Introduction
The ITAT Mumbai Bench I decision in Slack Technologies Limited v. ACIT (International Tax), ITA Nos. 4310/MUM/2023 and 979/MUM/2025 for A.Y. 2021-22 and 2022-23, is a significant non-resident tax ruling on software subscription fees and royalty. The Bench comprised Shri Saktijit Dey, Vice President, and Shri Bijayananda Pruseth, Accountant Member. The core issue was whether subscription fees received by Slack Technologies Limited, an Irish tax resident, for access to its online communication platform were royalty under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12(3) of the India-Ireland DTAA. The ITAT held they were not. This commentary analyses the Assessment Order, the DRP directions, and the Tribunal’s reasoning.
Facts
Slack Technologies Limited is a non-resident corporate entity incorporated in Ireland and a tax resident of that country. The Assessing Officer stated that it works as a Rest of the World seller of Slack software, a communication software, sold or supplied on subscription basis. In its returns for A.Y. 2021-22 and 2022-23, the assessee did not offer subscription charges of Rs. 14,48,49,742 and Rs. 74,11,37,632 respectively, claiming the receipts were not royalty under Section 9(1)(vi) or Article 12(3) of the India-Ireland DTAA. It relied on Engineering Analysis Centre of Excellence Private Limited v. CIT [2021] 432 ITR 471 (SC). The returns were selected for scrutiny.
In the assessment proceedings, the AO called for details on the nature and function of the software sold. After verifying details and referring to judicial precedents, the AO concluded the receipts were consideration for transfer of all or any right in respect of copyright, literary, artistic or scientific work, hence royalty under Section 9(1)(vi). Without prejudice, he held that the software, being a process used by a computer to achieve a desired result and similar to a patent, invention, design, or process, was covered as royalty under Section 9(1)(vi) and Article 12(3). The draft Assessment Order treated the receipts as royalty.
The assessee objected before the DRP. The DRP observed that the software is hosted on Amazon Web Services and data is stored within the AWS US region. It held that the subscription fee was not for sale of software but for provision of services through use of Software as a Service. The processes were used for value-added, high-end services mediating communication and collaboration. It found it was not a one-time sale but engagement with the customer and provision of access to process. The core project was service—online communication, collaboration, file hosting, file sharing—attained through online, cloud-based process. Thus, it was not software sale simpliciter but access to patented digital process and online services. The DRP concluded the receipts were royalty. Final assessment orders under Section 143(3) read with Section 144C(13) were passed in pursuance of the DRP’s directions.
Before the ITAT, the assessee’s counsel explained that the software is an online platform for communication on subscription basis. Subscribers can host meetings, share messages and files. Through various subscription plans, a subscriber accesses the platform using login ID credentials. Third-party customers in India received only use of the platform and its facilities. No proprietary rights or right to use copyright were transferred. The customer terms of service showed that ownership of copyrights and all related intellectual property rights are non-transferable and non-exclusive. No backup copy was permitted. Subscriptions were annual or for a particular period. Counsel argued the DRP’s reasoning was irrational because while selling off-the-shelf software, the process involved in creating the software is not also transferred. The software was a communication platform simpliciter, comparable to Cisco WebEx, Zoom, etc. The assessee relied on decisions including MOL Corporation, Salesforce.com Singapore Pte. Ltd., GoTo Technologies Ireland Unlimited Company, Microsoft Regional Sales Pte. Ltd., ADIT v. Til Team Telecom International (P.) Ltd., Adore Technologies Pvt. Ltd., and Datamine International Ltd. The DR argued that the subscriber receives communication, collaboration, hosting, security, data storage, workflow management, and continuous backend functionality, and every interaction invokes Slack’s proprietary processes, so use of process qualifies as royalty.
Reasoning
The Tribunal gave thoughtful consideration to the rival contentions and perused the record. It noted that the assessee is undisputedly the creator, developer, and owner of the Slack software. The software, provided on subscription basis, is in simple terms a communication platform providing services such as hosting meetings, messages, and sharing files. The terms and conditions of subscription entitle the customer to create a workspace and invite users. Once a customer subscribes, he is given access to log in through email domain. The subscription plans may be annual or for a particular period.
The Tribunal found that the software sold on subscription basis is simply a communication platform and nothing else. The terms and conditions clearly demonstrate that the developer of the software, i.e., the assessee, not only owns but will continue to own the services, including all intellectual property rights. The customer is merely granted a non-exclusive limited licence to use the software and nothing more. Therefore, the AO’s premise that the assessee transferred the right to use the copyright incorporated in the software along with the process was not accepted. The record showed no transfer of source code, copyright, or embedded processes. Subscribers received only a limited, non-exclusive right to use the platform while the IP remained vested in the assessee.
Crucially, the DRP’s own finding was fatal to the Revenue’s case. The DRP found that the assessee used complex, technical, and value-added processes to render services. That established that the processes were used by the assessee, not transferred to subscribers. If the processes are used by the service provider to deliver an output, the subscriber’s payment is for service or access, not for use of the process. The Tribunal drew an analogy to a restaurant: the customer pays for the dish, not for the process of cooking. It also compared Slack with Cisco Webex, Zoom, etc., which are communication platforms accessed on subscription.
The Tribunal found no material showing that any subscriber acquired rights to modify, replicate, or commercially exploit the software or IP. Therefore, the receipts did not fall within Explanation 2(iii) to Section 9(1)(vi) of the Act or Article 12(3)(a) of the India-Ireland DTAA. The Tribunal applied the ratio of Engineering Analysis Centre of Excellence (SC) and the Delhi Tribunal/High Court precedents in MOL Corporation, Salesforce.com, GoTo Technologies, Microsoft Regional Sales, etc. The SLP dismissals in MOL Corporation and Salesforce.com reinforced the position. Since there was no transfer of copyright or process, the subscription fees were not royalty. They were business receipts, and since the assessee had no PE in India, they were not taxable in India. The AO was directed to delete the additions. The TDS credit short-grant ground was restored to the AO for verification, while other grounds were kept open or dismissed. The appeals were partly allowed.
Conclusion
The ITAT Mumbai ruling is significant for non-resident SaaS and software subscription providers. It reinforces the distinction between sale or use of copyrighted software and the right to use copyright. It also clarifies process royalty: where the assessee uses processes to deliver a service, rather than transferring the process, royalty does not arise. The Tribunal followed the Supreme Court in Engineering Analysis Centre of Excellence and High Court precedents. For taxpayers, key factors include terms of service, retention of IP, a non-exclusive limited licence, no transfer of source code, and no right to modify, replicate, or commercially exploit the software. For tax authorities, the Assessment Order must distinguish service access from copyright transfer. Since no PE existed in India, the business receipts were not taxable. The decision is relevant for communication platforms such as Slack, Cisco WebEx, and Zoom.