MUREX SOUTHEAST ASIA PVT LTD ,SINGAPORE vs. DEPUTY COMM. OF INCOME TAX (INT TAXATION) 3(2)(2), MUMBAI
What did the Tribunal hold?
The Tribunal held that payments for maintenance, support, and additional services are not FTS as the 'make available' condition under Article 12(4)(b) of the India-Singapore DTAA was not satisfied. The assessee did not make available technical knowledge, know-how, or skill to enable the recipient to independently apply the technology.
What were the facts?
The assessee, a non-resident company, received payments for software sub-licensing, maintenance, support, training, and additional services. The Assessing Officer treated the receipts from maintenance, support, and additional services as Fees for Technical Services (FTS) under the India-Singapore DTAA.
What were the issues?
Whether payments for software maintenance, support, and migration services constitute Fees for Technical Services under the India-Singapore DTAA, specifically if the 'make available' condition is met.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, V.P.
These two appeals have been filed by the assessee challenging the final assessment orders both dated 18.07.2022 and 30.10.2023 passed under Section (u/s.) 143(3) r.w.s.
144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) pertaining to Assessment Years (AY) 2019-20 and 2021-22 in pursuance to directions of learned Dispute Resolution Panel (DRP).
At the outset, learned counsel appearing for the assessee did not press Ground Nos.1 and 4. Accordingly, these grounds are dismissed as not pressed. In Ground No.2, the assessee has challenged taxability of Rs.39,88,77,103/- received towards maintenance, other support and training services and Rs.16,93,17,904/- received on account of additional services as Fee for Technical Services (FTS).
Briefly, facts are, the assessee is a non-resident corporate entity incorporated under the laws of Singapore and is a tax resident of Singapore. For the assessment year under dispute, assessee filed its return of income on 11.10.2019 declaring income of Rs.56,81,95,010/- and claiming refund of Rs.6,29,61,021/-. As stated by the Assessing Officer, the assessee is engaged in the business of providing/sublicensing software to entities in the Financial Service Sector and also i. Sub licensing of Software Rs.10,80,65,944/- ii. Maintenance and Support Services Rs.39,86,26,668/- iii. Training Services Rs. 2,50,435/- iii. Additional Services such as Implementation and migration of software Rs.16,93,17,904/- Whereas, assessee has claimed exemption in respect of these income stating that in absence of a permanent establishment (PE), the receipts in the nature of business income cannot be taxed. As far as receipts of Rs.10,80,65,944/- from sublicensing of software is concerned, the Assessing Officer accepted the contention of the assessee that in view of the decision of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd., cannot be treated as royalty income. However, in so far as receipts from maintenance and support services and additional services are concerned, the Assessing Officer issued a show cause notice to the assessee to explain why such receipts should not be treated as FTS under Article 12(4) of the India-Singapore Double Taxation Avoidence Agreement (“DTAA”). In response to the show cause notice, the assessee furnished a detailed reply stating that the receipts cannot be treated as FTS under Article 12(4)(a) of the Treaty as the services are not relating to any income in the nature of royalty. Further, the assessee submitted that the receipts cannot be treated as FTS even under Article 12(4)(b) of the Treaty as the make available condition is not satisfied. The Assessing Officer, however, did not agree with the contentions of the assessee.
Referring to various clauses of the maintenance agreement, the Assessing Officer observed that in terms of such agreement not only the assessee is providing technical services required for maintenance of software but in course of rendition of such services, the assessee has also made available the technical knowledge, know-how, skill etc. Thus, he held that the fees received will qualify as FTS under Article 12(4)(b) of Treaty as well as u/s. 9(1)(vii) of the Act. Accordingly, he framed the draft assessment order. Against the draft assessment order, the assessee raised objections before learned DRP. However, following the directions issued by them in assessee’s case in Assessment Year 2019-20, learned DRP upheld the decision of the Assessing Officer.
Before us, learned counsel appearing for the assessee submitted that identical issue arose in assessee’s own case in AY 2018-19. He submitted, after perusing the terms of the agreement, the Tribunal had decided that the receipts are not in the nature of FTS, as, in course of rendition of services the assessee has not made available any technical knowledge, know-how, skill etc. Thus, he submitted that the issue is squarely covered in favour of the assessee.
Learned Departmental Representative (DR) relied upon the observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused the material on record. The crux of the issue is whether the receipts in dispute qualify as FTS under Article 12(4)(b) of the India- Singapore Treaty DTAA. A careful reading of the said provision makes it clear that a receipt can be treated as FTS if agreement and concluded that the receipts are not in the nature of FTS. For better appreciation, the relevant observations of the Coordinate Bench in this regard are reproduced hereunder:
6. We have heard both the parties at length and also perused the relevant finding given in the impugned order as well as material referred to before us and the maintenance agreement, which is core issue before us, whether income from rendering maintenance and other support services is taxable in India as FTS under Article 12 (4) of India- Singapore DTAA. The relevant portion of the article reads as under:- “The term fees for technical services us used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (b) make available technical knowledge, experience, skill, know-how or processer, which enables the person acquiring the services to apply the technology contained therein.
7. Thus, what is required is to be seen whether the said services satisfying “make available” clause. The sum and substance of the assessee’s explanation before us has been that:- The Indian customer (including its In-House support team) is not able to apply any expertise/technology contained therein or use knowledge on its own, without recourse to the Company. Further, the Indian customer is not at liberty to use the technical knowledge, skill, know-how and process of the Company in their own right; and The Indian customer would not be in a position to perform services (of the nature provided by the Company) In-House. They have to necessarily seek services of the Company time and again.
Further before us, the ld. Counsel for the assessee has given comparison of relevant clauses of simple agreements submitted by the assessee that the software sub-license and services agreement as well as maintenance agreement vis-à-vis nature of maintenance, other support services and training services rendered by the assessee which have been highlighted as under:- Nature of services rendered / Relevant clauses facts of the case of the from the sample Appellant agreements Annex 5- During the year under Maintenance consideration, the Appellant Procedure Clause has rendered maintenance and other support services to the in- 2- General House support team of the Assistance Indian customers by way of 2.1 Service: MSEA's telephone / email / remote log- "General in assistance with respect to Assistance" usage of the software program. services comprise Such assistance consists of the provision of responding to the Indian telephone and/or customer's reasonable email responses to questions communicated by the reasonable In-house support team questions concerning use of Software communicated by program and resolving the an In-House discovery of bug. Support Team member to the For example, there could be a MSEA Office time gap in input of data and regarding the use the output generated i.e., or operation of Indian customer inputs data in the software program the software at 10.54 am but in the output is generated at accordance with the 11.00 am. This time gap is a agreement.... bug as the reports should be Clause 3: generated within seconds / a Corrective minute and timings cannot be Maintenance haywire. The Appellant submits that these are the kind of bugs which the Company is 3.1 Service: MSEA's resolving and providing by way "Corrective of software maintenance. Maintenance" Further, the Company submits services consist of that during the year under using reasonable
consideration there is no on-site efforts to Resolve an maintenance and support Error or Critical services assistance provided Error in the by MSEA to Indian customers Software Program during the year under identified by consideration. The Company SUBLICENSEE also submits that it is a non- during the resident with no presence / applicable Permanent Establishment in Maintenance Term, terms of India-Singapore DTAA i.e., to identify and in India and there is no reproduce the Error maintenance team of the or Critical Error Company in India. and, to the extent practicable using reasonable efforts, to diagnose the Error or Critical Error, and upon such identification and diagnosis, to the extent practicable using reasonable efforts in the good faith judgment of MSEA, to provide a correction of the Error or Critical Error or, if no correction is available, a reduction of the effects of, or a work- around solution with respect to, the Error or Critical Error (e.g. reversion of a change in configuration or a change in the way of using the Software Program by the Users to its previous value)
Article 1: Maintenance Services 1.1.1 Telephone' and Email Assistance to SUBLICENSEE or Sublicensee Affiliates: MSEA will provide telephone and/or email assistance to the In-House Support Group (as defined in Article 1.3.1 hereof) during MSEA's normal business hours (09:00 to 18:00 Singapore time, Monday through Friday excluding holidays in Singapore)...Such assistance will consist of responding to SUBLICENSEE'S reasonable questions concerning SUBLICENSEE'S or the Sub licensee use of Affiliates' the Software Program, as the case may be... The Role and requirement of the Clause 4: In-House la-House support team:- Support Team As highlighted in the The Maintenance agreement, the In-House Services provided support team is required to by MSEA hereunder understand the concerns / constitute second- requirements from the Indian level maintenance. customers employees who are Accordingly, actually using the software and SUBLICENSEE explain the same to the must establish and Appellant's technical team to maintain an in- help them resolve the errors / house technical bugs. support team of Users at each Site As you will appreciate the whose members Indian customers to whom the possess the Appellant caters to are requisite business generally large financial and technical organizations with many competencies and employees in its organization. knowledge in For example, say SBI, which is respect of each Site one of the customers to whom and in respect of the Appellant sub-licenses its each Authorized software, has lakhs of Business and have employees, some of whom are received using the Murex Software. appropriate training from MSEA and are Similar to any large competent in the organization, SBI has also use of the established an internal Software Program Information Technology ('IT') team i.e. In-House support ("In-House Support team. The employees using the Team") ... MSEA software raise their software usage related queries 1.3.1 In-House / bugs to the In-House support Support. team. Thereafter, the In-House SUBLICENSEE'S in- support team co-ordinates with house support the Appellant for resolving such group in Mumbai queries / bugs. If every ("In-House Support employee in the organization Group") will be co-ordinates with the Appellant generally for their independent queries / responsible for bugs, it would become difficult providing Internal for the Appellant to resolve the and External Users queries / bugs. Thus, the In- with technical House support team of the assistance and training Indian customers is mainly a regarding the use centralized point of contact for of the software purpose of coordination of program("In-House queries / bugs and related activities of Indian customers Support"). The In- with MSEA. Since the role of In- House Support will general House support team involves include technical coordinating with MSEA assistance and regarding the issues in the training MSEA software program, the of personnel in such In-House SUBLICENSEE'S support team / IT team need to Internal and be competent to know how to External Users. use the software program to be able to effectively explain the 1.3.2 Maintenance Services. ... The In query / bug to MSEA which –House support would then enable MSEA to Group identify the issue and resolve will be responsible for all the same. communications with MSEA in of any respect questions encountered in any Site concerning SUBLICENSEE'S use of the Software Program Description of training provided 1.1.3 Training as part of the Maintenance Upon the request of services: SUBLICENSEE, and The Company submits that it at times and provides training to the end locations to be users and In-house team mutually agreed members of the Indian between the customers only with respect to parties, MSEA will train the proper usage of the SUBLICENSEE program. Considering it is a specific software for financial and Sub licensee sector customers, it is Affiliates on the proper usage of necessary for the Appellant to the Software provide training to the Indian Program. customers else the software would be of little value / use to the said customers. In simple terms, such training is akin to training provided to an individual for operating any product such as a software like SAP, Tally, Microsoft Excel or even a refrigerator / water purifier. Further, the training is generally provided at the initial stage when the software is sub-licensed and subsequently provided only on need basis e.g. if there is an additional module which is sub-licensed or there is a change in the Indian customers users / In- House support team etc. 1.2 Updates Updates to the software sub- licensed: 1.2.1 Updates: As a pan of the maintenance From time to time, services, the Appellant also MSEA will provide provides updates to the SUBLICENSEE with software program. Such an update to the updates include e.g., correction Software Program of errors, improvements including, for concerning existing functioning example, correction of program, and changes of errors, intended to improve improvements calculations / results / concerning the formulate of software program existing functioning etc. There is no addition in the of the program or functionalities through such the screens, and update. program changes The updates are standard, intended to improve provided to all the customers, the calculations, not customized and the results and installation of such updates is formulae of the at the discretion of the Indian Software Program. Additional customers. functionalities shall not generally be delivered in connection with an update. "Updates": Updates to the Software Program that MSEA distributes to its general customer base having a similar scope of use of the Software Program as SUBLICENSEE as part of the maintenance services which they are entitled to receive, and provided to SUBLICENSEE as part of the Maintenance Services, or otherwise at no additional sublicense fee or maintenance fee (and "Updated Version" means the version of the Software Program resulting from the installation of an Update). The maintenance services 5.3 Automatic contract is dependent on the Termination: In software sublicensing the event of the expiration or agreement. In case of separate termination of agreements for sublicensing the Sublicense and maintenance, there is a Agreement. this termination clause which Maintenance provides that maintenance Agreement shall services will automatically automatically terminate if software sublicensing contract is expired terminate or terminated The Company submits that Article III the fees for maintenance Maintenance Fees 3.1 Annual Basic services are annual and based Maintenance Fee: on a percentage of licence fee. The said fees are not based on the number of queries / bugs 3.1. 1 raised / resolved by the SUBLICENSEE Appellant. The said fee shall pay MSEA in an increases year on year advance on annual basis, an according to the agreed annual basic inflation index which implies maintenance fee that there is no diminishing for the Software services and the Indian Program (for one customers year on year hundred (100) named Users as continue with such maintenance service contract. set forth in Annex 1- D of the Sublicense Agreement) as follows:
Y Y Y Y Y Y e e e e e e a a a a a a r r r r r r 2 2 2 2 2 2 0 0 0 0 0 0 0 0 0 0 0 1 6 5 7 8 9 0 a n d a f t e r U U U U U U S S S S S S D D D D D D 1 1 2 3 3 3 2 8 4 0 6 6 0 0 0 0 0 0 , , , , , , 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
On the other hand, ld. DR had referred to the same agreement and submitted that the ld. AO has rightly concluded that the income earned from maintenance agreement is nothing but fee for technical services and also ‘make available’ for technical expertise as well as delivery of technical plan is there.
10. After considering the relevant clauses of the maintenance agreement, we find that the assessee rendered maintenance and other support services to the in-house support team of Indian customers through telephone / email/ login assistance with respect to usage of the software programme. Such assistance is by responding to reasonable questions communicated by the in- house support team concerning the use of software programme and resolving the discovery of bug in respect of software supplied by the assessee. Before us, certain instances and examples have been cited as to how the assessee has been resolving the issue arising out of bugs provided by the software during the software maintenance. Further there are no onsite maintenance and support services, assistance provided by the assessee to the Indian customers. Apart from that, another very important fact is that there is no permanent establishment or any maintenance team of the company in India. Indian customers have in-house support team which is required to understand the source / requirements from the Indian customers. Employees of the Indian customers who are using the software, if they happen to come across any problem, then the same is referred to the assessee’s technical team to help them to resolve errors / bugs. These Indian customers are mainly big organizations and the one of the biggest customer was SBI, to whom the assessee has sub- licensed its software and which is used by lakhs of employees. SBI has an internal IT team to cater assistance to their employees in case there are any queries / bugs. That in-house team coordinates with assessee for resolving such queries / bugs. The in-house support team of the Indian customers is mainly a centralized point of contact for purpose of co-ordination and related activities of Indian customers with the assessee. Since, the role of in-house support team involves coordinating with the assessee regarding MSEA software programme supplied by the assessee, the personnel in such In-House support team / IT team need to be competent to know how to use the software program to be able to effectively explain the query / bug to MSEA which would then enable MSEA to identify the issue and resolve the same. This fact is clearly borne out from the relevant clauses of the agreements which has been filed before us and also which has been noted in the foregoing paragraphs.
11. In so far as the training part is concerned, the assessee company provides training to the end users and in-house team members of the Indian customers only with respect to the proper usage of the program. This training is a akin to training provided for operating any product, software and it is generally provided at the initial stage when the software is sub-licensed and subsequently provided only on need basis. Apart from that, as a part of maintenance services, assessee also provides updates to the software programmes like correction of errors, improvements concerning existing functioning of program, and changes intended to improve calculations / results / formulate of software program etc. There is no addition in the functionalities through such update which are only standard updates and not customization. Thus, the entire maintenance service contract is dependent on the software sublicensing agreement. In case of separate agreements for sublicensing and maintenance, there is a termination clause which provides that maintenance services will automatically terminate if software sublicensing contract is expired or terminated. Here, fees for maintenance services are annual and based on a percentage of licence fee and is not dependent upon the number of queries / bugs raised or resolved by the assessee.
12. If it is of recurring annual fees, there is no question that assessee was making available any technology or knowhow of the Indian customers on year to year basis as has been interpreted by the ld. AO. Assessee is having the technical expertise in the software sub-licensed by it. If there is any bug or problem faced by the customers while using the software, assessee provides trouble shooting to fix those bugs and helps them for maintaining and support of the software used by the clients. This does not mean that assessee had made available any technology in software.
Another allegation is that services have been provided on on telephone, on email, remote login and providing training for the software and therefore, it is ‘make available’. If assessee is resolving the problems on software sub-licensed by it, this does not per se mean that any technology has been transferred or any know how has been make available which can enable the in- house team of the customer to acquire the technology. Thus, such maintenance support services and training services do not fall in the ambit and nature of FTS within Article 12(4) of India- Singapore DTAA, as these services do not make available any technical skill knowledge or expertise etc., which can enable Indian customer to apply the technology content therein. Thus, we hold that these services are not liable to be taxable. In the result, this issue is passed in favour of the assessee.”
8. Factual position relating to the issue being identical in the impugned assessment year, respectfully following the decision of the Coordinate Bench in assessee’s own case as referred to above, we hold that receipts are not in the nature of FTS.
9. Having held so, let us examine whether the receipts of Rs.16,93,17,904/- from additional services can be treated as FTS under the Treaty provisions.
Briefly stated, while examining the issue, the AO observed that the assessee has provided additional services in relation to implementation and migration of software. In other words, the assessee provide service relating to migration of software from old to new. Before the Assessing Officer, the assessee claimed that the receipt would not qualify as FTS in terms of Article 12(4)(b) of the India-Singapore treaty DTAA.
The Assessing Officer, however, was not convinced with the submission of the assessee. Referring to protocol to India- USA Treaty, the Assessing Officer observed that the additional services provided technical assistance and training in connection with the migration of the software delivered to the Indian client from one person to another. He observed while rendering such services, the assessee has transferred a technical plan to Indian client. Hence, the receipts will qualify as FTS. He further observed that in Assessment Year 2018-19, the assessee had offered the receipts from additional services to tax in India. In the aforesaid premises, he treated the receipts as FTS both under the treaty provisions as well as u/s. 9(1)(vii) of the Act. While disposing of the objections on this issue, learned DRP upheld the decision of the Assessing Officer.
Before us, learned counsel appearing for the assessee submitted that the additional services involved migration of software from old version to new version without modifying the software. He submitted, in course of rendition of such services the assessee has not transferred technology, know-how and skill or provided any training services. Thus, he submitted, the conditions of Article 12(4)(b) are not satisfied. Proceeding further, he submitted that in Assessment Year 2018-19, the assessee had offered the receipts from additional services as income simply because it had a service P.E. in India, which is not the case in the impugned assessment year.
13. Learned D.R. strongly relied upon the observations of the Assessing Officer and learned First Appellate Authority.
We have considered rival submissions and perused the material on record. Facts on record reveal that the additional services rendered by the assessee are only to the extent of migration of software from old version to new version. The Assessing Officer has not brought on record any material/ evidence to demonstrate that in course of rendition of such services, the assessee has transferred or made available any technical knowledge, know-how, skill etc. to its clients in India so as to enable them to perform such services independently without requiring the aid and assistance of the assessee. If the Department seeks to invoke Article 12(4)(b) of the treaty the burden is entirely on the department to demonstrate the fulfillment of make available condition through cogent evidence. Unfortunately, the Department has failed to do so. The other allegation of the Assessing Officer that the assessee has offered similar income to tax in A.Y. 2018-19 does not stand to reason in view of the fact that in A.Y. 2018-19, the assessee offered it as business income in view of the fact that it had a service PE in India. Whereas, it is the assertion of the assessee that in the impugned assessment year there was no PE in India. Even, in the assessment order, there is no allegation by the Assessing Officer regarding existence of PE in India. In that view of the matter, once the receipts are not in the nature of FTS under Article 12(4) of the Treaty, they have to be treated as business receipts and in absence of PE in India, cannot be made taxable. In view of the aforesaid, we hold that receipts in dispute are not taxable in India. Ground is allowed.
Other grounds being consequential or premature, do not require adjudication.
ITA No. 4630/Mum/2023 (A.Y. 2021-22)
In the result, both the appeals are partly allowed in the terms indicated above.
Order pronounced in the open court on 13/01/2025.
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