The issue before the Madhya Pradesh High Court was whether payment made for purchase of data in the form of monthly compilation from foreign company was taxable as Royalty in India?
Nature of payments/transactions:
Payment was made for purchase of data of confidential nature which was in the form of monthly compilation called “Executive overview” containing data on Carbon Graphite Electrodes Industry in which the assessee is dealing.
The High Court in the case of HEG observed that the information obtained by the assessee is in the nature of a book and is not an information which would show any kind of experience skill or expertise and therefore not taxable to meet the definition of Royalty laid down in Explanation 2 to Section 9(l)(iv). The subject information was available in the market and cannot be considered as secret and confidential. The Court held that the data, although informative was publicly available and provided to all players in the industry on non-exclusive basis, and therefore in absence of an element of skill or expertise associated with the provision of data, the payment cannot be regarded as being in the nature of Royalty.
Though the matter was remitted to the Tribunal for fresh adjudication after verification of entire records relating to data, the High Court has clearly held that every information would not have the status of royalty. There are various kinds of categories of information. Solely because an entry is of the commercial nature or value would not make it a royalty. That cannot be an exclusive base or foundation. Some sort of expertise or skill is required. The aforesaid factor would be the requisite one and therefore the contention, that
- Whether payments for accessing web portal, which also included use of software and equipment of the assessee, falls within the ambit of Royalty?
The issue before the Mumbai Tribunal was whether payment made for use of licensed software along with computer system to access the assessee’s portal constitutes Royalty in India?
Nature of payments/transactions:
The assessee entered into a contract with the Indian clients for providing foreign exchange deal matching system. The main server of the assessee was located in Geneva. In order to provide services to the Indian clients, the assessee also entered into agreement with its Indian subsidiary RIPL to provide the equipment and connectivity within India on behalf of the assessee. The assessee is providing the service in form of information solution to the need of the subscribers by providing the matching party. The entire system involves processing of subscriber’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. Peculiar facts about the arrangement/transactions are:-
- License to use software was on non-transferable and non-exclusive basis
- The clients were permitted to sub license the agreement with assessee’s prior permission.
- The clients would avail services only through the equipment and connectivity provided by the assessee through its subsidiary RIPL.
- Charges for entire facility and services shall be paid by the client to the assessee. The assessee remunerates RIPL in turn for providing services of marketing and installation of equipment
Mumbai ITAT in the case of Reuters Transaction Services Ltd. observed that the instant case is not a case of simplicitor payment for access to the portal by use of normal computer and internal facility but the access is given only by use of computer system and software system provided by the assessee. The
- CIT vs. HEG Ltd.  130 Taxman 72(MP)
- Reuters Transaction Services Ltd vs. DDIT  47 taxman 10 (Mumbai-Trib)
The Organisation for Economic Co-operation and Development (OECD) and G 20 countries adopted a 15 point action plan to address Base Erosion and Profit Shifting (BEPS1 issues. Though not directly relatable, yet interesting would be the new set of standards set on account of Action Plan on Digital Economy, which would certainly have some relevance and may provide much needed clarity on the issue of characterisation of subscription income from data retrieval/use of database.
Tribunal held that allowing use of software and computer system to have access to the portal of the assessee for finding relevant match would amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and payment made in this respect would constitute Royalty in terms of Article 13(3) of the India-UK Double Taxation Avoidance Agreement.
In Kotak’s case, the subscriber made payment for the activity of specialised data processing which included activities such as sending raw data to the Australian company, which was processed and transmitted back electronically to the assessee. The Assessing Officer held that such payments to be taxable as royalty as appearing in Section 9(1) of the Act as also in Article 12(3)(a) of the Treaty between India and Australia. The Tribunal held that irrespective of the fact that use of the mainframe in the course of processing of data was one of the important aspects of the whole activity, the payments were not for the use of mainframe computer per se and since the assessee did not have any control over or physical access to the mainframe in Australia, such payments could not be classified as Royalty in terms of clause 12(3)(b) of the Treaty between India and Australia.
It can be clearly seen that the facts of the above cases (i.e. Reuters and Kotak) are different and the difference has resulted in one transaction being liable to tax and the other not taxable in India.
It can be concluded that there are numerous factors associated with characterisation of payments as Royalty or otherwise and it is in itself a fact intensive exercise. In view of the persisting complexity in the nature of transactions, the judicial opinion also seems to be divided on this vexed issue.
Evidently, the alarming innovation in technology has shaken the pillars of the conventional taxation regime. The global tax policy is still trying to match pace with the ever evolving ‘Digital economy! Developments on the international front on issues concerning the classification of various types of e-commerce income as either royalties or income from the sale of goods or income from the provision of services would be noteworthy. The Organisation for Economic Co-operation and Development (OECD) and G 20 countries adopted a 15 point action plan to address Base Erosion and Profit Shifting (BEPS) issues. Though not directly relatable, yet interesting would be the new set of standards set on account of Action Plan on Digital Economy, which would certainly have some relevance and may provide much needed clarity on the issue of characterisation of subscription income from data retrieval/use of database.
‘ “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—
- the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;
- 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;
- the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
- 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;
- the transfer of all or any rights (including the granting of a license) 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
- the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).” ■
130 THE CHARTERED ACCOUNTANT MARCH 2015 www.icai.org
 Kotak Mahindra Primus Ltd. vs. DDIT  11 SOT 578 (Mumb)