TMI Blog2023 (8) TMI 875X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Article is different from taxability of that income under the said Article. A particular item of income can fall either under Article 7 or Article 12. However, their taxability under these articles is subject to fulfillment of conditions enumerated therein. The residuary provisions of Article 23 will not apply to items of income, which can be classified under other provisions of the tax treaty, but their taxability is subject to fulfillment of conditions mentioned therein. To our understanding, the receipts in dispute could have been characterized either as royalty income falling under Article 12 or business income under Article 7 of the tax treaty. However, in view of the ratio laid down in judicial precedents, the income is not taxable as royalty. Alternatively, it could have been taxed as business income under Article 7 of the tax treaty. However, in absence of a PE, it cannot be taxed in India. Thus, in our view, the income in dispute, since can be classified under other Articles of the tax treaty, they cannot be brought under the residuary provision contained under Article 23 of the tax treaty. The income cannot be treated as other income under Article 23(3) of the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, the Assessing Officer issued a show-cause notice to the assessee seeking response, as to why, the amount received towards software licence fee should not be brought to tax. The assessee filed its response explaining the nature of transaction and further stating that the amount received, being in the nature of business income under Article 7 of India - USA DTAA, is not taxable in India in absence of a Permanent Establishment (PE). The Assessing Officer, however, did not accept the claim of the assessee. He issued a second show-cause notice to the assessee seeking explanation, as to why the receipts should not be treated as income from other sources in terms of section 56(1) of the Act and Article 23(3) of India USA DTAA and brought to tax in India. Though, the assessee objected to the proposed addition, however, rejecting the objections of the assessee, the Assessing Officer proceeded to frame the draft assessment order by holding that the reimbursement of software licence fee is to be treated as income from other sources under section 56(1) of the Act and Article 23(3) of the tax treaty. 6. Though, the assessee contested the aforesaid decision by filing objections before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess income, learned counsel submitted that as per definition of business in section 2(13) of the Act, it includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. He submitted, the definition of business is of wide import and would cover activities performed by the assessee in the normal course of business. He submitted, undisputedly, the assessee had procured and sublicensed standardized software licences to its affiliates in course of its normal business and not as a standalone activity. He submitted, the assessee carries on healthcare business for the GE group and such model of centralized procurement of standard software licences is, in fact, aimed at bringing the cost and usage efficiency for its healthcare business around the globe owing to the economies of scale and dynamic availability of the licences as and when required. Thus, he submitted, since, the software licences were sold as tools of business in furtherance of assessee s business activity, the receipts therefrom have to be treated as business income. 10. As regards the allegation of the departmental authorities that there is no continuity in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces by assessee to its Indian Associated Enterprises (AEs). There is no dispute between the parties that the assessee is neither manufacturer nor creator of the software licences sold to the AEs. The assessee purchases software licences from third party software licensors and sublicenses them to Indian affiliates/AEs to be used in healthcare business. Upfront, the assessee pays licence fees of the software to the third party licensors and thereafter cross charges them to the affiliates on cost to cost basis. Undoubtedly, in course of assessment proceeding, the assessee has claimed the reimbursement of software licence cost as business income in terms of Article 7 of the tax treaty and claimed that in absence of PE, it is not taxable in India. 14. It is observed, in the first show-cause notice dated 27.02.2022 issued by the Assessing Officer in course of assessment proceeding, he called upon the assessee to explain, as to why the receipts should not be treated as royalty taxable under section 9(1)(vi) of the Act and Article 12 of the tax treaty. In response to the show-cause notice, the assessee furnished its reply on 7th March, 2022, stating therein that what has been sold to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wares can be treated as other income under section 56(1) of the Act and Article 23(3) of the tax treaty. It is established on record that the assessee has not sublicensed standardized software licenses on standalone basis. The details of software licenses sublicensed by the assessee to its affiliates and their functionality are described as under: S.No. Software Licenses Brief description 1. Apttus CPQ Apttus Configure Price Quote is a sales tool that can help quote for complex and configurable products with ease and consistency. 2. Apttus CLM Contract Management solution ends the era of manual and disjointed contract processes, helping legal teams drive contract compliance while reducing cycle times, avoiding bottlenecks, improving negotiation outcomes eliminating errors risk 3. X-Arthur Designer X-Author lets you use Microsoft Excel natively as a user interface (UI) for tasks that need Excel rather than a browser UI. 4. Apptu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, which does not fall under any specific heads of income, such as, salary, house property, business and profession and capital gain, will fall under the residuary head income from other sources as per section 56(1) of the Act. Similarly, Article 23(3) of the tax treaty provides for taxation of residuary items of income which are not dealt with in the other Articles of the tax treaty. In the facts of the present appeal, admittedly, the item of income sought to be taxed is the receipts from sublicensing of software licences. Therefore, ordinarily, the income can be characterized as royalty under section 9(1)(vi) of the Act and Article 12 of the DTAA. In case, it is not taxable as royalty income, it can be treated as business income under Article 7 of the tax treaty. Thus, to our understanding, the residuary provision under Article 23 can come into play when an item of income is not expressly dealt with in other articles preceding article 23 of the tax treaty. 19. Characterization of an item of income under a particular Article is different from taxability of that income under the said Article. A particular item of income can fall either under Article 7 or Article 12. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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