Direct Taxes

Advance Rulings

Facts of the Case

1. A Licence agreement was entered into between Conversagent USA and IMT Labs A/S (Licensee), a Danish Corporation.
    

2. Subsequently the Danish Corporation assigned all the rights and obligations under the agreement to IMT Labs India Pvt. Ltd. (applicant).
    

3. According to the License agreement the applicant will have the right to use the Buddy script and Smarterchild technologies
    

4. The software that is used by the Conversagent is only for the 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.
    

5. 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 and shall include the Buddy Script code currently used to run the “Smarterchild” Interactive Agent application.
    

6. Minimum royalty of US $ 10,000 shall be paid each month up to 500,000 sessions and an additional sum of US $ 10,000 for 500,000 additional sessions thereafter.
    

7. Conversagent shall host Interactive Agents for the applicant in accordance with the then applicable rate card of the applicant.
    

8. 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 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.
    

9. Conversagent shall provide the Licensee email support not to exceed 4 hours per month.
    

10. The licensee shall only disclose the source code for Conversagent’s Buddy script software to a limited number of employees.
     

Questions before the authority

1. 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 tax deduction at source under Double Taxation Avoidance Agreement (DTAA) with USA?

Contention of the department

1. Jurisdictional Commissioner in his comments stated that the assessee company is making payment for using the software developed by the non resident on internet and Software is covered under the definition of ‘copyright u/s 14 of the Copyright Act, 1957 and the US copyright Act also treats the computer programme as copyright. Therefore the payment is in the nature of royalty
    

2. Accordingly the assessee will be liable to deduct TDS while making payment even though the non-resident does not have office/establishment in India.

Contention of the applicant

1. The information provided by the non-resident on Internet in connection with software is not a secret information/process/formula/copyright. Software information is like business information, is available to anybody on Internet on payment of some fee, hence it should be treated as Business income instead of Royalties
    

2. Reference was made to the decision in case of Dun & Bradstreet Espana S.A. to support the contention that the income should be treated as business income and not Royalties or Fees for technical/included services.

Ruling of the authority

1. Authority enumerated certain clauses of the licence agreement, Articles 7 and 12 of Indo-US DTAA, Sections 9(1) of the Income-tax Act, 1962 (the Act) and section 195 of the Act and derived following analysis
    

2. Article 7 of the Indo-US DTAA states that where profits include items of income, which are dealt with separately in other articles of the Convention, then the provisions of those articles will apply. Therefore it should be first analysed whether the payment is covered under Article 12 of the Indo-US DTAA.

3. The payment is made for the use of “Smarterchild” software on Conversagent Server only, for producing, hosting and distributing ‘Interactive Agent’ applications. The License Fee to be paid monthly is termed as Royalty in the agreement.

4. Article 12 of the Indo-US DTAA defines ‘Royalty’ to mean payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. The ‘Smarterchild’ application on Conversagent Server Platform is scientific equipment, licensed to be used for commercial purpose and the payment is based on the number of sessions for which the equipment is utilized for the licensed purpose.

5. Also Conversagent has to provide

1. one qualified staff member to assist the Licensee with the transfer of technical information provided, of aggregate of 16 hours, however such technical assistance shall be effected at the premises of Conversagent
    

2. management personnel to assist the applicant’s management by making introduction to content providers featured in the Smarter Child Application

3. email support up to 4 hours per monthThere is no separate fee charged for these technical services which are covered by the definition of included services as per Indo-US DTAA

6. Therefore as per the DTAA between India and USA, the payment are in the nature of Royalty.
    

7. The definitions of Royalty and Fees for Technical Services as provided in section 9(1) of the Act is at par with the definitions as per DTAA. Therefore, the payment will be taxable in India, also under the provisions of the Act.
    

8. Under the facts of the case of Dun and Bradstreet Espana S.A. as referred by the applicant, the non resident company was a leading seller of Business Information Reports (BIRs). It had subsidiaries and associates in different countries which were engaged in the activity of compiling BIRs and uploading the information on the central data server. Whenever the Indian customer placed an order the Indian subsidiary/associate would download, print and deliver the copy of required information to the customer. The associate companies were under an obligation not to take addition copies or reproduce the BIR in any manner or sell it to any customer other than the customer on whose requisition BIR was ordered. The activity was akin to the sale of a book. The facts of the case being totally different reliance cannot be placed.
    

9. Section 195 of the Act states that a person making a payment to non resident of any sum chargeable under the Act is required to deduct tax at source on the entire payment, which may or may not be income. In this regard the authority referred to the case of Transmission Corporation of A.P. Ltd. vs. CIT [239 ITR 587 (SC)]
    

10. Authority held that periodical payments being ‘Royalties or Fees for included services, made to the non resident person not having office/establishment in India, in connection with the use of software developed by him on internet are subject to tax deduction at source.
    
    Source: www.aar.gov.in