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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI PRAMOD KUMAR, VICE- & SHRI VIKAS AWASTHY
आदेश/ ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the assessment order dated 24/09/2019 passed under section 143(3) r.w.s. 144C (13) of the Income Tax Act, 1961 (herein after referred to as ‘the Act’) for the assessment year 2016-17.
The assessee has assailed the Assessment Order on following grounds:
“The appellant company objects to the order dated 24 September 2019 passed by the Deputy Commissioner of Income Tax (International Taxation), 2(2)(1), Mumbai CAO') under section 143(3) read with section 144C(13) of the Income Tax Act, 1961 (‘the Act') on the following grounds: 1. The learned AO erred in holding that an amount of Rs. 14,86,39,250 received by the appellant is chargeable to tax in India.
2. Subscription fees considered as fees for technical services The learned AO erred in holding that the subscription fees of Rs. 14,86,39,250 received by the appellant are in the nature of "fees for technical services" CRTS') as defined under section 9(l)(vii) of the Act and also under Article 12 of the India-Germany Tax Treaty.
3. Subscription fees considered as Royalty The learned AO erred in holding that the subscription fees of Rs. 14,86,39,250 received by the appellant are also in the nature of "Royalty" as defined under section 9(l)(vi) of the Act and also under Article 12 of the India-Germany Tax Treaty.
The learned AO/ DRP erred in holding that the subscription fees received by the appellant are in the nature of FTS as well as royalty. The appellant submits that the subscription fees received by the appellant are not subject to tax in India. 5. Without prejudice to the above, the appellant submits that the subscription payments could either fall under the definition of FTS or fall under the definition of royalty and not both. 6. The learned AO/ DRP erred in not considering the submissions filed by the appellant and also the following decisions relied upon by the appellant: • Decision of Mumbai Tribunal in assessee's own case for AY 2011-12, AY 2013-14, AY 2014-15 and AY 2015-16; • DIT v. Dun & Bradstreet Information Services India (P.) Ltd. [2011] 338 ITR 95 (Bombay); • M/s Dun & Bradstreet Information Services India Pvt Ltd v. ADIT 2010-TH-59-ITAT-MUM-INTL (Mum Trib); • Dun & Bradstreet Espana, S.A., In re [2005J272 ITR 99 (AAR); • Factset Research Systems Inc., In re [2009] 317 ITR 169 (AAR); • GVK Oil & Gas Ltd v. ADIT [2016] 68 taxmann.com 134 (Hyderabad ITAT); • ITO vs Cadila Healthcare Ltd [(2017) 77 taxmann.com 309 (Ahmedabad ITAT)]; • DCIT vs Welspun Corporation Limited [(IT£ No 48/Rjt/2015)(Ahmedabad ITAT)]; • ITO vs Me Kinsey Knowledge Centre India Pvt Ltd (2017) (Delhi ITAT); • Kitara Capital Private Limited v ITO (ITA no 130/ Mum/ 2014) (Mumbai Tribunal); • Sulphur Mills Ltd vs. Addl. CIT [(2019) ITA 5349/Mum/ 2016 7. Surcharge and education cess Without prejudice to the above, the learned AO erred in levying surcharge of Rs. 7,43,196 and education cess of Rs. 4,68,214 and failed to appreciate that the treaty rate of 10% as per Article 12 of the India-Germany tax treaty is inclusive of surcharge and education cess.
8. Interest under section 234B of the Act The learned AO erred in levying interest under section 234B of the Act at Rs. 67,51,626.
9. Penalty proceedings under section 271(l)(c) of the Act The learned AO erred in holding that the appellant has concealed the particulars of his income and also erred in initiating penalty proceedings under section 271(l)(c) of the Act.
10. General 10.1 Each one of the above grounds of appeal
is without prejudice to one another, 10.2 The appellant craves leave to add to, alter or withdraw all or any of the grounds of appeal.”
3. The brief facts of the case as emanating from records are: The assessee /appellant filed its return of income for the impugned Assessment Year declaring NIL income. The appellant is a tax resident of Germany and a 100% subsidiary of Reed Elsevier Deutschland GmbH. The assessee is engaged in providing access to proprietary data bases namely - REAXYS & EMBASE to its client in India pursuant to subscription agreement. Both the data base are scientific data base rendering unique search and research. The assessee has earned subscription fee of Rs.14,86,39,251/- for providing access to the database to Indian clients during the period relevant to assessment year under appeal. The contention of the assessee is that since the assessee is not having any Permanent Establishment (PE) in India, the receipts from subscription are not taxable in India as per Article -12 of India Germany DTAA. The Assessing Officer while passing the draft assessment order held that the subscription fee receipts are in the nature of Royalty/Fee for Technical Services (FTS) and hence, taxable in India under section 9 of the Act read with Article 12 of India-Germany DTAA. Consequently, the Assessing Officer made addition of the aforesaid amount as Royalty/FTS. Against the draft assessment order dated 08/12/2018, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP rejected the objections of the assessee in toto. The assessing Officer passed the impugned assessment order in line with the directions of DRP making addition of Rs.14,86,39,251/- on account of Royalty/FTS taxable in India.
4. Shri Ketan Ved appearing on behalf of the assessee submitted that in the immediately preceding assessment years i.e. assessment year 2013-14 to 2015-16 similar addition was made by the Assessing Officer in respect of subscription fee treating it as royalty/FTS. The assessee carried the issue in appeal before the Tribunal in ITA No.7267/Mum/2017, and ITA No.7098/Mum/2018 for the respective assessment years. The Tribunal after examining the facts and nature of transactions decided the appeals by common order dated 28/06/2019 holding ‘subscription fee’ can neither be considered as Royalty/FTS within the meaning of section 9(1)(vi)/(vii) of the Act nor under India-Germany DTAA. The ld. Authorized Representative further pointed that the issue was first decided in favour of assessee by the Tribunal in appeal by the assessee for AY 2011-12 in ITA No.1683/Mum/2015 decided on 15/4/2019. In later assessment years the Tribunal followed the order passed in AY2011-12. The ld. Authorised Representative for the assessee submitted that the issue in present appeal by the assessee is squarely covered by the decision of the Tribunal in assessee’s own case.
Shri Vijay Kumar Subramaniyam representing the Department fairly admitted that the issue of treating subscription fee being considered as Royalty/FTS raised in present appeal by the assessee has been considered by the Tribunal in assessee’s own case in the preceding assessment years.
We have heard the submissions made by rival sides and have examined the orders of authorities below. In ground No.2 to 6 of the appeal, the assessee has assailed the findings of Assessing Officer in treating subscription fee received from the clients in India as Royalty/FTS within the meaning of section 9(1)(vi) and 9(1)(vii) r.w. Article -12 of India Germany Tax Treaty. We find that this issue is perennial. In assessment year 2011-12 similar addition was made by the Assessing Officer by treating subscription fee as Royalty/FTS. After being unsuccessful before the DRP, the assessee carried the issue in appeal before the Tribunal in (supra). The Co-ordinate Bench after examining the facts of the case threadbare held as under:- “10. We have considered rival submissions and perused material on record. We have also applied our mind to the decisions relied upon. Before we proceed to decide the nature of subscription fee earned by the assessee from Indian entities, whether fees for technical services/royalty or business profit, it is necessary to understand the activities carried on by the assessee for generating such income. Undisputedly, the assessee has created an online database named “reaxys.com” pertaining to chemical information which the users having interest in chemistry topic, substance data and preparation and reaction method can access for their own benefit and use. It is also not disputed that the data stored in the online database is collated by the assessee from articles printed in various journals on similar topics which are otherwise available to public on subscription basis. The data collated by the assessee from various journals are entered and stored in the database in a structured and user- friendly manner to enable the users to search and retrieve the data required by them and beneficial to them. The users of the online database can access it through regular web browsers such as Internet Explorer, Google Chrome or Firefox on payment of subscription fee. The customers and users are allowed to access the online database on a 24 hours basis from an agreed internet protocol range either authenticated via user name and password or via Internet Protocol (IP) number. Thus, it is evident, the database is accessible to the users through regular internet access and no particular software or hardware is required for accessing it. However, each customer/user has to enter into a subscription agreement with the assessee for accessing the database. While accessing the database the customer/user can access, search, browse and view the subscribed products. On a perusal of a sample copy of the subscription agreement placed at Page–56 of the paper book it is to be seen that as per Clause–1.1 of the said agreement, the assessee grants non–exclusive and non– transferrable right to the subscriber to access and use the products and services identified in schedule–I. As per schedule–I, the product to be accessed by the subscriber is reaxys.com. Further, schedule–I of the subscription agreement provides that upon termination of the subscription agreement, the subscriber shall delete all stored copies of items from reaxys and document the same to assessee’s reasonable satisfaction. By agreeing to such subscription, the authorised user/customer may access search and browse and view the subscribe product. Further, the customer or user can print, make electronic copies of and store for its exclusive use individual items from the subscribed products. Further, it can incorporate links to the subscribed products to the subscriber’s intranet and internet websites provided the appearance of such link and / or statements accompanying such links shall be changed as per the request of the assessee. Clause 1.4 of the subscription agreement enlists the following restrictions on use of subscribed products. “1.4 Restrictions on Use of Subscribed Products. Except as may be expressly permitted in this Agreement, the Subscriber and its Authorised User may not; 1.4.1 abridge, modify translate or create any derivative work based on the Subscribed Products without the prior written permission of Elsevier, except to the extent necessary to make them perceptible on a computer screen to Authorised Users; 1.4.2 remove, obscure or modify in any way any copyright notices, other notices or disclaimers as they appear in the Subscribed Products; or 1.4.3 Substantially or systematically reproduce, retain or redistribute the Subscribed Products. Authorised Users who are independent contractions may use the Subscribed Products only for the purposes of the contracted work for the Subscriber.”
Clause 1.5 of the agreement makes it clear that all right, title and interest in the subscribed products remain with the assessee and any unauthorized re–distribution of the subscribed products which may harm the assessee and its supplier is prohibited. Clause–2.3 of the agreement provides that the assessee reserves the right to withdraw from the subscribed products content that it no longer retains the right to provide or that it has reasonable grounds to believe is unlawful, harmful, false or infringing. As per clause–4 of the agreement, subscriber shall pay the subscription fee to the assessee as set forth in Schedule–1 within 30 days of the date of invoice. Clause–5.1 of the agreement stipulates the duration of agreement from 1st February 2010 to 30th June 2010 with an option for renewal of the agreement for an addition term upon mutual agreement.
12. Thus, on reading of the aforesaid important terms of the agreement it is very much clear that the assessee has created a database wherein the data relating to Chemistry are collated from various journals and articles and are stored in a structured and user friendly manner which is accessible to customers/users on subscription basis without conferring any exclusive or transferrable right on the customer/user. Further, the assessee retains its exclusive right and ownership over the intellectual property relating to the product and the users subscribers are specifically debarred from using the data in any manner other than for their own exclusive purpose. Keeping in view the aforesaid factual position, we need to examine whether the subscription fee received by the assessee from the customers in India for allowing access to the online database is transfer of right to use the copyright, hence, can be treated as royalty under the India–Germany Tax Treaty. The departmental authorities have held that while allowing access to use its online database i.e., reaxys.com the assessee has transferred the right to use the copyright which is in the nature of a literary work, hence, to be treated as royalty. No doubt, the assessee being a tax resident of Germany is governed by India–Germany DTAA. Therefore, it is necessary to examine whether the subscription fee received by the assessee fits into the definition of royalty as provided under Artricle–12 of the India–Germany Tax Treaty. Article–12.1 of the Tax Treaty provides that royalty and fees for technical services arising in a contracting state and paid to a resident of the other contracting state may be taxed in the other state. As per the plain meaning of the aforesaid provision, the subscription fee paid to the assessee is ordinarily taxable in Germany. However, Article–12.2 also provides for taxation of royalty and fees for technical services in India subject to condition that the tax leviable shall not exceed 10% of the gross amount of royalty or fees for technical services. Article–12.3 of the Tax Treaty defines royalty in the following manner. “The term “royalties” as used in this Article means 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, including cinematograph films or films or tapes used for radio or television broadcasting any patent, trade mark, cinematograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.”
As per the aforesaid definition of royalty in the tax treaty, any amount received for use of or right to use of any copyright or literary, artistic or scientific work, etc., can be treated as royalty. In the facts of the present case, there is no dispute that the assessee has collated data from various journals and articles, which are otherwise available for subscription to the general public, and entered them into the database in structured manner. It is also clear from the terms of subscription agreement, the assessee has not transferred use or right to use of any copyright of literary, artistic or scientific work to its subscribers. What the assessee has done is, it has allowed customers to access its database and utilize the information available therein for their use. Further, it is observed, the data available in assessee’s database relates to the subject of chemistry and from the list of clients submitted in the paper book it is very much clear that they are either chemical or chemical related companies. There is no material on record which could even remotely demonstrate that while allowing the customer /users to the access the database, the assessee had transferred its right to use the copyright of any literary, artistic or scientific work to the subscribers. Further, from the invoices raised by the assessee, sample copies of which are placed in the paper book, it is noticed that the subscription is period based and further the subscriber may not even use the data stored in the database. That being the case, the payment made cannot be treated as royalty under Article– 12(3) of the India–Germany Tax Treaty.
x x x 15. x x x 16. x x x
Having held so, the next issue which arises for consideration is, whether the subscription fee can be treated as fees for technical services. As discussed earlier, it is evident that the assessee has collated data from various journals and articles and put them in a structured manner in the database to make it more user friendly and beneficial to the users/customers who want to access the database. The assessee has neither employed any technical/skilled person to provide any managerial or technical service nor there is any direct interaction between the customer/user of the database and the employees of the assessee. The customer/user is allowed access to the online database through various search engines provided through
internet connection. There is no material on record to demonstrate that while providing access to the database there is any human intervention. As held by the Hon'ble Supreme Court in CIT v/s Bharati Cellular Ltd., [2010] 193 taxman 97 (SC) and DIT v/s A.P. Moller Maersk A.S., [2017] 392 ITR 186 (SC), for providing technical / managerial service human intervention is a sin qua non. Further, Article–12(4) of India–Germany Tax Treaty provides that payment for the service of managerial, technical or consultancy nature including the provisions of services by technical or other personnel can be termed as fees for technical services. None of the features of fees for technical services as provided under Article 12(4) of the India– Germany Tax Treaty can be found in the subscription fee received by the assessee. Further, the Department has not brought any material on record to demonstrate that the assessee has employed any skilled personnel having knowledge of chemical industry either to assist in collating articles from journals / magazines which are publicly available or through them the assessee provides instructions to subscribers for accessing the online database. The assessee even does not alter or modify in any manner the articles collated and stored in the database. In the aforesaid view of the matter, the subscription fee received cannot be considered as a fee for technical services as well. By way of illustration we may further observe, online databases are provided by Taxman, CTR online, etc. which are accessible on subscription not only to professionals but also any person who may be having interest in the subject of law. When a subscriber accesses the online database maintained by Taxman/CTR online etc. he only gets access to a copyrighted article or judgment and not the copyright. Similar is the case with the assessee. Therefore, in the facts of the present case, the subscription fee received by the assessee cannot be treated as royalty under Artile–12(3) of India–Germany Tax Treaty.” [Emphasised by us] Thus, the Co-ordinate Bench in an unambiguous manner has held that the assessee has not transferred any of its right to use copyright of any literary, artistic or scientific work to the subscribers nor any technical services have been provided by the assessee to its subscribers, therefore, subscription fee received for providing access to database by the assessee to its subscribers neither falls within the ambit of Royalty or Fee for Technical Services.
In subsequent assessment years i.e. AY 2013-14 to 2015-16, the Assessing Officer made addition for similar reasons by treating subscription fee as Royalty/FTS. The Tribunal following its’ own order in (supra) held that the subscription fee is neither Royalty nor FTS, hence, the provisions of section 9(1)(vi) or 9(1)(vii) are not attracted. The transaction is not even covered by Article- 12 of India Germany DTAA. The facts and nature of transactions in impugned assessment year are pari materia, hence, respectfully following the decision of Co- ordinate Bench, we allow ground No.2 to 6 of the appeal for parity of reasons.
In ground No.7 of the appeal, the assessee without prejudice to the primary contentions has assailed levy of surcharge and education cess. Since, we have held that subscription fee received by the assessee is not in the nature of Royalty/FTS, the same is not taxable in India, consequently, the ground No.7 has become infructuous and is dismissed as such.
In ground No.8, the assessee has assailed charging of interest under section 234B of the Act. Levy of interest under section 234B is consequential, in view of our findings on ground No.2 to 6, ground No.8 does not require specific adjudication.
In ground No.9 of appeal, the assessee has assailed initiation of penalty proceedings under section. 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground No.9 is dismissed.
11. Ground No.1 & 10 of the appeal are general in nature, hence, requires no adjudication.
In the result, appeal by the assessee is partly allowed in the aforesaid terms.
Order pronounced in the open court on Monday the 3rd day of May, 2021.