Software Distribution Receipts & Management Service Fees Not Taxable Under India-Singapore DTAA: ITAT Mumbai
Case Overview
Tech Data (Singapore) Private Limited Vs DCIT (ITAT Mumbai)
Assessment Year: 2020-21
Order Pronounced: 23.04.2024
The Income Tax Appellate Tribunal, Mumbai ("ITAT" or "Tribunal"), in the matter of Tech Data (Singapore) Private Limited Vs DCIT, adjudicated a multi-ground appeal filed by the assessee against the order of the CIT (DRP-2)-2, Mumbai for Assessment Year 2020-21. The case raised significant questions concerning the taxability of receipts arising from distribution of off-the-shelf software and management service fees under the India-Singapore Double Taxation Avoidance Agreement (DTAA), specifically in the context of Article 12 governing royalties and fees for technical services.
The assessee, a Singapore-incorporated foreign company engaged in distribution and resale of hardware and software products, had filed its return of income on 31.12.2020 declaring a total income of Rs. 58,48,510. Upon scrutiny, the Assessing Officer (AO) brought to tax two streams of income — Rs. 58,48,511 from off-the-shelf software distribution and Rs. 34,11,68,364 from management service fees — by treating both as taxable under Article 12 of the India-Singapore DTAA. The assessee contested this position and challenged various aspects of the assessment before the Tribunal.
Grounds of Appeal at a Glance
The assessee raised five distinct grounds before the Tribunal:
- Ground 1 – Validity of notice issued under
Section 143(2)by the National e-Assessment Centre (NeAC) - Ground 2 – Taxability of receipts from sale/distribution of off-the-shelf software (Rs. 58,48,511) as royalty
- Ground 3 – Taxability of management service fees (Rs. 34,11,68,364) as fees for technical services (FTS)
- Ground 4 – Levy of interest under
Section 234AandSection 234B - Ground 5 – Initiation of penalty proceedings under
Section 274read withSection 270A
Ground 1 – Validity of Notice Under Section 143(2)
The assessee had initially challenged the authority of the National e-Assessment Centre (NeAC) to issue the notice under Section 143(2) of the Income-tax Act, 1961, contending that such issuance was without proper jurisdiction.
However, during the course of the appellate proceedings before the Tribunal, the assessee's counsel did not press this ground or advance any substantive submissions in support of it, treating the issue as having become academic. Consequently, the Tribunal dismissed Ground 1 without entering into its merits.
Ground 2 – Receipts from Distribution of Off-the-Shelf Software Not Taxable as Royalty
Background and AO's Position
During the financial year 2019-20, the assessee earned Rs. 58,48,511 from the sale of off-the-shelf software to Indian customers. The assessee claimed these receipts as non-taxable under the India-Singapore DTAA, relying on the "make available" clause under Article 12. Its position was that it purchased software licences in bulk and resold them to end-users or resellers in India, who received only a limited, non-exclusive, and non-transferable right to use the software — without any entitlement to sub-license, reproduce, or commercially exploit the software.
The Assessing Officer issued a show cause notice questioning why the receipts should not be treated as royalty under Section 9(1)(vi) of the Income-tax Act, 1961, read with Article 12 of the India-Singapore DTAA. The AO rejected the assessee's explanation, holding that since the software came with periodic upgrades and improved versions, it had a character of continuity and could not be placed on the same footing as the situation analysed by the Supreme Court. Accordingly, the draft assessment order under Section 144C(1) treated the entire receipts of Rs. 58,48,511 as royalty taxable at 10% under the treaty rate.
The Dispute Resolution Panel (DRP), in its directions issued under Section 144C(5), upheld the AO's position and rejected the assessee's objections.