PLURALSIGHT LLC,UTAH vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 2(1), BANGALORE

This is an appeal filed by the assessee against the final order passed by the AO on 07/07/2023 in DIN No.ITBA/AST/S/143(3)/2023-24/1054219036(1) on the following grounds:

“Ground No. 1 On the facts and in the circumstances of the case and in law, the assessment order framed under section 143(3) read with section 144C( 13) of the Income tax Act 1961 ('the Act`) passed by the Learned Assessing ('learned AO) dated 7 duly 2023 incorporating the direction of Hon’ble Dispute Resolution Panel - 2, Bangalore ('Hon’bleI DRP') dated 07 June 2023 to the extent prejudicial to the Appellant, is bad in law. contrary to the facts and circumstances of the case and is liable to be quashed. Ground No. 2 On the facts and in the circumstances of the ease and in late, the Hon'ble DRP / Learned AO erred in making an addition of INR 40,0072,256/- received from the Indian customers as subscription fees by treating it as 'Royalty' u/s 9(1)(vi) ('the Act') and Article 12(3) of the of the tax treaty between India and the. United States of America ('India-USA DTAA'). Accordingly, the Appellant prays that the aforesaid addition made by the Learned AO ought to be deleted. Ground No. 3 3.1 On the facts and in the circumstances of the case and in law, the F3on'ble DRP erred in not quoting computer-generated DIN on the body of DRP directions u/s. 144C(5) of the Act, in contravention to Circular No. 19 of 201g issued by the CBOT, deeming such an order to be invalid and never to have been issued as per para 4 to the said Circular. 3,2. On the facts and in the circumstances of the case and in law, the final assessment order dated 7 July 2023 under section 143(3) read with section 144C(13) of the Act passed by the I,d. A0 pursuant to invalid directions passed by Hon’ble DRP, is illegal, thus making the final assessment order bad in law, null and void and liable to be quashed. Ground No. 4 On the facts and in the circumstances of the case and in law, the Learned AO erred in levying interest under section 234A of the Act amounting to INR 2,27,154. Ground No. 5 On the facts and in the circumstances of the case and in law, the Learned AU erred in levying interest under section 234B of the Act amountingtoINR30,28,720 Ground No. 6 On the facts and in the circumstances of the case and in law, the Learned AO has erred in initiating the penalty proceedings under section 24 read with section 'OA of the Act. Accordingly, the Appellant prays that the penalty proceedings initiated by the Learned AO ought to be dropped.”

2. At the outset of hearing, the ld.AR of the assessee argued only groundNo.2 and rest of the grounds was not pressed, hence the ground, which were not pressed are dismissed as not pressed.

Accordingly, the assessee filed submission and after considering the submission a draft order u/s 144(1) of the Income-tax Act was passed on 30/09/2022.

8. On the other hand, the ld. DR relied on the order of the lower authorities.

9. After hearing the rival contentions, we note from the submissions that the issue has been decided by the co- ordinate bench of the Tribunal in assessee’s own case for assessment year 2016-17 in and considering the submissions of the assessee that the facts and agreement made with the Indian entities are the same as submitted by the ld.AR in this assessment year. We also observe from the order that the issue is squarely covered in favour of the assessee. The relevant part of the judgment is as under:-

“7. 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.

“3. The term "royalties as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

3. PROHIBITED CONDUCT a. Prohibited Conduct. Customer will use the Site in compliance with applicable law and acknowledges and agrees that neither it nor its Business Users may: 1.reproduce , redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, create derivative works of , license, capture, download, save , upload, print, or otherwise retain information and content available on the Site other than with regard to Authorized Downloadable Materials, subject to the limited permissions set forth in this Agreement; 2. permit or provide others access to the Site’s library using a Business User username and password or otherwise, or the username and password of another authorized user;

3. remove or modify any copyright, trademark, legal notices, or other proprietary notations from the Proprietary Materials or any other content available on the site; 4. violate or attempt to violate the Site’s security mechanisms or digital rights management, or otherwise breach the security of the Site or corrupt the Site in any way; 5. attempt to gain unauthorized access to the Site or assist others to do so; 6. co-brand or frame the Site or establish a link in such a way as to suggest any form or association, approval, or endorsement on our part, without the prior express written permission of an authorized representative of Pluralsight; 7. post to the Interactive Features or any other portion of the Site any inappropriate, offensive, racist, hateful, sexist, pornographic, false, misleading, infringing, defamatory, or libelous content; 8. use or attempt to use the Site to store or transmit software viruses, worms, time bombs, Trojan horses, or any other computer code, files, or programs designed to interrupt, destroy, or limit the functionality of any computer software, hardware, or telecommunications equipment; or 9. manually or systematically harvest, scrape, collect or otherwise extract information or data contained on the Site, other than permitted use of Authorized Downloadable Materials or temporary storage of video materials for offline viewing as permitted by the Site’s intended features. (Emphasis supplied) 13. From a perusal of the MSA, we find that the subscribers only get a nonexclusive, 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:

• to download or reproduce the Proprietary Material in any form including the storing of it in any medium by electronic means; • to further distribute, sell, sub-license, rent, lease or issue copies of the Proprietary Material; • to create any derivative work or exploit the Proprietary Material in any manner; • to remove or alter any copyright, trademark or proprietary notice in the Proprietary Material; • to decompile, disassemble, or reverse engineer the Proprietary Material/database.

made cannot be treated as royalty under Article–12(3) of the India–Germany Tax Treaty. . . . . 17. … 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.” (emphasis supplied) 15. Similar view has been taken in the following cases: a) Elsevier BV, In re: (2021) 123 taxmann.com 143 (AAR) b) Dow Jones & Company Inc. vs. ACIT: (2022) 135 taxmann.com 270 (Del ITAT) c) DIT(IT) vs. Dun & Bradstreet Information Services India (P.) Ltd.: (2011) 338 ITR 95 (Bom HC) d) Dun & Bradstreet Espana S.A., In re : (2005) 272 ITR 99 (AAR) e) Mc Kinsey Knowledge Centre India Pvt Ltd v. ITO: (Del ITAT) f) DCIT (IT) vs. Welspun Corporation Ltd.: (2017) 183 TTJ 697 (Ahd ITAT) g) ITO (IT) vs. Cadila Healthcare Ltd.: (2017) 184 TTJ 178 (Ahd ITAT) h) Iqvia AG v. DCIT: ITA No. 1203/Mum. /2021 (Mumbai ITAT) 16. 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: 17. 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: “8. … 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.” (emphasis supplied) 18. 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: “11. The learned Departmental Representative then invoked clause (iv) of Explanation 2 which speaks of "imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill". The DTAA (Article

12.3) uses slightly different language. It speaks of payment received for "information concerning industrial, commercial or scientific experience". We do not think that the payment in question can be brought within the fold of this part of definition of 'royalty'. The clause does not contemplate merely imparting information on technical, industrial or commercial matters. The requirement is imparting of information concerning technical, commercial or scientific knowledge, experience or skill. The information which the licensee gets through the database does not relate to the underlying experience or skills which contributed to the end-product. The applicant does not share its experiences, techniques or methodology employed in evolving the database with the subscribers. The applicant does not impart any information relating to them. As already noted, the information or data transmitted through the database is the published information already available in public domain and it is not something which is exclusively available to the applicant. The applicant compiles and presents the information in proper form by applying its own methodology. It does not amount to imparting of information concerning the applicant's own knowledge, experience or skills in commercial and financial matters. The contention that imparting of information regarding analysis and research done by the applicant is involved here is devoid of merit.” (emphasis supplied) 19. 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: 20. 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: “11.5 The learned DR faintly suggested that it can also be brought within the purview of equipment royalty i.e., "use" or "right to use" any industrial, commercial or scientific equipment. It is submitted that the server which maintains database is being used by customers as a point of inter-face. We do not think that the consideration is paid by the licensee for the use of equipment. The consideration is for availing of the facility of accessing the data/information collected and collated by the applicant.” (emphasis supplied) 21. Similarly, in the case of American Chemical Society vs. DCIT(IT) (supra), the Hon’ble Mumbai Bench of the Tribunal held as under: “17. …. 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. …….. 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.” (emphasis supplied) 22. 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.

10. Respectfully following the above judgments of coordinate bench of this Tribunal cited supra, we allow the ground of appeal of the assessee, which he argued.