With the advent of technology, the way business is being done has undergone a complete change. Even the academic side has not been left untouched by technology. Now books, periodicals, business data etc. are made available in electronic version. To access them, a user / consumer has to subscribe. Taxability of such access revenue has been a topic of debate especially when annual license to an online book is granted to the user.
Recently, the Authority for Advance Rulings (AAR) had an occasion1 to evaluate whether granting of access to compiled and collated information (i.e. online access to journals / books / database etc.) on pay as you use / subscription basis is taxable as royalty or as business income.
We, at BDO in India, have summarised the ruling of AAR and provided our comments on the impact of this decision.
Facts of the case
Taxpayer, a Netherlands company, is a leading provider of professional information and online workflow solutions in the Science, Medical Legal and Risk Information and Analytics and Business Sectors. Its products include electronic and print version of books, journals and online database solutions and covers health, life, physical and social sciences subject areas. The taxpayer publishes various books written by authors which are then put on the web portal in the e-format. In India, users can access its database by either of the following models:
1. Pay per view
Under this, customer can purchase a book chapter/journal article in an electronic format from the taxpayer’s website after making online payment for the same. After the payment is made, the customer can view, download and print the content for its personal, non-commercial use on a pre-condition that the customer will keep intact all copyright and other proprietary notices.
2. Subscription agreement (SA):
Under this, the taxpayer grants non-exclusive, non-transferable right to access and use subscribed products to the subscribers and authorised users. SA allows subscriber to access, search, browse, view, print, make electronic copies and store the contents of the subscribed products only for the purpose of contracted research work for itself and not for commercial use.
In essence, both the above models are similar as their content remains the same; the only difference being that in the pay per view model, the customers are permitted to view, print or download a particular book chapter / journal article only after making payment whereas in a SA model, the customers can view, print, download, etc., various books/journal, in their entirety, or journal articles/book chapters on the subscribed topics for which a lumpsum amount is paid by the subscriber.
Before the AAR, the taxpayer sought ruling on following questions:
- Whether the receipts from afore-stated business model is taxable as ‘royalty’ or as ‘business income’?
- If the answer to (a) is ‘business income’, in absence of taxpayer having Permanent Establishment (PE) in India, whether the receipts from Indian customers / subscribers is taxable under Article 7 of the DTAA?
- If the answer to (a) and (b) is in negative, whether the Indian customer / subscribers are required to withhold tax on the payment made to the taxpayer?
- The taxpayer contended that all rights, title and interest in and to the subscribed products remains with it.
- The customers / subscribers i.e., authorized users have not been given the exclusive right to reproduce or adapt the work or to distribute the contents of database to others.
- Under the SA, the subscribers i.e., authorized users can login to the database only from the pre-designated computers.
- In essence, the transactions are similar to purchase of a book, journal or an article in an electronic format. Purchasing of a book, journal or article in an electronic format does not amount to use of copyright and thus cannot be treated as ‘royalty’ as per Article 12 of the Dobule Tax Avoidance Agreement between India and Netherland (DTAA).
- At most, it amounts to use of copyrighted article.
- The taxpayer placed reliance on AAR ruling in case of Dun & Bradstreet Espana, S.A.2, ABC Ltd3 and Factset Research Systems Inc4.
- If receipts are to be taxed as ‘business income’, then such income would be taxable in India only if it carries out any business activity through a PE in India. In absence of PE in India, the said receipt should not be taxable in India.
Tax Officer’s contention
- The definition of ‘royalty’ under both the IT Act and DTAA is almost similar. However, in relation to consideration paid for industrial, commercial or scientific experience, the IT Act uses the word ‘imparting’ before the words ‘industrial, commercial or scientific knowledge, experience or skill’.
- The Tax Officer placed reliance on the Hon’ble Karnataka HC decision in case of Synopsis International Old Limited5 wherein it was held that the expression ‘in respect of’ used in Explanation 2 denotes the intention of Parliament to give a broader meaning and wider connotation that covered all the income from transfer of all or any of the rights in respect of a copyright.
- The taxpayer has intellectual property ownership over the contents in the Science Data Base and, hence the consideration received by the taxpayer by way of subscription fees is covered by the definition of ‘royalty’ in clause (i) of explanation 2 to section 9(i)(vi) IT Act.
- Information in the science database is made available to the subscriber amounts to sharing of scientific experience and is also covered by the words ‘payment of any kind received as a consideration….for information concerning industrial, commercial or scientific experience’ in the definition of royalty in Article 12(4) of DTAA.
Rejoinder by Taxpayer
In response to Revenue’s submission, the applicant submitted that:
- Nature of payments received is similar to a physical book / journal.
- When journal’s copies are stored either in physical or e-format or copies are taken for use personally for own business (by lawyers, CA, other professionals), no use or right to use is at all exploited.
- Taxpayer’s case is no different than Taxmann, AIR, ITR, etc.
- The taxpayer also relied on Mumbai Tax Tribunal’s decision in the case of American Chemical Society6, wherein under similar facts and circumstances the Tribunal held that subscription fee received from Indian subscribers does not amount to payment for information concerning commercial experience and hence cannot be treated as royalty under India-USA DTAA.
- The Tax Officer has nowhere pointed out how the information provided by the taxpayer in its database / portal is not publicly available.
1. AAR observed that the definition of royalty as per Article 12(4) of the DTAA has following 3 limbs:
i. Payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work;
ii. Payments of any kind received as consideration for the use of, or the right to use cinematograph films, any patent, trade-mark, design or model, plan, secret formula or process;
iii. Payments of any kind received as a consideration for the use of, or the right to use for information concerning industrial, commercial or scientific experience.
Only (i) and (iii) are pertinent to facts of the case in hand.
2. While evaluating limb (i), AAR observed that customer / subscriber can access / print the electronic copy of the content of the database and this amounts to use of copyright in a scientific work. Contention of Tax Officer is not tenable as printing copies of content by user for self-use is not infringement of copyright in scientific work. Accepting the taxpayer’s contention that the transaction is akin to buying books from a bookstore, it held that it is not covered by limb (i).
3. In evaluating limb (iii), AAR referred to OECD commentary for definition of scientific experience. It observed that it is the scientific experience of the recipient of the consideration and not that contained in the goods or services transferred by payee. In present case, the taxpayer is compiling and collating books, articles or journals relating to science but not transferring any scientific experience to the customer/subscriber. Hence, limb (iii) is also not applicable and thereby the receipts from Indian customers / subscribers is not taxable as royalty as per Article 12 of DTAA but is in the nature of business income.
4. Existence of PE is a fact specific exercise, and this can vary from year to year and the Tax Officer is best suited to carry out this exercise and also determine profit attributed to PE, if need be.
Apart from relying on quoted judicial pronouncements, the AAR also relied on the Mumbai Tribunal ruling in taxpayer’s own group company case7 wherein the Tribunal had held that the fees paid for accessing an online database should not be treated as royalty or fees for technical services but rather as business income. With now many lectures and lecture material available online upon payment of certain charges, the taxability of such payment has gained more importance. This Ruling will help the taxpayers who are providing access to online database. Further, with scope of Equalisation Levy (EL) widened, while this Ruling will help the taxpayer to contend that amount received from access given to database is not taxable in India, it could still be liable to EL. Hence, the taxpayer should also evaluate whether they are liable to pay EL in India or not.
1Elsevier BV, The Netherlands (AAR No 1481 of 2013)
2Dun & Bradstreet Espana, S.A. (272 ITR 99) (AAR)
3ABC Ltd (284 ITR 1) (AAR)
4Factset Research Systems Inc (317 ITR 169) (AAR)
5CIT vs Synopsis International Old Limited (2012) 28 taxmann.com 162 (Kar)
6American Chemical Society vs DCIT (106 taxmann.com 253)
7Elsevier Information Systems Gmbh vs DCIT (ITA No 1683/Mum/2015)