2017 (1) TMI 554 - AT - Income Tax

TDS u/s 195 - payment made to Non-Resident, viz. Chemical Abstract Services USA, for online access to the database system SciFinder - Held that - Payment made for access to online publication/database cannot be considered as being in the nature of royalty, liable to withholding tax, either under the Income-tax Act or under the DTAA with USA. Therefore, hold that the payment made to Chemical Abstract Service USA was not liable to TDS under the provisions of Sec. 195 and accordingly, the appellant could not be held liable to pay tax as an assessee in default u/s. 201(1). Payments treated as royalty payments - copyright work - Indo US tax treaty - Held that - It is only when the use is of the copyright that the taxability can be triggered in the source country. In the present case, the payment is for the use of copyrighted material rather than for the use of copyright. The distinction between the copyright and copyrighted article has been very well pointed out by the decisions of Hon ble Delhi High Court in the case of DIT Vs Nokia Networks OY 2012 (9) TMI 409 - DELHI HIGH COURT . In this case all that the assessee gets right is to access the copyrighted material and there is no dispute about. As a matter of fact, the AO righty noted that royalty has been defined as payment of any kind received as a consideration for the use of, or right to use of, any copyright of literary, artistic or scientific work and that the expression literary work , under section 2(o) of the Copyright Act, includes literary database but then he fell in error of reasoning inasmuch as the payment was not for use of copyright of literary database but only for access to the literary database under limited non exclusive and non transferable licence. Even during the course of hearing before us, learned Departmental Representative could not demonstrate as to how there was use of copyright. In our considered view, it was simply a case of copyrighted material and therefore the impugned payments cannot be treated as royalty payments.

Summary

Issues Involved:
1. Taxability of payments made to non-residents for technical services under section 195 of the Income Tax Act, 1961, in light of the 'make available' clause in Indo-US, Indo-Canada, and Indo-UK DTAAs.
2. Classification of payments made for online access to a database as 'royalty' under Article 12 of the Indo-US DTAA.

Issue-wise Detailed Analysis:

1. Taxability of Payments for Technical Services:

Facts:
The Assessing Officer (AO) observed that the assessee made payments to non-resident entities for technical services, such as bioequivalence studies and bioanalysis, and argued these payments were taxable in India under section 195 of the Income Tax Act, 1961. The AO contended that the services rendered were highly technical and should be taxed as fees for technical services (FTS) since they involved the transfer of technical knowledge, experience, skill, and know-how.

CIT(A) Decision:
The CIT(A) held that the services did not satisfy the 'make available' clause under the relevant DTAAs with the USA, Canada, and the UK. The CIT(A) reasoned that for services to be taxed as FTS, they must enable the recipient to perform the technical functions independently in the future without the service provider's help. The CIT(A) relied on precedents, including the ITAT Hyderabad decision in Dr. Reddy's Laboratories Ltd. and the ITAT Ahmedabad decision in B.A. Research India Pvt. Ltd., which clarified that mere provision of technical services does not constitute 'making available' technical knowledge or skills.

Tribunal's Analysis:
The Tribunal agreed with the CIT(A) that the services provided did not involve the transfer of technology enabling the recipient to perform the services independently. The Tribunal cited the Delhi High Court in DIT Vs Guy Carpenter & Co Ltd and the Karnataka High Court in CIT Vs De Beers India Pvt Ltd, emphasizing that 'make available' requires the recipient to be able to utilize the technical knowledge or skill on their own in the future. The Tribunal found no evidence that the assessee could perform the services independently after receiving them. Therefore, the payments were not taxable as FTS under the DTAAs.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the payments made to non-resident entities were not liable for TDS under section 195 as they did not meet the 'make available' criteria under the relevant DTAAs.

2. Classification of Payments for Online Database Access as 'Royalty':

Facts:
The AO noted that the assessee made a payment to Chemical Abstract Service USA for online access to a database and classified this payment as 'royalty' under Article 12 of the Indo-US DTAA. The AO argued that the payment was for the use of a copyrighted database, thus attracting tax as royalty.

CIT(A) Decision:
The CIT(A) disagreed with the AO, stating that the payment was for access to a copyrighted material, not for the use of the copyright itself. The CIT(A) relied on decisions such as Factset Research Systems and Dun & Bradstreet Espana, which held that payments for access to online databases are not royalties.

Tribunal's Analysis:
The Tribunal reviewed Article 12(3) of the Indo-US tax treaty, which defines 'royalty' as payments for the use of, or the right to use, any copyright. The Tribunal distinguished between the use of a copyrighted article and the use of the copyright itself. It concluded that the payment was for accessing copyrighted material under a non-exclusive and non-transferable license, not for using the copyright. The Tribunal cited the Delhi High Court's decision in DIT Vs Nokia Networks OY and the Bombay High Court's decision in DIT Vs Sun and Breadstreet Information Services India Pvt Ltd, which supported this distinction.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the payment for online database access was not 'royalty' under the Indo-US DTAA and thus not subject to TDS under section 195.

Final Judgment:
The Tribunal dismissed the appeal, affirming the CIT(A)'s decisions on both issues. The payments made for technical services did not meet the 'make available' criteria, and the payment for online database access was not classified as 'royalty.'