2012 (4) TMI 209 - AT - Income Tax

Lump sum payment received on sale of software - assessee was giving services to various clients all over the world for development of Balance Score Card (BSC) project - A.O. treated it as royalty under Article 12 of Double Taxation Agreement (DTA) between India and Singapore - assessee contented that the amounts received were business profits in view of Article 7 DTA - assessee argue that it did not have any permanent establishment in India and that supply of software and consultancy services were interdependent insofar as development of BSC was concerned - assessee never parted with possession or control over the rights in such software - Held that - the software used by the assessee cannot be considered independent, but, only as a part of the service rendered by the assessee to its clients with regard to the development of BSC - by means of the Balance Score Card system developed by the assessee, the clients were getting an advantage which went much beyond the period of agreement between the assessee and its clients - assesse made available technical knowledge for meeting the long term targets of the clients and the benefits ran well into the future - the Balance Score Card prepared for each client and system of filling data in such BSC on a continual basis depended on the needs of each client - that the fees received for designing of the management tool called Balance Score Card will definitely fall within the definition of fees for technical services as given under sub-clause (iv) of Article 12 of DTA between India and Singapore - A.O. was justified in treating the amount received by the assessee from its clients as income taxable in India in accordance with DTA between India and Singapore - Appeal of assessee dismissed.

Issues Involved:
1. Classification of lump sum payment received on sale of software as royalty or business profits.
2. Classification of professional fees received as royalty or fees for technical services.
3. Application of Article 7 and Article 12 of the Double Taxation Agreement (DTA) between India and Singapore.
4. Consideration of the Balance Score Card (BSC) project as a tool or technical service.
5. The requirement of a permanent establishment (P.E.) in India for taxing the income.

Detailed Analysis:

1. Classification of Lump Sum Payment Received on Sale of Software as Royalty or Business Profits:
The assessee, a foreign company based in Singapore, argued that the lump sum payments received from Indian clients for software related to the Balance Score Card (BSC) project should be classified as business profits under Article 7 of the DTA between India and Singapore. The Assessing Officer (A.O.) treated these payments as royalty under Article 12 of the DTA and Section 9(1) of the Income-tax Act, 1961. The A.O. considered the software as an equipment, and the payment for its use as royalty. The Dispute Resolution Panel (DRP) upheld the A.O.'s view, rejecting the assessee's argument that the software was a packaged product with no control or domain over it by the user, thus not qualifying as equipment royalty.

2. Classification of Professional Fees Received as Royalty or Fees for Technical Services:
The A.O. classified the professional fees received by the assessee for the BSC project as royalty under clauses (i) and (ii) of Explanation (2) to sub-section (vi) of Section 9(1) of the Act, or alternatively, as fees for technical services under Section 9(1)(vii). The DRP agreed with the A.O., stating that the services provided were of managerial or technical nature, making available technical knowledge, experience, and skill to the clients. The assessee contended that the BSC was a management system and not a tool, and the services did not make available any technical knowledge to the clients, thus not qualifying as fees for technical services under Article 12 of the DTA.

3. Application of Article 7 and Article 12 of the Double Taxation Agreement (DTA) Between India and Singapore:
The A.O. and DRP concluded that Article 7 of the DTA, which pertains to business profits, could not be applied since the payments received were in the nature of royalty and fees for technical services. The DRP emphasized that the technical knowledge and skills provided by the assessee remained with the clients, enabling them to use the BSC system for their business purposes, thus falling within the definition of "fees for technical services" under Article 12 of the DTA.

4. Consideration of the Balance Score Card (BSC) Project as a Tool or Technical Service:
The assessee argued that the BSC was a management tool and the software used was only a part of the process, not an independent equipment. The A.O. and DRP treated the software as an integral part of the technical services provided. The Tribunal agreed with the lower authorities, stating that the BSC system involved significant technical and consultancy services, and the software was not independent but part of the overall service rendered. The Tribunal concluded that the entire amount received for the BSC project was fees for technical services, not business income or royalty.

5. The Requirement of a Permanent Establishment (P.E.) in India for Taxing the Income:
The assessee claimed that it did not have a permanent establishment (P.E.) in India, and therefore, its business income should not be taxable in India under Article 7 of the DTA. However, the Tribunal noted that the payments were classified as fees for technical services under Article 12 of the DTA, which does not require a P.E. for taxation. The Tribunal upheld the A.O.'s treatment of the income as taxable in India under the DTA, dismissing the assessee's appeal.

Conclusion:
The Tribunal concluded that the entire amount received by the assessee from its clients for the BSC project was fees for technical services under Article 12 of the DTA between India and Singapore. The software used was not independent but part of the technical services provided. Therefore, the income was taxable in India, and the assessee's appeal was dismissed.

← Previous Next →