2024 (3) TMI 105 - HC - Income Tax

Income deemed to accrue or arise in India - Accrual of income in India - receipts of subscription fees - Taxability in the nature of business income and not taxable as assessee has no Permanent Establishment PE in India as per ITAT - distinction between the transfer of a copyright as distinct from a mere right to use copyrighted material - as argued the solution provided by the assessee has attributes of independent performance and as per the examples provided in the MoU in this case, imparting of a technical training is indicative of fulfilment of a make available clause in terms of Article 12(4)(b) of the India-USA DTAA as well as Explanation- 2 of Section 9(1)(vii) of the Income Tax Act, 1961 - HELD THAT - As is plainly evident from a reading of Explanation 2 of Section 9(1)(vii) of the Act and which defines FTS, it contemplates consideration which may be said to fall within the ambit of rendering of a managerial, technical or consultancy service. The mere access granted to a subscriber to the legal data base would clearly not fall within the ambit of Section 9(1)(vii) of the Act. All that the assessee does is provide access to the database. It has not been shown to be providing any further managerial, technical or consultancy service to a subscriber. We, in any case, find ourselves unable to countenance the contention that the access so granted could be construed as providing services of the nature spoken of in Section 9(1)(vii) of the Act. We find that similar would be the position which would obtain when subscription fee is examined on the anvil of Article 12 of the DTAA. If the Department were to describe subscription fee as royalty , they would necessarily have to establish that the payments so received by the assessee was consideration for the use of or the right to use any copyright or a literary, artistic or scientific work as defined by Article 12(3) of the DTAA. Granting access to the database would clearly not amount to a transfer of a right to use a copyright. We must bear in mind the clear distinction that must be recognised to exist between the transfer of a copyright and the mere grant of the right to use and take advantage of copyrighted material. Neither the subscription agreement nor the advantages accorded to a subscriber can possibly be considered in law to be a transfer of a copyright. In fact, it was the categorical assertion of the assessee that the copyright remains with it at all times. This issue in any case no longer appears to be res integra in light of the judgment of this Court in Director of Income Tax Vs. Infrasoft 2013 (11) TMI 1382 - DELHI HIGH COURT as held incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licencee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licencees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty. Similarly, in order for that income to fall within the ambit of fees for included services , it was imperative for the Department to establish that the assessee was rendering technical or consultancy services and which included making available technical knowledge, experience, skill, know-how or processes. As has been found by the Tribunal, the access to the database did not constitute the rendering of any technical or consultancy services and in any case did not amount to technical knowledge, experience, skill, know-how or processes being made available. As we examine the nature of the transaction between an Indian subscriber and the assessee, it becomes manifest and apparent that it neither comprises of a transfer of copyright nor does it include a transfer of a right to apply technology and other related aspects which are spoken of in Article 12(4)(b) of the DTAA. No justification to interfere with the view as expressed by the Tribunal - Decided against revenue.

Summary

Issues Involved:
1. Taxability of subscription fees as business income or Fees for Technical Services (FTS).
2. Determination of the existence of a Permanent Establishment (PE) in India.
3. Classification of subscription fees as royalty under Article 12 of the DTAA.

Summary:

1. Taxability of Subscription Fees:
The Department challenged the Tribunal's decision that subscription fees received by the assessee were business income and not taxable in India due to the absence of a PE. The Tribunal held that the subscription fees did not qualify as FTS under Section 9(1)(vii) of the Income Tax Act or Article 12(4)(b) of the DTAA, as it did not involve the transfer of technical knowledge or services. The Tribunal referenced the Elsevier Information System GmbH case, where similar provisions were interpreted under the Indo-German Tax Treaty.

2. Permanent Establishment (PE):
The Tribunal found that the assessee did not have a fixed place of business in India, which is essential for Article 7 of the DTAA to apply. The Department did not contest this finding, and thus, the subscription fees were deemed business profits not taxable in India without a PE.

3. Classification as Royalty:
The Department argued that the subscription fees should be classified as royalties under Article 12(3) of the DTAA. However, the Tribunal and the High Court found that granting access to a legal database did not constitute a transfer of copyright. The Court cited the Supreme Court's decision in Engineering Analysis Centre for Excellence, which distinguished between the transfer of copyright and the right to use copyrighted material. The Court emphasized that the mere right to use copyrighted material does not equate to royalty payments.

Conclusion:
The High Court upheld the Tribunal's decision, concluding that the subscription fees were business profits and not taxable in India due to the absence of a PE. The fees did not qualify as FTS or royalties under the relevant sections of the Income Tax Act or the DTAA. The appeal was dismissed, affirming that the income from subscription fees was not subject to tax in India.