TaxTMI 
TaxTMI 
2026 (7) TMI 291
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....ed in these two appeals, the same are being disposed off by way of this common order for the sake of convenience and brevity. 2. Grounds of appeal filed by the Assessee (ITA- 917/Del/2023) for A.Y. 2020- 21 are reproduced as under: "1. That the Assessing Officer ("AO") erred on facts and in law in computing the income of the Appellant for the relevant Assessment Year ("AY") at Rs. 27,85,51,009/- as against income of Rs. 2,08,64,650/- returned by the Appellant. 2. That on the facts and in the circumstances of the case and in law, the directions issued by the Dispute Resolution Panel ("DRP") and the final assessment order passed by the AO are void-ab-initio having been issued beyond statutory limitation prescribed under Section 153 of the Income tax Act, 1961 (the "Act"). Re: Receipt of Rs. 24,95,71,598/- from supply of software subscription and services to be taxable as Royalty income and/or Fees for Technical/Included Services ("FTS/FIS") under Article 12 of the India-US Double Taxation Avoidance Agreement ("DTAA") 3. That on the facts and circumstances of the case, the AO and the DRP has erred in treating the receipts from the supply of softw....
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....ubscription provided by the Appellant is the use of a copyrighted article. and not use of copyright right of the software. 9. That on the facts and circumstances of the case, the AO and the DRP has failed to appreciate that the Appellant provides a non-exclusive, non-transferable and a limited access software subscription to customers in India. for the duration of the applicable subscription period, and the ownership and reservation of all rights, title, and interest in and to the software subscription (including online subscription support services) supplied by the Appellant always remained owned and retained with the Appellant. 10. That on the facts and circumstances of the case, the AO and the DRP has failed to appreciate that the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos. 8733-8734 of 2018) applies in all fours in the facts of the instant and any deviation from the decision constitutes judicial indiscipline, bordering on contempt of court. 11. That on the facts and circumstances of the case, the AO and the DRP has failed to appreciate that the online subsc....
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....a US Double Taxation Avoidance Agreement ("DTAА") 4. That on the facts and circumstances of the case, the AO and the DRP have erred in treating the receipts from the supply of software subscription and professional services to the customers in India amounting to Rs. 58,91,49,695/- as income in the nature of FTS/FIS without appreciating that the Appellant did not make available any skill, know-how, knowledge, etc. to the customers as per Article 12 of India - USA DТАА. 5. That on the facts and circumstances of the case, the AO and DRP have erred in misinterpreting the Enterprise Subscription Master Agreement ('ESMA') by holding that the Appellant is primarily engaged in the business of providing consulting, training and software support and maintenance services and the software subscription are supplied incidentally only on need basis of the customer without appreciating that the Appellant is primarily engaged in the business of supply of software subscription 6. The learned AO and Hon'ble DRP ought to have considered that the support services in relation to the software subscription is only ancillary to the main contrac....
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....the facts and circumstances of the case, the AO has erred in treating the receipts from the supply of software subscription and services to the customers in India amounting to Rs. 58,91,49,694/- as income in the nature of FTS and royalty both without appreciating that royalty and FTS are mutually exclusive and same payment cannot be characterised both as royalty and FTS. 14. That on the facts and circumstances of the case, the AO and the DRP have failed to appreciate that the Appellant provides a non-exclusive, nontransferable and a limited access software subscription to customers in India, for the duration of the applicable subscription period, and the ownership and reservation of all rights, title, and interest in - the software subscription (including online subscription support services) supplied by the Appellant always remained with the Appellant. 15. That on the facts and circumstances of the case, the AO and the DRP have failed to appreciate that the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos. 8733- 8734 of 2018) applies on all fours in the facts of the instant case o....
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.... erred in misinterpreting the Enterprise Subscription Master Agreement ('ESMA') by holding that the Appellant is primarily engaged in the business of providing consulting, training and software support and maintenance services and the software subscription are supplied incidentally only on need basis of the customer without appreciating that the Appellant is primarily engaged in the business of supply of software subscription as its main source of Revenue in India and support services are inextricably linked to the software subscription. 5. That on the facts and in the circumstances of the case and in law, the AO and the DRP ought to have considered that the support services in relation to the software subscription is only ancillary to the main contract of software subscription and the taxability of same is to be analysed on the basis of the principal purpose, which is supply of software subscription. 6. That on the facts and in the circumstances of the case and in law, the AO and the DRP erred in holding that the Appellant provides a comprehensive range of products and services as a package during the subscription period taken by the customer without appr....
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....ing the receipts from the supply of software subscription and professional services to the customers in India amounting to Rs. 59,68,35,379 as income in the nature of FIS and royalty both without appreciating that royalty and FIS are mutually exclusive and same payment cannot be characterised both as royalty and FIS. 13. That on the facts and in the circumstances of the case and in law, the AO and the DRP have failed to appreciate that the Appellant provides a nonexclusive, non-transferable and a limited access software subscription to customers in India, for the duration of the applicable subscription period, and the ownership and reservation of all rights, title, and interest in the software subscription always remained with the Appellant. 14. That on the facts and in the circumstances of the case and in law, the AO and the DRP have failed to appreciate that the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited (Civil Appeal Nos. 8733-8734 of 2018) applies to the facts of the instant case, wherein it was held that the payments made from resident Indian end users/distributors to Non-resident supplie....
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.... Without prejudice, the computation of the interest is erroneous and excessive. 3. As common issues are involved in these appeals, A.Y. 2022-23 (ITA No.- 1185/Del/2025) is taken as the lead case. 3.1 Brief facts are that the assessee is a company incorporated in the USA and is a tax resident of that country. It is a provider of data software solutions and generates revenue from software products subscriptions and related services including training / educational services. For A.Y. 2022-23, return declaring income of Rs. 60,75,88,684/- was filed out of which Rs. 59,68,35,379/- was claimed as exempt. Total receipts were declared as under: (i) Receipts from sale of training material - Rs. 69,51,872/- (ii) Receipts from supply of software products - Rs, 59,68,35,379/- 3.2 While the receipts from sale of training material were offered to tax as Fee for Technical Services (FTS) in the return, receipts from supply of software products were not offered to tax. These were claimed to be not taxable in India relying on the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. AIRONLINE 2021 SC 102. However, the AO trea....
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....anguage it was found out that the source code is converted into the bit code and then executed by the Python Virtual Machine. In the case of Engineering Analysis, the transfer of object code with respect to shrinkwrap software was discussed and it was explicitly stated that the source code was not transferred whereas in the case of the assessee it is neither shrinkwrap software nor transfer of object code. Further, the Panel also brings about the difference in the features between the shrinkwrap software and the Cloudera Software Package. Shrinkwrap Software (The considered software for discussion by the Hon'ble Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd.) (i) It is used for Microsoft Office, Adobe Acrobat, and Trend Officescan. Micro (ii) Shrinkwrap software is a term for on premises software that is installed on a company's computers On-premises software is installed and runs or computers on premises of the person or organization using the software. (iii) It is an off-the-shel software that is available to the public under standard terms and conditions. (iv) It is often sold at a low cost and is no open to modification. Cloudera ....
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....ial modification as required by the client, the exercise of departing from the original basic softwares has been conducted on the software to make it usable for the client. Thus, by the very nature of different products (software) being the object of discussion in examination, the Engineering Analysis as relied upon by the assessee is inapplicable in the instant case. So, in view of elaborate discussion above, the case of the assessee is distinguished from the case of Engineering Analysis as it can be construed as comparing apple and oranges as the basic premise from which the entire judgment emanates is different from the case of the assessee and so the reliance placed by the assessee on the case of Engineering Analysis for pleading for not holding the receipts from sale of software as FTS holds no merit and deserves to be rejected. (ii) Quoting from the relevant clause of ESMA "1.15 "Subscription" means: (i) with respect to Supported OSS Products, a Cloudera offering that provides Customer the right to access and receive Support Services during the applicable Subscription Period for such Supported OSS Products in accordance with the terms of this ESMA a....
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....erves all rights not expressly granted in this ESMA or the applicable Order Form, and no licenses are granted by Cloudera to Customer, whether by implication, estoppel or otherwise, except as expressly set forth in this ESMA or the applicable Order Form. 2.5 License Keys. Any license keys provided, by Cloudera to Customer are personal to Customer. Customer may not distribute any license keys provided by Cloudera to any third party. Such requirements of Section 6 of this ESMA. 2.6 Cloudera Trademarks in Supported OSS Products. Unless as otherwise set forth in the applicable Order Form, this ESMA and the applicable Order Form do not permit Customer to distribute Supported OSS Products or any of their components containing Cloudera's trademarks. The "Cloudera" trademark is a registered or unregistered trademark of Cloudera in various countries, Customer may redistribute Supported OSS Products that include Cloudera trademarks only if: (i) permitted under a separate written license agreement with Cloudera authorizing such redistribution, or (ii) Customer removes all occurrences of Cloudera trademarks and logos in such Supported OSS Products prior ....
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....)(vii) of the IT Act and Article 12 of the DTAA. 4.6 In view of the above discussion in e pre-paras, the Panel not only affirms the findings of the AO in the DAO but also strengthens. The AO is directed to incorporate the discussion of the DRP in the body of the order at appropriate places. Ground Number 1 & 2 are accordingly disposed of." 3.4 Final assessment order was accordingly passed at total assessed income of Rs. 60,75,88,684/- after making addition of Rs. 59,68,35,378/- as above. 3.5 Aggrieved, the assessee has preferred an appeal before the Tribunal. 4. Ground no. 1 is general in nature and ground no. 2 has not been pressed, ground no. 3 to 15 are essentially related to the addition of Rs. 59,68,35,378/- made on account of FTS /FIS and Royalty from supply of software subscriptions and professional services. 4.1 Before us, the Ld. AR has vehemently argued that the AO and the DRP have erred in treating these receipts as taxable and has submitted impugned addition is comprised of the following components as under: (a) Receipts from supply of software subscription - Rs. 56,62,94,044/- (b) Supply of Professional Services - Rs. 3,05,41,334/....
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....rs. While deciding the issue regarding withholding of tax, the Hon'ble jurisdictional High Court held as under: "In so far as the IT infrastructure and software development is concerned, the petitioner had explained it maintains the network connectivity and ensures that the business of AIPL and AIGSPL is being maintained and run at optimum effectiveness and maximum security. The same would include the applications and software, which are used by the professionals of AIPL and AIGSPL. However, the assumption that there is any transfer of right in relation to the said software or applications to AIPL and AIGSPL is not supported by any material on record. .... ... Given the fact that AIPL and AIGSPL did not acquire any copyright in the software, the cross charges paid by them could not be construed as royalties within the scope of Article 12(3) of the India-US DTAA. This issue is covered by the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Private Limited v. CIT & Anr.: (2021) 432 ITR 471." iii. CIT (IT)-1, vs. Amazon Web Services Inc. [2025] 174 taxmann.com 1188 (Delhi), In this case, Hon'ble jurisdi....
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....ty. 6.2 With regard to the professional services (Rs. 3,05,41,334/-), we note that these have been shown for the first time in the year under consideration. The assessee, in its submission dated 30.08.2023 before the AO has explained the nature of these receipts and the scope of professional services as under: "B. Professional services Professional services help the customers/ end-users to derive maximum value from the implementation and use of software subscriptions, machine learning, enabling customers/ end-users to efficiently use their data environment specific to customer data systems, data analytics, and business data needs such as, upgrading from old version of applications to the newest available version; helping customers/ end-users where having any issue with Cloudera products while accessing them; tuning the software for the customers/ end-user needs." 6.3 Further, the term 'services' has been defined under the ESMA as follows:- "1.15 "Subscription" means: (i) with respect to Supported OSS Products, a Cloudera offering that provides Customer the right to access and receive Support Services during the applicable Subscription Period for such Support....
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....ove chart, it is clear that only some of the customers have paid for professional services and the amounts paid by them (in absolute terms and also as a percentage of total subscription fee paid) vary drastically suggesting customized technical and professional services specific to the individual customers. 6.6 Thus, we are not convinced that these services are simply restricted to providing assistance for migration from old to new version of the software application. Rather, the substantial payments made by some of the parties is suggestive of the fact that these are specialized customer specific consultations provided to some of the clients and therefore, these are clearly in the nature of FTS / FIS. Thus, we are of the considered view that akin to the receipts from supply of training material and services, the professional services being provided by the assessee are not covered by the decision of the Hon'ble Apex Court in Engineering Analysis (supra) where an off the shelf software (Shrinkwrap) was under consideration. The assessee has already offered the receipts from supply of training material services. In view of above facts and circumstances, the receipts from supply of ....