2024 (5) TMI 160 - AT - Income Tax

Software licensing fees and AMC services by US resident constitute business income, not royalty or FTS under Article 7 India-USA DTAA

ITAT Delhi held that software licensing fees and AMC services provided by US resident assessee to Indian company constitute business income under Article ... Income deemed to accrue or arise in India - FTS/FIS - receipts pertaining to supply of software (including AMC services) - DR held software licence fee will not constitute royalty income but business income under Article 7 of India- USA DTAA which is not taxable in India in the absence of PE of the assessee. HELD THAT:- Assessee is a tax resident of USA and has opted to be governed by the provisions of India-USA DTAA. Also, the assessee does not have a PE in India. The assessee had entered into a Software Licensing Agreement for supply and license certain Software and Service Level Agreement (forming part of Software Licence Agreement) to provide AMC services to Reliance/Jio/ RJIL. What the assessee has supplied in the form of a Software to Reliance/ Jio is a copyrighted article not a copyright in the Software. Fact on record demonstrates that the Software is supplied by the assessee on a non-transferable, non-exclusive basis to various customers all over India. The assessee has only granted a right to use its Software to Jio in connection with its telecommunication business. The consideration received towards licensing of software is for use of a copyrighted article and therefore not taxable as royalty income under the provisions of Article 12 of the India-USA DTAA. In our considered view, the case of the assessee is squarely covered by the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence P. Ltd. (2021 (3) TMI 138 - SUPREME COURT]) which has already been upheld by the DRP and the Hon’ble Delhi High Court in light of the factual matrix of the present case. We, therefore have no reason to interfere with the findings of the Ld. DRP on the impugned issue. Consequently, consideration received by the assessee from supply of software licence is not taxable in India in terms of Article 7 of the India-USA DTAA. Accordingly, ground Nos. 1 to 4 is allowed with a direction to the Ld. AO to give effect to the Ld. DRP’s findings in its directions/ order. Remaining receipts on account of support and maintenance services rendered by the assessee - Nothing has been brought on record by the Revenue to establish that any technical knowledge has been provided to the employees of Reliance / JIO and / or human intervention is required in provision of AMC services. The observations and findings of the AO/ DRP on these aspects are based on surmises and conjectures. Imparting training or educating a person with respect to functionality and attributes of a software or application would clearly not amount to the rendering of technical service under the DTAA which view has been upheld by the Hon’ble Delhi High Court’s decision in the case SFDC Ireland vs. CIT [2024 (3) TMI 620 - DELHI HIGH COURT]. We hold that the receipts are not taxable in India as FTS/ FIS under Article 12(4) of the India-USA DTAA. It is business profits of the assessee not taxable in India in the absence of a PE of the assessee in India in terms of Article 7 of the India-USA DTAA. Accordingly, ground decided in favour of the assessee. In the nutshell, the entire receipts from the supply of software licence and maintenance and support services (AMC services) rendered by the assessee are held to be non-taxable in India. Appeal of the assessee is allowed. Issues Involved:1. Non-compliance with DRP directions by AO regarding software license fees.2. Nature of software licensing fees: copyrighted article vs. copyright.3. Treatment of software licensing fees as Royalty under DTAA.4. Rights of licensee under the Copyright Act.5. Nature of support and maintenance services under DTAA.6. Addition of INR 4,94,29,858 as Fees for Technical Services (FTS) under DTAA.7. Treatment of support and maintenance services as FTS without basis for 'make available' test.Summary:Issue 1: Non-compliance with DRP Directions by AOThe assessee argued that the AO erred in passing the assessment order without following the DRP's directions to not make an addition on account of software license fees. The Tribunal agreed with the assessee, noting that the AO's order was in violation of section 144C(10) of the Income Tax Act, 1961.Issue 2: Nature of Software Licensing Fees: Copyrighted Article vs. CopyrightThe assessee contended that the software licensing fees were for a copyrighted article and not for a copyright. The Tribunal agreed, stating that the software provided was a proprietary solution, not a product, and thus, the fees were not for the use of a copyright.Issue 3: Treatment of Software Licensing Fees as Royalty under DTAAThe AO treated the software licensing fees as Royalty under the India-USA DTAA. The Tribunal, relying on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., held that the fees did not constitute Royalty but business income under Article 7 of the DTAA, not taxable in India in the absence of a PE.Issue 4: Rights of Licensee under the Copyright ActThe AO alleged that the licensee had rights to make copies of the software or commercially exploit it. The Tribunal found no evidence supporting this claim, noting that the licensee could not modify, alter, or decompile the software, and the source code remained the assessee's proprietary trade secret.Issue 5: Nature of Support and Maintenance Services under DTAAThe assessee argued that support and maintenance services were ancillary and subsidiary to the software license and not Fees for Included Services (FIS) under Article 12(5)(a) of the India-USA DTAA. The Tribunal agreed, stating that these services were inextricably linked to the software license and did not meet the 'make available' test.Issue 6: Addition of INR 4,94,29,858 as Fees for Technical Services (FTS) under DTAAThe AO added INR 4,94,29,858 by treating the transactions as FTS. The Tribunal disagreed, holding that the software licensing fees were not taxable as FTS and should be treated as business income.Issue 7: Treatment of Support and Maintenance Services as FTS without Basis for 'Make Available' TestThe AO and DRP treated support and maintenance services as FTS without demonstrating that the services made technical knowledge available to the licensee. The Tribunal found no evidence of technical knowledge being transferred or human intervention involved, thus ruling that these services did not qualify as FTS under the DTAA.Conclusion:The Tribunal allowed the appeal, holding that the entire receipts of INR 4,94,29,858 from software licensing and maintenance services were not taxable in India. The assessment order was quashed for non-compliance with DRP directions, and the AO was directed to follow the DRP's findings.