GE PRECISION HEALTHCARE LLC,KARNATAKA vs. ACIT CIRCLE INTERNATIONAL TAX 1(3)(1), NEW DELHI

Though, the assessee contested the aforesaid decision by filing objections before learned DRP, however, the view of the Assessing Officer was endorsed by learned DRP.

Before us, explaining the nature of transaction, learned counsel submitted that in the year under consideration, the assessee purchased certain standard commercial software licences from third party software licensors and further sublicensed them to affiliates in India. He submitted, the software licences sublicensed to the affiliates are nothing but copyrighted articles in the nature of standardized business software, which are required by affiliates as business tool to smoothly conduct their business operation. To demonstrate the nature of transaction, learned counsel drew our attention to Intercompany Reimbursement Agreement, dated 01.01.2020. He submitted, the assessee only recovers cost of the software licences which the assessee has paid to the third party licensor. Thus, he submitted, since, the amount received from the affiliates was towards sale of copyrighted articles and not for use or right to use of copyright, the receipts are not taxable as royalty income either under section 4 | P a g e 9(1)(vi) of the Act or under the tax treaty in view of the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (432 ITR 471) and the decision of Hon’ble Delhi High Court in case of DIT Vs. Infrasoft Ltd. (2014)

He submitted, once the receipts are not in the nature of royalty, it can only be treated as business income under Article 7 of the tax treaty and in absence of PE in India, it is not taxable.

Strongly contesting the reasoning of the departmental authorities in not treating the receipts as business income, learned counsel submitted that as per definition of “business” in section 2(13) of the Act, it includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. He submitted, the definition of “business” is of wide import and would cover activities performed by the assessee in the normal course of business. He submitted, undisputedly, the assessee had procured and sublicensed standardized software licences to its affiliates in course of its normal business and not as a standalone activity. He submitted, the assessee carries on healthcare business for the GE group and such model of centralized procurement of standard software licences is, in fact, aimed at bringing the cost and usage efficiency for its healthcare business around the globe owing to the economies of scale and dynamic availability of the licences as and when required. Thus, he submitted, since, the software licences were sold as tools of business in furtherance of assessee’s business activity, the receipts therefrom have to be treated as business income.

As regards the allegation of the departmental authorities that there is no continuity in the activity to consider it to be in the nature of business, learned counsel submitted, the assessee was incorporated in the year 2019-20 and the impugned year is the second year of operation, wherein, the agreement to sublicense the software was entered into and is operational till date. He submitted, even in the subsequent assessment years, i.e., 2021- 22 and 2022-23, there are similar transactions between the parties, which demonstrate the continuity in the activity. Thus, all these factors demolish the basic argument of the regularity, continuity and frequency.

Reverting back to the issue of applicability of section 56(1) of the Act and Article 23(3) of the tax treaty, learned counsel submitted, if the nature and character of a particular item is specifically identifiable, it cannot be brought within the residuary clause of other income, as provided under section 56(1) of the Act read with Article 23(3) of the tax treaty. He submitted, other income can only be those types of income, which would not fall under any other head of income. He submitted, if a particular item of income falls under any other head of income but is not taxable due to non-satisfaction of conditions mentioned under 7 | P a g e those heads, it cannot automatically be treated as other income and brought under section 56(1) of the Act or Article 23(3) of DTAA. In this context, he drew our attention to Article 21 of the UN Model Commentary. Thus, he submitted, the amount cannot be treated as other income under section 56(1) of the Act read with Article 23(3) of the tax treaty. In this context, he relied upon the following decisions: i. Husco International Inc. Vs. ACIT [2021] 133 taxmann.com 196 (Pune – Trib.) ii. CSC Technology Singapore Pte. Ltd. Vs. ADIT, 19 taxmann.com 123 (ITAT-Delhi) iii. JCIT (OSD) Vs. Merrill Lynch Capital Market Espana SA SV, 112 taxmann.com 119 iv. Bangkok Glass Industry Co. Ltd. Vs. ACIT, 34 taxmann.com 77 (Madras HC) v. Mc Kinsey & Company (Thailand) Co. Ltd. Vs. DDIT, 36 taxmann.com 375 (ITAT – Mumbai)

Learned Departmental Representative strongly relied upon the observations of departmental authorities.

We have considered rival submissions in the light of the decisions relied upon and perused materials on record. The lis between the parties is regarding the nature and character of the receipts from sublicensing of software licences by assessee to its Indian Associated Enterprises (AEs). There is no dispute between the parties that the assessee is neither manufacturer nor creator of the software licences sold to the AEs. The assessee purchases software licences from third party software licensors and sublicenses them to Indian affiliates/AEs to be used in healthcare business. Upfront, the assessee pays licence fees of the software to the third party licensors and thereafter cross charges them to the affiliates on cost to cost basis. Undoubtedly, in course of assessment proceeding, the assessee has claimed the reimbursement of software licence cost as business income in terms of Article 7 of the tax treaty and claimed that in absence of PE, it is not taxable in India.

It is observed, in the first show-cause notice dated 27.02.2022 issued by the Assessing Officer in course of assessment proceeding, he called upon the assessee to explain, as to why the receipts should not be treated as royalty taxable under section 9(1)(vi) of the Act and Article 12 of the tax treaty. In response to the show-cause notice, the assessee furnished its reply on 7th March, 2022, stating therein that what has been sold to the affiliates are copyrighted articles and not any right to use copyright, hence, the receipts cannot be taxable as royalty income in view of the decision of the Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. (supra) and 9 | P a g e the decision of Hon’ble Bombay High Court in case of DIT Vs. Infrasoft Ltd. (supra).

After going through the submissions of the assessee, the Assessing Officer, having realized that the receipts cannot be taxed as royalty income, either under section 9(1)(vi) of the Act or Article 12 of India – Singapore DTAA, re-characterized the receipts as other income falling under section 56(1) of the Act and Article 23(3) of the tax treaty. While doing so, the Assessing Officer rejected assessee’s claim of business income on the following reasons:

On going through the aforesaid reasonings of the Assessing Officer, it is very much clear that the Assessing Officer has accepted the position that the assessee buys software licenses from third party vendors and sublicenses them to its affiliates. He has also observed that by using the sublicensed software the affiliates carry on their business activity and generate income from services provided to the assessee. From the aforesaid observations of the Assessing Officer, two facts are very much clear. Firstly, the assessee is not the owner and manufacturer of the software, and secondly, the licenced softwares are used as business tools by the affiliates to generate service income from the assessee. If that is the case, we fail to understand how the receipts from sublicensing of softwares can be treated as other income under section 56(1) of the Act and Article 23(3) of the tax treaty. It is established on record that the assessee has not sublicensed standardized software licenses on standalone basis. 11 | P a g e The details of software licenses sublicensed by the assessee to its affiliates and their functionality are described as under:

Analytics Used for information technology inventory, tool tracking, spare parts, evaluation, demonstration 6. SFDC ELTON equipment and assets. The Chatter Plus license is for users who don't have Salesforce licenses but must have access to Chatter and some additional Salesforce objects. Chatter Plus 7. SFDC Chatter Plus users can be Chatter moderators and have access to standard Chatter people, profiles, groups, and files pages. Variable Compensation is a software related to human resource function that is used to create and manage multiple variable compensation plans. These plans Oracle Variable 8. can encompass everything from onetime ad hoc Compensation awards to stock options, bonus plans, non-cash incentives, and holiday gifts or bonuses.

From the description of the software licences sublicensed to the affiliates, it is very much clear that the sublicensed softwares were meant to be used by the affiliates in their day-to-day business activity of healthcare, which is the business of the entire group. Therefore, it cannot be said that the receipt from sublicensing of software is not in course of assessee’s business activity, hence, cannot be characterized as business income.

Reverting back to the issue, whether the receipts can be re- characterized as other income as envisaged under section 56(1) of the Act and Article 23(3) of the Act, it is very much clear, as per the provisions of domestic law, an item of income, which does not fall under any specific heads of income, such as, salary, house property, business and profession and capital gain, will fall under the residuary head ‘income from other sources’ as per section 56(1) of the Act. Similarly, Article 23(3) of the tax treaty provides for taxation of residuary items of income which are not dealt with in the other Articles of the tax treaty. In the facts of the present 13 | P a g e appeal, admittedly, the item of income sought to be taxed is the receipts from sublicensing of software licences. Therefore, ordinarily, the income can be characterized as royalty under section 9(1)(vi) of the Act and Article 12 of the DTAA. In case, it is not taxable as royalty income, it can be treated as business income under Article 7 of the tax treaty. Thus, to our understanding, the residuary provision under Article 23 can come into play when an item of income is not expressly dealt with in other articles preceding article 23 of the tax treaty.

Characterization of an item of income under a particular Article is different from taxability of that income under the said Article. A particular item of income can fall either under Article 7 or Article 12. However, their taxability under these articles is subject to fulfillment of conditions enumerated therein. If the particular item of income falling under these articles is not taxable due to non-fulfillment of the conditions mentioned therein, it cannot automatically be re-characterized as other income under Article 23 of the tax treaty. In other words, the residuary provisions of Article 23 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfillment of conditions mentioned therein.

In the facts of the present appeal, to our understanding, the receipts in dispute could have been characterized either as royalty income falling under Article 12 or business income under Article 7 of the tax treaty. However, in view of the ratio laid down in judicial precedents, the income is not taxable as royalty.

Ground no. 6 and 7, being consequential and premature, are dismissed.

In the result, appeal is allowed, as indicated above.