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AAR: Subscription Fee for Online Scientific Database is Business Income, Not Royalty

IN BRIEF:

In the case of Elsevier B.V., a company incorporated in the Netherlands (the applicant), the Authority for Advance Ruling, Mumbai (AAR) held that subscription fees received from the Indian subscribers and customers for accessing a database containing e-books/e-journals/e-articles is not taxable as ‘Royalty’ as per section 9(1)(vi) of the Income Tax Act, 1961 (the Act) and Article 12 of the India-Netherlands Double Tax Avoidance Agreement (‘DTAA’) but is in the nature of ‘Business Income’.

THE CASE: 

The Applicant owns a database wherein a host of information on subject/topics relating to science, technology and health science is stored in the form of books, journals and articles. The applicant charges two different types of subscription fees from customers:

(i) ‘Pay-per-view’, and

(ii) ‘Subscription’ agreement.

Pay-per-view Agreement – The pay per view arrangement allows the customer in India to purchase a particular book, article or journal which exists in electronic format on the applicant’s website. After the online payment is made, the customer is entitled to view, download and print the content for its personal, non-commercial use, on a pre-condition that the customer will keep intact all copyright and other proprietary notices.

Subscription Agreement – The subscription model grants the customer non-exclusive, non-transferable right to access books, articles, and journals during the subscription period and the access is terminated once the subscription period concludes. The copyright notices as displayed by the Applicant have to be kept intact.

In essence, both the above transactions are similar in nature as the content being offered remains the same i.e., books, articles, and journals in electronic format. In both the above transactions, the customer cannot copy, display, distribute, modify, publish, reproduce, store, transmit, create derivative works from, or sell or license all or any part of the content obtained from this site, to ensure that the exclusive proprietary right, title, and interest of the Applicant are kept intact.

QUESTION BEFORE THE AAR:

The key question before the AAR was determining the taxability of the subscription fees received from Indian subscribers and customers for e-books/e-journals/e-articles as:

  • Royalty, as defined under section 9(1)(vi) of the Act and Article 12 of the DTAA; or
  • Business Income under section 28 of the Act and Article 7 of the DTAA.

APPLICANT’S CONTENTION:

The contentions of the Applicant are summarized below:

  • Exclusive proprietary right, title, and interest in the subscribed product remain with the applicant.
  • Several restrictions are placed on the subscribers/customers on the usage of content to ensure that the customers cannot venture into the business of distributing the data downloaded by it or providing access to it to others.
  • Both the transactions, in essence, are similar to the purchase of books, journals or articles in electronic format. The Applicant merely collects and collates the data and uses its experience and expertise to present the information/ data in a presentable manner to facilitate easy and convenient reference to the user.
  • In view of the above, the subscription fees received from the Indian customers for providing access to e-books/e-journals/e-articles is not taxable as ‘Royalty’ as per section 9(1)(vi) of the Act and Article 12 of the DTAA.
  • Further, the Applicant contended that the consideration received as subscription fees are taxable as ‘Business Profits’, but due to the absence of any Permanent Establishment in India, the subscription fee received by the Applicant would not be chargeable to tax in India.

REVENUE DEPARTMENT’S CONTENTION:

The contentions of the Revenue Department are summarized below:

  • The Applicant has intellectual property ownership (copyright) over the host of information relating to science, technology and health science in the database, hence subscription received by the Applicant falls under the ambit of ‘Royalty’ as per Explanation 2(i) to section 9(1)(vi) of the Act.
  • Further, the information which is made available to the subscribers is taxable as ‘Royalty’ under the DTAA, which includes “consideration for information concerning industrial, commercial or scientific experience”.

THE RULING:

The AAR dismissed the Revenue Department’s contention and upheld that of the Applicant, stating that the payments made to access a database containing books/ journals/ articles in electronic format with a limited right of printing, making e-copies, and storing information, is not ‘Royalty’ under Article 12 of the DTAA, but is in the nature of ‘Business Income’.

The AAR agreed to the Applicant’s contention that purchasing books, journals, articles online are akin to buying books from a bookstore. Thus, it does not tantamount to the use of any copyright in a scientific/literary work.

Further, the AAR held that the term ‘scientific experience’ referred to in Article 12(4) of the DTAA refers to the scientific experience of the recipient and not the scientific experience which is contained in the content put up on the portal, to be accessed electronically by the subscribers. By giving online access, there is no transfer of the know-how or the experience by the Applicant to its subscribers. Thus, the AAR held that the receipts from Indian subscribers for accessing the content do not tantamount to the transfer of any information concerning the scientific experience. Hence, the same is not taxable as royalty as per the DTAA.

Moreover, the AAR held that the earlier rulings in the case of Elsevier Information System, American Chemical Society and Dun & Bradstreet Espana, as relied upon by the Applicant, have similar facts as in the present case. In the aforesaid rulings, the subscription fee paid by Indian customers for information concerning “commercial experience” was not treated as royalty and concluded that subscribers have no withholding obligation u/s 195 of the Act.

ANALYSIS:

The taxation of royalty has been a vexed issue in the Indian context. There have been conflicting rulings on the issue relating to the characterization of payments made for cross-border services, especially for the use of software, online facilities or IT infrastructure. This ruling is a welcome decision given all the above complexities and conflicting views on this subject and has laid down a good precedent for cases that provide web access to compiled information on an electronic platform. However, with the recent introduction of the Equalization levy in the statute, going forward, such transactions of subscription fee would also need to be evaluated from the perspective of the Equalization levy, before deciding on the complete impact.

In essence, both the above transactions are similar in nature as the content being offered remains the same i.e., books, articles, and journals in electronic format. In both the above transactions, the customer cannot copy, display, distribute, modify, publish, reproduce, store, transmit, create derivative works from, or sell or license all or any part of the content obtained from this site, to ensure that the exclusive proprietary right, title, and interest of the Applicant are kept intact.

References

Authored by Sandip Mukherjee – Director International Tax, with inputs from Preeti Kothari & Piyush Milani

TS-696-AAR-2020

Image Credits: Gerd Altmann on Pixabay

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