ITAT held that sale of off-the-shelf software by Milestone Systems A/S to Indian distributors did not create a Dependent Agent PE under the India–Denmark DTAA, making the income non-taxable in India.
Meetu Kumari | Mar 9, 2026 |
ITAT Says Software Licence Sales Not Taxable In Absence Of Permanent Establishment
Milestone Systems A/S, a Denmark-based company engaged in IP video management software and surveillance solutions, earned ₹19.83 crore during AY 2022–23 from sale of licensed software to Indian distributors. In its return, the assessee declared income of ₹18.94 crore but did not offer the software licence revenue to tax in India, claiming it as business income under the India–Denmark DTAA and asserting that it had no Permanent Establishment (PE) in India.
The Assessing Officer alleged that the software was customized and that the assessee exercised control over distributors, concluding that a Dependent Agent Permanent Establishment (DAPE) existed in India and attributing 50% of the profits to such PE. The Dispute Resolution Panel upheld the existence of DAPE but reduced profit attribution to 25%. Aggrieved, the assessee appealed before the Income Tax Appellate Tribunal.
Main Issue: Whether sale of licensed software by a Denmark-based company to Indian distributors created a Dependent Agent Permanent Establishment in India under Article 5(4) of the India–Denmark DTAA.
Tribunal’s Ruling: The Income Tax Appellate Tribunal allowed the appeal and held that the assessee had no DAPE in India. The Tribunal observed that under Article 5(4) of the India–Denmark Double Taxation Avoidance Agreement, a DAPE arises only where a person in India habitually concludes contracts, maintains stock for delivery, or secures orders on behalf of the foreign enterprise—none of which was established by the Revenue.
The Tribunal noted that the Distributor Partner Agreement operated on a non-exclusive, principal-to-principal basis, with distributors purchasing products in their own name and bearing their own risks. Restrictions such as adherence to maximum retail price or technical certification of resellers were held to be regulatory or quality-control measures and did not amount to control over distributors. It also rejected the claim that the software was customized, holding that scalability or adaptability of software does not make it tailor-made.
Therefore the Tribunal concluded that the assessee had no PE or DAPE in India and therefore no profits from software licence sales could be taxed in India.
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