2026 (1) TMI 876 - AT - Income Tax

Distribution revenue from software distribution characterised as business income, not FTS; eligible for equalisation levy exclusion.

Distribution receipts from granting rights to distribute standardized software were held to be business income, not fees for technical services, because ... Income deemed to accrue or arise in India - receipts from Indian distributors on account of granting rights to distribute Acronis software are in the nature of fees for technical services (FTS) under the Act - benefit of make available clause under Article 12 of India Singapore DTAA - Invoking India–Switzerland DTAA in the hands of a Singapore resident assessee - as argued receipts are exempt u/s. 10(50) by disregarding the proof of payment of equalization levy furnished during the course of DRP proceedings - assessee is a foreign company incorporated under the laws of Singapore HELD THAT:- Determination of whether a receipt constitutes fees for technical services must necessarily hinge upon whether the recipient of the income has rendered technical services to the payer. The potential benefits or functionalities enjoyed by end users of the software are wholly irrelevant for characterising the nature of income in the hands of the distributor. This principle has been clearly enunciated by judicial authorities and has been reiterated in the case of SFDC Ireland Ltd. [2024 (3) TMI 620 - DELHI HIGH COURT] The enquiry must be confined to examining whether the assessee rendered any technical services to the Indian sub-distributors. On the admitted facts, the answer is in the negative. The assessee merely sold distribution rights and software products, and did not provide any technical service, consultancy or know-how to the Indian entities. Accordingly, on a cumulative appreciation of the agreements, invoices, functional profile and admitted factual position, we have no hesitation in holding that the distribution revenue received by the assessee cannot be recharacterized as fees for technical services. The said receipts constitute business income arising from distribution activity. Having held that the distribution revenue received by the assessee cannot, on facts or in law, be characterized as fees for technical services, we now proceed to examine, without prejudice, the alternative reasoning adopted by the learned Dispute Resolution Panel in invoking the provisions of the India–Switzerland Double Taxation Avoidance Agreement in the hands of the assessee. DRP has proceeded on the premise that since the “core services” and software infrastructure were owned and operated by the Swiss group entity, namely Acronis International GmbH, the income received by the assessee ought to be tested under the provisions of the India–Switzerland DTAA, which does not contain a “make available” clause, rather than the India–Singapore DTAA. This line of reasoning, in our considered opinion, is fundamentally flawed, legally unsustainable, and contrary to the most elementary principles governing the application of tax treaties. Once the tax residency of the assessee is not in dispute, the applicable tax treaty for determining the taxability of its income in India can only be the India–Singapore DTAA. The attempt of the Revenue to invoke the India–Switzerland DTAA in the hands of a Singapore resident assessee is contrary to the express language of Article 1 of the India–Switzerland DTAA, which governs the personal scope of the treaty. Revenue has not even alleged that the assessee is a sham or conduit entity, nor has it questioned the genuineness of the Tax Residency Certificate. Once the TRC is accepted, the treaty entitlement necessarily follows, unless there is a specific finding of fraud or abuse, which is conspicuously absent in the present case. We hold that the invocation of the India–Switzerland DTAA in the hands of the assessee is legally impermissible and wholly unsustainable. The assessee, being a tax resident of Singapore, is entitled to the protection and benefits of the India–Singapore DTAA, and the Revenue is bound to examine the taxability of the impugned receipts strictly within that treaty framework. Section 9(1)(vii) of the Act brings to tax income by way of fees for technical services if such services are rendered in India or are utilized in India. The judicial interpretation of this provision has consistently held that for a receipt to qualify as fees for technical services, there must be rendition of a service of a technical, managerial or consultancy nature to the payer, involving human intervention and application of specialised knowledge for the benefit of the recipient. In the present case, the assessee has not rendered any service to the Indian sub-distributors. The receipts arise from sale of distribution rights and software products. The software products distributed by the assessee are standardised products, not customised for individual customers. Whether delivered as electronically downloadable software or accessed through a cloud-based platform, the functionality of the software is automated. Any coding, upgrades or maintenance activities result in enhancement of the software product itself and do not amount to rendition of a service to any specific customer or distributor. The element of “human intervention”, which has been judicially recognised as a critical factor for characterising a receipt as fees for technical services, is conspicuously absent in the present case. The assessee does not deploy personnel to provide technical advice, consultancy or troubleshooting to Indian sub-distributors. Any limited support, if required by end users, is provided by the Swiss group entity in accordance with standardised support protocols, without any separate consideration. The detailed submissions and judicial authorities relied upon by the assessee, which were placed on record before the learned DRP, are required to be taken note of in their entirety and are, therefore, consciously not reproduced here to avoid prolixity, but the relevant portions may be incorporated at the appropriate stage of finalisation. Accordingly, even under the domestic law provisions of the Act, the distribution revenue received by the assessee cannot be brought to tax as fees for technical services. Claim for exemption u/s 10(50) - Section 10(50) of the Act provides that any income arising from e-commerce supply or services, which is chargeable to Equalization Levy, shall not be included in the total income. The proviso and Explanation to the section clarify that such exclusion shall not apply only where the income is chargeable to tax as royalty or fees for technical services under the Act read with the applicable DTAA. In the present case, having held that the distribution revenue does not constitute fees for technical services either under the Act or under the DTAA, the bar contained in Explanation 1 to section 10(50) does not come into operation. Consequently, the assessee is entitled to exclusion of the impugned income from total income under section 10(50), subject to verification of payment of Equalization Levy, which the assessee has already demonstrated. Receipts do not constitute royalty or fees for technical services, the exclusion provided under section 10(50) of the Act squarely applies. Consequently, the distribution revenue is not liable to be included in the total income of the assessee. Accordingly, the addition made by the AO, pursuant to the directions of the learned Dispute Resolution Panel, on account of alleged fees for technical services is hereby directed to be deleted in entirety. Short grant of credit for tax deducted at source - Assessee has contended that credit of TDS has not been fully granted as per Form 26AS - This issue is purely computational in nature. We direct the Assessing Officer to verify the claim of the assessee with reference to Form 26AS and grant due credit for tax deducted at source in accordance with law, after affording reasonable opportunity of being heard to the assessee. Issues: (i) Whether receipts from Indian sub-distributors are taxable as fees for technical services (FTS) under the Act and applicable DTAA; (ii) Whether the IndiaSwitzerland DTAA can be invoked instead of the IndiaSingapore DTAA in respect of a Singapore resident assessee; (iii) Whether the receipts are excluded from total income under section 10(50) of the Act by reason of payment of Equalization Levy; (iv) Whether credit for tax deducted at source (TDS) as claimed by the assessee should be granted.Issue (i): Whether the receipts received from Indian sub-distributors constitute fees for technical services (FTS) in the hands of the recipient.Analysis: Relevant contractual terms show a principal-to-principal distribution arrangement; intellectual property remains with another group entity; invoices reflect sale of software products on price/quantity basis; no contractual obligation or factual finding that the distributor rendered technical, managerial or consultancy services to the sub-distributors; cited authorities restrict the enquiry to services rendered to the recipient rather than benefits to end-users; domestic provision tested under section 9(1)(vii) and treaty provision tested under Article 12(4) (make available clause) of the IndiaSingapore DTAA.Conclusion: The receipts do not constitute fees for technical services; they are business income from distribution and not FTS (in favour of the assessee).Issue (ii): Whether the IndiaSwitzerland DTAA applies to the assessee instead of the IndiaSingapore DTAA.Analysis: Treaty applicability is governed by the residence of the juridical person; the assessee is an undisputed tax resident of Singapore and holds a valid Tax Residency Certificate; Article 1 of the IndiaSwitzerland DTAA limits that treaty to residents of India or Switzerland; invoking a treaty applicable to a different resident entity is contrary to treaty scope and settled principles of international taxation and relevant authority.Conclusion: Invocation of the IndiaSwitzerland DTAA in respect of the Singapore resident assessee is impermissible; the IndiaSingapore DTAA alone governs the taxability of the receipts (in favour of the assessee).Issue (iii): Whether the receipts are excluded from total income under section 10(50) of the Act because Equalization Levy was paid.Analysis: Section 10(50) excludes income chargeable to Equalization Levy unless that income is chargeable as royalty or FTS under the Act read with the applicable DTAA; having held the receipts are not FTS under domestic law or the IndiaSingapore DTAA, the proviso/explanation to section 10(50) does not operate to deny exclusion; the assessee furnished evidence of Equalization Levy payment during DRP proceedings.Conclusion: The receipts are excluded from total income under section 10(50) subject to verification of the Equalization Levy payment (in favour of the assessee).Issue (iv): Whether the assessee is entitled to TDS credit as claimed.Analysis: The claim is computational and supported by Form 26AS; verification against statutory records is a matter of routine compliance.Conclusion: The Assessing Officer is directed to verify and grant TDS credit in accordance with law (in favour of the assessee as to grant of credit).Final Conclusion: The impugned addition treating the distribution receipts as fees for technical services is unsustainable; accordingly the assessment addition is deleted and the appeal is allowed.Ratio Decidendi: Where a resident juridical person under a distribution agreement receives amounts as distributor on a principal-to-principal basis and does not render technical services or make available technical knowledge to the recipient, such receipts are business profits and not fees for technical services for tax and treaty purposes.