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TMI Blog2005 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and the questions in the first mentioned application, in re ABC Ltd. 2. The Applicant is a subsidiary of A Ltd. B Ltd. is a 100% subsidiary of C Ltd., a company incorporated in Cayman Islands, A Ltd., holds 10% of the shares of C Ltd. The balance 90% shares of C Ltd. are held by investors (in various jurisdictions) and employees of C Ltd. and B Ltd. D Ltd. (parent of A Ltd.), a US corporation is the world's leading seller of business information reports ('BIRs'), enabling business-to-business commerce now for 160 years. Their information and technology solutions help businesses reduce credit risk, find profitable customers and manage vendors efficiently. The Group (hereinafter referred to as "Group") has the largest and most comprehensive database available, with information on 79 million business entities worldwide - for making credit, marketing and purchasing decisions. Group provides various products to various businesses worldwide, by providing such information as required by them. Amongst these products, BIRs are the most popular products, available on millions of establishments situated worldwide, and attempt to help customers improve their understanding of a pros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that it is not necessary for a customer who desires a BIR prepared by the Applicant to approach B Ltd. for the same. Such a customer can approach B Ltd. and request for a subscriber ID and a password to get the BIR directly from the Applicant. The customer through an international credit card makes payments for the same directly to the Applicant. However, it is only for the sake of convenience of the customer that a customer would approach B Ltd. instead of directly approaching the Applicant. For instance, the Export Credit Guarantee Corporation is one such customer who avails of direct access. The specific manner in which B Ltd. obtains these reports from the Applicant is as under: Upon an Indian customer of B Ltd. placing an order for a particular BIR in respect of a company situated in the UK, B Ltd. would access the master server of ABC Ltd. through G Ltd. (i.e. the regional server). This master server would identify B Ltd. and would allow it an access to enable it to select a country, in which the company is situated (UK, in this case). B Ltd. would then request the Applicant (in this case) for a BIR in respect of the company for which the Indian customer has placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is asserted that it does not have a PE in India. On these facts the applicant sought ruling of the Authority on the following questions: - 1. Whether on the facts and the circumstances of the case, the payments made to ABC Ltd. (hereinafter referred to as the "Applicant") by B Ltd. (hereinafter referred to as " B Ltd.") for the electronic purchase of Business Information Reports (hereinafter referred to as the "BIRs") will be treated as part of the Applicant's business profits and hence be covered within the provisions of Article 7 of the Convention between the Government of the Republic of India and the Government of the United Kingdom for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, dated October 26, 1993 (hereinafter referred to as the "Treaty")? 2. Whether on the facts and the circumstances of the case, the applicant will be held as having a Permanent Establishment (hereinafter referred to as a "PE") in India under the provisions of Article 5 of the Treaty? 3. Whether on the facts and the circumstances of the case, and based on the provisions of Article 7 (read with Article 5) of the Treaty, the Applicant will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n general terms and conditions for all products and services. 'Services' mean such services as are referred to in Clauses 1 to 3 of the contract and the 'product' refers to BIR. 'Information' as well as BIR received from the applicant is licensed by B Ltd. to the customer. The terms of 'license' are given in clauses 1 to 4 of the contract. The product and the information are provided solely for the internal use of the customer. B Ltd. imposes the aforementioned conditions in the capacity of a proprietor of the copyright in the products and information. Clause 11 of the contract explicitly states: - "The customer acknowledges that the information and software licensed by the Group are proprietary to Group and comprises: (a) works of original authorship, including compiled information containing the Group's selection, arrangement and expression of such information or pre-existing material it has created, gathered or assembled, (b) confidential and secret information and (c) information that has been created, developed and maintained by the Group at great expenses of time and money such that misappropriation or unauthorized use by others for commercial gain would unfairly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as under: - "We write to you on behalf of our above-mentioned client, XYZ Ltd., ("Applicant"). We refer to the letter of the Director of Income Tax (International Taxation) ("DIT") dated April 25, 2005 and the letter dated June 22, 2005, raising preliminary objections (jointly referred to as the "Letters"(attached herewith as Attachment 1) in response to the application filed by the Applicant. In these Letters, the DIT has responded to the application by referring to the order dated January 31, 2005 ("Order") issued by the Additional Director of Income-tax (International Taxation), Range 1("ADIT") pursuant to the course of proceedings under section 195(2) read with section 201 of the Income Tax Act, 1961("ITA") in the case of B Limited (" B Ltd."). At the outset we wish to submit that as the Order of the DIT is very extensive, for the ease of reference we have prepared an index summarizing the Contents of the Order……. We have hereunder briefly provided our response to the legal issues raised by the DIT in the Letter and the Order. The entire Order of the ADIT has proceeded on the assumption of the existence of "Conditions of Service" contract between B Ltd. (an Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opyrights Act and therefore payments made for the BIRs cannot fall under section 9(1)(vi) of the ITA or under Article 13 of the India-UK tax treaty; The consideration paid is not 'for' any intellectual property right (including copyright) in the BIRs but is for the BIR itself as a product (copyrighted article); There is only a sale of a copyrighted article. There is no consideration paid for 'use' of a copyright. Therefore Article 7 of the treaty apply land not Article 13; However, in order to attract Article 7, the Applicants should have a permanent establishment ('PE') in India. Since it has not been established that the Applicants have a PE in India, nothing can be said to be chargeable under Article 7 of the treaty. We request your good self to take the above on record." 6. During the course of hearing Mr. Desai, the learned counsel for the applicant placed reliance on the decision of the Authority in the case of Z Ltd. and stated that facts in the present applications are not only similar but in fact identical to the facts in that case. But on enquiry from the bench that whether there was any reference to the "conditions of service" between B Ltd. and the customer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to use or use the copyright. That for the purpose of examining the character of payment to Z Ltd, the authority did not consider it relevant to examine the contract entered into by B Ltd. with its customers. 7. Shri S.D. Kapila, learned counsel for the Commissioner argued that the 'conditions of service' between the Indian company (B Ltd.) and its customers in India was neither considered nor referred to by the Authority while deciding the issue in the case of Z Ltd.. In the absence of any contract between the applicant and B Ltd., the 'conditions of service' between B Ltd. and the customer is extremely relevant for determining: - Whether the contract between B Ltd. and the customer (end user) is one of sale or of license. Whether the applicant has partially granted copyright or the right to use copyright in India to the B Ltd.. How B Ltd. describes itself as the proprietor of the copyright. If the applicant has not granted any right in the copy right to the applicant, whether by way of license or assignment, how B Ltd. is concluding agreement with the customer on behalf of the applicant. Whether B Ltd. is the agent of the applicant in India. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Indian Company has to be examined without reference to the earlier ruling. On careful consideration we find that the contention of the Commissioner regarding 'conditions of service' between the B Ltd. and Indian customers, is not borne out from the record since the applicant had filed the same during the course of proceedings in the case of Z Ltd. (reference misc. application in the case of Z Ltd. dated July 16, 2005). Notwithstanding what is stated above, we shall examine the relevance of 'conditions of service' independently without reference to the earlier ruling in the case of Z Ltd. Another apprehension expressed by the Commissioner is that applicant is trying to obtain an appellate order from the authority against order under section 195(2) and 201 of the Act passed by the ADIT on 31st January 2005. The apprehension is actually misconceived and unfounded since the order mentioned above relates to the case of B Ltd. and has no relevance to the case of the applicant. Further, the applicant never referred to this order in the application dated 9th February 2005. It is only the Commissioner who placed reliance on this order while giving the comments vide its letter-d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been ignored. The activities of B Ltd. not only include purchase of BIRs from abroad for sale in India, but also developing its own BIRs for sale in India and overseas and providing other domestic services such as Business Marketing Services, Risk Management Software, Trade Lists Labels and Publications. B Ltd. also provides support services locally to the domestic customers to assist them in interpretation of BIRs and effectively use the solutions. The 'conditions of service' are, therefore, generic and omnibus in nature and certain conditions may therefore, not apply to certain products/activities. In order to fully appreciate and understand the import of the expression 'software licensed by Group are proprietary to Group', it is necessary to refer to the certificate given by the applicant explaining the position, as attachment No.2 along with the written submissions of the applicant dated August 8, 2005 which is extracted below: - "ABC Ltd. is a company incorporated in the UK and is in the business of selling original Business Information Reports ("BIR"), and purchased Business Information Reports ("Purchase"). An original BIR is one where the copyright in the compi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the applicant for electronic purchases of BIRs are its business income covered by article 7 of the treaty. Indeed the applicant itself in annexure III of the application says, "Further, the income generated by the applicant from the preparation and sale of such BIRs is taxable in U.K. as business income. Accordingly, the sale of BIRs to B Ltd., or any other Group associate is an activity forming part of the business activity of the applicant, and hence any income generated from such activity would be regarded as business income in the hands of the applicant". It is on this premise the applicant refers to article 7(1) of the treaty to contend that the business income of the applicant would be chargeable to tax in India only if the applicant has a permanent establishment in India and categorically denies that it has any permanent establishment in India as it does not have any subsidiary, branch, office or place of business in India and that it does not have any advisor or agent or any employee deputed by it to India. The Commissioner's plea on the other hand is that the applicant would be having a permanent establishment in India within the meaning of article 5 of the treaty. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicant is that it purchases BIRs from the applicant. As and when a customer for BIRs approaches B Ltd. it contacts the applicant for purchasing the required BIRs from the applicant. It would not also be a case of B Ltd. wholly devoting itself to the applicant. In view of this position, it is unnecessary to delve into any further aspects. In the light of the above discussions, B Ltd. cannot be said to be the permanent establishment of the applicant." We are in agreement with the above conclusions since facts in the case of applicant are identical to the facts in the case of Z Ltd. The last contention of the Commissioner is that the payments made by B Ltd. to the applicant fall within the meaning of royalty under article 13 of the treaty. If payments made by B Ltd. to the applicant were found to be royalties, they would be taxable in India even if the applicant has no permanent establishment in India. The term royalties is defined in Para 3 of article 13 of the treaty in the following terms: "Article 13: Royalties and fees for technical services: 1 and 2. 3. For the purposes of this Article, the term "royalties" means: payments of any kind received as a considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s required. The applicant states that access to the data base of the applicant is available to the public at large at a price as in the case of buying a book and it is not a pre-requisite, that the BIR must be downloaded by B Ltd. only. In fact some clients, such as Export Credit Guarantee Corporation access the server themselves to download a BIR. The applicant does not have any server in India for the use of B Ltd. Indeed the applicant has specifically averred that the copyright in the BIR would neither be licensed nor assigned to either B Ltd. or the Indian customer. This issue was also discussed in detail in the case of Z Ltd. (supra) and the same conclusion was arrived at in that case. 11. For the abovementioned reasons, payments made by B Ltd. to the applicant for purchases of BIRs, do not answer the description of "royalties" within the meaning of Para 3 of article 13 of the treaty. So payments made by B Ltd. to the applicant cannot be regarded as royalty payment. In our view, the applicant has rightly equated the transaction of sale of BIRs to sale of a book, which does not involve any transfer of intellectual property right. For the aforementioned reasons we r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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