2021 (12) TMI 647 - AT - Income Tax

Royalty income - appellant company appointed Dow Jones Consulting India Pvt Ltd DJCIPL on a principal to principal basis for distributing its products in the Indian market - AO was of the firm belief that the receipts from DJCIPL should be taxed in India as Royalty Income under the provisions of the Act as well as India-USA DTA - HELD THAT - We have to state that basis the provisions of section 92 of the Act, the assessee is entitled to invoke the provisions of India - USA DTAA to the extent it is more beneficial. Our view is fortified by the decision of the Hon'ble Supreme Court in the case of Union of India Vs. Azadi Bachao Andalon 2003 (10) TMI 5 - SUPREME COURT . Accordingly, we will consider the beneficial provisions of the tax treaty to see whether the contention of the assessee that the alleged payment from DJCIPL is not royalty income. The payments made for acquiring right to use product itself, without allowing any right to use the copy right in the product are not covered with the scope of Royalty which may get covered under the term under Royalty as per the Act. The facts of the case in hand show that there is no transfer of legal title in the copyrighted article as the same rests with the assessee. All rights, title and interest in the licensed software which is being claimed to be copyrighted article are the exclusive property of the assessee. DJCIPL has no authority to reproduce the date in any material form to make any translation in the date or to make adaptation in the data. The end user cannot be said to have acquired a copy right or right to use the copy right in data. A perusal of the agreement with DJCIPL shows that DJCIPL does not acquire any right in relation to the products. In our considered view, in determining whether or not a payment is for use of copyright, it is important to distinguish between a payment for right to use the copy right in a program and right to use the program itself . The revenue derived by the assessee from granting limited access to its data base is akin to sale of book, wherein purchaser does not acquire any right to exploit the underlying copyright. In the case of a book, the publisher of the book grants the purchaser certain rights to use the content of the book, which is copyrighted. The purchaser of the book does not acquire the right to exploit the underlying copyright. When the purchaser reads the book, he only enjoys the contents. Similarly, the user of the database does not receive the right to exploit the copyright in the database he only enjoys the product in the normal course of his business. Appellant is only granting access to its database to DJCIPL. In our considered opinion, the payments received cannot be said to be Royalty in nature. The transaction under consideration is for provision of accessing database of the assessee. Hence the same cannot be considered as Royalty under Article 12 of the India-US DTAA. We, therefore, set aside the findings of the Assessing Officer and direct the Assessing Officer to delete the impugned addition. - Decided in favour of assessee.

Summary

Issues:
1. Taxability of receipts as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).
2. Applicability of the tax rate under the India-USA DTAA.
3. Classification of the sum as 'Business Profits' under Article 7 of the DTAA.
4. Proposal to initiate penalty proceedings under section 271(1)(c) of the Act.

Analysis:

Issue 1: Taxability as 'Royalty' under the IT Act and DTAA
The case involved a dispute regarding the taxability of receipts as 'Royalty' under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-USA DTAA. The Assessing Officer believed that the receipts from the distributor should be taxed as 'Royalty Income.' However, the appellant argued that the payments were for providing access to a database and did not involve the transfer of copyright. The Tribunal analyzed the definitions of 'Royalty' under the DTAA and concluded that the payments were not for the use of copyright, as the distributor did not acquire any rights related to the products. Therefore, the Tribunal set aside the Assessing Officer's findings and directed the deletion of the addition.

Issue 2: Applicability of Tax Rate under the DTAA
The appellant contested the rate applied by the Assessing Officer under the India-USA DTAA, arguing for a lower rate. However, since the Tribunal ruled in favor of the appellant on the first issue, the question of the tax rate became irrelevant, and the Tribunal did not need to address this issue separately.

Issue 3: Classification as 'Business Profits' under the DTAA
The appellant also contended that the sum in question should be classified as 'Business Profits' under Article 7 of the DTAA, stating that it was not taxable in India due to the absence of a Permanent Establishment. However, the Tribunal's decision on the first issue rendered this argument moot, and no separate analysis was required on this point.

Issue 4: Penalty Proceedings under Section 271(1)(c) of the Act
The Assessing Officer proposed penalty proceedings under section 271(1)(c) of the Act, which the appellant challenged. The Tribunal did not find it necessary to address this issue separately, as it allowed the appellant's appeal on the primary issue of taxability as 'Royalty.' Consequently, the Tribunal's decision on the penalty proceedings was not explicitly discussed in the judgment.

In conclusion, the Appellate Tribunal ITAT DELHI ruled in favor of the appellant, setting aside the Assessing Officer's findings and directing the deletion of the addition. The appeal was allowed, and the order was pronounced on 14.12.2021.