M/S. MCKINSEY KNOWLEDGE CENTRE INDIA PVT. LTD.,,GURGAON vs. ITO, NEW DELHI

The present appeal has been filed by assessee against order dated 29.10.2012 passed by Ld. CIT(A)-XXIX, New Delhi, on following grounds of appeal: 1.1 The Learned Commissioner of Income Tax (Appeals)-XXIX, New Delhi (hereinafter referred to as "CIT(A)"), has erred on facts and in law in holding that the payments made by appellant to Thomson Asia Pte Limited ("Thomson'1) for accessing its database and downloading readily available information is in the nature of Royalty under section 9(l)(vi) of the Act as well as under Article 12(3) of the India- Singapore Double Taxation Avoidance Agreement ("Treaty") and subject to tax at the rate of 10 percent. 1.2 Without prejudice to the above the CIT(A) has erred in law and on facts of the case in holding that the payment made by the appellant is in the nature of royalty under Clauses (i),{ii) and (Jii) of Explanation 2 of section 9(l)(vi) of the Act being in the nature of "similar property" and is akin to patent, invention, model, design, secret formula or process or trade mark or similar property. 1.3 The CIT(A) has further erred on facts and in law in holding that the payment made by appellant is covered under Clause (iv) of Explanation 2 to section 9(l)(vi) of the Act without appreciating that the recipient is not engaged in any industrial or commercial activity and does not have the experience, skill, knowledge or capability to impart such industrial or commercial knowledge to the appellant which may be covered under the said clause. Ground No. 2j Without prejudice to Ground No. 1 above, the CIT(A) has erred on facts and in law in denying the benefit of exclusionary clause under section 9(1 )(vi)(b) of the Act by rejecting the appellants claim of exclusion of royalty from ambit of taxation in India by holding that the source of income of the appellant for which payment is being made is in India.

Brief facts of case are as under:

Ld. ITO observed that assessee is engaged in the export of computer software (including data processing), rendering support services and acting as a back-office to its parent entity being Mc Kinsey and Co. Inc. It has been submitted by assessee that for the purpose of its business, assessee is required to access certain database, maintained by Thomson which provides general information on share price, market, commodity price, currency exchange rates etc. It was submitted that these are publicly available database which can be accessed by anyone, who is willing to subscribe to it. Ld. ITO observed that Thompson is a company incorporated in Singapore and is tax resident of Singapore, entitled to benefits under India Singapore Double Taxation Avoidance Agreement (DTAA). It was submitted that Thompson, neither renders any services in India nor has any place of business/office/personnel in India.

Leased Equipment The Leased Equipment rented to Client, is, and will remain the property of Thomson. Client will not part with possession or control of the Leased Equipment for purposes of installation, removal, maintenance, or repair during reasonable business hours. Client agrees not to move the Leased Equipment without giving Thomson no less than ten (10} days prior written notice. Client agrees not to use any apparatus or device, directly indirectly, with the Leased Equipment supplied without the prior written consent of Thomson. Client shall maintain the Leased Equipment in good working order subject to ordinary wear and tear and locate the Leased Equipment in an appropriate environment. Client agrees to insure the Leased Equipment in a sum equal to its replacement value under a commercial multi-peril policy or its equivalent. Client further agrees to furnish Thomson with a certificate of insurance evidencing such coverage.

Subsequent to agreement for access of databases following invoices were raised upon assessee by Thomson on 04.01.2007, the details of which are as under: Tax Voice # Agreement # P.O# Billing Date Due Date Amount Due Amount Enclosed 866150 206656 04-Jan- 2007 03-Feb-2007 39,427.50 USD Qty. Product Service Amount Period Frequency 1 Global Equities & Economics 01-Jan-2007 Gross 29,452.50 USD Worldwide 31-Mar-2007 Quarterly Net 29452.50 USD 1 Ibes Global Current Summary & 01-Jan-2007 Gross 5,250.00 USD Global History Summary 31-Mar-2007 I/B/E/S Consensus Current & Quarterly Net 5,250.00 USD History(Global) 1 Ibes Global Current Summary & 01-Jan-2007 Gross 4,725.00 USD Global Aggregate 31-Mar-2007 I/B/E/S Consensus Current & Quarterly Net History(Global) 4,725.00 USD Subtotal 39,427.50 USD GST @ 0% 0.00 USD Invoice Total 39,427.50 USD Adjustments 0.00 USD Exchange Rate 1.5376 Total Amount Due 39427.50 USD

Assessee contended before Ld. ITO that the above payments are not of nature of royalty as per section 9(1)(vi) of the Act. It was contended that payments were merely for accessing databases and it does not have any license for commercial exploitation of copyright, with regard to database maintained and owned exclusively by Thomson. Rejecting submissions advanced by assessee, Ld. ITO passed order dated 24.08.2007 under section 195(2) of the Act, treating payment as Royalty/FTS, thereby directing assessee to withhold tax at source at rate of 20%. Subsequent to this, assessee filed tax residency certificate and TDS officer rectified the order passed by Ld. ITO to the extent of granting benefit to assessee under the treaty. As per revised order passed by ITO on 11.09.2007, the rate of withholding tax was granted at 10%, under Article 12 of treaty.

Aggrieved by this order, assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) disagreeing with submissions advanced by assessee upheld order passed by ITO. 8. Aggrieved by order of Ld. CIT(A), assessee is in appeal before us now. 9. Ld. Counsel submitted that, database accessed by assessee is a source of information for various commercial, economic, financial matters. As the main function of assessee is to provide customized back-office operations and acting as support centre, it is required to access certain databases such as Bloomberg, Reuters, Once source, Dow Jones and Data Stream. It has submitted that, one such database accessed by assessee is database maintained by Thomson. He referred to global master service agreement, which is placed at page 2 to 5 of paper book dated 21.04.2015 wherein it provides that services to be availed would be agreed upon between parties as per separate service orders, to be executed from time to time. Ld. Counsel referred to service order dated 23.11.2005 which is placed at page 6 to 8 of paper book. He submitted that as per service order burden of payment of taxes in India if any is on assessee. It is submitted that this is merely a subscription fee for accessing database of general, publicly available information, which, as per law is not liable to be taxed in India, and therefore, assessee made application under section 195 of the Act before TDS officer for nil withholding tax, which stood rejected. Ld. Counsel placed reliance upon or of decisions on identical issues decided by Hon’ble jurisdictional High Court, other High Courts, and various co-ordinate benches of this Tribunal.

He further submitted that there is no transfer of any right in respect of copyrights by Thomson and it is a mere simple case of transfer of copyrighted article. Ld. Counsel submitted that in order to qualify payments made to Thomson as royalty, it is necessary to establish that there is a transfer of all or any rights (including the granting of any license) in respect of copyright of literary, artistic or scientific work. He submitted that in order to treat consideration paid by assessee as royalty, it is to be established that assessee by making such payment claims all or any of copyrights of such literary work. Ld. Counsel submitted that decision of Hon’ble Karnataka High Court in the case of CIT vs. Samsung Electronics Co. Ltd., reported in (2012) 345 ITR 494 has been distinguished by Hon’ble Delhi High Court in case of DIT vs. Infrasoft Ltd., reported in (2014) 264 CTR 329. He placed specific reference to para 98 of the decision of Hon’ble Delhi High Court in the case of CIT vs. Infrasot Ltd., (supra) which reads as under: “98. We are not in agreement with the decision of the Karnataka High Court in the case of Samsung Electronics Co. Ltd., (supra) that right to make a copy of software and storing the same on the hard disk of the designated computer and taking backup copy would amount to copyright under article 14 (1) of the Copyright act and the payments made for the grant of the license for the said purpose would constitute royalty. The license granted to the licensee permitting him to download the computer program and storing it in the computer for his own use was only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process was necessary to make the program functional and to have access to it and is qualitatively different from the right contempt related by the said provision because it is only integral to the use of copyrighted product. The right to make a backup copy purely as a temporary protection against loss, destruction or damage has been held by Delhi High Court in Nokia Networks OY (supra) is not amounting to acquiring a copyright in the software.)”

Ld. Counsel submitted that issue is squarely covered by the decision of Hon’ble Jurisdictional High Court in case of DIT vs. Infrasoft (supra).

On the contrary, Ld. DR placed reliance upon decisions of authorities below. He submitted that Explanation 2 clause (iv) to section 9 (1) (iv) covers information received by assessee, for which payment has been made to Thomson. He submitted that clause (v) cannot be made applicable to assessee.

We have perused the submissions advanced by both the parties in the light of records placed before us and judicial precedent relied upon by Ld. Counsel. 14. To elucidate nature of transaction in the case of assessee, is necessary to examine some of clauses of master agreement entered into by assessee with Thompson, which has been reproduced hereinabove. On perusal of the agreement it is observed that Thomson provides general data relating to equity, share price, market, exchange rates, commodity prices etc which is publicly available. The database provided by Thomson to assessee is compilation Asian of general information, relating to share market which is neither relating to Thomson’s own experience nor is it secret or divulged information. The payments made by assessee to Thomson are for merely accessing the database. With this access assessee has not received any knowledge as to how the databases are maintained nor does it have any licence for commercial exploitation of the Copyright with regard to the database maintained by Thomson. Assessee had claimed a limited right to use the information which is no doubt the “copyrighted information” solely belonging to Thomson under master agreement. Assessee is also not required to pay any third-party fee which is evident on reading of master agreement.

The clauses in agreement are non-exclusive, non transferable and information available on database has to be used in accordance with the agreement only. We agree with the agreement advanced by Ld. Counsel that in order to qualify payment made to Thomson as royalty payment it is necessary to establish that there is a transfer of all or any rights in respect of copyright of literary work. It is observed that assessee is not allowed to exploit the database commercially under the agreement.

We find that treaty provisions between India and Singapore unambiguously require the use of copyright to be taxed in the source country. In the present case, the payment has been made by assessee for use of “copyrighted material” rather than for the use of copyright. The distinction between “copyright” and “copyright article” has been well dealt with by Hon’ble Delhi High Court in the case of DIT vs. Infrasoft (supra), wherein it has been held that in a case where assessee gets right to access “copyrighted material”, there is no dispute regarding the same to fall out of definition of term “Royalty”, under India Singapore DTAA. In this case, as assessee has only received access of copyrighted material, there is no dispute about payment falling out of definition of royalty. During course of hearing before us Ld. DR could not demonstrate as to how there was use of copyright and therefore, attempt to bring payments made under explanation 2 clause (iv) to section 9 (1) (vi) of the Act cannot be accepted. Accordingly respectfully following decision of Hon’ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd. (supra) and on the basis of discussions above we allow grounds raised by assessee. In the result appeal filed by the assessee stands allowed. Order pronounced in the open court on 11th May, 2017. Sd/- Sd/- (N. K. SAINI) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Date: 11.05.2017 @m!t