Non-resident software manufacturers' income from Indian users not taxable as royalty under India-US DTAA Article 12

The ITAT Delhi ruled that revenue from online database of text journals and books does not constitute royalty income under Article 12 of the India-US DTAA. The Tribunal held that payments made by resident Indian end users/distributors to non-resident computer software manufacturers for resale/use of software through EULAs/distribution agreements are not royalty payments for copyright use. Consequently, such income is not taxable in India and no TDS liability arises under section 195 of the Income Tax Act. The decision favored the assessee against revenue authorities.

---

---

Issues:
The judgment involves the issues of whether receipts earned from providing online database access are covered within the ambit of Royalty u/s 9(1)(vi) of the Act and whether such receipts can be construed as Royalty under Article 12 of the India US Double Taxation Avoidance Agreement.

Issue 1:
The Tribunal considered the appeal filed by the Revenue against the order of the ld.CIT(Appeals) for the assessment years 2020-21 & 2021-22. The Revenue contended that the receipts earned from providing online database access are not covered within the ambit of Royalty u/s 9(1)(vi) of the Act. The Tribunal referred to the decision of the Hon'ble Supreme Court in a similar case and concluded that the payments made for acquiring the right to use the product itself, without allowing any right to use the copyright in the product, are not covered within the scope of Royalty. It was held that the revenue derived by the assessee from granting limited access to its database is akin to the sale of a book, where the purchaser does not acquire any right to exploit the underlying copyright. Therefore, the Tribunal directed the Assessing Officer to delete the impugned addition, ruling in favor of the assessee.

Issue 2:
The second issue revolved around whether the receipts earned from providing online database access of journals and books can be construed as Royalty under Article 12 of the India US Double Taxation Avoidance Agreement. The Tribunal analyzed the provisions of the Tax Treaty and defined 'Royalty' as payments received for the use of or the right to use any copyright of a literary, artistic, or scientific work. It was emphasized that only payments allowing a payer to use or acquire a right to use copyright in such works are covered within the definition of Royalty. The Tribunal held that in the case at hand, the appellant was granting access to its database, and the transaction was for the provision of accessing the database, which could not be considered as Royalty under Article 12 of the India US DTAA. Citing the decision of the Hon'ble Supreme Court, the Tribunal set aside the findings of the CIT(A) and directed the Assessing Officer to delete the addition, ultimately allowing the appeals of the assessee.

Conclusion:
The Tribunal, after considering the arguments and precedents, ruled in favor of the assessee on both issues, stating that the revenue earned from providing online database access did not fall within the definition of Royalty u/s 9(1)(vi) of the Act or under Article 12 of the India US Double Taxation Avoidance Agreement. The Tribunal directed the Assessing Officer to delete the additions made, thereby dismissing the appeals of the Revenue.

---