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2022 (7) TMI 744 - AT - Income TaxIncome accrued in India - treating receipt from Support and Maintenance Services rendered in relation to software sold as chargeable to tax as Fees for Technical Services ( FTS ) under the Act and also India-Singapore Double Taxation Avoidance Agreement (DTAA) - whether IT Support service charges in relation to the software sold will still constitute FTS under para 4(a) of Article 12 of the DTAA? - HELD THAT - There can be two situations of income arising from licensing of software and also from support and maintenance services for such software. First, where the amount received by the assessee from licensing of software satisfies the condition of royalty as right to copy is also assigned to the licensee; and second, where copyright is not assigned. In the first situation, income from licensing of software would descend in para 3(a) of Article 12 and accordingly the amount of support and maintenance charges will be governed by para 4(a) of Article 12. In the second scenario, income from licensing of software would not satisfy the condition of royalty and hence will not drop into para 3(a) of Article 12 with sequitur that the question of application of para 4(a) to support and maintenance charges will not arise. Since there is no amount taxable as royalties under Article 12(3)(a) in this case, the IT Support service charges, as a natural corollary, cannot be brought within the purview of Article 12(4)(a) of the DTAA. Do IT Support charges fall under Article 12(4)(b)? - From the description of services, it is graphically apparent that the assessee has been called upon to perform sizing review for new integrations and new lines of businesses; assisting Customer Operations team to perform Remedy operations; reviewing application performance and health check; quarterly review of activities undertaken. Further, the assessee was asked to deploy two persons for rendering on-site services. Judicially settled meaning of the term make available has been incorporated in para 4(b) of Article 12 of the DTAA itself, which opens with making available technical knowledge etc. and culminates with which enables the person acquiring the services to apply the technology contained therein . On going through the nature of services discussed supra , it is unequivocal that albeit the assessee provided the services laced with technical knowhow, but did not provide any technical knowledge, experience or skill etc. to the recipients for their own application in future without assistance of the assessee. The services provided by the assessee were consumed with their provision. In the hue of the command of Article 12(4)(b), it is palpable that the assessee, with the provision of IT Support services, did not make available any technical knowledge, experience or skill etc. to its customers to apply in future. Ex consequenti, receipt for IT Support services does not become FTS under this provision as well. Once it is held that the amount received by the assessee for providing the IT Support services does not fall under para 4(a) and also misses the prescription of para 4(b), the same ceases to be FTS. The same way in which income from sale of software license in the present case broadly falls under para 3(a) of Article 12 but has been held by the DRP to not satisfy the condition of taxability, income from Support and Maintenance charges of the licensed software also largely fall under para 4(a b) but fail to magnetize taxability within its purview. DRP has arrived at the conclusion of taxability of IT Support service charges as FTS by distinguishing the earlier years tribunal orders. It held that the Tribunal did not separately examine the nature of Support services charges de hors receipts on account of software licenses and proceeded to treat both as software royalty. Firstly, the DRP in the earlier orders did not draw any such distinction and held the entire amount as chargeable to tax as royalty in the light of the decision in Samsung ( 2011 (10) TMI 195 - KARNATAKA HIGH COURT . When the matter came up before the Tribunal, the decision in Engineering Analysis ( 2021 (3) TMI 138 - SUPREME COURT ) had been delivered by then, based on which the decision of the AO, treating the composite amount as royalty, was reversed. When neither the AO nor the DRP had treated the two streams of income as separate from each other, having different connotation in terms of the DTAA, there could have been no question of the Tribunal setting up a new case. Be that as it may, we have eloquently discussed the issue above and reached the conclusion that the income from IT Support services, even if viewed independent of software license income, is not chargeable to tax. The impugned order is, ergo, overturned and the addition and odd is directed to be deleted. Assessee appeal allowed.
Issues Involved:
1. Tax treatment of receipt from Support and Maintenance Services rendered in relation to software sold. 2. Classification of such receipts as Fees for Technical Services (FTS) under the Income-tax Act and India-Singapore Double Taxation Avoidance Agreement (DTAA). Issue-wise Detailed Analysis: 1. Tax treatment of receipt from Support and Maintenance Services rendered in relation to software sold: The assessee, a tax resident of Singapore, earned income from selling software products and providing IT support services. The primary issue was whether the receipt of Rs.42,42,96,498/- from support and maintenance services should be taxed as Fees for Technical Services (FTS) under the Income-tax Act and the DTAA between India and Singapore. The assessee argued that the income from IT support services did not make available any technical know-how to the customers and hence should not be taxed under Article 12(4)(b) of the DTAA. However, the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) treated the income as taxable under Article 12(4)(a) and 12(4)(b) of the DTAA, respectively. 2. Classification of such receipts as Fees for Technical Services (FTS) under the Income-tax Act and India-Singapore Double Taxation Avoidance Agreement (DTAA): The Tribunal examined whether the income from IT support services fell under Article 12(4)(a) or 12(4)(b) of the DTAA. Article 12(4)(a) covers services ancillary and subsidiary to the application or enjoyment of the right, property, or information for which a payment described in paragraph 3 is received. Since the income from the sale of software licenses was not considered royalty under Article 12(3)(a), the IT support service charges could not be considered ancillary or subsidiary to such right, property, or information, and thus did not fall under Article 12(4)(a). The Tribunal then analyzed whether the IT support services made available technical knowledge, experience, skill, or know-how under Article 12(4)(b). The Tribunal found that the services provided by the assessee, such as sizing review, performance management, and technical advisory, required technical knowledge but did not transfer such knowledge to the customers in a way that they could apply it independently in the future. Therefore, the services did not satisfy the condition of "making available" technical knowledge or skill under Article 12(4)(b). Conclusion: The Tribunal concluded that the income from IT support services did not fall under Article 12(4)(a) or 12(4)(b) of the DTAA and thus was not taxable as Fees for Technical Services. The DRP's decision to tax the IT support service charges was overturned, and the addition of Rs.42.42 crore was directed to be deleted. The appeal was allowed, and the order was pronounced in the open court on 15th July 2022.
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