ITAT Grants Relief on Software Subscriptions, Taxes Professional Services Separately:

The assessee, Cloudera Inc., a tax resident of the USA, is engaged in providing data software solutions through software subscriptions along with related services such as support, training and professional services. For Assessment Years 2020-21, 2021-22 and 2022-23, it offered receipts from sale of training material to tax but claimed that receipts from software subscriptions were not taxable in India, relying on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd.

The Assessing Officer, however, treated the software subscription receipts as Fees for Technical Services (FTS) and alternatively as royalty under the Income-tax Act and the India-US DTAA.The Dispute Resolution Panel (DRP) upheld the additions, holding that Cloudera's offerings constituted a comprehensive package of software, consulting, support and training services that made available technical knowledge to customers.

The assessee contended before the Tribunal that customers merely received a limited, non-exclusive and non-transferable right to use the software for their own business purposes. It argued that ownership of the software, intellectual property rights and source code always remained with Cloudera and customers had no right to modify, sublicense, distribute or commercially exploit the software. It further submitted that the subscription model involved only access to copyrighted software and did not amount to transfer of copyright or technical know-how.

The Delhi ITAT partly allowed the appeals. It held that the software subscription receipts could not be taxed either as royalty or as Fees for Technical Services. After examining the Enterprise Subscription Master Agreement (ESMA), the Tribunal found that customers were merely granted limited and non-transferable access to use the software for their own business purposes. There was no transfer of copyright, source code or intellectual property rights, nor was any technology made available to customers.

Following the Supreme Court's ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. and subsequent Delhi High Court decisions, the Tribunal concluded that subscription receipts represented consideration for use of a copyrighted article and were therefore not taxable in India.

However, the Tribunal reached a different conclusion regarding professional services received during AY 2022-23. It observed that these services were separately charged, varied significantly across customers and involved customer-specific technical and professional assistance rather than routine software support. Since the services were specialised and tailored to individual customer requirements, they were held to constitute Fees for Technical Services taxable under the Act and the India-USA DTAA at 10%.

The Tribunal also directed the Assessing Officer to grant proportionate refund of Equalisation Levy paid on receipts that were ultimately held taxable as FTS and to provide consequential relief regarding surcharge, cess and interest.

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