The Delhi ITAT clarified that to fall within the scope of Fess for Technical Services (FTS), it is incumbent upon the Revenue Department to establish an indelible link between the payment received by the appellant entity (multinational security software developer) and the consideration for providing technical services.
Since the Revenue Department has not shown that, based on the agreement or the invoices, read with details of the product portfolio, that software has not been sold and that technical services rendered were in the nature of FTS, the Tribunal emphasized that technology embedded/ shrink wrapped in the security software, cannot be characterised as rendering of technical service.
The Court therefore held that the appellant supplied a software product which facilitated digital security in a user’s technology infrastructure and which was delivered on the cloud, and therefore, the payment received by the overseas-based appellant from the Indian distributor for acquiring such security software simpliciter for onward selling to the end customer is not liable to be taxed as FTS.
The Division Bench comprising Anubhav Sharma (Judicial Member) and Naveen Chandra (Accountant Member) observed that the sale of software simplicitor as a product by way of SaaS on the internet cloud services does not amount to rendering of any technical service to the distributor and to the end user, if the end user receives only ancillary technical support in installation/maintenance of the software, by using the code and password.
The Bench referred to the distribution agreement between the software seller and the distributor to note that the distributor is granted only a non-exclusive, non-transferable license to resell computer software to the end user, without any right to sub-license or transfer, or any right to modify and reproduce in any manner otherwise than permitted by the license to the end user.
The Bench also pointed out that the distributor in India pays by way of consideration to the foreign, non-resident manufacturer or supplier, the price of the computer software programme as a supply of goods via the internet as SaaS on the cloud, which is then further resold by the distributor to the end-user in India, and the distributor makes a profit margin on such resale.
Briefly, in this case, the appellant, an Ireland-based entity and a leading provider of data protection Cybersecurity software (Triton), products entrusted to safeguard the IT Infrastructure of organizations, having no permanent establishment (PE) in India, had declared Nil income and claimed a refund of Rs. 9.31 crores. The appellant sells Websense software products to independent third-party distributors, but holds non-exclusive, non-transferable rights to market and distribute Websense products together with a subscription to access Websense’s proprietary databases of URL addresses.
During the relevant AY, the appellant had a receipt of Rs. 52.71 crores from Inflow Technologies Pvt Ltd and Rs. 40.43 crores from Ivalue Infosolutions (who were Indian distributors respectively), on account of the sale of software products, under a tripartite sub-distributor agreement. These receipts are claimed as business income, neither accruing nor arising in India, as there is no PE in India. The AO, however, opined that the receipts of Rs. 93.14 crores arising from the sale of the software product to the Indian Distributor, who, in turn, resold to different end users, were taxable in India as Fee for Technical Services (FTS) under Article 12(3)(b) of the India-Ireland DTAA, and additionally taxable under Section 9(1)(vii) of the Income-tax Act.
Appearances:
CA Anil Bhalla, for the Appellant/ Taxpayer
CIT Vijay B. Basanta, for the Respondent/ Revenue