2014 (7) TMI 899 - AT - Income Tax

Foreign exchange system services provided - Article 13 Indo-UK DTAA Royalty under clause (iva) of Explanation 2 to 9(1)(vi) Held that - Assessee is facilitating its clients to use its system and application programming interface which is subscriber interface for use with the related services includding Autoquote service - assessee is also providing the equipments with pre-loaded software to its subscribers and network used for provision of the services - it is clear from the terms and conditions of the contract between the parties that it is subscriber who is using the information and system of the assessee for their commercial/business purposes - the portal having system of matching the request along with the computer and internal access to the clients constitute integrated commercial equipment which performs complex functions of processing the request, providing information and facilitates the transaction of purchase and sale of foreign exchange by matching the demand and supply - The platform of transacting the purchase and sale is commercial equipment allowed to be used by clients/subscribers for commercial purposes - The payments made by Indian clients/subscribers to the Assessee for use and right to use of such equipment and information for processing their request of purchase and sale of foreign exchange constitute royalty. By allowing the use of software and computer system to have access to the portal of the Assessee for finding relevant information and matching their request for purchase and sale of foreign exchange amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and payment made in this respect would constitute royalty - the income received by the assessee from the Indian Banks is in the nature of royalty - once the receipt has been decided as royalty in nature then there is no need to go into the question of assessee having PE in India - the provision of para 6 of Article -13 cannot be invoked in case when the receipt is found as royalty in terms of Article - 13(3) of the DTAA and assessee has not admitted any PE in India Decided against Assessee.

Issues Involved:

1. Characterization of subscription revenue as 'royalty' under Article 13(3) of the India-UK DTAA and Section 9(1)(vi) of the Income-tax Act.
2. Characterization of subscription revenue as 'Fees for Technical Services' (FTS) under Article 13(4)(c) of the DTAA and Section 9(1)(vii) of the Income-tax Act.
3. Whether Reuters India Private Limited (RIPL) constitutes a Dependent Agent Permanent Establishment (DAPE) of the appellant in India under Article 5(4) of the DTAA.
4. Whether the server located in Geneva constitutes a Permanent Establishment (PE) of the appellant in India under Article 5(1) of the DTAA.
5. Applicability of Section 44D read with Section 115A of the Income-tax Act.
6. Levy of interest under Section 234B of the Income-tax Act.
7. Taxability of revenue under the provisions of the DTAA and the Income-tax Act.

Issue-wise Detailed Analysis:

1. Characterization of Subscription Revenue as 'Royalty':

The Tribunal examined whether the subscription revenue received by the appellant from its subscribers in India constitutes 'royalty' under Article 13(3) of the India-UK DTAA and Section 9(1)(vi) of the Income-tax Act. The appellant argued that the revenue was business profit and not royalty, as the services were provided through a server located in Geneva, and the subscribers did not have control over the server. The Tribunal, however, concluded that the payments made by Indian clients for the use and right to use the equipment and information for processing their requests constituted royalty. The Tribunal noted that the system provided by the appellant, including the necessary information and data, facilitated the matching of bids in foreign exchange transactions, thus falling under the definition of royalty.

2. Characterization of Subscription Revenue as 'Fees for Technical Services' (FTS):

The Tribunal also considered whether the subscription revenue could be characterized as FTS under Article 13(4)(c) of the DTAA and Section 9(1)(vii) of the Income-tax Act. The appellant contended that the services did not make available any technical knowledge to the subscribers and thus did not qualify as FTS. The Tribunal did not provide a detailed analysis on this issue since it had already concluded that the revenue constituted royalty. Therefore, the issue of FTS became academic and was not further addressed.

3. Whether RIPL Constitutes a Dependent Agent Permanent Establishment (DAPE):

The Tribunal examined whether RIPL, acting as an agent for the appellant, constituted a DAPE under Article 5(4) of the DTAA. The appellant argued that RIPL was an independent entity providing marketing and support services and did not constitute a PE. The Tribunal did not specifically address this issue in detail, as it had already concluded that the revenue was taxable as royalty, rendering the PE issue secondary.

4. Whether the Server in Geneva Constitutes a Permanent Establishment (PE):

The Tribunal considered whether the server located in Geneva constituted a PE of the appellant in India under Article 5(1) of the DTAA. The appellant argued that the server was outside India, and thus, it did not have a PE in India. The Tribunal did not delve deeply into this issue, as the primary conclusion was that the revenue constituted royalty, making the PE determination less critical.

5. Applicability of Section 44D read with Section 115A of the Income-tax Act:

The Tribunal addressed the applicability of Section 44D read with Section 115A of the Income-tax Act, which pertains to the taxation of royalties and FTS on a gross basis. The appellant argued against the applicability of these sections, but the Tribunal upheld the CIT(A)'s decision that the revenue was taxable on a gross basis as royalty and FTS under the Act and the DTAA.

6. Levy of Interest under Section 234B:

The Tribunal considered the levy of interest under Section 234B of the Income-tax Act. The appellant argued against the levy of interest, but the Tribunal upheld the Assessing Officer's decision, noting that there was no variation in the total income of the appellant.

7. Taxability of Revenue under the Provisions of the DTAA and the Income-tax Act:

The Tribunal concluded that the revenue received by the appellant from its Indian subscribers was taxable as royalty under Article 13(3) of the India-UK DTAA and Section 9(1)(vi) of the Income-tax Act. The Tribunal rejected the appellant's contention that the revenue was business profit and not taxable in India. The Tribunal emphasized that the integrated services provided by the appellant, including the use of equipment and software, constituted royalty.

Conclusion:

The Tribunal dismissed the appeals of the appellant, upholding the CIT(A)'s decision that the subscription revenue was taxable as royalty under the DTAA and the Income-tax Act. The Tribunal did not find it necessary to address the issues of FTS and PE in detail, as the primary conclusion of royalty taxation was sufficient to resolve the appeals. The Tribunal also upheld the levy of interest under Section 234B.

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