2022 (4) TMI 327 - AT - Income Tax

Income deemed to accrue or arise in India - Royalty receipt - treatment of subscription fees received by the assessee as falling within the ambit of royalty u/s 9(1)(i) of the Income-tax Act, 1961 r.w and/or under Article 12 of the India Singapore DTA - CIT-A held that services rendered by the assessee are in the nature of imparting of information concerning commercial expediency - AO alleged that the assessee has been providing services in the form of Web services and is made available to users over a network, which is normally through the web/internet - HELD THAT - Assessee provides web-based online access to its customer s data hosted on servers located in data centers maintained by the assessee outside India. The assessee does not have any data centers in India and hence it cannot be considered to have a fixed place of business in India. The assessee neither has a place of management in India nor has any equipment or personnel in India. This fact has also been accepted by the ld. CIT(A) in his order. Therefore, in the absence of granting any control over the equipment belonging to the assessee to its customers, the allegation of the AO that the amount so received will constitute Royalty is not acceptable. Assessee does not provide any information concerning industrial, commercial, scientific experience. The assessee only processes the proprietary data of the customers and provides the result in form of desired reports etc. On this count also, it cannot be said that consideration for CRM services are in the nature of royalty. If the services have been rendered de hors imparting of knowledge or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article 12 of the treaty. By granting access to the information forming part of the database, the assessee neither shares its own experience, technique or methodology employed in evolving databases with the users, nor imparts any information relating to them. The income earned by the assessee from the Indian customers with respect to the subscription fees for CRM cannot be taxed as royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the treaty. As in light of the Master Subscription Agreement, we are of the considered view that the customers do not have any access to the process of the service provider i.e. the assessee, and the assessee does not have any access except otherwise provided in the master subscription agreement to the data of the subscriber. All the equipments and machines relating to the service provided by the assessee are under its control and are outside India and the subscribers do not have any physical access to the equipment providing system service which means that the subscribers are only using the services provided by the assessee. We have no hesitation to hold that the subscriber fees received by the assessee do not fall within the ambit of royalty u/s 9(1)(vi) of the Act nor under Article 12 of the India Singapore DTAA. The Assessing Officer is accordingly directed to delete the impugned additions. Appeal of assessee allowed.

Summary

Issues Involved:
1. Treatment of subscription fees as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA.
2. Nature of services rendered by the assessee and whether they fall within the ambit of royalty.
3. Application of previous rulings and judgments to the current case.

Issue-wise Detailed Analysis:

1. Treatment of Subscription Fees as Royalty:
The primary grievance in all the appeals relates to the treatment of subscription fees received by the assessee as falling within the ambit of royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and/or under Article 12 of the India-Singapore DTAA. The assessee argued that the subscription fees for CRM services do not qualify as royalty or fees for technical services under the DTAA. The Assessing Officer contended that the services provided by the assessee involve the use of a process and thus should be considered as royalty. However, the tribunal concluded that the subscription fees received by the assessee do not fall within the ambit of royalty under the Act or the DTAA.

2. Nature of Services Rendered:
The assessee is engaged in providing comprehensive Customer Relationship Management (CRM) services, which enable customers to systematically record, store, and act upon business data. The services rendered help clients generate reports and summaries of the data fed into the Salesforce database by the clients themselves. The tribunal noted that the assessee does not have a place of business in India and that the subscription fees for CRM services do not qualify as royalty or fees for technical services under the DTAA. The tribunal emphasized that the assessee processes the proprietary data of the customers and provides the result in the form of desired reports, and does not impart any information concerning industrial, commercial, or scientific experience.

3. Application of Previous Rulings and Judgments:
The tribunal referred to several previous rulings and judgments to support its decision. In the case of American Chemical Society vs. DCIT, it was held that the database does not provide any information arising from the assessee's own previous experience or knowledge of the subject. Similarly, in the case of Dun & Bradstreet Espana S.A., the AAR opined that the purchase of standardized reports publicly available on the internet upon payment of subscription charges does not constitute royalty. The tribunal also referred to the case of GECF Asia Ltd, where it was held that services rendered without imparting know-how or transferring any knowledge, experience, or skill do not fall within the ambit of royalty. Lastly, in the case of Kotak Mahendra Primus Ltd, it was concluded that the payment in question cannot be said to be for the supply of any knowledge or information and thus does not fall within the scope of royalty.

Conclusion:
The tribunal concluded that the subscription fees received by the assessee do not fall within the ambit of royalty under Section 9(1)(vi) of the Income-tax Act, 1961 or Article 12 of the India-Singapore DTAA. The tribunal directed the Assessing Officer to delete the impugned additions. Consequently, all the seven appeals of the assessee were allowed. The order was pronounced in the open court on 25.03.2022.