Software maintenance fees, consulting and training fees cannot be held as Fees for Technical Services: ITAT

The appellant is a non-resident company incorporated in Netherlands. The company is engaged in sale of Software licences and provision of Software maintenance, Consulting and Training services in India. The return of income for the assessment year 2011-12 was not filed by assessee-company. Thereafter, on receipt of information that the appellant had received income of Rs.33,96,623/- on which TDS had been deducted, the Assessing Officer formed an opinion that income had escaped assessment to tax, then issued notice u/s 148 on 29.03.2018 after recording reasons u/s 147.

In response to notice u/s 148, the appellant had filed return of income on 26.04.2018. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax (International Taxation), Circle-2, Pune (‘the Assessing Officer’). During the previous year relevant to the assessment year under consideration, it is stated that the appellant company had received a sum of Rs.98,72,321/- towards Software licenses, Software maintenance and Customer support, Consultancy services and Training services in India.

During the year relevant to the assessment year under consideration, above sum of Rs.98,72,321/- received by the appellant company was brought to tax by AO.

The appellant contended that such payment cannot be characterized as Royalty as the payment is made for the purchase of standard software, not for use of ‘copyright itself’. The appellant placed reliance on the OECD commentary as well as the decisions of the Hon’ble Delhi High Court in the case of DIT Vs. Infrasoft Ltd. (2013) 39 taxmann.com 88 (Del), the decision of Pune Tribunal in the case of Allianz SE Vs. ADIT (TS-204-ITAT-2012 (Pun) and the decision of Mumbai Tribunal in the case of DDIT Vs. Solid Works Corporation (ITA No.3219/Mum/2010.

These contentions were rejected by the Income Tax Department.

ITAT Order

Consideration for grant of the software license

In the light of the judgment of the Hon’ble Supreme Court in matter of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (2021) 432 ITR 472 (SC), ITAT held that fee for grant of software license cannot be taxed in India. Since we have held that the subject transaction of receipt of consideration for grant of software license is held not to be Royalty under the provisions of Income Tax Act, 1961, the question of consideration of the issue under the provisions as per DTAA between India and Netherland does not arise.

Consideration for Software maintenance fees, consulting, and training fees

The software maintenance fees, consulting charges, and training fees which are incidental to the software license fee, assume the same character as that of the software license fee. ITAT has already held that consideration received towards software license fee cannot be termed as “Royalty”. Hence, what follows from this, is that even the software maintenance, consulting charges, and training fees which are incidental to software maintenance fees cannot come within the purview of the Fees for Technical Services (FTS).