Delhi High Court: Subscription Received from Subscriber’s Cannot Be Treated as Royalty as No Copyright is Granted to Subscribers

Delhi High Court: Subscription Received from Subscriber’s Cannot Be Treated as Royalty as No Copyright is Granted to Subscribers

The Delhi High Court ruled that the subscription amount cannot be treated as royalty, considering that there was no evidence on file indicating that the respondent/assessee had granted the right in respect of copyright to the relevant subscribers of the e-journals.

The division bench of Justices Rajiv Shakdher and Girish Kathpalia observed in the present case that all that the respondent or assessee had done was to sell the copyrighted publication to the concerned entities without conferring any copyright in the said material.

In the present case on 31 March, 2015 the respondent/assessee submitted its return of income (ROI) for the pertinent AY, which was 2013–2014. The respondent/assessee originally processed its declaration of ‘nil’ income under Section 143(1) of the Income Tax Act, 1961 through the aforementioned return of income (ROI).

However, the ROI was chosen for examination, and as a result, the respondent/assessee was served with a notice dated 20 August, 2015 issued under Section 143(2) of the Act. Three increases to the respondent’s income were made by the Assessing Officer (AO) through order dated 4 May, 2016, which was issued in accordance with Section 143(3) read with Section 144C(3)(a) of the Act.

The AO saw the aforementioned three additions as royalties, and to that end, it made use of Section 9(1)(vi) of the Act and Article 12 of the Double Taxation Avoidance Agreement between Germany and India (DTAA).

The respondent/assessee opted to file an appeal with the Commissioner of Income Tax (Appeals) (CIT[A]).

In a ruling dated 22 January, 2019, the CIT(A) partially upheld the appeal. The second part of the initial addition, which was equal to Rs. 1,94,279 and had been labelled as ‘service charges’ for the sale of ‘Indian journals in printed form,’ was eliminated by the CIT(A).

Insofar as the second and third additions were concerned, the CIT(A) confirmed the same, i.e., both with regard to the amount, as well as the treatment accorded to them by the AO. In other words, these amounts were treated as royalty, by the CIT(A) as well.

Aggrieved, the respondent/assessee preferred an appeal with the ITAT. The ITAT allowed the appeal of the assessee.

Senior Standing Counsel Ruchir Bhatia, for the appellant/revenue, submitted that the addition of Rs. 22,89,835/- sustained by the CIT(A) as fee for technical services (FTS) was tenable, having regard to the terms of the Commissionaire Agreement. The services such as promotion, sale and distribution of products globally could be categorised as consultancy services. Likewise, services such as order handling, inventory management, debtor management and subscription management could be categorised as managerial services.

Advocate Himanshu Sinha, for the respondent, submitted that the respondent/assessee, which is a German company, was part of Springer Science + Business Media Group during the period under consideration. The Springer Group was engaged in the business of publishing books, and academic journals, in the field of natural sciences, technology and medicine.

He argued that the respondent/assessee collected subscription and other revenue/fees from the sale of electronic books and journals to third-party customers, which it ultimately paid to SIPL, albeit after retaining its commission, as agreed under the Commissionaire Agreement.

The Court at the outset observed, “Section 9 establishes a deeming fiction for income accruing or generating in India, which includes, among other things, FTS paid by a resident. Explanation 2 to the aforementioned provision defines FTS as any payment (including lump sum payments) for the provision of managerial, technical, or consulting services. Payments for the recipient’s own construction, assembly, mining, or similar projects are not considered to be FTS, nor are payments that would otherwise be considered compensation subject to taxation under the ‘salaries’ heading.”

Therefore, for the consideration received by the respondent/assessee against services rendered as per the Commissionaire Agreement to be construed as FTS, the services would have to fall under one or more categories mentioned above, i.e., managerial, technical or consultancy services, opined the Court.

The bench noted that there were no special skills or knowledge that the respondent/assessee’s personnel were required to possess to render the services that were contemplated under the Commissionaire Agreement. The respondent/assessee also did not render any professional advice, or service concerning a specialized field.

The Court avowed that for a service to be categorized as a technical service, it had to be concerned with applied science, i.e., using scientific knowledge for practical applications, or industrial science concerning, relating to or derived from industry.

The bench held that the CIT(A)’s conclusion that the said amount received by the respondent/assessee had attributes of FTS was erroneous.

It was opined by the bench that the submission that subscription fee should be treated as FTS cannot be accepted, as this was not the stand of the appellant/revenue before the ITAT.

The Court remarked this to be a flip-flop which the respondent/assessee would do well to abjure.

It was further opined that the subscription amount cannot be treated as royalty, having regard to the fact that there is nothing on record to suggest that the respondent/assessee has granted the right in respect of copyright to the concerned subscribers of the e-journals. All that the respondent/assessee did was to sell the copyrighted publication to the concerned entities, without conferring any copyright in the said material.

Thus, the Court stated that the ITAT had rightly deleted the addition made and upheld the order passed by the ITAT. The appeal was accordingly, closed.