Summary: Mumbai ITAT in Slack Technologies Ltd. v. ACIT (International Taxation) held that subscription receipts earned by the Irish company from Indian customers for access to its hosted communication platform were not “royalty” either under Section 9(1)(vi) of the Income-tax Act, 1961 or Article 12(3)(a) of the India-Ireland DTAA. Slack retained ownership of the software and intellectual property, while subscribers received only limited, non-exclusive and time-bound access to the platform. The Tribunal found no evidence that source code, copyright or any proprietary process was transferred to customers. Although Slack used complex technological processes to provide its services, those processes continued to be used by Slack itself rather than by subscribers. Drawing an analogy with a restaurant, the Tribunal observed that a customer pays for the finished product and not for the recipe or process used to prepare it. The ruling therefore treated the receipts as business income which, in the absence of a permanent establishment in India, was not taxable in India. The article also examines the limits of the ruling, including its treatment of the wider domestic-law royalty definition, Explanations 4 and 5 to Section 9(1)(vi), Section 90(2), the India-Ireland treaty, possible Revenue appeal under Section 260A, and the extent to which the reasoning may apply to hosted AI subscriptions.
1. The dispute
Slack Technologies Ltd. is an Irish company, resident in Ireland, which sells Slack to customers outside the United States and Canada (the “Rest of the World” or ROW seller). Indian customers buy Slack on a subscription basis, annual or for a fixed period. The company had no permanent establishment in India. It did not offer the subscription receipts to tax, arguing that they were not “royalty” under section 9(1)(vi) of the Income-tax Act, 1961 or under Article 12(3) of the India-Ireland DTAA. It relied on the Supreme Court’s decision in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (2021). The Assessing Officer disagreed on two footings:
- The receipts were consideration for the transfer of rights in a copyright, which is royalty under section 9(1)(vi).
- Alternatively, and without prejudice, the software was a “process” (or property similar to a patent, design or process) whose use is royalty under section 9(1)(vi) and Article 12(3).
The Dispute Resolution Panel (DRP) took a somewhat different route. It noted that the software is hosted on Amazon Web Services and held that the fee was not for the sale of software but for software-as-a-service delivered through a chain of digital processes. In its view the customer was being given “access to process”, so the receipts were royalty. Final assessments followed the DRP’s directions, and Slack appealed to the Tribunal.
2. What the Tribunal decided, and why
The Mumbai Bench allowed the appeal in favour of the taxpayer on the merits basis following points:
(a) Slack owns the software and keeps owning it. The subscription terms give the customer only a non-exclusive, limited licence to use the platform. All intellectual property stays with Slack, and no backup copy is permitted.
(b) The ‘copyright’ limb failed on the record. The Tribunal said the AO had “miserably failed” to show that subscribers acquired any right to use the copyright. It treated the source code as the “lifeline and soul” of software: a person who holds it can replicate and commercially exploit the product. Nothing on record showed that source code or intellectual property rights had been handed to subscribers.
(c) The process limb failed because Slack uses the process, not the customer. The Tribunal agreed with the DRP that Slack delivers its service through complex processes. But it turned that finding against the Revenue. If Slack provides services by using its processes, the processes are used by Slack, not transferred to subscribers. Using a process to render a service and letting a customer use the software without access to that process are “two distinct activities” that cannot be mixed up.
(d) The comparison with other platforms. After COVID-19, Cisco Webex, Zoom, Google Meet and similar platforms are used on subscription for business and even judicial proceedings. The Tribunal compared Slack’s interface with Webex’s and found them “functionally similar”. It called it “preposterous” to assume that millions of users of such platforms have access to the technology behind them.
(e) The illustration. The Tribunal put its inference in a restaurant analogy. A diner at a fine-dining restaurant pays for the dish, not for the process of preparing it. The restaurant is not obliged to reveal the recipe, and the diner does not want it. The customer wants the finished product. The analogy carries three inferences. First, a subscriber pays for the outcome of the platform (messaging, meetings, file sharing), not for a right over the method that produces it. Second, the existence of a sophisticated process behind a service does not make the service a transfer of that process. Third, if the customer neither gets nor wants the process, a payment for the service cannot be a payment for the “use or right to use” of the process.
Result. The receipts are not royalty under Explanation 2(iii) to section 9(1)(vi) or Article 12(3)(a) of the DTAA. They are business receipts, and without a PE in India they are not taxable.
3. What does Slack actually provide?
On the Tribunal’s description, and the submissions it records, Slack is “a communication platform and nothing else”. Concretely:
- A customer subscribes, creates a workspace, and invites users, who log in through the email domain.
- Within the workspace users run channels and direct messages, hold meetings and audio huddles, and share files and notes. The screenshots also show canvases, lists and workflows.
- The customer picks a plan (Free, Pro, Business+ and Enterprise+ in the pricing screenshot). Higher tiers add features such as unlimited history, app integrations and single sign-on, and also AI features: conversation summaries, AI search, daily recaps and file summaries.
- The software is hosted on AWS and the data sits in Slack’s environment. The customer reaches it over the internet and has no installed copy to keep.
- Access lasts only while the subscription does. When the plan ends, so does access.
The Revenue’s own description was wider. It said the customer receives communication, collaboration, hosting, security, data storage, workflow management and continuous back-end functionality, and that each click invokes Slack’s proprietary processes. The Tribunal accepted that these are real services delivered through complex processes. Its answer was that this makes Slack a service provider, not a licensor of the process.
4. Act versus DTAA: how far does the Tribunal’s analysis go?
The order does not contrast the Act’s wider royalty definition with the treaty’s narrower one, and it does not discuss the “copyright” versus “copyrighted article” distinction. It tests both the Act (Explanation 2(iii)) and the treaty (Article 12(3)(a)) against the same question: was the use, or right to use, of a copyright or process transferred to the subscriber? Having answered that on the facts, it held the receipts outside both. That is useful to know before relying on the decision for the wider proposition. Two consequences follow, and they matter for how far the Slack decision can be pushed:
1. For a treaty resident such as Slack Ireland, the Act’s width largely does not matter. Under section 90(2), the assessee can rely on whichever is more beneficial. If the treaty does not treat the receipt as royalty, the Act’s wider net is academic. And Article 12(3)(a), as the Tribunal quotes it, already includes “process”, so the fight on the process limb is a treaty fight too.
2. The Act’s wider definition bites on the copyright-licence limb (Explanation 4) and on the Explanation 5 “information or right” limb, which have no treaty equivalent. These matter where there is no treaty protection, or where a treaty is not as favourable.
Therefore, the question arises is whether the reasoning provided by the Tribunal enough to consider such payments out of the section 9 ambit? In our view, the decision is persuasive in its core but loosely drafted at the edges.
Ownership and commercial exploitation are not the statutory test. Tribunal repeatedly asks whether subscribers could replicate, modify or “exploit commercially” the software, “as owner of the copyright”. But the clauses speak of “use or right to use”. A licensee can “use” a copyright or process without owning or exploiting it. The reasoning works better when read as “the customer received no right to use the process, as distinct from the benefit of its output”, and the paragraph does not always say that. The restaurant analogy explains the process limb, but not the copyright limb. It does not address Explanations 4 and 5 or the argument that the customer uses embedded copyright every time it uses the software. Further, the Act-only limbs are not engaged. The order does not discuss Explanations 4, 5 or 6, which is why the legal grounds were left open.
5. Risk of reversal in higher forums
Any appeal by the Revenue would lie to the Bombay High Court under section 260A of the 1961 Act and would need a substantial question of law. Overall, the treaty-based result reasonably secure but the Act-based reasoning is thinner. A reversal is more likely to come from a different characterisation of “use or right to use” than from a challenge to the facts.
6. Does the decision carry over to AI tool subscriptions?
A plain subscription to a hosted AI assistant resembles Slack on the points the Tribunal relied on where the provider keeps the model and code, the user gets limited, time-bound access, and the processes run on the provider’s infrastructure. But modern AI tools do much more than communicate. They write and debug code, generate scripts and build working software tools, and the output often becomes the customer’s own commercial asset. That makes two assessee-friendly arguments harder to sustain:
- “Make available” (fees for technical services).The Revenue can argue that a user who receives working code, a documented method or a reusable automation has been enabled to apply the technology independently, which is the idea behind the make-available condition. The assessee would answer that only an output is delivered, not the provider’s know-how, but that answer weakens where the tool substitutes for engineering or consulting work.
- Copyright versus copyrighted article.Generated code and designs may attract copyright, and many providers assign or license output rights to the user. The Revenue can say the payment buys more than access to a copyrighted article, so the Engineering Analysis decision does not obviously settle the matter.
Downloadable clients, licensed model weights, dedicated deployments and bundled advisory work add further risk. The contract and the actual use of the tool will decide the outcome. The Slack decision supports hosted, access-only subscriptions, not every AI offering.
7. Conclusion
The Slack decision applies a clean principle, paying to use a platform that the provider operates is not paying for a right to use the provider’s copyright or process. The treaty-based outcome is consistent with the existing line of authority. The reasoning on the Act leave room for the Revenue to contest it. For AI subscriptions, the decision is a helpful starting point for pure SaaS access, and the contract and delivery model will decide whether it reaches further.
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Disclaimer: The above information is intended for academic guidance and is to be used for informative purpose only. The said information is not to be considered as an opinion or advice. The aforesaid information is proprietary and privileged and is not to be used, reproduced and disclosed without consent. It is advisable to check with a subject matter expert before concluding on applicability or non-applicability of any compliance under any legislature. The views expressed are strictly personal.
The above article is written by CA Shravan Suratwala. The author can be reached at [email protected].
CA Shravan Suratwala is a Partner at S.M. Suratwala & Co., Chartered Accountants. Shravan has 10+ years of post-qualification professional experience in advisory, litigation and compliance areas of Corporate and International taxation and Assurance and 5+ plus years in the field of Internal and Process Audit.
