Taxability of subscription fees for accessing a database has been a vexed issue with the judiciary divided. While the taxpayers contend that the access to database is on similar lines as that of purchase of books, the tax officers contend that the access is granted to the copyright of the database and hence royalty in nature. Recently, the Mumbai Tax Tribunal1 had an occasion to examine the taxability of subscription fees paid to a Switzerland Company in light of India-Switzerland Tax Treaty. We, at BDO in India, have summarised the ruling of Mumbai Tribunal and provided our comments on the impact of this decision.
Facts of the case:
Taxpayer, a company incorporated and fiscally domiciled in Switzerland, is engaged in providing market research report on pharmaceutical sector to its customers across the world at predetermined subscription fees. It collects, processes and utilises the data and information, particularly in the field of medicine and pharmaceuticals for the delivery of reports through online knowledge link. The taxpayer enters into agreements with its customers for reviewing reports, setting out the details of modules required to be accessed by the customers and the fees for these services. The reports, based on the module selected, are statistical database compilations, providing geo-economical data, about a pharma molecule, providing insight into the connected issues relating to information and developments. The database access licence so granted is a non-exclusive and non-transferable right. For the fiscal year 2012-13, the tax officer treated the database access license fees as royalty and brought it under the tax net. While concluding, the tax officer relied on Hon’ble Karnataka High Court’s decision in the case of Wipro2and other decisions of the same Hon’ble High Court wherein, on similar facts, it was held that these receipts are to be taxed as royalty. The First Appellate Authority upheld the order of the tax officer. Aggrieved, the taxpayer filed an appeal before the Tax Tribunal.
After hearing the contentions of the taxpayer and the tax officer, the Tribunal referred to the Bombay High Court’s (being jurisdictional High Court) decision in case of Dun and Bradstreet India3, wherein the following key observations were made:
- The taxpayer imported Business Information Reports (BIRs) from Dun and Bradstreet, USA, and made remittances in respect thereof without deducting tax at source.
- Authority for Advance Rulings held that the sale of the very same BIRs by the subsidiaries of Dun and Bradstreet US in Spain, Europe and U. K. (AAR applicants) to the taxpayer did not attract the provisions of section 195 of the Act.
- BIR is a standardised product of Dun and Bradstreet, it provides factual information on the existence, operation, financial condition, management and experience line of business, facility and location of a company; it also provides special events like any suit, lien, judgment or previous or pending bankruptcy.
- The information that is provided in a BIR is said to be publicly available; they are collected and complied by D&B associates. A BIR is accessible by any subscriber on payment of a requisite fee with regular internet access for which no particular software or hardware is required.
- If a group of companies collects information about the historical places and places of interest for tourists in each country and all the information is maintained on a central computer which is accessible to each constituent of the Group in each country, the supply of such information electronically on payment of fee cannot be treated as royalty or fee for technical services.
- Hence, payments made towards purchase of BIRs do not fall within the purview of 'royalties' within the meaning of para 3 of Article 13 of the India-Spain DTAA. Therefore, such payments cannot be regarded as royalty payment.
Duly relying on the observation made by the Bombay High Court, the Tax Tribunal then compared the language of Article 12(3) of the India-Switzerland Tax Treaty with the corresponding Article of India-Spain Tax Treaty. With the Article being verbatim, the Tribunal held that the conclusions arrived by the jurisdictional High Court would hold good for India-Switzerland Tax Treaty as well. Since the income was not taxable under the tax treaty, the Tax Tribunal refrained from commenting on its taxability under the IT Act.
This ruling further strengthens that in cases where the database provide access to standardised reports which are compiled from publicly available information, it could be contended that the license fee is not royalty. Further, the tax tribunal has compared the language of Article 12(3) of both the tax treaties (i.e. India-Switzerland and India-Spain) and since they were verbatim, it relied completely on the Bombay High Court, being jurisdictional decision, to come to the conclusion that the payment is not taxable in India.
It is pertinent to note that on similar factual matrix, Courts/Tribunals in various cases4 have held that the amount paid towards access of database was not taxable as royalty.
1IMS AG vs DCIT [ITA No 6445/Mum/2016]
2CIT vs Wipro Ltd [(2011) 203 Taxman 621 (Kar)]
3DIT vs Dun and Bradstreet Information Services India Pvt Ltd [(2012) 20 taxmann.695 (Mum)]
4Factset Research Systems Inc  317 ITR 169 (AAR), Elsevier Information Systems GmbH  106 taxmann.com 401 (Mum), Cadila Healthcare Ltd  77 taxmann.com 309 (Ahm), GVK Oil & Gas Ltd vs ADIT (ITA No 317 & 318/Hyd/2012)