By Pradip Kapasi, Gautam Nayak, Chartered Accountants
Issue for
Consideration
Under the
Income-tax Act, payment of royalty is one of the items which is subjected to
deduction of tax at source u/s. 194J, if the payment is made to a resident, or
u/s. 195, if the payment is made to a non-resident. The term “royalty” has been
defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act, as well as
in various double taxation avoidance agreements (DTAAs) that India has signed
with different countries.
The definition
in explanation 2 to section 9(1)(vi) defines the term “royalty” as under:
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) the transfer of all or any rights
(including the granting of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or similar property;
(ii) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design,
secret formula or process or trade mark or similar property;
(iii) the use of any patent, invention,
model, design, secret formula or process or trade mark or similar property;
(iv) the imparting of any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill;
(iva) the use or right to use any industrial,
commercial or scientific equipment but not including the amounts referred to in
section 44BB;
(v) the transfer of all or any rights (including
the granting of a licence) in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, but not
including consideration for the sale, distribution or exhibition of
cinematographic films; or
(vi) the rendering of any services in
connection with the activities referred to in sub-clauses (i) to (iv), (iva)
and(v).
Explanations 3
to 6 to section 9(1)(vi) clarify various aspects of and terms used in the
definition of royalty. Explanations 4 to 6 were inserted by the Finance Act
2012, with retrospective effect from 1.4.1976. Explanations 3 to 6 read as
under:
Explanation 3. —For the purposes of this
clause, “computer software” means any computer programme recorded on
any disc, tape, perforated media or other information storage device and
includes any such programme or any customized electronic data.
Explanation 4. —For the removal of doubts, it
is hereby clarified that the transfer of all or any rights in respect of any
right, property or information includes and has always included transfer of all
or any right for use or right to use a computer software (including granting of
a licence) irrespective of the medium through which such right is transferred.
Explanation 5. —For the removal of doubts, it
is hereby clarified that the royalty includes and has always included
consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right,
property or information is with the payer;
(b) such right, property or information is
used directly by the payer;
(c) the location of such right, property or
information is in India.
Explanation 6. —For the removal of doubts, it
is hereby clarified that the expression “process” includes and shall
be deemed to have always included transmission by satellite (including
up-linking, amplification, conversion for down-linking of any signal), cable,
optic fibre or by any other similar technology, whether or not such process is
secret;
The issue has
arisen before the courts as to whether fees for subscription to an online
database, containing standard information available to all subscribers, amounts
to royalty or not. While the Karnataka High Court has taken the view that such
payments amount to royalty, the Authority for Advance Ruling has taken a
contrary view, holding that such payments are not royalty.
Factset Research
Systems’ case
The issue came
up before the Authority for Advance Rulings in the case of Factset Research
System Inc., in re (2009) 317 ITR 169 (AAR).
In this case,
the assessee was a US company, which maintained a database outside India
containing financial and economic information, including fundamental data of a
large number of companies worldwide. Its customers were financial
intermediaries and investment banks, which required access to such such data.
The database contained public information collated, stored and displayed in an
organised manner by the assessee, such information being available in the
public domain in a raw form. Through the database combined with the use of
software, the assessee enabled its customers to retrieve this publicly
available information within a shorter span of time and in a focused manner.
The database contained historical information, and the software to access the
database, and other related documentation were hosted on its mainframes and
data libraries maintained at the data centres in the USA.
To access and
view the database, the customers had to download a client interface software
(similar to an Internet browser). Customers could subscribe to specific
database as per their requirements, and could view the data on their computer
screens. The assessee entered into a Master Client License Agreement with its
customers, under which it granted limited, non-exclusive, non-transferable
rights to its customers to use its databases, software tools, etc. the
assessee did not carry on any business operations in India, and it had no agent
in India acting on its behalf, or having an authority to conclude contracts.
Subscription fees were received by it directly outside India from its
customers.
The assessee
sought an advance ruling on the taxability of such subscriptions received by
it, under the Income-tax Act or under the India-USA DTAA. It claimed before the
AAR that such fees received from customers in India were not taxable in India,
as they did not constitute royalty or fees for technical services either under
the Income-tax Act or under the India-USA DTAA. Further, as it did not have any
permanent establishment in India, the fees could not be taxed as business
income in view of article 7 of the India-USA DTAA.
The AAR
examined the material terms of the Master Client License Agreement. It noted
that the assessee granted the licensee limited , non-exclusive,
non-transferable rights to use the software, hardware, consulting services and
databases. The consulting services were provided through certain consultants,
who demonstrated FactSet’s products and its uses to customers. Such services
were not really required, as the assessee provided helpdesk facilitation free
of cost, though there was more such facilitation centre in India. It was further
clarified that no hardware was being provided to customers in India.
The AAR noted
that the services were provided solely and exclusively for the licensee’s own
internal use and business purposes only and that too in the licensee’s business
premises. Only the licensee’s employees, who had a password or user ID, could
access the service. The licensee could not use or permit any individual or
entity under its control to use the services and the licensed material for any
unauthorised use or purpose. All proprietary rights, including intellectual
property rights in the software, databases and all related documentation
(licensed material) remained the property of the assessee or its third-party
data/software suppliers. The licensee was permitted to use the assessee’s name
for the limited purpose of source attribution of the data obtained from the
database, in the internal business reports and other similar documents. The
licensee was solely responsible for obtaining required authorisation from the
suppliers for products received through them, and in the absence of such
authorisation, the assessee had the right to terminate the licensee’s access to
any supplier product.
The licensee
agreed not to copy, transfer, distribute, reproduce, reverse engineer, decrypt,
decompile, disassemble, create derivative works from, or make any part of the
service, including the data received from the service, available to others. The
licensee could use in substantial amounts of the Licensed Materials in the
normal conduct of its business for use in reports, memoranda and presentations
to licensee’s employees, customers, agents and consultants, but the assessee
(suppliers and their respective affiliates) reserved all ownership rights and
rights to redistribute the data and databases. Under the agreement, the
licensee acknowledged that the service and its component parts constituted
valuable intellectual property and trade secrets of the licensor and its
suppliers. The licensee agreed to cooperate with the licensor and suppliers to
protect the proprietary
rights in the software and databases during the term of the agreement.
The agreement
further provided that on termination of the agreement, the licensee would cease
to use all the licensed material, return any licensor hardware on request, and
expunge all data and software from its storage facility and destroy all
documentation, except such copies of data to the extent required by law. The
licensee could not use any part of the services to create a proprietary
financial instrument or to list on its exchange facilities.
On behalf of
the assessee, it was argued before the AAR that the assessee provided to the
subscriber, a mere right to view the information or access to the database,
while online. No transfer, including licensing of any right in respect of
copyright, was involved in this case. The right that the customer got was a
right to use copyrighted database and not copyright in the database. According
to the assessee, clause (v) of explanation 2 to section 9(1)(vi) did not encompass
the use of copyrighted material. The data was available in the public domain,
and was presented in the form of statements/charts after analysis, indexing,
description and appending notes for facilitating easy access. These value
additions were outside the public domain, and the copyright in them was not
transferred or licensed to the subscribers. The copyright which the assessee
had was similar to the head notes and indexing part of law reports. It was
submitted that none of the other clauses of explanation 2 could be invoked to
bring the subscription fee within the ambit of royalty u/s. 9(1)(vi).
So far as the
DTAA was concerned, it was argued that the fee had not been paid for the use of
or the right to use any copyright. The term “use” in the context of royalty
signified exploitation of property in the form of copyright, but not use of the
copyrighted product. The customers did not acquire any exclusive rights
enumerated in section 14(a) of the Indian Copyright Act.
On behalf of
the Department, reliance was placed on sections 14(a)(i) and (vi) of the Indian
Copyright Act for the argument that the rights specified therein were granted
to the customers, and that therefore there was a transfer of rights in respect
of the copyright. It was further argued that the data could be rearranged
according to the needs of the subscriber, and this amounted to adaptation
contemplated by sub clause (vi) of section 14(a) of the Indian Copyright Act.
Clause (iv) of explanation 2 to section 9(1)(vi) was also sought to be invoked
by the Department, by claiming that this amounted to imparting any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill.
The AAR noted
that the assessee’s database was a source of information on various commercial
and financial matters of companies and similar entities. What the assessee did
was to collect and collate the said information/data, which was available in
public domain, and put them all in one place in the proper format, so that the
customer could have easy and quick access to this publicly available
information. The assessee had to bestow its effort, experience and expertise to
present the information/data in a focused manner, so as to facilitate easy and
convenient reference to the user. For this purpose, it was called upon to do
collation, analysis, indexing and noting, wherever necessary. These value
additions were the product of the assessee’s efforts and skills, and they were
outside the public domain. In that sense, the database was the intellectual
property of the assessee, and copyright attached to it.
In answer to
the question as to whether, in making the centralised data available to the
licensee for a consideration, whether it could be said that any rights which
the applicant had as a holder of copyright in the database were being parted in
favour of the customer, the AAR’s view was in the negative. The copyright or
other proprietary rights over the literary work remained intact with the
assessee, notwithstanding the fact that the right to view and make use of the
data for internal purposes of the customer was conferred upon the customer.
Several restrictions were placed on the licensee, so as to ensure that the
licensee could not venture on a business of his own, by distributing the data
downloaded by him or providing access to others. The grant of license was only
to authorise the licensee to have access to the copyrighted database, rather
than granting any right in or over the copyright as such.
In the view of
the AAR, the consideration paid was for the facility made available to the
licensee, and the license was a non-exclusive license. An exclusive license
would have conferred on the licensee and persons authorised by him, to the
exclusion of all other persons, including the owner of the copyright, any right
comprised in the copyright in a work. According to the AAR, the expression
“granting of license” in explanation 2 to section 9(1)(vi) took its colour from
the preceding expression “transfer of all or any rights”. It was not used in
the wider sense of granting a mere permission to do a certain thing, nor did
the grant of license denude the owner of copyrights of all or any of his
rights. According to the AAR, a license granting some rights and entitlements
attached to the copyright, so as to enable the licensee to commercially exploit
the limited rights conferred on him, is what is contemplated by the expression
‘granting of license’ in clause (v) of explanation 2.
The AAR
rejected the department’s argument that there was a transfer of rights in
respect of the copyright, by noting that the applicant was not conferred with
the exclusive right to reproduce the work (including the storing of it in
electronic medium) as contemplated by sub clause (i) of section 14(a) of the
Copyright Act. The exclusive right remained with the assessee, being the owner of
the copyright. By permitting the customer to store and use the data in the
computer for its internal business purpose, nothing was done to confer the
exclusive right to the customer. Such access was provided to any person who
subscribed, subject to limitations. The copyright of the assessee had not been
assigned or otherwise transferred, so as to enable the subscriber to have
certain exclusive rights over the assessee’s works. The AAR noted that the
Supreme Court, in SBI vs. Collector of Customs 2000 (115) ELT 597, in a
case where the property in the software had remained with the supplier and
license fee was payable by SBI for use of the software in a limited way, at its
own centres for a limited period, had held that “countrywide use of the
software and reproduction of software are two different things, and license fee
for countrywide use cannot be considered as the charges for the right to
reproduce the imported goods.”
The AAR
further negated the Department’s argument that permitting the data to be rearranged
amounted to adaptation, by holding that that was not the adaptation
contemplated by sub clause (vi) of section 14(a) of the Copyright Act read with
the definition of adaptation as per section 2(a). Therefore, according to the
AAR, no right of adaptation of the work had been conferred on the subscriber,
and the subscription fees received by the assessee from the licensee (user of
the database) did not fall within the scope of clause (v) of explanation 2 to section 9(1)(vi).
Examining the
position from the perspective of the DTAA, the AAR observed that the use of or
right to use any copyright of a literary or scientific work was not involved in
the subscriber getting access to the database for his own internal purpose. It
was akin to offering of a facility for viewing and taking copies for its own
use, without conferring any other rights available to a copyright holder. The
AAR observed that the expression “use of copyright” was not used in a generic
and general sense of having access to a copyrighted work, but the emphasis was
on “the use of copyright or the right to use it”. It was only if any of the
exclusive rights which the owner of the copyright had in the database was made
over to the customer/subscriber, so that he could enjoy such right, either
permanently or for a fixed duration of time and make a business out of it,
would such arrangement fall within the ambit of the phrase ‘use or right to use
the copyright’. The AAR noted that no rights of exclusive nature attached to
the ownership of copyright had been passed on to the subscriber even partially,
the licensee was not conferred with the right of reproduction and distribution
of the reproduced works to its own clientele, nor was the subscriber given the
right to adapt or alter the work for the purposes of marketing it. Therefore,
the underlying copyright behind the database could not be said to have been
conveyed to the licensee who made use of the copyrighted product.
The AAR also
rejected the argument of the Department that there was imparting of information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill. According to the AAR, the information which the licensee
got to the database did not relate to the underlying experience or skills which
contributed to the end product, and the assessee did not share its experiences,
techniques or methodology employed in evolving the database with the
subscribers, nor impart any information relating to them. The information or
data transmitted to the database was published information already available in
public domain, and not something which was exclusively available to the
assessee. It did not amount to imparting of information concerning the
assessee’s own knowledge, experience or skills in commercial and financial
matters.
As regards the
Department’s argument that such payment also included equipment royalty, i.e.
for use or right to use any industrial, commercial or scientific equipment,
since the server, which maintained the database, was used by customers as a
point of interface, the AAR was of the view that the consideration was not paid
by the licensee for the use of equipment, but was for availing of the facility
of accessing the data/information collected and collated by the assessee.
The AAR was
therefore of the view that the subscription fee was not in the nature of
royalty, either under the Income-tax Act, or under the DTAA.
Wipro’s case
The issue
again came up for consideration before the Karnataka High Court in the case of CIT
vs. Wipro Ltd 355 ITR 284.
In this case,
the assessee made certain payments to a non-resident, Gartner Group,
USA/Ireland, for obtaining access to the database maintained by the group, on
which no tax was deducted u/s. 195 of the Income-tax Act. A show cause notice
was issued under section 201 to the assessee, asking it to explain the reasons
for non-deduction of tax at source.
The assessee
responded by stating that the payment was akin to making a subscription for a
journal or magazine of a foreign publisher, and though the journal contained
information concerning commercial, industrial or technical knowledge, the payee
made no attempt to impart the same to the payer. According to it, the payment
fell outside the scope of clause (ii) of explanation 2 to section 9(1)(vi).
Further, it was claimed that the payment was not contingent on productivity,
use, or disposition of the information concerning industrial, commercial or
scientific experience in order to be construed as royalty under article 12 of
the DTAA between India and USA. Further, the assessee claimed that the payment
was for the purposes of a business carried on outside India or for the purposes
of making or earning any income from any source outside India, and therefore fell within the exception (b) to section 9(1)(vi).
The assessing
officer held that the payments amounted to royalty within the meaning of
explanation 2 to section 9(1)(vi), or alternatively amounted to fees for
technical services, both of which were liable to tax in India, both under the
Act, as well as under the DTAA. The Commissioner(Appeals) upheld the order of
the assessing officer holding that the payments amounted to royalty.
The Income Tax
Appellate Tribunal allowed the assessee’s appeals, by holding that the payments
made to Gartner Group did not constitute royalty, as the same was in the nature
of subscription made to a journal or magazine, and no part of the copyright was
transferred to the assessee, and that therefore the income was not chargeable
to tax in India.
Before the
High Court, on behalf of the revenue, it was argued that the payment made by
the assessee to Gartner Group was by way of royalty, as what was granted to the
assessee was a licence to have access to the database maintained by Gartner
Group, which was a scientific and technical service. Therefore, there was
transfer of copyright to the extent of having access to the database maintained
by Gartner Group, which access, but for the license, would have been an
infringement of copyright, the copyright continuing to be with Gartner Group.
Therefore, payments made by the assessee amounted to royalty, and could not be
considered to be akin to subscription made to a journal or magazine.
On behalf of
the assessee, it was argued that the payment made by the assessee to Gartner
Group was not by way of royalty, as no part of copyright was transferred to the
assessee for having access to the database. Further, as the right conferred
upon the assessee was only to have access to the database, it was akin to
subscription to a journal or magazine, and nothing more than that, and could
not be called as royalty.
The Karnataka
High Court, after considering the arguments observed that in identical cases,
i.e. ITA No 2988/2005 and connected cases (reported as CIT vs. Samsung
Electronics Co Ltd 345 ITR 494), after considering the contentions which
were identical to the contentions raised in these appeals, the court had held
that the payment made by the assessee to a non-resident company would amount to
royalty. According to the High Court, the fact that the issue in those cases
related to shrink-wrapped or off-the-shelf software, while that in this case
related to access to a database which was granted online, would not make any
difference to the reasoning adopted by the court to hold that such a right to
access would amount to transfer of right to use the copyright, and would amount
to royalty.
The Karnataka
High Court accordingly held that the payment for online access to the database
amounted to royalty.
Observations
To appreciate
the issue, one needs to refer to the facts and the ratio of the Karnataka High
Court decision in Samsung Electronics case (supra); the reason being
that the high court, in deciding Wipro’s case, has simply followed the decision
in Samsung Electronics case. That was a case of payment of licence fees by a
distributor of software to the overseas company and the Court held that for understanding
the meaning of ‘copyright’, one had to make a reference to the Copyright Act,
in the absence of any definition of the term under the Income-tax Act.
According to the Karnataka High Court, the right to copyright work would also
constitute exclusive right of the copyright holder, and any violation of such
right would amount to infringement u/s. 51 of the Copyright Act. According to
the court, granting of licence for taking copy of the software, and to store it
in the hard disk, and to take a backup copy and the right to make a copy
itself, was a part of copyright, since in the absence of licence, it would
constitute an infringement of copyright. Therefore, what was transferred was
the right to use the software (a right to use a copy of the software for the
internal business), an exclusive right which the owner of the copyright owned.
Therefore,
according to the Karnataka High Court, in Samsung Electronics case, the right
to make a copy of the software and use it for internal business by making a copy
of the same, and storing the same in the hard disk of the designated computer,
and taking backup copy, would itself amount to copyright work u/s. 14(1) of the
Copyright Act. Licence was granted to use the software by making copies, which
work, but for the license granted, would have constituted an infringement of
copyright. The supply of a copy of the software and the grant of the right to
copy the software was also a transfer of the copyright, since, copyright was a
negative right, in the absence of which there would be an infringement of the
copyright.
According to
the Karnataka High Court, in Samsung Electronics case, software was different
from a book or a pre-recorded music CD, as books or pre-recorded music CD could
be used once they were purchased, while in the case of software, the
acquisition of the CD by itself would not confer any right to the end-user, the
purpose of the CD being only to enable the end-user to take a copy of the
software and storage in the hard disk of the designated computer. If licence
was granted in that behalf. In the absence of licence, it would amount to
infringement of copyright.
If one
examines the logic of the Karnataka High Court’s decision, it is clear that the
case of a distributor would stand on a different footing from that of an
end-user, because a distributor would have the right to reproduce the software
for further distribution to customers, and the payment of the licence fees
would be in the ratio of the number of software licenses sold by him. In the
case of an end-user, there would be no right to reproduce for resale.
Further, the
Karnataka High Court seems to have lost sight of the fact that the payment for
the license for use of the software is made at the time of purchase of the CD
itself, and the ‘online clicking’ of the terms of the license after
installation of the software on the computer is merely a formality, and does
not involve payment of any further consideration to the owner of the copyright.
Therefore, the distinction sought to be drawn by the Karnataka High Court
between copyrighted articles such as books and music CD on the one hand, and
software on the other hand, does not seem to be valid.
Besides,
access to an online database is quite different from purchase of a
shrink-wrapped software, and an exclusive reliance on the logic of a decision
in Samsung Electronics case delivered in
the context of purchase of shrink-wrapped software to a case of subscription to
an online database in Wipro’s case does not seem to be justified.
Further, even there
various other High Courts/AAR have taken a view contrary to the view taken in Samsung
Electronics case holding that payments for purchase of shrink-wrapped
software does not amount to royalty, contrary to the view of the Karnataka High
Court. Please see DIT vs. Intrasoft Ltd 220 Taxman 273 (Del), Ericsson AB
vs. DDIT 343 ITR 470 (Del), Dassault Systems K K, in re 322 ITR 125 (AAR),
.
One can also
draw an analogy from the Supreme Court decision in the case of CIT vs. Kotak
Securities Ltd 383 ITR 1, in the context of fees for technical services,
where the Supreme Court has taken the view that provision of a standard service
does not amount to provision of technical services. The services have to be
specialized, exclusive and as per individual requirement of the user or
consumer who may approach the service provider for such assistance/service, to
constitute fees for technical services. In the case of royalty as well, the
same analogy should apply.
Internationally,
also, there is a clear distinction drawn between provision of database services
using a copyright, and transfer or use of a copyright in the OECD Commentary on
“Treaty characterization issues arising from e-Commerce” wherein ,
there is a useful discussion on this aspect under the heads ‘Data retrieval’
and ‘Delivery of exclusive or other high value data’, as under:
“Category 15: Data retrieval
Definition —The provider makes a repository
of information available for customers to search and retrieve. The principal
value to customers is the ability to search and extract a specific item of data
from amongst a vast collection of widely available data.
27. Analysis and conclusions —The payment
arising from this type of transaction would fall under Article 7. Some Member
countries reach that conclusion because, given that the principal value of such
a database would be the ability to search and extract the documents, these
countries view the contract as a contract for services. Others consider that,
in this transaction, the customer pays in order to ultimately obtain the data
that he will search for. They therefore view the transaction as being similar
to those described in category 2 and will accordingly treat the payment as
business profits.
28. Another issue is whether such payment
could be considered as a payment for services “of a technical nature”
under the alternative provisions on technical fees previously referred to.
Providing a client with the use of search and retrieval software and with
access to a database does not involve the exercise of special skill or
knowledge when the software and database is delivered to the client. The fact
that the development of the necessary software and database would itself
require substantial technical skills was found to be irrelevant as the service
provided to the client was not the development of the software and database
(which may well be done by someone other than the supplier) but rather making
the completed software and database available to that client.
Category 16: Delivery of exclusive or other high-value
data
Definition —As in the previous example, the
provider makes a repository of information available to customers. In this
case, however, the data is of greater value to the customer than the means of
finding and retrieving it. The provider adds significant value in terms of
content (e.g., by adding analysis of raw data) but the resulting product is not
prepared for a specific customer and no obligation to keep its contents
confidential is imposed on customers. Examples of such products might include
special industry or investment reports. Such reports are either sent
electronically to subscribers or are made available for purchase and download
from an online catalogue or index.
29. Analysis and conclusions —These
transactions involve the same characterization issues as those described in the
previous category. Thus, the payment arising from this type of transaction
falls under Article 7 and is not a technical fee for the same reason.”
Though the
discussion is in the context of fees for technical services, the same logic
would equally apply to royalty.
Therefore, the
better view is that of the AAR, that both under the Income-tax Act as well as
under the DTAA, subscription to an online database does not amount to royalty
or the fees for technical services and does not require deduction of tax at
source on payment, nor could it be deemed to be an income accrued in India u/s.
9(1)(vi) or (vii) or DTAA..
The decisions
discussed above (except that of Intrasoft) have been rendered in the context of
the law prevailing prior to 2012. In 2012, explanations 3 to 6 to section
9(1)(vi) were inserted with retrospective effect from 1.4.1976. We need to
perhaps examine whether the amendments affect the issue under consideration?
Explanations 3
and 4 deal with computer software. An online database is not a computer
software. The mere fact that a software may be used to access the database does
not make the payment one for use of the software. The payment remains in
substance for access of the information contained in the database. These
explanations 3 and 4 therefore do not apply to subscription to online
databases.
Explanation 6
deals with use of a process. In the case of subscription to an online database,
there is in substance no payment for use of a process. Even if the method of
‘logging in’ is regarded as a process, that is merely incidental to the access
to the database. The payment cannot be regarded as having been made for use of
a process, but for access to the information contained in the database.
Explanation 6 also therefore does not apply.
Explanation 5
deals with consideration for any right, property or information, and clarifies
that it would amount to royalty, irrespective of whether the possession or
control of such right, property or information is with the payer, whether such
right, property or information is used directly by the payer, or whether the
location of such right, property or information is in India. In case of an
online database, the consideration is surely for information, which is not
within the control of the payer. However, the imparting of information under
explanation 5 by itself cannot be read in isolation, and has to be read along
with the main definition of “royalty” in explanation 2 to section 9(1)(vi).
This is evident from the fact that if one reads explanation 5 in the absence of
explanation 2, it has no meaning at all in the context of section
9(1)(vi).
Clause (ii) of
explanation 2 refers to the imparting of any information concerning the working
of, or the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property. An online database does not provide
working of any such intellectual property, but merely provides financial or
general information in an organised manner. Clause (iv) of explanation 2 refers
to the imparting of any information concerning technical, industrial,
commercial or scientific knowledge, experience or skill. In case of an online
database, as rightly pointed out by the AAR in Factset’s case, no information
regarding knowledge, experience or skill of the database provider is provided
to the subscriber. Therefore, subscription to an online database does not fall
under either of these clauses. The insertion of explanation 5, though with
retrospective effect, therefore does not change the position in law that was
prevailing prior to the amendment, in so far as subscription to an online
database is concerned.
Even after the amendments, the law therefore seems to
be the same – subscription to an online database does not amount to royalty,
either under the Income-tax Act or under the DTAA.
