Foreign firms' income from data not taxable

FOREIGN ENTERPRISES

A new trend of using specialised information in the shape of database is fast emerging in India. Certain foreign companies specialise in creating a database of information which may be used for taking business decisions. The database can also be used to obtain commercial, economic or financial positions of business enterprises.

The issue for consideration is the nature of payment by an Indian company to a foreign company for using its database. Is such payment a "royalty" or "fee for technical services" and is the foreign company liable to be taxed for such payments in India?

In the case of Wipro Ltd versus ITO 278 ITR 57 (AT), an Indian company subscribed to the business data collected and maintained by a renowned US agency which maintains and publishes data pertaining to the technology/software aspect of the business.

The assessing officer was of the view that the payment to the US company be regarded as "royalty" or "fees for technical services," both of which are taxed in India.

The matter was taken to the tribunal, which said access to a database cannot be considered the same as passing on information concerning industrial, commercial or scientific experience. The experience mentioned in the law should be "one's own experience in the realm of industrial, commercial and scientific and not compilation of somebody else's experience." The tribunal held that the payment to the US company was not taxable in India.

In another recent case of Dun and Bradstreet Espana SA (2005) 272 ITR 99 (AAR), DBIS, an Indian company, procured a business information report (BIR) from a Spanish company.

Whenever an Indian customer placed an order for a BIR regarding a company in Spain, DBIS used to collect information from a master server of the foreign company. On locating the BIR, DBIS used to download, print and deliver a copy to the Indian customer.

The Spanish company approached the authority for advance ruling to decide if payments by DBIS for purchase of the reports would be treated as business profits.

The authority said the payment could be regarded as royalty. Such payment can be compared with sale of a book, which does not involve transfer of intellectual property. Therefore, the payments would be treated as business profits, which, however, could not be taxed since the company did not have a permanent establishment in India.

A reading of the above cases will clarify that payment made by an Indian company to a foreign company for using the latter's database will neither be treated as "royalty" nor "fees for technical services."

Such payments, being business profits, can be taxed in India only if the foreign company has a permanent establishment in India. If the foreign company manages its affairs in India without a permanent establishment, it will not be liable to pay tax in India.

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