Subscription fees for accessing online data base held not to be royalty income
FactSet Research Systems Inc. (the “Applicant”), a company incorporated in US, approached the Authority for Advance Ruling (the “Authority”) with respect to its tax liability in India regarding the subscription fees received by it from customers in India, in accordance with the Income Tax Act , 1961 (the “Act”) and India-US tax treaty (the “Treaty”).
The Applicant maintains a database outside India which contains financial and economic information of companies globally. The information in the said database contains information available in public domain however, collated and formatted for a comprehensive presentation to the customers. Importantly, in a rejoinder to the application, the Applicant disclosed that the Applicant’s group had a wholly owned subsidiary in India, with offices in Hyderabad and Mumbai. The Hyderabad office functioned as a captive undertaking for FactSet undertakings outside India; while the Mumbai office provided marketing and support services to Applicant’s customers in India. The Mumbai office had no authority to conclude contracts with customers in India.
The Applicant’s case was that the customers were only granted rights to access the information online and no intellectual property rights with respect to the same were transferred. Consequently, the subscription fee was in the nature of business income and not royalty. The Revenue on the other hand characterised the said payment as royalty and further argued that Applicant constituted an agency PE in India.
The Authority perused the Master Client License Agreement (the “Agreement”) to understand the true nature of the transaction and, the terms and conditions involved. The Authority dealt with various contentions raised by the Revenue in great detail, placing reliance on the OECD Commentary, the OECD report on “Treaty characterization issues arising from e-Commerce”, Prof. Klaus Vogel’s commentary and cases such as Dun and Bradstreet Espana, S.A. and Anapharm Inc., In Re. to reach the following conclusions:
· Subscription fee as royalty:
The Authority scrutinized the definition of the term “royalty” together with the definition of “copyright” and observed that (i) the customers were granted non-exclusive rights to financial information in the database and therefore, no copyright could be said to be transferred, as copyright law contemplated the grant of an exclusive right with respect to a copyright; and (ii) the expression “granting of license” in the Act requires transfer of copyright enabling the licensee to commercially exploit the rights, which was not the case here.
As regards the Treaty, the Authority remarked that the expression “use” in the Treaty was not used in the generic sense of having access to a copyrighted work. Only a transaction wherein a customer/ licensee was granted exclusive rights of the copyright owner either permanently or for a limited duration for commercial or business purposes could be brought under the meaning of the expression "use".
In light of these observations, the Authority held that the subscription fee could not be characterized as royalty income since the access to information was on a non-exclusive basis, wherein all intellectual property rights remained with the Applicant.
· Subscription fee as fee for “imparting any information concerning technical, industrial, commercial or scientific knowledge, experience or skill”
In this regard, the Authority noted that the Applicant did not share with the customers the methodology, techniques or experiences involved in creating the databases and therefore, held that the said contention of the Revenue was devoid of merit.
· Applicant having a permanent establishment in India
The Revenue contended that the Hyderabad and the Mumbai offices in India would constitute a permanent establishment of the Applicant in India. On merits, the Authority observed that, in light of the limited facts made available by the Applicant, it could not be said to have a permanent establishment in India. However, the Authority allowed the Revenue to make further enquiry into the same as limited information was made available to it.
This ruling is important as it reinforces the industry’s stand that fees in lieu of grant of rights in copyrighted work falls outside the purview of “royalty”. In the recent past we have seen a gradual shift in the approach of the judiciary with respect to the characterization of such payments. However, the rigid stance of the tax authorities continues to haunt the industry. This ruling comes as a relief to companies operating online databases as in normal commercial practice, such sites only grant the users right to use the copyrighted work and grant no rights with respect to the intellectual property contained therein.