2022 (1) TMI 92 - AT - Income Tax

Chargeability as 'Fees for technical services - test of make available - HELD THAT - The technical knowledge, experience, skill etc. should not get exhausted in the service itself. Something should be provided in such a manner that the receiver may use it after its receipt. If certain technical or consultancy services etc. are provided by one, which get exhausted in the process of providing such services, they do not make available any technical knowledge, experience, skill etc., to the other. Extantly, we are confronted with a situation in which the assessee provided technical or consultancy services through its two employees which were consumed in the provision of services itself and nothing was made available to TTL or TML for afterwards use. The PVR clearly refers to certain deliverables by TTL to TTM, such as, Vehicle Configuration (VC) with all necessary components required to construct the full VC for the X101Aa (Vista FL LHD and FL LHD NCAP 3 star) VTS and Manufacturing Feasibility Considerations, which refer to making available the requisite design or engineering to TML. Unlike TTL, there is no reference to any deliverables in the PVR by the assessee either to TTL or TML, which further fortifies that services rendered by the assessee are albeit in realm of technical services but are not made available to anyone. Whereas the provision of Engineering and Design services by TTL to TML satisfy the test of make available , the provision of services by the assessee to TTL fall short of the same and hence they do not fall within the definition of Fees for included services under Article 12(4) of the DTAA. Going with the mandate of section 90(2) of the Act, it is the definition of Fees for Included services under the DTAA which would prevail over the definition of Fees for technical services u/s.9(1)(vii) of the Act. Since the assessee did not receive any Fees for Included services under Article 12(4) of the DTAA to TTL, the sum of ₹ 52.73 lakh, can t be charged to tax as Fees for Technical services. We have observed above that the assessee categorically stated before the AO that it did not have any Permanent Establishment in India, which point has not been controverted by the Officer. In the absence of the assessee having any PE in India as per Article 5 of the DTAA, the amount received from TTL cannot be considered as Business profits in terms of Article 7. We, therefore, hold that the amount of ₹ 52.73 lakh is not chargeable to tax. This ground is allowed. Taxability of Software License fees - After analyzing the identical issue in the backdrop of similar expression as used in Article 12(3), it has been held that ownership of copyright in a work is different from the ownership of the physical material in which the copyrighted work may happen to be embodied. Parting with copyright entails parting with the right to do any of the acts mentioned in section 14 of the Copyright Act. Where the core of a transaction is to authorize the end-user to have access to and make use of the licensed computer software product over which the licensee has no exclusive rights, no copyright is parted with. Adverting to the facts of the extant case, it is seen that the disputed receipt of ₹ 65.28 lakh from TTL is on account of sale of Software license and not for parting with the copyright of the software. Since facts of the present case are similar to those considered and decided by the Hon ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT , respectfully following the precedent, we hold that the amount cannot be brought within the ambit of Royalties under Article 12 of the DTAA. Ergo, its taxability is not magnetized. This ground is accepted.

Summary

Issues Involved:
1. Chargeability of ?52,73,977 as 'Fees for Technical Services'.
2. Taxability of Software License Fees amounting to ?65,28,405.

Issue-wise Detailed Analysis:

1. Chargeability of ?52,73,977 as 'Fees for Technical Services':

The assessee, a US-based company, filed a return of income declaring Nil income, claiming no Permanent Establishment (PE) in India. The Assessing Officer (AO) noted that the assessee received ?1,69,29,769 for 'Provision of Design and Engineering services'. Out of this, ?52,73,977 received from Tata Technologies Limited (TTL) for services to Tata Motors Limited (TML) was construed as fees for technical services. The assessee contended that it did not 'make available' any technical knowledge, experience, or skill, thus falling outside the ambit of taxation under Article 12(4) of the Double Taxation Avoidance Agreement (DTAA) between India and USA. The AO and the Dispute Resolution Panel (DRP) disagreed, treating the amount as 'fees for technical services/fees for included services' and included it in the total income.

The Tribunal analyzed the nature of the transaction, noting that TTL was engaged by TML for engineering services related to vehicle development. The Project Variation Request (PVR) indicated that the assessee provided manpower support (one Project Engineer and one Design Lead) for the project. The Tribunal found that the services provided by the assessee were predominantly supervisory, ensuring timely delivery and issue resolution, and did not 'make available' any technical knowledge or skill for future use by TTL or TML. Thus, the services did not fall under 'Fees for Included Services' as per Article 12(4) of the DTAA. Since the assessee had no PE in India, the amount could not be considered as Business profits under Article 7. Consequently, the ?52,73,977 was not chargeable to tax.

2. Taxability of Software License Fees amounting to ?65,28,405:

The AO observed that the assessee, a distributor of software licenses, acquired software packages from third parties and sold them to TTL, which in turn sold them to Indian customers. The AO treated the sale of software licenses as Royalty under the Act and the DTAA, relying on various judicial decisions. The DRP upheld this view.

The Tribunal referred to Article 12 of the DTAA, which defines 'Royalties' as payments for the use or right to use any copyright. The Tribunal cited the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT, which distinguished between ownership of copyright and ownership of the physical material embodying the copyrighted work. The Supreme Court held that transactions allowing end-users to access and use software without exclusive rights do not constitute parting with copyright.

Applying this precedent, the Tribunal found that the ?65,28,405 received by the assessee was for the sale of software licenses, not for parting with copyright. Therefore, the amount did not qualify as 'Royalties' under Article 12 of the DTAA and was not taxable.

Conclusion:

The appeal was allowed, with the Tribunal ruling that neither the ?52,73,977 for technical services nor the ?65,28,405 for software license fees were chargeable to tax. The order was pronounced in the Open Court on 21st December 2021.