Income from sub licensing software for healthcare business in India Shall not be taxed as Business Income under India – USA DTAA due to absence of PE: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Delhi bench held that the Income from sub licensing software for the healthcare business  in India should not be taxed under Business Income due to absence of Permanent Establishment (PE)  under India -USA Double Taxation Avoidance Agreement (DTAA).

Assessee, GE Precision Healthcare LLC is a non-resident corporate entity and a tax resident of the United States of America (USA). Assessee is engaged in healthcare business for the General Electric (GE) group, and is a global medical device provider.

During the assessment year the assessee received  an amount of Rs.10,66,35,790/- towards software licence fee cross charged to its affiliates in India. However, the software licence fee received as reimbursement from the affiliates was not offered to tax in India by the assessee.

In the course of assessment proceedings, the Assessing Officer issued a show cause notice to the assessee regarding the matter. 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).

Without accepting the submission, the AO made a draft assessment order and held that reimbursement of software license 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.

Aggrieved by the order, assessee filed an appeal before the Dispute Resolution Panel who upheld the decision of the Assessing Officer.

Thereafter, the assessee filed a second appeal before the tribunal.

Before the bench, Ravi Sharma, counsel for the assessee submitted that the Receipts do not have the characteristics of royalties; instead, they can only be classified as business income in accordance with Article 7 of the tax convention, and since PE is not present in India, they are not taxable.

Further that the software licences were sold as tools of business in furtherance of assessee’s business activity, the receipts there from have to be treated as business income.

Vizay B. Vasanta, Counsel for the revenue,  supported the decision of the lower authorities.

The tribunal during the proceedings observed that the assessee pays license fees of the software to the third party licensors and thereafter cross charges them to the affiliates on a cost to cost basis.

Further the sublicensed softwares was meant to be used by the affiliates in their day-to-day business activity of healthcare, which is the business of the entire group. Therefore, it couldn't be said that the receipt from sub licensing of software is not in the course of the assessee's business activity.

After considering the facts submitted by both parties, the two member bench of G.S. Pannu, (President)  and  Saktijit Dey, (Vice President) held that the Due to the absence of a Permanent Establishment, the income from sub licensing software for healthcare business should not be taxed as business Income.

To Read the full text of the Order CLICK HERE

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