ITAT Holds Slack Subscription Fees Not Taxable as Royalty Under Income Tax Act and India-Ireland DTAA:

Slack Technologies Limited is an Ireland-incorporated and Ireland tax-resident company, operates as a Rest of the World seller of Slack software, a communication platform supplied to customers on a subscription basis.

For Assessment Years 2021-22 and 2022-23, the assessee received subscription charges of Rs 14,48,49,742 and Rs 74,11,37,632 respectively. It did not offer these receipts to tax in India, arguing that the subscription fees were not royalty either under Section 9(1)(vi) of the Income Tax Act, 1961 or Article 12(3) of the India-Ireland DTAA. 

During assessment proceedings, the AO examined the nature and functionality of the software and concluded that the receipts represented consideration for the transfer of rights in copyright, literary, artistic or scientific work. Alternatively, the AO held that the software involved a process covered within the definition of royalty under Section 9(1)(vi) of the Act and Article 12(3) of the India-Ireland DTAA. Accordingly, the subscription receipts were treated as royalty. The assessee challenged the proposed additions before the DRP which held that the receipts represented consideration for access to digital processes and were therefore in the nature of royalty.

Before the Tribunal, the assessee submitted that Slack was an online communication platform through which subscribers could host meetings, exchange messages and share files according to their selected subscription plans. The subscription terms specifically provided that copyright and other intellectual property rights remained with the assessee, while customers received only a non-exclusive right to access and use the platform during the subscription period.

But, according to the Department, the consideration was for the use of a process and constituted royalty under both the Act and the DTAA. The Tribunal noted that Slack Technologies was the creator, developer and owner of the software. Subscribers were provided access to the platform under different subscription plans for specified periods and could use it for functions such as meetings, messaging and file sharing.

The Tribunal observed that the subscription terms clearly established that the assessee retained ownership of the software and all related intellectual property rights. The Tribunal made an important distinction between using a process to provide services and transferring the use or right to use that process to a customer.

However, in the present case, the subscription agreements and other material on record did not establish that subscribers were granted the use or right to use any process involved in developing Slack software. The payment was for access to the online communication platform and its facilities, not for the underlying process.

Accordingly, the Tribunal held that the subscription receipts did not fall within the definition of “royalty” under Article 12(3)(a) of the India-Ireland DTAA or Explanation 2(iii) to Section 9(1)(vi) of the Income Tax Act. The Tribunal held that the receipts were business receipts of Slack Technologies. Since the assessee did not have a permanent establishment in India, the receipts were not taxable in India. The AO was therefore directed to delete the additions.