Treatment of subscription fees, membership fees, etc.

Basic idea of what the article relates to: –
Many of us visit regularly on various websites to read some articles, journals or to watch some videos. One of such example is Taxmann, Netflix. To watch videos on Netflix we have to pay subscription fees.
Now the question arises how this amount received by Netflix from its India Customers will be taxable in India, whether it will be taxable in India or Not? If yes then How? & If no then Why?

CASE LAW: – Elsevier Information Systems GmbH v/s Dy. Commissioner of Income Tax

Facts of the Case: –
Elsevier Information Systems GmbH, a company incorporated in German, had a website named ‘Reaxys’, the website provides access to its database pertaining to chemical information including articles on chemistry topic. The website is accessed by customers all around the world and the company earns subscription fees in return. In the same way, the company received fees from its Indian Customers also.
The taxpayer considered the same to be its business income, which should not be taxed in India with reference to Article 5 (Permanent Establishment – PE) of the Double Taxation Avoidance Agreement (DTAA) between India and Germany, as the taxpayer didn’t had any PE in India. The Assessing Officer (AO) considered the fees to be Royalty or Fees for Technical Services (FTS), and should thereby be taxable in India.
The AO considered the fees to be Royalty or FTS with a view that the database is akin to a very
well-equipped library of relevant information with a knowledgeable librarian who provides instant required information on demand as the database is managed in such a manner that the customer can get the desired result without applying much efforts due to the execution of tools embedded in the database.
Issue: –
Whether the subscription fees received by the assessee from its Indian Customers should be treated as Royalty or FTS and be liable to tax.
Contentions: –
The Assessee argued that,
1. The subscription fees cannot be treated as “Royalty” under Article 12 as while providing the access to the online database, the assesse does not give its customers any right to use the copyright in the database. There is no transfer of any ownership rights such as right to copy the database for reproduction or sale, right to grant license to any person who wishes to use the database, etc to the customers.
Further, the articles in the database are collated from various magazines and journals which are available publicly and hence, the subscription fees shall not be considered as Royalty.

2. The term “Fees for Technical Services” (FTS) includes services which are of managerial, technical or consultancy nature including the provision of services by technical or other personnel.
Assessee contested that giving access to the database is not in the nature of managerial, technical or consultancy service merely because the subject matter of the database is highly technical. It also does not involve any human intervention, the customers enter their queries and based on some keywords the queries are answered, there is no customize response given to such queries.
Ruling: –
The ITAT also examined the subscription agreement, to understand the business model of the assesse and to determine how the income earned by the assesse should be characterized. The database can be accessed thru regular web browsers such as Internet Explorer, Google Chrome, etc. wherein the users are authenticated via a User Id and Password or via Internet Protocol (IP) address i.e. there is no need of a particular hardware or software to be installed to access the database.

The ITAT found that when a subscriber accesses an online database he or she only gets an access to a copyrighted article & not the copyright itself. Hence, the same cannot be treated as Royalty or FTS.

Conclusion: –

On the basis of above, The ITAT concluded that the same was business income of the German Co. and was not taxable in India as it did not have any PE in India.

CA. Mehul S. Parmar: +91 9619 845 782

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