The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that receipts earned by a US-based software company from supplying software subscriptions to Indian customers cannot be taxed in India as either Fees for Technical Services (FTS) or Royalty, as the arrangement merely grants customers limited access to use the software without transferring any copyright or technical know-how. 

However, the bench of Vikas Awasthy (Judicial Member) and Renu Jauhari (Accountant Member) simultaneously ruled that separately charged, customer-specific professional services constitute taxable FTS under the Income Tax Act and the India-US Double Taxation Avoidance Agreement (DTAA). 

The assessee, a US tax resident engaged in providing enterprise data software solutions, earned revenue from software subscriptions, related support services, professional services and training material supplied to Indian customers.

For Assessment Year 2022-23, the company declared receipts of approximately ₹59.68 crore from software products while offering only receipts from training material to tax as FTS. Relying on the Supreme Court’s landmark judgment in Engineering Analysis Centre of Excellence Pvt. Ltd., it claimed that subscription receipts were not taxable in India because customers merely obtained the right to use software and no copyright or technology was transferred. 

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The Assessing Officer disagreed and treated the receipts as consideration for technical and consultancy services taxable as FTS under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-US DTAA. The Dispute Resolution Panel (DRP) affirmed this view, holding that the software package comprised an integrated offering of software access, technical support, consulting and training, making it distinct from ordinary off-the-shelf software considered by the Supreme Court in Engineering Analysis. 

The DRP reasoned that the company’s enterprise software platform was not a simple “shrink-wrap” software product but a sophisticated subscription package involving support services, consulting and technical assistance. It observed that customers obtained access to an integrated platform consisting of multiple enterprise tools and ongoing support rather than merely receiving a software copy.

According to the DRP, these features distinguished the arrangement from the facts before the Supreme Court in Engineering Analysis. The panel also referred to the Enterprise Subscription Master Agreement (ESMA), noting that subscriptions included software access together with support services during the subscription period. 

The Tribunal closely analysed the Enterprise Subscription Master Agreement governing the software subscriptions.

It noted that customers were granted only a non-exclusive, non-transferable and limited right to access and use the software for their own internal business purposes. The agreement prohibited customers from modifying, sublicensing, transferring, reverse engineering or commercially exploiting the software. Ownership of all intellectual property rights remained with the software provider throughout the subscription period. 

After examining these contractual restrictions, the Tribunal concluded that there was no transfer of technology, copyright or intellectual property to Indian customers.

Relying upon the Supreme Court’s decision in Engineering Analysis Centre of Excellence Pvt. Ltd., as well as subsequent Delhi High Court rulings involving cloud computing and software subscription models, the Tribunal held that customers merely obtained limited access to use the software and not any copyright rights.

Accordingly, receipts of ₹56.62 crore from software subscriptions were held not taxable in India either as Royalty or as Fees for Technical Services. 

The Tribunal, however, reached a different conclusion regarding separately billed professional services amounting to ₹3.05 crore.

The company argued that these services mainly assisted customers in migrating to newer software versions and in effectively utilising the subscribed software.

The Tribunal examined the customer-wise breakup of receipts and found that while several customers purchased only software subscriptions, others paid substantial additional amounts specifically towards professional services. In some instances, professional service charges constituted nearly 40% of the subscription fee, indicating extensive customer-specific technical assistance rather than routine software support. 

The Bench observed that these services were customised to individual customer requirements and involved specialised technical consultation.

Consequently, unlike software subscription receipts, these professional services satisfied the character of Fees for Technical Services (FTS/FIS) and were therefore taxable in India under both the Income Tax Act and the India-US DTAA at 10%. 

The assessee had also contended that Equalisation Levy had already been paid on the disputed receipts and sought exemption under Section 10(50) of the Income Tax Act.

Since the Tribunal ultimately held only the professional service receipts taxable while excluding software subscription income from taxation, it directed the tax authorities to refund the proportionate Equalisation Levy attributable to the professional services that had now been subjected to income tax. Consequential relief regarding surcharge, cess and interest was also directed to be granted in accordance with law. 

The Tribunal noted that the disputes for Assessment Years 2020-21 and 2021-22 involved identical issues, except that those years did not include separate professional service receipts.

Accordingly, it applied the same legal reasoning to both years, holding that software subscription receipts were not taxable as Royalty or FTS while partly allowing all three appeals filed by the assessee.

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