2023 (9) TMI 1222 - AT - Income Tax

Income taxable in India - Taxability of the amount received from sale of software as fees for technical services (FTS) under Article 12(4) of India-Singapore DTAA - assessee purchased software products from third party vendors like Microsoft, Adobe etc. and distributes them to customers in India - HELD THAT - Interestingly, in the final assessment order, while implementing the directions of learned DRP, the AO has treated part of the receipts from sale of software as FTS. However, on what basis, he bifurcated the receipts between the sale of products and provision of services is not forthcoming. AO has absolutely not made any discussion about the factual aspect of the issue and the evidences examined by him to come to such conclusion. Though, learned Departmental Representative has tried to make out a case before us that certain invoices of the assessee include service component, however, no such fact has been established on record. On verification of copies of invoices placed in the paper book, we are convinced that they are only in respect of sale of software and do not contain any element of service. Thus, in our view, even a part of the receipts cannot fall within the ambit of FTS. Even, assuming for arguments sake that a part of the receipts from sale of software also involves service element, hence, to be treated as FTS, however, the issue, which arises for consideration is whether such receipts can be treated as FTS under Article 12(4)(b) of India-Singapore DTAA in absence of fulfilment of make available condition. On a reading of assessment order, we do not find any material brought on record by the AO to establish that during rendition of services, the assessee has made available technical know-how, skill etc. to the service recipient so as to enable him to apply technical knowledge, know-how, skill etc in future independently, without the aid and assistance of the assessee . In fact, in the final assessment orders, the Assessing Officer has not made any discussion, under which limb of article 12(4) of India- Singapore DTAA, he has taxed a part of the receipts. In view of the aforesaid, we hold that the additions made by the Assessing Officer are unsustainable. Accordingly, we direct him to delete them.

Summary

Issues involved:
The judgment involves the challenge of final assessment orders under the Income-tax Act, 1961 for assessment years 2018-19 and 2019-20, specifically regarding the taxability of amounts received from the sale of software as fees for technical services under the India-Singapore Double Taxation Avoidance Agreement (DTAA).

Taxability of amount received from sale of software as fees for technical services (FTS) under India-Singapore DTAA:
The non-resident corporate entity, a distributor of software, earned income from the sale of software and provision of support services. The Assessing Officer re-characterized receipts from the sale of software as FTS under the Act and India-Singapore DTAA, bringing them to tax. The Dispute Resolution Panel (DRP) held that receipts from the sale of software are not taxable in India, while receipts from technical services are taxable. However, the Assessing Officer treated a portion of the sale of software receipts as FTS in the final assessment order without clear justification.

Re-characterization of receipts as FTS and taxability under India-Singapore DTAA:
The counsel for the assessee argued that despite the identical nature of receipts in previous assessment years, the re-characterization of receipts as FTS in the current assessment years is illegal and should be deleted. It was contended that unless technical know-how is made available to the service recipient, it should not be considered FTS under the treaty provision.

Analysis and Decision:
The Tribunal observed that the Assessing Officer had previously treated similar receipts as royalty but later re-characterized them as FTS without valid reasons. The Tribunal found no evidence to support the re-characterization and noted discrepancies in the treatment of receipts between the draft assessment order and final assessment order. Upon review of the invoices and lack of evidence of service components, the Tribunal held that even if services were involved, they did not meet the criteria for FTS under the India-Singapore DTAA. The Tribunal directed the Assessing Officer to delete the additions, ultimately allowing the appeals.

Conclusion:
The Tribunal allowed the appeals, emphasizing the lack of evidence to support the re-characterization of receipts from the sale of software as fees for technical services under the India-Singapore DTAA. The Assessing Officer was directed to delete the additions made, highlighting the importance of meeting the criteria for FTS under the treaty provision.