M/S. PLURALSIGHT LLC,UNITED STATES OF AMERICA vs. DCIT ASMT, CIRCLE-2(1), BENGALURU

This appeal at the instance of the assessee is directed against CIT(A)’s order dated 28.11.2023, passed under section 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’). The relevant Assessment Year is 2016-17.

Brief facts of the case are as follows:

Aggrieved by the assessment completed, assessee filed appeal before the First Appellate Authority. Assessee relied on the judgment of the Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd., Vs. CIT432 ITR 471 (SC) in support of its contention. However, the CIT(A) upheld the addition made by the AO and dismissed the appeal of the assessee vide impugned order dated 28.11.2022. As regards the case laws relied on by the assessee, the CIT(A) held that the facts of those cases are specific to those assessees and cannot be applied to the facts of the instant case.

Aggrieved by the order of the CIT(A), assessee has filed the present appeal before the Tribunal. Assessee has filed two sets of Paper Books, one enclosing the case laws relied on and the other enclosing therein the submissions made before the AO, CIT(A), sample copy of the master subscription agreement, etc. The learned AR has also filed a brief written submission essentially reiterating the submissions made before the Income Tax authorities.

The learned DR, on the other hand, supported the orders of the AO and the CIT(A).

We have heard the rival submissions and perused the material on record. In order to adjudicate the issue raised, it is necessary to understand the business profile of the assessee. Briefly, the business profile of the assessee is that it is incorporated under the laws of United States of America (‘USA’) and is a tax resident of USA. It is in the business of uploading online videos on its website and earns subscription revenue by facilitating viewing of such online videos by individuals, government enterprises, small businesses and enterprises globally. The assessee aggregates video content from content authors all around the world. Such videos are stored on its online content library which is hosted on servers located in the United States of America and also in other parts of the world other than India. The online videos are pre-recorded (i.e., not live) and are audio visual in nature. Using such videos, the assessee compiles different kinds of courses in areas such as manufacturing, software development, etc. The online videos/courses are segregated on the basis of variety of users from various fields. Online viewing facility of these courses/video content is provided to customers through the assessee's website or mobile application. The assessee sells subscription plans to customers in India and prices are agreed between the assessee and the customers. In this regard, sample Master Subscription Agreement (‘MSA’) which the assessee enters with subscribers/customers is enclosed at pages 97-108 of the Paper Book. Subsequent to entering into agreements and payment of subscription amount, the customers are provided with login information (login ID and password). After the customers log in on the website, the customers/subscribers can view all or any of the 5000+ online videos/courses stored in the content library for the duration of the subscription period, based on their choice and interest at subscription charges (currently Rs. 1,499 per month for standard plan – providing access to 2500+ courses and Rs. 2,299 per month for premium plan – providing access to 7,000+ courses) Along with the same, there are certain ancillary add-on features, such as short quizzes, exercises, discussion board etc. Prima facie, the online video content is very generic and routine in nature. The customers/subscribers can only view the videos and are not allowed to download, store, transmit or edit such videos. Further, the customers/subscribers do not get any right on the content or the infrastructure facilities. However, the customers are allowed to download certain ancillary course material such as exercise files, course slides, course index etc., but even such material cannot be shared, transferred, sold or exploited in any manner.

The AO had given three reasons to bring to tax the subscription amount received by assessee as “royalty”. The three reasons are as follows:

The provisions of India-USA DTAA have a more restrictive scope than the provisions of the Act (in view of section 90(2) of the Act), hence, we confine our adjudication of taxability of subscription fee under the India-USA DTAA. The Article 12(3) of India-USA DTAA defines the term “Royalties”. The same reads as under:

Now let us examine each of the reasonings given by the AO for bringing to tax subscription revenue as “royalty”. i) Whether the subscription revenue is towards use of, or right to use any copyright:

Based on the definition of ‘Royalty’ under the India-USA DTAA, it is important to understand the meaning of the term ‘copyright’. The term ‘copyright’ is not defined under the provisions of the Act. Therefore, the provisions of the Copyright Act, 1957 (‘Copyright Act’) has to be examined. As per section 14 of the Copyright Act, ‘copyright’ means the exclusive right to do any of the acts specified therein, viz., to reproduce the work, to issue copies of the work to public, to make any translation or adaptation of the work, etc. Unless any of the exclusive rights or a combination thereof as stated under section 14 of the Copyright Act are transferred by the copyright holder, it cannot be said that the use or right to use the copyright has been granted. Thus, payment made for acquiring the right to use any copyrighted product, wherein the payer does not get any of the ‘exclusive right’ as stated in section 14 of the Copyright Act, does not amount to payment made for the use or right to use the ‘copyright’ in the product and therefore, shall not be covered within the scope of ‘royalty’. The aforesaid principles have been upheld by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (supra). The Hon’ble Supreme Court has held that the amount paid by resident Indian end- user/distributors to non-resident computer software manufacturers/suppliers is not payment of royalty for use of copyright since the end-use/distributor does not get any of the rights under section 14 of the Copyright Act and does not get the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc., which is at the heart of the definition of ‘copyright’ under the Copyright Act. While holding so, the Apex Court has upheld the conclusions derived from the judgements of the Hon’ble Delhi High Court on the said issue as under:

Consequently, the view contained in the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft Ltd. (supra), ZTE Corporation (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India's DTAAs are based.” (emphasis supplied)

The assessee in the instant case also does not transfer any copyright or the right to use any copyright of any nature to any of the subscribers. The relevant clauses of the sample MSA which the assessee enters with the subscribers read as under:

GRANT OF LICENSE a. License Grant. Subject to the terms and conditions set forth in this Agreement, Pluralsight grants Customer a worldwide, non-exclusive, non-transferable License (the “License”) to use the Site. The License is for use by a specific number of Customer’s Business Users to whom Customer has assigned a valid business subscription (the “Business Subscriptions”) to access the Site by way of the License. The License and each Business Subscriptions are to be used solely internal purposes of Customer, for which the applicable Business License Fees have been paid. The number of Business Subscription granted hereunder will be set forth in a separate sales order form (each, a “Sales Order”) to be signed by Customer. Customer acknowledges and agrees that any breach of the terms and conditions of this Agreement by any of its Business Users will be deemed a breach by Customer. . . . .

PROPRIETARY MATERIALS a. Use of Materials. The Site contains copyrighted materials, trademarks, proprietary and confidential information, and intellectual property of Pluralsight and licensors of Pluralsight (collectively, “Proprietary Materials”), including, but not limited to, source code, video, text, software, photos, graphics, image, music, and sound. Customer agrees, for itself and for each business User, not to modify, publish, perform, make available to the public, transmit, participate in the transfer of sale of , create derivative works or adaptations of , or in any way exploit, in whole or in part, any Proprietary Materials. Proprietary Materials may only be accessed through the Site, and not from any other site or means. The License granted by this Agreement is a right of access through the Site only, and does not grant Customer or its Business Users any right to download or store any Proprietary Materials in any medium, other than that downloadable content that is provided for certain training courses and specifically identified as available for download, including exercise files, course slides, and sample code (“Authorized Downloadable Materials”). Authorized Downloadable Materials are held by Customer or its business Users pursuant to a limited right only, and are subject to all restrictions described in this Agreement, including the prohibition on further transfer, sale , creation of derivative works, or exploitation in any manner. Customer shall not, directly or indirectly: (a) sublicense , resell, rent, lease, distribute or otherwise transfer rights or usage in the Proprietary Material ; (b) provide the Proprietary Material on a timesharing, service bureau, service provider or other similar basis ; or (c) remove or alter any copyright, trademark or proprietary notice in the Proprietary Material.

From a perusal of the MSA, we find that the subscribers only get a non- exclusive, non-transferable license to view the videos on the website. Neither any copyright in the software/database, nor any copyright in the videos is granted to the subscribers. The assessee reserves all intellectual property rights in its Proprietary Material, which includes the source code, videos, text, software, intellectual property of the assessee etc. The subscribers are not even allowed to download, store, transmit or edit such videos. Further, while the subscribers are allowed to download certain ancillary course material (Authorized Downloadable Materials) such as exercise files, course slides etc., are subject to all the restrictions mentioned in the agreement and even such material cannot be shared, transferred, sold or exploited in any manner. In essence, in view of the restrictions imposed under the MSA, the subscribers are not allowed:

Therefore, by subscribing to the assessee’s database, the subscribers merely get ‘access’ to the database to view the videos - which are akin to ‘copyrighted articles’. The subscribers do not receive any right to use the copyright in the videos/database at any point in time. Thus, in view of the principle laid down by the Hon’ble Supreme Court in the case of Engineering Analysis (supra), the subscription fees received by the assessee does not amount to payment for the ‘use of or right to use copyright’ but rather payments for access to copyrighted products, i.e., the videos on the assessee’s database. The Mumbai Bench of the Tribunal in the case of Elsevier Information Systems GmbH v. DCIT: wherein on similar facts, has held as under:

In view of the above, we hold that the subscription fees received by the assessee does not amount to ‘royalty’ for use of or right to use of any ‘copyright’. ii) The subscription revenue received by the assessee whether it is for any information concerning industrial, commercial or scientific experience:

In the impugned assessment order, while alleging that the subscription fees received by the assessee is for the use of copyright, the AO has also made a remark that there is a transfer of copyright to the extent of having access to the database and such access to videos would also amount to access to information concerning industrial, commercial or scientific experience (refer page 17 of the assessment order). The assessee is in the business of aggregating videos, creating a database on its website and earning subscription revenue by granting access to such database. Thus, the skill and experience of the assessee lies in creating and evolving the database of videos on the website, maintaining the website, marketing for the subscription plans etc. By granting access to the videos forming part of the database on its website, the assessee neither shares its own experience, techniques, methodology or strategies employed in running its business, nor imparts any information in relation thereto with the subscribers. Further, even the subscribers make the payment to the assessee merely for viewing the videos on its website. The subscribers do not make the payment for availing the knowledge of the assessee's experience regarding its business of creating/maintaining the database of videos. Therefore, the subscription fees received by the assessee from various subscribers does not constitute payment for “information concerning industrial, commercial or scientific experience”. In this regard, we rely on Mumbai Bench’s Tribunal order in the case of American Chemical Society vs. DCIT(IT) reported in (2019) 106 taxmann.com 253 (Mum ITAT), wherein on similar facts, the Mumbai Bench of the Tribunal held that the customers do not make payments for availing the knowledge of assessee's experience of creating/maintaining database; on the contrary, what they pay for is to access the information that such database encompasses. Therefore, it was concluded by the Mumbai Bench of the Tribunal that the payment does not constitute payment made for information concerning industrial, commercial or scientific experience. Relevant finding of the Tribunal reads as follows:

On similar facts as that of the assessee, the Hon’ble AAR in the case of Factset Research Systems Inc., reported in 317 ITR 169 (AAR) had held as under in Para 11 of the ruling:

In view of the above, since the assessee receives subscription fees merely to grant access to the database of videos and not for imparting any information concerning the assessee’s own knowledge or experience of creating/maintaining the database, the said subscription fees cannot be said to be for imparting of ‘any information concerning industrial, commercial or scientific experience of the Appellant’. iii) The subscription revenue received by the assessee whether it is for granting any right to use of equipment:

In the impugned assessment order, the AO also made a remark that the subscription fee could also be for the use of, or right to use, any industrial, commercial or scientific equipment as the server containing the database is used by the customers as “a point of interface” (refer page 13 of the assessment order). The consideration received by the assessee is merely for granting access to the database of videos and not for the use or right to use any equipment whatsoever. The subscribers have no access, right or control of any manner whatsoever over the server on which the assessee maintains the database. Therefore, the subscription fee received by the assessee cannot, in any manner, be termed as consideration for use or right to use any industrial, commercial or scientific equipment. In the case of Factset Research Systems Inc. (supra), the Revenue raised an identical contention that the server is used by the customers as ‘a point of interface’. However, the said contention of Revenue was rejected by the Hon’ble AAR. The finding of the Hon’ble AAR in this regard is as under:

Similarly, in the case of American Chemical Society vs. DCIT(IT) (supra), the Hon’ble Mumbai Bench of the Tribunal held as under:

In view of the above rulings, we hold that the payment made for viewing the videos on the database cannot be termed as consideration for use or right to use any industrial, commercial or scientific equipment.

In view of the aforesaid reasoning and judicial pronouncements, we hold that the subscription revenue received by the assessee is not taxable as ‘Royalty’ in the hands of the assessee under Article 12 of the India-USA DTAA read with the provisions of the Act. Accordingly, the impugned addition made by the AO in this regard, as upheld by the CIT(A) is hereby deleted. It is ordered accordingly.

In the result, appeal filed by the assessee is allowed.