Authority For Advance Rulings
IMT Labs (India) (P) Ltd., In Re
Sections 9(1)(vi), 195, DTAA between India & USA, Art. 7, DTAA between India & USA, Art 12
Syed Shah Mohammed Quadri, J., Chairman; A.S. Narang & A. Sinha, Members
AAR No. 676 of 2005
6th November, 2006
Counsel Appeared
Naveen Modi, for the Applicant : None, for the CIT concerned
Ruling
A.S. Narang, Member :
In this case an application under s. 245Q(1) of the IT Act, 1961 (for short the Act), has been filed on 30th Dec., 2005 in Form No. 34D (meant for resident applicants), seeking ruling with regard to the tax liability of a non- resident arising out of a transaction with a resident. The applicant IMT Lab (India) (P) Ltd. (for short IMT India) having its registered office at C-1/113, Janakpuri, New Delhi has entered into an agreement with a non-resident company, Conversagent Inc. a Delaware Corporation, New York, USA (for short Conversagent) and secured license of a particular software, which the applicant is entitled to use. The applicant has to pay license fee for the software to the said non-resident company. It has been categorically stated by the applicant that ‘Conversagent’, the non-resident company does not have any establishment or office in India, and therefore, the payments received by the non-resident (Conversagent) from the applicant, for allowing the applicant to download and use the software are covered under art. 7 of the DTAA with USA (i.e. business profits), which are not chargeable to tax in India. On these facts the applicant has sought ruling of the Authority on the following question :
“Whether periodical payments made to the non-resident person, having no office/establishment in India, in connection with the use of software developed by him on internet are subject to TDS under DTAA with USA.”
2. The jurisdictional CIT in his comments has stated as under :
“As per copy of agreement between the assessee- company and Conversagent Inc., New York, royalty payment for the license shall be paid of 10,000 US dollar for using the software on internet, and as per art. 12.3 of USA-Indo DTAA royalty means payment of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work.
As per s. 9(1)(vi) Expln. 2 of the IT Act, 1961, the use of software falls under the category ‘royalty’ and art. 12 of USA-Indo DTAA defines royalty for use of secret process or formula, use or right to use of copyright, use or right to use literary or scientific work.
The assessee-company is using the software developed by him on internet and software is covered under the definition of ‘copyright’ under s. 14 of the Copyright Act, 1957. Sec. 14(b)(i) defines copyright in the case of a computer programme, to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme. The US Copyright Act also treats the computer programme as copyright. Sec. 106 of the 1976 Copyright Act defines copyright as right to do and to authorize other to do the following : To reproduce the work in copies or phonorecords To prepare derivative works based upon the work : To distribute copies or phonorecords of the work to the public by sale or other transfer of ownership or by rental, lease or lending …… Copyrightable works include literary works also. Computer programme therefore falls under literary works. In view of the above, in this case assessee is liable to deduct tax at source while making payment to non-resident person having no office/establishment in India for use of software developed by him on internet.”
3. The applicant in his rejoinder has stated as under : “In our opinion, payments made to the non-resident i.e. Conversagent Inc., New York for downloading and using the readymade information in connection with a software should be covered under art. 7 of US-Indo DTAA (i.e. business profits) instead of covering the same under art. 12 (i.e. royalty payments). The information provided by the non-resident on internet in connection with software is not a secret information/process/formula/copyright. This software information, just like business information, is available to anybody on internet on payment of some fee, hence this is a normal business covered under art. 7 of USA-Indo DTAA. Further since the non-resident does not have any establishment/branch in India in terms of art. 7 of US-Indo DTAA, payments made to him are, in our opinion, not liable to deduction of tax at source.” During the course of oral hearing, Shri Naveen Modi, chartered accountant, counsel for the applicant, has pleaded that the payments received by the Conversagent for allowing the applicant-company to download and use the software, are covered under art. 7 of the DTAA with USA which are not chargeable to tax in India since the non-resident company does not have a PE or a branch in India, and in view of this position, payments made to the non-resident are not chargeable to tax in India. At this point of time during the hearing, counsel’s attention was drawn to the ‘License agreement’ with Conversagent, which states that license is granted only to produce and distribute interactive agents by using the software on the server platform of Conversagent for which royalty is required to be paid on monthly basis, the learned counsel did not like to controvert the plea of the Revenue or to elaborate and support his own line of argument. The learned counsel however, placed reliance on the decision of Dun & Bradstreet Espana, S.A., In re (2005) 193 CTR (AAR) 9 : (2005) 272 ITR 99 (AAR).
We have carefully considered the written submissions of the applicant and the Revenue as also the submissions of the learned counsel during the course of oral hearing. In view of the contentions of the learned counsel, the first aspect, which needs to be addressed, is whether the periodical payments are in the nature of business income of the non-resident (Conversagent). This takes us to art. 7 of the DTAA, which deals with business profits. Para 6 of art. 7 which is relevant, is in the following terms : “Article 7 : Business profits 1. to 5. xxxxx
6. Where profits include items of income which are dealt with separately in other articles of the Convention, then the provisions of those articles shall not be affected by the provisions of this article.” A plain reading of the para quoted above shows that where profits include items of income, which are dealt with separately in other articles of the Convention, then the provisions of those articles shall not be affected by the provisions of this article. Therefore, it follows that if the periodical payments fall under any other article of the DTAA, they will have to be dealt with under that particular article. The plea is that they are covered by art. 12 of the DTAA, which deals with “royalties and fees for included services”. If the periodical payments fall under art. 12 then art. 7 is ipso facto excluded. It is, therefore, necessary to ascertain the nature of periodical payments. In this case the ‘License Agreement’ was entered into on 25th day of August, 2004 between Conversagent USA and IMT Labs A/S (licensee), a Danish Corporation having office at Copenhagen, Denmark, which is the parent company of the applicant. Subsequently the parent company assigned all the rights and obligations specified in the ‘License Agreement’ to its subsidiary, IMT India on 10th April, 2005. The main conditions of the agreement are as follows :
Effective 1st April, 2005 the assignor transfers all its rights and liabilities under the Conversagent Agreement to the assignee.
The assignee will have the right to use the Buddyscript and Smarterchild technologies under the same terms and conditions as were applicable to the assignor.
The assignee will directly pay all the software license fees under the Conversagent Agreement to Conversagent Inc. as per the invoices raised by them from time to time. Prior to this the applicant had entered into a service agreement with the parent company on 15th March, 2005, for providing technical development services to the IMT Labs A/S. For the purposes the applicant needs to use Smarterchild software, made by using Buddyscript technology (a scripting language); both of which are developed and owned by Conversagent. Accordingly the rights and obligations under the ‘License Agreement’ have been assigned to the applicant by the parent company.
Some of the important clauses of the ‘License Agreement’ are extracted below : “License agreement xxxxxxx 1. Grant of license (a) xxxxxxx (X) The software that is currently used by Conversagent for its ‘Smarterchild’ application for the sole purpose of enabling the licensee to produce and distribute interactive agents (‘interactive agents’) that can respond to text based messages. The license is expressly limited to use of the software on the Conversagent server platform only. (Y) The licensed software shall include the Buddyscript code currently used to run the ‘Smarterchild’ interactive agent application as it is currently distributed on the AOL messaging network………. The licensee expressly acknowledges that the ‘Smarterchild’ application is only authorized pursuant to this agreement to run on the Conversagent server platform. Any other use is strictly prohibited. (Z) The licensed software shall include a license to the object code of the Conversagent server platform, to enable the ongoing development and deployment of the interactive agent application………. The licensee expressly acknowledges that the Conversagent server platform licensed herein shall be used exclusively to host the licensee’s interactive agent application based upon the ‘Smarterchild’ application. Any other use is strictly prohibited. 4. Payment (a) The minimum royalty payment each month for the license shall be $10,000 (US). At such time as in any given calendar month the number of sessions (as defined herein) shall exceed 500,000 but not exceed 1,000,000, the minimum royalty payment shall be increased to $20,000 (US) per month, commencing with the next subsequent month. Prior to 1st July, 2006, the minimum royalty payment shall have a cap and shall not exceed $ 20,000 (US) per month. After 1st July, 2006, there shall be no cap to the monthly royalty payments. Commencing 1st July, 2006 and thereafter, upon each subsequent increase in monthly session volume of 500,000 sessions, the monthly royalty payment shall be increased by increments of $10,000. (b) and (c) xxxxx (d) In addition to the cash payments referred to above, the licensee shall issue 6119 shares of DKK 1 per share at par value. A certified copy of the shareholder register will be provided to Conversagent within 60 days after the date of this agreement. The equity securities shall initially consist of Series A securities of the licensee. Conversagent’s ownership position will not be diluted below 3.5 per cent of the total, aggregate ownership of equity of the company, on a fully diluted basis, prior to 2nd Aug., 2006. 5. Hosting fees (a) Conversagent shall provide free hosting for interactive agents created by the licensee until 30th Sept., 2004. Thereafter, if requested by the licensee, Conversagent shall host interactive agents for the licensee in accordance with the then applicable rate card of the licensee. Attached as Exhibit B hereto is the current rate card of Conversagent for such hosting. Conversagent warrants that such hosting fees will not be increased prior to 1st July, 2006. (b) xxxxxxx 6. Obligations of Conversagent (a) xxxxxxx (b) After the effective date, Conversagent will, at the request of the licensee, at such times as reasonably requested by the licensee, provide one qualified staff member to assist the licensee with the transfer of technical information to the licensee as contemplated by this agreement; provided, however, that such services shall not exceed an aggregate of 16 working hours and all such assistance shall be effected at Conversagent’s premises. (c) xxxxx (d) After the effective date, Conversagent shall provide the licensee e-mail support not to exceed 4 hours per month. 7. Confidentiality (a) xxxxx (b) The licensee shall only disclose the source code for Conversagent’s Buddyscript software to a limited number of employees [or limited number of sub-contractors, pursuant to s. 7(c) below] on a strictly need to know basis; disclosure to each specific employee will require the prior written consent of Conversagent, which consent shall not be unreasonably withheld. Consent may be given by exchange of e-mails.”
From the study of the above clauses of the ‘License Agreement’, it is seen that license is granted essentially for the use of the ‘Smarterchild’ software on the Conversagent server platform only, for the purpose of producing, hosting and distributing ‘interactive agent’ applications. License fee to be paid monthly, is termed as royalty in cl. (4) of the agreement. The payment of royalty is based on the number of sessions for which the equipment (‘Smarterchild’ software on the Conversagent server platform) is utilized for the licensed purpose. As per cl. (6) of the agreement, Conversagent has to provide one qualified staff member to assist the licensee with the transfer of technical information provided, however, that such services shall not exceed an aggregate of 16 working hours and such technical assistance will be effected at the premises of Conversagent. Further Conversagent management personnel shall assist the applicant’s management by making introduction to content providers currently featured in the Smarterchild application. The Conversagent is also duty-bound to provide the applicant e-mail support not exceeding 4 hours per month. However, there is no separate fee being charged for these technical services which are covered by the definition of included services as per para 4 of art. 12 of the DTAA with USA notified vide Notification No. GSR 990(E) dt. 12th Dec., 1990 [(1991) 91 CTR (St) 6]. Para 3 of art. 12 defines the term ‘royalties’. For the sake of facility the relevant clauses of art. 12 are extracted below : “Article 12 : Royalties and fees for included services 1. and 2. xxxxxx 3. The term ‘royalties’ as used in this article means : (a) xxxx (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in para 1 of art. 8 (shipping and air transport) from activities described in para 2(c) or 3 of art. 8.
4. For purposes of this article, ‘fees for included services’ means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or”
From the above it is seen that the term ‘royalties’ as used in sub-cl. (b) of para 3 of art. 12 means payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientificequipment. As already stated, the ‘Smarterchild’ application (software) on the Conversagent server platform is scientific equipment, licensed to be used for commercial purposes. Therefore, payments made for producing and hosting ‘interactive agent’ applications (‘interactive agents’) would be covered by the expression ‘royalties’ as used in art. 12 of the DTAA. Further, the technical and consultancy services being rendered by the provision of services of technical personnel and e-mail support are covered by the description of ‘fees for included services’. These are ancillary and subsidiary to the application and enjoyment of the use of, or the right to use, the scientific equipment for commercial purposes. Now, what remains to be seen is whether the payments being made to the Conversagent fall within the meaning of ‘royalty’ and ‘fees for technical services’ as defined in s. 9(1) of the Act : “9. Income deemed to accrue or arise in India.—(1) The following incomes shall be deemed to accrue or arise in India— (i) to (v) xxxxxx (vi) income by way of royalty payable by— (a) xxxxxx (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) xxxxxxx Explanation 1.—xxxxxx Explanation 2.—For the purposes of this clause, ‘royalty’ means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘Capital gains’) for— (i) to (iv) xxxxxx (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in s. 44BB; (vii) income by way of fees for technical services payable by— (a) xxxxxx (b) a person who is a resident, except where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) xxxxxx Explanation 1.—xxxxxx Explanation 2.—For the purposes of this clause, ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’.”
After carefully reading the above provisions we find that meaning of the term ‘royalty’ as used in Expln. 2 to cl. (vi) of sub-s. (1) of s. 9, is at par with the term ‘royalties’ as used in art. 12(3)(b) of the DTAA. The term ‘fees for technical services’ as used in Expln. 2 of cl. (vii) of sub-s. (1) of s. 9, is at par with the term ‘fees for included services’ as used in art. 12(4)(a) of the DTAA. In view of this position, the payments being made by the applicant (a resident), to the Conversagent (a nonresident), are chargeable to tax in India under art. 12 of the DTAA as also under s. 9 of the Act. Inasmuch as we have concluded that the periodical payments made by the applicant to the Conversagent are in the nature of “royalties and fees for included services” and taxable under art. 12 of DTAA, the said payments cannot, therefore, be treated as business income.
6. Before parting with the issue, it may be stated that reliance placed by the applicant’s counsel on the decision of Dun & Bradstreet Espana, S.A. (supra), in support of his argument that payments being made are covered under art. 7 of DTAA (business profits) is of no avail. As per the facts arising in that case the applicant, a non-resident company incorporated in Spain, was a subsidiary of D&B of USA, an American company, which was a leading seller of Business Information Reports (BIRs). Dun & Bradstreet Information Services (DBIS) India (P) Ltd., an Indian company, was a 100 per cent subsidiary of a company incorporated in the Cayman Islands in which D&B of USA held 10 per cent equity shares. Each associate company of D&B of USA compiled the information in respect of companies functioning in its country in the standardized D&B format and electronically uploaded the information on the server of the associate companies and copied (mirrored) on the central database server situated in the USA. DBIS, the Indian company, was also engaged in a similar business of compiling and selling BIRs in respect of business entities incorporated in India and doing business here. The server farm in the USA was owned and operated by D&B of USA and it contained mirror servers of all the D&B associate companies. Whenever an Indian customer placed an order on DBIS in respect of a company in Spain, DBIS would access the master server of D&B of USA. The master server would identify DBIS and would allow access to connect the mirror server of the applicant situated in the USA server farm. The DBIS would request the applicant for a BIR of the company for which the Indian customer placed the order. On locating the required BIR, DBIS would download, print and deliver a copy thereof to the customer. DBIS was under an obligation not to take additional copies or reproduce the BIR in any manner or sell it to any customer other than the Indian customer on whose requisition the BIR was ordered. The sale of BIRs was, therefore, akin to the sale of a book, and the payments received by the applicant from the DBIS were held to be the applicant’s business profits under art. 7 of the DTAA. In the present case, however, royalty is being paid for the license to use scientific-commercial equipment, depending on the number of sessions in a calendar month, provided that minimum royalty each month shall be $10,000 (US), and there is no provision for downloading or sale of the software as per the license agreement. The facts being entirely different, reliance is misplaced on the decision of Dun & Bradstreet Espana, S.A. (supra), and of no help to the applicant.
7. We shall now deal with the scope of s. 195 of the Act. It will be useful to read the relevant portion of sub-s. (1) of s. 195 of the Act : “195. Other sums.—(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head ‘Salaries’) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.” A plain reading of the sub-section shows that any person responsible for paying to a foreign company (i) any interest; or (ii) any other sum chargeable under the provisions of the Act (except salary) is required to deduct income-tax at the time of credit of such sum to the account of the payee or at the time of actual payment thereof, whichever is earlier. The expression “any other sum chargeable under the provisions of this Act” would mean a sum on which income-tax is leviable. In other words, the said sum is chargeable to tax and could be assessed to tax under the Act. The only consideration would be whether payment of the sum to the non-resident is chargeable to tax under the provisions of the Act. The sum may or may not be income or income hidden or otherwise embedded therein. The scheme of TDS applies not only to the amount paid, which wholly bears “income” character, but also to gross sums, the whole of which may not be income or profits of the recipient. In this regard it would be apposite to refer to decision of the Hon’ble Supreme Court in the case of Transmission Corporation of A.P. Ltd. vs. CIT (1999) 155 CTR (SC) 489 : (1999) 239 ITR 587 (SC), speaking through Justice M.B. Shah the Hon’ble apex Court observed : “The purpose of sub-s. (1) of s. 195 is to see that the sum which is chargeable under s. 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for tentative deduction of income-tax thereon subject to regular assessment and by the deduction of income-tax, the rights of the parties are not, in any manner, adversely affected. Further, the rights of the payee or recipient are fully safeguarded under ss. 195(2), 195(3) and 197. The only thing which is required to be done by them is to file an application for determination by the AO that such sum would not be chargeable to tax in the case of the recipient, or for determination of the appropriate proportion of such sum so chargeable, or for grant of certificate authorizing the recipient to receive the amount without deduction of tax, or deduction of income-tax at any lower rates or no deduction. On such determination, tax at the appropriate rate could be deducted at the source. If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such ‘sum’ to deduct tax thereon before making payment. He has to discharge the obligation of TDS.”
In the light of the forgoing discussion we rule as follows : “Periodical payments (being ‘royalties and fees for included services’), made to the non-resident person, having no office/establishment in India, in connection with the use of software developed by him on internet are subject to TDS, under DTAA with USA.”
[Citation : 287 ITR 450]
