2019 (5) TMI 405 - AT - Income Tax

Income accrued in India - royalty or fees for technical services - subscription fees receipts - assessee company is a tax resident of Germany - Permanent Establishment (PE) in India - India Germany Tax Treaty - Whether payment received by the assessee is only in the nature of business profit ? - HELD THAT - A customer/subscriber can access the data stored in the database by paying subscription. Tribunal, Ahmedabad Bench, in ITO v/s Cedilla Healthcare Ltd. 2017 (1) TMI 554 - ITAT AHMEDABAD following decision of Authority for Advance Ruling in Dun Brad Street Espana, S.A. 2011 (7) TMI 957 - BOMBAY HIGH COURT while considering the nature of subscription paid to a U.S. based company viz. Chemical Abstract Services, which is in the same line of business and is stated to be the competitor of the assessee, held that the subscription paid for online access to the database system scifinder is not in the nature of royalty. Assessees were maintaining databases of information collated from various journals and articles and allowed access to the users to use such material as required by them. Keeping in view the ratio laid down in the decisions (supra), the payment received by the assessee has to be held to have been received for use of copyrighted article rather than for use of or right to use of copyright. Whether the subscription fee can be treated as fees for technical services ? - It is evident that the assessee has collated data from various journals and articles and put them in a structured manner in the database to make it more user friendly and beneficial to the users/customers who want to access the database. The assessee has neither employed any technical/skilled person to provide any managerial or technical service nor there is any direct interaction between the customer/user of the database and the employees of the assessee. The customer/user is allowed access to the online database through various search engines provided through internet connection. There is no material on record to demonstrate that while providing access to the database there is any human intervention. Department has not brought any material on record to demonstrate that the assessee has employed any skilled personnel having knowledge of chemical industry either to assist in collating articles from journals / magazines which are publicly available or through them the assessee provides instructions to subscribers for accessing the online database. The assessee even does not alter or modify in any manner the articles collated and stored in the database. In the aforesaid view of the matter, the subscription fee received cannot be considered as a fee for technical services as well. Online databases are provided by Taxman, CTR online, etc. which are accessible on subscription not only to professionals but also any person who may be having interest in the subject of law. When a subscriber accesses the online database maintained by Taxman/CTR online etc. he only gets access to a copyrighted article or judgment and not the copyright. Similar is the case with the assessee. Therefore, in the facts of the present case, the subscription fee received by the assessee cannot be treated as royalty under Artile 12(3) of India Germany Tax Treaty. Thus the addition made has to be deleted, as, the payment received by the assessee is only in the nature of business profit which cannot be brought to tax in India in the absence of PE. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the subscription fee received by the assessee is in the nature of royalty or fees for technical services, hence, chargeable to tax in India.
2. Whether the subscription fee can be treated as business income and its taxability in the absence of a Permanent Establishment (PE) in India.

Issue-Wise Detailed Analysis:

1. Nature of Subscription Fee: Royalty or Fees for Technical Services

The core issue was whether the subscription fee of ?8,16,35,185 received by the assessee, a tax resident of Germany, is in the nature of royalty or fees for technical services, and thus chargeable to tax in India. The assessee maintained an online database, "reaxys.com," pertaining to chemical information, which was accessible to Indian customers on a subscription basis. The Assessing Officer (AO) argued that the subscription fee was for providing scientific database facilities and thus constituted fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961, and royalty under section 9(1)(vi) and Article 12(3) of the India-Germany Tax Treaty.

The AO observed that the database included general science books, magazines, research-based reports, and complex reaction formulas, which required technical expertise and human intervention for data collation. Therefore, the AO concluded that the subscription fee should be treated as fees for technical services. Additionally, the AO held that the subscription fee constituted royalty under the India-Germany Tax Treaty as it involved the transfer of the right to use a copyright.

2. Assessee's Argument: Business Income and Absence of PE

The assessee contended that the subscription fee was neither royalty nor fees for technical services under the Income Tax Act or the India-Germany Tax Treaty. The assessee argued that the fee was in the nature of business income and, in the absence of a PE in India, was not taxable as per the India-Germany DTAA. The assessee emphasized that the subscription agreement only provided access to the database without transferring any ownership rights or imparting technical know-how to the subscribers. The data in the database were publicly available articles collated from various journals, and the entire process of accessing and searching the database was automated without any human intervention.

Tribunal's Decision:

Subscription Fee as Royalty:
The Tribunal examined the subscription agreement and observed that the assessee granted a non-exclusive and non-transferable right to access the database, retaining exclusive ownership over the intellectual property. The Tribunal noted that the data were collated from publicly available journals and structured in a user-friendly manner. The Tribunal concluded that the subscription fee did not constitute royalty under Article 12(3) of the India-Germany Tax Treaty as there was no transfer of the right to use the copyright.

Subscription Fee as Fees for Technical Services:
The Tribunal further analyzed whether the subscription fee could be treated as fees for technical services. It observed that the assessee did not employ any technical personnel to provide managerial or technical services to the subscribers. The database was accessed through regular internet browsers without any human intervention. The Tribunal relied on the Supreme Court's rulings in CIT v/s Bharati Cellular Ltd. and DIT v/s A.P. Moller Maersk A.S., which emphasized that human intervention is a sine qua non for technical services. Thus, the subscription fee did not qualify as fees for technical services under Article 12(4) of the India-Germany Tax Treaty.

Business Income and Taxability:
The Tribunal concluded that the subscription fee was in the nature of business profit, which could not be taxed in India in the absence of a PE. The Tribunal relied on various judicial precedents, including the Authority for Advance Ruling in Dun & Brad Street Espana, S.A., and the Tribunal's decisions in ITO v/s Cadila Healthcare Ltd. and DCIT v/s Welspun Corporation Ltd., which supported the assessee's contention.

Conclusion:
The Tribunal allowed the appeal, holding that the subscription fee received by the assessee was neither royalty nor fees for technical services but business income not taxable in India due to the absence of a PE. The addition made by the AO was deleted. The appeal was pronounced in open court on 15.04.2019.