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Tax on the trail of chatterbot charges
November, 25th 2006

"Have you been chatting with your computer lately? Wouldn't it be a major achievement to stop clicking our way through the Web or complex programs and get answers in the same way we talk to a colleague or a friend?"

These are the questions that pop up on, the site of IMT Labs, which is "developing a virtual communication system that allows you to use human-like communication and natural language for virtually everything you can imagine doing on the Internet and on your own computer." The `totally new way of communication' called Spleak, "was born as a virtual buddy for MSN Messenger," explains IMT. "She is a virtual friend for the English-speaking instant messaging community. She can bring any information the user asks about from our growing list of content providers. And the only interaction needed for that request is simple, natural conversation."

However, when IMT wanted to clarify a tax doubt, it was not Spleak who spoke but the AAR (Authority for Advance Rulings), New Delhi. The poser before the Authority was about monthly payment made to a non-resident company for right to use Internet-based software.

Facts of the case

First, the facts. IMT obtained licence from Conversagent Inc of the US for the use of `Smarterchild software, made by using Buddyscript technology (a scripting language)'. Since Conversagent had no establishment or office in India, IMT said that the payments made to the US company are covered under Article 7 of the DTAA (double-taxation avoidance agreement) with the US, as `business profits', and therefore not chargeable to tax in India.

To know more about `child' and `buddy', let's visit, the site of renamed Conversagent. When the transformation happened a few months ago, Colloquis CEO Stephen Klein had said, "Our new name strongly encapsulates the advantage we bring to the marketplace. Colloquis (pronounced cull oh' kwis) derives from the Latin word `colloquium,' meaning conversation. This is precisely what our Automated Service Agent (ASA) system delivers," as reported on July 24.

"Colloquis' technology enables conversational self-service and other high-value uses of our natural language platform. Offering automated conversations is a low-cost solution for businesses and a high-value resource for customers who get immediate and accurate service," Klein had explained. One learns that Colloquis' technology has been adopted by top three US cable companies, viz. Comcast, Time-Warner Cable and Cox, with 38 million subscribers (more than half of the US total). No surprise, therefore, that Microsoft acquired Colloquis last month.

What is SmarterChild? An `interactive agent,' says an FAQ on "Interactive agents are software applications, often called `bots,' that interact with users on Instant Messaging (IM) or other text messaging services. You can `chat' with an interactive agent, whether on the web or over IM, the same way you talk to any other contact. To talk with SmarterChild, just send him a message saying `hi!'." Bots or Internet bots, a.k.a. Web robots, are automated Internet applications controlled by software agents, explains Wikipedia. "These bots interact with network services intended for people, carrying out monotonous tasks and behaving in a humanlike manner. Bots can gather information, reply to queries, provide entertainment, and serve commercial purposes." Wonder if the taxman would like to release bots to gather information from assessees!

"Chatterbots may allow people to ask questions in plain English and then formulate a proper response," says "These bots can often handle many tasks, including reporting weather, zip-code information, sports scores, converting currency or other units, etc." BuddyScript is `a simple but powerful language designed specifically for developing conversational applications'. You can download a software development kit on the developer site

How much was IMT to pay for the software? "The minimum royalty payment each month for the licence shall be $10,000," reads the agreement with Conversagent. "At such time as in any given calendar month the number of sessions shall exceed 500,000 but not exceed 1,000,000, the minimum royalty payment shall be increased to $20,000 per month, commencing with the next subsequent month."

The information provided by the non-resident on the Internet in connection with software is not a secret information/process/formula/copyright, contended Naveen Modi, CA, arguing on behalf of IMT. This software information, just like business information, is available to anybody on the Internet on payment of some fee, hence this is a normal business covered under Article 7 of the US-India DTAA, he said. For the Department, though, none spoke.

At the AAR

The Chairman of AAR, Mr Syed Shah Mohammed Quadri, and Members, Mr A. S. Narang and Mr A. Sinha, heard the submissions and studied the relevant provisions. "As per Section 9(1)(vi) Explanation 2 of the Income-Tax Act, 1961, the use of software falls under the category `royalty' and Article 12 of the US-lndo DTAA defines royalty for use of secret process or formula, use or right to use of copyright, and use or right to use literary or scientific work," they observed.

Section 9(1) speaks of incomes `deemed to accrue or arise in India' and (vi) specifies `income by way of royalty'. The word `royalty' in the Income-Tax Act is `at par with the term `royalties' as used in Article 12 of the DTAA, said the AAR. Likewise, the phrase `fees for technical services' is `at par with the term `fees for included services' as used in Article 12,' it noted. "In view of this position, the payments being made by the applicant (a resident), to the Conversagent (a non-resident), are chargeable to tax in India, under Article 12 of the DTAA as also under Section 9 of the Act."

Thus the Authority concluded that the periodical payments made by IMT to Conversagent are in the nature of `royalties and fees for included services' and taxable under Article 12 of DTAA. "The said payments cannot, therefore, be treated as business income," ruled the AAR. In what may mean a difference to many similar transactions, the Authority's order dated November 6 concludes by stating, "Periodical payments (being `royalties and fees for included services'), made to the non-resident person, having no office/establishment in India, in connection with the use of software developed by him on the Internet are subject to tax deduction at source, under DTAA with the US."


"I like things extra large, be it car or house, yet I'm humble enough... "

"Not to opt for LTU, large taxpayer unit?"

D. Murali

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