Whether subscription made by garment manufacturer to online fashion website is royalty or not?

IN THE ITAT MUMBAI BENCH ‘L’

Assistant Director of Income-tax, (International Taxation)

Versus

Globus Stores (P.) Ltd.

IT Appeal No. 4432 (Mum.) of 2005

[Assessment year 2005-06]

NOVEMBER 9, 2012

ORDER

Vijay Pal Rao, Judicial Member 

This appeal by the revenue is directed against the order dated 1.3.2005 of the Commissioner of Income Tax(Appeals) arising from the order of ADIT(International Taxation) passed u/s 195 of the I T Act for the Assessment Year 2005-06.

2. The revenue has raised the only ground in this appeal as under:

“In the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the subscription fees is not in the nature of royalty and also cannot be taxed as business income as there is no PE.”

3. The assessee is a company engaged in the business of retailing fashionable ready to wear garments through its stores. The assessee has set up large super stores and was selling garments and accessories in the major cities. The assessee has also set up back activities like design department, quality control department etc., in order to manufacture its own garments. In order to get an idea of international trend analysis and other information for fashion design and style, the assessee entered into an agreement with Worth Global Style Network Ltd (in short WGSN) and thereby subscribed to an internet site namely www.wgsn.com which belongs to WGSN based in United Kingdom. The subscription charges for accessing the website is UK Pound 17000 for which the foreign company has raised an invoice. The assessee filed an application u/s 195(2) of the act requesting the revenue authorities to issue No Objection Certificate for remittance of the aforesaid amount to the foreign company without deduction of tax.

3.1 The assessee submitted before the ADIT(IT) that as per the provisions of sec. 90(2) of the Act where the Central Government has entered into any DTAA with the Government of other countries outside India for the purpose of granting relief or avoidance of double taxation, the provisions of the Act or the DTAA whichever is more beneficial to the assessee shall apply. It is stated that the foreign company is a resident of UK and therefore, the provisions of DTAA shall apply. Since the subscription fee received by the foreign company is its business income; therefore, in the absence of a PE in India, within the meaning of Article 5 of DTAA, business income of the foreign company is not taxable in India as per Article 7 of the DTAA.

3.2 The ADIT did not agree with the contention of the assessee and held that the amount payable to the foreign company is nothing but use of information concerning industrial, commercial experience falling within the definition of the term ‘royalties’ as defined in Article 13(3) of the Indo UK DTAA of which tax is required to be deducted at source.

3.3 The ADIT has further observed that as per the clause (iv) of explanation 2 to sec. 9(1)(vi) of the Act, the term ‘royalty’ means consideration for imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. Thus, the ADIT was also of the view that the payment for imparting of information concerning commercial knowledge or experience or skill is royalty and is income deemed to accrue or arise in India subjected to deduction of tax at source. Accordingly, the ADIT has directed the assessee to deduct the tax at source @ 15% plus 2% educational cess on the amount of UK Pounds 17,000.

4. The assessee challenged the said order before the CITA) and mainly contended that the payment being subscription fees is not in the nature of royalty; but is business income in the hands of WGSN and as per article 7, the business income of non-resident is not taxable in India unless there is a PE in India. The assessee relied upon the decision of the Hon’ble Madhya Pradesh High Court in the case of CIT v. HEG Ltd. [2003] 263 ITR 230 as well as the decision of the Tribunal in the case of Wipro Ltd v. ITO [2005] 94 ITD 9 (Bang.) and submitted that the subscription for providing access database through website was not covered as royalties under DTAA as well as u/s 9(1)(vi) of the Act and consequently, the assessee was not obliged to deduct tax u/s 195.

4.1 The Commissioner of Income Tax (Appeals) has observed that the decision in the case of Wipro Ltd. (supra) as cited by the assessee is covered in favour of the assessee. Accordingly, the Commissioner of Income Tax(Appeals) has held that the payment in question is not royalty as defined in Article 13(3)a of the DTAA and the same is in the nature of business income and in the absence of PE, the same is not liable to tax in India. Accordingly, the Commissioner of Income Tax (Appeals) held that the assessee is not liable to deduct tax at source on the impugned payment to WGSN.

5. Before us, the ld DR has submitted that the Commissioner of Income Tax (Appeals) has relied upon the decision of the Bangalore Benches of the Tribunal in the case of Wipro Ltd. (supra) which has been reversed by the Hon’ble Karnataka High Court reported in 203 Taxman 621. Thus, the ld DR has submitted that now this issue is covered against the assessee by the decision of the Hon’ble Karnataka High Court (supra). She has referred various clauses of the agreement between the assessee and WGSN and submitted that the payment in question was for license granted to the assessee for access and utilisation of the site of WGSN. She has submitted that as per the terms of the agreement, the subscription fee is nothing but royalty against the grant of license for access and utilisation of the site and the information available on the site. It is stated in the agreement that all the material on the site belongs to WGSN or its licensor and the assessee is permitted to retrieve and display content from the site on a computer screen, and to take print of individual pages without photocopy information available in the site is permitted to be retained in electronic form on disc for the assessee’s personal use.

5.1 The ld DR has relied upon the decision of the Authority for Advance Rulings (AAR) in the case of Cargo Community Network (P.) Ltd, In re [2007] 289 ITR 355 and submitted that an identical issue has been decided by the AAR wherein the subscription fee for concurrent access, fee for additional access and helpdesk charges paid by the cargo in India for use of portal developed by the non-resident and hosted on his server in Singapore, the AAR has held that portal and server together constitute integrated commercial-cum-scientific equipment and for obtaining internet access to airlines the use of portal without server is unthinkable. It was observed that the factual position in the site access was that a cargo booking agent/subscriber depending on his business needs, can use the portal at will on the server platform of the assessee at any time according to his needs for processing his request for booking cargo with various airlines and obtaining benefits of other sophisticated services offered by portal. The AAR has considered the meaning of terms ‘royalties’ as used in article 12(3) of Indo-Singapore treaty and held that the payment made for concurrent access to utilise the sophisticated services offered by portal would be covered by expression ‘royalties’ as used in article 12 of the DTAA.

5.2 Thus, the ld DR has submitted that in the case in hand, the assessee is also utilising the concurrent access to the portal of the WGSN for using the information available on the site and therefore, the payment, being subscription fee falls under the definition of ‘royalty’ as per Article 13(3) of Indo-UK DTAA.

5.3 The ld DR has also relied upon the decision of the AAR dated 7.5.2012 in the case of ThoughtBuzz (P.) Ltd. [2012] 346 ITR 345 and submitted that the business of gathering, collating and making available or imparting information concerning industrial and commercial knowledge, experience and skill and consequently the payment received from the subscriber would be royalty in terms of clause (iv) of Explanation 2to sec. 9(1)(vi) of the Act as well as the said payment also qualify as royalty under DTAA between India and Singapore. Thus, the ld DR has submitted that the payment in question, being subscription fee is for utilising of the information related to industrial and commercial knowledge, experience and skill; therefore, the same would fall under the definition and meaning of ‘royalty’ under Explanation 2 of sec. 9(1)(vi) of the Act as well as Article 13(3) of the DTAA between Indo-UK treaty. She has relied upon the orders of the Assessing Officer and ADIT.

5.4 On the other hand, the ld AR of the assessee has submitted that the assessee is in the business of retailing fashionable ready garments through departmental stores and therefore to get an idea of latest international trends in fashion and style in the garments, the assessee had subscribed to an internet site of WGSN Ltd. He has referred Article 13(3) of the Indo UK treaty and submitted that the terms ‘royalty’ means payment for use or right to use any copyright, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience as provided in sub. para (1) of para 3 of article 13 of the Indo-UK treaty. He has referred the clauses of the agreement and submitted that this is not the case of use or right to use of copy right, trade, patent, design or model or any other secret formula or process. The information used by the assessee is not related to industrial, commercial or scientific experience. To elaborate the terms of ‘information’ concerning industrial, commercial or scientific experience as contemplated in clause (a) of para 3 of the article 13 of Indo UK treaty, the assessee has referred OECD commentary on royalty under DTAA and submitted that the consideration for information concerning industrial, commercial or scientific experience alludes to the concept of know-how; therefore, the information concerning industrial, commercial or scientific experience as mentioned in the DTAA should be equivalent to concept of know-how. The know-how is all the un-divulged technical information whether capable of being patented or not, that is necessary for the industrial reproduction of a product or process; therefore, the same conditions are to be applied in case of information concerning industrial, commercial or scientific experience.

5.5 The ld AR has also referred the report of High Powered Committee on E-Commerce and submitted that the information provided by the provider is out of a vast collection of widely available data and not any copyrighted article. Simple data retrieval would amount to rendering of services and would be taxable as business income under article 7 of the India UK DTAA as per the report of the High Powered Committee of E Commerce. He has submitted that merely giving right to access to the information at the site is not a giving right to use of any know-how. The information available on the site is only regarding the latest trend in the fashion. He has referred para 2.11 of the agreement and submitted that no specific information is dedicated to the assessee but the information available on the site is general in nature and available to all the subscribers. He has relied upon the decision of the Hon’ble Madhya Pradesh High Court in the case of HEG Ltd. (supra) as well as the decision of the AAR in the case of Dun & Bradstreet Espana S.A., In re. [2005] 272 ITR 99 and submitted that when the information received and used by the assessee is nothing but compilation of data based by the provider, then it is not a know-how which earned the royalty. The payment is not for use of or right to use of any know-how as per the OECD Commentary that the information concerning industrial, commercial or scientific experience has to be equivalent to know-how.

5.6 The ld AR has also relied upon the decision of the coordinate Benches of the Tribunal in the case of the Dy. DIT v. Solid Works Corpn. [2012] 51 SOT 34. The ld AR has contended that the AAR in the case of Cargo Community Network (P.) Ltd (supra) is not applicable as the payment is not for use of any equipment in the case of the assessee as in the said case. The ld AR has further submitted that the decision in the case of Wipro Ltd. (supra) is also not applicable in the facts of the assessee’s case because in the said case, the issue was payment for use of technical know-how, which is not in the case of the assessee. The ld AR has submitted that in the case of Wipro Ltd. (supra), the Hon’ble High Court has framed the question regarding whether the payment to the foreign software supplier was not royalty and accordingly, the Hon’ble High Court has decided the issue by holding that such right to access the database maintained by the supplier would amount to transfer of right to use the copyright held by the supplier and accordingly, such payment is to be treated as royalty. The ld AR has further submitted that neither the Assessing Officer nor the Commissioner of Income Tax(Appeals) has held that the payment is towards transfer of right to use the copyright.

5.7 In rebuttal, the ld DR has submitted that the decision of the AAR in the case of Dun & Bradstreet Espana S.A. (supra) is not applicable because in the said case, the information provided by the provider from the data base collected from the available information in the public domain whereas in the case of the assessee, the assessee has received technical knowledge and information with respect to the latest design of the garments. She has further submitted that the decision in the case of Hon’ble Madhya Pradesh High Court (supra) is also not applicable because in the said decision, no finding has been given by the Hon’ble High Court and the matter was remitted to the record of the Tribunal for deciding the factual aspect on the basis of the relevant record and material.

6. We have considered the rival submissions as well as the relevant material on record. The payment in question has been made by the assessee towards the subscription for access to the website of WGSN thereby having access to the information available at the said website. The Assessing Officer held that the assessee is permitted to keep the design, trade mark and not permissible to redistribute any of the contents accessible at the website; therefore, the assessee has no other right except the right to use the information from the website. Accordingly, the Assessing Officer has held that amount payable to foreign company is nothing but for use of information concerning industrial, commercial experience falls within the definition term ‘royalty’ as defined in Article 13(3) of the DTAA.

6.1 Even under the provisions of the Act, the royalty is defined under Clause (iv) of Explanation to Sec 9(i)(vi), the term royalty means consideration for imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill.

6.2 On appeal, the Commissioner of Income Tax (Appeals) has decided the issue in favour of the assessee by following the decision of the Tribunal in the case of Wipro Ltd. (supra) wherein it was held that the payment made for access of database is not royalty since it is used for copy right the article and not transfer of right in the copyright in the article. Accordingly, the Commissioner of Income Tax (Appeals) has held that the foreign company has not transferred the copy right therein; but only online fashion magazine available on the website.

6.3 There is no dispute that the information available on the website of the WGSN is not a database available in public domain but access to the information is restricted only to the subscribers. The Commissioner of Income Tax(Appeals) has decided the issue by following the order of the Tribunal in the case of Wipro Ltd. (supra) which has been reversed by the Hon’ble Karnataka High Court CIT (International Taxation) v. Wipro Ltd. [2011] 203 Taxman 621 and held in para 6 as under:

“6. It is clear from the material on record that in identical cases i.e., I.T.A. No. 2988/2005 and connected cases, this Court after considering the contentions, which are identical to the contentions raised in these appeals. In the light of the decisions relied upon by the learned counsel appearing for the parties in the said cases, by a separate order, held that the payment made by the respondent to M/s. Gartner, which is a non-resident Company would amount to ‘royalty’ and wherefore, there is statutory obligation on the part of the respondent to make tax deduction, failing which, it is liable to pay tax and interest under Section 201(l) and 201(1A) of the Act, Mere fact that in the instant case, the issue do not pertain to shrink wrapped software or off-the-shelf software and access to database maintained by M/s Gartner is granted online, would not make any difference in the reasoning assigned by us to hold that such right to access would amount to transfer of’ right to use the copyright held by M/s. Gartner and the payment made by the respondent to M/s. Gartner in that behalf is for the licence to use the said data base maintained by M/s. Gartner and such payment is to be treated as royalty.’ Therefore, following the detailed reasons assigned by us in ITA No. 2808/2005 and connected cases, we hold that the finding of the Tribunal that payment made by the respondent to M/s. Gartner, a non-resident Company would not amount to royalty is not justified and liable to be set aside and accordingly, we answer the substantial question of law in the negative in favour of the revenue and against the respondent and pass the following Order:”

6.4 As regards the contention of the ld AR of the assessee that the Hon’ble High Court has decided the issue by holding that the payment was made for transfer of right to use the copyright in the case of Wipro Ltd. (supra) whereas the authorities below have not held that in the case of the assessee the payment was for transfer of right to use of copyright and the subscription was made only for online fashion magazine.

6.5 It is to be noted that the facts in the case of Wipro Ltd. (supra) as reproduced by the Hon’ble High Court in para 2.1 are as under:

“2.1 On perusal of the details tiled in respect of foreign remittances made by the respondent-assessee, it was noticed by the revenue that certain payments had been made by the assessee to a non-resident, M/s. Garner Group (hereinafter referred to as the ‘M/s. Gartner’), U.S.A/ireland, on which no tax was deducted under Section 195 of the Income Tax Act. 1961 (hereinafter referred to as ‘the Act’). It was found that the following payments had been made by the assessee during the period from 18.04.2000 to 02.12.2002:

Since prima-facie, the payments appeared to be royalty payments, wherein the respondent-assessee was required to deduct tax at source on such remittances and no deduction had been made as required under Section 195(1) of the Act, show cause notice under Section 201 of the Act was issued to the assessee to explain the reasons for non-deduction of tax. In response to the show cause notice, the assessee tiled a reply dated 10.01.2003 wherein it was submitted that payment is 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 makes no attempt to impart the same to the payer. Thus, the payment falls outside the scope of Clause (ii) of Explanation 2 to Section 9(l)(vi) of the Act and 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 within the meaning of Article 12 of the Double Taxation Avoidance Agreement (for short, ‘the DTAA’) between India and USA. In any case, the payment will not be covered by Section 9(l)(vi) as it would fall into the exception (b) under that Section and the payment is 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.”

6.6 It is clear that in the case of Wipro Ltd. (supra), the assessee has contended that the payment was made for subscription for a journal or a magazine of a foreign publisher which is similar to the facts of the case in hand where the assessee has also claimed that the payment is towards subscription to online fashion magazine. The Assessing Officer has held that the payment is towards royalty whereas the Commissioner of Income Tax(Appeals) has straightaway decided the issue by holding that the payment is not for transfer of right to use in the copyright as held by the Tribunal in the case of Wipro Ltd. (supra).

7. Since no specific finding has been given by the Commissioner of Income Tax (Appeals) on the point of transfer of right to use the copyright and the decision relied upon by the Commissioner of Income Tax(Appeals) has been reversed by the Hon’ble High Court; therefore, the impugned order of the Commissioner of Income Tax(Appeals) is not sustainable as the very basis of the same has been reversed. Accordingly, we remit the issue to the record of the Commissioner of Income Tax(Appeals) to decide the same afresh in the light of the decision of the Hon’ble Karnataka High Court in the case of Wipro Ltd. (supra) as well as the other decisions/rulings available on the point.

8. In the result, the appeal filed by the revenue is allowed for statistical purpose.