Reimbursement Of Software License Fee From Indian Aes Can Only Be Taxed As ‘Business Income’ And That Too In Presence Of Its Pe

While hearing an appeal pertaining to the taxability of fees received from sub-licensing of software, the New Delhi ITAT observed that sublicensing of software was not a one-off activity, but was an activity carried on with regularity, continuity, and frequency, and hence it cannot be treated as a passive activity.

A Coram of Mr. GS Pannu, President, and Mr Saktijit Dey, Vice President noted that the income sought to be taxed is receipt from sub-licensing of software & which can ordinarily be characterized as Royalty under Section 9(1)(vi) of the Income Tax Act 1961 and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA), and that since in case this receipt is not taxable as royalty income, it could alternatively be treated as business income under Article 7 of the DTAA.

Therefore, the Bench found that the residuary provision under Article 23 of the DTAA would come into play only when an item of income was not expressly dealt with in the other Articles preceding Article 23. (Paras 17-18)

The Appellant-Assessee was represented by Mr. Ravi Sharma, Advocate, whereas the Respondent-Revenue was represented by Mr Vizay B Vasanta, Commissioner of Income Tax (Departmental Representative).

The primary issue in the matter pertained to taxability as ‘Income from other sources’ of receipts towards software sub-license fee, as per Section 56 of the Income Tax Act 1961 and relevant Articles of the India-USA DTAA.

The Appellant is a non-resident corporate entity and a tax resident of the USA, and is engaged in the healthcare industry. It supplies medical devices globally; designs, develops, manufactures & distributes diagnostic imaging and clinical systems; development of drugs; biopharmaceutical manufacturing; scanning procedures and other Information Technology solutions pertaining to healthcare.

During the relevant Assessment Year, the Appellant received income through Fees for Technical Services/Fees for Included Services, amounting to about Rs 3.32 Crores. The same was offered to tax under Section 9(1)(vii) read with Section 115A of the Income Tax Act.

A sum of about Rs 10.66 Crores was received towards software license fee cross charged to its Indian affiliates. However, this amount was not offered to tax in India. The Assessing Officer (AO) issued Show Cause Notice proposing to tax the amount of software license fee, and in written response to which, the Appellant claimed that amount was of nature of business income under the India-USA DTAA. It was further claimed that in absence of a Permanent Establishment, the same was not taxable.

This objection of the Appellant was rejected by the AO, who issued a second Show Cause Notice proposing to treat the software license fee as Income from Other Sources in terms of Section 56(1) of the Income Tax Act 1961 and Article 23(3) of the India-USA DTAA. The Appellant submitted objections to this Show Cause Notice but the same was rejected.

The AO framed a draft assessment order holding that the reimbursement of software license fee was to be treated as income from other sources under Section 51 of the Act and Article 23 of the India-USA DTAA.

On hearing the contentions of both parties, the Bench observed that the receipts in dispute could have been characterized either as royalty income falling under Article 12 or business income under Article 7 of the tax treaty.

Considering the judicial precedents cited by the Appellant, it emerged that the receipt could not qualify as Royalty. Ergo, the Bench observed that the receipt could be treated as Business Income under Article 7 of the DTAA.

Therefore, the Bench observed that the receipt could not be taxed under the residuary Article 23, as was sought to be done by the AO.

The Bench further observed that since the Appellant-Assessee, being a non-resident corporate entity, had no Permanent Establishment in India, therefore, the receipts in question could not be treated as Business Income. (Paras 19 & 20)

With these observations, the Bench directed the AO to delete the additions framed.

Cause Title: GE Precision Healthcare LLC Vs Assistant Commissioner of Income Tax, Circle- International Tax – 1(3)(1), New Delhi [ITA No.404/Del/2023 / 2023-Enterslice-6-ITAT-Del]

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GE-Precision