The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that subscription fees received by Slack Technologies Limited from Indian customers for access to its online communication platform do not constitute “royalty” under the Income Tax Act, 1961, or the India-Ireland Double Taxation Avoidance Agreement (DTAA).
The bench of Vice President Saktijit Dey and Accountant Member Bijayananda Pruseth observed that Slack’s customers merely receive limited access to use the online platform and its features. They do not acquire any copyright, source code, intellectual property rights or the right to use the technical processes involved in developing and operating the software.
The bench ruled that the subscription receipts were business income of the Ireland-based company. Since Slack Technologies did not have a permanent establishment in India, the income was not taxable in India.
The appellant/assessee, Slack Technologies Limited is a non-resident corporate entity incorporated in Ireland and a tax resident of that country. It operates as a “Rest of the World” seller of Slack software, an online communication and collaboration platform supplied to customers on a subscription basis.
For Assessment Years 2021-22 and 2022-23, the company received subscription charges of ₹14.48 crore and ₹74.11 crore, respectively. It did not offer these amounts to tax in India, contending that the receipts did not qualify as royalty either under Section 9(1)(vi) of the Income Tax Act or Article 12(3) of the India-Ireland DTAA.
Slack relied on the Supreme Court’s decision in Engineering Analysis Centre of Excellence Private Limited v. CIT, which distinguished the use of copyrighted software from the transfer of a right to use copyright.
During scrutiny proceedings, the Assessing Officer held that the subscription receipts represented consideration for the transfer of rights in a copyright or for the use of a process. The officer consequently classified the receipts as royalty.
The Dispute Resolution Panel upheld the proposed tax treatment, although it adopted a somewhat different reasoning.
The DRP noted that Slack’s software was hosted on Amazon Web Services and that data was stored in the AWS US region. According to the panel, Slack was not merely selling software but providing Software as a Service through a combination of digital processes.
It observed that the platform offered online communication, collaboration, file hosting, file sharing, data storage, security and other services. These services required continuous access through the internet to Slack’s data servers and hosting systems.
The DRP therefore concluded that customers were being given access to a patented or proprietary digital process. It treated the subscription payments as royalty for the use or right to use such a process.
Following the DRP’s directions, the Assessing Officer passed final assessment orders treating the receipts as taxable royalty.
Slack argued that its software was simply an online communication platform through which subscribers could hold meetings, exchange messages and share files.
Customers could select different subscription plans and access the platform using their login credentials. However, the subscription did not transfer any proprietary interest in the software.
Slack pointed out that the customer terms of service expressly retained ownership of the software, copyrights and related intellectual property rights with the company. Subscribers received only a limited, non-exclusive and non-transferable right to access the platform for the duration of their subscription.
Customers were not permitted to make backup copies of the software or exploit it commercially. Slack argued that the platform was functionally comparable to Cisco Webex, Zoom and other online communication platforms.
The Revenue, however, maintained that customers were receiving more than passive software access. It contended that whenever users created channels, stored files, searched conversations, accessed archives or used integrations, they were actively invoking Slack’s proprietary communication processes. Such interaction, according to the department, amounted to the use of a process and was therefore taxable as royalty.
After examining the subscription conditions and the features of the platform, the ITAT held that Slack was simply providing access to an online communication platform.
The Tribunal noted that customers could create workspaces, invite users, hold meetings, exchange messages and share files. Nevertheless, ownership of the software and all related intellectual property rights continued to remain with Slack.
Subscribers were given only a limited licence to use the platform in accordance with the selected subscription plan. Once the subscription expired, the customer could no longer access the platform unless the plan was renewed.
The Tribunal observed that a subscription did not confer any permanent right, title or interest in the software. Nor could customers replicate, modify or commercially exploit the platform.
Rejecting the Assessing Officer’s conclusion, the ITAT said that the tax authority had failed to demonstrate that subscribers acquired any right to use the copyright embedded in Slack’s software.
The Tribunal explained that the development of software involves several stages, including architecture, system design, implementation, coding, testing, cloud assurance and maintenance. The source code is central to the software and enables a person having access to it to replicate or commercially exploit the product.
However, neither the assessment order nor the DRP’s directions identified any material showing that Slack transferred its source code or intellectual property rights to customers in India.
The Bench noted that while Slack undoubtedly used sophisticated technology and processes to provide its services, those processes were used by Slack itself. They were not transferred to its subscribers.
The Tribunal said the DRP’s own findings acknowledged that Slack provided services using its experience, expertise, technology and secret processes while retaining the intellectual property rights. This effectively demonstrated that such expertise, technology and processes were never transferred to customers.
The ITAT drew a clear distinction between a software provider using a technical process to deliver services and a customer obtaining the right to use that process.
It observed that millions of people use platforms such as Cisco Webex, Zoom, Google Meet, WhatsApp and Facebook for communication and file sharing. That does not mean those users have access to the technology or processes involved in developing and operating those platforms.
The Tribunal remarked that it would be “preposterous” to assume that merely using an online platform gives a user access to its underlying technology or development process.
To explain the distinction, the Bench used the example of a customer ordering a gourmet dish at a fine-dining restaurant. The customer pays for the finished dish, not for the process used to prepare it. The restaurant is not required to disclose its process, and the customer is ordinarily not interested in acquiring it.
Similarly, Slack’s subscribers paid to use the finished communication platform, not to obtain the technical process through which the platform was created or operated.
The Tribunal noted that Slack had more than 100 customers or subscribers. However, the department had not cited even one instance where a customer had acquired ownership of the intellectual property embedded in the software.
There was no evidence that any subscriber could modify the software, make additions to it, reproduce it or exploit it commercially.
The ITAT held that the use of internal processes by Slack to provide services and the limited use of the finished platform by customers were two distinct activities that could not be mixed together.
Once it was accepted that Slack itself used the technical processes to render services, it necessarily followed that the use or right to use those processes had not been transferred to customers.
The ITAT ultimately held that the subscription receipts did not fall within the definition of royalty under Article 12(3)(a) of the India-Ireland DTAA or Explanation 2(iii) to Section 9(1)(vi) of the Income Tax Act.
The receipts were consequently characterised as Slack’s business income. In the absence of a permanent establishment in India, the business income could not be taxed in India.
The Assessing Officer was directed to delete the additions made for both assessment years.
The Tribunal also directed the Assessing Officer to verify Slack’s claim concerning the short grant of tax deducted at source credit and allow the appropriate credit in accordance with law.
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