The Income Tax Appellate Tribunal, Delhi Bench, has recently, in an appeal filed before it, held thatM/s. Uptodate is not taxable under “royalty” for allowing access to online database of journals and books, on the ground that the same has no PE in India.
The aforesaid observation was made by the Delhi ITAT, when an appeal was preferred before it by the assessee, M/s. Uptodate Inc., challenging the order dated 25.06.2019 passed by the Commissioner of Income Tax (Appeals)-43, New Delhi, pertaining to assessment year 2016-17.
The core issue arising for consideration before the Delhi Tribunal being as to whether the amount received by the assessee for allowing access to online database of journals and books is, in the nature of royalty under section9(1)(vi) of the Income-tax Act, 1961and Article 12 of India – United States of America (USA) Double Taxation Avoidance Agreement (DTAA), the relevant facts relating to this issue were that, the assesseewas a non-resident corporate entity incorporated in USA and a tax resident of USA.
It so happened that for the assessment year under dispute, the assessee hadfiled its return of income on 30.11.2016 declaring income of Rs.18,71,520/-. And, in the course of assessment proceeding, the Assessing Officer, after calling for and examining various information from the assessee, noticed that during the year, the assessee had received an amount of Rs.3,52,84,277/- from customers in Indian for providing access to online data base created by the assessee.
Noticing that the assessee had not offered this income for taxation, the Assessing Officer called upon the assessee to explain as to why the amount received, being in the nature of royalty, should not be brought to tax, and in reply to the show-cause notice issued by the Assessing Officer, the assessee furnished a detailed submission.
Thereby vehemently opposing taxability of the amount received, theassessee pleaded that while granting access to the online database it has not transferred any copyright or licence, and thereforethat, the amount received by it is not in the nature ofroyalty, either under the treaty provisions or under the provisions of the Income Tax Act.
The Assessing Officer, however, not being convinced with the submissions of the assessee,reffred to the definition of royalty under Explanation 2 to section 9(1)(vi) of the Income Tax Act, thus observing that the assessee has transferred the use or right to use of a copyright, and further that the amount received would even fall under the definition of royalty under Article 12(3) of India – USA DTAA.
While coming to such conclusion, the Assessing Officer strongly relied upon the decision of the Karnataka High court in case of CIT Vs. Samsung Electronics Pvt. Ltd, thus, ultimately treating the amount received as royalty and thereby bringing the same to tax by applying the rate of 15% as per Article 12 of India – USA DTAA.
Aggrieved by the same, the assesseee filed an appeal before the CIT(A). But, even though, the assessee contested the aforesaid decision of the Assessing Officer by filing appeal before the Commissioner (Appeals), however, the Commissioner (Appeals) upheld the addition, thus leaving the assessee further aggrieved, with the only option of preferring the instant appeal before the Delhi ITAT.
With Advocates Sh. Salil Kapoor, Ms. Ananya Kapoor, Sh. Vibhu Jain, along with Sh. Amarbir Singh Walia, CA, contenting on behalf of the assessee that the database is the intellectual property of the assessee and copyright is attached to the database, it was further submitted by them that , by making available the centralized data to customers for a consideration, the assessee has not transferred any right to use of the copyright in favour of the customer, and hence that the payments received by the assessee for accessing data/information, cannot be characterized as royalty, as, while giving access to the database, the user does not get any copyright in the content of the database.
Per contra, Sh. Sanjay Kumar, the Sr. DR, on the other hand ,Strongly relied upon the observations of the departmental authorities, thereby submitting that the subscription received by the assessee allowing access to the online database, amounts to royalty, as in the process, the assessee has transferred use or right to use of copyright created by it in the database .Thus, he contented that, the amount received by the assessee has to be treated as royalty.
Hearing the opposing contentions of either sides, and perusing the materials available on record, the Delhi ITAT commented:
“We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. As far as the activities of the assessee are concerned, there is no dispute that the assessee collates data relating to healthcare as available in public domain and has put them in one place by creating a database. Thus, the content which is put in the database is not created by the assessee but created by third parties, which the assessee has picked up from public domain and created a database. The only improvement the assessee has made in the database is like analysis, indexing, description, appending notes for facilitating easy access to the customers.”
“As could be seen from the definition of royalty in the treaty, payment received 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, trademark, 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 can be treated as royalty. Further, any payment received for the use of, or the right to use, any industrial, commercial, or scientific equipment subject to certain exception can be considered as royalty.”, the ITAT added.
In approval of the same, the ITAT Panel comprising of G.S Pannu, the President, along with Saktijit Dey, the Judicial Member, observed:
“In the facts of the present appeal, undisputedly, the materials/contents available in the database of the assessee are collated from public domain and assessee certainly is not the creator of such content or material. The assessee has simply put the collated data in database in a user-friendly manner. That being the factual position emerging on record, it cannot be said that in terms with Article 12(3) of the Treaty, the assessee has transferred right to use of any copyright of literary, artistic or scientific work or any other secret formula or process or information concerning industrial, commercial, scientific experience. Further, the assessee has not transferred right to use of any industrial, commercial, or scientific equipment as the subscriber are only granted access to online database.”
“By way of illustration, we may observe that various law journals have created online database by collating judgments/orders of courts, tribunals etc. and access is allowed to subscribers upon payment of subscription. However, by allowing such access there is no transfer of right to use of any copyright. Further, the terms of the agreement, as discussed earlier, restricts the subscribers from exploiting or modifying the contents. Thus, it is very much clear, only limited right of access to the database was granted tocustomers on subscription basis. Therefore, in our view, the amount received will not fall within the ambit of royalty as defined under Article 12(3) of the tax treaty.”, they further noted.
Thus, allowing the assessee’s appeal, the Delhi ITAT held:
“In view of the aforesaid, we hold that the amount received by the assessee, being not in the nature of royalty under Article 12(3) of the treaty, cannot be brought to tax in India in absence of a Permanent Establishment. Accordingly, we direct the Assessing Officer to delete the addition. The other grounds, being consequential or premature, are dismissed.”
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