2024 (8) TMI 1080 - AT - Income Tax

Accrual of income - receipts from Indian customers - chargeable to tax as Royalty / FTS/FIS or not? - Amount received for sale of online or hard copy journals - assessee did not have a Permanent Establishment ( PE ) in India - HELD THAT - As providing access to online database / journals is nothing but providing access to copyrighted article which does not amount to royalty. In this regard, reliance is placed on following decisions, wherein difference between a Copyright and a copyrighted article has been brought out very clearly in Engineering Analysis Centre of Excellence (P.) Ltd. 2021 (3) TMI 138 - SUPREME COURT , ZTE Corporation 2021 (7) TMI 1336 - SC ORDER . Even as per Explanation 2 to the Section 9(1)(vi) of the Act, the impugned receipts from Indian customers do not constitute consideration for grant of any rights in the copyright, hence are not taxable as royalty. Thus, receipts from Indian customers for offshore sales of books / journals or providing access to online journals / online library do not qualify as Royalties under the Act as well as under the Treaty. The services are also do not fall under FIS as the services do not satisfy the clause make available as required for the provisions of Article 12 of DTAA. Assessee appeal allowed.

Issues Involved:
1. Assessment of total income.
2. Classification of receipts as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-USA tax treaty.
3. Classification of receipts as Fees for Technical Services (FTS) / Fees for Included Services (FIS) under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-USA tax treaty.
4. Applicability of the India-USA tax treaty benefits.
5. Validity of the directions issued by the Dispute Resolution Panel (DRP) without a Document Identification Number (DIN).
6. Timeliness of the final assessment order.
7. Initiation of penalty proceedings under Section 270A of the Income Tax Act.

Detailed Analysis:

1. Assessment of Total Income:
The assessee contested the assessment of total income at INR 16,32,72,111 against the returned income of INR 17,93,540. The addition of INR 16,12,78,571 was made pursuant to the directions issued by the Dispute Resolution Panel (DRP). The Tribunal reviewed the facts and arguments presented by both parties.

2. Classification of Receipts as Royalty:
The core issue was whether the consideration received for the sale of online journals or books constituted royalty under Section 9(1)(vi) of the Act read with Article 12 of the India-USA tax treaty. The Tribunal noted that:
- The assessee's products are copyrighted but do not grant users the right to amend, modify, or alter the product.
- The limited access granted to online journals does not amount to granting any right in the copyright.
- Citing precedents like ACIT vs. Relx Inc. and Uptodate Inc. vs. DCIT, the Tribunal concluded that subscription fees for access to online databases do not constitute royalties as the customers did not acquire any copyright.

3. Classification of Receipts as FTS/FIS:
The Tribunal also examined whether the receipts constituted Fees for Technical Services (FTS) or Fees for Included Services (FIS) under Section 9(1)(vii) of the Act and Article 12 of the India-USA tax treaty. It was observed that:
- The services provided were standard and did not involve human intervention.
- The receipts did not make available any technical knowledge, skill, or know-how, and thus did not qualify as FIS.
- The Tribunal relied on decisions such as Elsevier Information System GmbH vs. DCIT, which held that providing access to an online database does not involve technical services.

4. Applicability of the India-USA Tax Treaty Benefits:
The Tribunal noted that the DRP's stance that the application of treaty benefits was debatable was incorrect. Since the assessee did not have a Permanent Establishment (PE) in India, the income was not taxable as business income under the India-USA DTAA.

5. Validity of DRP Directions without a DIN:
The issue regarding the absence of a Document Identification Number (DIN) on the DRP's directions was not pressed by the assessee, and thus, not adjudicated.

6. Timeliness of the Final Assessment Order:
The assessee argued that the final assessment order dated 27.06.2023, issued on 12.07.2023, was barred by limitation under Section 144C(13) of the Act. However, since the primary issues were adjudicated on merits, this ground was not specifically addressed.

7. Initiation of Penalty Proceedings:
The Tribunal did not specifically address the initiation of penalty proceedings under Section 270A of the Act, as the main issues were resolved in favor of the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee, concluding that the receipts from Indian customers for access to online journals do not constitute royalties or FTS/FIS under the Act or the India-USA tax treaty. Consequently, the addition made by the AO was deleted, and the other grounds raised by the assessee were deemed academic and not adjudicated. The order was pronounced in the open court on 21/08/2024.

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