Introduction
With an increase in the complexity and growing enterprise landscape, a number of IT companies engage in creation of databases and softwares and have also entered in the business of data collection and data systematization. In return, these vendor companies charge annual subscription fee that can be defined as the amount of money the vendors charge on a consequential basis for providing periodic access to their database and software.
Direct Tax and Subscription Charges
Payment of subscription charges have been under the scrutiny of the Income Tax Department since a long time. The main litigation that arises is whether these charges are to be categorized under Royalty? Whether tax should be withheld on the same?
Royalty
As per Section 9(1)(vi) of the Income Tax Act, 1961, Royalty, in layman terms, can be briefly explained as, “Consideration paid for transfer of any rights (including licenses) or usage with respect to a patent, invention, model, design, secret formula or process or trade mark. It may also include consideration for imparting information concerning technical, industrial, commercial or scientific knowledge, experience or skill.”
Judicial Decisions
Case: AAR (IT), New Delhi vs Thoughtbuzz (P.) Limited, [2012] 21 taxmann.com 129 (AAR - New Delhi)
Facts: The question raised was whether subscription received by Singaporean company for imparting information concerning industrial and commercial knowledge, experience and skill on internet through social media monitoring services would account to royalty and whether should be liable to deduction of tax u/s 195.
Judgement: It was held that if we went by the DTAA between India and Singapore, it qualified as royalty as it was a right to use the process or information concerning industrial, commercial or scientific experience for a definite amount of consideration, and under the DTAA, the subscription received from the Indian subscriber would be taxable as royalty and taxable in India in view of paragraph 2 of article 12 of the DTAC.
Case: ONGC Videsh Limited Vs ITO, International Taxation, TDS Ward 2(1), New Delhi
Facts: The question here arose was whether information available from website in respect of exploration of oil and gas was specialized technical knowledge and not of general nature and that the fee thus given for procuring any information regarding this field should be covered under the category of royalty and whether tax should be withheld u/s 195.
Judgement: It was held that since the nature of payment was in the nature of technical consultancy and since Oil and natural gas and its exploration are a field of specialized technical knowledge and not for the use of public at large. A specific training is required in the field and since the assessee was granted a non- transferable and non-inclusive licence to use the confidential name and passwords and hence according to section 9(1)(iv) and (vi) of Income Tax Act, 1961 and Article 13(3) of the DTAA with UK it was covered under the definition of royalty and hence tax should be withheld u/s 195 of Income Tax Act, 1961.
Conclusion
According to the judicial decisions stated above one can conclude that subscription charges, have, in fact been regarded as royalty and hence tax has been withheld u/s 195 accordingly. But, there still exists a lot of ambiguity whether subscription charges should be regarded as royalty. It can be concluded that charges merely amounting to subscription for services cannot be construed as royalty and that a detailed analysis should be undertaken regarding the services being provided and that such services are of specialized nature and not for use of public at large and that a thorough study of the relevant DTAA should be undertaken to define the nature of such charges.
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