Swedish company wins tax case, software sales not royalties, shared services not taxable in India

The Tribunal ruled in favor of the Swedish company, holding that receipts from the sale of software products were not taxable as royalty under the Income Tax Act and India-Sweden Double Taxation Avoidance Agreement. Additionally, the receipts from shared services provided by the company were not considered fees for technical services and thus were not taxable in India. The Tribunal allowed the appeal of the assessee on both issues.

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Issues Involved:
1. Taxability of receipts from the sale of software products as "royalty."
2. Treatment of receipts from shared services as "fees for technical services."

Issue-Wise Detailed Analysis:

1. Taxability of Receipts from Sale of Software Products as "Royalty":

The assessee, a Swedish company, engaged in selling software products and rendering IT services, entered into an agreement with its subsidiary for the sale of software in India. The AO held that the receipts from the sale of software products were taxable as royalty under Article 12(3) of the India-Sweden DTAA and Section 9(1)(vi) of the Income Tax Act, 1961. The CIT(A) upheld this view, relying on decisions from the Karnataka High Court.

The Tribunal noted that the issue had been previously decided in favor of the assessee for earlier assessment years (2012-13 and 2013-14), where it was held that the right transferred was limited to the use of copyrighted material and did not constitute a transfer of copyright, thus not giving rise to royalty income. The Tribunal observed that the software sold did not grant any rights to the source code or the intellectual property, which remained with the assessee.

The Tribunal also considered the recent Supreme Court decision in Engineering Analysis Centre of Excellence, which clarified that payments for software sales do not constitute royalty as per the DTAA and the Act. The Supreme Court held that a copyright involves exclusive rights, and selling software does not transfer these rights. The Tribunal concluded that the receipts from the sale of software to Indian distributors were not in the nature of royalty and were not taxable under Section 9(1)(vi) or Article 12 of the DTAA.

2. Treatment of Receipts from Shared Services as "Fees for Technical Services":

The assessee provided back-office support services to its Indian subsidiary, receiving a sum of Rs. 98,93,448. The AO and CIT(A) held that these receipts were taxable as fees for technical services (FTS) under Section 9(1)(vii) of the Act and Article 12 of the India-Sweden DTAA.

The assessee argued that the services were not technical or consultancy services, and even if they were, they did not "make available" technical knowledge or skills, a requirement under the MFN clause in the India-Sweden DTAA. The Tribunal referred to the Pune ITAT's decision in Sandvik AB, which supported the assessee's claim that the MFN clause required the services to "make available" technical knowledge to be taxable as FTS.

The Tribunal analyzed the nature of the services provided, concluding that they were purely back-office support services and did not transfer any technical knowledge or skills to the recipient. The Tribunal held that the receipts from shared services were not in the nature of FTS and could not be taxed in India. The sum could not be taxed as business profits either, as it could not be attributed to the permanent establishment.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that:
- The receipts from the sale of software products were not taxable as royalty under the provisions of the Act or the India-Sweden DTAA.
- The receipts from shared services were not in the nature of FTS and were not taxable in India.

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