GSMA LTD,USA vs. ACIT CIRCLE INTL TAXATION 1(3)(1), NEW DELHI

The facts of the case in brief as emanating from records are: The assessee company was incorporated in the United State of America (USA) and is a tax resident of USA. The assessee has been appointed by Mobile Industry as a sole Global Decimal Administrator (GDA) and is responsible to coordinate allocation of ‘International Mobile Equipment Identifier’ (IMEI) to device manufactures in accordance with the specification developed by the Third Generation Partnership Project for mobile telecommunications (3GPP). In discharge of its GDA responsibilities, the assessee appointed AB Mobile Standards Alliance India Pvt. Ltd. (in short ‘MSAI’) as Regional Administrator also known as Reporting Body (RB). An agreement between the assessee and MSAI was executed for this purpose. As per the agreement MSAI was required to pay administration fee to the assessee @70% of the service fee received by MSAI from the third party i.e. Mobile Equipment Manufactures. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the Administration Fee received by the assessee is in the nature of royalty as per Section 9(1)(vii) of the Act, as well as, India-USA DTAA.

Per contra, Shri M.S Nethrapal representing the department vehemently defended the impugned order. The ld. DR fairly admitted that in so far as issue relating to Administration Fee is concerned, the same has been considered by the Tribunal in assessee’s own case in preceding assessment years. With regard to issue no. 2 relating to Subscription Fee in the nature of royalty, the ld. DR placed reliance on the findings of the AO and the DRP.

Both sides heard, orders of the authorities below examined and the case laws on which the ld. Counsel for the assessee has placed reliance considered. The assessee in ground no. 2 of appeal has assailed the assessment order in treating Administration Fee received by the assessee as royalty. We find that this issue is recurring. In AY 2013-14 and 2015-16 on identical set of facts, the AO had characterized Administration Fees received by the assessee as royalty u/s 9(1)(vi) of the Act as well as under Article 12(3) of India-US DTAA. The assessee carried the issue in appeal before the Tribunal in and ITA No.3035/Del/2019 for the respective assessment years. The Co-ordinate Bench (A.Y.2017-18) vide order dated 08.12.2023, decided the issue in favour of the assessee, holding as under:- “9. We have considered rival submissions and perused materials on record. As discussed earlier, the assessee is a global decimal administrator appointed by mobile industry for providing unique identification number known as IMEI or TAC for tracking mobile devices. As submitted before us by learned counsel for the assessee, this is the only company in the world which allocates these numbers. As discussed earlier, the assessee is a non-profit organisation, hence, exempt from taxation in USA. The specific activity of the assessee is to provide a unique identification number, which can be incorporated/implanted in the mobile devices by device manufacturers in a combination with other numbers to be provided by the device manufacturer to create a 14 digit IMEI number, which is unique to each mobile device. As discussed earlier, in so far as India is concerned, the assessee has appointed MSAI as the reporting body (RB) through agreement dated 22.07.2011. As per the terms of the agreement, the assessee shall provide a database to MSAI through which TAC can be generated and allocated to the device manufacturer. As a RB, MSAI is required to assist GSMA in allocation of TAC to mobile device manufacturers, approve the representatives of mobile device manufacturers, and the brand owners distributing or offering the mobile equipments for sale. So the only service rendered by MSAI is, facilitation of allocation of TACs for mobile manufacturers.

The AO is directed to delete the addition made in respect of Administration Fee treating it as royalty.

In ground no. 3 of appeal, assessee has assailed treating of Subscription Fee as royalty under provisions of the Act as well as India-US DTAA. The assessee has entered into Master License Agreement with Comviva Technologies Ltd. It is imperative to refer to para 2 of Master License Agreement which explains the conditions qua Ownership and License. The relevant extracts of para 2 are as under:- “2. OWNERSHIP AND LICENSE 2.1 The Deliverables and all rights, including, without limitation, title and all intellectual property rights contained therein, are owned by GMA and/or its licensors and their Affiliates and are protected by international treaty provisions and all other applicable national laws of the country in which they are being used.

A bare perusal of above terms and conditions agreement would show that the assessee has granted access to Comviva Technologies Ltd. for limited purpose and for its internal use only. Comviva Technologies Ltd. is not authorized to commercially exploit the data/information that is accessible to it by way of Subscription services. The facility provided by the assessee provides limited access to the subscriber to copy righted article and not to the copy rights of the article. There is no material available on record which would show that while allowing access of material and data, the assessee has transferred its right to use the copy right in any literary, artistic and scientific work to the subscribers or for information concerning industrial and commercial scientific experience. Further, the subscription is time based carried a restrictive covent. After the end of term of subscription and for two years after termination of the agreement, the subscriber is barred from offering the same and similar services as the syndicated research services covered by the agreement. Thus, in light of the facts available on record the payment made by the subscriber to the assessee referred to as Subscription Fee does not fall within the meaning of royalty under Article 12(3) of India-US DTAA.

The Hon’ble Delhi High Court in the case of CIT vs. Relx Ltd. (supra) had the occasion to deal with similar issue. In the said case, the assessee/respondent had (A.Y.2017-18) received Subscription Fee from Indian subscribers for the use of legal data base. The subscribers had the access to the judgments, articles, legislation and other research material relevant to the legal field. The assessee claimed Subscription Fee is in the nature of ‘Business Income’. Since, the assessee was not having PE in India, the assessee claimed that subscription fee would not be subject to tax in India as per Article 7 of the India-US DTAA. Whereas, stand of the Revenue in the said case was that Subscription Fee is in the of nature of technical consultancy and would fall within the ambit of Article 12(4) i.e. Fee for Included Services. The Department also tried to make out a case to treat Subscription Fee as royalty within the meaning of Article 12(3) of India-US DTAA. The Hon’ble Delhi High Court held that the Subscription Fee received by the assessee for granting access to its data does not constitute fee for technical services nor does the Subscription Fee is in the nature of royalty. The relevant observations of the Hon’ble Delhi High Court holding Subscription Fee is not in the nature of ‘royalty’ are as under:- “11. We find that similar would be the position which would obtain when subscription fee is examined on the anvil of article 12 of the DTAA. If the Department were to describe subscription fee as 'royalty' they would necessarily have to establish that the payments so received by the assessee was consideration for the use of or the right to use any copyright or a literary, artistic or scientific work as defined by article 12(3) of the DTAA. Granting access to the database would clearly not amount to a transfer of a right to use a copyright. We must bear in mind the clear distinction that must be recognised to exist between the transfer of a copyright and the mere grant of the right to use and take advantage of copyrighted material. Neither the subscription agreement nor the advantages accorded to a subscriber can possibly be considered in law to be a transfer of a copyright. In fact, it was the categorical assertion of the assessee that the copyright remains with it at all times.

The licence granted to the licencee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licencee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by the said paragraph because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licencee has no right to deal with the product just as the owner would be in a position to do.

There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA.

The licencees are not allowed to exploit the computer software commercially, they have acquired under licence agreement, only the copyrighted software which by itself is an article and they have not acquired any copyright in the software. In the case of the Assessee Company, the licencee to whom the Assessee Company has sold/licenced the software were allowed to make only one copy of the software and associated support information for backup purposes with a condition that such copyright shall include Infrasoft copyright and all copies of the software shall be exclusive properties of Infrasoft. Licencee (A.Y.2017-18) was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Infrasoft.

The licencee has been prohibited from copying, de-compiling, de-assembling, or reverse engineering the software without the written consent of Infrasoft. The licence agreement between the Assessee Company and its customers stipulates that all copyrights and intellectual property rights in the software and copies made by the licencee were owned by Infrasoft and only Infrasoft has the power to grant licence rights for use of the software. The licence agreement stipulates that upon termination of the agreement for any reason, the licencee shall return the software including supporting information and licence authorisation device to Infrasoft.

The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a cassette or a CD which may be a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright to bring it within the definition of royalty as given in the DTAA. What the licencee has acquired is only a copy of the copyright article whereas the copyright remains with the owner and the Licencees have acquired a computer programme for being used in their business and no right is granted to them to utilize the copyright of a computer programme and thus the payment for the same is not in the nature of royalty."

Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in Section 195 of the Income-tax Act were not liable to deduct any TDS under section 195 of the Income-tax Act. The answer to this question will apply to all four categories of cases enumerated by us in para 3 of this judgment."

The distinction between the right of access to copyrighted content as opposed to parting with the copyright itself was again explained by our Court in CIT, International Taxation v. Microsoft Corpn. [2022] 139 taxmann.com 554/288 Taxman 32/445 ITR 6 (Delhi)/2022 SCC OnLine Del 1514 where the following pertinent observations were made:- "4. Having heard learned counsel for the appellant, this court finds that the issue raised in the present appeals is no longer res integra as the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT [2021] 432 ITR 471 (SC)/[2021] SCC OnLine SC 159 has held has under (page 488 of 432 ITR): "The appeals before us may be grouped into four categories : (i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer. (ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users.

Further, this court on similar facts has allowed writ petitions filed by the similarly placed assessee in EY Global Services Ltd. v. Asst. CIT W. P. (C) No. 11957 of 2016 and EYGBS (India) Pvt. Ltd. v. Joint CIT W. P. (C) No. 12003 of 2016 [2022] 441 ITR 54 (Delhi). The relevant portion of the said judgment is reproduced hereinbelow (page 69 of 441 ITR) : "A reading of the above judgment would clearly show that for the payment received by EYGSL (UK) from EYGBS (India) to be taxed as 'royalty', it is essential to show a transfer of copyright in the software to do any of the acts mentioned in section 14 of the Copyright Act, 1957. A licence conferring no proprietary interest on the licensee, does not entail parting with the copyright. Where the core of a transaction is to authorise the end-user to have access to and make use of the licenced software over which the licensee has no exclusive rights, no copyright is parted with and therefore, the payment received cannot be termed as 'royalty'. In the present case, the EYGBS (India), in terms of the Service Agreement and the memorandum of understanding, merely receives the right to use the software procured by the EYGSL (UK) from third-party vendors. The consideration paid for the use of the same therefore, cannot be termed as 'royalty' as held by the Supreme Court in Engineering Analysis Centre (supra). In determining the same, the rights acquired by the EYGSL (UK) from the third-party software vendors are not relevant. What is relevant is the agreement between the EYGSL (UK) and the EYGBS (India). As the same does not create any right to transfer the copyright in the software, the same would not fall within the ambit of the term 'royalty' as held by the Supreme Court in Engineering Analysis Centre (supra). We may also note that the learned Authority for Advance Rulings in its impugned order has relied upon its earlier view in Citrix Systems Asia Pacific Pty. Ltd., In re [2012] 343 ITR 1 (AAR), which has been expressly stated to be bad law in Engineering Analysis Centre (supra). The submission of the learned counsel for the Revenue that the judgment of the Supreme Court in Engineering Analysis Centre (supra)

Since, the issue of law raised in the present appeals has been conclusively decided in favour of the assessee by the Supreme Court, no substantial question of law arises for consideration in the present appeals. It is also pertinent to mention that the appellant had admitted before the Income-tax Appellate Tribunal that the dispute in question had been decided in favour of the assessee by the Tribunal in the earlier years. Accordingly, the present appeals are dismissed."

Similarly, in order for that income to fall within the ambit of 'fees for included services', it was imperative for the Department to establish that the assessee was rendering technical or consultancy services and which included making available technical knowledge, experience, skill, know-how or processes. As has been found by the Tribunal, the access to the database did not constitute the rendering of any technical or consultancy services and in any case did not amount to technical knowledge, experience, skill, know-how or processes being made available.

We note that while explaining the meaning liable to be ascribed to the expression 'make available', the Court in CIT (International Taxation) v. Bio-Rad Laboratories (Singapore) Pte. Ltd. [2023] 155 taxmann.com 646/[2024] 296 Taxman 167/[2023] 459 ITR 5 (Delhi)/[2023] SCC OnLine Del 6770 had affirmed the following opinion as expressed by the Tribunal. This is evident from a reading of paras 14, 14.1 and 15, which is extracted below: "14. According to the Tribunal, the agreement between the respondent-assessee and its Indian affiliate had been effective from January 1, 2010, and if, as contended by the appellant-Revenue, technical knowledge, experience, skill, and (A.Y.2017-18) other processes had been made available to the Indian affiliate, the agreement would not have run its course for such a long period. 14.1 Notably, this aspect is adverted to in paragraphs 17 to 23 of the impugned order. For convenience, the relevant paragraphs are extracted hereafter (page 463 of 33 ITR (Trib)-OL) : "A perusal of the aforementioned provision shows that in order to qualify as fees for technical services, the services rendered ought to satisfy the 'make available' test. Therefore, in our considered opinion, in order to bring the alleged managerial services within the ambit of fees for technical services under the India-Singapore Double Taxation Avoidance Agreement, the services would have to satisfy the 'make available' test and such services should enable the person acquiring the services to apply the technology contained therein.. .. .. . agreement is effective from January 1, 2010 and we are in the assessment years 2018-19 and 2019-20. In our considered opinion, if the assessee had enabled the service recipient to apply the technology on its own, then why would the service recipient require such service year after year every year since 2009 ? This undisputed fact in itself demolishes the action of the Assessing Officer/Dispute Resolution Panel. The facts on record show that the recipient of the services is not enabled to provide the same service without recourse to the service provider, i.e, the assessee. In our humble opinion, mere incidental advantage to the recipient of services is not enough. The real test is the transfer of technology and on the given facts of the case, there is no transfer of technology and what has been appreciated by the Assessing Officer/learned Commissioner of Income-tax (Appeals) is the incidental benefit to the assessee which has been considered to be of enduring advantage. In our understanding, in order to invoke make available clauses, technical knowledge and skill must remain with the person receiving the services even after the particular contract comes to an end and the technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider." (emphasis is ours) 15. We tend to agree with the analysis and conclusion arrived at by the Tribunal."

As we examine the nature of the transaction between an Indian subscriber and the assessee, it becomes manifest and apparent that it neither comprises of a transfer of (A.Y.2017-18) copyright nor does it include a transfer of a right to apply technology and other related aspects which are spoken of in article 12(4)(b) of the DTAA.”

The AO while coming to the conclusion that the Subscription Fee is in the nature of royalty has placed reliance on the decision in the case of ONGC Videsh Ltd. vs. ITO (IT) 31 taxmann.com 119 (Delhi Trib.). We find that it is an old decision much water has flown, thereafter. The Hon’ble Supreme Court of India in the case of Engineering Analyses Centre for Excellence vs. CIT (supra) has given a conclusive finding that where any agreement creates interest or right for use of copy righted article the payments for such use does not constitutes royalty. Thus, in light of the facts of the case and above mentioned decisions, we hold that the Subscription Fee received by the assessee for providing access to copyrighted article is not in the nature of royalty. Thus, the assessee succeeds on ground no. 3 of appeal as well.