Database access: the subscription fee is not taxable

A number of international companies are engaged in the business of data collation/organization and creation of databases and software. With the growth in the Indian financial services and software sector, Indian companies in these sectors often subscribe to such databases to know the international best practices, research reports, etc.

Typically, the business arrangement is such that the customer would be given a non-exclusive licence for access to the vendor’s database on payment of an annual subscription fee.

The issue that arises from a direct tax perspective is whether the payment of subscription charges to access such databases would be characterized as royalty income and would consequently trigger a withholding tax.

The Authority of Advance Ruling (AAR), in a case of FactSet Research Systems Inc., US (FactSet), said in a 30 June ruling that such subscription charges received by FactSet should not be subject to tax in India.

In this context, it would be relevant to mention that the Madhya Pradesh high court, in the case of CIT v. HEG Ltd, dealing with the issue of payments made for the purchase of confidential data, has held that every information would not have the status of royalty.

Although this decision deals with the purchase of data, its observation that every information should not have the status of royalty merely because of its commercial nature provides guidance on the taxability of transactions to access information/data even under the licensing arrangement.

AAR, in the case of Dun and Bradstreet Espana S.A., has also held that payments for providing access to business information reports were not royalties or fee for technical services.

The Bangalore tribunal in the case of Wipro Ltd v. Income-tax officer has held that payments made by Wipro Ltd towards annual subscription charges to Web-based foreign publishing houses for access to their databases would not be taxable as royalty under the Act or treaty.

FactSet case

FactSet is a company incorporated in the US. It maintains a database which is located outside India. This database contains financial information and other data on a large number of companies worldwide that is available in the public domain.

FactSet enters into a master client licence agreement with customers under which it grants limited, non-exclusive, non-transferable rights to use its database, software tools, etc., and charges a subscription fee for this. FactSet does not carry out any business operations in India.

FactSet sought a ruling from AAR on the following:

• Whether the subscription fee received by it would be taxable in India under the provisions of the Act or the India-US Tax Treaty?

• If the income is not taxable in India, whether its customers in India would have to withhold taxes under section 195 of the Act?

• If FactSet has no other taxable income in India, whether it would be required to file its return of income in India?

FactSet collates information/data available by applying its own methodology. This methodology is outside the public domain and the copyright in them is not transferred or licensed to the subscribers, who are only granted the right to view the information or access the database while online. Thus, subscribers are granted a right to use the copyrighted database and not the copyright in the database. After placing reliance on certain judicial precedents, FactSet contended that subscription fee received is not taxable as “royalty” under the Act/treaty.

It was also contended that subscription fee is in the nature of “business income” and hence, in the absence of private equity in India, it is not taxable in India. Consequently, subscribers are not required to withhold taxes before making payments to the applicant

DTAA USA

54. Agreement for avoidance of double taxation of income with USA

Article 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed :

  (a)  in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph] :

   (i)  during the first five taxable years for which this Convention has effect,

  (a)  15 per cent of the gross amount of the royalties or fees for included services as defined in this Article, where the payer of the royalties or fees is the Government of that Contracting State, a political sub-division or a public sector company ; and

  (b)  20 per cent of the gross amount of the royalties or fees for included services in all other cases ; and

  (ii)  during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services ; and

  (b)  in the case of royalties referred to in sub-paragraph (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services.

3. The term “royalties” as used in this Article means:

  (a)  payments of any kind received as a consideration 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, trade mark, 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 ; and

  (b)  payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8.

4. For purposes of this Article, “fees for included services” means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

  (a)  are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or

  (b)  make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.

5. Notwithstanding paragraph 4, “fees for included services” does not include amounts paid :

  (a)  for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ;

  (b)  for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;

  (c)  for teaching in or by educational institutions ;

  (d)  for services for the personal use of the individual or individuals making the payments ; or

  (e)  to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services).

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply.

7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

(b) Where under sub-paragraph (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for included services shall be deemed to arise in that Contracting State.

8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for included services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Convention.