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Income Tax Appellate Tribunal, Mumbai Rules Subscription Fees as Non-Taxable Business Profits for Assessee Without Permanent Establishment in India


In a significant decision, the Income Tax Appellate Tribunal (‘ITAT’), Mumbai in the case of American Chemical Society v. Dy Commissioner of Income Tax[i] examined whether the subscription fees received by the American Chemical Society (‘assessee’) from its Indian customers constitute ‘royalty’ under the US-India Double Avoidance Taxation Treaty (‘DTAA’) and the Income-tax Act, 1961 (‘Act’).  The ITAT ruled that these fees are business profits, not taxable in India, as the assessee does not have a permanent establishment (‘PE’) in the country.

 Facts of the case

  • The assessee is the US-based scientific society that supports scientific inquiry in the field of chemistry. It also provides journal services in India from outside India and earns revenue in the form of subscription fees from Indian customers.

  • The assessee filed its return of income (‘ROI’) for the assessment year (‘AY’) 2021-22 amounting to Rs.2,89,46,950. The assessee’s ROI was subjected to scrutiny assessment under s.143(2) of the Act.

  • Subsequently, the assessing officer (‘AO’) passed a draft assessment order u/s.143(3) r/w s.144C(1) of the Act, focusing primarily on subscription revenues from providing access to online chemistry databases, sales of online journals, and subscription revenues from membership in the M&SA division, excluding advertising and membership revenue.

  • Furthermore, the AO had previously assessed subscription revenue for A.Y.2014-15 to 2017-18 earned by the assessee. This assessment excluded advertising and membership revenue. The AO charged the subscription fee earned by the assessee at the rate of 15% under the DTAA.

  • In which the ITAT has granted relief for AY 2014-15 to AY 2017-18 and the Department of Income Tax (‘Department’) has filed an appeal before the High Court of Bombay (‘HC’) for A.Y.2014-15 to A.Y.2017-18, which is still pending as on date.

  • The Dispute Resolution Panel (‘DRP’) upheld the order passed by the AO. Aggrieved from the said directions of the DRP, the assessee has filed a present appeal before the ITAT.


  • The ITAT allowed the appeal filed by the assessee, rely6ing on a precedent[ii] set in the assessee’s own case for the AY 2016-17, which dealt with an identical issue regarding whether the subscription fee earned by the assessee can be termed as ‘royalty’.

  • It was determined that while the assessee grants access to its database, it does not confer the right to exploit or reproduce the articles. Thus, the customers are only able to access journals/articles for the personal use of information and no kind of use or right to reuse the copyright is provided to the customers by the assessee.

  • Furthermore, the customers do not get access, nor do they possess control dominion over the servers. Hence, the consideration received by the assessee for permitting the right to use any article by way of Chemical Abstract Service (‘CAS’) division fees and Publications (‘PUBS’) division for sale of journal does not amount to ‘royalty’ in terms of s.9(1)(vi) of the Act and as well as a.12(3) of the DTAA and therefore absence of PE in India the assessee income earned is not taxable in India. 

  • The ITAT restored the issue to the file of the AO for further examination. They instructed the AO to verify the relevant documents to determine the correct receipt of the assessee. The reported figure stands at Indian Rs.2,91,61,72,122/-, whereas the actual receipt is Indian Rs.137,25,62,534/.

  • The ITAT restored the issue of levying interest of Rs. 128,63,845 and Rs.793,83,839 under ss.234A and 234B of the Act, to the file of the AO for deciding afresh after verification of the relevant material.

Our Analysis

Taxation of subscription fees has become a contentious issue in India and has led to significant litigation at various forums. The ambiguity arises as to whether subscription fees amount to royalty and whether it is subjected to taxation under the DTAA (in the case of foreign companies) and the Act. This issue was addressed in the present case which had held that the subscription fees collected by the assessee do not amount to royalty and shall not be taxable in India.

In order to analyse the ratio of the decision, it is imperative to understand what royalty is and the relevant article under the DTAA, the nature of business undertaken by the assessee and the jurisprudence surrounding this issue. Royalty refers to the payment made to an individual for the utilization of their intangible assets such as copyrights, trademarks, or patents, which is taxable under both the DTAA and the Act.

The Hon’ble Supreme Court in its decision of Engineering Analysis Center for Excellence v. CIT[iii], observed that the amount paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers as consideration for resale/use of the computer software as consideration for the resale/use of computer software through distribution agreements is not payment of royalty for the use of copyright. The Delhi High Court in its decision of Director of Income Tax v. Infrasoft[iv], observed that the right to use a copyrighted article or product with the owner retaining his copyright is not the same thing as transferring or assigning rights in relation to the copyright.

To conclude, the decision rendered by the ITAT has provided a sigh of relief to the foreign companies which are rendering database services in India. However, the issue remains prevalent despite SC addressing it as it evolves factually rather than legally.

End Notes

[i] [2024] 161 354 (Mumbai - Trib.)

[ii] ITA No. 6952/Mum/2019

[iii]  (2022) 3 SCC 321

[iv] SCC OnLine Del 13369

Authored by Kushagra Gahlot, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.


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