Applicability of TDS on various subscription fees paid outside India
Introduction:
As per section 195 of the Income Tax Act, Any person who makes any payment (other than salary or interest referred to in sections 194LB, 194LC, and 194LD) taxable in India to a non-resident must deduct TDS under this section.
The TDS rate will be deducted at the rate specified under the Income Tax Act, 1961, or the tax rate specified under the DTAA, which is more beneficial if certain conditions are fulfilled, like the availability of TRC and form 10F.
Analysis of Various Subscription Fees Paid by Indian Customers to Non-Residents
There are various payments as subscription fees paid by Indian taxpayers to entities outside India on which TDS has not been required to be deducted that were held in various judgments. Some of the instances are as follows:
1. Subscription Fees for Legal Database
In one of the cases, the Delhi High Court observed that granting access to the database did not constitute technical knowledge, experience, skill, know-how, or processes being ‘made available’ in terms of the definition of fees for included services (FIS) as per the India-US Double Taxation Avoidance Agreement (DTAA). The court also held that granting mere access to the legal database to the subscriber would not be covered within the ambit of fees for technical services (FTS) under the Income-tax Act, 1961 (the Act) Delhi High Court decision confirms the position that the subscription fees received for granting access to a database are not taxable as royalty or FIS under the India-US DTAA. The subscription fees would be business income and not taxable in India in the absence of a PE.
2. Subscription Fees for Using Services Like ChatGPT
As per section 195 of the Income Tax Act, 1961 (‘Act’), every person responsible for paying any sum chargeable to tax to a non-resident / foreign company is required to deduct income tax thereon at the rates in force. This includes payments such as royalties, fees for technical services, and other income accruing or arising in India.
Further, section 90(2) of the Act provides an option for the taxpayer to apply the provisions of the Act or the Tax Treaty, whichever is more beneficial. Considering the India-US Tax Treaty has a restricted definition of royalty and Fee for technical services /Fee for included services (FIS), we have analyzed the taxability of subscription services under the India-US Tax Treaty.
- Royalty – The term ‘royalties’ has been defined under the India-US Tax Treaty to interalia include payment of any kind received as a consideration for the use of, or the right to use, any copyright or literary work, etc.
- To be characterized as royalty, the payer should be given certain rights (such as the right to modify, commercially exploit, public display, etc.) for the underlying work. The mere right to use the work itself would not qualify as the right to use a copyright.
- In the instant case, the subscription services provided/to be provided by OpenAI, LLC to the Company is a standard service with no right to exploit /reproduce/modify, and do not attract TDS under Section 195 Accordingly, the said subscription services may not fall under the definition of royalty.
- Reliance can be placed on multiple judicial precedents including Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT [2021] 125 taxmann.com 42 (SC) and Commissioner of Income-tax, international taxation v. RELX Inc, 160 taxmann.com 109 (Delhi), High Court of Delhi.
3. Subscription Fees for Foreign Ed-Tech Platforms
Subscription fees paid by Indian customers to a foreign Ed-tech platform for access to online educational videos did not constitute payments for the ‘use’ or ‘right to use ’ of any copyright. Such fees did not constitute payments for information concerning industrial, commercial, or scientific experience. Such fees did not constitute payments for the ‘use’ or ‘right to use’ scientific equipment
Key Judgment: Supreme Court Ruling on Software Procurement
According to the landmark judgment of the Supreme Court, the charges paid for software procurement by Indian entities to foreign non-resident companies are not for the use of, or the right to use copyright, and therefore, not liable for TDS on subscription fees under Section 195 of the Income Tax Act on these transactions.
Conclusion
The taxability of subscription fees paid to non-residents depends on their classification under Section 195 or relevant tax treaties like the India-US DTAA. Adhering to the rulings and provisions ensures compliance while optimizing benefits.
This analysis of TDS on subscription fees helps Indian businesses navigate the complexities of tax compliance when dealing with international service providers.
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