ITAT rules on software-related services treated as FTS

ITAT rules on software-related services treated as FTS

It was not convinced with the findings and the response of the revenue department

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that treating software-related services as Fees for Technical Services (FTS) in the absence of cogent material, is not sustainable.

The Coram of Anubhav Sharma (Judicial Member) and Pradip Kumar Kedia (Accountant Member) held that the findings of the tax authorities below holding receipts towards the provisions of software-related services as FTS were not sustainable. Thus, it allowed the appeals filed by the assessee.

MSTR Singapore is a wholly-owned subsidiary and was responsible for the distribution and maintenance of software to customers in the Asian markets and sold its products in India through third-party partners/distributors.

The assessee Microstrategy claimed that it was eligible to claim the benefit under the India-Singapore Tax Treaty as MSTR Singapore was incorporated in and was a tax resident of Singapore.

The company did not offer the receipts of Rs.2,23,78,025 for tax in India with the belief that the income/fee did not constitute Royalty/FTS under the Double Taxation Avoidance Agreements (DTAA) between India and Singapore.

However, the Assessing Officer (AO) held that the consideration for software supplied by the assessee and consideration instead of providing information technology-related support services was royalty income taxable in India. The Commissioner of Income Tax (Appeals) also confirmed it.

The revenue department pointed out that there was an addition on account of receipt in lieu of providing information technology-related support services. That was because FTS and as such the sale of software products being taxable as royalty, the tax authorities did not consider it for addition.

It further held that the assessee had sold software products to the customers in India and also provided software-related maintenance services. If it did not come within the ambit of royalty, going into the provisions of the Act was not required.

Relying on the judicial precedents, the AO assumed that the assessee had sold the copyright. The AO failed to find out the sample agreement or any other material available on record, which demonstrated that the assessee had transferred/sold the use or right to use the copyright and not the copyrighted article.

The AO further said that it seemed the assessee had sold a copyrighted article and not the copyright. He held that the amount received by the assessee from the sale of software and provision of software-related services could not be treated as royalty under the India-Singapore DTAA.