Delhi High Court ruling which set aside the order denying Nil deduction on a sum received for software related services based on Engineering Analysis tax ruling & India-US DTAA.

Excerpts from the case law

• The taxpayer had received payments for software-based information security solutions provided to its partners under the Reseller Agreements. For this purpose, they had applied for lower tax dispensation certificates at the rate of 0%. Tax Officer had rejected the application;
• Delhi HC takes note that payment received for software based solutions by the non-resident entity cannot be treated as Royalty, both as per Indo-US DTAA and Supreme Court (‘SC’) ruling in Engineering Analysis as there is no transfer of copyright owned by the such entity in favour of its Indian Partners under Reseller Agreements;
• HC also observes that for AYs 2019-20 and 2020-21, the taxpayer offered to pay withholding tax at the rate of 10%. HC also notes that for AY 2021-22, the taxpayer deposited Equalisation Levy at 2%. In this regard, the taxpayer submits that then the payments were treated as Fee for Technical Services but later a fresh reasoning was accorded by Supreme Court (‘SC’) in Engineering Analysis;
• HC notes the Revenue’s submission that the scope of the proceedings under Section 197 is different from assessment proceedings and remarks that in the impugned order there was no discussion with regard to the provisions of Article 12 of the India-US DTAA and the SC ruling;
• HC directs the Revenue “to re-examine the application filed on behalf of the petitioner under Section 197 of the Act, both, in the backdrop of Article 12 of the Indo-US DTAA and the judgment of the Supreme Court rendered in Engineering Analysis Centre of Excellence (P.) Ltd.”.

Relevance of the ruling

• In case transactions undertaken by Group entities are in relation to software related payments – it is advisable to validate the position based on the Engineering Analysis ruling to mitigate tax withholding based on specific facts which could avoid unnecessary working capital blockage/ sunk costs in the event tax credit is not available in the home country jurisdiction;
• In case transactions are with unrelated third parties where taxes are grossed up, evaluating no TDS position could be relevant to optimize additional tax costs;
• Approaching tax authorities for TDS dispensation certificates on such debatable transactions can be explored.