Karnataka HC Reaffirms Engineering Analysis: Ancillary Software Services Not Taxable as FTS or Royalty

CIT Vs Informatica LLC (Karnataka High Court)

Karnataka HC Reaffirms Engineering Analysis: Ancillary Software Services Not Taxable as FTS or Royalty

The Karnataka High Court dismissed the Revenue’s appeal and reaffirmed that receipts from ancillary services connected with software licensing cannot be taxed as Fees for Technical Services (FTS) or royalty merely because they accompany the software transaction. The Revenue had contended that the Tribunal erred in treating the ancillary services as part of software services by relying on the Supreme Court’s decision in Engineering Analysis Centre for Excellence Pvt. Ltd. without independently examining the nature of the agreements or the applicability of Article 12(4) of the India–USA DTAA governing FTS. However, the Court noted that an identical issue in the assessee’s own case for AY 2015-16 had already been decided in favour of the assessee by following the Supreme Court’s ruling in Engineering Analysis. It further observed that the review petition against the Supreme Court’s judgment had also been dismissed, thereby reinforcing the binding nature of that decision. Holding that the controversy was squarely covered by the earlier precedent and that no fresh or substantial question of law survived for consideration, the High Court dismissed the Revenue’s appeal.

Cases Discussed:

• Engineering Analysis Centre for Excellence Private Limited v. Commissioner of Income Tax and Another, AIR 2021 Supreme Court 124
• CIT Vs Informatica LLC (Karnataka High Court)

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

Heard learned counsel Sri E.I. Sanmathi along with learned counsel Sri Dilip M. for the appellants and learned counsel Smt.Manasa Ananthan for Smt.Tanmayee Rajkumar for the respondent.

2. This appeal is filed under Section 260A of the Income Tax Act, 1961, questioning the order dated 05.07.2021 in IT(IT)A No.913/Bang/2019 passed by the Income Tax Appellate Tribunal, “C” Bench, Bangalore, raising the following substantial questions of law:

1. “Whether on the facts and circumstances of the case and in law, the Tribunal is right in law in allowing the appeal preferred by assessee by deciding the issue of sale of ancillary services by treating same as software services akin to sale of software license by following the decision of Apex Court in case of Engineering Analysis without examining the applicability of Section 12(4)(b) of the Act and without examining the nature of transactions involved in present case and ignoring contents of agreements entered into by assesssee?

2. Whether on the facts and circumstances of the case and in law, is not acknowledging the findings of the assessing authority relating to tax the receipts from ancillary services as Fee for Technical Services under Article 12(4)(a) of the DTAA and materials brought on record in support of findings of assessing authority and as such order passed by Tribunal is perverse in nature”?

3. However, learned counsel for the respondent would point out that the subject matter relates to Assessment Year 2016-17 and whereas in respect of Assessment Year 2015-16, the order impugned herein was followed by the Tribunal in the case of respondent itself and the said order passed by the Tribunal for the Assessment Year 2015-16 was the subject matter in ITA No.672/2023. The said ITA was disposed of placing reliance on the decision of Hon’ble Apex Court in Engineering Analysis Centre for Excellence Private Limited vs. Commissioner of Income Tax and Another reported in AIR 2021 Supreme Court 124. Further, it is brought to our notice that the review filed against the Engineering Analysis Centre for Excellence Private Limited (supra) was also dismissed by the Hon’ble Apex Court vide order dated 11.05.2026.

4. In view of the above, we are of the considered opinion that no substantial question of law arises for consideration. Accordingly, the appeal stands dismissed.