ITAT Mumbai Rules on Management Fees and Software Distribution Income under India–Singapore DTAA

Background of the Dispute

The case concerns Tech Data (Singapore) Private Limited Vs DCIT (ITAT Mumbai) involving Assessment Year 2019-20. The impugned assessment order was framed under Section 143(3) read with Section 144C(13) of the Income Tax Act 1961.

The assessee, a Singapore tax resident, operates in two principal spheres in relation to India:

  • Provision of management and support services to its Indian group entity; and
  • Distribution of software and information technology products to its Indian associated enterprise and other Indian customers.

During scrutiny, the Assessing Officer (AO) examined whether the sums received from India ought to be characterised as royalty and/or Fees for Technical Services (FTS) under the Act and the India-Singapore DTAA. The assessee carried the matter in appeal before the Tribunal against the assessment order dated 19 July 2022, raising five broad issues:

  1. Alleged invalidity of scrutiny notice under Section 143(2)
  2. Tax treatment of income from sale/distribution of off-the-shelf software
  3. Taxability of management fee as FTS under the Act read with Article 12 of the India-Singapore DTAA
  4. Charging of interest under Sections 234A and 234B
  5. Validity of initiation of penalty proceedings under Section 274 read with Section 270A

The Mumbai Bench of the ITAT analysed each ground and partly granted relief to the assessee.

Ground 1 – Challenge to Notice under Section 143(2)

The assessee had questioned the competence and validity of the scrutiny notice issued under Section 143(2). However, at the hearing, no arguments were advanced on this issue.

Tribunal’s view: Since the assessee did not press this ground, the Tribunal treated it as abandoned and dismissed Ground No. 1 as not pressed.

Ground 2 – Characterisation of Off-the-Shelf Software Receipts

Business Model and Original Tax Position

The assessee explained that its software distribution model worked as follows:

  • It procures standard, off-the-shelf software in bulk outside India (in Singapore).
  • The software is purchased from the foreign developer, F5 Networks Inc (F5).
  • The assessee acts as a non-exclusive distributor in the specified territory.
  • The software is sold onwards to an Indian group entity (distributor in India).
  • The Indian distributor then sells the products to authorised resellers and, ultimately, Indian end-users.

At the time of filing the original return, the assessee on its own declared income from such software sales as “royalty”, and the AO accepted that position while completing the assessment.

Subsequently, after the landmark judgment in Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT, 432 ITR 471 / 125 taxmann.com 42, the assessee took the stand that its software distribution income does not constitute “royalty” but is instead business income.

Agreements Relied Upon

To support this revised stand, the assessee produced, inter alia:

  1. Distribution Agreement dated 01/10/2010 between F5 and the assessee (earlier known as Avenet Technology Solutions (Singapore) Pte. Ltd.)
  2. Participation Agreement, which periodically extends and modifies the base arrangement

Key features noted from the Distribution Agreement included:

  • The assessee is appointed non-exclusive distributor for promoting, selling and delivering authorised F5 products and services.
  • As per Clause 9, the assessee enjoys only a non-exclusive, non-transferable right to use F5 trademarks and marketing slogans within the authorised territory.
  • There is no transfer of copyright in the underlying software either to the assessee or to downstream buyers.

Fresh Claim before AO and DRP’s Refusal

In the course of assessment proceedings (not in a revised return), the assessee raised a fresh legal claim that such receipts were, in fact, business income, relying on Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT.