Subscription income received by a foreign entity from Indian clients is not Royalty in accordance with the India-Ireland tax treaty

Court: Mumbai bench of the Income-tax Appellate Tribunal

Citation: Gartner Ireland Ltd Vs. DDIT (ITA No. 1452/Mum/08) (Mum)

Brief :Mumbai bench of the Income-tax Appellate Tribunal held that subscription income received by a foreign entity from Indian clients is not in the nature of Royalty in accordance with the India-Ireland tax treaty (tax treaty).  Further, the Tribunal relying on various Supreme Court decisions observed that the orders of the higher appellate authorities should be followed by the subordinate authorities and non compliance of this rule will result into undue harassment to taxpayers and chaos in the administration of tax laws.

Facts of the case

• The taxpayer, a tax resident of Republic of Ireland, is engaged in the business of distributing Gartner Group’s research products in the form of subscriptions, both in Ireland and in those territories where the Gartner Group does not have a local presence.

• The research products consisted of qualitative and quantitative research that include statistical analysis, growth projections and market share rankings of suppliers and vendors of IT manufacturers and the financial community.

• The taxpayer sold subscriptions to its Indian customers/subscribers which enabled them to access Gartner’s research products over the internet from its data server which was located outside India. The Indian subscribers paid the subscription/ access fees to the taxpayer in terms of service agreement.

• The taxpayer claimed that the subscription/access fees represented its business income and in the absence of any place of business in India during the year under consideration the same was not taxable in India as per Article 7 read with Article 5 of the tax treaty.

• The taxpayer placed reliance on the decision of Bangalore Tribunal in the case of Wipro Ltd. Vs. ITO [2004] 278 ITR 57 (Bang) , in which similar subscription/ access fees received by the taxpayer from WIPRO Ltd. under identical service agreement was held to be not chargeable to tax in India.

• The Assessing Officer (AO) in his order had acknowledged that similar arguments of the taxpayer were accepted by the Bangalore Tribunal in the case of WIPRO Ltd. However, he still treated the subscription/access fees received by the taxpayer from Indian clients as royalty as per Article 12 of the tax treaty.

Tribunal’s ruling

• The Tribunal observed that the taxpayer had received similar subscription amounts from WIPRO Ltd. under identical agreement. Further, the decision rendered in the case of WIPRO Ltd. was squarely applicable to the case under consideration.

• In the case of WIPRO Ltd it was held that:

-The payments were towards obtaining market data and clients strategy details etc., which were publications and not information or advice given individually. The information was available on subscription to anyone willing to pay.

-It was copyright information and couldn’t be passed on to anyone else. There was no license to anyone to use it in any manner or quote to anyone else and the access was restricted to specific individuals.

-The annual subscription was an access fee to database maintained outside India and the fee was payable even if no service was utilized.

-It was for use of a copyrighted article and not for transfer of right in the copyright in the article.

-The copy-right must be of a literary, scientific or artistic work which was not the case of the taxpayer and therefore payments of subscription fell outside the scope of definition of royalty under the tax treaty.

• Based on the decision of WIPRO Ltd, the Tribunal held that the subscription/access fees received by the taxpayer from Indian clients were not in the nature of Royalty under the tax treaty.

• The Tribunal observed the Supreme Court’s decision in the case of Kamlakshmi Finance Corpn. Ltd. [1991] 55 ELT 433 (SC) , in which it was held that principles of judicial discipline require that the orders of the higher appellate authorities should be followed by the subordinate authorities. Further, the Supreme Court had held that non compliance of this rule will result into undue harassment to taxpayers and chaos in the administration of tax laws.

• Accordingly, the Tribunal held that the A.O. as well as the Commissioner of Income tax (Appeals) [CIT (A)] ought to have followed the order of the Tribunal in the case of WIPRO Ltd. which was squarely applicable to the case under consideration.

Our Comments

This is an important ruling by the Mumbai Tribunal wherein it is held that income by way of subscription/access fees received by the taxpayer from Indian clients were not in the nature of Royalty in accordance with the tax treaty.

The Tribunal has vehemently stated that the principle of judicial discipline which requires that the orders of the higher appellate authorities should be followed by the subordinate authorities, has to be observed at all times. The Tribunal has severely critisised the AO and CIT (A) for not following the decision of the Bangalore Tribunal in the case of WIPRO Ltd.