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Section 9(1)(vi) of the Act, Article 12(3) of India- USA DTAA – Payment for access to networking facilities involving use of embedded software, is ‘royalty’ under the Act as well as India-US DTAA .
Facts
The Taxpayer, the US Company, was engaged in the business of providing software solutions including creating personalised document, management of solutions, managing complex manufacturing operations and building and maintaining personalised e-business software, development and solutions.
The Taxpayer entered into an agreement with its Indian Group Company (ICo), as per which the Taxpayer was required to provide ICo with an access to its internet and other email and networking facilities. For these services, ICo paid certain amounts to the Taxpayer. While for the first year under consideration, ICo claimed the payment was ‘fees for included services’, for subsequent years, it claimed they were not taxable in India. The Tax Authority, however, concluded that the payments were in the nature of royalty. However, the Taxpayer contended that such income is not taxable in India.
Held:
In the facts of the case, the Taxpayer provided ICo with access to its embedded software or Gateway for the purpose of enabling the customer from India to call the residents of USA or vice-versa. Therefore, the payment made by ICo to the Taxpayer would amount to payment for use of software and hence, would qualify as royalty u/s. 9(1)(vi) of the Act as well as under Article 12(3) of the India-US DTAA .
The Tribunal relied on the ratio of AAR decision in P. No. 30 of 1999, In re (1999) (238 ITR 296)(AAR), wherein it was held that payments made for access to US based global central processing unit would amount to royalty as such access allowed use of embedded secret software developed by Taxpayer.
