ITAT: Software Licence Income Not Taxable in India Without Permanent Establishment

Tribunal allowed the appeal of the assessee, holding that income from software licences and maintenance services is not taxable in India due to the absence of a Permanent Establishment.

Background of the Case

The Present appeal has been filed by Computer Modelling Group Ltd against the Assistant Commissioner of Income Tax in the ITAT Delhi, challenging the order dated January 1, 2025, passed under section 143(3) of the Income Tax Act, 1961.

The assessee is a company based in Canada engaged in developing and selling reservoir simulation software used in the oil and gas exploration industry. The company provides software licences and software maintenance support services to customers worldwide, including companies and educational institutions in India.

The assessee claimed that the income earned from software licences and maintenance services should not be taxable in India because it is covered under the India-Canada Double Taxation Avoidance Agreement and the company does not have a Permanent Establishment (PE) in India.

However, the AO passed an order treating the receipts from the sale of software licences amounting to Rs. 30,478,620 as “royalty” under Article 12 of the tax treaty. The officer also treated the software maintenance fees of about Rs 96,234,954 as a Fee for Included Services (FIS) under Article 12(4) of the treaty.

Further, the tax department concluded that the company had a Permanent Establishment in India and therefore the entire receipts were taxable under Section 44BB of the Income Tax Act.

The assessee filed an appeal before the tribunal. During the hearing, the assessee submitted that in previous years the tribunal had held that the assessee did not have a Permanent Establishment in India and therefore its income could not be taxed in India. It was also argued that the software sold by the company was standard “off-the-shelf” software with limited usage rights and not customised software.

Tribunal’s Ruling

After examining the facts and previous decisions, the tribunal observed that similar additions were made in earlier years, such as Assessment Year 2012-13 and 2019-20 to 2021-22. In those cases, the tribunal had already held that the company did not have a Permanent Establishment (PE) in India and, therefore, its income could not be taxed under Section 44BB or under the royalty provisions.

The tribunal further stated that the existence of a Permanent Establishment lies on the tax authorities and in this case, the department failed to produce any evidence to establish that the assessee had a PE in India. Therefore, it held that the findings of the tax authorities regarding the existence of a PE were not justified.

Considering all the facts and earlier tribunal decisions in the assessee’s own case, the tribunal set aside the impugned assessment order and allowed the grounds raised by the assessee. Since the assessee succeeded on the main issues, the tribunal stated that the remaining grounds became academic and did not require further discussion.

Accordingly, the tribunal allowed the appeal of the assessee and held that the income from software licences and maintenance services was not taxable in India in the absence of a Permanent Establishment.