Permanent establishment and software-related receipts: offshore sale profits escaped Indian tax, while linked services fell under presumptive mineral-oil taxation.

Offshore sale of off-the-shelf software was treated as not taxable in India for the relevant year because the non-resident had no permanent establishment in India under the India-US DTAA, and Article 7 did not permit taxation of business profits in the absence of such a presence. Installation and commissioning services closely linked to the software supply were treated as outside the fee-for-included-services limb, while standalone training and software-rental receipts connected with mineral-oil operations were brought within the presumptive regime applicable to such activities. The note distinguishes treaty taxation of software receipts from domestic presumptive taxation for mineral-oil related software services.

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Issues: (i) Whether the assessee had a permanent establishment in India for Assessment Year 2002-03 so as to tax the software-sale receipts in India under the India-US DTAA; (ii) Whether the receipts from installation and commissioning, standalone training and software rental for the later assessment years were taxable under section 44BB of the Income-tax Act, 1961 rather than as fee for included services or royalty.

Issue (i): Whether the assessee had a permanent establishment in India for Assessment Year 2002-03 so as to tax the software-sale receipts in India under the India-US DTAA.

Analysis: The assessee had no office in India and its presence in India was only for short durations. The Assessing Officer had not examined the existence of a permanent establishment, while the appellate authority found that the activities did not fall within the deeming fiction of Article 5(2) of the India-US DTAA. In the absence of a permanent establishment, the business profits from offshore sale of off-the-shelf software could not be taxed in India under Article 7(1).

Conclusion: The software-sale receipts for Assessment Year 2002-03 were not taxable in India, and the Revenue's challenge on this issue failed.

Issue (ii): Whether the receipts from installation and commissioning, standalone training and software rental for the later assessment years were taxable under section 44BB of the Income-tax Act, 1961 rather than as fee for included services or royalty.

Analysis: The installation and commissioning services were found to be inextricably linked with the software supply and therefore outside the ambit of fee for included services under Article 12(5)(a). Standalone training and software-rental receipts were held to be connected with exploration and extraction of mineral oils, attracting the presumptive scheme under section 44BB. For the later years, the absence of a permanent establishment did not preclude taxation under the treaty-backed domestic regime once the receipts were otherwise taxable, and the software-related activities were treated as falling within section 44BB.

Conclusion: The later-year receipts were directed to be assessed under section 44BB, and the Revenue obtained only partial relief.

Final Conclusion: The appeal for Assessment Year 2002-03 was rejected, while the remaining appeals were disposed of by directing assessment of the relevant software-related receipts under the presumptive mineral-oil regime.

Ratio Decidendi: In the absence of a permanent establishment, offshore software-sale profits are not taxable in India under the treaty, but receipts for ancillary software-related services connected with mineral-oil operations may be assessed under section 44BB where the statutory conditions are satisfied.

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