Subscription fees received by FCO for providing social media monitoring services for market intelligence constitutes royalty u/s.9(1)(vi) of Income-tax Act and Article 12(3) of India- Singapore DTAA.

Subscription fees received by FCO for providing social media monitoring services for market intelligence constitutes royalty u/s.9(1)(vi)   of  income-tax  act and  article 12(3) of  india-Singapore DTAA.

•  Taxpayer, a Singapore company (FCO), is engaged in providing social media monitoring service for a company, brand or product. The service is a platform for users to hear and engage with their customers, brand ambassadors, etc. on the Internet. The clients who subscribed, for a subscription fee, could login to the website and search on what is being spoken about various brands.

• The system operated by FCO generated a report of analytics with inputs provided by clients. FCO obtained information, for generating report, from various external sources by using its own crawlers (computer program that gather and categorise information on the Internet).

•  FCO approached AAR on taxability of subscription fee received from Indian subscribers under the Income-tax Act and also India-Singapore DTAA.

• Tax Department contended that the subscription fee was in the nature of royalty as the basic mechanism of providing service was through a computer program (crawler) which was owned by FCO. Hence, subscription fee could not be disassociated from the user of computer system and it constituted fee paid for equipment use as also for imparting technical, commercial or scientific knowledge under Income-tax Act and India-Singapore DTAA

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• FCO contended that the subscription fee received from the Indian customers was not royalty u/s.9(1) (vi) or under India-Singapore DTAA as no exclusive right or copyright was given to its customers. There was no control of software and they did not have any possessory rights in relation to the equipments. Also, information passed on to its clients was not its own knowledge, experience or skill.

• As FCO had no PE in India, the income was only taxable in Singapore under Article 7 of the DTAA.

AAR Ruling:

• AAR upheld the Tax Department’s contentions and held that subscription fee received by FCO constitutes royalty for the following reasons:

• As FCO was in business of gathering collating and making available or imparting information concerning industrial and commercial knowledge, experience and skill, the subscription fee would be covered under clause (iv) of Explanation 2 to section 9(1)(vi) of Income-tax Act.

•  Payment received by FCO would constitute royalty under Article 12(3)4 of the DTAA, as it represents consideration for use of or right to use the process or information concerning industrial, commercial or scientific experience.

• As subscription fee received by FCO is taxable under the Income-tax Act as also India-Singapore DTAA, tax is required to be deducted at source u/s.195 of the Income-tax Act.