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Facts
The assessee, a US-based company, provides software licenses and annual maintenance services to Indian customers. The Assessing Officer treated software license subscription fees as royalty and annual maintenance fees as 'fee for included services' under the India-USA DTAA. The assessee claimed these receipts as exempt.
Held
The Tribunal held that software license subscription fees are not royalty and annual maintenance fees are not 'fee for included services' under the India-USA DTAA, following its own previous decisions and Supreme Court rulings. The 'make available' condition for FIS was not met.
Key Issues
Whether software license fees are taxable as royalty and annual maintenance charges are taxable as 'fee for included services' under the India-USA DTAA.
Sections Cited
143(3), 144C(13), 143(2), 9(1)(vii), Article 12
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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI GEORGE GEORGE K & SHRI JAGADISH
आदेश /O R D E R
PER GEORGE GEORGE K, VICE PRESIDENT:
This appeal at the instance of the assessee is directed against the final assessment order dated 16.12.2024 passed under section
Brief facts of the case are as follows:- The assessee is a non- resident company incorporated in USA. It is a developer of Kone Mobile Application Platform (KMAP) and provides software license to its customers. For the assessment year 2022-23, the return of income was filed on 04.11.2022 declaring total income of Rs.30,31,692/- and claimed refund of Rs.1,30,87,130/-. The assessment was selected up for complete scrutiny under CASS and notice u/s.143(2) of the Act was issued on 31.05.2023. On perusal of the financials filed by the assessee company, the AO noted that an amount of Rs.13,02,06,818/- was received as income from sale of software license which was claimed as exempt during the relevant assessment year. The said income consists of software license subscription fee of Rs.12,33,63,210/- and annual maintenance fee of Rs.68,43,603/-. The assessee was issued show-cause notice dated 31.01.2024 directing it to explain why the above said sum of Rs.13,02,06,818/- should not be brought to tax as royalty and fee for included services under the Income-tax Act read with provisions of Article 12 of India-USA DTAA. The assessee submitted its SA No.25/CHNY/2025 response objecting to the said proposal. However, the objections raised by the assessee was rejected and software license subscription fee of Rs.12,33,63,210/- was brought to tax as royalty under Article 12 of India-USA DTAA. As regards annual maintenance fee of Rs.68,43,608/-, the same was brought to tax under Article 12 of section 4(b) of India-USA DTAA and taxed the same at 10%.
The view taken by the AO in the draft assessment order was confirmed by the DRP in its directions dated 29.11.2024. Pursuant to the DRP’s direction, the impugned final assessment order was passed on 16.12.2024.
Aggrieved by the impugned final assessment order, the assessee has filed the present appeal raising seven grounds and various sub-grounds. The Ld.AR argued only two issues, namely the taxability of receipts from suppliers of software license subscription fee as income chargeable to tax as ‘royalty income’ and annual maintenance charge as ‘fee for included services’. The Ld.AR submitted that the issues in question are covered in favour of assessee by the orders of the Tribunal in assessee’s own case for SA No.25/CHNY/2025 assessment years 2014-15, 2015-16, 2017-18 and 2021-22. The details of tribunal orders are as under:- Assessment year Appeal No. Order dated 2014-15 01.06.2022 2015-16 & & 11.01.2023 2017-18 ITA No.616/Del/2021 2021-22 ITA No.1572/CHNY/2023 30.05.2024
The Ld.DR supported the orders of the AO and the DRP.
We have heard rival submissions and perused the material on record. The issue of taxability of software license subscription fee of Rs.12,33,63,210/- and annual fee of Rs.68,43,608/- are covered by the decisions / orders of the Tribunal in assessee’s own case for assessment years 2014-15, 2015-16, 2017-18 & 2021-22 (supra). The relevant finding of the Tribunal in assessee’s own case for assessment year 2021-22 in reads as under:- “8. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. Upon perusal of case records and after considering the tribunal decisions in assessee’s own case for the assessment years 2014-15, 2015-16 & 2017-18, the submissions of the ld.AR that the issue on legal grounds as well as on merits are covered in assessee’s own case and there is no change in the material facts. The Hon’ble Tribunal of Delhi bench in their order in dated 11.01.2023, after considering the decision taken in the assessment year 2014-15 of the assessee’s own case, has held as under:
We have considered rival submissions and perused materials on record. It is evident, the assessee had entered into End User Licence Agreement (EULA) with customers in India in terms of which the assessee has granted licence to use certain standardized software to the customer. The licences provided to the end users are non-exclusive and non-transferable. The end users of the licnese do not have any access to the source code, nor there was any transfer of right in process or use of any process. The limited right granted to the customers under EULA is to use the software for their own internal purposes. Notably, while deciding identical issue in assessee’s own case in assessment year 2014-15, the Coordinate Bench in dated 01.06.2022 has held as under: “5. We have carefully considered the submissions of both the parties and gone through the record.
6. Ld. counsel of the assessee submitted that the issue is now squarely covered by the decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Private Ltd. vs. The Commission of Income-tax in Civil Appeal Nos.8733-8734 of 2018. In this case, Hon'ble Apex Court expounded that consideration for the resale of the computer software through End User License Agreement (EULA)/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India. Ld. counsel submitted that the facts in the assessee's case are identical. He further submitted that ITAT in assessee's own case earlier also has decided the issue in favour of the assessee.
7. Ld. DR for the Revenue could not dispute the above proposition.
8. Accordingly, respectfully following the precedent from Hon’ble Apex Court and duly taking note that Revenue has not disputed that the facts in this case are not identical, we set aside the order of the Revenue authorities and decide the issue in favour of the assessee.”
There is no dispute that factually the issue stands on the same footing as assessment year 2014-15. Therefore, respectfully following the decision of the Coordinate Bench in assessee’s own case, as referred to above, we hold that the receipt in dispute is not in the nature of royalty, hence, not taxable in India. The Assessing Officer is directed to delete the addition. These grounds are allowed.
9. In ground no. 6, the assessee has challenged the addition of Rs.1,23,20,383/- by treating it as Fee for Included Services (FIS) under Article 12(4)(a) of Indian – USA DTAA. As discussed earlier, while completing the assessment, the Assessing Officer held that the amount received by the assessee towards granting licence under EULA is in the nature of royalty, hence, taxable in India. In the context of the said reasoning, the Assessing Officer held the view that the receipts from annual maintenance charges of the software are in the nature of FIS/FTS, both under the tax treaty as well as under section 9(1)(vii) of the Act. Accordingly, he brought to tax the amount of Rs.1,23,20,383/-. Learned DRP, while deciding the objections of the assessee, upheld the decision of the Assessing Officer.
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 SA No.25/CHNY/2025 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 appeal, by taking the same view, we set aside the order of the revenue authorities and decide the issue in favour of the assessee.”
7. Since facts for the assessment years mentioned supra are identical to the relevant assessment year namely 2022-23 (since the agreement entered by the assessee with Indian entities and end user license agreement for the earlier years and the relevant assessment year being identical), we follow the co-ordinate bench orders of the Tribunal for the assessment year 2021-22 and hold that software license subscription fee of Rs.12,33,63,210/- cannot be brought to tax as royalty under the India-USA DTAA. Similarly, the annual maintenance fee of Rs.68,43,608/- cannot be brought to tax as ‘fee for included services’ following the co-ordinate bench order of the Tribunal. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed and the stay petition filed by the assessee is dismissed.
Order pronounced in the open court on 8th May, 2025 at Chennai.