2025 (11) TMI 814 - AT - Income Tax

Subscription fees from Indian customers for online databases and journals not 'royalty' or 'FTS' under Article 12 India-USA DTAA

ITAT Delhi (AT) held that subscription and fee receipts from Indian customers for access to online databases and journals do not constitute royalty or ... Income deemed to accrue or arise in India - Royalty/FIS under Article 12 of the India USA DTAA - assessee received the said amount by way of subscription, fees from its Indian customers for providing online database and/or journals - HELD THAT:- As following the above order of the Tribunal on identical facts [2025 (2) TMI 1268 - ITAT DELHI] it is held that the amount is not taxable as the same is not in the nature of Royalty/FTS under Article 12 of the India-USA DTAA and therefore, the same is deleted. ISSUES PRESENTED AND CONSIDERED 1. Whether receipts from sale of access to offshore online journals/online library amount to 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961 read with Article 12 of the India-USA DTAA (i.e., payments for the 'use of, or the right to use' copyright of literary, artistic or scientific work). 2. Whether such receipts qualify as Fees for Technical Services (FTS) / Fees for Included Services (FIS) under Section 9(1)(vii) of the Act read with Article 12 of the India-USA DTAA (including whether the services 'make available' technical knowledge, skill or know-how). 3. Whether the receipts are instead business profits not taxable in India in the absence of a Permanent Establishment (PE) (interplay with Article 7 and domestic law as raised in analogous decisions). 4. Ancillary/adjudicative issues: (a) applicability of limitation under Section 153 (ground not pressed), (b) computation/charging of interest consequential to assessment, (c) correctness of AO's finding that a refund was issued, and (d) initiation of penalty proceedings under Section 270A (prematurity). ISSUE-WISE DETAILED ANALYSIS - Receipts as 'Royalty' (Section 9(1)(vi) / Article 12) Legal framework: Article 12 of the India-USA DTAA defines 'royalty' as payments for the use of, or the right to use, any copyright of a literary, artistic or scientific work; Section 9(1)(vi) and Explanation 2 to Section 9(1)(vi) distinguish between copyright and copyrighted article. Precedent treatment: The Tribunal followed a consistent line of decisions holding subscription/access fees for online databases/journals are payments for the use of copyrighted articles, not for the use of copyright - decisions of coordinate Benches and higher forum decisions were relied upon and followed (including decisions addressing online database/subscription models and the copyright vs copyrighted article distinction). Interpretation and reasoning: The Court analysed the nature of the licence granted by the taxpayer - limited, non-exclusive, non-transferable access to compiled/indexed copyrighted material hosted offshore - and concluded customers obtained access to copyrighted material but did not acquire rights in the underlying copyright (no right to amend, reproduce, sub-license or otherwise exploit the copyright). The fact that content accessed could be obtained by other lawful means (e.g., purchase of a book) and that the taxpayer's product collates material from authors supported the distinction. Explanation 2 to Section 9(1)(vi) was held to support the conclusion that such receipts are not consideration for grant of rights in copyright. Ratio vs. Obiter: Ratio - subscription/access fees for online journals/databases that confer limited access to copyrighted articles, without transfer of copyright or rights in the copyright, are not 'royalty' under Section 9(1)(vi) or Article 12. Obiter - references to comparative factual permutations in other cases (e.g., variations in licence terms) that were not present in the record. Conclusion: Receipts for offshore provision of access to online journals/online library do not constitute 'royalty' under Section 9(1)(vi) or Article 12 of the DTAA and are not taxable as such in India on the facts before the Court. ISSUE-WISE DETAILED ANALYSIS - Receipts as FTS / FIS (Section 9(1)(vii) / Article 12) Legal framework: Section 9(1)(vii) of the Act and Article 12 of the DTAA treat fees for technical or managerial services as taxable when they amount to payment for technical services; related treaty jurisprudence applies the 'make available' test for FIS. Precedent treatment: The Tribunal relied on decisions holding subscription fees for databases/journals are not FTS/FIS where no human intervention, no managerial/technical service was provided to subscribers, and where no personnel were deployed to deliver services constituting technical or managerial assistance. Supreme Court authority emphasising human intervention as a sine qua non for FTS-style taxation was invoked. Interpretation and reasoning: The Court found on the record there was no material showing provision of managerial/technical services to Indian customers, no qualified personnel interacting with subscribers, no modification or tailoring of content, and no demonstration that the taxpayer 'made available' technical knowledge, skill or know-how to subscribers. Access was via automated online search engines; the product was a compiled database rather than a deliverable technical solution. The absence of human intervention and lack of evidence that services imparted technical know-how led to rejecting characterization as FTS/FIS. Ratio vs. Obiter: Ratio - where a foreign provider supplies access to an online database/journal without providing managerial/technical services or making available technical knowledge/skill, such receipts do not constitute FTS/FIS under Section 9(1)(vii) or Article 12. Obiter - observations on how different facts (active consultancy, bespoke technical assistance) might change the outcome. Conclusion: On the facts, receipts for subscription/access do not qualify as FTS or FIS and are not taxable as such under the Act or the DTAA. ISSUE-WISE DETAILED ANALYSIS - Business Profits / PE Consideration Legal framework: Article 7 of the India-USA DTAA taxes business profits in the source state only where a PE exists; absent PE, business profits of a non-resident are generally not taxable in the source state. Precedent treatment: The Tribunal noted prior decisions which, while addressing similar facts under other treaties, treated subscription income as business profits and held such income not taxable in India in absence of PE. The present decision follows the reasoning that subscription receipts reflect business profits arising from sale of access to database rather than royalties or FTS. Interpretation and reasoning: Having concluded receipts are not royalty or FTS/FIS, the Court accepted that the receipts bear the character of business profits from sale of product/access and hence, in absence of PE, are not taxable in India under Article 7. The Court emphasised identical factual matrix across prior years and absence of distinguishing factors in the assessment for the year under appeal. Ratio vs. Obiter: Ratio - subscription/access receipts characterized as business profits are not taxable in India absent a PE. Obiter - discussion of treaty variations and alternative treaty provisions was not essential to the decision on the present facts. Conclusion: The receipts are to be treated as business profits and, in the absence of PE, not taxable in India under the DTAA. ANCILLARY ISSUES - Limitation, Interest, Refund Finding, Penalty Proceedings Limitation (Section 153): Ground alleging assessment barred by limitation was not pressed and therefore dismissed as not pressed; no adjudication on merit. Interest computation: Levy of interest arises consequentially from assessment; AO directed to levy interest as per law - no substantive interference on quantum beyond directing statutory computation. Refund finding: AO's assertion that a refund of INR 19,404,685 had been issued was challenged; the AO was directed to verify the claim and act according to law - factual verification required (directional relief/remand). Penalty under Section 270A: Initiation of penalty proceedings was held premature and this ground was dismissed as premature - no substantive decision on penalty merits. CROSS-REFERENCES AND PRECEDENTIAL EFFECT The Court expressly relied upon and followed coordinate Bench and other tribunal decisions addressing identical factual matrices on subscription/access to online databases/journals, adopting their ratio distinguishing 'copyright' from 'copyrighted article' and applying the 'make available' and human intervention tests for FTS/FIS. Those precedents were treated as binding on identical facts and formed the basis for deletion of additions. Observations as to how different factual arrangements (transfer of copyright, active technical/managerial services) would change taxation were left as non-decisional remarks. OVERALL CONCLUSION The appeal is partly allowed: amounts received for offshore access to online journals/online library are not taxable as royalty or FTS/FIS under Section 9(1)(vi)/9(1)(vii) and Article 12 of the India-USA DTAA on the facts before the Court; related consequential points directed for verification or treated as premature where applicable. Other grounds not pressed were dismissed as not pressed.