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Facts
M/s. Temenos Headquarters SA, a Swiss company, received Rs. 11,11,70,515/- as annual recurring license fees for banking software, which the Assessing Officer (AO) treated as 'Fees for Technical Services' (FTS) under the Income Tax Act and Article 12 of the India-Switzerland DTAA, taxing it at 10%. The assessee challenged this, arguing that these charges are an integral part of software license sales and not FTS. The DRP upheld the AO's draft assessment order.
Held
The Income Tax Appellate Tribunal (ITAT) followed its own previous decisions in the assessee's own case for earlier assessment years, holding that annual maintenance service fees are an integral part of software license sales and not taxable as FTS. The Tribunal concluded that the amount received is not taxable in India as it cannot be treated as 'Fees for Included Services' under Article 12(4) of the DTAA, and directed the AO to delete the addition. The related stay petition was dismissed as infructuous.
Key Issues
Whether annual software maintenance charges received by a non-resident company are taxable as 'Fees for Technical Services' under the Income Tax Act, 1961, and Article 12 of the India-Switzerland DTAA.
Sections Cited
143(2), 142(1), 143(3), 144C(1), 144C(5), 144C(13), 9(1)(vii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI S.R. RAGHUNATHA
आदेश /O R D E R
PER S. R. RAGHUNATHA, AM :
These appeals filed by the assessee are directed against the order passed by the learned Commissioner of The Assistant Commissioner of Income Tax, International Taxation Circle 2(2), Chennai dated 13.01.2025 and pertains to assessment year 2022-23.
:-2-: ITA. No: 558/Chny/2025 SA No: 50/Chny/2025
The brief facts of the case are that the assessee M/s.Temenos Headquarters SA, company incorporated under the laws of Switzerland and is a wholly owned subsidiary of Temenos AG. The registered office of the assessee is located in Geneva, Switzerland. The assessee company is engaged in the business of providing banking software systems and services to retail, corporate, universal, private, microfinance and community banks, wealth managers and financial institutions. The assessee company earns income from sale of software licenses where the client is granted access to use the software. As per the licensing agreement, the Intellectual property (IP) rights in software system are the exclusive Intellectual property of the assessee. The is the sole owner of the copyright in the said software. In addition as per the agreement, entered into by the assessee with its clients, the assessee also undertakes to provide clients with updates in the form of software fixes, patches, corrections and enhancements to the current version in the form of modules for which the client pays annual recurring license fees. The assessee has stated that while the payment is made towards recurring licenses the payment for such recurring licenses has been referred to as ‘annual maintenance services’.
The sole issue involved in this appeal is as regards to the final order of Assessing Officer treating Annual Software Maintenance charges as ‘fees for technical services (FTS) of Rs.11,11,70,514/- received from Indian entities.
During the assessment year 2022-23, the assessee company filed its original return of income on 04.11.2022, admitting total income of Rs.27,96,802/- and exempt income of Rs.32,23,79,566/- (income in the nature of sale of software to Indian customers of Rs.29,57,75,812/- and online automatic training services income of Rs.2,66,03,754/-.) and claimed a refund of Rs.61,43,622/-. The case was selected for scrutiny and issued notices u/s. 143(2) and 142(1) of the Income- tax Act, 1961 (hereinafter referred to as “the Act”) dated 31.05.2023 and 12.07.2023, respectively. In response to the notices, the assessee filed a reply
:-3-: ITA. No: 558/Chny/2025 SA No: 50/Chny/2025 stating the background of the company, nature of services, break up of payments made etc. After verification of relevant details of the operations of the company, the Assessing Officer found that the income in the nature of sale of software to Indian customers of Rs.29,57,75,812/- is having the following break up:
- Sale of Software Rs.18,46,05,298/- - Annual Recurring license fees Rs.11,11,70,515/- The issue under contention during the present proceedings is only related to the income from Annual Recurring license fees Rs.11,11,70,515/-.
After considering the detailed submissions of the assessee. the AO issued a draft assessment order u/s.143(3) r.w.s.144C(1) of the Act dated 31.03.2024 by proposing to tax Annual Maintenance Services fees of Rs.11,11,70,515/- as ‘Fees for Technical Services’ both under the Act and also as per the provisions of the Article 12 of the India-Switzerland DTAA. Applying the beneficial provisions of the DTAA income from Annual Maintenance Services fees of Rs.11,11,70,515/- is brought to tax @ 10% under India-Switzerland DTAA.
Against the draft order u/s.143(3) r.w.s.144C(1) of the Act, the assessee filed an objections before the Dispute Resolution Panel (DRP) on 29.04.2024. The DRP after hearing the case, passed an order u/s.144C(5) of the Act dated 26.12.2024 upholding the draft assessment order of the AO. As per the directions given by the DRP the AO passed the impugned assessment order u/s.143(3) r.w.s.144C(13) of the Act on 13.01.2025. Aggrieved by the impugned order of the Assessing Officer, the assessee preferred an appeal before us.
Before us, the Ld. AR for the assessee, submitted that the AO has erred on facts and circumstances of the case Annual Maintenance Services fees of Rs.11,11,70,515/- as ‘Fees for Technical Services’ both under the Act and also as per the provisions of the Article 12 of the India-Switzerland DTAA. The ld.AR submitted the paper book of 282 pages containing the written submission, return
:-4-: ITA. No: 558/Chny/2025 SA No: 50/Chny/2025 of income with 26AS, Tax residency certificate, Order of the Tribunal in assessee’s own case, agreement and sample invoice copies etc,. The Ld. AR further submitted that the impugned issue in assessee’s own case has already been decided by the co-ordinate bench of this Tribunal in favour of the assessee for the A.Y.2020-21 and 2021-22 vide and 1575/Chny/2023 dated 12.06.2024. In light of the above arguments the ld.AR prayed for setting aside the order of the AO by allowing the appeal of the assessee.
Per contra the ld.DR for the Revenue strongly supported the order of the AO and the DRP.
We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper book filed and case laws relied on. The sole issue involved in the appeal is as regards to whether the ‘Annual maintenance service fees’ for an amount of Rs.11,11,70,515/- taxable as ‘fees for technical service’ both under the Act and also under Article 12 of the India-Switzerland DTAA. We find that this issue is no res integra since, the issue has been discussed in detail and decided in favour of the assessee in their own case by the co-ordinate bench of this Tribunal for the A.Y.2020-21 & 2021-22 and 1575/Chny/2023 dated 12.06.2024 as detailed below.
“9. The sole issue involved in these two appeals is as regards to whether ‘Annual maintenance service fees’ for an amount of Rs.9,93,54,234/- and Rs.11,36,88,069/- for assessment years 2020-21 and 2021-22 respectively, taxable as ‘fees for included service’ both under I.T. Act, 1961 and also under Article 12 of the India-Switzerland DTAA.
10. The assessee company filed its original return of income, for the assessment years 2020-21 and 2021-22 on 09.01.2021 and 24.12.2021 declaring total income of Rs.78,21,970/- and Rs.44,39,720/- respectively. The case was selected for scrutiny and issued notices u/s. 143(2) and 142(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”). In response to the notices, the assessee filed a reply stating the background of the company, nature of services, break up of payments made etc. After verification of relevant details of the operations of the company, the Assessing Officer passed the impugned assessment orders u/s. 143(3) r.w.s. 144C(3) of the Act on 28.04.2022 and :-5-: ITA. No: 558/Chny/2025 SA No: 50/Chny/2025 23.01.2023 for assessment years 2020-21 and 2021-22 respectively, by treating the income received as ‘Annual maintenance services’ as taxable in India as under: “The income earned by the assessee during the relevant assessment year under the head Annual Maintenance Service Fee or income is taxable as fees for technical services both under the Income Tax Act and also as per Article 12 of the India-Switzerland DTAA. Applying the beneficial provisions of the DTAA, Annual Maintenance Services Fee or Income amounting to Rs.9,93,54,234/-for the assessment year 2020-21 and Rs.10,92,48,345/- and service Income of Rs.44,39,724/- for assessment year 2021-22 is brought to tax at 10%.
11. We have noted that the annual maintenance services which is an integral part of sale of software license and not a separate service in itself, partakes the taxability of the sale of software licenses. Further, the issue involved in assessment years 2020-21 and 2021-22 are identical to the issue of assessee’s group company M/s. Kony Inc., (Supra), considering in favour of the assessee and held as under:
“10. We have considered rival submissions and perused the materials on record. It is evident, being of the view that annual maintenance charges are ancillary and subsidiary to the grant of licence for right to use software, which is treated as royalty, the Assessing Officer concluded that receipt from annual maintenance charges is in the nature of FIS under Article 12(4)(a) of India - USA DTAA as well as under section 9(1)(vii) of the Act. However, while deciding the issue of taxability of receipts from granting of licence, we have held that they are not in the nature of royalty under the treaty provisions. That being the case, the receipt from annual maintenance charges being not ancillary or subsidiary to any royalty income cannot be brought to tax under Article 12(4)(a) of the tax treaty. Therefore, it has to be seen, whether it can come within the purview of Article 12(4)(b) of the tax treaty. As could be seen, to be considered as FIS under Article 12(4)(b) under the tax treaty, the make available condition has to be satisfied. In the facts of the present appeal, the Departmental Authorities have failed to demonstrate that while rendering the services, the assessee had made available technical knowledge, experience, skills, knowhow etc. to the recipient of such services. That being the case, the amount received cannot be treated as FIS under Article 12(4)(b) of the tax treaty.
In any case of the matter, the entire case of the revenue is, the amount received falls under Article 12(4)(a) of the treaty. In view of the aforesaid, we hold that the amount received is not taxable in India as it cannot be treated as FIS under Article 12(4) of the tax treaty. Accordingly, we direct the Assessing Officer to delete the addition.” Therefore, the facts and circumstances being the same in the present two appeals, by respectfully following the view taken by the coordinate bench, we are inclined to delete the addition and set aside the order of the revenue authorities and decide the issue in favour of the assessee for both the assessment years.”
:-6-: ITA. No: 558/Chny/2025 SA No: 50/Chny/2025
In view of the above discussion, in the present facts and circumstances of the case, respectfully following the view taken by the coordinate bench in assessee’s own case (supra), we are inclined to delete the addition and set aside the order of the AO and decide the issue in favour of the assessee. Hence, we direct the AO to recompute the total income of the assessee by deleting the addition by allowing the appeal of the assessee. SA Nos: 50/Chny/2025: 11. The stay petition is filed by the assessee seeking stay of outstanding demand of Rs.1,38,29,231/- for assessment years 2022-23. Since, we have disposed of the main appeals in the stay petition becomes infructuous and hence, dismissed.
In the result, the appeals filed by the assessee for assessment years 2022- 23 is allowed and stay application filed by the assessee for assessment years 2022-23 is dismissed as infructuous.
Order pronounced in the court on 28th August, 2025 at Chennai.