Taxation of Software License Fees and Technical Services: Insights from Perfetti Van Melle ICT & BV vs ACIT International Taxation

Taxation of Software License Fees and Technical Services: Insights from Perfetti Van Melle ICT & BV vs ACIT International Taxation

Introduction

The case of Perfetti Van Melle ICT & BV, Gurgaon v. ACIT International Taxation, Gurgaon is a landmark judgment delivered by the Income Tax Appellate Tribunal (ITAT) Delhi Bench on February 28, 2022. This case addresses significant issues concerning the classification and taxation of software license fees and Information & Communication Technology (ICT) service charges under the Indian Income Tax Act, 1961, and the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands.

Summary of the Judgment

Perfetti Van Melle ICT & BV, a Netherlands-incorporated company, filed an appeal against the Assessing Officer's (AO) order, which had reassessed the company's income for the financial year 2017-18 based on alleged royalty and technical service fee receipts. The AO had added INR 5,54,28,352/- as taxable income, citing the reimbursements received for SAP and Microsoft license fees as royalties under section 9(1)(vi) of the Income Tax Act and Article 13 of the India-Netherlands DTAA. Additionally, INR 3,70,35,976/- received as ICT service charges was taxed as "Fees for Technical Services" under Article 12 of the same DTAA.

The ITAT, after thorough examination, upheld the appellant's contention that the reimbursements did not qualify as royalties or fees for technical services. The Tribunal emphasized the absence of ownership rights in the software licenses and the non-applicability of the "make available" clause under the DTAA, thereby allowing the appellant's appeal.

Analysis

Precedents Cited

The Tribunal extensively referenced several precedential judgments that influenced its decision:

  • CIT v. Synopsis International Old Ltd. [2012] - Addressed the nature of software royalties.
  • CIT (IT) v. Wipro Ltd. [2013] - Further elaborated on software license fees as royalties.
  • CIT v. CGI Information Systems & Management Consultants (P.) Ltd. [2014] - Discussed the applicability of Explanations to Section 9(1)(vi).
  • Engineering Analysis Centre of Excellence Pvt. Ltd. (CA No. 8733-8734 of 2018) - Supreme Court decision that overruled earlier ITAT judgments concerning software royalties.
  • SCA Hygiene Products AB vs. DCIT (ITA No. 7315/Mum/2018) - ITAT Mumbai Committee judgment supporting the appellant's stance.
  • Steria India Ltd vs. CIT (2016) - The Supreme Court reiterated that treaty benefits do not require additional notifications.

Legal Reasoning

The core of the Tribunal's legal reasoning revolved around the definitions of "royalty" and "fees for technical services" under both the Indian Income Tax Act and the India-Netherlands DTAA.

  • Definition of Royalties: Under Article 13 of the DTAA, royalties include payments for the use of, or the right to use, copyrights, patents, trade marks, and processes. However, the Tribunal emphasized that royalties are contingent upon the transfer or usage rights of the underlying intellectual property.
  • Make Available Clause: A pivotal aspect was the "make available" clause in the DTAA, which requires that technical services must enable the recipient to utilize the technology independently in the future for the payments to qualify as "fees for technical services."
  • Ownership and Licensing: The Tribunal noted that Perfetti Van Melle ICT & BV did not own the SAP and Microsoft software but acted merely as a facilitator for procurement without granting any ownership or usage rights that would necessitate classification as royalties.
  • Enduring Benefit: The concept of "enduring benefit" proposed by the DRP was dismissed, as the Tribunal maintained that merely enhancing efficiency or providing incidental training does not satisfy the "make available" requirement.
  • Precedential Overruling: The Tribunal placed significant weight on the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which overruled earlier ITAT positions, aligning with the appellant's arguments.

Impact

This judgment has profound implications for multinational corporations operating in India, especially those engaging in cross-border software licensing and technical service agreements. Key impacts include:

  • Clarification on Royalties: Payments for software licenses without transfer of ownership or usage rights will not be taxed as royalties, provided they do not grant the recipient perpetual usage capabilities.
  • Redefinition of Technical Services: Technical service fees will only be taxable if they fulfill the "make available" clause, ensuring that recipients can independently utilize the transferred technology.
  • DTAA Interpretation: Reinforces the necessity for clear delineation of services and rights in DTAA applications, preventing blanket taxation of cross-border transactions.
  • Precedential Guidance: Future cases will reference this judgment to assess the nature of cross-border software and technical service payments, promoting consistency and predictability in tax assessments.

Complex Concepts Simplified

Royalty

Royalty: A payment made for the use of, or the right to use, intellectual property such as copyrights, patents, trademarks, or processes. It typically involves the transfer of usage rights from the owner to the recipient.

Fees for Technical Services (FTS)

Fees for Technical Services: Payments made in exchange for managerial, technical, or consultancy services that enable the recipient to utilize specific technologies or processes independently in the future.

Make Available Clause

Make Available Clause: A provision in a DTAA that stipulates technical service fees qualify as FTS only if the services rendered enable the recipient to use the technology or process without ongoing dependency on the service provider.

Cross Charges

Cross Charges: Fees charged by one entity to another within the same corporate group for services rendered or goods provided, typically at cost without additional markup.

Conclusion

The ITAT's ruling in Perfetti Van Melle ICT & BV vs ACIT International Taxation establishes a critical precedent in the classification and taxation of cross-border software licensing and technical service fees under Indian tax law and international DTAA agreements. By emphasizing the necessity of ownership rights and the fulfillment of the "make available" clause, the Tribunal provides clear guidelines that will aid both taxpayers and tax authorities in future assessments. This decision underscores the importance of detailed contractual agreements and the need for precise definitions in international tax treaties to ensure fair and predictable taxation outcomes.

Case Details

Year: 2022
Court: Income Tax Appellate Tribunal

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