Automated Software Services Cannot Be Treated As FTS Without Examining Human Intervention: ITAT Delhi

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) on 17 July held that receipts from automated software services cannot be treated as Fees for Technical Services (FTS) under the India-Ireland Double Taxation Avoidance Agreement (DTAA) without first examining whether the services involve the requisite human intervention and possess the characteristics of specialised technical services.

Judicial Member Vikas Awasthy and Accountant Member Brajesh Kumar Singh allowed an appeal filed by SFDC Ireland Ltd., and remanded the matter to the Assessing Officer for fresh adjudication for failing to examine the issue in light of the Supreme Court's decision in Kotak Securities Ltd., which distinguishes technical services from a mere facility. The Bench held:

“The issue in dispute has not been examined by the AO/Ld. DRP keeping in view the above observations of the Hon'ble Apex Court so as to bring the facts on record as to whether the 'technical services' provided by the assessee to its customers in this case in automation mode as stated by the AO has blurred the requirement of specific human element to qualify such services as 'technical services' under Article 12(3)(b) India-Ireland DTAA.”

SFDC Ireland Ltd., the successor to Tableau International Unlimited Company, filed its return for Assessment Year 2020-21 declaring nil income. It received Rs. 73.41 crore from Indian customers towards the supply of non customised shrink wrapped and electronically downloadable Tableau software, Software as a Service (SaaS), support and maintenance services, training services and partner fees.

The company treated the receipts as business income and claimed they were not taxable in India because it did not have a permanent establishment under the India-Ireland DTAA. The Assessing Officer rejected the claim and treated the entire receipts as FTS taxable at 10 per cent under Article 12 of the India-Ireland DTAA.

According to the Revenue, the company was not merely supplying standard software but was providing comprehensive technology solutions through tutorials, training material, support resources and reseller assistance. It also relied on the End User Licence Agreement (EULA) to contend that customers received limited rights to modify sample source code, demonstrating that the services were technical in nature.

Before the Tribunal, SFDC Ireland Ltd. argued that receipts from software sales were covered by the Supreme Court's decision in Engineering Analysis Centre of Excellence Pvt. Ltd., which held that consideration received for the sale of copyrighted articles does not constitute royalty. It further submitted that its SaaS offerings were standard, fully automated services requiring no human intervention and therefore could not be characterised as FTS under either Section 9(1)(vii) of the Income Tax Act, 1961 (which taxes fees for technical services), or Article 12 of the India-Ireland DTAA.

The Revenue argued that Article 12(3)(b) of the India-Ireland DTAA contains a broad definition of FTS and does not incorporate a “make available” requirement. It also relied on the Tribunal's earlier decision in Volvo Information Technology AB to contend that technical services may be rendered through automated digital platforms without human intervention.

After considering the submissions, the Tribunal observed that the Assessing Officer had proceeded on the premise that automated digital services could themselves constitute technical services. However, the Assessing Officer and the DRP had failed to determine whether the services rendered by the company involved the degree of human intervention necessary to qualify as technical services under Article 12(3)(b) of the DTAA.

It further observed that the authorities had not examined the distinction drawn by the Supreme Court between specialised technical services and standard facilities available to all customers. While the Supreme Court recognised that technological developments may blur the requirement of human intervention in certain cases, the Tribunal held that the authorities must still determine whether the services were specialised and exclusive or merely common facilities available to every customer. The Bench stated:

“The AO/Ld. DRP shall examine the issue afresh in accordance with law keeping in view the observations of the Hon'ble Apex Court in the case of Kotak Securities Ltd. (Supra) and after providing reasonable opportunity of hearing to the assessee.”

Accordingly, the ITAT restored the matter to the Assessing Officer for fresh adjudication in accordance with the principles laid down in Kotak Securities Ltd. after granting SFDC Ireland Ltd. a reasonable opportunity of hearing.

For the Assessee: Shri Ravi Sharma, Advocate and Shri Harmeet Singh, CA

For the Revenue: Shri M.S. Nethrapal, CIT (DR)