In view of rapid globalisation, a large number of companies subscribe to several kinds of electronic database, journals, market intelligence reports, etc. These subscriptions are at times standardised and generally provide the content/database which is industry specific and may not be tailor-made, meeting the requirements of the service recipient. The subscriptions paid most often do not involve any kind of licensing. The vexed issue surrounding the characterisation and taxation of payments relating to data retrieval/access to database has been a subject matter of debate before the Courts for a long time. The controversy essentially hovers around the characterisation of payments in the nature of subscription charges/fees etc., to access the database. By way of this article, an attempt is made to analyse the judicial precedents in the Indian context. Read on to know more…
On one side of the debate are the Taxpayers, who argue that transaction of access to database is akin to subscription made to a journal or magazine and no part of the copyright in the software is transferred. Payments made represent simply access to the information and are in the nature of business income for the provider. Consequently, such payments are not liable to tax in India in the absence of a permanent establishment (“PE”) and accordingly there can be no withholding tax implications on the payer.
The ambiguity in taxation of such payments in the
nature of subscription charges/fees etc. for data
retrieval/access to database needs to be redressed
both, on domestic as well as international front. While
the commercial terms used for access to database
may vary across business models, the facts and
substance of the transactions in each case shall have
to be examined to ascertain the true character of the
On the other side of the debate stands the Revenue, which argues that such payments are in effect of a licence granted by software companies to end-users. The tax authorities have majorly held that right to access a database by virtue of a license amounts to infringement of the copyright and, as such, payments made represent royalty for that licence. Consequently, such payments are liable to tax in India under the provisions of the Income Tax Act, 1961 (“ITA”‘).
The controversy essentially hovers around the characterisation of payments in the nature of subscription charges/fees etc., to access the database. By way of this article, an attempt is made to analyse the judicial precedents in Indian context which can throw some light on this issue.
- Whether such payments would be characterised as ‘Royalty’ income and would consequently trigger withholding tax implications? OR
- Whether such payments would be characterised as business income and be taxable if the entity has a presence in form of a Permanent Establishment (“PE”) in India?
A small example would explain as to how technology has evolved over a period of time. Earlier, there was physical access to database, reports, subscriptions etc. which has now transformed to buying virtual books, accessing the portals to buy information, electronic transmission etc. by downloading the content and acquiring the right to read without the right to reproduce/exploit and is more or less similar to buying a paperback. Viewing this from a layman’s perspective, it seems logical that taxation treatment on Internet based transactions need not be different from the conventional tax system.
However, the question to be contemplated is that if that be the scenario, is there a need for the much talked about transformation in the global tax policy to match pace with the evolving technology?
Certainly not! Considering the flexibility usually associated with e-commerce business (which is primarily dominated by the evolving technological advancements), various judicial precedents, commentaries and authors have expressed differing views on these tax issues