2025 (4) TMI 1626 - HC - Income Tax

Income deemed to accrue or arise in India - treatment of commission income and the amounts received by the Assessee as subscription fee - AO held that the commission income and the subscription fee received by the Assessee from entities in India were required to be construed as fees for technical services FTS and were chargeable to tax under the Act and passed the draft assessment orders - HELD THAT - For any receipt to fall within the expression fees for technical services it is necessary that the same be received as consideration for rendering services which are of technical nature. The expression rendering of managerial technical or consultancy services must necessarily be construed in a narrow sense where such specialized services are rendered by the service provider as may be required by the service recipient. Ordinarily the same would require human intervention. Mere access to technical database or technical literature would not constitute provision of technical services. The sale of technical texts information or research material collated by extensive research would not constitute rendering technical services within the scope of Section 9 (1) (vii) of the Act. In the facts of the present case the subscription fee collected by the Assessee from various third parties is for subscription to e-magazines and content which is standardized and not specifically collected or generated for any particular entity. Thus clearly the subscription fee would not partake the character of a fee for technical service within the meaning of Explanation 2 to Section 9 (1) (vii) of the Act. It is not necessary to examine the provisions of DTAA. The same would be necessary only if the subscription fee was chargeable to tax under the normal provisions of the Act. No substantial question of law arises for consideration.

Summary

The core legal questions considered by the Court revolve around the taxability of two types of receipts earned by the Assessee: (i) commission income under a Commissionaire Agreement with an Indian entity, and (ii) subscription fees received for access to online journals and related content. Specifically, the issues are whether these receipts constitute "fees for technical services" (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961 ("the Act") and Article 12(4) of the India-Germany Double Taxation Avoidance Agreement (DTAA), thereby rendering them taxable in India.

First, the Court examined whether the commission income received by the Assessee qualifies as FTS. Second, it scrutinized whether the subscription fees collected for online journals and books constitute FTS or royalty income, and whether the Revenue's reliance on Supreme Court precedent concerning software royalty income was applicable.

Regarding the commission income, the Court referred to a prior decision of this Court in the Assessee's own case for AY 2013-14, which had settled the question in favour of the Assessee. The prior ruling held that the commission income received under the Commissionaire Agreement, which involved various services such as global sales and marketing, customer services, order handling, debtor management, and subscription management, did not amount to FTS taxable under the Act or DTAA. The Court noted that there were no material changes in facts or law for the assessment years 2020-21 and 2021-22 to warrant a different conclusion.

The more contentious issue pertained to the subscription fees. The Revenue contended that these fees should be taxable as FTS under the Act, relying on the AO's assessment and prior Supreme Court decisions related to royalty income from software. The Revenue argued that the subscription fees represented payment for the right to use copyrighted material and thus fell within the ambit of FTS or royalty. The Assessee, supported by the ITAT, argued that the subscription fees were for access to standardized content and did not involve rendering any managerial, technical, or consultancy services as required for FTS classification.

The Court undertook a detailed analysis of the legal framework governing FTS under Section 9(1)(vii) of the Act, which defines FTS as consideration for rendering managerial, technical, or consultancy services, explicitly excluding construction or assembly projects and salary income. The Court highlighted Explanation 2 to Section 9(1)(vii), which clarifies the nature of FTS.

In interpreting "technical services," the Court relied extensively on the Madras High Court's decision in Skycell Communications Ltd. v. Deputy Commissioner of Income-Tax, which emphasized that "technical" must be understood in a narrow sense, involving specialized knowledge or skill, and necessarily entails a human element. The Court underscored that mere use or access to technology or technical equipment does not amount to rendering technical services. For instance, services such as taxi driving, railway or airline transport, electricity supply, cable TV, internet access, or telephone services, though involving technology, do not constitute technical services for tax purposes.

The Court further examined the decision of this Court in Commissioner of Income-Tax v. Bharti Cellular Ltd., which applied the rule of noscitur a sociis to construe "technical services" in the context of Section 9(1)(vii). The Court noted that "technical" is sandwiched between "managerial" and "consultancy" services, both of which involve human intervention. Therefore, "technical services" must also involve a human element, and automated or machine-provided services do not qualify.

The Supreme Court's endorsement of this narrow interpretation was also considered. The Supreme Court had upheld the view that "technical services" require human interface and are not to be construed broadly to include automated services or mere facilities. The Supreme Court's observations in Commissioner of Income Tax v. Kotak Securities were cited, where the Court held that technical services must be specialized, exclusive, or customized services rendered to a client, distinguishing such services from routine, standardized, or automated facilities available to all users.

The Court then applied these principles to the facts of the present case. It observed that the subscription fees collected by the Assessee were for access to standardized e-magazines, journals, and content, which were not customized or exclusive to any particular subscriber. The service provided was essentially access to information, not the rendering of managerial, technical, or consultancy services involving specialized knowledge or human intervention. This was consistent with the decision in Commissioner of Income-Tax, International Taxation v. Relx Inc., where subscription fees for access to an online legal database were held not to constitute FTS.

The Court also referred to the Bombay High Court's decision in Commissioner of Income Tax v. India Capital Markets (P) Ltd., which rejected the Revenue's contention that subscription payments for e-magazines constituted consultative services. The Court noted that mere availability of information or research material does not amount to rendering technical or consultative services.

Further, the Court considered the United Nations Model Double Taxation Convention (UNMDTC) 2021 definition of FTS, which aligns with the Indian statutory definition and emphasizes that fees for technical services must involve the application of specialized knowledge, skill, or expertise, excluding routine services or mere access to databases. The Commentary on the UNMDTC clarifies that routine access to databases is not FTS, but customized services involving application of expertise are.

In conclusion, the Court held that the subscription fees received by the Assessee do not fall within the definition of FTS under Section 9(1)(vii) of the Act or the DTAA. The services rendered were standardized access to content and did not involve the specialized, exclusive, or customized services that characterize FTS. Consequently, the ITAT's deletion of the additions made by the AO on account of subscription fees was upheld.

Regarding the commission income, the Court reaffirmed the settled position from the Assessee's earlier case that such income is not taxable as FTS.

Accordingly, the Court dismissed the Revenue's appeals, finding no substantial question of law arising for consideration.

Significant holdings include the following verbatim excerpts that encapsulate the Court's reasoning on the scope of "fees for technical services":

"The expression 'technical service' referred in section 9(1)(vii) contemplates rendering of a 'service' to the payer of the fee. Mere collection of a 'fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services."

"The word 'technical' as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element... The facility may even be construed as a 'service' in the broader sense such as a 'communication service'. But... the expression 'technical service' is not to be construed in the abstract and general sense but in the narrower sense as circumscribed by the expressions 'managerial service' and 'consultancy service'."

"Technical services like managerial and consultancy service would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider... The service provided... fails to satisfy the aforesaid test of specialised, exclusive and individual requirement of the user or consumer."

"For any receipt to fall within the expression 'fees for technical services', it is necessary that the same be received as consideration for rendering services which are of technical nature... Mere access to technical database or technical literature would not constitute provision of technical services."

Core principles established are that the term "fees for technical services" under the Act and DTAA must be narrowly construed to include only those services involving specialized, exclusive, or customized managerial, technical, or consultancy services rendered with human intervention. Routine, standardized access to content or facilities, even if technologically sophisticated, does not constitute FTS.

Final determinations are that (i) the commission income earned under the Commissionaire Agreement is not taxable as FTS; and (ii) the subscription fees received for access to online journals and content do not constitute FTS or royalty income and are not taxable under the Act or DTAA provisions relating to FTS.