Payment for development of Balanced Score Card (BSC) management tool is Fees for Technical Services under Article 12 of the India-Singapore DTAA.

Payment for development of Balanced Score Card (BSC) management tool is Fees for Technical Services under Article 12 of the India-Singapore DTAA.

Taxpayer, a company incorporated in Singapore (FCO), provided services to various clients around the world for development of BSC project. BSC is a strategic performance management tool which can indicate deviations from expected levels of performance. During the year under consideration, FCO rendered services to various companies located in India.

FCO contended that the receipts towards services were business profits under Article 7 of DTAA and in the absence of Permanent Establishment (PE) the same would not be taxable in India.

The Tax Department divided services for development of BSC into two segments viz. professional fees rendered to the clients and lump sum received for sale of software. The Tax Department held that the amount received towards the sale of software was taxable as ‘royalty’ for use of equipment, while the professional fees were taxable as ‘fees for technical services’ (FTS).

FCO contended that there was no ‘equipment royalty’ as the users had no domain or control over such software. Also the software downloaded by clients was not customised to suit any particular client. Furthermore, as FCO had not made available any technical knowledge, experience, skill, knowhow, etc. amount would not be taxable as FTS. The matter was referred before the Dispute Resolution Panel (DRP) which upheld the order of the Tax Department.

ITAT Ruling:

• The ITAT held that the payments received by FCO would be taxable as FTS u/s.9(1)(vii) for following reasons: FCO had sent its team to help its clients in implementing licensed software which was required to develop BSC. The clients were required to make lump-sum payments for downloading such software from the designated sites and such software was to be used in various phases of developing the BSC system.
•  In a BSC system each client has its own goals and different strategies to reach such goals. A team, which is evolving a BSC system necessarily, has to identify the measures that are relatable to the entity under study. This is not a type of service which can be used by any organisation by application of an off-the-shelf software.
• Software is only a part of the total process for development of BSC. Fees received by FCO are linked to the downloading of software, but that is not sufficient to come to a conclusion that software is equipment from which FCO earned royalty. The Tax Department was not right in dividing the whole process into two parts one for the royalty and the other for FTS.
• The provisions of DTAA with regard to the definition of the term ‘FTS’ are different from the definition provided u/s.9(1)(vii) of the Incometax Act. This is supported by AAR in the case of Bharti AXA General Insurance1. FCO is thus justified in availing benefit of treaty provisions and this is well supported by SC ruling in UOI v. Azadi Bachao Andolan2.
• FCO made available technical knowledge and skill which enabled its clients to acquire the knowledge for using BSC system for their business and for meeting long-term targets.
• Software was only a part of the management consultancy tool and was never considered as independent of the total system. The technical knowledge and skill provided by FCO remained with its clients. Thus, fees received for designing of BSC management tool falls within definition of FTS under Article 12(4) of the India–Singapore DTAA.