Delhi ITAT ruling wherein it was held that fees received for providing services in relation to software license is not in the nature of Fee for Technical Services (‘FTS’) and any payments for such software related services are also not taxable.

Brief Background

• Assessee had earned revenue from Indian Customers primarily for (i) rendition of software license and (ii) provision of software related services including implementation services, enhancement services, annual maintenance services and consultancy services as per the request of the Customers. It had also received reimbursement of expenses made for provision of such services;
• Revenue held that since the user has no right to make copies or commercially exploit the right in the copyright of such software, following SC ruling in Engineering Analysis, the receipts from providing software license was not taxable in India as royalty and in absence of PE in India, not taxable as business income. However, it held that provision of other related services was taxable under Article 13 of India-UK DTAA as FTS holding it to be intricately and inextricably associated with utilisation of software;

Key Excerpts

• ITAT observed that the services were in respect of training programmes and updations in connection with utilization of the software. ITAT stated that “simply latching on to use of words “Make Available” in the DTAA, it cannot be said that conditions of Article 13(4)(c) are satisfied.”;
• ITAT also observed that “when software itself is not taxable, the training and the related activities concerned with utilization and installation cannot be held to be FTS.” Accordingly holds that the fees received for provision of other related services is not taxable;
• With regard to receipt for reimbursement of expenses, ITAT noted that DRP had remanded the matter to examine travelling and lodging expenses reimbursed, however Revenue wrongly taxed the same under FTS. Thus opined that Revenue’s action cannot be supported and addition must be deleted.