2024 (2) TMI 1396 - HC - Income Tax

Income deemed to accrue or arise in India - Royalty receipts - consideration received by the assessee from various customers on account of licensing of Customer Relationship Management CRM software - India-Singapore DTAA - assessee is a tax resident of Singapore income in question as derived from the subscription fee which the assessee receives from customers in India for providing CRM related services. HELD THAT - Since the copyright in the application was never transferred or came to vest in a subscriber, we fail to appreciate the contentions which are addressed on the anvil of Section 9 of the Act. This issue, in any case, stands conclusively settled bearing in mind the pertinent observations which were rendered in Engineering Analysis Centre for Excellence 2021 (3) TMI 138 - SUPREME COURT and have been noticed in Relx and have been reproduced hereinabove. We deem it appropriate to additionally observe that the right of subscription to a cloud-based software cannot possibly be said to be equivalent to the use or right to use any industrial, commercial or scientific equipment. This more so since the respondents sought to place the consideration received under Article 12 (4)(b) and which is specifically excluded from sub-article (3)(b). The argument based upon Article 12(4)(a) also cannot sustain since the same pertains to payments received as consideration for managerial, technical or consultancy services and which are ancillary or subsidiary to enjoyment of the right, property or information referable to paragraph 3. This again would be founded upon the payment foundationally falling within the ambit of royalty as defined therein. Similar would be the position which would obtain bearing in mind the unambiguous language in which Article 12(4)(b) of the DTAA is couched. Article 12(4)(b) would have been applicable provided the appellants had been able to establish that the assessee had provided technical knowledge, experience, skill, knowhow or processes enabling the subscriber acquiring the services to apply the technology contained therein. The explanation of the assessee, and which has gone unrefuted even before us, was that the customer is merely accorded access to the application and it is the subscriber which thereafter inputs the requisite data and takes advantage of the analytical attributes of the software. This would clearly not fall within the ambit of Article 12(4)(b) of the DTAA. In any event, clauses (a), (b) and (c) are factors which must be found to exist in addition to the consideration for service being relatable to the provision of managerial, technical or consultancy services. This is clearly evident from Article 12 (4) using the expression if such services . However, once we have found that the principal conditions spelt out in Article 12(4) are themselves not satisfied, this issue would pale into insignificance. It becomes pertinent to observe that Explanation 4 in essence introduces a deeming fiction and includes transfer of all or any rights for use or to use a computer software including by way of a license irrespective of the medium through which such right is transferred. Significantly, the DTAA does not bring within its sweep a right for use or a right of use of a computer software. ITAT correctly held that the consideration received by the assessee from various customers on account of licensing of Customer Relationship Management CRM software is not royalty income within the meaning of Article 12(3) of the IndiaSingapore Double Taxation Avoidance Agreements DTAA. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the consideration received from licensing CRM software is royalty income under Article 12(3) of the India-Singapore DTAA.
2. Whether the ITAT erred by addressing the issue under clause (iv) instead of clauses (iv-a) and (v) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act.
3. Whether CRM software constitutes scientific equipment and its income as royalty under Section 9(1)(vi) and Article 12(3)(b) of the DTAA.
4. Whether the ITAT erred in not considering the service leading to royalty income chargeable to tax in India.
5. Whether the ITAT restricted the scope of taxation due to the non-fulfillment of the "make available clause."
6. Whether service income from CRM software should be treated as royalty under Article 12(4)(a) of the DTAA.

Detailed Analysis:

1. Licensing CRM Software as Royalty Income:
The court examined whether the subscription fee received for CRM software should be treated as royalty under Article 12(3) of the India-Singapore DTAA. The assessee argued that the subscription fees are business profits and not royalties, as there is no transfer of copyright to the customers. The court referenced the case of Relx Inc. and the Supreme Court's ruling in Engineering Analysis Centre for Excellence vs. CIT, which clarified that granting access to a database does not amount to transferring the right to use a copyright. The court concluded that the subscription fee does not constitute royalty income as the copyright remains with the assessee.

2. ITAT's Interpretation of Explanation 2 to Section 9(1)(vi):
The appellant contended that the ITAT erred by addressing the issue under clause (iv) instead of clauses (iv-a) and (v). The court found that the ITAT's interpretation was consistent with the law, as the subscription fee did not involve the transfer of any rights in respect of a copyright. The court reiterated that the subscription fee is not royalty under Section 9(1)(vi) of the Act.

3. CRM Software as Scientific Equipment:
The appellant argued that the CRM platform is scientific equipment and income from its use should be treated as royalty. The court rejected this argument, stating that the right of subscription to a cloud-based software cannot be equated to the use or right to use any industrial, commercial, or scientific equipment. The court emphasized that the CRM software merely provides access to data and analytical tools, which does not fall under the definition of royalty.

4. Service Leading to Royalty Income Chargeable in India:
The appellant asserted that the service leading to royalty income is chargeable to tax in India. The court noted that the provision under Section 9 of the Act would only be attracted if it were more beneficial to the assessee. Since the copyright in the application was never transferred to the subscriber, the court found no basis for treating the subscription fee as royalty under Section 9.

5. Non-fulfillment of "Make Available Clause":
The court referred to its previous judgment in Relx Inc., where it was held that for income to fall under "fees for included services," it must involve making available technical knowledge, experience, skill, know-how, or processes. The court found that the CRM services did not meet this criterion, as the subscription merely provided access to the software without transferring any technical knowledge or skills to the customers.

6. Service Income as Royalty under Article 12(4)(a):
The appellant argued that even if the income is considered service income, it should be treated as royalty under Article 12(4)(a) of the DTAA. The court rejected this argument, stating that Article 12(4)(a) pertains to payments for managerial, technical, or consultancy services ancillary to the enjoyment of the right, property, or information. Since the subscription fee does not fall within the definition of royalty, Article 12(4)(a) is not applicable.

Conclusion:
The court upheld the ITAT's decision, concluding that the subscription fee received for CRM software is not royalty income under Article 12(3) of the India-Singapore DTAA or Section 9(1)(vi) of the Income Tax Act. The appeals were dismissed, and no substantial question of law was found.