The Income Tax Appellate Tribunal’s decision in ITA No. 2006/Del/2022 for the assessment year 2019-20 provides significant insights into the complexities of taxing software licensing fees and related services under international tax agreements and local laws. TSYS Card Tech Ltd, a UK-based company, appealed against the Indian tax authorities’ decision regarding the taxability of its earnings from software licenses and related services provided to Indian customers.
The primary issue at dispute was whether the software licensing fees received by TSYS Card Tech Ltd from Indian entities are taxable as Fees for Technical Services (FTS) under the India-UK Double Taxation Avoidance Agreement (DTAA) and the Indian Income Tax Act. The tribunal also examined the taxability of additional receipts from related services, which the authorities considered as FTS.
The tribunal considered various submissions, agreements, and legal precedents to determine the nature of the payments. It was established that the software licenses in question did not confer any permanent establishment in India for the appellant. Accordingly, these were not taxable in India under the provisions of the DTAA as business income. However, the challenge remained with the characterization of other related services.
The tribunal disagreed with the revenue’s position that all related services were automatically FTS. It emphasized that the services in connection with the use of the software, like training and updates, did not constitute FTS as they were inherently connected to the non-taxable software itself. Thus, these were not taxable under the specific provisions of the DTAA that apply to FTS.
This decision is pivotal for foreign companies operating in India through cross-border software licensing and related services. It clarifies the scope of tax obligations under the DTAA and emphasizes the need for clear distinctions between different types of payments in the context of international taxation.
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