Software sublicensing receipts treated as business income and not taxed in India absent a permanent establishment.

Receipts from sublicensing standardised software to Indian affiliates were held to be business receipts, not residuary income, because they could not be recharacterised under section 56(1) or Article 23(3) merely since they were not taxable as royalty. Applying the coordinate bench view and Engineering Analysis, the ITAT stated that where such income is properly classifiable as business profits, it is taxable in India only if the non-resident has a permanent establishment. In the absence of a permanent establishment in India, the receipts could not be brought to tax as business income or under the residuary article.

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Issues: Whether receipts from sublicensing of standardised software tools to Indian affiliates were taxable as income from other sources under the Income-tax Act and the India-USA DTAA, or were to be treated as business income not taxable in India in the absence of a permanent establishment.

Analysis: The receipts arose from sublicensing of software used by the Indian affiliates in their business operations. The decisive question was whether such receipts could be recharacterised as residuary income under section 56(1) and Article 23(3), or whether they were in substance business receipts that, in the absence of a permanent establishment in India, could not be taxed as business profits. The order followed the earlier coordinate bench view and the Supreme Court decision in Engineering Analysis, holding that software sublicensing receipts do not become taxable merely because they are not taxed as royalty, and that the residuary article cannot be invoked where the income is otherwise classifiable under the business profits article.

Conclusion: The receipts from sublicensing of standardised software were not taxable as income from other sources and could not be brought to tax in India as business income in the absence of a permanent establishment. The issue was decided in favour of the assessee.

Ratio Decidendi: Where software sublicensing receipts are properly characterised as business receipts and the non-resident has no permanent establishment in India, they cannot be taxed under the residuary income article merely because they are not taxable as royalty.

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