2009 (6) TMI 28 - AAR - Income Tax

Subscription Fees - Data Base retrieval system - databases outside but subscribers in India - in the case of US-based financial data analytics firm FactSet Research Systems, which provides financial and economic information to Indian customers by entering into licence agreements with them, granting them the right to use its database and software tools. Providing a client with the use of search and retrieval software and access to a database does not involve the exercise of special skill or knowledge when the software and database is delivered to the client, the ruling has said. Thus, payments by Indian companies cannot be seen as money spent on services of a technical nature . Under the income-tax laws in India, receipts in lieu of technical services are taxable.

Issues Involved:
1. Taxability of subscription fees under the Income-tax Act, 1961.
2. Taxability of subscription fees under the Double Taxation Avoidance Agreement (DTAA) between India and the USA.
3. Obligation of Indian customers to withhold taxes under section 195 of the Act.
4. Requirement for the applicant to file a tax return in India under Section 139 of the Act.

Detailed Analysis:

1. Taxability of Subscription Fees under the Income-tax Act, 1961:
The applicant argued that the subscription fees do not constitute 'royalty' or 'fees for technical services' under the Income-tax Act, 1961. The Authority examined the Master Client License Agreement (MCLA) and noted that FactSet grants limited, non-exclusive, non-transferable rights to use its databases and software tools. The proprietary rights, including intellectual property rights, remain with FactSet. The subscription fees were considered for accessing the database rather than transferring any rights in respect of copyright. The Authority concluded that the subscription fees do not fall within the scope of clause (v) of Explanation 2 to Section 9(1) of the Act, as no rights in the copyright were transferred to the customers.

2. Taxability of Subscription Fees under the DTAA between India and the USA:
The DTAA defines 'royalty' similarly to the Income-tax Act, focusing on the use or right to use any copyright. The Authority determined that the subscription fees do not involve the use or right to use any copyright of a literary or scientific work. The fees were for accessing the database for internal purposes, without transferring any exclusive rights associated with the copyright. The Authority referenced the OECD Commentary and previous rulings, including Dun & Bradstreet Espana, S.A., to support its conclusion that the fees are not 'royalty' under the DTAA.

3. Obligation of Indian Customers to Withhold Taxes under Section 195 of the Act:
Since the subscription fees were not considered 'royalty' and there was no permanent establishment (PE) in India based on the facts presented, the Authority ruled that the customers in India are not required to withhold taxes under section 195 of the Act. However, the Authority left it open for the Department to investigate the existence of an agency PE in India.

4. Requirement for the Applicant to File a Tax Return in India under Section 139 of the Act:
Given the findings that the subscription fees are not 'royalty' and there is no PE in India, the Authority concluded that the applicant is not required to file a tax return in India under Section 139 of the Act. This conclusion is contingent on the Department not finding an agency PE upon further investigation.

Conclusion:
The Authority ruled that the subscription fees received by FactSet are not taxable in India as 'royalty' under either the Income-tax Act, 1961, or the DTAA between India and the USA. Consequently, Indian customers are not required to withhold taxes on these fees, and the applicant is not obligated to file a tax return in India, provided there is no PE. The ruling is subject to the Department's investigation into the existence of an agency PE.

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