Delhi High Court ruling wherein it was held that Subscription fees received by the taxpayer from Indian subscribers for access to legal database services is neither Royalty nor fees for technical services (‘FTS’) under India-US Double Taxation Avoidance Agreement (DTAA).

Key excerpts from the ruling

• The taxpayer, being a US tax-resident, having no Permanent Establishment (PE) in India, provides legal database services (judgments, articles, legislations and other research material relevant to the legal field) to subscribers;
• The taxpayer filed a tax return declaring Nil income by taking into consideration subscription fees from Indian subscribers as business income not subject to tax in the absence of a PE.
• The taxpayer took a position that subscription fee would neither be Royalty nor can it be validly viewed as Fees for Technical Services since the access accorded to the Indian consumer was neither a transfer of copyright nor would it satisfy the requirement of included service comprising an element where technical knowledge, experience, skill, know-how or processes was made available.
• The taxpayer further took the position that subscription fee would not be treated as FTS as it has not provided any further managerial, technical or consultancy service to subscribers.
• The High Court rejected Revenue’s plea and held that granting access to a database does not amount to a transfer of a right to use a copyright and that clear distinction must be recognised to exist between the transfer of a copyright and the mere grant of the right to use and taking advantage of copyrighted material.
• The High Court remarked “Neither the subscription agreement nor the advantages accorded to a subscriber can possibly be considered in law to be a transfer of a copyright. In fact, it was the categorical assertion of the assessee that the copyright remains with it at all times”
• The High Court also rejected Revenue’s plea of taxability as FTS/FIS by following the coordinate bench judgment in Bio-Rad Lab dealing with the expanse of make available clause and observes that the nature of the transaction in this case neither comprises a transfer of copyright nor does it include a transfer of a right to apply technology and other related aspects which are spoken of in Article 12(4)(b) of India-US DTAA. Further holds that mere access granted to a subscriber to the legal database would clearly not fall within the ambit of Section 9(1)(vii) and “It has not been shown to be providing any further managerial, technical or consultancy service to a subscriber.”

This ruling is relevant to payers who have taken subscription services wherein neither there is a transfer of copyright nor does it include a transfer of a right to apply technology and consequently does not amount to Royalty or FTS. Accordingly, this ruling will help to substantiate the NO withholding tax position from an Indian payer perspective.