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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 12/01/2023, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 ("the Act"), pursuant to the directions dated 28/12/2022 issued by the learned Dispute Resolution Panel–1, Mumbai–2, [“learned DRP”], under section 144C(5) of the Act for the assessment year 2020–21.
In its appeal, the assessee has raised the following grounds:–
Ämerican Chemical Society ITA no.735/Mum./2023 “Appeal under section 253(1)(d) of the Income-tax Act, 1961 (hereinafter referred to as the "Act"), against the order dated 12 January 2023 (received on 19 January 2023), passed by the Deputy Commissioner of Income Tax, International Taxation Circle 1(1)(1), Mumbai ("Ld. AO") under section 143(3) read with section 144C(13) of the Act.
That on the facts and circumstances of the case and in law, the Ld. AO has erred in assessing the total income of the Appellant under section 143(3) read with section 144C(13) of the Act at INR 2,14,76,13,270 as against Nil returned income.
2. That on the facts and circumstances of the case and in law, the Ld. AO / Dispute Resolution Panel ("DRP") have erred in holding that the receipts from Indian customers amounting to INR 2,14,76,13,270 are chargeable to tax as royalty in terms of Article 12(3) of India-US Double Tax Avoidance Agreement ("DTAA") and under section 9(1)(vi) of the Act. 2.1 That on the facts and in the circumstances of the case and in law, the Ld. AO/ DRP have erred in holding that the subscription charges received under Chemical Abstract Service (CAS) division and Publications (PUBS) division would be chargeable to tax in India under India-US DTAA being received for use or right to use of copyright in artistic, literary or scientific work and / or for use of information concerning industrial, commercial or scientific experience and / or for use of industrial, commercial or scientific equipment. 2.2 That on the facts and circumstances of the case and in law, the Ld. AO/ DRP have erred in holding that the subscription charges received under CAS and PUBS divisions would be chargeable to tax in India under India-US DTAA being received for use of ACS databases/software. 2.3 That on the facts and circumstances of the case and in law, the Ld. AO/DRP have erred in completely ignoring the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal No. 8733-8734 of 2018) while holding that the receipts of the Appellant be treated as being received for the use or right to use copyright in a literary or scientific work within the meaning of royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of India-US DTAA. 2.4 That on the facts and circumstances of the case and in law, the Ld. AO/DRP have erred in not following the decision passed by the Hon'ble Mumbai Bench of the Income-tax Appellate Tribunal ("ITAT") in Appellant's own case for immediately preceding assessment years i.e. AY 2014-15 to 2019-20, wherein on similar facts and circumstances, the Hon'ble ITAT held that the revenue from CAS and PUBS division cannot be taxed as royalty under section 9(1)(vi) of the Act as well as Article 12(3) of India-US DTAA.
3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest of INR 21,40,784 under section 234A of the Act, while the return of income was furnished by the appellant within the due date prescribed under section 139(1) of the Act.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest of INR 7,27,86,656 under section 2348 of the Act.” Page | 2
Ämerican Chemical Society ITA no.735/Mum./2023
Ground no.1, raised in assessee’s appeal being general in nature, hence, no separate adjudication is required.
The issue arising in ground no.2, raised in assessee’s appeal, is with regard to the taxability of subscription charges received by the assessee as “Royalty” under the provisions of Article–12(3) of India–USA Double Taxation Avoidance Agreement (“DTAA”) and under section 9(1)(vi) of the Act.
The brief facts of the case pertaining to this issue are: The assessee is a scientific society based in the United States of America that supports scientific enquiry in the field of chemistry. The assessee is the world’s largest scientific society by membership. For the year under consideration, the assessee filed its return of income on 02/11/2020 declaring a total income of Rs. Nil. During the year, the assessee received payment for providing the following products/services from outside India to Indian customers:-
Fee for providing access (by 1. subscription) to online chemistry Rs.51,54,87,392 databases (CAS division) Subscription revenue from sale 2. Rs.1,63,21,25,879 of online journals (PUBS division) Subscription revenue from 3. Rs. 52,05,699 membership of M&SA division 4. Advertising revenues Rs.16,14,076
During the assessment proceedings, the assessee submitted that none of these receipts qualify as royalty or fee for included services under the India– USA DTAA. During the course of assessment proceedings, it was found that the Page | 3
Ämerican Chemical Society ITA no.735/Mum./2023 return of income of the assessee for the assessment years 2014-15 to 2019- 20 were also scrutinized and in these years, the Assessing Officer has treated all the above revenues of the assessee except membership revenue and advertisement revenue as its income from Royalty taxable @15% under the beneficial provisions of India USA DTAA. Further, during the course of assessment proceedings, the assessee submitted that its business model has remained the same and streams of revenue are also the same in comparison to previous years, and that no other income was earned by the assessee from India. The Assessing Officer, vide draft assessment order dated 21/03/2022, after noting that a similar issue has been decided in favour of the assessee in assessment years 2014-15 to 2017-18 by the Co–ordinate Bench of the Tribunal, followed the approach adopted in earlier years and taxed subscription revenue earned by the assessee as “Royalty” income on the basis that the Department has gone in further appeal before the Hon’ble High Court in assessment years 2014-15, 2015-16 and 2016-17.
7. Being aggrieved, the assessee filed detailed objections before the learned DRP. Vide Directions dated 28/12/2022, issued under section 144C(5) of the Act, the learned DRP, following its directions rendered in assessee’s own case for the assessment year 2019-20, rejected the objections filed by the assessee. In conformity, the Assessing Officer passed the impugned final assessment order dated 12/01/2023. Being aggrieved, the assessee is in appeal before us.
8. During the course of hearing, the learned Authorised Representative (“learned A.R.”) submitted that this issue has been decided in favour of the Page | 4
Ämerican Chemical Society ITA no.735/Mum./2023 assessee by the decision of the Co–ordinate Bench of the Tribunal in assessee’s own case for preceding assessment years. The learned A.R. further submitted that even lower authorities have accepted that facts for the year under consideration are similar to the facts of the preceding assessment years, wherein this issue has been decided in favour of the assessee.
9. On the other hand, the learned Departmental Representative (“learned D.R.”) vehemently relied upon the order of the authorities below.
We have considered the rival submissions and perused the material available on record. We find that the Co–ordinate Bench of the Tribunal in assessee’s own case in American Chemical Society v/s DCIT, Mum./2017, for the assessment year 2014-15, vide order dated 30/04/2019, held that subscription revenue received by the assessee in Chemical Extract Service and Publication division does not qualify as “Royalty” in terms of section 9(1)(vi) of the Act as well as Article–12(3) of the India–USA DTAA. The relevant findings of the Co–ordinate Bench of the Tribunal are as under:–
“7. We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. Notably, the controversy before us primarily revolves around the characterization of the income earned by the assessee from the Indian subscribers. The income-tax authorities have invoked section 9(1)(vi) of the Act and/or Article 12(3) of the India-USA Treaty in order to say that the receipts are in the nature of royalty, and therefore the same is taxable in India. On the contrary, as per the assessee, the impugned receipts are in the nature of business profits, and in the absence of any PE in India, the same are not taxable in India. In the earlier part of this order, we have noted in sufficient detail, the manner in which the assessee earns the CAS fee from Indian subscribers, and the same is not being repeated for the sake of brevity. "Factually speaking, it is evident that the assessee merely accumulates and organizes information already available in public domain / publicly disclosed information, and organizes the same at one place, thereby creating a database which is accessed by its customers against payment of subscription fee termed as CAS fee. Thus, prima facie, there is no copyright or intellectual property lying with the assessee itself in relation to such information or the contents of the database. Thus, there cannot be a case that the assessee company has transacted in the copyrights or intellectual property rights of the contents of the database of information which is merely collated and collected by it. It Page | 5
Ämerican Chemical Society ITA no.735/Mum./2023 is abundantly clear from a perusal of some of the sample agreements with customers (placed in the Paper book at pages 15 to 42) that what the customers get is only the right to search, view and display information (whether online or by taking a print) and reproducing or exploiting the same in any manner; and its use for purposes other than personal use is strictly prohibited. Further, in para 7.12 of the assessment order, the Assessing Officer has stated that the assessee has a wealth of industrial, commercial and scientific experience collected, developed and systemized over a period of time. Further, in para 7.13 of the assessment order, the Assessing Officer has also referred to paragraph 11 of OECD commentary on Article 12 to hold that the payment in question is to be understood as 'royalty. As per the Assessing Officer, the technical, commercial or scientific information provided by the assessee to the Indian customers through SciFinder arises from its previous experience which gives economic benefit to the customers. The Assessing Officer also points out that ACS Network and SciFinder serve as a platform as well as a tool/gateway for access to such information. All these have been referred by the Assessing Officer to arrive at an inference that the CAS fee is in the nature of 'royalty'; and, for that purpose, the Assessing Officer has referred to para 11 of the OECD commentary on Article 12. In fact, the OECD commentary which has been referred to by the Assessing Officer itself provides an answer and belies the stand taken by the Assessing Officer. The OECD commentary referred in para 7.13 of the assessment order brings out that the payments which are to be understood as 'royalty' in the context of information concerning industrial, commercial or scientific experience ought to be in relation to information which is undivulged and/or arises from previous experience. In other words, in order to be understood as 'royalty', the payment must be for information which is exclusively possessed or secret under the ownership of the grantor of such information. In our considered opinion, the fact- situation in the instant case does not comply with the aforesaid requirement so as to be treated as a payment for 'royalty'.
As discussed earlier, in the instant case, the assessee merely identifies, aggregates, and organizes publicly disclosed chemistry related scientific information or publishes research work submitted by scientists worldwide. Thus, this information is clearly not undivulged; rather, it is an Information which is available in public domain, as is also evident from the factual position noted by the Assessing Officer himself in the assessment order.Further, chemistry and related scientific information accumulated by the assessee in the form of a database is the experience of various scientists, researchers and various other persons and not that of the assessee. Thus, what the assessee collates is experience of others and provides access thereto. The database does not provide any information arising from assessee's own previous experience or knowledge of the subject. The assessee's experience lies in the creation and maintaining the database, which cannot be labelled as industrial or commercial or scientific in any way in the context of the receipts in question. In fact, it is nobody's plea that such experience is shared by the assessee with the Indian customers. The Indian customers do not make payments for availing the knowledge of assessee's experience of creating/maintaining database; what they pay for is access to information that such database encompasses. 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.
In this context, the learned Counsel pointed out that similar situation has been considered by the AAR ruling in the case of Dun and Bradstreet Espana S.A.(supra), which has been upheld by the Hon'ble Bombay High Court in the case of DIT vs. Dun and Bradstreet information Services Indio (P) Ltd. (supra). In this case, the applicant, a non-resident company of Spain was engaged in the business of compilation and selling Business Information Reports (BIR) in their local markets and to other associate companies worldwide. On the issue of whether the payment made for the purchase of BIRS would be in the nature of Royalty, the AAR opined that the applicant has rightly equated the transaction of sale of Business Information Reports in electronic form to a sale of book, which does not involve any transfer of intellectual property and held that Page | 6
Ämerican Chemical Society ITA no.735/Mum./2023 the payment to non-resident company for downloading BIRS is not in the nature of Royalty or fee for technical services. The AAR held that the purchase of standardized reports publicly available on the internet upon payment of subscription charges is akin to payment for a copyrighted article and accordingly does not constitute Royalty. Relevant extract of the AAR ruling is as follows: "1. This application...... DB US is the leading seller of BIRS enabling business-to-business commerce for about 160 years. The operating subsidiaries and associates of D&B US in each country are engaged in compilation and selling BIRS in their local markets and to other associate companies worldwide as their core business. Each associate company of D&B compiles the information in respect of companies functioning in its country in the standardized D&B format which is electronically uploaded on the server of the associates companies and is copied (mirrored) on the Central data base server situated in US. DBIS is also engaged in a similar business of compilation and selling BIRs in respect of business entities, either they are incorporated in their respective countries or doing business in their country. The US server farm is owned and operated by D&B US and it contains mirror servers of all the D&B associate companies. The modus operandi of the business of DBIS is that whenever an Indian customer places an order for a BIR in respect of a company situated in Spain, DBIS would access the master server of D&B US. Thereupon, the master server would identify DBIS and would allow access to connect to the mirror server of the applicant which is situated in US server farm. It was then DBIS would request the applicant for a BIR of the company for which the Indian customer has placed an order. On locating the required BIR, DBIS would download, print and deliver a copy thereof to the customer. DBIS is under an obligation not to take additional copies or reproduce the BIR in any manner or sell it to any customer other than Indian customer on whose requisition the BIR is ordered because the BIR is copyright protected with the copy right vested in the applicant who prepares the BIR. There is further obligation on the Indian customer to use the BIR for its own purpose, the copyright in the BIR would neither be licensed nor assigned to either the DBIS or the Indian customer ………….
It will be …………. The instant case it is not a case of paying consideration for the use of or right to use any copyright of literary, artistic or scientific work or any patent trade mark or for information of commercial experience. The Commissioner sought to bring the payments under royalty/fees for technical service for the reason that the BIRS are copyright protected and end-users are required to use for their own purpose and the analysis of raw data provided in the BIRS would be similar to that of providing a technical or consultancy services. We have already mentioned above that a BIR is a standardized product of D&B, 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. Further, banking relationship and accountants, information like whether it is a patent company or authority concerned, has any branches etc. It also gives a rating of the company. The informations that are provided in a BIR are said to be publicly available; they are collected and complied by D&B associates. A BIR is accessible by any subscriber on payment of requisite price with regular internet access for which no particular software or hardware is required. The applicant states that access to data base of the applicant is available to public at large at a price as in case of buying a book and it is not a pre-requisite, that BIR must be downloaded by DBIS only and in fact some clients, such as Expert credit guarantee corporation, in fact, access the server themselves to download BIR. The applicant does not have any server in India for the use of DBIS. Indeed the applicant has specifically averred that the copyright in the BIR would neither be licensed nor assigned to either the DBIS or the Indian customer. From these aspects it is clear that the aforementioned ruling of the Authority is distinguishable on facts. If a group of companies collects information about the historical places and places of interest for tourists in each country and all informations are maintained on a central computer which is accessible to each constituent of the Group in each country, can a supply of such information electronically on payment of price be treated as royalty or fee for technical services? We think not. (underlined for emphasis by us) 10. In this context, we also think it apposite to refer to the judgment rendered by the Hon'ble Madhya Pradesh High Court in the case of CIT vs. HEG Limited [2003] 263 ITR 230 (MP). In the aforesaid case, the assessee paid certain amount to a firm of USA for purchase of some information. The Assessing Officer held that the said transaction Page | 7
Ämerican Chemical Society ITA no.735/Mum./2023 involved imparting of information concerning technical, industrial, commercial or scientific knowledge, experience or skill, and, therefore, the payment was royalty for purchase of data of confidential nature and the assessee was liable to deduct TDS thereon. The matter travelled to the High Court and it held that purchase of any and every type of commercial information cannot earn the status of royalty. To have the status of royalty, the information transacted should have some special features, which is hitherto not available in public domain. The relevant extract of the said ruling is as follows: "20...... That apart we have already indicated that every information would not have in the status of royalty. There are various kinds of categories of information. Solely because an entry of the commercial nature would not make it a royalty. That cannot be exclusive base or foundation. Some sort of expertise or skill is required. The aforesaid factor would be the requite one. We are not inclined to accept the bio of M. Arye that every information if it concerns the Industres commercial venture would be a royalty. That would tamount to state the low quite broadly That does not seem to be the purpose of the statute or that of the treaty." (Emphasis supplied) 11. With respect to the subscription fee for the CAS division being considered as Royalty for "use" of or "right to use" of a copyright, a reference to Copyright Act, 1957 is also relevant. A person can be said to have acquired a copyright or the right to use the copyright in a computer software or database (as described by the Assessing Officer), where he is authorized to do all or any of the acts as per the definition of the term "copyright" under Section 14 of the Copyright Act, 1957. However, mere access to that work or permission to use the work cannot imply that the payer is paying for use or right to use the copyright. In other words, when no copyright is acquired by the payer, question of using it or getting a right to use it does not arise.
12. In the present context, we may also examine the issue from another angle as follows. The transfer of a copyrighted right means that the recipient has a right to commercially exploit the database/software, eg. reproduce, duplicate or sub-license the same; such payments may be classified as royalty, but factually speaking in the present no such rights in database or search tools (SciFinder or STN) are acquired by the customers, as is evident from the terms of the sample agreement of CAS customers in our considered view, transfer of any right in a copyrighted article is analogous to the rights acquired by the purchaser of a book. In the case of a book, the publisher of the book grants the purchaser certain rights with respect to the use of the content of the book, which is copyrighted, but the purchaser of the book does not acquire the right to exploit the underlying copyright. When the purchaser reads the book, he only enjoys its contents. Similarly, the user of the copyrighted software does not receive the right to exploit the copyright in the software; he only enjoys the product/benefits of the product in the normal course of his business. Similarly, in the instant case, customers of the assessee only enjoy the benefits of using SciFinder and STN and do not acquire the right to exploit any copyright in these software. The difference between a copyright and a copyrighted article in context of software has been brought out very clearly by the Hon'ble Supreme Court of India in the case of Tata Consultancy Services vs. State of Andhra Pradesh (supra).
In view of the aforesaid discussion, in our considered view, the income earned by the assessee from the Indian Customers with respect to the subscription fees for CAS cannot be taxed as royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA. Thus, assessee succeeds on this issue.
14. We shall now advert to another issue, which pertains to whether income earned by the assessee from the Indian Customers with respect to the subscription fees for PUBS division be taxed as royalty in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA.
Ämerican Chemical Society ITA no.735/Mum./2023
15. Before us, the Ld. Senior Counsel pointed out that the characteristics of the PUBS divisions is similar to CAS division, which has been dealt at length by us in the foregoing paragraphs. The Learned Senior Counsel submitted that the PUBS division of the assessee reviews and publishes research work submitted by scientists worldwide, organizes the same into research journals/ e-books and engages in subscription sales of internet and print copies of such research journals. The assessee grants online/ web based access to e-journals, e-books, chapters, articles, proceedings, etc., stored on the server, in consideration for an annual fee /subscription charges. Such e-journals/ e- books can be searched by a subscriber by using relevant keywords on PUBS website after logging in by using their log-in credentials. Customers are merely granted access to search and view the e journals and obtain standardized reports/research articles available therein with no right to use the copyright in the e-journals/ articles. The agreements (as filed in the Paper book at page 43 to 71) entered by the assessee with the customers provide that copyright in the e-books, e-journals etc., remain with the assessee and the customers do not have any right of ownership on the same. The access to e-journals etc. is given only for limited users and the same is restricted to specified authorized sites /users per customer through the IP address of customers. The web access journals can only be accessed by the customers/authorized users through a secure network as prescribed in the agreements.
On the other hand, the Ld. Departmental Representative for the Revenue has merely reiterated the stand of the lower authorities on the PUBS division similar to stand with respect to taxability of the CAS fee. 17. We have heard the rival submissions and perused the relevant material on record including the order of the lower authorities on the issue in dispute. We find that issue with respect to the PUBS division coincides with the issues on the CAS fee. The journal provided by the PUBS division do not provide any information arising from assessee's previous experience. The assessee's experience lies in the creation of maintaining such information online. By granting access to the journals, the assessee neither shares its experiences, techniques or methodology employed in evolving databases with the users, nor imparts any information relating to them. As is clearly evident from the sample agreements, all that the customers get is the right to search, view and display the articles (whether online or by taking a print) and reproducing or exploiting the same in any manner other than for personal use is strictly prohibited. Further, the customers do not get any rights to the journal or articles therein. They can only view the article in the journal that they have subscribed to and cannot amend or replicate or reproduce the journal. Thus, the customers are only able to access journal/articles for personal use of the information. No 'use or right to use' in any copyright or any other intellectual property of any kind is provided by the assessee to its customers. Furthermore, the information resides on servers outside India, to which the customers have no right or access, nor do they possess control or dominion over the servers in any way. Therefore, the question of such payments qualifying as consideration for use or right to use any equipment, whether industrial, commercial or scientific, does not arise. 18. To put a comparison, if someone purchases a book, then the consideration paid is not for the use of the copyright in the book/article. The purchaser of a book does not acquire the right to make multiple copies for re-sale or to make derivative works of the book, i.e., the purchaser of a book does not obtain the copyright in the book. Similarly, the purchaser of the assessee's journals, articles or database access does not have the right to make copies for re-sale and does not have the right to make derivative works. In short, the purchaser has not acquired the copyright of the article or of the database. What the buyer gets is a copyrighted product, and accordingly the consideration paid is not royalty, but for purchase of a product. In the instant case too, what is acquired by the customer is a copyrighted article, copyrights of which continue to lie with assessee for all purposes. It is a well settled law that copyrighted article is different from a copyright, and that consideration for the former, i.e. a copyrighted article does not qualify as royalties. Page | 9
Ämerican Chemical Society ITA no.735/Mum./2023
Thus, the principles noted by us in the earlier part of this order in the context of the income earned by way of CAS fee are squarely applicable to the subscription revenue received from customers of PUBS division for sale of journal also, and accordingly PUBS fee also does not qualify as 'Royalty' in terms of section 9(1)(vi) of the Act as well as Article 12(3) of the India-USA DTAA.”
We further find that the Co–ordinate Bench of the Tribunal in assessee’s own case in American Chemical Society v/s DCIT, ITA no.5928/Mum./2018, for the assessment year 2015-16, vide order dated 21/08/2019, rendered similar findings following the aforesaid decision in the immediately preceding assessment year. Similarly was held in assessment years 2016-17, 2017-18, 2018-19, and 2019-20 by the Co–ordinate Bench of the Tribunal in assessee’s own case in ITA no.6952/Mum./2019, ITA no.1030/Mum./2021, ITA no.1521/Mum./2022 and ITA no.1520/Mum./2022 vide orders dated 13/12/2019, 26/10/2021, and 29/09/2022, respectively.
The learned D.R. could not show us any reason to deviate from the aforesaid decisions rendered in assessee’s own case and no change in facts and law was alleged in the relevant assessment year. The issue arising in the present appeal is recurring in nature and has been decided by the Co–ordinate Bench of the Tribunal in preceding assessment years. Thus, respectfully following the orders passed by the Co–ordinate Bench of the Tribunal in assessee’s own case cited supra, we uphold the plea of the assessee and delete the impugned addition in respect of the subscription fee received by the assessee under Chemical Abstract Service and Publications division. As a result, ground no.2, raised by the assessee is allowed.
Ämerican Chemical Society ITA no.735/Mum./2023
13. Insofar as the levy of interest under section 234A of the Act is concerned, we deem it appropriate to remand this issue to the file of the Assessing Officer for de novo adjudication after the necessary examination of the fact whether the return of income was filed by the assessee within the prescribed time under the Act. Accordingly, ground no.3, raised in assessee’s appeal is allowed for statistical purposes.
Insofar as ground no.4, raised in assessee’s appeal is concerned, the same relates to the charging of interest under section 234B of the Act, which is consequential in nature. Therefore, ground no.4 is allowed for statistical purposes.
In the result, the appeal by the assessee is allowed for statistical purposes. Order pronounced in the open Court on 31/03/2023