Taxability of Subscription to Database Paid to Non-Resident

Digitalisation has changed the way we conduct business in the last few years. In this article, the authors seek to analyse the tax implications arising from paying a subscription to a database to a non-resident.

1. BACKGROUND
Payment for the subscription to an online database is one of the most common remittances for businesses in India. The taxability of this payment has been a litigative issue, especially when it comes to TDS. The nature of the payment is such that one would need to look at various provisions under the Act and the DTAA to determine its taxability. The issue of whether payments for the use of an online database constitute royalty has been covered in the May, 2017 edition of BCAJ in the ‘Controversies’ feature. Further, the authors also covered this issue in the March, 2007 edition of BCAJ.

However, in the context of payment for the use of the software, the Hon’ble Supreme Court has laid down the law in its recent decision in Engineering Analysis Centre of Excellence (P.) Ltd vs. CIT (2021) 432 ITR 471. Further, India has introduced Equalisation Levy provisions for E-commerce operators as well as extended the definition of ‘income deemed to accrue or arise in India’ with the introduction of the Significant Economic Presence provisions (Explanation 2A to section 9(1)(i)) and extended source rule provisions (Explanation 3A to section 9(1)(i)). Therefore, the authors have sought