TaxTMI 
TaxTMI 
2016 (4) TMI 589
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....ng that the payment to M/s. GGS Spectrum Limited, UK, ('GGS'), for purchase of dataset is in the nature of royalty, hence taxable under the Act and India UK Double tax avoidance agreement. 2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding the assessee as an "assessee in default' for not withholding of taxes on payments made to GGS, and to that extent the order of the Ld. CIT(A) is unjustified, erroneous and unsustainable. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, to enable the learned Commissioner of Income-tax (Appeals) to decide this appeal according to law." 1.1. In ITA.No.318/H/2012, the grounds raised are as under: "Based on the facts and circumstances of the case, GVK Oil & Gas Limited (hereinafter referred to as the 'Appellant') respectfully craves leave to prefer an appeal against the order passed by the Learned Commissioner of Income-tax (Appeals)-V ('Ld. CIT(A)') dated 2 December, 2011 under section 250 of the Income-tax Act, 1961 ('Act') on the follow....
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.... blocks, the company was required to understand the geological and seismic quality of the block in order to optimise the risk of exploration and in order to evaluate various blocks, the company required available geological and seismic data. The A.O. observed that for the above purpose, the assessee has entered into an agreements (Master Geophysical Data Use License and Supplemental Agreements) both with GXT, which is a USA based Corporation and a leading provider of a comprehensive range of advanced seismic Data and Derivatives and M/s. GGS, a UK based company and a leading provider of a comprehensive range of advanced seismic Data and Derivatives. By virtue of these agreements, both the companies agreed to grant non-exclusive license/right to use certain Data and Derivatives in consideration for an agreed license fee. The A.O. observed that the assessee has made the payment to GXT, as a consideration/compensation for the non-exclusive license to use certain Data and Derivatives, which the GXT named as IndiaSPAN, while payment to GGS was towards consideration/compensation for the non-exclusive license to use the Data and Derivatives. As regards the transaction with GXT, the AO obs....
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....proprietary to and a trade secret of GX Technology Corporation, USA and is undivulged to the public. He found that the above information/knowledge is available to the user only on securing a valid license from the licensor i.e., GXT and therefore, the payment made by the assessee to GXT by way of "license-fee" amounts to consideration for information concerning industrial, commercial or scientific experience and as such constitutes "royalty" both as per Indo US DTAA and Income-tax Act. He, therefore, issued a notice dated 04.12.2008 to the assessee under section 201, to showcause as to why the payment should not be considered as 'Royalty' both as per the DTAA and Income Tax Act. The assessee submitted its detailed reply vide letter dated 10.12.2008 against the treatment of the payment as 'Royalty'. The A.O, after considering assessee's contentions at length, held the payment to be royalty both under the India-US DTAA as well as the Indian Income Tax At. Further, he observed that the GXT owns knowledge i.e., right on IndiaSPAN or the data and derivatives for which the assessee has paid the license-fee and held that the same constitutes 'Royalty'. Since the assessee has failed to mak....
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..... As regards the alternate finding of the A.O. that license fee paid by the assessee was towards the use of the Copyright on Dataset IndiaSPAN and therefore, the payment made by the assessee for use of such a copyright is also in the nature of 'Royalty', the Ld. Counsel for the assessee, submitted that the dataset is not a transfer of the right itself but it is a copyrighted article like computer software off the SHELF and therefore, it cannot be considered as use of a copyright and the payment as 'Royalty'. He further drew our attention to the clauses in the agreement wherein it is provided that the assessee is provided with a non-exclusive right to use dataset and thus proves that the software is not customized to the requirement of the assessee and further is not for exclusive use of the assessee, which means that it can be utilized by other similarly placed customers. He further submitted that on the expiry or termination of the license, the assessee is required to return back or destroy the dataset which clearly proves that knowhow has not been allowed to be used by the assessee. He drew our attention to the OECD commentary on the definition of 'Royalty' under Article-12 where....
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.... further submitted that where the customized data has been made available upon the request of the assessee, it becomes 'knowhow' as it cannot be used by any other party. He further relied upon the decision of ITAT at Bangalore in the case of ING Vysya Bank in support of his contention that the payment made for use of data is Royalty. Further he has also relied upon the findings of the A.O. that the dataset provided by GXT and GGS are copyrighted data and therefore consideration for use of an intangible property has to be considered as 'Royalty'. Thus, according to him, the A.O. and the Ld. CIT(A) have rightly treated the consideration paid under the license as 'Royalty'. 7. In rebuttal, the Ld. Counsel for the assessee, while reiterating the submissions made earlier, has drawn our attention to the distinction between the definition of 'Royalty' under section 9(1)(vi) of the Income Tax Act and the Explanation (2) thereunder, and also under the Indo- US DTAA, and stated that under section-9, the term 'Royalty' includes knowledge, experience or skill while under DTAA only the word 'experience' is used and further that where the provisions of the DTAA are beneficial to an assessee, ....
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....se of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; [ (iva)] the use or right to use any industrial commercial or scientific equipment but not including the amounts referred to in section 44BB]. (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (iv); (iva) and (v)." 8.1. The definition of Royalty under Article 12(3) of the DTAA between India and US is as under : "ARTICLE 12 Royalties and Fees for Included Services ....
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....e DTAA between India and USA and India and UK. Under the Income Tax Act, consideration for granting of a license for the use of the property mentioned therein also means Royalty, whereas, there is no such provision under the Double Taxation Avoidance Agreements between India and USA & UK. As held by the Coordinate Bench of this Tribunal at Bangalore in the case of Wipro (cited supra), the established principle is that the provisions of DTAA, if beneficial to the assessee, should prevail over I.T.Act. Therefore, we proceed to apply the definition of 'Royalty' under the DTAA and examine whether the transactions of the assessee fall within the ambit of the said definitions. In the case before us, the assessee has made payment for the right to use information embedded in the product. Further, though the said information is scientific as well as technical, the assessee is permitted to use the said information only as a licensee. 8.4. Let us, now see the ratio laid down by the Courts in the cases relied upon by the assessee. 8.4.1. In the case of Wipro Limited vs. ITO (2005) 94 ITD ( (Bang), the ITAT was dealing with the definition of 'Royalty' under the Income Tax Act and the DTAA....
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....of consultancy services, cannot be considered to be ancillary and subsidiary to the enjoyment/application of the right or information referred to in para 3(a). Moreover, by giving access to the database, it cannot be said that the information concerning industrial, commercial or scientific experience will be transmitted by the applicant to the recruiting agencies. If the contention of Revenue is accepted, it would amount to unwarranted expansion of the terms fees for technical services and royalties. Consideration for providing information concerning industrial, commercial or scientific experience basically involves the sharing of technical know-how and experience which is not the case here. Secondly, it would be far-fetched to suggest that the ingredient of 'making available' technical knowledge, experience, skill, know-how or process is involved in this case. Taking steps to make available the experience and skill of candidates available for recruitment does not at all fall within the ambit of making available the technical knowledge and experience of the service provider. The criterion envisaged by art. 13.4(a) of DTAA has not been satisfied in the instant case." 8.4.....
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....tancy nature. That could include to the application or enjoyment of the right, property or information. This is not the case here. Neither is it making available technical knowledge, experience, skill, etc., to enable the person acquiring the service to apply the technology contained therein." 8.4.5. In the case of Factset Research Systems Inc., reported in (2009) 317 ITR 169, the Authority for Advance Rulings while dealing with the definition of 'Royalty' under the DTAA between India and USA, has held as under : "The Departmental Representative then invoked c1. (iv) of Expln. 2 to s. 9(1) which speaks of "imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill". The DTAA (art. 12.3) uses slightly different language. It speaks of payment received for "information concerning industrial, commercial or scientific experience". The payment in question cannot be brought within the fold of this part of definition of 'royalty'. The clause does not contemplate merely imparting information on technical, industrial or commercial matters. The requirement is imparting of information concerning technical, commercial ....
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....ive(s)" means all processed and reprocessed Data regardless of the form or medium on which it is displayed or stored whether produced by Licensee or Third Parties. 1.8. "Licensee's Consultant(s)" means Third Party(- ies) which are Consultants in the geophysical industry freely selected and entrusted by Licensee to interpret, reprocess, make other technical studies or provide storage of the Data for the sole use and benefit of Licensee but subject to the terms of Licensee under this License. Licensee's Consultants may not be Prospective Partners, Partners, Prospective Acquirers or Acquirers." 1.9. "Licensee Interpretation(s)" means product(s) created by Licensee or its Consultants that are based upon space and time location of the Data and/or Derivatives but do not directly incorporate actual Data or Derivative values or magnitudes. Ownership/Confidential Treatment : 2. Data Ownership/Confidential Treatment: Ownership/Confidentiality : Licensor is the owner, or the duly authorized agent if of its principal (the "Data Owner") of any and all intellectual and/or industrial property rights. Licensor represents, and Licensee acknowledg....
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....ense." This notice shall not be removed, obliterated, concealed or otherwise obscured by Licensee or those to whom the Data or Derivatives is disclosed, displayed or transferred by Licensee, as may be permitted in this License. 4. Disclosure of Data & Derivatives : Licensee shall have the non-exclusive right to use the Data and Derivatives for its intended use subject to the terms and conditions of Licensee under this License. Licensee shall not Show, Transfer or otherwise dispose of or allow access to, or use of any or all, of the Data or Derivatives except as specifically provided for in this Article 3 and the Article 5 below. Copies of any Confidentiality Agreements between Licensee and Third Parties as required by the terms and conditions of this License shall be provided to Licensor upon formal written request. 3.3. Licensee's Consultant The Data and Derivatives may be made available to any Licensee's Consultant for the sole use and benefit of Licensee, provided that the Consultant signs a Confidentiality Agreement with Licensee prior to the service. The Data and Derivatives shall remain on the premises of Licensee's Consultant solely for....
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.... leases will be granted or other exploration and/or development for production activity will be authorized for geographical areas covered by the Data by any individual, , company or other legal entity, government agency or other third party and any implied warranty or representation to that effect is hereby expressly negated. 9. Effects of Termination : 9.1. Return of Data Upon expiration or termination of this License or any Supplement, regardless of the cause, Licensee shall within 30 days return and/or destroy all respective Data and Derivatives and shall within the same 30 day period provide written certification that all copies of the Data and Derivatives, and any physical manifestations thereof, subject to this License and/or the affected Supplement, have been returned to Licensor or destroyed, including removal of such Data from Licensee's storage and archival systems, workstations, prospect files, and that Licensee has retained no copies of such Data and Derivatives. For a period of 24 months from the termination of any License or Supplement, Licensor shall have the right to audit Licensee's premises, systems and storage sites to verify that all of....