AI, SaaS and Fees for Technical Services (FTS): A chessboard anology

It’s fairly settled that for being taxed as FTS, an essential element is ‘human intervention’ while rendition of a service. As we embrace an era of Artificial or ‘human like’ Intelligence, does the requirement of ‘human intervention’ get blurred?

Consider a classic example of AI: the virtual chess game which many of us have played against the ‘Computer’.

When a player purchases a chess software (CD or download), the payment for software obviously does not qualify as FTS since there is no service element, let alone any human intervention. The player does not pay for the services of the coder, developer, etc. He pays for a software ‘product’ simplicitor. The software uses AI, but that is just a 'functionality' of the software and does not recharacterize the software into a service.

Now, consider that the player subscribes to an online cloud-based chess game, generally referred as Software-as-a-Service (‘SaaS’).

Though the term ‘service’ is used, SaaS is essentially a ‘software delivery model’ where installation is not required. Thus, logically, SaaS model also does not recharacterize a software into a ‘service’. Similarly, when a new functionality is added via an update, it’s just a new ‘feature'.

Of course, coding/designing would involve human involvement and hosting on cloud may require back-end human support. However, there's no ‘human intervention’ from the software provider during actual gameplay (i.e., during the intended use of the software) and that is what matters!

It is as simple as this: a player buys/rents a wooden chess set handcrafted with immense ‘human intervention’. Does he pay for the services of the artisans? No. Ofcourse this would be factored in the cost but the customer actually pays only for the ‘product’. Can it ever be FTS?

So what really is the difference between a software & SaaS? For a player, it’s the utility of the software which matters, not the mode of delivery. He pays for the chess software, not for cloud hosting.

In any case, cloud hosting/computing, even if considered separately, are automated standard facilities not involving ‘human intervention’.

A case of potential FTS may however arise when, for instance, a gaming company takes services of a software developer to build a virtual chess game for its platform. Even then, if ‘make available’ clause applies, it won’t be taxable as FTS if the gaming company doesn’t get to learn how to build a virtual chess game on its own.

As regards characterisation of such payment as 'royalty', principles laid down in Engineering Analysis should apply irrespective of the mode of delivery of software.

Didn’t realise a game of chess could be so taxing!

#Incometax #FTS #SaaS #AI