2024 (5) TMI 1593 - AT - Income Tax

CRM service receipts not taxable as royalty or technical fees under sections 9(1)(vi) and 9(1)(vii)

ITAT DELHI ruled that receipts from Customer Relationship Management services are not taxable in India as royalty or Fee for Technical Services, following ... Accrual of income in India - addition of receipts from Customer Relationship Management (‘CRM’) Services as Fee for Technical Services (‘FTS’), both under the provisions of the Income-tax Act, 1961 as well as under India-Singapore Double Taxation Avoidance Agreement (‘DTAA’) - Whether the receipts from CRM services is taxable or not as royalty/ FTS? - HELD THAT:- Respectfully following the decisions of the coordinate Bench [2022 (4) TMI 327 - ITAT DELHI] and Hon’ble Jurisdictional High Court [2024 (2) TMI 1396 - DELHI HIGH COURT] in assessee’s own case, as discussed above, we hold that receipts from CRM services are not taxable in India as royalty or FTS. Grounds are allowed. Inclusion of interest on income-tax refund in the receipts from CRM services - Case of the assessee that though on 26.11.2019 the assessee had filed a revised return of income declaring income towards subscription fee from CRM services and towards interest from income-tax refund, however, while computing assessee’s income in the final assessment order the AO has erroneously included the interest on income tax refund in the receipts of CRM services - HELD THAT:- Having considered the submissions of the parties, we direct the Assessing Officer to factually verify assessee’s claim and pass necessary orders. Ground is allowed for statistical purposes. Levy of interest u/s 244A - HELD THAT:- We have heard the parties and perused the materials on record. It is the case of the assessee that without granting refund due as per return of income the Assessing Officer has erroneously levied interest u/s 244A of the Act. In this context learned counsel for the assessee submitted that rectification application filed by the assessee is still pending before the Assessing Officer. Considering the nature of dispute, we direct the Assessing Officer to factually verify assessee’s claim and accordingly decide the validity of levy of interest u/s 244A of the Act. Short grant of TDS credit - As assessee submitted that assessee’s rectification application on the issue is still pending before the Assessing Officer. Be that as it may, we direct the Assessing Officer to factually verify assessee’s claim and grant credit for TDS in accordance with law. Levy of interest under section 234D - It is the case of the assessee that though the assessee was not issued any refund, still interest u/s 234D of the Act has been levied. Undisputedly, interest under section 234D of the Act is to be levied in case of excess refund being granted to an assessee. That being the case we direct the AO to factually verify assessee’s claim that interest u/s 234D is not leviable since no refund has been granted to the assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal across the appeals for assessment years 2018-19 to 2021-22 are:Whether receipts from Customer Relationship Management (CRM) services provided by a non-resident entity are taxable in India as Fee for Technical Services (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961 and Article 12(4) of the India-Singapore Double Taxation Avoidance Agreement (DTAA).Whether such receipts qualify as royalty under the Income-tax Act or DTAA.The applicability and correctness of inclusion of interest on income-tax refund within CRM service receipts.The validity of levy of interest under various provisions of the Income-tax Act, namely sections 234A, 234C, 234D, and 244A.Issues relating to short grant of Tax Deducted at Source (TDS) credit claimed by the assessee.Prematurity of certain grounds raised by the assessee.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of CRM Service Receipts as FTS or RoyaltyRelevant Legal Framework and Precedents: Section 9(1)(vii) of the Income-tax Act defines FTS as consideration for managerial, technical, or consultancy services. Article 12(4) of the India-Singapore DTAA elaborates on payments for such services ancillary or subsidiary to the enjoyment of rights or property. Royalty is defined under Section 9(1)(vi) and corresponding DTAA provisions, generally involving transfer or use of copyrights or patents.Precedents include decisions by the Income Tax Appellate Tribunal (ITAT) for assessment years 2010-11 to 2017-18 and the Hon'ble Jurisdictional High Court's consolidated ruling dated 14.02.2024, which examined the nature of CRM service receipts.Court's Interpretation and Reasoning: The Tribunal examined the factual matrix and legal submissions, noting that the assessee, a Singapore-resident company, provides CRM services via internet without any physical presence or data center in India. The assessee argued that it does not transfer or allow use of copyright in software, thus receipts cannot be treated as royalty. The Assessing Officer contended that services are technical consultancy and taxable as FTS.The Tribunal relied heavily on the prior ITAT decisions and the High Court ruling, which concluded that:The copyright in the software was never transferred or vested in Indian subscribers, negating royalty claims.The right of subscription to cloud-based software does not equate to 'use' or 'right to use' industrial or scientific equipment under the law.Article 12(4)(b) of the DTAA, which excludes payments for mere access to software, was applicable, as the assessee only provided access without imparting technical knowledge or know-how enabling application of technology.Article 12(4)(a) was inapplicable as the services were not ancillary to enjoyment of rights falling under royalty.Explanation 4 to Section 9(1)(vi) of the Act introduces a deeming fiction for transfer of rights in computer software but does not extend to mere subscription rights as per DTAA.Key Evidence and Findings: The assessee's unrefuted explanation that customers only accessed the software and input data themselves, without receiving technical skill or know-how, was pivotal. The absence of any transfer of copyright or license to use the software was a critical factual finding.Application of Law to Facts: Applying the legal provisions and precedents, the Tribunal held that receipts from CRM services do not constitute royalty or FTS under Indian law or the DTAA, thereby not taxable in India.Treatment of Competing Arguments: The Department conceded the issue was covered by earlier decisions but relied on Assessing Officer's observations. The Tribunal gave precedence to binding judicial pronouncements over Assessing Officer's contrary view.Conclusions: The Tribunal allowed the grounds challenging taxability of CRM service receipts as FTS or royalty, following the binding precedents.Issue 2: Inclusion of Interest on Income-Tax Refund in CRM Service ReceiptsRelevant Legal Framework: Interest on income-tax refund is distinct income and should not be clubbed with business receipts.Court's Interpretation and Reasoning: The assessee had declared interest separately in revised returns. The Assessing Officer erroneously included it within CRM receipts. The Tribunal directed factual verification of the claim and appropriate rectification.Conclusions: Ground allowed for statistical purposes with directions to Assessing Officer.Issue 3: Levy of Interest under Sections 234A, 234C, 234D, and 244ARelevant Legal Framework: Sections 234A, 234C, and 234D deal with interest for defaults in advance tax payment, delay in furnishing returns, and excess refund respectively. Section 244A concerns interest on delayed refunds.Court's Interpretation and Reasoning: Since the main taxability issue was decided in favour of the assessee, the levy of interest under these provisions became largely academic. However, the Tribunal directed the Assessing Officer to verify factual claims regarding refund and TDS credits before deciding on interest levy.Treatment of Competing Arguments: The assessee argued that interest was wrongly levied without granting refunds or proper TDS credit. The Department did not contest the directions for factual verification.Conclusions: Interest levies were set aside or directed for reconsideration based on factual verification. Premature grounds were dismissed.Issue 4: Short Grant of TDS CreditRelevant Legal Framework: TDS credit entitlement is governed by provisions ensuring that tax deducted at source is credited to the deductee's account.Court's Interpretation and Reasoning: The assessee's rectification applications on short TDS credit were pending. The Tribunal directed the Assessing Officer to verify and grant credit as per law.Conclusions: Grounds allowed with directions for factual verification.Issue 5: Prematurity of Certain GroundsThe Tribunal dismissed grounds which were premature or consequential on other issues not yet decided.3. SIGNIFICANT HOLDINGSThe Tribunal's crucial legal reasoning is encapsulated in the reliance on the Hon'ble Jurisdictional High Court's observations, including the following verbatim excerpts:'Since the copyright in the application was never transferred or came to vest in a subscriber, we fail to appreciate the contentions which are addressed on the anvil of Section 9 of the Act.''The right of subscription to a cloud-based software cannot possibly be said to be equivalent to the 'use' or 'right to use' any industrial, commercial or scientific equipment.''Article 12(4)(b) would have been applicable provided the appellants had been able to establish that the assessee had provided technical knowledge, experience, skill, knowhow or processes enabling the subscriber acquiring the services to apply the technology contained therein... This would clearly not fall within the ambit of Article 12(4)(b) of the DTAA.''Explanation 4 in essence introduces a deeming fiction and includes transfer of all or any rights 'for use' or 'to use' a computer software including by way of a license irrespective of the medium through which such right is transferred. Significantly, the DTAA does not bring within its sweep a right for use or a right of use of a computer software.''We accordingly find that the view taken by the ITAT merits no interference. We find that the appeals raise no substantial question of law. The appeals shall consequently stand dismissed.'Core principles established include:Provision of CRM services via cloud-based software without transfer or grant of right to use copyright does not amount to royalty or FTS under Indian tax law or DTAA.Subscription or access to software as a service is distinct from transfer of technical knowledge or skill that would constitute FTS.Deeming provisions under domestic law cannot override the specific treaty provisions which exclude such receipts from royalty or FTS.Tax authorities must respect judicial precedents and not re-litigate settled issues.Final determinations on each issue were in favour of the assessee, with the Tribunal allowing the appeals partly, directing reassessment or verification on ancillary issues such as interest inclusion and TDS credit, and dismissing premature grounds.