ACRONIS ASIA PTE LTD ,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION )RANGE-1(1)(1), MUMBAI

In various grounds of appeal the core issue which has been argued and challenged before us is with regard to action of the ld. AO and ld. DRP holding that the receipts amounting to ₹8,16,73,828/- from Indian distributors on account of granting rights to distribute Acronis software are in the nature of fees for technical services (FTS) under the Act and secondly, both AO and DRP have heard that in law and on facts in not granting the benefit of make available clause under Article 12 of India Singapore DTAA and lastly, the AO and ld. DRP have erred in not appreciating that receipts are exempt u/s.10(50) of the Act by disregarding the proof of payment of equalization levy furnished during the course of DRP proceedings.

Brief facts are that the assessee is a foreign company incorporated under the laws of Singapore on 4 November 2004 and is an undisputed tax resident of Singapore. It holds a valid Tax Residency Certificate issued by the Singapore tax authorities for the relevant calendar years and, therefore, is entitled to claim benefits under the India-Singapore Double Taxation Avoidance Agreement. The assessee forms part of the globally renowned Acronis Group, which is engaged in the development and provision of software solutions relating to data backup, cyber security, disaster recovery and allied services. These products are made available either as electronically downloadable software or as cloud-based

It is an admitted and undisputed position on record that all intellectual property rights, copyrights, source codes, enhancements and proprietary interests in the Acronis software products and SaaS platform are exclusively owned and retained by Acronis International GmbH, a group entity incorporated in Switzerland. The assessee does not own, nor has it been assigned, any intellectual property rights in respect of the said software products or platforms.

Pursuant to a Sales and Distribution Agreement dated 1 January 2011, the assessee was appointed as a limited-risk distributor by Acronis International GmbH for distribution of Acronis software products in the Asia Pacific and Japan region, including India. Under the said agreement, the assessee operates strictly on a principal-to-principal basis and performs the role of a distributor and marketing facilitator without assuming any significant market or business risks. For distribution of the software products in India, the assessee has further appointed independent third- party sub-distributors. During the relevant assessment year, the assessee earned distribution revenue aggregating to ₹8,16,73,828 from such Indian sub-distributors, which constituted merely 2.23% of its total distribution revenue from the entire Asia Pacific and Japan region. The detailed break-up of the said distribution revenue, distributor-wise, Sr. Name of Indian distributor Amount (Rs.) No. 1 ZNet Technologies Pvt Ltd 2,80,65,195 2 Sea Infonet Pvt. Ltd. 1,85,03,867 3 Web Werks India Pvt. Ltd. 59,84,468 4 Ingram Micro India Pvt Limited 1,51,35,055 5 RAH Infotech Pvt Ltd 13,50,738 6 KMI Business Technologies Pvt 10,83,853 Ltd 7 Crayon Software Experts India 85,09,039 Private Limited 8 Compuage Infocom Limited 30,41,683 Total 8,16,73,828

It is also not in dispute that the assessee discharged Equalization Levy at the rate of 2% on the aforesaid consideration received from Indian sub-distributors, treating the same as consideration received from e-commerce supply or services. Consequent thereto, the assessee claimed exemption of the said income under section 10(50) of the Act.

7. In the return of income, the assessee characterized the receipts as business income not chargeable to tax in India, as it admittedly did not have a permanent establishment in India within the meaning of Article 5 of the India-Singapore DTAA. Alternatively, and without prejudice, it was contended that once Equalization Levy had been paid, the income stood excluded from the total income by virtue of section 10(50) of the Act.

In the draft assessment order dated 16 March 2024, the Assessing Officer held that the receipts had accrued or arisen in India and were taxable. Curiously, while the body of the order discussed the issue in the context of business income, the computation sheet appended to the draft assessment order characterized the receipts as “technical service fee as FTS”, without furnishing any cogent reasoning or analytical basis for such recharacterization. Ld. AO observed that assessee has neither submitted any copy of agreement nor proof in respect of equalisation levied having been paid and therefore, in absence of any documentary evidences he held that claim of exemption u/s.10(50) cannot be given. He has added amount of ₹8,16,73,828 as profit derived under the head „business income‟ holding it that this income has accrued / arose in India. Finally, an amount of ₹8,16,73,828/- was added as FTS.

In its directions dated 3 December 2024, the learned DRP, while recording that the assessee itself did not render any technical services and that the “make available” condition under the India-Singapore DTAA was not satisfied, nevertheless proceeded to hold that since the core software infrastructure and technical functionalities were owned and operated by the Swiss entity, the provisions of the India- Switzerland DTAA would apply. On this basis, the DRP concluded that the receipts constituted fees for technical services taxable in India, as the India-Switzerland DTAA does not contain a “make available” clause. The DRP also rejected the assessee‟s claim for exemption under section 10(50) on the ground that the nature of income was FTS and that proof of payment of Equalization Levy had allegedly not been furnished. The relevant direction reads as under:-

Equalisation Levy (EL): The Applicant failed to provide adequate evidence of El payment. The claim that the levy was "in process" does not suffice to grant the exemption under sub- section 10(50). The Panel concludes that, without proof of EL payment, no exemption can be granted Further exemption of sub-section 10(50) is not relevant when the nature of income is Fees for Technical Services as in this case. Finding: The Panel concludes that the payments of Rs 8,16,73,828 are taxable as Fees for Technical Services (FTS) under Indian tax law The technical services were provided by the Switzerland entity, and Singapore's role was primarily that of an intermediary /marketing agent on paper The "make available" clause does not apply to this case, as the core services have been provided by Switzerland, where no such condition exists in the tax treaty Furthermore, the claim for exemption under sub-section 10(50) rejected due to the Applicant's failure to provide evidence of Equalisation Levy payment and the nature of payment being Fees for Technical Services The amounts have, therefore, been rightly taxed as FTS.

Pursuant to the DRP‟s directions, the final assessment order was passed making the impugned addition.

Aggrieved by the said order, the assessee is now in appeal before this Tribunal.

Before adverting to the rival contentions and the legal issues involved, it would be appropriate to note that Ground No. 1 is general in nature and does not call for separate adjudication, and Ground No. 2 relating to limitation has been kept open by the assessee.

M/s. Acronis Asia Pte. Ltd., 15. The core controversy in the present appeal revolves around the recharacterization of distribution revenue as fees for technical services, the applicability of the India- Switzerland DTAA to a Singapore resident assessee, the relevance of the “make available” clause, and the interplay between Equalization Levy and section 10(50) of the Act.

Having carefully considered the rival pleadings, the material placed on record, and the detailed submissions advanced before the authorities below as well as before us, the principal issue which arises for determination is whether the distribution revenue received by the assessee from Indian sub-distributors can, in law and on facts, be recharacterized as “fees for technical services”, and further, whether the Revenue was justified in invoking the provisions of the India– Switzerland Double Taxation Avoidance Agreement in the hands of an assessee who is an undisputed tax resident of Singapore.

A careful reading of the Sales and Distribution Agreement clearly establishes that all intellectual property rights in the Acronis software products and the SaaS platform are exclusively owned and retained by Acronis International GmbH. The assessee has neither been granted nor assigned any right to commercially exploit the copyright in the software, nor any right to duplicate, modify, reverse engineer or otherwise deal with the proprietary elements of the software. The assessee‟s role is confined to distribution, marketing support and facilitation of customer relationships within the designated territory.

The relevant clauses of the Sales and Distribution Agreement, which delineate the nature of relationship between the parties, the scope of rights granted, and the responsibilities of the assessee, are of critical importance in understanding the true character of the receipts. The agreement expressly provides that the relationship between the assessee and Acronis International GmbH is on a principal-to-principal basis, that the assessee acts as an independent contractor, and that no agency, employment or fiduciary relationship is created. The relevant extracts from the Sales and Distribution Agreement, including the preamble, clause relating to the nature of relationship, clause dealing with intellectual property rights, and clause enumerating the responsibilities of the distributor, are required to be reproduced verbatim and are, therefore, consciously left to be incorporated hereunder.

It is equally significant to note that the assessee does not distribute the software products directly to end users in India. Instead, it has appointed independent third-party sub- distributors in India, who in turn distribute the products to resellers and end customers. The agreements entered into between the assessee and such sub-distributors further reinforce the distribution character of the arrangement. These agreements grant a non-exclusive right to market and distribute the software products, clearly stipulate that all intellectual property rights remain vested with the Acronis Group, and provide for invoicing based on product quantities and price lists.

The relevant clauses from one such distribution agreement entered into between the assessee and an Indian sub-distributor, namely Sea Infonet Pvt. Ltd., including M/s. Acronis Asia Pte. Ltd., clauses relating to authorization, pricing and ownership of intellectual property, are required to be reproduced verbatim and are, therefore, left to be incorporated hereunder. "DISTRIBUTION AGREEMENT This distribution agreement ("Agreement") is entered into on September 26, 2018 (the "Effective Date") by and between SEA INFONET PRIVATE LIMITED, an Indian company with a principal place of business located at P-17 MINSSION ROW EXTENSION, IG.C AVENUE KOLKATA -700 013, INDIA (the "Distributor") and Acronis Asia Pte. Ltd., a Singapore company with its registered office in 8 Temasek Boulevard, 30-01/02 Suntec Tower 3, Singapore 03988 ("Acronis"). WHEREAS, the Acronis wishes to allow Distributor to market and distribute Acronis products; and WHEREAS, it is the intention of the Parties to establish this Agreement to govern their respective rights, duties and obligations; 2.1 Distributor Authorization. Subject to the terms and conditions of this Agreement, Acronis hereby grants to Distributor the non-exclusive right to market and distribute such Products to Resellers and End Users within the Territory during the term hereof." 8.1 Distributor Price List. Acronis will invoice Distributor on the basis of the applicable price list set forth on Exhibit A hereto as may be updated by Acronis from time to time ('Distributor Price List), which list may be sub-divided by Product, as appropriate...

It has also been consistently explained by the assessee, and not controverted by the Revenue, that any troubleshooting or technical support required by end users is provided, if at all, by Acronis International GmbH in accordance with standard support guidelines hosted on the M/s. Acronis Asia Pte. Ltd., group‟s website. Such support is limited in scope, largely automated, and no separate fee is charged for the same. Importantly, the assessee does not render such support services, nor does it have any contractual obligation to do so.

In fact, even the learned Dispute Resolution Panel has categorically recorded a finding that the assessee does not provide the “core services” and merely undertakes payment collection and marketing support, while the software infrastructure and technical operations are managed by the Swiss entity. Once such a factual finding has been returned, it is difficult to comprehend how the distribution revenue received by the assessee can still be characterized as fees for technical services in its hands. The approach adopted by the Revenue, in this regard, is internally inconsistent and legally untenable.

The determination of whether a receipt constitutes fees for technical services must necessarily hinge upon whether the recipient of the income has rendered technical services to the payer. The potential benefits or functionalities enjoyed by end users of the software are wholly irrelevant for characterising the nature of income in the hands of the distributor. This principle has been clearly enunciated by judicial authorities and has been reiterated by the Hon‟ble Delhi High Court in the case of SFDC Ireland Ltd. v. CIT reported in 465 ITR 471. The relevant observations of the Hon‟ble High Court, which directly address the distinction between services rendered to a "6. SFDC India in terms of the Reseller Agreement was to market, distribute and sell SFDC products in India. However, it was accorded no rights over the intellectual property rights existing in SFDC products. According to the writ petitioner, SFDC India was also not transferred the right to manage, control, adapt, alter, modify, decompile, translate, disassemble or reverse engineer the content of SFDC products.

Accordingly, on a cumulative appreciation of the agreements, invoices, functional profile and admitted factual position, we have no hesitation in holding that the distribution revenue received by the assessee cannot be recharacterized as fees for technical services. The said receipts constitute business income arising from distribution activity.

Having held that the distribution revenue received by the assessee cannot, on facts or in law, be characterized as fees for technical services, we now proceed to examine, without prejudice, the alternative reasoning adopted by the learned Dispute Resolution Panel in invoking the provisions of the India–Switzerland Double Taxation Avoidance Agreement in the hands of the assessee.

The learned DRP has proceeded on the premise that since the “core services” and software infrastructure were M/s. Acronis Asia Pte. Ltd., owned and operated by the Swiss group entity, namely Acronis International GmbH, the income received by the assessee ought to be tested under the provisions of the India– Switzerland DTAA, which does not contain a “make available” clause, rather than the India–Singapore DTAA. This line of reasoning, in our considered opinion, is fundamentally flawed, legally unsustainable, and contrary to the most elementary principles governing the application of tax treaties.

At the very threshold, it must be emphasized that the assessee before us is a juridical person incorporated in Singapore, carrying on business in its own right, employing its own personnel, maintaining its own books of account, and holding a valid Tax Residency Certificate issued by the Singapore tax authorities. The assessee has existed since 2004 and has been engaged in distribution activity for the Asia Pacific and Japan region since 2011. These facts have been expressly recorded by the learned DRP itself and remain wholly undisputed.

Once the tax residency of the assessee is not in dispute, the applicable tax treaty for determining the taxability of its income in India can only be the India–Singapore DTAA. The attempt of the Revenue to invoke the India–Switzerland DTAA in the hands of a Singapore resident assessee is contrary to the express language of Article 1 of the India–Switzerland DTAA, which governs the personal scope of the treaty.

The learned DRP‟s approach effectively disregards the separate legal existence of the assessee and proceeds as if the Swiss entity and the Singapore entity are to be treated interchangeably for treaty purposes. Such an approach is impermissible in law. Each juridical entity must be taxed on the basis of its own residence, activities and receipts. Treaty entitlement flows from residence, not from the geographical location of servers, ownership of intellectual property, or origin of technology. It is also important to note that the learned DRP itself has categorically recorded that the assessee has not rendered any technical services and that the alleged services do not satisfy the “make available” condition under Article 12(4) of the India–Singapore DTAA. Having so recorded, the learned DRP could not have, in the same

The reasoning that the “origin” of services determines the applicable treaty is alien to international tax jurisprudence. Tax treaties do not operate on the basis of where technology is developed or servers are located; they operate on the basis of the residence of the taxpayer whose income is sought to be taxed. The income under consideration is the distribution revenue received by the assessee from Indian sub- distributors. That income accrues to the assessee, belongs to the assessee, and must necessarily be tested under the treaty applicable to the assessee.

This principle has been lucidly explained and affirmed by the Hon‟ble Bombay High Court in the case of CIT v. Alibaba.com Singapore E-Commerce (P.) Ltd reported in (2023) 152 taxmanncom 110. In that case, the Revenue sought to disregard the Singapore entity and attempted to attribute the income to another group entity on the basis of ownership of the website and intellectual property. The Tribunal rejected the Revenue‟s approach, and the Hon‟ble High Court upheld the Tribunal‟s findings, emphasizing the sanctity of the Tax Residency Certificate and the impermissibility of ignoring a legally existing resident entity. The relevant observations of the Hon‟ble Bombay High Court, which decisively negate the Revenue‟s approach of disregarding treaty residence and legal personality, are reproduced hereunder.

The ITAT has considered various documentary evidences, including the Tax Residency Certificate of assessee, and has come to a factual finding that it cannot be held that assessee is either non-existent entity or some kind of conduit of Alibaba Hong Kong which is not even the parent company...

The ITAT also rejected the submissions of the revenue, relying on Vodafone International Holdings B.V. (supra), that the IT authorities have blanket powers to gate or ignore the tax residency certificate given to the assessee by Singapore Tax that the Tox residency certificate does not prevent the tax authority to enquire into possible tax fraud, which is not even the allegation in the matter at hand

The learned DRP has also made a passing observation regarding alleged changes in distribution arrangements from the year 2023 onwards, suggesting that Indian customers may have started dealing directly with the Swiss entity. This observation, even if factually assumed to be correct, is wholly irrelevant for adjudicating the taxability of the receipts under consideration for the assessment year 2022–23. Taxability must be determined year-wise, based on the facts and legal relationships prevailing during the relevant previous year. Subsequent commercial arrangements cannot retrospectively alter the character or taxability of income already earned.

In view of the foregoing discussion, we hold that the invocation of the India–Switzerland DTAA in the hands of the assessee is legally impermissible and wholly unsustainable. The assessee, being a tax resident of Singapore, is entitled to the protection and benefits of the India–Singapore DTAA, and the Revenue is bound to examine the taxability of the impugned receipts strictly within that treaty framework.

Under the India–Singapore DTAA, fees for technical services are dealt with under Article 12(4) which has “make available” clause. It is an admitted position on record, and has been expressly recorded by the learned Dispute Resolution Panel in its directions, that the distribution revenue received by the assessee does not satisfy the “make available” condition prescribed under Article 12(4) of the India–Singapore DTAA. This finding is not incidental or peripheral; it goes to the very root of the matter. Once it is accepted that the assessee has not rendered any service which “makes available” technical knowledge, experience, skill, know-how or processes to the Indian sub-distributors, the characterisation of the receipts as fees for technical services under the India–Singapore DTAA stands conclusively ruled out. The treaty provision admits of no ambiguity in this regard. The relevant extract of Article 12(4) of the India– Singapore DTAA, along with the DRP‟s own admission on this aspect, is reproduced verbatim and is, therefore, consciously left to be incorporated hereunder:-

In view of the aforesaid admitted position, the distribution revenue earned by the assessee necessarily falls to be examined under Article 7 of the India–Singapore DTAA as business profits. It is not the case of the Revenue that the assessee has a permanent establishment in India within the meaning of Article 5 of the DTAA. No finding has been recorded to that effect either by the Assessing Officer or by the learned DRP. In the absence of a permanent establishment, business profits of the assessee cannot be taxed in India under Article 7 of the DTAA.

At this juncture, it would be apposite to reiterate that section 90(2) of the Act mandates that where the provisions of the Act and the provisions of the DTAA are in conflict, the provisions which are more beneficial to the assessee shall prevail. Once the income in question is found to be not taxable as fees for technical services under the DTAA, and further, not taxable as business profits in the absence of a permanent establishment, the enquiry into domestic law provisions becomes largely academic.

Section 9(1)(vii) of the Act brings to tax income by way of fees for technical services if such services are rendered in India or are utilized in India. The judicial interpretation of this provision has consistently held that for a receipt to qualify as fees for technical services, there must be rendition of a service of a technical, managerial or consultancy nature to the payer, involving human intervention and application of specialised knowledge for the benefit of the recipient.

In the present case, the assessee has not rendered any service to the Indian sub-distributors. The receipts arise from sale of distribution rights and software products. The software products distributed by the assessee are standardised products, not customised for individual customers. Whether delivered as electronically downloadable software or accessed through a cloud-based platform, the functionality of the software is automated. Any coding, upgrades or maintenance activities result in enhancement of the software product itself and do not amount to rendition of a service to any specific customer or distributor.

The element of “human intervention”, which has been judicially recognised as a critical factor for characterising a receipt as fees for technical services, is conspicuously absent

In this context, the assessee has placed reliance on a catena of judicial precedents before the learned DRP to demonstrate that consideration for standard software and automated SaaS offerings does not constitute fees for technical services under section 9(1)(vii). The detailed submissions and judicial authorities relied upon by the assessee, which were placed on record before the learned DRP, are required to be taken note of in their entirety and are, therefore, consciously not reproduced here to avoid prolixity, but the relevant portions may be incorporated at the appropriate stage of finalisation.

Accordingly, even under the domestic law provisions of the Act, the distribution revenue received by the assessee cannot be brought to tax as fees for technical services.

We now turn to the assessee‟s claim for exemption under section 10(50) of the Act. The assessee has consistently maintained that it is an e-commerce operator within the meaning of Chapter VIII of the Finance Act, 2016, and that the consideration received from Indian sub-distributors constitutes consideration for e-commerce supply or services.

The assessee has placed on record that Form 1 along with the challans evidencing payment of Equalization Levy were furnished before the learned DRP along with the objections filed in Form 35A. The relevant documentary evidences evidencing the payment of equilisation levy is scanned as under:-

In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included- (50) any income arising from any- (1) specified service provided on or after the date on which the provisions of Chapter VIII of the Finance Act, 2016 (28 of 2016) comes into force; or (i) e-commerce supply or services made or provided or facilitated on or after the 1st day of April, 2020 but before the 1st day of August, 2024, and chargeable to equalisation levy under that Chapter Provided that the provisions of this clause shall not apply to any income of the previous year relevant to the assessment year beginning on or after the 1st day of April, 2026. Explanation 1. For the removal of doubts it is hereby clarified that the income referred to in this clause shall not include and shall be deemed never to have been included any income which is chargeable to tax as royalty or fees for technical services in India under this Act read with the agreement notified by the Central Government under section 90 or section 90A."

Section 10(50) of the Act provides that any income arising from e-commerce supply or services, which is chargeable to Equalization Levy, shall not be included in the total income. The proviso and Explanation to the section clarify that such exclusion shall not apply only where the income is chargeable

In the present case, having held that the distribution revenue does not constitute fees for technical services either under the Act or under the DTAA, the bar contained in Explanation 1 to section 10(50) does not come into operation. Consequently, the assessee is entitled to exclusion of the impugned income from total income under section 10(50), subject to verification of payment of Equalization Levy, which the assessee has already demonstrated.

Having examined the issue from every conceivable angle factually, contractually, statutorily, and under the applicable tax treaty we now proceed to record our final conclusions.

In view of our findings that the receipts do not constitute royalty or fees for technical services, the exclusion provided under section 10(50) of the Act squarely applies. Consequently, the distribution revenue is not liable to be included in the total income of the assessee. Accordingly, the addition made by the Assessing Officer, pursuant to the directions of the learned Dispute Resolution Panel, on account of alleged fees for technical services is hereby directed to be deleted in entirety.

Coming to Ground No. 8 relating to short grant of credit for tax deducted at source, the assessee has contended that credit of TDS amounting to ₹18,50,387 has not been fully granted as per Form 26AS. This issue is purely computational in nature. We direct the Assessing Officer to verify the claim

Ground Nos. 7 and 9 being consequential in nature do not require separate adjudication and are disposed of accordingly.

As regards Ground No. 10 challenging the initiation of penalty proceedings under section 270A of the Act, it is premature at this stage and does not call for adjudication in the present appeal. The said ground is, therefore, dismissed as premature.

Ground No. 2 relating to limitation, having been kept open by the assessee, is left open.

In the result, the appeal filed by the assessee is allowed in the aforesaid terms.