– Sahibnoor Singh Sidhu
India continues to be an attractive market for international players. The boom in Indian education and the increasing internationalization of professions like law and business management also means that international publishers look towards India as a market that is ripe for expansion. However, the inability of the various national governments to update the Double Tax Avoidance Agreements (DTAA) keeping in mind the increasing importance of the Internet as a medium to provide services continues to cost the Indian treasury. A recent order of the Delhi Income Tax Appellate Tribunal (ITAT) has re-opened this controversy. This short article explains the main takeaways from one such recent case: LNRS Data Services Ltd. v. Assistant Commissioner of Income Tax, [2025] 170 taxmann.com 171 (Delhi- Trib.).
UNNECESSARY HASSLE: Facts and Adjudication History
LNRS Data Services Ltd. (assessee) is a publisher incorporated in the United Kingdom (UK) and is also a tax resident of the UK. The assessee publishes books, journals and articles, which it makes available to consumers all over the world, including in India, for a subscription fee. In the relevant years (2016-17 and 2017-18), the assessee received approximately INR 25 crores as subscription fees from Indian consumers. The access to the assesses’ database and online analytical tools was completely through the online medium. The assessee had no offices or employees working in India.
The assessing officer (AO) issued a Draft Assessment Order stating that the INR 25 crores that the assessee had received as subscription fees was a fee for technical services (FTS). Income from FTS is taxable both under domestic and international law. Section 9(1)(vii) of the Income Tax Act, 1961 and Article 13 of the India-UK DTAA provide the taxation of income from FTS. The AO also argued that if not as an FTS, the income could be taxed as income from royalty either under Section 9(1)(viii) of the ITA or Article 12 of the India-UK DTAA.
An appeal by the assessee to the Dispute Resolution Board was rejected. The Commission of Income Tax (Appeals) also sided with the AO and held that by providing online access to the database through the use of technology, the same technology was being ‘made available’ to the Indian consumer and therefore was income from FTS. This was appealed by the assessee before the Delhi ITAT which overturned the orders of the AO and CIT(A) and sided with the assessee in a short order that was heavily reliant on a recent Delhi High Court judgment.
CLEARING THE MIST: Decision of the Delhi ITAT
The ITAT relied heavily on the judgment of the Delhi High Court in the case of Commissioner of Income Tax v. Relx Inc, 2024 SCC OnLine Del 1314. where a group company of the assessee had been reassessed under similar grounds and the Delhi High Court had held in favour of the assessee. The ITAT decided to tackle the two grounds raised by the AO to tax the assessee, one after the other, in the same order in which they were argued.
The ITAT held that the subscription fee was not an FTS because the assessee only provides access to the database, but does not provide any further ‘managerial, technical or consultancy’ services to a subscriber which is a requirement for an income to be characterized as an FTS under both the domestic and international law provisions. It further held that this income could not be categorized as royalty because by providing access to the copyrighted material, the assessee was not transferring the copyright or any right in it, which are the main requirements to characterize an income as royalty under the relevant provisions.
The ITAT concluded that this income from subscription fees was income from business. Under Article 7 of the India-UK DTAA business income could only be taxed in the source country if the assessee had a permanent establishment (PE) in the source country. The definition of what constitutes a PE is further given in Article 5. One of the foundational requirements to ascertain if a PE exists or not is to see if the assessee had a ‘fixed place’ of business for the relevant time during which business was transacted in the source country. Since the assessee in this case had no fixed place of business in India and was only making its services available to consumers online, there was no permanent establishment, and hence the business income could not be taxed in India, which was the source country of that income.
WHAT MUST BE LEARNT: Critical Analysis
This case demonstrates a few key issues in the method and provisions of tax implementation in India.
First, the reason why the revenue argued that the income accrued was FTS or royalty was because both these categories of income do not require the assessee to have a physical space of business in India, whereas business income has this requirement. PE is a concept of international law. The Indian domestic variant of PE is called ‘business connection’. While the phrase ‘business connection’ has been amended in the past few years to also include income from online sources without any physical apparatus, the same changes and advancements are not reflected in India’s DTAAs with other countries. While it is understandable that renegotiating a tax treaty is a challenging task given the obvious reluctance by countries in the Global North, it is nonetheless a task that India must find a way to accomplish. Or else, the Indian treasury will continue to be incapable of tapping its entire legitimate tax base.
Second, the revenue has a notorious habit of alleging that an assessee owes taxes under both domestic and international law simultaneously. In this case, the revenue department continued to argue the assessee’s tax liability under the Indian Income Tax Act, 1961 and the India-UK DTAA. This is a flawed practice because Section 90(2) of the Income Tax Act, 1961 categorically states that wherever there exists an applicable DTAA, the DTAA will apply to the assessee unless the Income Tax Act is more beneficial to the assessee. Once the revenue department had received confirmation that the assessee was a tax resident of the UK, and the department had the India-UK DTAA on file, there was no need to argue under domestic law. While it does not elongate the proceedings procedurally, however, it reflects poorly on the expertise of the revenue officials.
Third, the sheer unnecessary nature of this case is symptomatic of a larger problem of Indian tax compliance machinery, which is that the various sub-departments of the Income Tax Department either do not communicate with each other efficiently or (and this is worse) continue to wish for a Hail Mary kind of scenario long after the conclusion of the case has become apparent. The judgment of the Delhi High Court in Relix Inc. was released on 7th February 2024 giving the revenue enough time to revise its faulty assessment and prevent the wastage of precious judicial time of the ITAT. The fact that Relix Inc was a group company of the assessee and that the Delhi High Court had sided with Relix Inc in a case whose facts and arguments were similar to the present case should have been enough for the revenue to mend its mistakes and provide the assessee the much-needed relief. This negligence or ignorance does not bode well for our system which is attempting to genuinely create goodwill and trust for international investors to operate in India.
It is time that India ups its game and updates its international tax treaties, and it is imperative that it does so quickly to minimize the loss of tax revenue. It will take considerable political will, which is well worth the cause.