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

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI

BEFORE SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, VICE PRESIDENT

ITA No.404/Del/2023 Assessment Year: 2020-21

GE Precision Healthcare LLC, Vs. Assistant Commissioner of C/o- Wipro GE Healthcare Income Tax, Private Ltd., No. 4, Kadugodi Circle- International Tax - Industrial Area Whitefield, 1(3)(1), Bangalore, New Delhi Karnataka PAN :AAHCG6915E (Appellant) (Respondent)

Assessee by Sh. Ravi Sharma, Adv. Sh. Anubhav Rastogi, CA Department by Sh. Vizay B. Vasanta, CIT(DR) Date of hearing 16.05.2023 Date of pronouncement 14.08.2023

ORDER This is an appeal by the assessee against final assessment

order dated 23.01.2023 passed under section 143(3) read with

section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’)

pertaining to assessment year 2020-21, in pursuance to the

directions of learned Dispute Resolution Panel (DRP).

adjudication.

ITA No.404/Del/2023 AY: 2020-21

taxability of receipts towards software sub-licence fee as income

from other sources under section 56 of the Act and Article 23(3) of

India – USA Double Taxation Avoidance Agreement (DTAA).

non-resident corporate entity and a tax resident of United States

of America (USA). As stated, the assessee is engaged in healthcare

business for the General Electric (GE) group, and is a global

medical device provider that designs, develops, manufactures and

distributes diagnostic imaging and clinical system, products and

services for drugs discovery, bio-pharmaceutical manufacturing,

and cellular technologies, imaging agents used during medicinal

scanning procedures, and a range of healthcare Information

Technology (IT) solutions.

income in the nature of Fee for Technical Services (FTS)/Fee for

Included Services (FIS) amounting to Rs. 3,32,12,204/-, which

was offered to tax in India under section 9(1)(vii) read with section

115A of the Act. The assessee also received an amount of

Rs.10,66,35,790/- towards software licence fee cross charged to

its affiliates in India, namely, Wipro GE Healthcare Pvt. Ltd., GE 2 | P a g e

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BE Pvt. Ltd. and GE India Industrial Pvt. Ltd. However, the

software licence fee received as reimbursement from the affiliates

was not offered to tax in India by the assessee. In course of

assessment proceedings, the Assessing Officer issued a show-

cause notice to the assessee seeking response, as to why, the

amount received towards software licence fee should not be

brought to tax. The assessee filed its response explaining the

nature of transaction and further stating that the amount

received, being in the nature of business income under Article 7

of India - USA DTAA, is not taxable in India in absence of a

Permanent Establishment (PE). The Assessing Officer, however,

did not accept the claim of the assessee. He issued a second

show-cause notice to the assessee seeking explanation, as to why

the receipts should not be treated as income from other sources

in terms of section 56(1) of the Act and Article 23(3) of India –

USA DTAA and brought to tax in India. Though, the assessee

objected to the proposed addition, however, rejecting the

objections of the assessee, the Assessing Officer proceeded to

frame the draft assessment order by holding that the

reimbursement of software licence fee is to be treated as income

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from other sources under section 56(1) of the Act and Article 23(3)

of the tax treaty.

filing objections before learned DRP, however, the view of the

Assessing Officer was endorsed by learned DRP.

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

ITA No.404/Del/2023 AY: 2020-21

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)

264 CTR 329.

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.

He submitted, though, the receipts are purely in the nature of

business income, however, the departmental authorities have

wrongly treated it as income from other sources under section 56

of the Act read with Article 23(3) of the tax treaty. He submitted,

in the first show-cause notice, the Assessing Officer himself

wanted to treat the receipts as royalty income. However, being

conscious of the fact that the amount cannot be treated as royalty

income in view of the decision of Hon’ble Supreme Court in case

of Engineering Analysis Centre of Excellence Pvt. Ltd., he

proceeded to invoke section 56 of the Act read with Article 23(3) of

DTAA only for the purpose of bringing to tax an otherwise non-

taxable receipt.

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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.

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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.

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

ITA No.404/Del/2023 AY: 2020-21

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)

the observations of departmental authorities.

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

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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.

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

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the decision of Hon’ble Bombay High Court in case of DIT Vs.

Infrasoft Ltd. (supra).

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:

i. With respect to the activity of software licenses, the assessee

is involved with solely its affiliates/GE group entitles.

ii. The assessee takes no risk nor entrepreneurial activity in

sub-licensing these software applications from third parties

and further sub-licensing them to its affiliates, included

Wipro GE.

iii. For all software sub-licensed by the assessee to the Wipro-

GE (Indian AE), the AE makes use of the software to earn

service income which constitutes 21% of its overall revenue

from operations. During the subject year, 97% of this

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software income was earned by the AE through sale of

software services to the assessee.

iv. Thus, through the software sub-licensed by the assessee to

the AE on a per-user per-month basis, sales are made back

to the assessee.

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

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The details of software licenses sublicensed by the assessee to its

affiliates and their functionality are described as under:

S.No. Software Licenses Brief description Apttus Configure Price Quote is a sales tool that can help quote for complex and configurable products with 1. Apttus CPQ ease and consistency. Contract Management solution ends the era of manual and disjointed contract processes, helping legal teams drive contract compliance while reducing cycle times, 2. Apttus CLM avoiding bottlenecks, improving negotiation outcomes & eliminating errors & risk X-Author lets you use Microsoft Excel natively as a user interface (UI) for tasks that need Excel rather than a 3. X-Arthur Designer browser UI. With the Promotions Management application, the Apptus user can manage, execute, and analyze promotions Promotio using the CPQ product line. With the Promotions n 4. Management application, marketing managers can Manage create new promotions, get internal approvals for such ment promotions, and roll these promotions to their sales channels. Empower customer-facing teams with intelligent SFDC Einstein analytics and predictions in Salesforce workflows. 5. 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.

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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.

Further, from the details available on record, it is observed that

sublicensing of software is not an one off activity but an activity

carried on with regularity, continuity and frequency. Therefore, in

our view, it cannot be treated as a passive activity.

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

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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.

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

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treaty, but their taxability is subject to fulfillment of conditions

mentioned therein.

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.

Alternatively, it could have been taxed as business income under

Article 7 of the tax treaty. However, in absence of a PE, it cannot

be taxed in India. Thus, in our view, the income in dispute, since

can be classified under other Articles of the tax treaty, they

cannot be brought under the residuary provision contained under

Article 23 of the tax treaty. In this context, we are supported by

the decisions cited before us by learned counsel for the assessee.

Therefore, we conclude that the income cannot be treated as other

income under Article 23(3) of the tax treaty. The only provision

under which it could have been taxed is as business income

under Article 7. However, in absence of a PE in India, it cannot

be taxed under that provision as well. Therefore, we direct the

Assessing Officer to delete the addition.

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dismissed.

Order pronounced in the open court on 14th August, 2023

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT VICE PRESIDENT Dated: 14th August, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi

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