2023 (4) TMI 1088 - AT - Income Tax

Income taxable in India - PE in India - Receipts on account of Software (Prime) License Fee - Taxability under Article 13 India-UK DTAA under the head FTS - HELD THAT - Having gone through the agreement since the user has no right to make copies or commercially exploit the right in the copyright of such software the ld DRP following the ratio laid down by Hon'ble Supreme Court in the context of Business Income/Royalty in Engineering Analysis Centre of Excellence Private Ltd. 2021 (3) TMI 138 - SUPREME COURT directed to exclude receipts relating to sale of software licenses in accordance with and to the extent covered under the applicable categories contained in Hon'ble Supreme Court decision. DRP held that there is no dispute regarding the fact that the assessee does not have a permanent establishment in India. Accordingly, such receipts will constitute business income under Article 7 of the DTAA in line with the above-mentioned decision of Hon ble Supreme Court and will not be taxable in India in the absence of PE. Receipts on account of provision of other related services - The services are in respect of training programme and updations in connection with utilization of the software PRIME. Hence, we hold that when software itself is not taxable, the training and the related activities concerned with utilization and installation cannot be held to be FTS. Further, simply latching on to use of words Make Available in the agreement, it cannot be said that conditions of Article 13(4)(c) are satisfied. Burden is on the Revenue to demonstrate that make available condition is satisfied. Appeal of the assessee on Ground Nos. 4 and 5 are allowed. Addition of reimbursement - We find that the ld DRP has remanded the matter to the AO to examine travelling and lodging expenses reimbursed. AO has wrongly taxed the same under FTS. Hence, the action of the AO cannot be supported. The addition made is hereby directed to be deleted.

Summary

Issues:
1. Validity of final assessment order passed by the Ld. AO.
2. Consideration of material available on record by Ld. AO.
3. Compliance with directions passed by Ld. DRP in final assessment order.
4. Taxability of receipts in the nature of software license fee.
5. Taxability of receipts from provision of other related services.
6. Taxability of receipts classified as reimbursement.
7. Initiation of penalty proceedings under section 270A of the Act.

Analysis:

1. The appeal was filed against the final assessment order dated 28.06.2022 by the assessee. Grounds 1, 2, and 3 challenging the validity of the final assessment order were dismissed as being general in nature.

2. The assessee, engaged in providing IT services to the financial payments industry, earned revenue from software license fees, provision of software-related services, and reimbursements during the assessment year.

3. The receipts from software license fees were analyzed by the DRP based on agreements with customers. The DRP directed to exclude receipts related to the sale of software licenses as they constituted business income under the India-UK DTAA and were not taxable in India due to the absence of a Permanent Establishment (PE).

4. Regarding receipts from other related services, the DRP held them taxable under Article 13 of the India-UK DTAA as Fees for Technical Services (FTS). However, the Tribunal disagreed, stating that these services, intricately linked to the software utilization, should not be considered FTS when the software itself is not taxable.

5. The Tribunal also ruled in favor of the assessee concerning the classification of receipts as reimbursement, directing the deletion of the addition made by the AO under FTS for the reimbursed amount.

6. Consequently, the appeal was allowed, and the order was pronounced in the open court on 24/01/2023, in favor of the assessee.