2013 (9) TMI 793 - AT - Income Tax

Disallowance of royalty - assessee is accessing a scientific work which is in the nature of intellectual property - whether the subscription fees paid by the assessee to WM constitute royalty for information concerning industrial, commercial or scientific experience and the same is taxable under section 19(1)(vi) and article 13(3) of the Double Taxation Avoidance Agreement with the U. K - Held that - what is being assessed by the assessee was a scientific work which has a character of intellectual property compiled on the web- site for the purposes of the persons in the field of oil and gas exploration and production thereof. It is a segmented information and the product is in respect of a particular country or region. At the same time, as mentioned earlier, the assessee has been specifically denied the right to sub-licence, rent or loan any product, nor is the assessee authorised to create derivative work based upon any project except as otherwise expressly provided in the agreement. WM has granted a non-transferable and non-inclusive licence to use the confidential name and passwords, if any, subject to the condition to enter the restricted portion of the website for the sole purpose of down- loading to a permitted computer and reproducing in storage media of a permitted computer copies. The terms of the agreement shall end at 00.01 GM on the last of the then current terms unless such terms are extended or terminated. If the totality of the facts are analysed the information/know- ledge available to the assessee was made through a licence ; consequently, it is covered under the definition of royalty under the domestic law under section 9(1)(iv) and (vi) along with article 13(3) of the Double Taxation Avoidance Agreement with the U.K. - Decided against assessee.

Issues Involved:
1. Whether the subscription fees paid by the assessee to Wood Mackenzie (WM) constitute royalty under section 9(1)(vi) of the Income-tax Act and article 13(3) of the Double Taxation Avoidance Agreement (DTAA) with the U.K.
2. Whether the information accessed by the assessee through the subscription is of a general nature or specialized technical consultancy.

Issue-wise Detailed Analysis:

1. Nature of Subscription Fees as Royalty:

The primary issue is whether the subscription fees paid by the assessee to WM constitute royalty under section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The assessee argued that the subscription fees are not in the nature of royalty as WM is not imparting any specialized information, knowledge, or skill from its experience. Instead, the information is general and concerns the commercial aspects of the upstream sector of various countries.

However, the Revenue contended that the payment is for technical consultancy, as the oil and natural gas sector is specialized and requires specific training and access through passwords provided by WM. The Revenue emphasized that the nature of the payment and the specialized access granted to the assessee indicate that it is not merely general information but technical consultancy.

2. Analysis of Agreement and Information Accessed:

The Tribunal analyzed the agreement between the assessee and WM, noting that WM granted a non-transferable license to the assessee for downloading information from its website. The agreement restricted the use of this information to the assessee and prohibited sub-licensing or sharing with unauthorized persons. The Tribunal highlighted that the user names and passwords provided to the assessee were considered trade secrets and proprietary information of WM, indicating the specialized nature of the information.

The Tribunal further noted that the information accessed by the assessee was not available to the general public and required specific training and access through an agreement. The restrictive clauses in the agreement, which prohibited the disclosure and distribution of the information to unauthorized persons, reinforced the specialized nature of the information.

3. Legal Provisions and Definitions:

The Tribunal referred to section 9(1)(vi) of the Income-tax Act, which defines royalty as consideration for the transfer of all or any rights in respect of a patent, invention, model, design, secret formula or process, or for imparting any information concerning technical, industrial, commercial, or scientific knowledge, experience, or skill. The Tribunal also referred to article 13(3) of the DTAA with the U.K., which defines royalties as payments for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including information concerning industrial, commercial, or scientific experience.

The Tribunal concluded that the subscription fees paid by the assessee to WM fall within the definition of royalty under both section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The Tribunal emphasized that the information accessed by the assessee was specialized and technical, not general, and required specific training and access through an agreement.

4. Case Laws and Comparisons:

The Tribunal distinguished the present case from other cases cited by the assessee, such as Wipro Ltd. v. ITO and Dun and Bradstreet Espana S.A., In re, where the information provided was publicly available and only compiled by the respective entities. In contrast, the information accessed by the assessee in the present case was specialized, proprietary, and restricted to specific users under the terms of the agreement.

Conclusion:

The Tribunal held that the subscription fees paid by the assessee to WM constitute royalty for information concerning industrial, commercial, or scientific experience and are taxable under section 9(1)(vi) of the Income-tax Act and article 13(3) of the DTAA with the U.K. The Tribunal affirmed the order of the Commissioner of Income-tax (Appeals) and dismissed the appeals of the assessee.

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