An overview of FTS on access to online database
The characterization of income as Fees for Technical Services (FTS) has always been a matter under litigation on the global forum, with no systematic guidance available to date for its determination. However, the courts have had plenty of time to share additional inputs and further directions (like in the case of Kotak Securities and Skycell Communications) to help better analyze the characterization of income. However, there is no single thumb rule but a host of conditions based on various facts and circumstances for determining the characteristics of income being in the nature of FTS.
Meaning of FTS under the Income-tax Act
Section 9 of the Income-tax Act, 1961 (the Act) defines FTS under Clause (vii) as including managerial, technical, and consultancy services. The definition of FTS is wide enough to cover multiple services that fall within the meaning of managerial, technical or consultancy services.
Scope restricted under the make available clause
Under certain tax treaties signed with countries like the UK, USA, Singapore, etc, the scope of nature of income being fees for technical services is restricted to only cases where the services make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein.
This means that the service provider, by way of providing the services, also makes the inherent technicalities of the services available to the recipient’s disposal and that the service recipient can now independently use or apply the inherent technical knowledge or knowhow. Thus, such services where the expertise is not passed along with the services are not covered by the meaning of FTS.
The scope and meaning of making available inherent technical knowledge and know-how are explained in detail in the protocol of the India-USA tax treaty.
FTS on access to the database
Recently the Hon’ble Supreme Court dismissed a special leave petition against an order passed by the Hon’ble Karnataka High Court1, holding that the service of granting access to database is not in the nature of FTS.
The assessee was engaged in the business of providing graphic design solutions for advertising and marketing communications. It made payments to US companies for marketing services, and the scope of work was to generate customer leads using/subscribing to customer databases, market research, analysis, and online research data. The Assessing Officer (AO) held that services of a US company were utilized in concluding contracts, which could not have been done without sharing technical knowledge, knowhow, processes or experience, hence, payment was taxable in India as FTS.
The Hon’ble Tribunal allowed the assessee’s appeal by holding that the scope of work was to generate customer leads using/subscribing to customer database, market research, analysis, and online research data and by this, the service provider had not made available any technical knowledge, experience, know-how, process to develop and transfer technical plan or technical design. Karnataka High Court confirmed the Tribunal’s ruling.
On similar grounds, the Hon’ble Mumbai Tribunal2 held that payment towards subscription fees for access to specified online databases could not be considered as FTS as the same did not involve any human intervention.
Similarly, the Hon’ble Delhi Tribunal3 held that subscription fees for access to a database of books, journals, and material in the field of science, technology, life, health and physical and social sciences subject areas were not in the nature of FTS.
In view of the above, the current judicial precedent appears that services of access to the database are not in the nature of FTS provided the services do not make available any technical knowledge, experience, know-how, process to develop and transfer technical plan or technical design and the services do not involve any human intervention. Furthermore, it appears that the Apex Court also holds the same view, as it has dismissed the SLP against the Karnataka High Court’s order. Some further judicial precedents from the High Courts as well as the Apex Court in due course of time should help add further perspective to this issue.
1. CIT v. Ad2pro Media Solutions (P.) Ltd [2023] 148 taxmann.com 226 (Karnataka)
2. Elsevier Information Systems GmbH v. DCIT (IT) Circle 2(2)(1), Mumbai [2019] 106 taxmann.com 401 (Mumbai - Trib.)
3. Elsevier Ltd v. ACIT [2023] 152 taxmann.com 376 (Delhi - Trib.)