Software Licence Payments Not Royalty: ITAT Grants Partial Relief to US Company

A US-based technology company challenged several assessment orders before the Income Tax Appellate Tribunal for assessment years 2006-07 to 2012-13. The dispute arose from payments received from its Indian subsidiary for software licences and related support services. The tax department treated these receipts as “royalty” under the Income-tax Act, 1961 and the India–United States Double Taxation Avoidance Agreement, making them taxable in India.

The department also argued that the foreign company had a Permanent Establishment (PE) in India through the activities of its subsidiary. According to the Revenue, the subsidiary effectively acted as a dependent agent and provided a fixed place through which the foreign entity conducted business in India.

Issue Raised: Whether payments received for software licences and related services should be taxed as royalty in India, and whether the activities of the Indian subsidiary created a permanent establishment for the foreign company under the India–US tax treaty.

Tribunal’s Ruling: The Income Tax Appellate Tribunal partly allowed the appeals. Relying on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, the Tribunal held that payments for software licences did not amount to royalty since there was no transfer of copyright.

On the question of permanent establishment, the Tribunal observed that the Indian subsidiary functioned largely as an independent distributor. However, some factual aspects regarding a possible fixed place PE required further examination. Those issues were therefore sent back to the Assessing Officer for fresh verification, resulting in partial relief to the assessee.

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