Absent service component, sale of software cannot be taxed as FTS

While declaring the additions made by the Assessing Officer unsustainable, The Delhi Bench of Income Tax Appellate Tribunal held that the income earned by a non-resident from the sale of software cannot be taxed as FTS under Article 12(4)(b) of India-Singapore DTAA in absence of the element of service. 

A Division Bench of Vice-President, Saktijit Dey and Accountant Member Dr. BRR Kumar observed that “Even assuming for argument’s sake that a part of receipts from the sale of software also involves service element to tax it as FTS, however, such receipts cannot be treated as FTS under Article 12(4)(b) of India-Singapore DTAA in absence of fulfillment of make available condition since the plain reading of assessment order clearly stipulates that no material brought on record by the Revenue to establish that Assessee has made available technical know-how, skill to the service recipient so as to enable him to apply the same in future independently, without the aid and assistance of the Assessee.”

Advocate Ananya Kapoor appeared for the Assessee/Petitioner whereas Advocate Vizay B. Vasanta appeared for the Revenue/Respondent. 

The brief facts of the case were that Assessee is a Singapore-based company that earned income from the sale of software as well as from the provision of support services but offered receipts from the provision of support services as FTS and did not offer receipts from the sale of software to tax on the premise that it is not in the nature of royalty. Revenue held that the sale of software also involves services of a technical nature and hence, receipts would qualify as FTS both under the provisions of the Act as well as under Article 12(4)(b) of India-Singapore DTAA.

The Assessee raised objections before DRP.  DRP held that receipts from the sale of software are not taxable in India, however, the receipts from provisions of technical services are taxable in India, accordingly, directed Revenue to verify the material on record and tax the receipts accordingly. Consequently, Revenue treated an amount of Rs.3.55 Cr as FTS. Hence, the Assessee approached the Bench to seek relief. 

After considering the submission, the Bench noted that the material on record clearly evidences that the Assessee purchased software products from third-party vendors and distributed them to customers in India, however, the maintenance or upgrades of the said software are the responsibility of the vendor and not the Assessee.

The Bench stated that despite DRP directions that only service component can be treated as FTS, the Revenue failed to show how the receipts between the sale of products and the provision of services were bifurcated and no discussion on factual aspects were made on the basis of pieces of evidence examined before coming to such conclusion on the said issue.

While rejecting Revenue’s contention that certain invoices of the Assessee include service component and observes that no such fact has been established on record, however, the verification of invoices clearly establishes that they are only in respect of sale of software and does not contain element of service.

While referring to Assessee’s own case wherein Revenue treated the sale of software as royalty which was deleted by CIT(A) following SC ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (2021) 125 taxmann.com 42(SC), the bench consider the decision of first appellate authority.

Accordingly, on finding the same did not fall under section 12(4) of India-Singapore DTAA, the Bench directed to delete the additions made by the Assessing Officer. 

Cause Title: SoftwareONE Pte. Ltd. Vs ACIT, International Taxation, Delhi. [ITA Nos. 1839 & 1840/Del/2022 / 2023-Enterslice-48-ITAT-Del]

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SoftwareONE-Pte.-Ltd-Vs-ACIT