The Bangalore Income Tax Appellate Tribunal (ITAT) recently rendered a significant decision regarding the taxability of subscription fees collected for accessing pre-recorded video courses. The key question revolved around whether these fees should be classified as royalty and subjected to taxation under the India-USA Double Taxation Avoidance Agreement (DTAA).
Background and Facts:
The case involved Pluralsight LLC, a US-based company engaged in the provision of online video content through its website. The company garnered revenue through subscription charges paid by individuals, government entities, small businesses, and enterprises worldwide. In the assessment year 2016-17, Pluralsight LLC received subscription charges totaling Rs. 11.75 crore from Indian customers. However, it refrained from declaring this amount as taxable income in India, contending that it did not qualify as royalty under the India-USA DTAA.
The Revenue authorities argued that the subscription revenue collected by Pluralsight LLC should be treated as royalty and thus subject to taxation in India. The main grounds for this assertion were as follows:
- The subscription fees were deemed to be payments for the utilization of, or entitlement to use, copyright.
- The revenue was believed to pertain to information pertaining to industrial, commercial, or scientific experience.
- The payments were characterized as remuneration for granting the right to utilize equipment.
Decision and Rationale:
The ITAT’s decision, issued on August 21, 2023, overturned the Revenue’s contentions and ruled in favor of Pluralsight LLC. The tribunal’s findings and reasoning are outlined below:
- Not a Payment for Copyright Use: The ITAT determined that the subscription fees were not payments for the use of copyright or the right to use it. Rather, they were payments for access to copyrighted content—specifically, the videos stored on Pluralsight LLC’s database. The tribunal leaned on the Supreme Court’s judgment in Engineering Analysis Centre Of Excellence (P) Ltd. v. CIT (2021) 432 ITR 471 to support this conclusion.
- No Payment for Industrial, Commercial, or Scientific Experience: The tribunal highlighted that the subscribers’ payments were solely for accessing videos on Pluralsight LLC’s platform and did not encompass the utilization of the company’s expertise or experience related to its video database. Consequently, the fees did not constitute payments for “information concerning industrial, commercial or scientific experience.” This determination was reinforced by the Mumbai ITAT’s ruling in American Chemical Society v. DCIT (2019) 106 taxmann.com 253 and the Authority for Advance Rulings (AAR) ruling in Fact Set Research Systems Inc. v. Director of Income Tax (International Taxation) (2009) 317 ITR 169.
- Not Consideration for Equipment Use: The tribunal dismissed the notion that the subscription fees amounted to compensation for granting the right to use equipment. It elucidated that Pluralsight LLC was merely granting access to its video database, without conferring any right, access, or control over the underlying server hosting the content. Therefore, the revenue could not be categorized as consideration for the use of any equipment. This aligns with the Mumbai ITAT ruling in Elsevier Information Systems GmbH v. DCIT.
In conclusion, the Bangalore ITAT’s decision in Pluralsight LLC v. DCIT clarified the tax treatment of subscription fees collected for accessing pre-recorded video courses. The tribunal categorically held that such revenue does not fall within the purview of royalty under the India-USA DTAA. This decision is grounded in legal precedents, including Supreme Court judgments and previous rulings of the Mumbai ITAT and AAR. Consequently, Pluralsight LLC’s appeal was accepted, and the subscription fees it received from Indian customers during the assessment year 2016-17 were deemed not taxable as royalty.
This verdict carries significant implications for companies engaged in similar business models, providing much-needed clarity on the taxability of subscription revenue derived from the access to copyrighted digital content.