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Synopsis

In a significant ruling, the Delhi High Court has clarified the legal framework surrounding the subscription to legal databases, stating that such subscriptions do not constitute a transfer of copyright. This decision came as a result of an appeal by the Income Tax Department against Relx Inc., the owner of the LexisNexis legal database, which argued that subscription fees should be taxed as "royalties" under the Double Taxation Avoidance Agreement (DTAA).

The controversy stemmed from the IT Department's claim that the subscription fees paid to LexisNexis were for the use or right to use copyrighted or literary, artistic, or scientific works, thus constituting royalties. If proven, these payments would be subject to taxation under the DTAA between India and the USA.

Relx Inc., represented by Senior Advocate Ajay Vohra with Advocate Aditya Vohra, had initially declared ‘no income’ for tax purposes in India in 2018, leading to scrutiny from the IT Department. After an assessment, the IT Department deemed the income from the subscription as taxable under the guise of technical consultancy.

The matter had initially been brought before the Income Tax Appellate Tribunal (ITAT), which sided with Relx, prompting the IT Department's appeal to the High Court. The department's arguments extended to suggesting that Relx's income should be taxable in India under specific provisions of the Income Tax Act, asserting that the nature of the service fell within technical consultancy.

The IT Department's argument before the High Court highlighted their contention that the Income Tax Appellate Tribunal (ITAT) had made an error in ruling that the subscription fee for LexisNexis, owned by Relx Inc., should not be taxable as "business income" due to the lack of a "permanent establishment" in India. Furthermore, the IT Department argued that Relx Inc.'s income should be taxable in India according to Explanation 2 to Section 9(1)(vii) of the Income Tax Act. This section addresses situations in which income earned by a non-resident is considered taxable within the Indian jurisdiction.

However, the High Court, presided over by Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav, dismissed these arguments, affirming that simply providing access to a database does not fit the definition of technical consultancy and, more importantly, does not involve any transfer of copyright or technology application rights as outlined in the DTAA. The judgment reiterates the importance of distinguishing between different types of intellectual property rights and their implications for taxation and international agreements.

The division bench emphasised the distinct legal separation between a copyright transfer and the provision of a service or right to use copyrighted material. The court's reasoning hinged on the critical distinction between access and ownership. “Neither the subscription agreement nor the advantages accorded to a subscriber can possibly be considered in law to be a transfer of a copyright”, the court observed. The court found that the service provided by Relx Inc. was merely granting access to the database and did not include any additional managerial, technical, or consultancy services that would classify the fees as royalties

It highlighted that subscribing to a legal database only grants users access to the information it contains, not ownership rights over the copyrighted material itself, as delineated under Section 9(1)(vii) of the Income Tax Act. This distinction, the court stated, clearly separates the act of subscription from a transfer of copyright.

The court also delved into the specifics of the DTAA, particularly under Article 12, which relates to royalties. Court concluded that the transaction between an Indian subscriber and LexisNexis did not constitute a transfer of copyright or the right to apply technology as outlined in Article 12(3) and Article 12(4)(b) of the DTAA.

The court, therefore, upheld the Income Tax Appellate Tribunal's (ITAT) decision in favour of Relx Inc., the owner of LexisNexis holding that "As we examine the nature of the transaction between an Indian subscriber and the assessee, it becomes manifest and apparent that it neither comprises of a transfer of copyright nor does it include a transfer of a right to apply technology and other related aspects which are spoken of in Article 12(4)(b) of the DTAA.”

Finding no justification to interfere with the view expressed by the Income Tax Appellate Tribunal (ITAT), the court dismissed the appeal.

Case Title: The Commissioner Of Income Tax - International Taxation V. Relx Inc.