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© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Payment for the use of licensed software along with computer system to access the information on the foreign company’s portal constitutes royalty under the India-UK tax treaty

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Recently, the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Reuters Transaction Services Ltd. (the taxpayer) held that allowing the use of software and computer system to access the portal of the foreign company amounts to imparting of information concerning technical, industrial, commercial or scientific equipment. Accordingly, the payments made by Indian subscribers to the taxpayer are for the use or right to use of equipment and information for processing their request of purchase and sale of foreign exchange and taxable as royalty under the India-UK tax treaty.

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Payment for the use of licensed software along with computer system to access the information on the foreign company’s portal constitutes royalty under the India-UK tax treaty

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Payment for the use of licensed software along with computer system to access the information on the foreign company’s portal constitutes royalty under the India-UK tax treaty 1 August 2014 Background Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Reuters Transaction Services Ltd. 1 (the taxpayer) held that allowing the use of software and computer system to access the portal of the foreign company amounts to imparting of information concerning technical, industrial, commercial or scientific equipment. Accordingly, the payments made by Indian subscribers to the taxpayer are for the use or right to use of equipment and information for processing their request of purchase and sale of foreign exchange and taxable as royalty under the India-UK tax treaty (tax treaty). ______________ 1 Reuters Transaction Services Ltd. v. DDIT (ITA NO.6947/Mum/2012 and ITA NO.7211/Mum/2012) – Taxsutra.com Facts of the case  The taxpayer is a UK based company engaged in the business of providing Reuters Dealing 2000-2 and Dealing 3000 which are electronic deal matching systems. These systems enable authorised dealers in foreign exchange to effect deals in spot foreign exchange with other foreign exchange dealers.  The taxpayer entered into a contract with Indian clients for providing its foreign exchange deal matching system. The clients of the taxpayer are mainly Indian Banks.  The main server of the taxpayer is located in Geneva. The taxpayer has executed a Dealing Services Marketing Agreement (DSMA) with Reuters India Pvt. Ltd (RIPL) whereby RIPL will market the services of the taxpayer to the subscribers in India.  RIPL in turn also entered into Reuters Service Contract with the Indian clients for providing the necessary equipments, connection facility, installation and support service in order to avail the foreign exchange deal matching system provided by the taxpayer.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  During the years 2 under consideration the taxpayer earned revenue from its customers in India. The taxpayer claimed that the revenue earned from its subscribers in India was in the nature of business profit. However, such profit cannot be taxed in the absence of Permanent Establishment (PE) in India. Further, it was claimed that such revenue was not in the nature of royalty or Fees for Technical Services (FTS) and it was not liable to tax under the tax treaty.  The Assessing Officer (AO) held that the revenue was in the nature of ‘royalty’ as well as FTS, taxable in India under Income-tax Act, 1961 (the Act) as well as the tax treaty. The AO also held that the RIPL constitutes an agency PE of the taxpayer as well as the taxpayer is having fixed base PE in India.  The Commissioner of Income-tax (Appeals) [CIT(A)] held that the service charges received by the taxpayer are taxable as royalty and FTS under the Act as well as under the tax treaty. Tribunal’s ruling  Though the equipments and other installation and connectivity were installed and provided through RIPL but the charges for the entire services and facility were paid by the clients to the taxpayer and not to the RIPL.  The decision of the Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd 3 was not applicable to the facts of the present case since it was based on the income arising on account of lease of transponder capacity to TV channels. However, it was not the dispute in the present case.  As per the agreement, the taxpayer was facilitating its clients to use its system and application programming interface which was subscriber interface for use with the related services including auto quote service. The taxpayer was also providing the equipments with pre-loaded software to its subscribers and network used for provision of the services.  As per the agreement, the taxpayer grants the subscriber limited license of software to install and use at the site. Even the said license can be sub- licensed by the subscriber with the prior consent of the taxpayer.  The subscribers are allowed to use the information and even to manipulate and drive the data to anyone for their individual use. Thus, from the terms and conditions of the contract between the parties, it indicates that the subscriber was using the information and system of the taxpayer for their commercial/business purposes. _______________ 2 March 2008 and March 2009 3 Asia Satellite Telecommunications Co. Ltd [2011] 332 ITR 340 (Del)  The information was made available by the taxpayer through its system and other equipments installed at the site of the subscriber to facilitate the connectivity with the taxpayer’s system/reuter located in Geneva.  The portal design having the system of matching the request of the clients is hoisted on its server and thereby ensures the transactions of purchase and sale of foreign exchange between the two counterparts of the clients. Therefore, the portal having system of matching the request along with the computer and internal access to the clients constitute integrated commercial equipment which performs complex functions of processing the request, providing information and facilitates the transaction of purchase and sale of foreign exchange by matching the demand and supply.  The payments made by Indian subscribers to the taxpayer were for use and right to use of equipment and information for processing their request of purchase and sale of foreign exchange. Therefore, it would constitute royalty.  The entire system involves processing of subscriber’s business queries and orders and finding out the matching reply in the shape of counterpart demand or supply for execution of the transaction of purchase and sale of foreign exchange. This system of the taxpayer was available only to the subscribers who had been given the access to the information concerning commercial as well as processing the orders placed by the subscribers.  As per the agreement, the Indian clients accept the individual non-transferable and non-exclusive license to use the licensed software programme for the purpose of carrying out the purchase and sale of foreign exchange. Thus, what was granted under the agreement is license to use the software for internal business of Indian clients.  Further, the taxpayer permitted the Indian clients to sub-license the software with prior permission of taxpayer. It is pertinent to note that it was not the license to use the software alone but the taxpayer has made available the computer system along with the software. The Indian clients were paying for use and right to use of equipment (scientific, commercial) along with software for which license was granted by the taxpayer.  As per the agreement, Indian clients are not permitted to access the portal of the taxpayer from any other computer system other than the computer provided by the taxpayer and by use of software provided in the said computer system.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Therefore, it was not a case of simplicitor payment for access to the portal by use of normal computer and internal facility but the access was given only by use of computer system and software system provided by the taxpayer under license.  By allowing the use of software and computer system to have access to the portal of the taxpayer for finding relevant information amount to imparting of information concerning technical, industrial, commercial or scientific equipment work and payment made in this respect would constitute royalty.  Accordingly, the Tribunal held that the income received by the taxpayer from the Indian banks was in the nature of royalty. The Tribunal also held that once the receipt has been decided as royalty in nature, there was no need to go into the question of the taxpayer having PE in India. Our comments The Mumbai Tribunal in the present case has held that by allowing the use of software and computer system to access the information on the foreign company’s portal for finding relevant information amount to imparting of information concerning technical, industrial, commercial or scientific equipment and payment made in this respect would constitute royalty. It is pertinent to note that the Mumbai Tribunal in the case of Kotak Mahindra Primus Ltd. 4 has held that payment made by the taxpayer for the act of specialised data processing by the Australian company cannot be said to be for the use of, or right to use of, the mainframe computer, nor was it permissible to allocate a part of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of Article 12(3)(b) of the India-Australia tax treaty could not have any application. Further, it cannot be said that the payment was for the supply of any knowledge or information of any nature since the information furnished by the taxpayer was processed in Australia and transmitted back to the taxpayer. This activity only involved processing and not supply of information. Accordingly, the provisions of Article 12(3)(c) of the India-Australia tax treaty would also not have any application in the matter. ________________ 4 Kotak Mahindra Primus Ltd. v. DDIT [2007] 11 SOT 578 (Mum)
  4. 4. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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