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

ITAT Delhi held that software licensing income earned by a US company through End User License Agreements and reseller agreements with Indian customers ... Fee for Technical Services (FTS) - Income deemed to accrue or arise in India - beneficial provisions under India-USA DTAA - Assessee earned income from license of software where it provides the right to use the computer software license through End User License Agreements (EULAs) / reseller agreements to Indian customers which in its opinion, was neither taxable u/s 9(1)(vii) of the Act nor under Article 12 of the India-USA treaty - HELD THAT:- We find that the reliance placed by the assessee on the decision of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] is well founded wherein the transaction of the assessee is specifically covered under the second category of software sale stated in the said decision and such sale of software as end-user model or a reseller model granting non-exclusive restrictive license model would not be covered in the definition of royalty as per DTAA and accordingly not taxable in India. AO had relied on the agreement entered into with DXC Technology India Private Limited, wherein a separate clause for providing technical support services was present. In this regard, the assessee had submitted that the services rendered towards maintenance and support are only ancillary to the sale of software license and not any additional services rendered to Indian customers. We find that in any event, the receipts by the assessee from DXC Technology India Private Limited is only Rs 1,20,931/- which constitute 0.11% of the total receipts. Therefore, the learned AO erred in concluding that the whole receipts of the assessee would fall under the same category of technical services, ignoring the fact that 99 percent of the receipts were from two major parties with whom assessee had merely entered reseller agreement without having any provision for technical services. Article 12 of India US treaty defines fee for technical services and it insists that unless the technical services rendered result in “making available” technological support, technology, technical plan or design etc., only then the said services could be construed as fee for technical services so as to be taxable under the India US treaty. In the instant case, nowhere the lower authorities could bring with cogent evidence on record that the “make available clause” is duly satisfied so as to enable the end user to use the technology on his own. Hence the said services could not be construed as FTS as per Article 12(4)(b) of India US treaty. Assessee had split its revenue into two components i.e license fees and the support fees and that the support fees are much higher than what has been offered now by the assessee - Assessee submitted that agreements entered into with DXC Technology India Pvt Ltd, JNR Management Resources Pvt Ltd, Adweb Technologies Pvt Ltd and Safe Cyber Solutions & Services Pvt Ltd. With respect to remaining customers, the assessee submitted that these parties agreed to the standard terms via “click through” agreements. The standard terms of these agreements were also furnished before the learned DRP by the assessee. Assessee submitted that the Indian AE does not provide any technical services relating to software sale to the customers in India. We find that the earning of the Indian AE has no relevance to the issue in dispute before us. The learned Assessing Officer had stated that the Indian AE is rendering FTS for Indian customers. We find that there is no specific agreement in place between the AE and its Indian customers. Hence we are unable to comprehend ourselves to accept to the contention of the revenue that the services rendered by Indian AEs are FTS. We hold that the assessee was duly justified in treating the receipts as exempt from tax both under the Act as well as under the treaty in the facts and circumstances of the instant case. Accordingly, the grounds raised by the assessee are allowed. 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.