[By Harshita Agrawal]
The author is a student at the Ms. Ramaiah College of Law, Bangalore.
Background
In the current tech world, most companies share data online with their stakeholders to provide details of the company’s performance or in some cases to provide research reports in exchange for consideration. Post globalization, the supply of data is not bound to one territory but has widened to worldwide. These data or reports being copyrighted has created ambivalence between the tax authorities in India, for the royalty tax on the consideration received by the non-resident company in exchange for database used by customers in India. This created a lot of uncertainty on consideration received by these non-residents in the form of subscription fees and has prolonged since the advent of subscription fees started in India. This article will strive to give an outline of the current dispute between the tax authorities and non-residents relating to royalty tax on the sharing of an online database with the Indian customer. The article derives its contemporary relevance in light of the recent order of the Income Tax Appellate Tribunal (“ITAT”), Mumbai Bench in the case of IMS Ag, vDcit (Intl.Tax) Range 2(2)(1) (“IMS Ag case”).
Factual Matrix of IMS Ag Case
For better understanding, it is pertinent to delve into the facts of the case. IMS Ag (hereinafter referred to as “Assessee”) is a company incorporated and lodged in Switzerland. The Assessee’s primary business is providing subscription-based marketing research report of the pharmaceutical sector to its customers worldwide. The company delivers the data collected and processed by it through an online IMS knowledge link. For providing the review reports (“IMS reports”), the company enters into a service agreement with its customers to set out the details of the required modules to be accessed by the customers and the consideration received for these services. The dispute, in this case, was on the consideration received allowing the non-transferable and non-exclusive access to the IMS reports which was before the ITAT Mumbai.
The learned Assessing Officer passed an order commanding the assessee to pay royalty tax on the above-disputed sum under Section 9(1)(vi) of the Income Tax Act, 1961 (“IT Act, 1961”) read with Article 12(3) of the Indo-Swiss Double Taxation Avoidance Agreement (“DTAA”). Aggrieved by the above order, the assessee approached the Mumbai ITAT to challenge the impugned order.
The Mumbai ITAT while dealing with the aforesaid case has answered the two issues but our discussion will be limited to the issue of the requirement of payment of Royalty tax for the subscription fees paid by the Indian customer under Section 9(1)(vi) of the IT Act, 1961 read with Article 12(3) of India-Swiss DTAA.
Judicial Advancements before IMG Ag Case
Royalty tax on subscription fees has sprouted in the legal industry since the means of delivery of research reports shifted from physical mode to online mode. The tax authorities passed different views on this issue. At the outset, the ITAT Bangalore bench in the case of Wipro Limited v. ITO(2005), wherein the appellant had subscribed for the business data of Gartner Group. The Tribunal while discussing the amplitude of both domestic laws and DTAA observed that the database was copyrighted and hence do not form royalty under Section 9(1)(vi) of the Act. In addition to this, the services were provided outside India and payment was also received outside India through banking channels, therefore, no tax would be levied in India. This business income cannot be taxed in India as there is no business connection or Permanent Establishment (“PE”) of the non-resident, hence DTAA will also be not applicable. The Tribunal, in this case, have narrowed down the scope of royalty by connoting that web-based database is not included under Section 9(1)(vi) of the Act.
On appeal, the Hon’ble High Court of Karnataka decried the dicta of ITAT Bangalore in the case of The Commissioner Of Income Tax(CIT) v. M/S Wipro Ltd (2011) wherein it reversed the order of ITAT. It was observed by the CIT that the subscription fees would be treated as royalty tax under Section 9(1)(vi) of the IT Act, 1961 read with Article 12 of India- Ireland Double Taxation Avoidance Agreement (DTAA). According to the Hon’ble High Court, the payment of subscription grants the user a right over the data, thereby giving them royalty over the online database. . In the above case, the Hon’ble High court did not take into consideration Section 90(2) of the Act, which provides that in case of conflict between domestic laws and DTAA, whichever is more beneficial to the assessee will apply. In this case, DTAA will supersede the domestic laws as DTAA is more favorable to the respondent as it was not having PE in India.
Arguments Advanced In IMS Ag Case
The Revenue placed reliance on the ruling of the Karnataka High Court by claiming the taxability of subscription fees as royalty tax as per the domestic laws and India-Swiss DTAA. The Mumbai ITAT dissented from this view of the Revenue and placed reliance in the matter of DIT v. Dun and Bradstreet Information Services (DBIS) India Pvt Ltd[(2012)][i] (“DBIS Case”). In this case, the taxpayer imported business information reports (“BIRs”) from DBIS and made remittances without deducting tax at source under Section 195 of the IT Act, 1961. The Advance Ruling (“AAR”) distinguished this case on the parameter that the payment made by the DBIS for the purchase of BIRs does not constitute a case of royalty as defined under Article 13(3) of the India-Spain DTAA. There was an illustration drawn in this case that right to use BIRs is similar to buying a copyrighted book in which the person has no right to change it. In the above facts, the AAR was of the view that such payment for the availing BIRs would not constitute royalty under Article 13(3) of the Indian-Spain Treaty. The same was upheld by the Mumbai High Court in DBIS Case.
Order Passed by Mumbai ITAT in IMS Ag Case
The ITAT of Mumbai per-curiam upheld the same view of Mumbai High Court and passed the order concurring with the order of AAR in the matter of DBIS Case. ITAT Mumbai in the IMS AG case placed reliance on the Mumbai High Court view and observed that Article 12(3) of the India-Swiss DTAA is literatim for Article 13(3) of the India- Spain DTAA. Based on the factual matrix drawn by AAR in the case of DBIS Case, the Mumbai ITAT upheld the same view in this case and observed that the assessee is not liable to pay royalty tax to the Revenue on the subscription fees.
The Analysis drawn by the Tribunal
Section 9(1)(vi) of the IT Act, 1961 deals with the royalty payable outside India and it will be the income deemed to arise or accrue in India. According to this provision, non-resident shall pay royalty in India if he has business or profession in India or has earned income from India. The royalty above mentioned includes royalty for copyrighted software or database under Article 12(3) of India-Swiss DTAA, the definition of the term royalty does not include within its meaning the right to use database. Thus, concerning Section 90(2) of the IT Act, 1961, the Tribunal held that in case of conflict between DTAA and domestic laws, whichever is more beneficial to the assessee will prevail. In the instant case, DTAA will be applicable. Hence, the assessee is not liable for any royalty tax on the subscription fees of the database.
The way forward
This case has given a new direction to the prolonged battle between revenue and taxpayers for the taxability of royalty on the subscription fees of the database. Now, there exists a clash of views between Mumbai High Court and Karnataka High Court on this issue which has created more confusion for the Tribunals in India. It is a well-settled law that in case of a clash of opinion between two different High Courts, the Tribunal or other courts in India can go forth with the order that is more beneficial to the assessee. The Mumbai ITAT has adopted an adroit attitude by decrying the earlier judicial pronouncement in this issue, thus ameliorating the situation of taxpayers in India. But the royalty tax on subscription fees has now taken a new shape in the form of an equalization levy. The Finance Act, 2020 has brought in the insertion of Section 165A of the IT Act, 1961 providing an equalization levy of 2% on the sale of an online database to Indian customers or wherein any internet protocol located in India is used by any person. The non-resident who does not have a PE would be liable to pay an equalization levy under Section 165A on the sale of online data on or after 1 April 2020. After this, every non-resident who is engaged in the business of online database sales would be required to taxation as provided under Section 165A of the IT Act, 1961.
Endnotes:
[i]DITv. Dun and Bradstreet Information Services(DBIS)India Pvt Ltd,(2012) 20 taxmann.695 (Mum)].