ITAT Bangalore Reaffirms Non-Taxability Of Software Sale Consideration As Royalty Or FTS

Background And Core Issue

The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) has once again held that amounts received by a foreign software company from sale of software products and related support services to Indian customers are not taxable in India as royalty or fees for technical services (FTS).

In ACIT Vs Informatica LLC, the Tribunal rejected the Revenue’s contention that the Supreme Court’s landmark judgment in Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT (432 ITR 471) lacked finality due to a pending review petition. The ITAT noted that:

  • The Supreme Court had already reversed earlier contrary Karnataka High Court decisions such as CIT vs. Samsung Electronics Co. Ltd. and CIT vs. Synopsis International Old Ltd.
  • Review petitions against Engineering Analysis Centre for Excellence Pvt. Ltd. vs. CIT (432 ITR 471) have been dismissed, thereby confirming the legal position.

Accordingly, the consideration received by Informatica LLC, a US-based entity, for sale of software and ancillary support services to Indian parties was held to be non-taxable in India, either as royalty or FTS, under both the Income Tax Act 1961 and the India–USA Double Taxation Avoidance Agreement (DTAA).

Facts Of The Case

Nature of Business and Transactions

  • The assessee, Informatica LLC, is a company incorporated in the USA.

  • It is engaged in developing, manufacturing and distributing software products globally.

  • For the Indian market, the assessee entered into agreements with:

    • Distributors,
    • Resellers, and
    • End customers in India

    for:

    • Supply of software products, and
    • Provision of ancillary support services.

Return of Income and Scrutiny

  1. For Assessment Year (A.Y.) 2017-18, the assessee filed its return of income in India declaring Nil income and claimed a refund.
  2. The case was selected for scrutiny, and a notice under Section 143(2) of the Income Tax Act 1961 was issued.
  3. During the assessment proceedings, the Assessing Officer (AO):
    • Called for a detailed breakup of receipts from India during the year,
    • Sought clarification on whether such receipts were recognized as income and, if not, the reasons for not offering them to tax in India.

Stand of the Assessee Before AO

The assessee submitted that:

  • The receipts from India comprised:
    • Consideration from sale of software products, and
    • Consideration from sale of support services.
  • These receipts were not taxable in India under:
    • Section 5 read with Section 9 of the Income Tax Act 1961, and
    • Section 90 read with the India–USA DTAA.
  • The assessee asserted that:
    • The transactions represented sale of copyrighted articles (software licences for use), not transfer of copyright itself.
    • Hence, the receipts could not be categorized as “royalty”.
    • Ancillary support services did not fall within the definition of FTS under the India–USA DTAA.

Assessment Order

The AO did not accept the assessee’s contentions.