Whether income from the sale of software licenses should be classified as business income or royalty income?
The key issue before ITAT Delhi in the case of Tricentis GmbH (ITA Nos 2705 & 3526/Del/2023) was whether income from the sale of software licenses should be classified as business income or royalty income.
Assessee claimed that its income from software licenses sold to Indian customers should be exempt from taxation under the India-Austria Double Taxation Avoidance Agreement (DTAA).
The Assessing Officer argued that the company lacked economic substance and was primarily incorporated in Austria to avoid taxes, thus denying treaty benefits.
The Assessing Officer also concluded that the majority of the IP was registered outside Austria, primarily in the USA, and thus the income should be taxed there.
Tribunal’s Findings:
The tribunal ruled in favour of Tricentis, stating that:
1. The company is entitled to benefits under the India-Austria DTAA.
2. The income from software licenses cannot be taxed in India without a Permanent Establishment (PE) in the country.
3. The tribunal emphasized the importance of the Tax Residency Certificate (TRC) issued by Austrian authorities, which should not be disregarded without strong evidence of fraud or illegality.
4. Allegations against Tricentis lacked substantial evidence and upheld the company’s claim of being a legitimate tax resident of Austria.
This decision demonstrates the AOs thought process in assessing such transactions and finding other arguments/ avenues to bring the sale of software under the tax net. In this decision the AO also referred to BEPS Action Plan to tax this receipt, which was denied by the Tribunal stating that the same cannot have a role in judicial decision-making.
Additionally, there was one more technical ground challenging the notice issued by Faceless centre instead of JAO (Assessee being a Foreign Company). This ground was dismissed basis the Karnataka High Court decision in case of Adarsh Developers v DCIT.
The copy of the order is as under:
