2025 (5) TMI 6 - AT - Income Tax

ITAT deletes BSS addition following Bombay HC precedent, rules software maintenance not royalty under India-UK DTAA, corrects section 234A interest calculation

ITAT Mumbai held that BSS rendered by assessee arising from same CCA as SIMPL case cannot be treated as FTS, following binding precedent from Bombay HC. ... Income taxable in India or not - treatment of BSS as FTS in the hands of the assessee - HELD THAT:- Since the BSS rendered by the assessee is arising out of the same CCA as in the case of SIMPL, we are of the view that the decision of the Hon'ble High Court [2024 (3) TMI 216 - BOMBAY HIGH COURT] has a binding precedence in assessee's case also. Further the facts for the year under consideration are identical to AY 2009-10 [2024 (9) TMI 1712 - ITAT MUMBAI] and therefore in our considered view the above decision of the Co-ordinate Bench on the impugned issue is applicable for the year under consideration also. Accordingly, we direct the AO to delete the addition made towards BSS in the hands of the assessee. Ground No.2 of the assessee raised in this regard are allowed. Amount received by the assessee on account of SUN Maintenance Software usage charges - Royalty Receipts under the DTAA between India and UK - AR argued that it is a settled position that the amount received towards use of computer software is not a payment of royalty since the charges paid are towards use of copyrighted item and not for the use of copyright itself - HELD THAT:-We in this regard notice that a similar issue has been considered in Reliance Industries P. Ltd. [2024 (6) TMI 1069 - BOMBAY HIGH COURT] by placing reliance on the decision of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 - SUPREME COURT] the amount received towards SUN Maintenance Software cannot be treated as royalty and the addition made in this regard is not sustainable. Short grant of TDS - We direct the AO to examine the Form 16A issued by the payer along with the corresponding income offered to tax by the assessee and allow the credit towards TDS in accordance with law. Excess interest charged u/s 234A - as submitted that the assessee has filed the return of income on 28.11.2012 whereas the due date for filing the return of income was 30.08.2011 and AO has erroneously calculated the interest u/s 234A for 14 months instead of 12 months (from December 2011 to November 2012) - HELD THAT:- We direct the AO to examine the contention of the assessee based on evidences to be submitted in this regard and recalculate the interest under section 234A in accordance with law. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal include:Whether receipts from General Business Support Services (BSS) constitute taxable income under section 2(24) of the Income Tax Act, 1961, or are merely cost recharges not taxable in India.Whether such receipts qualify as Fees for Technical Services (FTS) under the Act and the India-UK Double Taxation Avoidance Agreement (DTAA), particularly under Article 13(4)(c).Whether the services rendered by the assessee make available technical knowledge, skill, experience, or know-how to the recipient, thereby constituting FTS under the DTAA.Whether payments received towards access to SUN Maintenance Software amount to taxable income under section 2(24) and qualify as royalty under Article 13 of the India-UK DTAA.Whether the payments for software usage represent 'use of copyrighted article' or 'use or right to use of copyright' for the purpose of royalty taxation under Article 13(3).Whether the assessee is entitled to credit for Tax Deducted at Source (TDS) amounting to Rs 13,67,697/-.Whether interest levied under sections 234A and 234B of the Act has been correctly computed.Whether penalty proceedings under section 271(1)(c) for concealment of income are justified.2. ISSUE-WISE DETAILED ANALYSISReceipts from General Business Support Services (BSS) as Income and FTSLegal Framework and Precedents: The Income Tax Act, 1961, defines income under section 2(24). The term Fees for Technical Services (FTS) is defined in Article 13(4) of the India-UK DTAA, which includes payments for technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes. The binding effect of Authority for Advance Ruling (AAR) decisions under section 245S was also considered. The Hon'ble Madras High Court and Karnataka High Court decisions, as well as the Delhi High Court and various Tribunal rulings, were referenced to interpret the scope of FTS and the 'make available' test.Court's Interpretation and Reasoning: The Tribunal examined the nature of BSS rendered by the assessee under a Cost Contribution Agreement (CCA) with Shell group companies. The services included management support, marketing support, legal and financial advice, employee relations, and other business support services. The AO had relied on an AAR ruling which held similar payments as FTS taxable in India. However, the Hon'ble Jurisdictional High Court quashed the AAR ruling in a related case involving SIMPL, holding that the services were managerial and advisory in nature, not technical, and thus did not constitute FTS under the DTAA.The Tribunal emphasized that Article 13(4)(c) restricts FTS to services that make available technical knowledge or involve the development and transfer of technical plans or designs. Managerial or general consultancy services that do not transfer technical know-how do not satisfy this criterion. The Tribunal relied on the principle of noscitur a sociis and authoritative judicial interpretations to conclude that the BSS provided were not technical services making available technical knowledge.Key Evidence and Findings: The list of services under the CCA was scrutinized and found to be primarily managerial and advisory. The continuation of the agreement indicated no transfer of enduring technical knowledge, as the recipient continued to require the service. The Tribunal also noted the absence of any determination regarding the assessee's permanent establishment in India in this context.Application of Law to Facts: Applying the legal tests and precedents, the Tribunal held that the BSS receipts were not taxable as FTS. The reliance by AO on the AAR ruling was misplaced due to subsequent judicial reversal. The Tribunal thus allowed the appeal on this ground and directed deletion of the addition.Treatment of Competing Arguments: The Revenue relied on the AAR ruling and contended that the BSS constituted FTS. The assessee argued that the ruling was not binding and that the services were managerial, not technical. The Tribunal agreed with the assessee, following the High Court's decision quashing the AAR ruling, and declined to delve into permanent establishment issues not raised in grounds of appeal.Receipts towards SUN Maintenance Software as RoyaltyLegal Framework and Precedents: Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA define royalty, including payments for use of or right to use copyrighted articles. The Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. clarified that payments for use of software as a copyrighted article do not constitute royalty unless they confer a right to use the copyright itself. The Hon'ble Bombay High Court in Reliance Industries Ltd. followed this principle.Court's Interpretation and Reasoning: The Tribunal found the payments for SUN Maintenance Software usage to be akin to payments for use of copyrighted articles, not for use or right to use the copyright. The Supreme Court's authoritative decision was held to be binding and directly applicable, negating the AO's characterization of such receipts as royalty.Key Evidence and Findings: The nature of the software usage payments, the terms of the End User License Agreement (EULA), and judicial precedents were examined. The Tribunal noted the absence of any transfer or licensing of copyright rights and that the payments were for use only.Application of Law to Facts: Following the Supreme Court and High Court rulings, the Tribunal held that the receipts from SUN Maintenance Software access do not constitute royalty and are not taxable as such. Consequently, the addition made by the AO was unsustainable.Treatment of Competing Arguments: The Revenue's reliance on section 9(1)(vi) and the AO's finding of royalty was rejected. The assessee's contention, supported by binding Supreme Court precedent, was accepted.Short Grant of TDS CreditThe Tribunal directed the AO to verify the Form 16A issued by the payer and reconcile the corresponding income declared by the assessee. The AO was instructed to allow the TDS credit in accordance with law, ensuring no short grant of credit.Interest under Sections 234A and 234BRegarding interest under section 234A, the Tribunal observed that the assessee filed the return late but contended that interest was incorrectly computed for 14 months instead of 12 months. The AO was directed to re-examine the evidence and recalculate interest accordingly.Interest under section 234B and penalty proceedings under section 271(1)(c) were considered consequential and did not warrant separate adjudication.3. SIGNIFICANT HOLDINGSOn the nature of BSS receipts, the Tribunal held:'The services availed by Petitioner cannot be said to be technical services and Article 13 is wholly inapplicable in the facts and circumstances of the present case... Thus, under paragraph 4(c), consultancy services which are not of a technical nature cannot be included services.'On the 'make available' test under Article 13(4)(c):'The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider... mere incidental advantage to the recipient of services is not enough.'On the characterization of software usage payments as royalty:'The amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/suppliers... is not the payment of royalty for the use of copyright in the computer software... The provisions contained in the Income-tax Act... have no application in the facts of these cases.'Final determinations:The receipts from General BSS are not taxable as income or FTS in India under the Income Tax Act or India-UK DTAA.The payments for access to SUN Maintenance Software do not constitute royalty and are not taxable as such.The AO's additions on these grounds are set aside.The assessee is entitled to TDS credit subject to verification.The interest under section 234A is to be recalculated as per correct period.Penalty proceedings and interest under section 234B are consequential and not separately adjudicated.