SaaS Subscription Fee Is Not “Royalty” Merely Because Technology Does the Work
ITAT Mumbai holds that access to a communication platform does not amount to use of a “process” under Section 9(1)(vi) or Article 12(3) of the India–Ireland DTAA
In the digital economy, almost everything happens through a “process”. Messages are routed, searches are performed, data is stored and software works continuously in the background. But does that mean that every payment made for a technology platform becomes “royalty” because a sophisticated process is operating behind the scenes? The Mumbai ITAT has answered this question in the negative. In Slack Technologies Ltd. v. ACIT, International Tax, the Tribunal examined whether subscription fees received by an Irish tax resident for providing access to its SaaS communication platform to Indian customers could be treated as royalty under Section 9(1)(vi) of the Income-tax Act, 1961 or Article 12(3) of the India–Ireland DTAA.
The business model
Slack Technologies Ltd., an Irish tax resident, provided its communication software to Indian customers on a subscription basis. It acted as the Rest of World seller for the platform. During AY 2021-22, it received approximately ₹14.48 crore from Indian customers, while the corresponding receipts for AY 2022-23 were approximately ₹74.11 crore. The assessee did not offer these receipts to tax in India, relying principally on the Supreme Court’s landmark decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which had examined the taxability of software payments. The Assessing Officer, however, took a different view. According to the AO, the subscription receipts represented royalty for the right to use copyright and, alternatively, royalty for the use of a “process” under Section 9(1)(vi) and Article 12(3) of the India–Ireland DTAA.
DRP: It is not merely software access
The dispute became more interesting before the Dispute Resolution Panel. The DRP noted that the software was hosted on AWS and that customers were receiving SaaS services through digital processes operating in real time. According to the DRP, the assessee was using its expertise and secret processes to provide the services. The Revenue therefore argued that every action performed by a subscriber — creating a channel, searching for information, routing messages, using integrations and so on — involved interaction with Slack’s proprietary processes. The Revenue’s argument, in essence, was: if the customer is actively using the platform, isn’t the customer also using the underlying process? The ITAT said that this was the wrong way to look at the transaction.
What exactly did the customer receive?
The Tribunal examined the terms of the subscription arrangement. Subscribers received only a limited and non-exclusive right to access the platform during the subscription period. They did not acquire ownership of the software or the underlying intellectual property. The assessee continued to retain ownership of its intellectual property. Once the subscription expired, access to the platform also ended. More importantly, the customer was not given any right to:
reproduce the software;
modify or alter it;
commercially exploit the underlying technology;
access the source code; or
transfer or exploit the intellectual property as its own. Thus, what the customer purchased was essentially access to the SaaS platform, and not the underlying copyright or technology.
Copyright is different from access
The Tribunal found that the AO had failed to demonstrate that any right to use copyright had actually been transferred to the Indian subscribers. Merely allowing a customer to access and use software does not automatically mean that the customer has acquired a right to exploit the copyright embedded in that software. The distinction is important. A customer may use a software application every day without acquiring the legal right to reproduce, modify, distribute or commercially exploit the underlying copyrighted work. In other words, using software is not necessarily the same as using the copyright in the software.
What about “process” royalty?
This was perhaps the more significant issue. Section 9(1)(vi) and Article 12(3) of the India–Ireland DTAA contain provisions dealing with royalty for the use or right to use a process. The Revenue argued that Slack’s customers were effectively using proprietary processes whenever they interacted with the platform. The Tribunal, however, drew an important distinction between using a process and receiving a service that is delivered through a process. If a company uses its own technology, infrastructure, expertise and processes to provide a service to customers, the fact that the customer interacts with the resulting service does not necessarily mean that the customer has acquired the right to use the underlying process. And this distinction was particularly important in the present case.
The DRP’s own finding worked against the Revenue
The Tribunal noticed that the DRP itself had observed that the assessee delivered the services through its expertise and secret processes. This finding, according to the Tribunal, indicated that the processes remained with and were used by the assessee in rendering the service. There was no evidence that these processes had been transferred or made available to the subscribers for their independent use. This led to a simple but powerful distinction: The provider may use a process to provide a service, while the customer merely uses the service. These two activities cannot automatically be treated as the same.
No source code. No transfer of technology.
Another important factor was that there were more than 100 subscribers, but there was no evidence that the source code or underlying intellectual property had been transferred to any of them. The customers were not given access to the technology behind the platform. They simply interacted with the interface made available to them during the subscription period. The Tribunal therefore rejected the attempt to equate customer interaction with the acquisition or use of the underlying proprietary process.
The Webex, Zoom and Google Meet comparison
The Tribunal also found Slack to be functionally comparable to familiar communication platforms such as Cisco Webex, Zoom and Google Meet. The practical implication is significant. When a person joins a Zoom meeting, creates a Webex session or uses an online collaboration platform, the platform’s sophisticated technology is obviously working behind the scenes. But it would be difficult to argue that every customer using the platform has thereby acquired the right to use the underlying technology or process. The Tribunal considered it untenable to treat ordinary users of such platforms as having acquired the technology merely because they interact with it.
Business income, not royalty
Ultimately, the ITAT held that the subscription receipts did not fall within Article 12(3)(a) of the India–Ireland DTAA or Explanation 2(iii) to Section 9(1)(vi). The receipts were held to be business income rather than royalty. Consequently, in the absence of a Permanent Establishment in India, the receipts were not taxable in India. The additions made by the Revenue were therefore deleted. The jurisdictional grounds were left open as academic, and the AO was also directed to verify the issue of short credit of TDS. The appeals were partly allowed in favour of the assessee.
Why this ruling matters
The ruling is important because the definition of royalty can become particularly difficult in the digital economy. Almost every modern technology service operates through some form of algorithm, process, infrastructure or proprietary technology. If the mere presence of such technology were enough to constitute “use of a process” by the customer, a very large number of ordinary SaaS and cloud-based subscriptions could potentially be characterised as royalty. The Tribunal has instead focused on the rights actually granted to the customer. Was the customer given the right to use the process itself? Or did the provider merely use its own process to deliver a service? That distinction can make all the difference.
A useful lesson for SaaS taxation
The ruling reinforces an important principle: the tax character of a digital payment should not be determined merely by looking at the technology operating behind the service. One must examine the actual contractual rights. If the customer merely obtains limited access to a platform for a specified period, without receiving source code, copyright rights, proprietary technology or the right to exploit the underlying process, the payment cannot automatically become royalty merely because sophisticated technology is involved. In today’s subscription-driven economy, “software as a service” should not automatically become “royalty as a service.” The real question remains: What right has actually been granted to the customer?
The copy of the order is as under:
