitute royalty under Article 12(3) of the India-USA DTAA. Consequently, the amount cannot be taxed in India in the absence of a Permanent Establishment. The Tribunal directed the Assessing Officer to delete the addition, thereby allowing the appeal in favor of the assessee.Final Judgment:The appeal was allowed, and the Tribunal directed the Assessing Officer to delete the addition, concluding that the amount received by the assessee is not in the nature of royalty under Article 12(3) of the India-USA DTAA. The other grounds were dismissed as consequential or premature. The order was pronounced in the open court on 28th February 2023.