TMI Blog2019 (12) TMI 1315X X X X Extracts X X X X X X X X Extracts X X X X ..... customers queries. In case, the distributors would require assistance on issues as regards functionalities, trouble shooting and verifying error situations, the assessee would provide the same. The aforesaid queries would be resolved via e-mails or telephone calls by the employees of the assessee based in Finland. In our considered view, as the payments received by the assessee from rendering of the maintenance and support services does not fall within the scope and gamut of the definition of royalty‟ in Article 12 of the India-Finland tax treaty, therefore, the payments received by the assessee for providing such support services cannot be held as royalty‟ in the hands of the assessee. Amount received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) cannot be held as being in the nature of royalty‟ as per Article 12 of the India-Finland tax treaty. Grounds of appeal allowed in terms of our aforesaid observations. Levy of interest u/s 234A - HELD THAT:- Levy of interest u/s 234B has been challenged. As the calculation of the interest liabilities would be consequential to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(3) of the Act beyond the time limit for completion of such proceedings as per the provisions of clause (viii) of Explanation 1 of Section 153 of the Act; Taxability of receipt from sale of 'off-the shelf' software amounting to ₹ 7,81,72,583 as 'Royalty' 4. On the facts and circumstances of the case, the learned At) has erred in holding that payments of ₹ 7,81,72,583 received by the Appellant towards sale of 'off-the shelf software are in the nature of 'Royalty' as per the provisions of Section 9(1)(vi) of the Act; 5. On the facts and circumstances of the case, the learned Aa has erred in holding that payments of ₹ 7,81,72,583 received by the Appellant towards sale of 'off-the shelf software are in the nature of 'Royalty' under Article 13 of the India-Finland Tax Treaty; Taxability of receipt from maintenance and support services (including upgrades) amounting to ₹ 2,22,46,237 as 'Royalty' 6. On the facts and circumstances of the case, the learned AO has erred in holding that payments of ₹ 2,22,46,237 received by the Appellant towards maintenance and support services (including upgrades) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olutions India Private Limited (earlier known as Tekla India Pvt. Ltd.), vide an agreement‟ dated 28.01.2008 AND M/s DowCoMax Services India Limited, vide an agreement‟ dated 23.06.2008, as its non-exclusive resellers/distributors for the Indian territory. On a perusal of the records, it was observed by the A.O that the assessee had during the year received the following payments from its distributors: Sr. No. Particulars Amount 1. Payment received for sale of off-the shelf software ₹ 7,81,72,583/- 2. Payment received for maintenance and support services (including upgrades) ₹ 2,22,46,237/- 3. Payment received for management fees ₹ 31,86,724/- Total ₹ 10,36,05,544/- In the course of the draft assessment proceedings, the assessee had in the last week of July, 2016 orally informed the A.O that it had filed an application dated 19/10/2012 under Sec. 245Q(1) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements‟ with its non-exclusive resellers/distributors for the Indian territory, viz. (i). M/s Trimble Solutions India Private Limited (earlier known as Tekla India Pvt. Ltd.); and (ii). M/s DowCoMax Services India Limited, had submitted before the A.O that it exclusively owned all the Intellectual Property Rights (IPR) in relation to the software and had merely granted the distributors the right to distribute a copyrighted article and not the copyright in the article. Accordingly, it was the claim of the assessee that the distributors did not use or had any right to use the copyright in the software programme. Referring to Article 12 of the India-Finland tax treaty, it was submitted by the assessee that the definition of the term royalty‟ therein envisaged receipt of payments of any kind as a consideration for the use of or the right to use certain specific works which could include intellectual properties (such as copyright, patents etc.) by the owner of such intellectual properties from any other person. Also, it was submitted by the assessee that the India-Finland tax treaty did not contain a definition of such intellectual properties that were included within the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted by the assessee that the beneficial provisions of the tax treaty would be applicable as per the provisions of Sec. 90(2) of the Act. In sum and substance, it was the claim of the assessee that as per the beneficial provisions of the India-Finland tax treaty, the payments received from its distributors for sale of off-the shelf software license cannot be held to be in the nature of royalty‟ payment. However, the A.O was not persuaded to subscribe to the aforesaid claim of the assessee. On the basis of reliance placed on certain judicial pronouncements the A.O rejected the claim of the assessee that the payments for off-the-shelf software were towards sale of a copyrighted article . It was observed by the A.O that the payments received by the assessee from its distributors were in nature of royalty‟ for certain reasons, viz. (i). that, Sec. 14 of the Copyright Act stated that transfer or use of a copyright in a computer program manifests itself in (a). allowing the computer program to be stored on a medium by electronic means; or (b). selling or providing the computer program on commercial rental. Accordingly, the A.O was of the view that a mere grant of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O rejected the aforesaid claim of the assessee. Observing, that the payments received by the assessee for maintenance and support services (including upgrades) were a part of and inextricably linked to the supply and use of the software, the A.O was of the view that the same were also in the nature of royalty‟ as per the Explanation 2 to Sec. 9(1)(vi) of the Act. 6. On the basis of his aforesaid observations, the A.O, vide his draft assessment order passed under Sec. 144C(1) r.w.s 143(3), dated 26.10.2016 being of the view that the payments received by the assessee for sale of specialized software and maintenance and support services (including upgrades) were in the nature of royalty, proposed to tax the same at 10% as per clause 2 of Article 12 of the India-Finland tax treaty. 7. The assessee objected to the additions proposed by the A.O, vide his draft assessment order passed under Sec.144C(1) r.w.s 143(3), dated 26.10.2016, before the Dispute Resolution Panel-2, Mumbai (for short DRP‟). As regards the claim of the assessee that the assessment framed by the A.O was barred by limitation, the DRP after necessary deliberations and perusing the records did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng been passed beyond the extended time limit prescribed in clause (viii) of Explanation 1 of Sec. 153 was thus barred by limitation. In order to support his aforesaid claim the ld. A.R took us through the chronology of events at Page 31 of the assesses Paper book‟ (for short APB‟). It was the claim of the ld. A.R that the withdrawal order of the AAR was despatched to the CIT(IT)-II, Mumbai on 20/02/2015. In order to drive home his aforesaid contention the ld. A.R had drawn our attention to the copy of the despatch register‟ of AAR office at Page 33 of the APB‟. It was submitted by the ld. A.R that the AAR order was received by the assessee on 25/02/2015. Further, it was claimed by the ld. A.R that as orally confirmed by the A.O the AAR order was received by the tax authorities on 24/02/2015. On being called upon to substantiate its claim that the order of the AAR was received by the tax authorities on 24/02/2015, the ld. A.R having failed to do so, thus did not stress upon his said claim any further. Relying on the orders of the Hon ble High Court of Delhi in the case of CIT-7 Vs. Odeon Buildes Pvt. Ltd. (2017) 393 ITR 0027 (Delhi) (FB) and GE Energy Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vert to the claim of the ld. A.R that as per the despatch register‟ the withdrawal order of the AAR was despatched to the CIT(IT)-II, Mumbai on 20/02/2015. It was the claim of the ld. A.R that as the order of withdrawal of the AAR was received by the CIT(IT)-II, Mumbai, the period of limitation would not cease to run only because the concerned CIT(IT)-4, Mumbai had not received the said order. In sum and substance, we find that it is the claim of the ld. A.R that now when the revenue was put to notice and had knowledge about the order of withdrawal of AAR, the period of limitation would commence and it was immaterial that the concerned CIT(IT)-4, Mumbai had not received the said order. As observed by us hereinabove, the ld. A.R. In order to drive home his aforesaid contention had relied on the order of the Hon ble High Court of Delhi in the case of CIT-7 Vs. Odeon Buildes Pvt. Ltd. (2017) 393 ITR 0027 (Delhi) (FB). We have given a thoughtful consideration to the facts of the case before us and are unable to find ourselves to be in agreement with the aforesaid claim of the assessee. Although, the ld. A.R had claimed that the order of withdrawal of AAR was despatched to CIT(IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore us, the ld. A.R had failed to lead necessary material as regards the date on which the counsel for the revenue/D.R had obtained the copy of the order of the AAR. As such, the aforesaid claim of the ld. A.R also has to fail in the absence of complete facts. On the basis of our aforesaid deliberations, we are of the considered view that the claim of the ld. A.R that the draft assessment order passed by the A.O under Sec. 144C(1) r.w.s 143(3), dated 26/10/2016 was beyond the stipulated prescribed time limit envisaged in clause (vi) of Explanation 1 to Sec. 153 of the Act, does not merit acceptance and is liable to be rejected. Ground of appeal No. 3 is dismissed. 11. We shall now advert to the contentions advanced by the ld. A.R as regards the merits of the case. As observed by us hereinabove, the assessee which is a foreign company incorporated in Finland is engaged in the business of developing and marketing specialized offthe-shelf software products which are used in industries like building and construction, energy distribution and infrastructure management. The assessee during the year had received the following payments from its non-exclusive resellers/distributors for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience, (b) The term fees for technical services as used in this article means payments of any kind, other than those mentioned in articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts) and not the copyright in the said article. In fact, we find that the assessee exclusively owned all the Intellectual Property Rights (IPR‟s) in relation to the software, viz. Trimble software . As per the respective agreements entered into by the assessee with its resellers/distributors, we find, that the distributors did not use or had any right to use the copyright in the software programme. In our considered view as the software provided by the assessee to its resellers/distributors was only for the purpose of resale/distribution to the end user customer for use as a copyrighted article‟ (i.e software product) with no right to use the copyright embedded in the software, therefore, it can safely or rather inescapably be concluded that the payments received by the assessee from its distributors were in the nature of sales revenue and not royalty‟. On a perusal of the respective agreements‟ entered into by the assessee with its resellers/distributors the rights which were vested with them can briefly be culled out as under : the distributors were granted a non-exclusive license to market and distribute the software products developed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as royalty‟ in the hands of the assessee. We also find substance in the claim of the ld. A.R that as per the Copyright Act, a transfer of the copyrighted article (i.e the software product) which is the subject of copyright would not necessarily involve a transfer of the copyright. As can be gathered from a perusal of the agreements‟ between the assessee and its distributors, the rights acquired by the transferee on the sale of the copyrighted article (i.e software products) is to use the copyrighted article and not the right to use the copyright embedded in the software. On the basis of our aforesaid observations, we are of the considered view that as the sale of the copyrighted article (i.e software products) by the assessee company cannot be regarded as a sale of copyright in the software, therefore, the payments received by the assessee on such sale of software would be its business income‟ and cannot be regarded as royalty‟ income under the provisions of IndiaFinland tax treaty. Our aforesaid view is fortified by the judgments of the Hon ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del). In the said judgment the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no reference in the tax treaty to the adoption of such provision from the Act, then such amendment will have no effect on the tax treaty. On a perusal of the IndiaFinland tax treaty, we find, that the term royalty‟ has been defined in Article 12(3)(a). Such definition of the term royalty‟ as per the said article is exhaustive. We find that pursuant to the insertion of Explanation 4, Explanation 5 and Explanation 6 by the Finance Act, 2012 w.r.e.f 01/04/1976, no corresponding amendment has been made in the India-Finland tax treaty to bring the definition of royalty‟ therein envisaged at par with that provided under Sec. 9(1)(vi) of the Act. Accordingly, we are of the considered view that the retrospective insertion of Explanation 4, Explanation 5 and Explanation 6 to Sec. 9(1)(vi) of the Act as had been made available on the statute by the Finance Act, 2012 w.r.e.f 01/06/1976 cannot be read into the India-Finland tax treaty. Our aforesaid view is fortified by the judgment of the Hon ble High Court of Delhi in DIT vs. New Skies Satellite BV (2016) 382 ITR 114 (Del). In the said case it was observed by the Hon‟ble High Court that no amendment to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the assessee. As the payments received by the assessee towards distribution of sub-releases and main releases were also for a right to provide a copyrighted article i.e software updates, which was akin to the amounts received for distribution of the specialized off-the-shelf software products, and not for any right to use the copyright embedded in the said copyrighted article (i.e software products), therefore, the same too in our considered view cannot be construed as royalty‟ income, and would be the business income‟ of the assessee. On a similar footing, we find, that as per the distributors agreements, it was the responsibility of the distributors to resolve the end user customers queries. In case, the distributors would require assistance on issues as regards functionalities, trouble shooting and verifying error situations, the assessee would provide the same. The aforesaid queries would be resolved via e-mails or telephone calls by the employees of the assessee based in Finland. In our considered view, as the payments received by the assessee from rendering of the maintenance and support services does not fall within the scope and gamut of the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case, the learned Aa has erred in determining the total taxable income of the Appellant for the subject AY at ₹ 15,95,09,620/- as against 'Nil' income reported in the return of income filed by the Appellant for the subject AY; Time-barring assessment proceedings 2. On the facts and circumstances of the case, the learned AO has erred in passing order under Section 143(3) of the Act beyond the time limit for completion of such proceedings as per the provisions of clause (viii) of Explanation 1 of Section 153 of the Act; Taxability of receipt from sale of 'off-the shelf' software amounting to ₹ 9,31,88,908/- as 'Royalty' 3. On the facts and circumstances of the case, the learned At) has erred in holding that payments of ₹ 9,31,88,908/- received by the Appellant towards sale of 'off-the shelf software are in the nature of 'Royalty' as per the provisions of Section 9(1)(vi) of the Act; 4. On the facts and circumstances of the case, the learned Aa has erred in holding that payments of ₹ 9,31,88,908/- received by the Appellant towards sale of 'off-the shelf software are in the nature of 'Royalty' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 28.01.2008 AND M/s DowCoMax Services India Limited, vide agreement‟ dated 23.06.2008, as its non-exclusive resellers/distributors for the Indian territory. On a perusal of the records, it was observed by the A.O that the assessee had during the year received the following payments from its distributors : Sr. No. Particulars Amount 1. Payment received for sale of off-the shelf software ₹ 9,31,88,908/- 2. Payment received for maintenance and support services (including upgrades) ₹ 6,63,20,712/- 3. Payment received for management fees ₹ 69,62,683/-- Total ₹ 16,64,72,303/- 24. As is discernible from the orders of the lower authorities, the assessee had filed an application dated 19/10/2012 under Sec. 245Q(1) of the Act before the Authority of Advance Ruling (for short AAR‟) for seeking an advance ruling on taxability of software payments received by it f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee for sale of specialized software of ₹ 9,31,88,908/- had wrongly been assessed as royalty‟ by the A.O; and (iii). that, the payments received by the assessee towards maintenance and support services (including upgrades) of software of ₹ 6,63,20,712/- were wrongly held by the A.O as being in the nature of royalty, were however rejected by the DRP. 27. After receiving the order of the DRP under Sec. 144C(5), dated 31.07.2017, the A.O passed the final assessment order under Sec. 144C(13) r.w.s 143(3), dated 31/08/2017. The A.O included the amounts received by the assessee on sale of specialized software (₹ 9,31,88,908/-) and towards maintenance and support services (including upgrades) of ₹ 6,63,20,712/- in the total income of the assessee and assessed its total income at ₹ 15,95,09,620/-. 28. The assessee being aggrieved with the assessment framed by the A.O under Sec. 144C(13) r.w.s 143(3), dated 31/08/2017 has carried the matter in appeal before us. It was submitted by the authorised representatives for both the parties that the facts and the issues involved in the present appeal remained the same as were there before us in the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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