2019 (4) TMI 1818 - AT - Income Tax

Income accrued in India - PE in India - income earned by the Assessee from the Indian Customers with respect to the subscription fees as royalty in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA - stand of the assessee was that such incomes constitute business profits , which are not taxable in the absence of any Permanent Establishment (PE) in India since the entire products/services were being provided entirely from outside India - HELD THAT - Transfer of any right in a copyrighted article is analogous to the rights acquired by the purchaser of a book. In the case of a book, the publisher of the book grants the purchaser certain rights with respect to the use of the content of the book, which is copyrighted, but the purchaser of the book does not acquire the right to exploit the underlying copyright. When the purchaser reads the book, he only enjoys its contents. Similarly, the user of the copyrighted software does not receive the right to exploit the copyright in the software; he only enjoys the product/benefits of the product in the normal course of his business. Similarly, in the instant case, customers of the assessee only enjoy the benefits of using SciFinder and STN and do not acquire the right to exploit any copyright in these software. The difference between a copyright and a copyrighted article in context of software has been brought out very clearly by the Hon'ble Supreme Court of India in the case of Tata Consultancy Services vs. State of Andhra Pradesh 2004 (11) TMI 11 - SUPREME COURT The income earned by the assessee from the Indian Customers with respect to the subscription fees for CAS cannot be taxed as royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA. Thus, assessee succeeds on this issue. Whether income earned by the assessee from the Indian Customers with respect to the subscription fees for PUBS division be taxed as royalty in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA? - As purchaser of the assessee's journals, articles or database access does not have the right to make copies for re-sale and does not have the right to make derivative works. In short, the purchaser has not acquired the copyright of the article or of the database. What the buyer gets is a copyrighted product, and accordingly the consideration paid is not royalty, but for purchase of a product. In the instant case too, what is acquired by the customer is a copyrighted article, copyrights of which continue to lie with assessee for all purposes. lt is a well settled law that copyrighted article is different from a copyright, and that consideration for the former, i.e. a copyrighted article does not qualify as royalties. Thus, the principles noted by us in the earlier part of this order in the context of the income earned by way of CAS fee are squarely applicable to the subscription revenue received from customers of PUBS division for sale of journal also, and accordingly PUBS fee also does not qualify as Royalty in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA.

Issues Involved:
1. Assessment of total income.
2. Taxability of subscription charges as royalty under Article 12(3) of the India-US DTAA.
3. Determination of tax rate on assessed income.
4. Charging of interest under sections 234A and 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The assessee, a not-for-profit corporation based in the USA, filed its return of income for AY 2014-15 declaring NIL income, asserting it was a tax resident of the USA and entitled to benefits under the India-US DTAA. The Assessing Officer (AO) assessed the total income at INR 730,429,685, treating it as royalty under Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12(3) of the India-US DTAA. The assessee contended that the income constituted business profits not taxable in India due to the absence of a Permanent Establishment (PE) in India.

2. Taxability of Subscription Charges as Royalty:
2.1 Chemical Abstract Service (CAS) Division:
The AO held that subscription fees for the CAS division were chargeable as royalty, considering them payments for information concerning industrial or commercial experience and for the use of industrial, commercial, or scientific equipment. The assessee argued that the fees were for access to a database of publicly disclosed information, not involving any transfer of copyright or intellectual property, and thus not royalty. The tribunal agreed with the assessee, stating that the information was publicly available and not exclusive or secret, and the customers did not acquire any rights to exploit the copyright.

2.2 Publications (PUBS) Division:
Similar to the CAS division, the PUBS division involved subscription fees for access to e-journals and e-books. The AO treated these fees as royalty. The assessee argued that the PUBS division provided access to research work without transferring any copyright. The tribunal found that the customers only had limited access to view and download articles for personal use, without any rights to reproduce or exploit the content, and hence, the fees did not qualify as royalty.

3. Determination of Tax Rate on Assessed Income:
The AO determined the tax payable on the assessed income at 20%, whereas the assessee argued for a 15% rate as per Article 12(2) of the India-US DTAA. Since the tribunal held that the income was not taxable in India, this issue was rendered academic.

4. Charging of Interest under Sections 234A and 234B:
The AO charged interest under sections 234A and 234B of the Income Tax Act. The tribunal noted that this issue was consequential to the main taxability issue and did not require specific adjudication.

Conclusion:
The tribunal allowed the appeal of the assessee, ruling that the subscription fees from both CAS and PUBS divisions were not taxable as royalty under the Income Tax Act or the India-US DTAA. Consequently, the determination of tax rate and the charging of interest were rendered academic or consequential. The order was pronounced in the open court on 30th April 2019.

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