Subscriber fees not Royalty as per Singapore DTAA when subscribers have no physical access to equipment providing service

The ground of Appeal with Income Tax Appellant Tribunal (ITAT) was the treatment of subscription fees received by the assessee as falling within the ambit of royalty u/s 9(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’] and/or under Article 12 of India – Singapore Double Taxation Avoidance Agreement (DTAA) and by treating such, the ld. CIT(A) erred in holding that the services rendered by the assessee are in the nature of imparting of information concerning commercial expediency.

The assessee is a company incorporated in Singapore and is a tax resident of Singapore and is a leading provider of comprehensive Customer Relationship Management (CRM) services to its customers. Services rendered by the assessee help the client in generating reports and summaries of the data which is fed into the salesforce database by the client itself.

It is pertinent to understand the services provided by the assessee. Client inputs, stores and retrieves its proprietary data on the Salesforce through the CRM application software portal. The assessee’s database provides access for the client’s own use to generate reports, basis the information fed in by the client in the desired format. The access to the assessee’s database is for a limited duration and the period for which the subscription fee is paid by the client. The assessee does not have a place of business in India and subscription fees for CRM services do not qualify as royalty or fees for technical services under the DTAA.

The Assessing Officer alleged that the assessee has been providing services in the form of Web services and is made available to users over a network, which is normally through the web/internet. The Assessing Officer further observed that by entering into the agreement, clients do not get ownership rights on any of the above items. They only get a right to use the equipment and software and therefore, the same is squarely covered under the definition of Royalty, both under section 9(1)(vi) of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’] as well as under Article 12 of India Singapore DTAA.

Supporting the findings of the Assessing Officer/ld. CIT(A), the ld. DR has strongly contended that cloud computing services/web hosting services involve the use of a process because the facility to use cloud computing has effectively led to the use of the technology-driven processes by the end-user. It is the say of the ld. DR that there are two broad level processes involved in cloud computing services. At one level, the process is to set up the system to deliver the cloud computing services and at the other level, there is a technology-driven process that is available for use by the end-user.

The ld. DR further submitted that cloud computing provides technology-enabled solutions which are embedded in them, the technology experience and skill which is industry and trade facility. The process embedded in these solutions is developed by people who have specialized empirical knowledge and technical skill, having already developed the required processes. It is the say of the ld. DR that it is these processes that are codified in the programming language to be conveyed through the software. These solutions, therefore, provide automation of the core process of a particular industry and definitely, are not simple computer programs.

According to the ld. DR, when the complex high-level technology solutions are transferred for use to the customer, the customer gets to use the process embedded in the said software. The process so made available still remains the property of the person who had created it and the customer gets the right to use the process embedded in the software.

In so far as the consideration received for subscription service to database and custom research is concerned, the ld. DR stated that the assessee has comprehensive databases, which contain research themes gathered from different sources. The database subscription service provides access to various customized reports and other data which is made available to subscribers via an interactive website.

Views of ITAT

In our understanding of the facts, the assessee provides web-based online access to its customer’s data hosted on servers located in data centers maintained by the assessee outside India. The assessee does not have any data centers in India and hence it cannot be considered to have a fixed place of business in India. The assessee neither has a place of management in India nor has any equipment or personnel in India. This fact has also been accepted by the ld. CIT(A) in his order. Therefore, in the absence of granting any control over the equipment belonging to the assessee to its customers, the allegation of the AO that the amount so received will constitute ‘Royalty’ is not acceptable.

Further, the assessee does not provide any information concerning industrial, commercial, scientific experience. The assessee only processes the proprietary data of the customers and provides the result in form of desired reports etc. On this count also, it cannot be said that consideration for CRM services are in the nature of royalty.

In our considered opinion, if the services have been rendered de hors imparting of knowledge or transfer of any knowledge, experience or skill, then such services will not fall within the ambit of Article 12 of the treaty.

Further, by granting access to the information forming part of the database, the assessee neither shares its own experience, technique or methodology employed in evolving databases with the users nor imparts any information relating to them.

In our considered view, the income earned by the assessee from the Indian customers with respect to the subscription fees for CRM cannot be taxed as royalty as per section 9(1)(vi) of the Act as well as Article 12(3) of the treaty.