2024 (11) TMI 1195 - AT - Income Tax

US software company's licensing income exempt from Indian tax under Section 9(1)(vii) and India-USA DTAA Article 12

DigiCert Inc. Versus Income Tax Officer, Circle International Taxation-1 (2) (2), New Delhi

DigiCert Inc. Versus Income Tax Officer, Circle International Taxation-1 (2) (2), New Delhi - TMI Issues Involved:1. Whether the receipts of INR 10,89,13,249/- should be taxed as Fee for Technical Services (FTS) under the Income-tax Act and the India-USA Double Taxation Avoidance Agreement (DTAA).2. Whether the services provided by the assessee qualify as technical services under Article 12 of the India-USA treaty.3. Whether the splitting of revenue into license fees and support fees is justified.4. Whether the Indian Associated Enterprises (AEs) provided Fee for Technical Services (FTS) to Indian customers.Issue-wise Detailed Analysis:1. Taxation of Receipts as Fee for Technical Services (FTS):The primary issue was whether the receipts of INR 10,89,13,249/- should be classified as Fee for Technical Services (FTS) under the Income-tax Act and the India-USA DTAA. The assessee, a USA-based technology company, argued that the income from the license of software to Indian customers was not taxable as FTS. The Assessing Officer (AO) had categorized the receipts as FTS, asserting that the services were inextricably linked to security licenses. However, the tribunal found that the assessee provided only a non-exclusive, non-transferable license for the use of its software, without any proprietary interest or copyright transfer. Thus, the payments were not in the nature of royalty or FTS, as the license merely enabled the use of the copyrighted product without creating any interest in the copyright.2. Qualification as Technical Services under Article 12 of the India-USA Treaty:The tribunal examined whether the services rendered by the assessee qualified as technical services under Article 12 of the India-USA treaty. The AO had relied on an agreement with DXC Technology India Pvt Ltd, which included a clause for technical support services. However, the tribunal noted that the receipts from DXC Technology constituted only 0.11% of the total receipts, and the majority of the revenue was from reseller agreements without technical service provisions. The tribunal concluded that the 'make available' clause, essential for classifying services as FTS under the treaty, was not satisfied. Therefore, the services could not be construed as FTS under Article 12(4)(b) of the treaty.3. Splitting of Revenue into License Fees and Support Fees:The tribunal addressed the contention that the assessee had split its revenue into license fees and support fees, with the latter being higher than reported. The assessee argued that its agreements did not provide for such a split, and invoices did not separately list support fees, which were ancillary to the software license sale. The tribunal found the AO's findings erroneous, noting that the invoices were in USD and not INR, and the agreements did not specify a bifurcation of fees. The tribunal accepted the assessee's submission that the agreements with certain parties were standard 'click through' agreements, and no specific party-wise contracts existed with all customers.4. Provision of Fee for Technical Services by Indian AEs:The AO had claimed that the Indian AEs provided FTS to Indian customers. However, the tribunal found no specific agreements between the Indian AEs and Indian customers to support this claim. The tribunal noted that the Indian AE provided level 2 technical support, while the assessee provided level 1 support. The tribunal concluded that the AO had incorrectly categorized the receipts as FTS by mixing the services provided by the assessee and the Indian AE.In conclusion, the tribunal held that the assessee was justified in treating the receipts as exempt from tax under both the Income-tax Act and the India-USA treaty. The appeal was partly allowed, with the grounds raised by the assessee being accepted.