Electronic deal matching services provided through equipment installed at customers’ location would constitute royalty under India-UK DTAA .
Facts:
The Taxpayer, a company incorporated in England and a Tax Resident of UK, is engaged in the business of providing an electronic deal matching systems services which enables authorised dealers in foreign exchange in India (customers), such as banks etc. to effect deals in spot foreign exchange with other foreign exchange dealers. The services are provided against certain monthly charges. Further, the server through which such services are provided is located outside India.
The electronic deal matching system services facilitates the customers to deal in the foreign exchange with the other counterparts who are ready for the transaction of purchase and sale of foreign currency.
In order to avail the above services, the customers entered into two contracts:
• Agreement to provide matching services with the Taxpayer
• Access agreement with an Indian company (I Co), a subsidiary of the Taxpayer, for obtaining equipment in order to avail the above matching services. The customers could avail the services of the Taxpayer only through the equipment and connectivity provided by the Taxpayer through I Co.
Separately, Taxpayer had entered into a marketing agreement with I Co.
The fee for providing the above services would be charged by the Taxpayer from the Indian subscribers and the Taxpayer in turn would remunerate I Co for the marketing and installation services provided by I Co to the customers.
Taxpayer contended that the fee received from its customers in India is in the nature of business profit which is not taxable in India in the absence of a PE as per Article 7 of the India-UK DTAA . Further, such fees did not constitute Royalty or FTS under the India-UK DTAA .
The Tax Authority contended that such fee was Royalty as well as FTS both under the Act as well as the DTAA . Alternatively, I Co constituted an Agency PE for the Taxpayer in India, and the equipment installed by I Co would also constitute a fixed place PE for the taxpayer in India and hence taxable as business profits.
Held:
The nature of service rendered by the Taxpayer includes the information concerning commercial use by the customer. The entire system along with the matching system and connectivity involves processing of customer’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This system of the Taxpayer is available only to the customers who have been given the access to the information concerning commercial as well as processing the orders placed by the customers.
As per the terms and conditions stipulated in the agreement the Indian customers accept the individual non-transferable and non-exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. The facts on hand is not a case of Payment for access to the portal by use of normal computer and internet facility but the access is given only by use of computer system and software system provided by the Taxpayer under license.
Customers make use of the copyright software along with computer system to have access to the requisite information and data available on the server of the Taxpayer.
Accordingly, by allowing the use of software and computer system to have access to the portal of the Taxpayer 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 hence the payment made in this respect would constitute royalty.
Delhi HC decision in the case of Asia Satellite Telecommunications Co. Ltd (332 ITR 340) is distinguishable in the facts of this case. The Asia Sat’s case was based on the finding that the transponder capacity has only a media for uplinking and downlinking of signals of the broadcaster and TV operators to be transmitted to their customers without any manipulation for improvement, whereas in the case on hand, the Taxpayer is providing not only media but also allowed to use the information, store the information on server and even to manipulate and drive the data to anyone for their commercial purpose.
