Delhi tribunal ruling wherein it was held that reimbursement of software license fee received by a US-based company from its Indian counterpart (AEs) for sub-licensing of software will be business income and not taxable as ‘Other Income’.

Key excerpts from the ruling

• The taxpayer, a US-based company had received INR 10.66 Cr as reimbursement of software licence fee from its Indian counterpart for sub-licensing of such software that it had procured from third party which was not offered to tax in India;
• Revenue held that the said receipts are taxable as income from other sources under Section 56(1) and Article 23 of India-US DTAA;
• ITAT notes that the taxpayer purchased software licences from third party software licensors and sub-licensed them to its Indian counterpart and cross charged the licence fee to the AEs on cost-to-cost basis;
• ITAT took note of the analysis in Supreme court ruling in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT and held that the taxpayer is providing/selling copyrighted articles to its Indian AEs and not any right to use copyright. Therefore, the receipts cannot be charged to tax as royalty income. Revenue, having realized that the receipts cannot be taxed as royalty, re-characterized the receipts as other income falling under Section 56(1) and Article 23(3) of the India-US DTAA;
• In this context, the tribunal observed that the sub-licensed software was being used by the AEs in their day-to-day business activity and thus it cannot be held that such receipts is not in course of taxpayer’s business activity and therefore it is to be characterized as business income;
• In this regard, it noted that an income falls under the residuary head of ‘income from other sources’, when it cannot be categorised as income from salary, house property, business and profession and capital gain. Similarly, Article 23(3) of the India-US DTAA provides for taxation of residuary items of income which are not dealt with in the other Articles. Since the income in dispute, in the current fact pattern can be classified under business income, they cannot be brought under the residuary provision contained under Article 23 of the tax treaty and allows taxpayer’s appeal;
• ITAT held that the said receipts are business receipts and in the absence of permanent establishment in India, such receipts are not taxable in India. Further, it will not be taxable as income from other sources under Section 56(1) and Article 23 of India-US DTAA.