2025 (1) TMI 380 - AT - Income Tax

Taxability in India - sale of software (prime) license fees - Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA) or not? - Fees for provisions for other related services - HELD THAT - We note that during the present assessment year i.e. AY 2020-21, AO has accepted the claim of the assessee that the sale of software (prime) license fee was not taxable. The Co-ordinate Bench of the Tribunal in AY 2019-20 in the case of the assessee 2023 (4) TMI 1088 - ITAT DELHI held that when software itself was not taxable, the training and the related activities concerned with utilization and installation cannot be held to be FTS. CIT-DR could not bring any distinguishing facts to controvert the findings of the above order of the Tribunal. Department has not brought any evidence on record to substantiate that make available condition is satisfied in the case of the assessee for this assessment year. Therefore, we are of the considered view that when software itself is not taxable, the Fees for provisions for other related services will also not be taxable. Hence, the addition made treating the Fees for provisions for other related services as taxable is not acceptable and the same is deleted. Assessee appeal allowed.

1. ISSUES PRESENTED and CONSIDERED

The judgment addresses several core legal questions:

Whether the final assessment order passed by the Assessing Officer (AO) is barred by limitation under section 144C(13) of the Income Tax Act, 1961.
Whether the receipts from the provision of other related services amounting to Rs. 13,97,78,164 should be classified as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA).
Whether the initiation of penalty proceedings under section 274 read with section 270A of the Act is justified.
Whether there was an error in the short granting of credit for tax deducted at source amounting to Rs. 16,75,457.
Whether the computation of interest under section 244A of the Act was correctly executed.
Whether the recovery of a refund amounting to Rs. 6,94,903 was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Limitation of Final Assessment Order

Relevant Legal Framework and Precedents: The relevant provision is section 144C(13) of the Income Tax Act, which prescribes the time limit for passing the final assessment order.
Court's Interpretation and Reasoning: The court did not delve into this issue as the grounds were not pressed by the assessee during the hearing.
Conclusion: The issue was dismissed as not pressed.

Issue 2: Classification of Receipts as FTS

Relevant Legal Framework and Precedents: Article 13(4)(c) of the India-UK DTAA defines FTS and its applicability to the case was contested.
Court's Interpretation and Reasoning: The court referred to a previous decision in the assessee's own case for AY 2019-20, where similar receipts were not classified as FTS. The court emphasized that the burden of proof for the 'make available' condition under Article 13(4)(c) lies with the Revenue.
Key Evidence and Findings: The court noted that the AO had accepted the non-taxability of software license fees, and similar reasoning should apply to related services.
Application of Law to Facts: The court found that the 'make available' condition was not satisfied, and thus the receipts could not be classified as FTS.
Treatment of Competing Arguments: The court rejected the Revenue's argument due to lack of evidence demonstrating that the 'make available' condition was met.
Conclusion: The court allowed the assessee's appeal on this ground, deleting the addition made by the AO.

Issue 3: Initiation of Penalty Proceedings

Relevant Legal Framework and Precedents: Sections 274 and 270A of the Income Tax Act govern the initiation of penalty proceedings.
Court's Interpretation and Reasoning: The court deemed the issue premature, as the penalty proceedings were merely initiated and not concluded.
Conclusion: The ground was dismissed as premature.

Issue 4: Short Granting of TDS Credit

Relevant Legal Framework and Precedents: The issue pertains to the accurate computation of tax credits under the Income Tax Act.
Court's Interpretation and Reasoning: The court directed the AO to verify the claim and allow TDS credit as per law.
Conclusion: The AO was instructed to review and rectify the TDS credit.

Issue 5: Computation of Interest under Section 244A

Relevant Legal Framework and Precedents: Section 244A of the Income Tax Act deals with interest on refunds.
Court's Interpretation and Reasoning: The court directed the AO to verify the claim and compute interest as per law.
Conclusion: The AO was instructed to review the interest computation.

Issue 6: Recovery of Refund

Relevant Legal Framework and Precedents: The issue involves the correct processing of refunds under the Income Tax Act.
Court's Interpretation and Reasoning: The court directed the AO to verify the claim and modify the tax computation as per law.
Conclusion: The AO was instructed to review and rectify the refund recovery.

3. SIGNIFICANT HOLDINGS

Core Principles Established: The burden of proof for the 'make available' condition under Article 13(4)(c) of the India-UK DTAA lies with the Revenue.
Verbatim Quotes: "The Co-ordinate Bench of the Tribunal in AY 2019-20 in the case of the assessee (supra) held that when software itself was not taxable, the training and the related activities concerned with utilization and installation cannot be held to be FTS."
Final Determinations on Each Issue: The court allowed the appeal regarding the classification of receipts as FTS, dismissed the penalty proceedings as premature, and directed the AO to review and rectify issues related to TDS credit, interest computation, and refund recovery.

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