2023 (12) TMI 463 - HC - Income Tax

Income taxable in India - granting rights to the customers under EULA to use the software - taxable Royalty receipts both u/s 9(1)(vi) of the Act and under Article 12 of India-USA DTAA - sale of the End User Licence and Annual Maintenance Charges (AMC) - Whether amount received towards annual maintenance charges of the software are not ancillary or subsidiary to enjoyment of right to use software and thus not taxable as FTS/FIS? - HELD THAT - Tribunal has returned a finding of fact that End User Licences issued by the respondent/assessee to its customers were non-exclusive and non-transferable and that the users were not given access to the source code. As regards the amount which the AO treated as FTS is concerned, the Tribunal concluded that Fee for Included Services (FIS) under the said Article would only mean payment made in consideration for rendering technical or consultancy services, if such services were ancillary and subsidiary to the enjoyment of right in the property. It was the Tribunal s view that since it had concluded that no right in the property had been transferred, Article 12(4)(a) of the DTAA had no applicability. Tribunal had also examined the applicability of Article 12(4)(b) of the DTAA. Tribunal concluded that the respondent/assessee had not made available any technical knowledge, experience, skill, know-how etc, to the recipients of such services. A finding of fact was returned in that behalf. We find that the first issue is covered by the judgment of the Supreme Court rendered in Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT and the second issue, in any case, is connected, as rightly held by the Tribunal, with the first issue.

Summary

Issues:
The judgment concerns Assessment Year 2015-16. The two main issues before the court are:
1. Whether consideration received for granting rights to customers under EULA to use software is taxable as Royalty under Section 9(1)(vi) of the Act and Article 12 of India-USA DTAA?
2. Whether the amount received for annual maintenance charges of the software is taxable as FTS/FIS under Section 9(1)(vii) of the Act and Article 12 of the India-US DTAA?

First Issue:
The respondent had received a sum under an End User Licence Agreement, including an amount for the sale of the licence and annual maintenance charges. The Assessing Officer treated the licence fee as royalty under the Act and DTAA. However, the Tribunal ruled that since no copyright was transferred to customers, the fee could not be considered as royalty, citing the decision in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT. The Tribunal also noted that the licences issued were non-exclusive and non-transferable, with no access to the source code provided.

Second Issue:
Regarding the amount treated as FTS by the AO, the Tribunal found that for it to be considered Fee for Included Services (FIS) under the DTAA, it must be ancillary to the enjoyment of property rights. Since no property rights were transferred, Article 12(4)(a) of the DTAA did not apply. The Tribunal also examined Article 12(4)(b) of the DTAA, concluding that no technical knowledge or skills were made available to the recipients of the services, thus not meeting the requirements for FIS under this provision.

The court, after considering the arguments and the Tribunal's findings, declined to interfere with the Tribunal's decision, stating that no substantial question of law arose for consideration. The appeal was closed, and a related application was deemed infructuous and closed as well. Parties were instructed to act based on the digitally signed copy of the order.