Delhi High Court: ‘Subscription Fee’ income not classified as ‘royalties’ or ‘included services’ under DTAA and IT Act

Delhi High Court

Delhi High Court: An appeal was filed by the Income Tax Department to consider whether the Tribunal has erred in law in holding that receipts of subscription fees are in the nature of business income and is not taxable as the assessee has no Permanent Establishment in India without taking into account the fact that the solution provided by the assessee has attributes of independent performance and as per the examples provided in the MoU in this case, imparting of a technical training is indicative of fulfillment of a ‘make available‘ clause in terms of Article 12(4)(b) of the India-USA Double Taxation Avoidance Agreement as well as Explanation- 2 of Section 9(1)(vii) of the Income Tax Act, 1961. A division bench of Yashwant Varma and Purushaindra Kumar, JJ., held that the income from subscription fees does not qualify as royalties or fees for technical services under the applicable tax laws and agreements.

The Income Tax Department was challenging the decision of the Income Tax Appellate Tribunal regarding the taxability of subscription fees received by the assessee. The assessee received subscription fees for providing access to a legal database called “Lexis Nexis” to Indian subscribers. The assessee argued that this income constitutes business income and is not taxable in India due to the absence of a Permanent Establishment (PE) as per the India-USA Double Taxation Avoidance Agreement (DTAA). The Department conducted a scrutiny assessment and concluded that the income should be treated as technical consultancy income falling under Article 12(4) of the DTAA. The Tribunal, however, ruled in favor of the assessee, citing a precedent case where it was held that similar income was considered business profit and not taxable in India without a PE.

The Department did not contest the fact that the assessee does not have a fixed place of business in India, which is necessary for Article 7 of the DTAA to apply. Based on these points, the Department proposed questions of law to challenge the Tribunal’s decision, particularly questioning whether the subscription fees should be treated as business income and whether the Tribunal erred in not considering the technical training aspect and the applicability of Article 12(4)(b) of the DTAA. The case revolved around the interpretation of the DTAA provisions, specifically Articles 7 and 12, regarding the taxation of business profits and fees for included services, respectively, and whether the income earned by the assessee falls within these categories.

Counsel for the Department argued that the income generated from subscription fees should be classified under Article 12 and Section 9(1)(vii) of the Income Tax Act. A reference was made to Article 12(3) of the Double Taxation Avoidance Agreement (DTAA), which defines “royalties” to include payments for the use of copyright or other intellectual property rights. Additionally, Article 12(4) of the DTAA discusses “fees for included services” as payments for technical or consultancy services. Section 9(1)(vii) of the Income Tax Act deals with income by way of fees for technical services, payable by residents or non-residents for services utilized in India or for earning income in India.

The Court observed that the mere provision of access to a database does not constitute the rendering of managerial, technical, or consultancy services as required by Section 9(1)(vii) of the Income Tax Act. Regarding the classification under the DTAA, the court noted that granting access to a database does not involve the transfer of copyright or intellectual property rights, as defined in Article 12(3) of the DTAA. The Court cited precedents and legal interpretations to distinguish between the transfer of copyright and the mere right to use copyrighted material, emphasizing that the latter does not constitute royalties.

The Court remarked “The mere access granted to a subscriber to the legal database would clearly not fall within the ambit of Section 9(1)(vii) of the Act. All that the assessee does is provide access to the database. It has not been shown to be providing any further managerial, technical or consultancy service to a subscriber. We, in any case, find ourselves unable to countenance the contention that the access so granted could be construed as providing services of the nature spoken of in Section 9(1)(vii) of the Act.”

The Court further remarked that “We find that similar would be the position which would obtain when subscription fee is examined on the anvil of Article 12 of the DTAA. If the Department were to describe subscription fee as ‘royalty‘, they would necessarily have to establish that the payments so received by the assessee was consideration for the use of or the right to use any copyright or a literary, artistic or scientific work as defined by Article 12(3) of the DTAA. Granting access to the database would clearly not amount to a transfer of a right to use a copyright. We must bear in mind the clear distinction that must be recognised to exist between the transfer of copyright and the mere grant of the right to use and take advantage of copyrighted material. Neither the subscription agreement nor the advantages accorded to a subscriber can possibly be considered in law to be a transfer of a copyright. In fact, it was the categorical assertion of the assessee that the copyright remains with it at all times.”

The Court concluded that the access granted to subscribers to the database does not involve the transfer of copyright or the rendering of technical or consultancy services. Therefore, the department’s contention that the subscription fees constitute royalties or fees for technical services was deemed unmerited. Thus, the Court held that the income generated from subscription fees does not fall within the ambit of royalties or fees for included services under both the DTAA and the Income Tax Act.

[Commissioner of Income Tax v. Relx Inc., 2024 SCC OnLine Del 1314, decided on 07-02-2024]

Advocates who appeared in this case :

Mr. Ruchir Bhatia, SSC with Ms. Deeksha Gupta & Mr. Pratyaksh Gupta, Advocates for appellants

Mr. Ajay Vohra, Sr. Adv. with Mr. Aditya Vohra, Advocate for respondent

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