SaaS Support Does Not Amount To Transfer Of Technology Under India-US DTAA: ITAT Delhi

The Income Tax Appellate Tribunal at Delhi has recently held that payments received by US-based Branch Metrics Inc. from Indian customers for its standard SaaS products do not qualify as Fees for Included Services (FIS) under Article 12(4)(b) of the India-US DTAA.

The tribunal found that while customers could use the platform, they were not enabled to apply the technology underlying it, failing the “make available” test under the treaty.

A bench comprising Judicial Member Vikas Awasthy and Accountant Member Manish Agarwal accordingly deleted the ₹24.16 crore addition for assessment year (AY) 2021-22.

“Tested on these principles, the receipts fail the make available condition,” the tribunal observed. It noted that the Revenue had not brought on record any instance of Branch Metrics transmitting technical knowledge, experience, skill, know-how or process to an Indian customer.

“Assistance which merely enables a customer to use a product does not transmit any technology,” it added.

Branch Metrics is a US tax resident and a cross-linking and attribution platform provider. It offers SaaS products through a Software Development Kit (SDK), which customers install and integrate into their own mobile applications or websites to generate links and track their efficiency.

During AY 2021-22, the company received ₹24,16,28,878 from Indian customers for its SaaS products. It claimed ₹7.42 crore as exempt under Section 10(50) after paying 2% equalisation levy and the remaining ₹16.74 crore as business profits not taxable in India under Article 7 of the DTAA, in the absence of a Permanent Establishment.

The Assessing Officer treated the entire amount as Fees for Technical Services under Section 9(1)(vii) of the Income Tax Act read with Article 12 of the DTAA. The Revenue relied on responses from Indian customers describing Branch Metrics' offerings as software services, sales and marketing services, marketing support and a marketing tool.

The tribunal, however, found that the arrangement was for a standard subscription-based product. The Terms and Conditions applied uniformly to customers, who were responsible for integrating and launching the services. There was no obligation on Branch Metrics to develop, modify or customise the product for any particular customer.

Customer-specific data and outputs did not change this character. The tribunal found no material showing that Branch Metrics wrote code, configured algorithms or developed any functionality specifically for an Indian customer.

The technology underlying the SDK remained with Branch Metrics. Customers were only licensed to use the product, while the contractual terms restricted transfer and sublicensing. Their recurring, year-on-year subscriptions also supported the finding that the technology had not been made available to them.

The tribunal treated technical account management and premium support as incidental to the main SaaS transaction. The Order Forms described the support as facilitating continued use of Branch products, and no separate consideration was charged for it.

It also contrasted the case with Example 5 of the DTAA Protocol, where a programme was developed to an Indian enterprise's specific requirements and then transferred to it. In Branch Metrics' case, nothing had been developed specifically for an Indian customer and the SDK remained a standard product developed for customers generally.

The tribunal held that the receipts were consideration for the use of a standard, non-customised, off-the-shelf facility and did not constitute FIS under Article 12(4) of the DTAA. It accordingly deleted the ₹24.16 crore addition.

Since Branch Metrics was entitled to the beneficial provisions of the DTAA under Section 90(2), the tribunal held that it was unnecessary to record a conclusive finding on taxability under Section 9(1)(vii) of the Act.

For AY 2022-23, both sides accepted that the facts were similar. The tribunal followed its findings for AY 2021-22 and deleted the corresponding additions.

The issue of TDS credit was restored to the Assessing Officer for verification. The tribunal directed the officer to recompute interest under Sections 234A and 234B, if applicable, while the challenge to penalty initiation was dismissed as premature. Both appeals were partly allowed.

For Assessee: Advocates Ravi Sharma, Shruti Khimta and Kashish Gupta

For Revenue:  M.S. Nethrapal, CIT(DR)