M/S. ZENDESK INC.,USA vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(2) (INTERNATIONAL TAXATION) , BANGALORE

Facts

The assessee, Zendesk Inc., a US-based foreign company, provides Software as a Service (SaaS) to Indian customers. The Assessing Officer (AO) treated the income earned from providing access to its platform as royalty. The assessee objected before the Dispute Resolution Panel (DRP) without success, leading to a final assessment order. The assessee appealed to the Income Tax Appellate Tribunal (ITAT) against the orders for Assessment Years (AY) 2014-15, 2020-21, and 2022-23. The assessee initially raised grounds challenging the validity of the assessment proceedings under Section 147 and Section 143(3) read with Section 147/144C, but these were withdrawn and dismissed as infructuous. The primary dispute concerned whether the income was royalty.

Held

The Tribunal decided the issues based on its previous ruling in the assessee's own case for AY 2021-22. Firstly, the grounds challenging the validity of the assessment proceedings under Section 147 were dismissed as infructuous as the assessee did not press them. Secondly, concerning the classification of income, the Tribunal held that the subscription fees received by the assessee from Indian customers do not constitute royalty under Article 12 of the India-USA DTAA. The Tribunal reasoned that the assessee provides Software as a Service (SaaS), where customers gain access to a platform hosted on cloud servers outside India. The consideration is for acquiring data and using the platform, not for the use of or right to use copyright or any industrial, commercial, or scientific equipment. The Tribunal followed its own prior decision and several other High Court and ITAT rulings, including those concerning Elsevier BV and Dow Jones & Company Inc., which held similar payments as not being royalty. The AO was directed to delete the addition made.

Key Issues

1. Whether the assessment orders framed under Section 143(3) read with Section 147/144C of the Income Tax Act, 1961, were valid? (Mixed question of law and fact) 2. Whether the income earned by the assessee for providing access to its platform to customers is to be treated as royalty under the Income Tax Act, 1961, and the India-USA Double Taxation Avoidance Agreement (DTAA)? (Question of law) Assessee's contentions: - The assessment proceedings were initiated without valid satisfaction under the law (initially raised, then withdrawn). - The income earned is not royalty. The issue has been decided in the assessee's own case for AY 2021-22 in ITA No. 1079/Bangalore/2023, which held that subscription fees for SaaS do not constitute royalty. The assessee relied on the Tribunal's order in its own case and cited several other precedents including Elsevier BV, Dow Jones & Company Inc., DIT(IT) vs. Dun & Bradstreet Information Services India (P.) Ltd., and others. Revenue's contentions: - The revenue supported the orders of the authorities below. - The learned DR could not controvert the assessee's arguments regarding the royalty issue.