INSIGHT: Database Access Not Taxable as a ‘Royalty’ Under India–Switzerland Tax Treaty

The entity IQVIA AG, formerly known as IMS AG (IMS or taxpayer) (IMS AG v. DCIT (ITA No.6445/Mum/2016) (2020) Mumbai Tribunal), is a fiscally domiciled company in Switzerland. IMS is engaged in the business of providing market research reports on the healthcare sector to its customers across the globe at an agreed subscription price. IMS collects, processes and utilizes the data and information for the delivery of reports online through the IMS knowledge link, specifically devoted to medicine and pharmaceuticals.

IMS entered into a subscription agreement with its customers to review reports outlining module details for their access on a non-exclusive and non-transferable rights basis. The reports, based on the module selected, are formed of statistical database compilations, providing geo-economic data, about a medical molecule, comprehensive insight into the connected issues relating to information and developments in the medicine and pharmaceuticals sector.

The taxpayer received consideration towards access of non-exclusive, non-transferable database reports from its customers. The tax authorities (revenue), relying on the High Court ruling of CIT v. Wipro Ltd [2011] 203 Taxman 621, assessed that consideration received for access of database in the report is taxable as a “royalty” under Indian domestic laws as well as under Article 12(3) of the India–Switzerland tax treaty (tax treaty).

Tribunal Ruling

Interplay of Covid-19 with the Tribunal Order

The Tribunal reviewed procedural rules that deal with the date of pronouncement of the order by the Bench “ordinarily” to be within 90 days from the date of concluding the hearing practiced by all revisionary and appellate authorities.

The Tribunal, considering the Covid-19 pandemic restrictions in India, pronounced the order after a period of 90 days. The Supreme Court and the High Court, owing to the unprecedented situation, issued an extension of limitation to exclude not only the restriction period but additional days prior to and after the restriction to consider the expiry of limitation until the date on which the lockdown is lifted in the jurisdictional area where the dispute lies or where cause of action arises.

The jurisdictional High Court and the Supreme Court suo motu had decided on extraordinary measures to grant relief of the restriction period that cannot be regarded as a usual situation during which the normal time limits can remain in force. Accordingly, the tribunal concluded that even without the term “ordinarily,” the period during which restrictions are enforced can be excluded from the time limit set out under the rules to pronounce the Tribunal order.

Royalty Characterization

IMS associated its transaction to grant non-exclusive and non-transferable access of the market research report and the database to its customers with the sale of a book, that does not involve in any transfer of intellectual property.

In support of this argument, the taxpayer relied on the High Court ruling of DIT v. Dun & Bradstreet Information Services India (P.) Ltd [2011] 338 ITR 95 (Bom) approving the AAR case stating that payment to foreign subsidiaries for sale of business information reports are for purchases of reports and not towards consideration for the use of, or right to use, any copyright of literary, artistic or scientific work or any patent trade mark or for information of commercial experience.

Thus, payment to access a standardized product where the information is available in the public domain did not fall within the criteria of “royalties” under Article 13(3) of the India–Spain tax treaty.

The Tribunal observed that the ratio of the Dun and Bradstreet decision, approved by the High Court, can be applied to the taxpayer’s case where Article 12(3) of the tax treaty is identical to Article 13(3) of the India–Spain tax treaty. Therefore, reports outlining module details accessed by the customers on a non-exclusive and non-transferable right basis of statistical database compilations, providing geo-economic data, about a medical molecule, and insight into the connected issues relating to information and developments is not taxable as a royalty under the provisions of Article 12(3) of the tax treaty.

In absence of taxability under the tax treaty, there was no question of charging tax under the Indian domestic laws since the provisions apply only when such provisions are more favorable to the taxpayer compared to the applicable tax treaty.

Consequently, the tribunal deleted the addition made by the revenue of a royalty in the hands of IMS by relying on the jurisdictional High Court ruling favoring the database access issue without any contrary opinions of any other High Court on record.

Key Takeaways

The taxability of subscription charges for access to online databases has been a subject matter of contention before multiple courts; dealt with adversely in the case of Wipro Ltd where the High Court held that payment to a nonresident to obtain a license to use a database was regarded as a royalty, and including the case of Gartner Ireland Ltd v. ADIT (ITA no. 7101/Mum/2010) that confirmed a subscription fee paid towards the research of the product sold by a foreign company was taxable as a royalty.

Contrary to this, it is worthwhile noting the case of Infrasoft, where Delhi High Court clarified that the taxpayer claimed a limited right to use the information which is simply the “copyrighted information,” rather than for the use of copyright. In explaining the concept, it made a distinction between “copyrighted” article and “copyright” in explaining the concept that the right to make a copy of the article be regarded to constitute copyright and payment made for granting a license would constitute royalties.

The decision remains consistent with the Commentary to the OECD Model tax treaty including favorable jurisprudence in the Dun & Bradstreet, Factset Research Systems Inc. cases which conceptually held that consideration towards non-exclusive and non-transferable access to the database and market research report is not taxable as “royalty” following the rationale of the copyright article under the India–Switzerland tax treaty.

Shailendra Sharma is a Chartered Accountant associated with a multinational financial services firm, India.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.