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2015 (8) TMI 135 - AAR - Income TaxFees for technical services under Article 12(3)(b) of the Agreement between the Government of the Republic of India and the Government of Ireland - whether payments received by the Applicant would be characterized as royalty under Article 12(3)(a) of the India-Ireland Treaty? - Permanent Establishment ( PE ) - whether the payments received by the Applicant for the SkillSoft Products would be subject to withholding tax in accordance with the provisions of section 195 ? - Held that - A SkillSoft Product consist of two components. The first is course content and the second is the software through which the course is delivered to the end customer. The applicant enters into a Reseller Agreement with the SkillSoft India for sale of SkillSoft Products. SkillSoft India buys the SkillSoft Product from the applicant and sells the same to the Indian end-users under the master license agreement, which is primarily in the nature of a software/content license agreement whereby the Indian endusers are permitted to access the e-learning platforms and the educational content. SkillSoft India provides to the end-users the access code/web-link by which they could access the SkillSoft Products. We have also gone through a demo of the website of the applicant and could see that they were marketing several copyrighted software containing simulation exercises and such software simulations were especially designed by them. Such especially designed software are not available in public domain. It is clearly mentioned by them that these products are licensed by the Applicant to SkillSoft India under the Agreement and further sub-licensed/distributed to end customers in India under the Customer Agreement. It is not correct to say that the applicant s case is completely different from the facts of a case surrounding software. The fact is that software and computer databases created by the applicant are included within the ambit of literary work and therefore covered under Article 12(3)(a). The payments received by the applicant from the distributor for sale of the software product are in the nature of royalty both within the meaning of section 9(1)(vi) of the IT Act and within the meaning of Article 12 of the DTAA As regards definition of royalty under DTAA, it was held in the case of Synopsis 2013 (2) TMI 448 - KARNATAKA HIGH COURT that under the DTAA to constitute royalty there need not be any transfer or any rights in respect of any copy rights and it is sufficient if consideration is received for use of or the use to any copyright. Therefore if the definition of royalty in the DTAA is taken into consideration it is not necessary that there should be a transfer of any exclusive right. In terms of the DTAA the consideration paid for the use or right to use the said confidential information in form of computer programme software itself constitutes royalty. We respectfully agree with the findings of Hon ble Karnataka High Court in the case of Synopsis. No permanent establishment is created for the applicant in India under the provision of Article 5 of the DTAA. The payment received by the applicant would be subject to withholding tax in accordance with the provisions of the section 195 of the IT Act. - Decided in favor of revenue.
Issues Involved:
1. Characterization of payments as 'fees for technical services' (FTS) under Article 12(3)(b) of the India-Ireland Treaty. 2. Characterization of payments as 'royalty' under Article 12(3)(a) of the India-Ireland Treaty. 3. Creation of a Permanent Establishment (PE) for the applicant in India under Article 5 of the India-Ireland Treaty. 4. Applicability of withholding tax under section 195 of the Income Tax Act. Detailed Analysis: 1. Characterization of Payments as 'Fees for Technical Services' (FTS) The applicant argued that the payments received for SkillSoft products are not for managerial, consultancy, or technical services but for a product. The end-line software platform should be regarded as software and not services. The Revenue did not contest this point, and the ruling concluded that the payments are not characterized as FTS under Article 12(3)(b) of the India-Ireland Treaty. 2. Characterization of Payments as 'Royalty' The main contention revolved around whether the payments made to the applicant by SkillSoft India should be classified as royalty. The applicant argued that the payments are for a copyrighted article (similar to a book) and not for the copyright itself. The applicant's counsel cited several case laws, including FactSet Research Systems Inc., Dassault Systems KK, and DIT vs Infrasoft Ltd, to support the argument that no rights in the copyright were transferred to SkillSoft India or the Indian end-users. The Revenue, however, relied on cases like CIT vs Samsung Electronics Co Ltd and CIT vs Synopsis International Old Ltd, arguing that the payments should be classified as royalty under Article 12(3)(a) of the India-Ireland Treaty. The ruling noted that the facts of the case are similar to the Citrix Systems Asia Pacific Pvt. Ltd case, where payments received for software products were considered royalty. The authority concluded that the payments received by the applicant are in the nature of royalty under Article 12(3)(a) of the India-Ireland Treaty. 3. Creation of a Permanent Establishment (PE) The Revenue did not argue that the applicant had a PE in India. The ruling confirmed that no PE is created for the applicant in India under Article 5 of the India-Ireland Treaty. 4. Applicability of Withholding Tax Given the conclusion that the payments are in the nature of royalty, the ruling stated that the payments received by the applicant would be subject to withholding tax under section 195 of the Income Tax Act. Conclusion: - The payments received by the applicant are not characterized as 'fees for technical services' under Article 12(3)(b) of the India-Ireland Treaty. - The payments are characterized as 'royalty' under Article 12(3)(a) of the India-Ireland Treaty. - No Permanent Establishment is created for the applicant in India under Article 5 of the India-Ireland Treaty. - The payments are subject to withholding tax under section 195 of the Income Tax Act.
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