2025 (9) TMI 91 - AT - Income Tax

Each assessment year distinct; res judicata dismissed; maintenance and training tied to software, not FTS under Article 5(a) Article 12(4)(b)

Veritas Storage [Singapore] Pte Ltd. Versus The Dy. C.I.T. International Taxation Circle-3 (1) (1), Delhi

Veritas Storage [Singapore] Pte Ltd. Versus The Dy. C.I.T. International Taxation Circle-3 (1) (1), Delhi - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the principle of consistency and judicial discipline precludes the Assessing Officer from characterising receipts as Fees for Technical Services (FTS) in the assessment year under consideration where similar receipts were earlier characterised as Royalty in a prior assessment year. 2. Whether receipts characterised as maintenance support, related services and education/training provided in connection with software fall within the scope of FTS under section 9(1)(vii) read with Explanation 2 of the Income-tax Act and Article 12 of the India-Singapore DTAA, or are non-taxable in India when the underlying software sale is not taxable. 3. Whether the 'make available' condition in Article 12(4)(b) of the India-Singapore DTAA (precondition for Article 12 taxation) is satisfied on the facts so as to render the receipts taxable as FTS, or alternatively whether such receipts constitute business income chargeable under Article 7 or are not chargeable at all. 4. Whether interest has been lawfully demanded by the Assessing Officer where the computation sheet shows interest charged but the relevant statutory provision for such demand is not specified. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Consistency and judicial discipline (res judicata argument) Legal framework: Tax assessments are year-specific; application of principles of consistency and res judicata in taxation is subject to the rule that each assessment year stands on its own facts and law applicable to that year. Precedent Treatment: Reliance was placed by the assessee on general principles of consistency and judicial discipline (Radhasoami Satsang and Kamlakshi Finance cited by the assessee). The Tribunal noted established tax law principle that there is no res judicata across different assessment years. Interpretation and reasoning: The Tribunal held that there is no res judicata in taxation law and each year is a separate assessment year where the Assessing Officer can make assessment in accordance with the facts of that year. Therefore, prior characterisation in an earlier assessment year does not bind the AO in the present year. Ratio vs. Obiter: Ratio - The proposition that assessments are year-specific and prior treatment does not automatically preclude re-characterisation in a subsequent year is binding within the facts of the appeal. (This is presented as dispositive of the ground.) Conclusion: Ground asserting breach of principle of consistency/res judicata dismissed; AO entitled to make assessment on facts of the current year. Issue 2 - Taxability of maintenance, related services and training linked to software (FTS v. non-taxability) Legal framework: Section 9(1)(vii) read with Explanation 2 (domestic charging provision for FTS) and Article 12 of the India-Singapore DTAA (treatment of royalties and fees for technical services); Article 5(a) of the DTAA (definition/scope regarding business and connection with utilization of software); burden of proof on Revenue to show 'make available' condition is satisfied under Article 12(4)(b). Precedent Treatment: The Tribunal followed a coordinate-bench decision (TSYS Card Tech Ltd v DCIT) in the assessee's own case for an earlier year, which held that where the software itself is not taxable, training and related services provided in connection with utilization/installation and which are intricately and inextricably associated with the software cannot be treated as FTS; and that Revenue bears burden to demonstrate that the 'make available' condition is satisfied. Interpretation and reasoning: The Tribunal examined the facts and receipts: substantial receipts were for maintenance support and related services and for education/training, which were found to be intricately and inextricably associated with the software sold and provided in connection with its utilization. The Revenue had accepted that sale of software was not taxable as Royalty. Given that linkage and absence of evidence from Revenue to establish the 'make available' condition, the Tribunal held that such receipts could not be treated as FTS under Article 12 and section 9(1)(vii). The Tribunal emphasised that mere use of the term 'make available' in an agreement is not enough; the Revenue must prove the factual satisfaction of that condition. Ratio vs. Obiter: Ratio - Where services are intricately and inextricably associated with a non-taxable software sale and are provided in connection with utilization of the software, such services are not taxable as FTS unless Revenue proves the 'make available' condition under Article 12(4)(b). The Tribunal applied and followed the coordinate-bench precedent as binding for similar facts. Conclusion: Grounds challenging characterization of maintenance support, related services and training as FTS are allowed; the Assessing Officer directed to delete additions treating such receipts as FTS (totaling Rs. 87,49,67,679 in the assessment record). The Tribunal explicitly finds the 'make available' condition not satisfied on the record and places burden on Revenue to prove same, which was not discharged. Issue 3 - Article 7 (business profits) v. Article 12 (FTS) under DTAA Legal framework: Allocation of taxing rights under DTAA - Article 7 deals with business profits (taxable where enterprise has a permanent establishment and profits attributable thereto), Article 12 deals with royalties and fees for technical services; distinction between business income and Article 12 receipts depends on nature of services and factual satisfaction of treaty preconditions (including 'make available'). Precedent Treatment: The Tribunal relied on the coordinate-bench decision which treated similar receipts as not falling within Article 13/Article 12 (FTS/Royalty) where linked to non-taxable software sale and not satisfying 'make available', implicitly supporting classification outside Article 12 and not taxable under DTAA. Interpretation and reasoning: The Tribunal accepted submissions that the receipts were inextricably tied to the software (whose sale was not taxable) and therefore could not be independently treated as FTS under Article 12 absent proof of 'make available'. The Tribunal noted the Revenue's failure to produce evidence showing that technical knowledge/know-how was made available so as to satisfy the treaty precondition for Article 12 taxation. Ratio vs. Obiter: Ratio - In the absence of proof that services made technical knowledge/know-how available (the treaty precondition), receipts closely linked to non-taxable software sale cannot be taxed under Article 12; Revenue must show facts demonstrating applicability of Article 12 rather than merely asserting it. Conclusion: The Tribunal held that the receipts do not satisfy Article 12 preconditions and are not taxable as FTS; the characterisation as business or non-taxable receipts stands in favour of the assessee for the amounts challenged (see Issue 2 conclusion). Ground 3 allowed. Issue 4 - Validity of interest demand where statutory basis not specified Legal framework: Statutory imposition of interest requires specification of the statutory provision under which interest is charged and appropriate computation reflecting the legal basis. Precedent Treatment: The assessee challenged an interest demand noted in the computation sheet without reference to the statutory provision; the grounds raised this deficiency. Interpretation and reasoning: The recorded grounds alleged that interest of INR 78,74,703 was demanded in the computation sheet without highlighting the relevant statutory provision. The final order disposes of substantive taxability grounds by deleting the additions for services treated as FTS, but the order does not set out an explicit, separate adjudication detailing the interest demand vis-à-vis a specific statutory provision in the written reasoning reproduced in the decision text. Ratio vs. Obiter: Obiter/Residual - The decision does not contain a detailed finding on the separate legal validity of the stated interest demand apart from the practical effect that deletion of the additions removes the basis for interest on those additions. Conclusion: No independent, detailed adjudication on the statutory basis for the stated interest demand is recorded in the reasoning; consequentially, by directing deletion of the additions treated as FTS the quantum basis for interest on those additions would be altered. The appeal is disposed of as partly allowed (substantive additions deleted); no express separate order on the specific legality of the interest charge is reflected in the text of the order.