Introduction

The case of Factiva Limited, Mumbai v. DCIT (IT) - 2(3)(1), Mumbai adjudicated by the Income Tax Appellate Tribunal on May 31, 2022, addresses pivotal issues concerning the classification of payments under the Income Tax Act, 1961, and the Double Taxation Avoidance Agreement (DTAA) between India and the United Kingdom. The central contention revolves around whether the sum of INR 2,82,15,036 received by Factiva Ltd. constitutes 'royalty' under Section 9(1)(vi) of the Act and Article 13 of the India-UK DTAA.

Parties Involved:

• Appellant: M/s. Factiva Ltd., Mumbai
• Respondent: Deputy Commissioner of Income-tax (International Taxation) – 2(3)(1), Mumbai

Summary of the Judgment

Factiva Ltd., a UK-incorporated company providing global business news and information services, entered into a distribution agreement with its Indian group company, Dow Jones Consulting India Pvt. Ltd. (DJCIPL), in 2014. During the assessment year 2015-16, Factiva received INR 2,82,15,036 from DJCIPL for the distribution of its Factiva products in India. Factiva declared its total income as nil, claiming the amount as business income under the DTAA, asserting the absence of a Permanent Establishment (PE) in India.

The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) contested this, classifying the sum as 'royalty' taxable under Section 9(1)(vi) of the Income Tax Act and Article 13 of the DTAA. Factiva appealed the decision, arguing that the payments should be treated as 'business profits' and not as royalty, thereby exempting them from Indian taxation.

After thorough examination, the Tribunal upheld Factiva's stance, ruling that the payments were not royalties but business profits. The Tribunal referenced multiple precedents and clarified the distinction between royalties and business income under the DTAA.

Analysis

Precedents Cited

The Tribunal extensively referenced prior judgments to substantiate its decision:

• Dow Jones & Company Inc. v. ACIT (2022) 135 Taxmann.com 270 (Del ITAT): Addressed the classification of payments for database access not constituting royalty.
• Dun and Bradstreet Espana S.A., IN RE (AAR) (2005) 272 ITR 99 (AAR): Established that payments for accessing information do not equate to royalties.
• American Chemical Society v. DCIT (2019) 106 Taxmann.com 253 (Mum ITAT): Confirmed that subscription fees for database access are business income, not royalty.
• Tata Consultancy Services v. State of Andhra Pradesh [2004] 141 Taxmann 132/271 ITR401: Differentiated between copyright ownership and the usage rights of software.
• ClT v. HEG Ltd. [2003] 130 Taxmann 72/263 1TR 230 (Madhya Pradesh HC): Clarified that commercial information lacking unique features does not qualify as royalty.

Legal Reasoning

The Tribunal closely examined the definitions under both the Income Tax Act and the DTAA:

• Section 9(1)(vi) of the Income Tax Act: Defines 'royalty' as payments for the use of or the right to use copyrights, patents, trademarks, and other intellectual properties.
• Article 13 of the India-UK DTAA: Mirrors the definition in the Income Tax Act, focusing on payments for rights to use intellectual properties.

The Tribunal determined that Factiva did not transfer any copyrights or rights to use copyrights to DJCIPL. Instead, the payments were for accessing a database comprising publicly available information, akin to purchasing a book where only the content is accessed without transferring any ownership rights.

Moreover, the Tribunal highlighted that the assessment by the AO lacked material evidence to substantiate the claim of an agency PE, further weakening the argument for categorizing the payments as royalties.

Impact

This judgment sets a significant precedent in the interpretation of royalties under DTAA provisions. It delineates the boundaries between business income and royalty, particularly in the context of digital products and databases. Companies engaged in similar business models can reference this ruling to argue against the reclassification of subscription-based payments as royalties, thereby potentially reducing tax liabilities in India.

Additionally, the decision underscores the necessity for tax authorities to provide concrete evidence when classifying payments as royalties, especially in intricate digital and intellectual property domains.

Complex Concepts Simplified

1. Royalty under Income Tax Act and DTAA

Royalty: Payments made for the use of intellectual property rights like copyrights, patents, and trademarks. Under income tax laws and DTAA, such payments are taxable.

2. Permanent Establishment (PE)

Permanent Establishment: A fixed place of business in a country, which can make a foreign company liable to pay taxes in that country on the profits attributed to the PE.

3. Double Taxation Avoidance Agreement (DTAA)

DTAA: An agreement between two countries to avoid taxing the same income twice, ensuring that businesses do not face excessive taxation.

4. Business Profits vs. Royalty

Business Profits: Earnings from regular business activities. When these profits do not involve the transfer of intellectual property rights, they are classified as business income.
Royalty: Specifically involves payments for the right to use intellectual property.

Conclusion

The Factiva Limited v. DCIT judgment is a landmark decision that clarifies the distinction between business income and royalty under both the Income Tax Act and the India-UK DTAA. By emphasizing the absence of copyright transfer and the lack of a Permanent Establishment, the Tribunal provided a clear framework for assessing similar cases in the future. This ruling not only aids companies in structuring their international transactions but also guides tax authorities in making informed and evidence-based assessments.

Ultimately, this judgment reinforces the principle that mere access to information or databases, without the transfer of intellectual property rights, should be treated as business income rather than royalty, thereby influencing the tax treatment of digital and information-based services.