2024 (9) TMI 1623 - AT - Income Tax

Income deemed to accrue or arise in India - software licensing amounts to Fee for Included Services under Article 12(4)(b) of India-US DTAA or not? - scope of 'Make available clause - whether the professional service such as installation of software into customer system amount to Fee for Included Services under Article 12(4)(b) of India-US DTAA? - HELD THAT - DR could not dispute that the issue with regard to software licensing is squarely covered by the order of the coordinate bench in which one of us i.e., Judicial Member was also on the Bench 2024 (9) TMI 1505 - ITAT DELHI assessee has only got the commercial information and not the technical know- how/technical expertise or the technologies on the basis of which it was prepared. For bringing any payment within the definition of fee for included services' the non- resident must make available the technical skill, expertise or technical know-how to the assessee, on the basis of which non-resident has prepared or developed the commercial information. Undisputedly in the instant case the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the assessee and hence the remittance made by the assessee for obtaining such commercial information cannot be called to be the 'fees for the included services to make it chargeable to tax in India. ' Make available clause is not satisfied, as erroneously held by the DRP We are of the considered view that clearly, these services are merely support services dealing with installation and integration and when the primary services themselves are not taxable as FTS, these ancillary services qua the primary services cannot be taxed as FTS. Reliance is rightly placed by Ld. AR on decision of TSYS Card Tech 2023 (4) TMI 1088 - ITAT DELHI and Net B.V 2017 (7) TMI 420 - ITAT DELHI wherein it is held that installation and integration services are support services and not taxable as FTS. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Whether the software licensing amounts to Fee for Included Services (FIS) under Article 12(4)(b) of India-US DTAA.
2. Whether the professional service such as installation of software into customer systems amounts to Fee for Included Services under Article 12(4)(b) of India-US DTAA.

Issue-wise Detailed Analysis:

1. Software Licensing as Fee for Included Services:

The primary issue was whether software licensing constitutes Fee for Included Services (FIS) under Article 12(4)(b) of the India-US Double Taxation Avoidance Agreement (DTAA). The Assessee argued that the software licensing does not amount to FIS, referencing a prior decision in their favor for AY 2018-19. The Tribunal agreed, citing that the software merely provided commercial information without transferring any technical knowledge, skill, or process to the end user, thus not meeting the criteria for FIS under Article 12(4)(b).

The Tribunal referenced the Memorandum of Understanding (MoU) dated 12.09.1989, which clarified that services must make technology available to the recipient to qualify as FIS. The Tribunal concluded that merely providing access to software, which generates commercial information, does not constitute making technology available. The Tribunal relied on the Karnataka High Court's decision in De Beers India Minerals (P.) Ltd., which explained that technical knowledge must be imparted and absorbed by the recipient for it to be considered as FIS.

2. Installation of Software as Fee for Included Services:

The second issue was whether professional services related to the installation of software into customer systems amounted to FIS. The Tribunal examined the nature of these services, which included the installation of Mixpanel software and integration of customer content with application services. The Tribunal found that these services were support services and not ancillary or subordinate services.

The Tribunal referred to the DRP's acknowledgment that these services were sophisticated and separately solicited by customers. However, the Tribunal held that since the primary services (software licensing) were not taxable as FIS, the ancillary services related to installation and integration could not be taxed as FIS. The Tribunal cited decisions from other Coordinate Benches, such as TSYS Card Tech v/s DCIT and Net B.V v/s DCIT, which held that installation and integration services are support services and not taxable as FIS.

Conclusion:

The Tribunal allowed the appeal of the Assessee, holding that neither the software licensing nor the installation services constituted Fee for Included Services under Article 12(4)(b) of the India-US DTAA. The remaining grounds were deemed academic or consequential and left open. The order was pronounced in the open court on 25.09.2024.