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2024 (5) TMI 160 - AT - Income Tax


Issues Involved:

1. Non-compliance with DRP directions by AO regarding software license fees.
2. Nature of software licensing fees: copyrighted article vs. copyright.
3. Treatment of software licensing fees as Royalty under DTAA.
4. Rights of licensee under the Copyright Act.
5. Nature of support and maintenance services under DTAA.
6. Addition of INR 4,94,29,858 as Fees for Technical Services (FTS) under DTAA.
7. Treatment of support and maintenance services as FTS without basis for 'make available' test.

Summary:

Issue 1: Non-compliance with DRP Directions by AO
The assessee argued that the AO erred in passing the assessment order without following the DRP's directions to not make an addition on account of software license fees. The Tribunal agreed with the assessee, noting that the AO's order was in violation of section 144C(10) of the Income Tax Act, 1961.

Issue 2: Nature of Software Licensing Fees: Copyrighted Article vs. Copyright
The assessee contended that the software licensing fees were for a copyrighted article and not for a copyright. The Tribunal agreed, stating that the software provided was a proprietary solution, not a product, and thus, the fees were not for the use of a copyright.

Issue 3: Treatment of Software Licensing Fees as Royalty under DTAA
The AO treated the software licensing fees as Royalty under the India-USA DTAA. The Tribunal, relying on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., held that the fees did not constitute Royalty but business income under Article 7 of the DTAA, not taxable in India in the absence of a PE.

Issue 4: Rights of Licensee under the Copyright Act
The AO alleged that the licensee had rights to make copies of the software or commercially exploit it. The Tribunal found no evidence supporting this claim, noting that the licensee could not modify, alter, or decompile the software, and the source code remained the assessee's proprietary trade secret.

Issue 5: Nature of Support and Maintenance Services under DTAA
The assessee argued that support and maintenance services were ancillary and subsidiary to the software license and not Fees for Included Services (FIS) under Article 12(5)(a) of the India-USA DTAA. The Tribunal agreed, stating that these services were inextricably linked to the software license and did not meet the 'make available' test.

Issue 6: Addition of INR 4,94,29,858 as Fees for Technical Services (FTS) under DTAA
The AO added INR 4,94,29,858 by treating the transactions as FTS. The Tribunal disagreed, holding that the software licensing fees were not taxable as FTS and should be treated as business income.

Issue 7: Treatment of Support and Maintenance Services as FTS without Basis for 'Make Available' Test
The AO and DRP treated support and maintenance services as FTS without demonstrating that the services made technical knowledge available to the licensee. The Tribunal found no evidence of technical knowledge being transferred or human intervention involved, thus ruling that these services did not qualify as FTS under the DTAA.

Conclusion:
The Tribunal allowed the appeal, holding that the entire receipts of INR 4,94,29,858 from software licensing and maintenance services were not taxable in India. The assessment order was quashed for non-compliance with DRP directions, and the AO was directed to follow the DRP's findings.

 

 

 

 

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