Taxation of cross border software receipts: characterised as business profits, not royalty or FIS, absent a permanent establishment.

Receipts from sale of off-the-shelf software licences were held to be business profits, not 'royalty' under the India Canada DTAA, because the licences had restricted use and facts mirrored prior Tribunal findings; outcome in favour of the assessee. Software maintenance fees were likewise characterised as business income, not Fee for Included Services under the DTAA; outcome in favour of the assessee. The revenue failed to prove a permanent establishment in India, so treaty resident status governed taxation and the presumption of taxability under domestic provisions for services connected to extraction did not apply; outcome in favour of the assessee.

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Issues: (i) Whether receipts from sale of software licences are taxable in India as 'royalty' under Article 12(3) of the India-Canada DTAA; (ii) Whether software maintenance fees are taxable in India as 'Fee for Included Services' under Article 12(4) of the India-Canada DTAA; (iii) Whether the assessee had a permanent establishment in India under Article 5 of the India-Canada DTAA so as to render receipts taxable under section 44BB of the Income-tax Act, 1961; (iv) Whether, in consequence of (iii), the entire receipts are taxable under section 44BB of the Income-tax Act, 1961.

Issue (i): Whether receipts from sale of software licences are taxable in India as 'royalty' under Article 12(3) of the India-Canada DTAA.

Analysis: The assessment year facts were found identical to earlier assessment years where a Coordinate Bench of the Tribunal considered the nature of the software licences and held them not taxable as royalty, treating the receipts as business income governed by the treaty. The record showed the software provided by the assessee was off-the-shelf with restricted use, and the reasoning and findings in the earlier Tribunal order apply to the impugned year. The revenue did not establish a distinguishing factual matrix.

Conclusion: Receipts from sale of software licences are not taxable in India as 'royalty' under Article 12(3) of the India-Canada DTAA; conclusion in favour of the assessee.

Issue (ii): Whether software maintenance fees are taxable in India as 'Fee for Included Services' under Article 12(4) of the India-Canada DTAA.

Analysis: The Tribunal's prior determination on identical facts found maintenance receipts to be business income and not FIS; the AO/DRP did not bring forward any material distinguishing the impugned year. The nature of services and contracts on record did not support treating the maintenance fees as treaty-excepted service income separate from business profits in India.

Conclusion: Software maintenance fees are not taxable in India as 'Fee for Included Services' under Article 12(4) of the India-Canada DTAA; conclusion in favour of the assessee.

Issue (iii): Whether the assessee had a permanent establishment in India under Article 5 of the India-Canada DTAA so as to render receipts taxable under section 44BB of the Income-tax Act, 1961.

Analysis: The onus to prove existence of a permanent establishment lay on the revenue. The DRP's finding of PE was based on treating licences as equipment royalty and speculative reasoning. The revenue failed to demonstrate presence or activities constituting a PE; the Tribunal's earlier order on identical facts held non-existence of PE, which applies to the impugned year.

Conclusion: The assessee did not have a permanent establishment in India under Article 5 of the India-Canada DTAA; conclusion in favour of the assessee.

Issue (iv): Whether, in consequence of (iii), the entire receipts are taxable under section 44BB of the Income-tax Act, 1961.

Analysis: Section 44BB applies to non-residents engaged in provision of services in connection with exploration and extraction of mineral oils through a presence/activities in India. In absence of a proven PE and given that the receipts constitute business profits of a Canada resident governed by the India-Canada DTAA, the presumption of taxability under section 44BB is inapplicable. The Tribunal's prior findings disposing identical earlier years support this result.

Conclusion: The entire receipts are not taxable under section 44BB of the Income-tax Act, 1961; conclusion in favour of the assessee.

Final Conclusion: The appeal is allowed on core substantive issues determining that the impugned receipts are not taxable in India as royalty or FIS and that no permanent establishment existed in India for the assessee, resulting in the disallowance of taxation under section 44BB for the assessment year under consideration.

Ratio Decidendi: Where revenue fails to prove existence of a permanent establishment in India and the relevant receipts constitute business profits of a treaty resident, those receipts are not taxable in India under domestic provisions such as section 44BB and must be governed by Article 7 of the applicable tax treaty.

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