Receipts By Foreign Entity From Provision Of Software Services In India Are Not Taxable U/s 44BB In Absence Of Its PE In India: Delhi ITAT

Section 44BB of Income tax Act contains special provisions for computation of taxable income of a non-resident assessee engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire, used or to be used, in the prospecting for, or extraction or production of, mineral oils.

The Division Bench comprising G.S. Pannu (Vice President) and Astha Chandra (Judicial Member) observed that “the impugned receipts of the assessee are not taxable in India under the provisions of Section 44BB of the Act for the reason that the assessee does not have a PE in India in the relevant AYs under consideration and that being a resident of Canada, the assessee is governed by the more beneficial provisions under the India-Canada DTAA”.

As per the brief facts of the case, the Assessee, a foreign company and a tax resident of Canada, is engaged in the business of supply of reservoir simulation software to oil companies such as ONGC, Oil India, Vedanta, etc. along with related software maintenance support services and training services for acquainting with the operation of such software. The AO issued notice under Section 148 on the ground that Assessee had not filed the return for the impugned AYs despite receipts from Indian companies on which TDS had been deducted and concluded that the Assessee was providing products and services which were being used to support exploratory activities in oil and gas exploration and production. Later, the AO applied Section 44BB and computed the income of the Assessee at Rs. 36.44 Lac equivalent to the 10% of the aggregate receipts of Rs. 3.64 Cr.

The Bench relied upon the jurisdictional High Court judgment in OHM Ltd. and PGS Exploration, wherein it was held that existence of a PE is a condition precedent for applicability of Section 44BB.

The Bench noted that it is an admitted fact that the Assessee does not have a PE in India and that as it is tax resident of Canada, India-Canada DTAA and further observed that Revenue has not brought on record any material to prove to the contrary.

The Bench held that Section 44BB does not override the provisions of Section 90 and therefore, if the treaty provisions are more beneficial, they need to be applied.

The Bench observed that the AO has not been able to bring on record anything to establish the existence of a PE of the Assessee in India and that it is not even the case of the Revenue that the Assessee has PE in India during the impugned AYs.

The Bench therefore concluded that since the Assessee does not have a PE in India in the impugned AYs, subject receipts are not taxable under Section 44BB.

Hence, holding that as the impugned receipts partake the character of business income, the question of treating them as royalty or FTS is irrelevant, the ITAT directed the AO to grant TDS credit in respect of tax deducted at source on the impugned receipts and also to grant interest under Section 244A.

Counsel for Taxpayer: Manuj Sabharwal

Counsel for Department: Vizay B. Vasanta

Case Title: Computer Modelling Group Ltd Vs ACIT

Case Number: ITA No. 2090/Del/2023

Click here to read/ download the Order