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Electronic Database Access Fee is Taxable Royalty

14 Dec 2011

Even before the dust from the Karnataka High Court's ruling in respect of payments made for import of shrink wrapped software has settled, the KHC has delivered another ruling in the realm of e-commerce taxation by holding that payments for accessing an electronic database is similar to royalties. Taxand India considers the potential tax impact of this decision on taxpayers who access electronic databases in India.

Facts of the case
Wipro Limited had made certain payments to Gartner group companies in US and Ireland for subscription to online databases. Since no taxes were withheld on these payments, the Revenue Authorities initiated proceedings under section 201 of the Income tax Act, 1961 and passed an order holding the payments to be in the nature of royalties or alternatively fees for technical services, and hence Wipro was held to be in default of its obligations to withhold tax on such payments.

On appeals, the Bangalore Bench of the Income tax Appellate Tribunal held that online access or subscriptions do not involve transfer of any part of the copyright to Wipro and hence, the same would not be classifiable as royalties and as there is no income chargeable to tax in India there is no withholding tax obligations on such payments.

The matter came up before the KHC and the court has referred to its earlier ruling on import of software being royalties in the case of Samsung and ruled that the mere fact that the issue does not pertain to shrink wrapped software and instead an access to database is granted online, the reasoning given in the case of software imports would apply here as well.

Right of access would amount to transfer of right to use the copyright held by Gartner Group. Payments made by Wipro is for the licence to use the said database maintained by Gartner and is therefore in the nature of royalty, requiring taxes to be withheld.

Taxand India discusses the Revenue and Applicant's contentions and looks at the ruling of the KHC

Taxand's Take

A large number of companies subscribe to several kinds of electronic databases, journals and market intelligence report offerings which are more often than not standardised industry specific databases providing content, and most often do not involve any kind of licensing. Under the Direct Tax Code there are no specific provisions in the DTC in respect of e-commerce transactions and if the twin objectives of simplification of tax laws and having a law that is in tune with the times are to be met, it would bode well for the Government to bring some clarity on the vexed tax issues related not just to e-commerce, but also emerging themes such as cloud computing.

Your Taxand contact for further queries is:
Vinay Sambaragimath
T. +91 22 3021 7000

Taxand's Take Author