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Introduction

The Bombay ITAT in its recent decision of Elsevier Information Systems GmbH v. Dy.Commissioner of Income Tax held that subscription fees paid to access an online database should be construed to be business income and not be treated as “royalty” or “fees for technical services” (“FTS”).

Facts

Elsevier which is based out of Germany, has an online database called `Reaxys’ which provides access to data on varied topics pertaining to chemistry and chemical reactions. In lieu of this, Elsevier charges a subscription fee from all its subscribers, including those based in India. Section 9 deems certain income to arise and be taxable in India. This inter alia includes payment of fee as royalty and payment of fee for technical services.

Issues

The issue revolved around the subscription fee of the online database.

  1. Elsevier considered the subscription fee as business income and owing to the lack of a permanent establishment in India concluded that it is not be taxable in India.
  2. The Assessing Officer considered it to as royalty or fees for technical services and felt it should be accordingly taxed in India.

Revenue’s arguments

  1. The online database was similar to a library, which contains historical data belonging to a technical domain. Such a database could not be put together without human intervention and hence the income earned from it should be ‘fees for technical services’.
  2. Also, the database was in the nature of a literary work, hence the subscription fee may also be taxed as royalty.

Elsevier’s arguments

On Royalty

  1. The access to the database does not include with it a right to use the copyright of the same. Hence, the fee is paid only to use the database not to use the copyright in the database. Such fee cannot be termed as royalty.
  2. There is no transfer of ownership rights in the database.
  3. The technology used to create the database is also not shared with the subscribers and they are given no rights to commercially utilize the database.
  4. Articles available on the database are a mere collation of publicly available articles and hence subscription fee should not be treated as royalty.

On Technical Services

  1. Technical service fee is typically for services rendered in the nature of managerial, technical or consultancy services. As the database did not provide any of those services, the subscription fee cannot amount to fee for technical services.
  2. There was no human intervention, as there was no interaction between Elsevier’s employees and the customers.

Judgement

ITAT perused through the arguments and held that subscription fee is in the nature of business income and not royalty or fee for technical services. It used the following rationale to arrive at its decision:

  1. A non-exclusive and non-transferable right is granted to subscribers upon the payment of subscription fee and all rights and titular interest remain with Elsevier.
  2. Upon the termination of the subscription agreement, the customer is mandated to delete all saved copies of any materials they may have accessed on the database.
  3. A perusal of the subscription agreement revealed to the ITAT that no copyright in the database has been transferred.
  4. There was no human intervention which is a pre-requisite for any service to fall within the ambit of managerial/technical service.
  5. The only service provided was access to a copyrighted article and not a copyright in the database.

On the above grounds, the ITAT upheld the appeal and held that the subscription fee is in the nature of business income.

Judgments referred

The ITAT referred to the judgments

  1. Dun & Brad Street Espana, S.A., In Re, (Authority for Advance Ruling)
  2. ITO v. Cedilla Healthcare Limited and DCIT v. Welspun Corporation Limited (ITAT)
  3. DCIT v. Welspun Corporation Limited (ITAT)
  4. DIT v. A.P.Moller Maersk

Judge Analytics:

The members of the ITAT who decided this case were Mr G.Manjunatha and Saktijit Dey.

  1. Mr Manjunatha has decided most of his cases in favour of the assessee. Further, some of the past decisions of Mr Manjunatha show that he takes a strict interpretation of the term `royalty fee’. In the Star Den Media Services decision, he denied the classification of the fee paid for placement of channels as royalty. He has taken a similar view with respect to fee for technical services. In the decision of ACIT v. Indo Industries, he refused to hold commissions paid to foreign export agents as the fee for technical services.
  2. Mr Dey too has decided more cases in favour of the assessee than the revenue. He too like his co-member has taken a strict interpretation of fee for technical services

Section Analytics

The charging section involved in this decision is Section 9. Section 9 deems certain incomes to accrue or arise in India. This inter alia includes royalty and fee for technical services. Section 9 Cases show that section 9 cases are typically decided in favour of the assessee most number of times.

Most cited decisions

Some of the most cited decisions of section 9 are:

  1. Motorola Inc. v. DCIT Non Resident Circle (“After analyzing the provisions of Copyright Act and considering the OECD commentary on characterization of income arising from sale of software license it was held that payment for software license where no right for use of copyright was granted to the licensee such as right to make copies thereof for commercial exploitation does not constitute use of copyright of literary work and is consequently not Royalty under the tax treaty entered into by India”.)
  2. Skycell Communications v. DCIT (“Payment of fee for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been paid for technical services”)

Takeaways

Another takeaway of this judgement is the careful drafting of agreements. The ITAT arrived at its decision after perusal of the subscription agreement and an unclear clause or poor drafting could have caused them to reach a contrary conclusion.

This decision is a very welcome decision as it clearly distinguishes between copyright in a product and access to a copyrighted product. As online databases provide cross-border services, such distinction becomes important for international taxation purposes.

Written by Soumya Shekhar, legal writer @ Riverus

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