Plural Sight LLC Vs DCIT (ITAT Bangalore)
Introduction: In a landmark decision, the Income Tax Appellate Tribunal (ITAT) Bangalore has set a significant precedent by ruling in favor of Plural Sight LLC, a United States-based company, in its appeal against the Income Tax Department. The core of the dispute revolved around whether the receipts from the sale of online videos to Indian clients should be taxed as ‘Royalty’ under the terms of the India-USA Double Taxation Avoidance Agreement (DTAA).
Detailed Analysis: Plural Sight LLC, engaged in the business of providing online technology learning platforms, challenged the Assessing Officer’s (AO) decision to tax its subscription revenue received from Indian customers as ‘Royalty’ under both the Income-tax Act, 1961, and the India-USA DTAA. The ITAT meticulously examined the nature of the transactions, the business model of Plural Sight LLC, and the applicable provisions of the India-USA DTAA, alongside relevant case laws and statutory provisions.
The Tribunal’s decision hinged on interpreting the term ‘Royalty’ as defined in Article 12(3) of the India-USA DTAA. It evaluated whether the subscription fees received by Plural Sight LLC constituted payment for the use of or right to use copyright, patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial, or scientific experience.
The ITAT observed that Plural Sight LLC provided a non-exclusive, non-transferable license to its subscribers to access and view pre-recorded online video content. Subscribers did not receive any rights to copyright, nor were they allowed to download, store, transmit, or edit the videos. Furthermore, the Tribunal noted that the access provided was to copyrighted products, and not to any copyright per se, thus not constituting ‘Royalty’ as per the DTAA.
Conclusion: The ITAT Bangalore’s ruling in favor of Plural Sight LLC marks a critical juncture in the interpretation of ‘Royalty’ under the India-USA DTAA. It clarifies that subscription revenues earned by companies through the sale of online video content to Indian clients do not fall within the ambit of ‘Royalty’ and are therefore not taxable as such. This decision not only benefits Plural Sight LLC but also sets a guiding precedent for similar cases involving digital content providers and their tax liabilities under international agreements. The ruling underscores the need for a nuanced understanding of digital transactions and their tax implications in the era of global digital commerce.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This is an appeal filed by the assessee against the final order passed by the AO on 07/07/2023 in DIN No. ITBA/AST/S/143(3)/2023-24/1054219036(1) on the following grounds:
“Ground No. 1
On the facts and in the circumstances of the case and in law, the assessment order framed under section 143(3) read with section 144C( 13) of the Income tax Act 1961 (‘the Act’) passed by the Learned Assessing (‘learned AO) dated 7 duly 2023 incorporating the direction of Hon’ble Dispute Resolution Panel – 2, Bangalore (‘Hon’ble DRP’) dated 07 June 2023 to the extent prejudicial to the Appellant, is bad in law. contrary to the facts and circumstances of the case and is liable to be quashed.
Ground No. 2
On the facts and in the circumstances of the ease and in late, the Hon’ble DRP / Learned AO erred in making an addition of INR 40,0072,256/- received from the Indian customers as subscription fees by treating it as ‘Royalty’ u/s 9(1)(vi) (‘the Act’) and Article 12(3) of the of the tax treaty between India and the. United States of America (‘India-USA DTAA’).
Accordingly, the Appellant prays that the aforesaid addition made by the Learned AO ought to be deleted.
Ground No. 3
3.1 On the facts and in the circumstances of the case and in law, the F3on’ble DRP erred in not quoting computer-generated DIN on the body of DRP directions u/s. 144C(5) of the Act, in contravention to Circular No. 19 of 201g issued by the CBOT, deeming such an order to be invalid and never to have been issued as per para 4 to the said Circular.
3,2. On the facts and in the circumstances of the case and in law, the final assessment order dated 7 July 2023 under section 143(3) read with section 144C(13) of the Act passed by the I,d. A0 pursuant to invalid directions passed by Hon’ble DRP, is illegal, thus making the final assessment order bad in law, null and void and liable to be quashed.
Ground No. 4
On the facts and in the circumstances of the case and in law, the Learned AO erred in levying interest under section 234A of the Act amounting to INR 2,27,154.
Ground No. 5
On the facts and in the circumstances of the case and in law, the Learned AU erred in levying interest under section 234B of the Act amountingtoINR30,28,720
Ground No. 6
On the facts and in the circumstances of the case and in law, the Learned AO has erred in initiating the penalty proceedings under section 24 read with section ‘OA of the Act.
Accordingly, the Appellant prays that the penalty proceedings initiated by the Learned AO ought to be dropped.”
2. At the outset of hearing, the AR of the assessee argued only groundNo.2 and rest of the grounds was not pressed, hence the ground, which were not pressed are dismissed as not pressed.
3. The brief facts of the case are that the assessee M/s Pluralsight LLC, USA, a foreign Company and non-resident filed its return of income for the asst. year 2020-21 on 12th Feb, 2021 declaring Nil income and claiming revenue of 3,27,74,010/- from the TDS made by Indian company.
4. The case was selected for scrutiny and statutory notices were issued to the The assessee was issued a letter and accordingly, the assessee furnished information and the AO noted that as per letter dated 12/01/2022, the assessee had preferred an application before the Authority for Advance Ruling for ruling on the taxability of the receipts by the assessee company from the Indian clients. The assessee submitted the details on 12/01/2022, 30/08/2022, 16/09/2022 and 21/09/2022 has filed details as called for and the assessee also filed detailed submissions on the taxability of receipts by the assessee company from the Indian clients. The AO issued show cause notice on 17/09/2022 proposed to treat the consideration receipts amounting to Rs.40,00,72,256/- received from various customers from India as royalty under the Income-tax Act as well as India-USA DTAA. Accordingly, the assessee filed submission and after considering the submission a draft order u/s 144(1) of the Income-tax Act was passed on 30/09/2022.
5. The assessee field appeal before the DRP against the draft assessment order The ld. DRP further considered the entire submissions and they upheld that the amount received from the Indian entities shall be treated as a royalty within the meaning of sec. 9(1)(vi) of the Act and rejected the contention of the assessee. Accordingly, the AO passed the final assessment order on 30/09/2022.
6. Aggrieved from the above order, the assessee filed appeal before the Income Tax Appellate Tribunal.
7. The learned AR reiterated the submission made before the lower authorities and submitted that the case is squarely covered in favour of the assessee in assessee’s own case decided by the coordinate bench of the Tribunal in ITA No.37/Bang/2023 vide order dated 21/08/2023 and the facts and agreements remains same for the assessment year 2016-17 also.
8. On the other hand, the DR relied on the order of the lower authorities.
9. After hearing the rival contentions, we note from the submissions that the issue has been decided by the co- ordinate bench of the Tribunal in assessee’s own case for assessment year 2016-17 in ITA 37/Bang/2023 and considering the submissions of the assessee that the facts and agreement made with the Indian entities are the same as submitted by the ld.AR in this assessment year. We also observe from the order that the issue is squarely covered in favour of the assessee. The relevant part of the judgment is as under:-
“7. We have heard the rival submissions and perused the material on record. In order to adjudicate the issue raised, it is necessary to understand the business profile of the assessee. Briefly, the business profile of the assessee is that it is incorporated under the laws of United States of America (‘USA’) and is a tax resident of USA. It is in the business of uploading online videos on its website and earns subscription revenue by facilitating viewing of such online videos by individuals, government enterprises, small businesses and enterprises globally. The assessee aggregates video content from content authors all around the world. Such videos are stored on its online content library which is hosted on servers located in the United States of America and also in other parts of the world other than India. The online videos are pre- recorded (i.e., not live) and are audio visual in nature. Using such videos, the assessee compiles different kinds of courses in areas such as manufacturing, software development, etc. The online videos/courses are segregated on the basis of variety of users from various fields. Online viewing facility of these courses/video content is provided to customers through the assessee’s website or mobile application. The assessee sells subscription plans to customers in India and prices are agreed between the assessee and the customers. In this regard, sample Master Subscription Agreement (‘MSA’) which the assessee enters with subscribers/customers is enclosed at pages 97-108 of the Paper Book. Subsequent to entering into agreements and payment of subscription amount, the customers are provided with login information (login ID and password). After the customers log in on the website, the customers/subscribers can view all or any of the 5000+ online videos/courses stored in the content library for the duration of the subscription period, based on their choice and interest at subscription charges (currently Rs. 1,499 per month for standard plan – providing access to 2500+ courses and Rs. 2,299 per month for premium plan – providing access to 7,000+ courses) Along with the same, there are certain ancillary add-on features, such as short quizzes, exercises, discussion board etc. Prima facie, the online video content is very generic and routine in nature. The customers/subscribers can only view the videos and are not allowed to download, store, transmit or edit such videos. Further, the customers/subscribers do not get any right on the content or the infrastructure facilities. However, the customers are allowed to download certain ancillary course material such as exercise files, course slides, course index etc., but even such material cannot be shared, transferred, sold or exploited in any manner.
8. The AO had given three reasons to bring to tax the subscription amount received by assessee as “royalty”. The three reasons are as follows:
i) The subscription revenue is towards use of, or right to use any copyright.
ii) The subscription revenue is for information concerning industrial, commercial or scientific experience.
iii) The subscription revenue is received by assessee for granting right to use of equipment.
9. The provisions of India-USA DTAA have a more restrictive scope than the provisions of the Act (in view of section 90(2) of the Act), hence, we confine our adjudication of taxability of subscription fee under the India-USA The Article 12(3) of India-USA DTAA defines the term “Royalties”. The same reads as under:
“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.”
10. Now let us examine each of the reasonings given by the AO for bringing to tax subscription revenue as “royalty”.
i) Whether the subscription revenue is towards use of, or right to use any copyright:
11. Based on the definition of ‘Royalty’ under the India-USA DTAA, it is important to understand the meaning of the term ‘copyright’. The term ‘copyright’ is not defined under the provisions of the Therefore, the provisions of the Copyright Act, 1957 (‘Copyright Act’) has to be examined. As per section 14 of the Copyright Act, ‘copyright’ means the exclusive right to do any of the acts specified therein, viz., to reproduce the work, to issue copies of the work to public, to make any translation or adaptation of the work, etc. Unless any of the exclusive rights or a combination thereof as stated under section 14 of the Copyright Act are transferred by the copyright holder, it cannot be said that the use or right to use the copyright has been granted. Thus, payment made for acquiring the right to use any copyrighted product, wherein the payer does not get any of the ‘exclusive right’ as stated in section 14 of the Copyright Act, does not amount to payment made for the use or right to use the ‘copyright’ in the product and therefore, shall not be covered within the scope of ‘royalty’. The aforesaid principles have been upheld by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (supra). The Hon’ble Supreme Court has held that the amount paid by resident Indian end user/distributors to non-resident computer software manufacturers/suppliers is not payment of royalty for use of copyright since the end-use/distributor does not get any of the rights under section 14 of the Copyright Act and does not get the right to reproduce a computer programme and exploit the reproduction by way of sale, transfer, license etc., which is at the heart of the definition of ‘copyright’ under the Copyright Act. While holding so, the Apex Court has upheld the conclusions derived from the judgments of the Hon’ble Delhi High Court on the said issue as under:
“117. The conclusions that can be derived on a reading of the aforesaid judgments are as follows: . . . iv. A licence from a copyright owner, conferring no proprietary interest on the licensee, does not entail parting with any copyright, and is different from a licence issued under section 30 of the Copyright Act, which is a licence which grants the licensee an interest in the rights mentioned in section 14(a) and 14(b) of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the “licensed” computer software product over which the licensee has no exclusive rights, no copyright is parted with and consequently, no infringement takes place, as is recognized by section 52(1)(aa) of the Copyright Act. It makes no difference whether the end-user is enabled to use computer software that is customised to its specifications or otherwise. v. A non- exclusive, non-transferable licence, merely enabling the use of a copyrighted product, is in the nature of restrictive conditions which are ancillary to such use, and cannot be construed as a licence to enjoy all or any of the enumerated rights mentioned in section 14 of the Copyright Act, or create any interest in any such rights so as to attract section 30 of the Copyright Act. vi. The right to reproduce and the right to use computer software are distinct and separate rights, as has been recognized in Starte Bank of India (supra) (see paragraph 21), the former amounting to parting with copyright and the latter, in the context of non-exclusive EULAs, not being so. 118. Consequently, the view contained in the determinations of the AAR in Dassault Systems K.K. (supra) and Geoquest Systems B.V. (supra) and the judgments of the High Court of Delhi in Ericsson A.B. (supra), Nokia Networks OY (supra), Infrasoft Ltd. (supra), ZTE Corporation (supra), state the law correctly and have our express approval. We may add that the view expressed in the aforesaid judgments and determinations also accords with the OECD Commentary on which most of India’s DTAAs are based.” (emphasis supplied)
12. The assessee in the instant case also does not transfer any copyright or the right to use any copyright of any nature to any of the The relevant clauses of the sample MSA which the assessee enters with the subscribers read as under: MASTER SUBSCRIPTION AGREEMENT …….. Pluralsight provides an online technology learning platform on its websites http://www.pluralsight.com and any applicable sub domains thereof, and through any applications, functionalities, content, materials, Interactive Features (as defined below), or other online services provided by Pluralsight (collectively, the “site”). Customer desires to acquire business subscriptions for a number of its employees or its Affiliates’ employees (collectively, the “Business Users”) to access the Site, and Pluralsight agreed to grant such subscriptions subject to the terms and conditions set forth in this Agreement. TERMS AND CONDITIONS 1. GRANT OF LICENSE a. License Grant. Subject to the terms and conditions set forth in this Agreement, Pluralsight grants Customer a worldwide, non- exclusive, non-transferable License (the “License”) to use the Site. The License is for use by a specific number of Customer’s Business Users to whom Customer has assigned a valid business subscription (the “Business Subscriptions”) to access the Site by way of the License. The License and each Business Subscriptions are to be used solely internal purposes of Customer, for which the applicable Business License Fees have been paid. The number of Business Subscription granted hereunder will be set forth in a separate sales order form (each, a “Sales Order”) to be signed by Customer. Customer acknowledges and agrees that any breach of the terms and conditions of this Agreement by any of its Business Users will be deemed a breach by Customer…………………. 2. PROPRIETARY MATERIALS a. Use of Materials.
The Site contains copyrighted materials, trademarks, proprietary and confidential information, and intellectual property of Pluralsight and licensors of Pluralsight (collectively, “Proprietary Materials”), including, but not limited to, source code, video, text, software, photos, graphics, image, music, and sound. Customer agrees, for itself and for each business User, not to modify, publish, perform, make available to the public, transmit, participate in the transfer of sale of , create derivative works or adaptations of , or in any way exploit, in whole or in part, any Proprietary Materials. Proprietary Materials may only be accessed through the Site, and not from any other site or means. The License granted by this Agreement is a right of access through the Site only, and does not grant Customer or its Business Users any right to download or store any Proprietary Materials in any medium, other than that downloadable content that is provided for certain training courses and specifically identified as available for download, including exercise files, course slides, and sample code (“Authorized Downloadable Materials”). Authorized Downloadable Materials are held by Customer or its business Users pursuant to a limited right only, and are subject to all restrictions described in this Agreement, including the prohibition on further transfer, sale , creation of derivative works, or exploitation in any manner. Customer shall not, directly or indirectly: (a) sublicense , resell, rent, lease, distribute or otherwise transfer rights or usage in the Proprietary Material ; (b) provide the Proprietary Material on a timesharing, service bureau, service provider or other similar basis ; or (c) remove or alter any copyright, trademark or proprietary notice in the Proprietary Material. b. Reservation of Rights. Pluralsight reserves all intellectual property rights to the Proprietary Materials, other than as specifically granted under the License contained in this Agreement. No posting, copying, transmission, retransmission, distribution, redistribution, publication, republication, or otherwise reproducing , storing transmitting, modifying or commercially exploiting any Proprietary Materials in any form or by any means , for any purpose, is permitted without the express written permission of Pluralsight. Customer and Subscribers may not decompile, disassemble , or reverse engineer any software comprised in the Proprietary Material except to the limited extent as it permitted by law notwithstanding contractual prohibition.
3. PROHIBITED CONDUCT a. Prohibited Conduct. Customer will use the Site in compliance with applicable law and acknowledges and agrees that neither it nor its Business Users may: 1.reproduce , redistribute, transmit, assign, sell, broadcast, rent, share, lend, modify, adapt, edit, create derivative works of , license, capture, download, save , upload, print, or otherwise retain information and content available on the Site other than with regard to Authorized Downloadable Materials, subject to the limited permissions set forth in this Agreement;
2. permit or provide others access to the Site’s library using a Business User username and password or otherwise, or the username and password of another authorized user;
3. remove or modify any copyright, trademark, legal notices, or other proprietary notations from the Proprietary Materials or any other content available on the site;
4. violate or attempt to violate the Site’s security mechanisms or digital rights management, or otherwise breach the security of the Site or corrupt the Site in any way;
5. attempt to gain unauthorized access to the Site or assist others to do so;
6. co-brand or frame the Site or establish a link in such a way as to suggest any form or association, approval, or endorsement on our part, without the prior express written permission of an authorized representative of Pluralsight;
7. post to the Interactive Features or any other portion of the Site any inappropriate, offensive, racist, hateful, sexist, pornographic, false, misleading, infringing, defamatory, or libelous content;
8. use or attempt to use the Site to store or transmit software viruses, worms, time bombs, Trojan horses, or any other computer code, files, or programs designed to interrupt, destroy, or limit the functionality of any computer software, hardware, or telecommunications equipment; or
9. manually or systematically harvest, scrape, collect or otherwise extract information or data contained on the Site, other than permitted use of Authorized Downloadable Materials or temporary storage of video materials for offline viewing as permitted by the Site’s intended (Emphasis supplied)
13. From a perusal of the MSA, we find that the subscribers only get a nonexclusive, non-transferable license to view the videos on the Neither any copyright in the software/database, nor any copyright in the videos is granted to the subscribers. The assessee reserves all intellectual property rights in its Proprietary Material, which includes the source code, videos, text, software, intellectual property of the assessee etc. The subscribers are not even allowed to download, store, transmit or edit such videos. Further, while the subscribers are allowed to download certain ancillary course material (Authorized Downloadable Materials) such as exercise files, course slides etc., are subject to all the restrictions mentioned in the agreement and even such material cannot be shared, transferred, sold or exploited in any manner. In essence, in view of the restrictions imposed under the MSA, the subscribers are not allowed:
