Dear All Please see the link below: http://www.livemint.com/Opinion/cjs0pKtmTJZGGy4hAiyN9J/Database-access-the-s... A number of international companies are engaged in the business of data collation/organization and creation of databases and software. With the growth in the Indian financial services and software sector, Indian companies in these sectors often subscribe to such databases to know the international best practices, research reports, etc. Typically, the business arrangement is such that the customer would be given a non-exclusive licence for access to the vendor’s database on payment of an annual subscription fee. The issue that arises from a direct tax perspective is whether the payment of subscription charges to access such databases would be characterized as royalty income and would consequently trigger a withholding tax. *Also Read *Ketan Dalal and Manish Desai’s earlier columnshttp://www.livemint.com/Articles/Authors.aspx?author=Ketan%20Dalal%20and%20Manish%20Desai&type=wa The Authority of Advance Ruling (AAR), in a case of FactSet Research Systems Inc., US (FactSet), said in a 30 June ruling that such subscription charges received by FactSet should not be subject to tax in India. In this context, it would be relevant to mention that the Madhya Pradesh high court, in the case of *CIT v. HEG Ltd, *dealing with the issue of payments made for the purchase of confidential data, has held that every information would not have the status of royalty. Although this decision deals with the purchase of data, its observation that every information should not have the status of royalty merely because of its commercial nature provides guidance on the taxability of transactions to access information/data even under the licensing arrangement. AAR, in the case of Dun and Bradstreet Espana S.A., has also held that payments for providing access to business information reports were not royalties or fee for technical services. The Bangalore tribunal in the case of *Wipro Ltd v. Income-tax officer* has held that payments made by Wipro Ltd towards annual subscription charges to Web-based foreign publishing houses for access to their databases would not be taxable as royalty under the Act or treaty. *FactSet case* FactSet is a company incorporated in the US. It maintains a database which is located outside India. This database contains financial information and other data on a large number of companies worldwide that is available in the public domain. FactSet enters into a master client licence agreement with customers under which it grants limited, non-exclusive, non-transferable rights to use its database, software tools, etc., and charges a subscription fee for this. FactSet does not carry out any business operations in India. FactSet sought a ruling from AAR on the following: • Whether the subscription fee received by it would be taxable in India under the provisions of the Act or the India-US Tax Treaty? • If the income is not taxable in India, whether its customers in India would have to withhold taxes under section 195 of the Act? • If FactSet has no other taxable income in India, whether it would be required to file its return of income in India? FactSet collates information/data available by applying its own methodology. This methodology is outside the public domain and the copyright in them is not transferred or licensed to the subscribers, who are only granted the right to view the information or access the database while online. Thus, subscribers are granted a right to use the copyrighted database and not the copyright in the database. After placing reliance on certain judicial precedents, FactSet contended that subscription fee received is not taxable as “royalty” under the Act/treaty. It was also contended that subscription fee is in the nature of “business income” and hence, in the absence of private equity in India, it is not taxable in India. Consequently, subscribers are not required to withhold taxes before making payments to the applicant. *Contention of revenue* The subscription fee paid to FactSet is for rights specified under the Copyright Act, 1957 [CP Act]. As per section 14(a)(i) of the CP Act (relating to reproducing and storing data) and section 14(a)(vi) (relating to right to adaptation of data), FactSet has granted rights in respect of “literary works” (including computer databases) to customers. Therefore, the applicant transfers the rights in the copyright of the database and hence, the subscription fees are “royalty” in nature. The subscription fee is for imparting any information on technical, industrial, commercial or scientific knowledge, experience or skill as per Article 12 of the tax treaty and hence, “royalty” in nature. Subscription fee could also be for the use of, or right to use, any industrial, commercial or scientific equipment as the server containing the database is used by customers as a point of interface. *Ruling of AAR* Subscription fee is not royalty. AAR relied on OECD commentaries and held that the payment to access databases is in the nature of business income, not royalty. The commentaries state that when the provider makes a repository of information available for customers to search and retrieve, or where special industry or investment reports are either sent or made available for purchase and download from an online catalogue or index, the payments made will be considered business income (falling within Article 7 of the tax treaty). Thus, AAR held that subscription fee received by FactSet is not royalty income on the following premise: • FactSet enters into a “non-exclusive” licence agreement with the customer whereby the customer is not granted the exclusive right to reproduce or adapt the work or distribute the contents of the database to others. • No proprietary rights or exclusive rights (that FactSet has in the database) are transferred to the subscriber. • FactSet doesn’t share its experience, techniques or the methodology employed in evolving the database with its subscribers and does not impart any information relating to this. • Subscription fee cannot be considered to be towards the use of “scientific equipment” as it is paid to make use of the facility to access the data/information collected and collated by the applicant in the database. • In the absence of PE, the subscription fee received by FactSet is not liable to be taxed in India as “business income”. FactSet does not have any obligation to file returns of income in India as the income is not liable to be taxed in India either as royalty or as business income. *Summary* This welcome ruling has upheld the view that subscription charges for accessing a database under a non-exclusive licence should not be characterized as royalty again. A string of judicial decisions has now established that such payment is not royalty. Given that Indian companies are also developing databases and are increasingly becoming recipients of such subscription fees from abroad, this will also enable such amounts not to be subjected to withholding tax in the overseas payer countries. *Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at groundrules@livemint.com* *regards* * * *Piyush Kumar Gupta* *Emerald Group Publishing (India) Pvt Ltd* -- This message has been scanned for viruses and dangerous content by MailScanner, and is believed to be clean.