2025 (5) TMI 819 - AT - Income Tax

Online chemistry database subscription revenue not taxable as royalty under section 9(1)(vi) or India-USA DTAA Article 12(3)

American Chemical Society c/o Deloitte Haskins and Sells LLP Versus The Deputy Commissioner of Income Tax (International Taxation) Circle-1 (1) (1), Mumbai

American Chemical Society c/o Deloitte Haskins and Sells LLP Versus The Deputy Commissioner of Income Tax (International Taxation) Circle-1 (1) (1), ... The core legal questions considered by the Tribunal in this appeal include:1. Whether the reopening of assessment proceedings under sections 147/148 of the Income Tax Act, 1961 (the Act) without issuance of mandatory notice under section 143(2) is valid and within jurisdiction.2. Whether the Assessing Officer (AO) had jurisdiction to initiate proceedings, considering the transfer of the case between different officers and locations.3. Whether the receipts from Indian customers towards subscription charges under Chemical Abstract Service (CAS) and Publications (PUBS) divisions constitute 'royalty' under section 9(1)(vi) of the Act and Article 12(3) of the India-US Double Tax Avoidance Agreement (DTAA).4. Whether the subscription charges received represent payment for use or right to use copyright in artistic, literary or scientific work or for information concerning industrial, commercial or scientific experience, or for use of industrial, commercial or scientific equipment, thereby attracting tax as royalty.5. Whether the decisions of coordinate Benches of the Tribunal in earlier assessment years, which held that such subscription revenues do not qualify as royalty, are binding and applicable to the present assessment year.6. Whether the imposition of interest under sections 234A and 234B and penalty proceedings under sections 271(1)(c) and 271F of the Act were justified.Issue-wise Detailed Analysis1. Validity and Jurisdiction of Reopening Proceedings under Sections 147/148The assessee challenged the reopening of assessment without issuance of mandatory notice under section 143(2) and contended that the proceedings were initiated by an officer lacking jurisdiction. The AO issued notice under section 148 on 31.03.2021, based on information obtained during proceedings involving another company, alleging escapement of income due to non-filing of return by the assessee.The Tribunal noted that the reopening was done following prescribed procedures, and the notice under section 148 was duly served. The issue of jurisdiction was raised but became academic after the substantive issue was decided in favour of the assessee. Since the addition was deleted, the Tribunal did not find it necessary to adjudicate further on jurisdictional grounds.2. Characterization of Subscription Receipts as Royalty under Section 9(1)(vi) and Article 12(3) of India-US DTAAThis was the pivotal issue. The AO and Dispute Resolution Panel (DRP) held that subscription fees received by the assessee from Indian customers for CAS and PUBS divisions constituted royalty income. The AO reasoned that payments were for use of ACS network, databases, and software embedded therein, which qualified as use or right to use copyright or information concerning industrial, commercial or scientific experience, or use of equipment, attracting tax under section 9(1)(vi) and Article 12(3) of the DTAA.The assessee contended that the receipts were business profits and not royalty, relying on earlier decisions of coordinate Benches of the Tribunal for assessment years 2014-15 to 2021-22, which held that subscription revenues did not qualify as royalty.The Tribunal extensively analyzed the legal framework and precedents, particularly the coordinate Bench decision dated 26.10.2011 for AY 2014-15, which was consistently followed in subsequent years. The Tribunal's reasoning included:The assessee merely aggregates and organizes publicly available scientific information into a database, without possessing copyright or intellectual property rights in the contents.The customers receive only the right to search, view, and display information, with strict prohibitions on reproduction or commercial exploitation.The OECD Commentary on Article 12 was examined, highlighting that for payments to qualify as royalty, the information must be undivulged or secret and owned exclusively by the grantor. Here, the information was public domain, and the assessee did not share its own industrial, commercial, or scientific experience.Regarding copyright, the Tribunal referred to the Copyright Act, 1957, noting that mere access or permission to use a copyrighted work does not amount to acquisition of copyright or right to use copyright. Customers did not acquire rights to reproduce or commercially exploit the database or software.The Tribunal drew an analogy with purchase of a copyrighted book, where the purchaser enjoys the content but does not acquire copyright or rights to exploit it commercially.The Tribunal relied on Supreme Court precedent distinguishing between copyright and copyrighted article, emphasizing that consideration for a copyrighted article does not amount to royalty.Applying these principles, the Tribunal concluded that the subscription fees for CAS and PUBS divisions did not constitute royalty under section 9(1)(vi) or Article 12(3) of the DTAA.3. Application of Coordinate Bench Decisions and Pending AppealsThe Tribunal noted that the AO and DRP relied on earlier year orders treating the receipts as royalty, but these were challenged by the assessee before the Tribunal and decided in its favour. The Revenue had filed appeals before the Bombay High Court, which were pending, but no stay was granted against the Tribunal's orders.Given that the facts and business model remained unchanged in the impugned assessment year, the Tribunal held that it was bound by the consistent decisions of coordinate Benches and saw no reason to deviate. The Tribunal thus deleted the addition made by the AO.4. Interest and Penalty ProceedingsThe assessee challenged the levy of interest under sections 234A and 234B and penalty proceedings under sections 271(1)(c) and 271F, contending that no taxable income arose and no return was required to be filed.Since the Tribunal deleted the addition, these grounds became academic and were not adjudicated upon.Conclusions on IssuesThe Tribunal held that:The subscription revenues from CAS and PUBS divisions do not constitute royalty income under section 9(1)(vi) of the Act or Article 12(3) of the India-US DTAA.The reopening of assessment and jurisdictional issues need not be decided in view of the deletion of the addition.The consistent decisions of coordinate Benches for earlier years are binding and applicable, especially as the facts remain unchanged.Other grounds including interest and penalty are rendered academic and left open.Significant HoldingsThe Tribunal preserved the following crucial legal reasoning verbatim from the coordinate Bench decision:'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.''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. 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.''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.''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.''Thus, 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.''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.'The core principle established is that mere subscription fees for access to databases or journals, where the underlying information is publicly available and no transfer or grant of copyright or right to use copyright is made, do not constitute royalty income under section 9(1)(vi) or Article 12(3) of the DTAA. The distinction between copyright and copyrighted article is critical in this context.Final determination was that the addition of INR 46,14,79,249/- as royalty income was unsustainable and was deleted, resulting in allowance of the appeal.