Case of Authority for Advance Rulings, June 30, 2009 (case Fact Set Researach Systems Inc. Vs Director of Income Tax (International Taxation-I))
| President | P.V. Reddi, J. (Chairman), A. Sinha and Rao Ranvijay Singh, Members |
| Resolution Date | June 30, 2009 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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This application is filed under Section 245Q(1) of the Income-tax Act, 1961 (for short 'the Act'). The applicant (referred to hereinafter as 'FactSet') is a company incorporated in USA and is non-resident for the purpose of Income-tax Act.
1.1 The following facts are stated in the application and in the written submissions filed: The applicant maintains a 'database' which is located outside India and which contains the financial and economic information including fundamental data of a large number of companies world-wise. The customers of the applicant are mostly financial intermediaries and investment banks which have the need for such data. The databases contain the published information collated, stored and displayed in an organized manner by FactSet, though the information contained in the database is available in public domain. The applicant, however, through its database enables the customer to retrieve this publicly available information within a shorter span of time and in a focused manner. The database maintains historical information and all the databases of FactSet are maintained at its datacenters in USA. For a customer to access and view FactSet data, the customer need to down-load client interface software (similar to internet browser). The customer can subscribe to specific database as per its requirement. The 'lion-share' database provides information on the shareholding by global holders of global equities. The 'Shark repellent' database provides information on takeover defence strategies adopted by various U.S. Public companies over a period of time. The Mergerstat database tracks formal transfers of ownership. A Call street database includes transcripts of quarterly conference calls (e.g. analysts's queries) held by public companies. There are some more databases also. A customer can view the data on their computer screens. The software, tools database and other related documentation are hosted on the FactSet's main frames and data libraries. Through the tools, any commercial data on FactSet's database can be easily woven into charts, graphs and spread-sheets. FactSet allows the data to be viewed and used only in the internal documents of its customers.
1.2 FactSet enters into a Master Client License Agreement (for short ' MCLA') with its customers under which FactSet grants limited, non-exclusive, non-transferable rights to use its databases, software tools etc. The applicant states that it does not carry on its business operation in India and there is no agent in India acting on behalf of the applicant and having an authority to conclude the contracts. The applicant receives subscription fees from its customers and the same is received outside India.
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The applicant seeks advance ruling on the following questions formulated by it:
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Whether, on the facts and circumstances of the case, FactSet Research Systems Inc. ('FactSet' or 'the applicant') will not be taxable in India under the Income-tax Act, 1961, with respect to the subscription fees?
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Whether, on the facts and circumstances of the case, the applicant will not be taxable under the Double Taxation Avoidance Agreement entered into between the Government of India and the Government of United States of America with respect to the subscription fees?
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Whether, on the facts and circumstances of the case, if the applicant is not taxable in India for the subscription fees, its customers in India will be required to withhold taxes under Section 195 of the Act on subscription fees paid to the applicant?
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Assuming that the applicant has no other taxable income in India, whether, on the facts and circumstances of the case, the applicant will be absolved from filing a tax return in India, under the provisions of Section 139 of the Act with respect to the subscription fees?
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Broadly, the contention of the applicant is that no tax liable to be paid on the subscription fees received from the customers in India as it does not constitute 'royalty' or 'fees for technical services' either under the provisions of the Income-tax Act, 1961 or the DTAA (Treaty) between India and USA. Moreover, as the applicant does not have permanent establishment (PE) in India, the subscription fees cannot be taxed as business income in view of Article 7 of India-USA Treaty.
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Let us now notice the material terms of MCL Agreement. The applicant is the Licensor and the Licensee is the subscriber/customer. Clause 1.a declares that the licensor grants to the licensee "limited, non-exclusive, non-transferable rights to use the software, hardware, consulting services and databases". As regards the consulting service, it is stated that FactSet provides certain consultants who are able to demonstrate the FactSet's products and its uses to the customers. It is clarified in the rejoinder that consulting services are not really required as FactSet provides helpdesk facilitation free of cost, though at present, there is no such facilitation Centre in India. As regards hardware, it is clarified in the rejoinder that at present no hardware is being provided to the customers in India.
4.1 According to cl. 2.a the licensor provides the services solely and exclusively for licensee's own internal use and business purposes only in the licensee's business premises. The licensee's employees having a password or user ID can access the service. Further, the licensee cannot use or permit any individual or entity under its control to use the services and the licensed material for any unauthorized use or purpose. Clause 1.b makes it clear that all proprietary rights including intellectual property rights in the software, databases and all related documentation ("licensed material") will remain the property of licensor or its third party data/software suppliers. The licensee is permitted to use licensor's name for the limited purpose of source attribution of data got from the database in the internal business reports and the like. Licensee is solely responsible for obtaining required authorization from the suppliers for products received through them and in the absence of such authorization the licensor has the right to terminate the licensee's access to any supplier product.
4.2 Clause 2.c reads as follows:
Clause 2.c. Except as permitted under this Agreement or under a written agreement with a Supplier, Licensee agrees that it will not copy, transfer, distribute, reproduce, reverse engineer, decrypt, decompile, disassemble, create derivative works from or make any part of the Service, including the data received from the Service available to others. Licensee may use Insubstantial amounts of the Licensed Materials in the normal conduct of its business for use in reports, memoranda and presentations to Licensee's employees, customers, agents and consultants, but Licensor, its Suppliers and their respective affiliates reserve all ownership rights and rights to redistribute the data and databases.
4.3 Clause 2.d on which the Revenue placed reliance may also be noticed.
Clause 2.d: Licensor represents and Licensee acknowledges that the Service and its component parts were developed, compiled, prepared, revised, selected and arranged by Licensor, its Suppliers or their respective affiliates through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, money and originality and that they constitute valuable intellectual property and trade secrets of Licensor and its Suppliers. At Licensor's expense and reasonable request, Licensee agrees to cooperate with Licensor and its Suppliers to protect the proprietary rights in the software and databases during the terms of this Agreement.
4.4 Coming to the other clauses, the fees is payable within 30 days of receiving the invoice failing which the Licensor may suspend the licensee's access (vide Clause 4). The initial term of the agreement is as set forth in Schedule (A) and thereafter the agreement can be renewed for successive one year periods (vide cl. 5). Clause 5.c stipulates that upon termination of the agreement, licensee will cease using all the licensed material, return any licensor hardware upon request and expunge all data and software from its storage facility and destroy all documentation except such copies of data to the extent required by law. Another restriction placed by cl. 5.d is that the Licensee may not use any part of the services (for eg., Index value) to create a...
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