This document reviews the tribunal decision for ITA No. 315/DEL/2021 involving Micro Focus Limited, UK, against the final assessment order regarding the income generated from the sale of software products to Indian customers for the assessment year 2017-18.
Micro Focus Limited contested the assessment which taxed the income from software sales as ‘Royalty’ under both the Income-tax Act, 1961, and the India-UK Double Taxation Avoidance Agreement (DTAA).
The key dispute revolved around whether the payments received by Micro Focus Limited for software products sold to Indian customers constitute ‘Royalty’ or ‘Business Profits’. The company argued that, in the absence of a Permanent Establishment (PE) in India, such receipts should not be taxable in India. Additionally, the case touched on whether the cost reimbursement from Indian entities was taxable as ‘Fees for Technical Services’ (FTS).
The Delhi High Court’s ruling in favor of the assessee in a similar case for A.Y.2014-15, which followed the Supreme Court’s decision in the case of Engineering Analysis Centre of Excellence Private Limited, was pivotal. These precedents led to the tribunal’s decision to direct the AO to delete the impugned addition, thereby allowing the appeal in favor of Micro Focus Limited.
The decision reiterates the importance of the judiciary’s role in clarifying tax obligations related to cross-border software sales and the definition of ‘Royalty’ under international tax agreements, significantly impacting how software sales are treated under the India-UK DTAA.
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