The period from April to June 2025 saw a series of significant rulings from various High Courts and Income Tax Appellate Tribunals (ITATs) across India, alongside a Supreme Court decision, offering crucial clarifications on international taxation matters. These decisions largely focus on the taxability of income for non-residents, the interpretation of Double Taxation Avoidance Agreements (DTAAs), and the applicability of withholding tax provisions.
Clarifying Royalty and Fees for Technical/Included Services (FTS/FIS) A predominant theme in these rulings has been the distinction between royalty, fees for technical services (FTS), or fees for included services (FIS), particularly in the context of digital and support services. Courts have consistently held that income derived from merely providing access to copyrighted software or digital platforms, without the transfer of underlying copyright or the 'make available' of technical knowledge, does not constitute royalty or FTS/FIS.
For instance, the Supreme Court dismissed a Special Leave Petition, upholding that subscription fees for providing CRM application software via remote internet servers, where no copyright is transferred, are not taxable as royalty. Similarly, the Delhi High Court ruled that cloud computing services do not generate royalties as customers do not acquire rights to commercially exploit the infrastructure or software. ITATs have also echoed this, stating that income from domain name registration, web hosting, online learning platforms, satellite transponder services, and general IT or business support services where technical knowledge is not 'made available' to the recipient, is generally not taxable as royalty or FTS/FIS in India.
DTAA Benefits and Capital Gains Several rulings addressed the application of DTAAs to capital gains, particularly for foreign investors. It was clarified that short-term capital gains (STCG) on the sale of 'rights entitlement' are typically taxable only in the resident state as per specific DTAA articles (e.g., India-Ireland DTAA and India-Saudi Arabia DTAA), rather than in India. Consequently, if such gains are not taxable in India, capital losses incurred in India cannot be set off against these exempt gains.
Furthermore, for long-term capital gains (LTCG) from the sale of shares acquired before a specific date (e.g., April 1, 2017 – 'grandfathered' sales), which are exempt under DTAAs (e.g., India-Mauritius DTAA or India-Singapore DTAA), the principle reiterated is that such exempt gains do not enter the computation of total income in India, although capital losses from non-exempt sales may be carried forward. It was also affirmed that capital gains on the sale of equity-oriented mutual funds by a Mauritius-based company might not be taxable in India under the India-Mauritius DTAA.
Permanent Establishment and Withholding Tax Issues The courts continued to scrutinise the existence of a Permanent Establishment (PE) for foreign companies in India. In one instance, a shipping company was denied DTAA benefits due to its effective place of management not being in Mauritius, although its agent in India was deemed independent, negating the existence of a PE. Reassessment proceedings initiated on the grounds of PE were also quashed in the absence of tangible material.
Regarding withholding tax (TDS), it was held that TDS is generally not applicable on payments for services rendered entirely outside India by non-residents, such as survey fees or certain marketing research services. Similarly, reimbursements for seconded employees were not deemed FTS for TDS purposes if the employees worked under the control of the Indian entity. However, income from services directly connected with mineral oil prospecting or extraction activities may fall under the presumptive taxation scheme of Section 44BB, rather than being taxed as FTS or royalty.
These rulings collectively underscore a consistent judicial approach aimed at providing clarity and certainty to non-resident taxpayers, reducing instances of double taxation, and aligning with DTAA principles to foster a more predictable international tax environment
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