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TMI Blog2019 (12) TMI 1315X X X X Extracts X X X X X X X X Extracts X X X X ..... imble Corporation') respectfully craves to prefer an appeal against the order passed under Section 144C(13) read with Section 143(3) of the Income-tax Act, 1961 ('the Act') by the Deputy Commissioner of Income-tax (International Taxation) - 4(1)(2), Mumbai (hereinafter referred to as the 'AO') dated 31 August 2017 (received on 8 September 2017) in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, Mumbai (hereinafter referred to as the 'DRP') on the following grounds: General Ground 1. On the facts and circumstances of the case, the learned Aa has erred in determining the total taxable income of the Appellant for the subject AY at Rs. 10,04,18,820 as against 'Nil' income reported in the return of income filed by the Appellant for the subject AY; Invalid service of notice under Section 143(2) of the Act 2. On the facts and circumstances of the case, the learned AO has erred in not validly serving the notice under Section 143(2) of the Act within the time-Iimit prescribed under Section 143(2) of the Act; Time-barring assessment proceedings 3. On the facts and circumstances of the case, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deem fit be granted. The Appellant craves leave to add, alter, omit or substitute any or all of the above grounds of appeal, at any time before or at the time of the appeal, to enable the Hon'ble ITAT to decide the appeal according to law." 2. Briefly stated, the assessee which is a foreign company incorporated in Finland is engaged in the business of developing and marketing specialized off-the-shelf software products which are used in industries like building and construction, energy distribution and infrastructure management. In India, the assessee markets and distributes the specialized software products to the end user customers through a distribution channel consisting of its subsidiary and a third party distributor. Return of income for A.Y 2010-11 was filed by the assessee company on 31.03.2012, declaring its total income at Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings it was observed by the A.O that the assessee in order to facilitate distribution of its software products in India had appointed its wholly owned subsidiary company viz. M/s Trimble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O a copy of the "despatch register‟ obtained from the office of the AAR. Rebutting the aforesaid claim of the assessee, it was observed by the A.O that as the withdrawal order dated 17/02/2015 of the AAR was received by the jurisdictional CIT(IT)-4, Mumbai for the first time on 29/08/2016, therefore, as per the provisions of Clause (viii) of Explanation 1 to Sec. 153 of the Act, the assessment could be validly framed upto 31/10/2016. Also, it was observed by the A.O that merely providing a copy of the "despatch register‟ that was obtained by the assessee from the office of the AAR could not be taken as a proof of service of the AAR‟s order. On the basis of his aforesaid deliberations, the A.O rejected the claim of the assessee that the draft assessment order was barred by limitation. 4. On merits, the assessee drawing support from the terms and conditions of its respective "agreements‟ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle‟ (i.e software product) and not the "right to use‟ the copyright embedded in the software. In order to support its aforesaid claim, the assessee also relied on Para 14.4 of the OECD Commentary. As such, it was the claim of the assessee that the payments received by the assessee from its distributors for sale of a copyrighted article did not tantamount to "royalty‟ under the provisions of India-Finland tax treaty. As regards the exigibility to tax of the amounts received by the assessee from its distributors, it was submitted by the assessee that as the term "royalty‟ has been defined under Article 12 of the India-Finland tax treaty, therefore, the insertion of "Explanation 4‟ to Sec. 9(1)(vi) of the Act, vide the Finance Act, 2012 w.r.e.f 01.06.1976 cannot be read into the India-Finland tax treaty by resorting to Article 3 of the India-Finland tax treaty. As such, it was 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rstood with the changing environment. 5. Further, it was observed by the A.O that the assessee had also provided software upgrades, maintenance and support services with regard to its software, viz. "Trimble software" to the distributors, who in turn provided the same to the end user customer, as and where such end user customer had entered into a maintenance agreement with the distributors. It was observed by the A.O that the assessee during the year was in receipt of a payment of Rs. 2,22,46,237/- towards maintenance and support services (including upgrades). It was the claim of the assessee that as the payments received for software upgrades, maintenance and support services with regard to its software were not for transfer of any right in the copyright of the article, therefore, the same could not be held as "royalty‟ under the India-Finland tax treaty as well as under the Act. However, 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated 31/08/2017, therein treating the amounts received by the assessee from its distributors for sale of specialized software of Rs. 7,81,72,583/- and maintenance and support services (including upgrades) of Rs. 2,22,46,237/- as being in the nature of "royalty‟, therein included the same in the total income of the assessee and determined its income at Rs. 10,04,18,820/-. 9. The assessee being aggrieved with the order of the A.O under Sec. 144C(13) r.w.s 143(3), dated 31/08/2017, has carried the matter in appeal before us. The ld Authorised Representative (for short "A.R‟) for the assessee after arguing at some length submitted that he was not pressing Ground of appeal No. 2. As per the concession of the Ld. A.R, the Ground of appeal No. 2 is dismissed as not pressed. As regards the validity of the assessment order, it was submitted by the ld. A.R that the same having 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order having been passed by the A.O under Sec. 144C(1) r.w.s 143(3), dated 26/10/2016 was beyond the prescribed time limit envisaged in clause (viii) of Explanation 1 to Sec. 153 of the Act. As observed by us hereinabove, it was though initially canvassed by the ld. A.R before us that as orally confirmed by the A.O the order of withdrawal of AAR was received by the revenue on 20/02/2015. However, as the ld. A.R on being called upon to substantiate his said claim had failed to do so, therefore, he had thereafter not stressed upon the same any further. Apart therefrom, as the aforesaid claim of the ld. A.R is absolutely unsubstantiated and no attempt has been made to support the same by way of an "affidavit‟ as required by Rule 10 of the Appellate Tribunal Rules, 1962, therefore, the same even otherwise does not merit to be taken cognizance by us. We shall now advert 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der by the AAR on 17/02/2015, therefore, it could be safely be concluded that the revenue was aware of the said order of withdrawal of the AAR. We find that the ld. A.R in support of 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). In our considered view, the ld. A.R had on the basis of incomplete facts raised the aforesaid claim. On a perusal of the order of the Hon‟ble High Court which was delivered in context of filing of an appeal u/s 260A, it was observed, that though the date of pronouncement of the order can safely be taken as the date on which the revenue was aware of the order, but then for the purpose of commencement of limitation the time taken by the counsel for the revenue to obtain a copy of the order will have to be excluded. In the case before 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any 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 consultanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement." 13. As is discernible from the records, we find, that the assessee company as per the terms and conditions of its respective "agreements‟ with its non-exclusive resellers/distributors for the Indian territory, viz. (i). M/s Trimble Solutions India Private Limited, WOS of the assessee company; and (ii). M/s DowCoMax Services India Limited, had merely granted to the said distributors the right to distribute the copyrighted article (i.e software products) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Intellectual property contained in the copyrighted article (i.e software products) with the transferee, the amounts received by the assessee from its distributors was clearly in the nature of sales revenue and could not be held as "royalty‟ in its hands. In sum and substance, we find that as the right acquired by the transferee from the sale of the software was to use the "copyrighted article‟ (i.e software products) and not the right to use the copyright embedded in the software, therefore, the payments received by the assesee from its distributors could not be stamped 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring on the definition of such term in the context of the convention, unless the tax treaty is also correspondingly amended. In our considered view, a country which is a party to the tax treaty cannot unilaterally alter its provisions. In fact, an amendment to the provision of the treaty can be made bilaterally after entertaining deliberations from both the countries who signed it. Accordingly, if there is no amendment to the provisions of the tax treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the tax treaty or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind, that the assessee would grant to its distributors a right of new official sub-release i.e a modification to a licensed software product which would incorporate the correctness and provide a functional or performance improvement. Also, the assessee would grant to its distributors a right of new official main release i.e an update to the existing software product with enhanced features, which the customers would prefer instead of buying new licensed software. Accordingly, the end user customers by entering into a maintenance agreement could access and download the updates offered 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 dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) respectfully craves to prefer an appeal against the order passed under Section 144C(13) read with Section 143(3) of the Income-tax Act, 1961 ('the Act') by the Deputy Commissioner of Income-tax (International Taxation) - 4(1)(2), Mumbai (hereinafter referred to as the 'AO') dated 31 August 2017 (received on 8 September 2017) in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, Mumbai (hereinafter referred to as the 'DRP') on the following grounds: General Ground 1. On the facts and circumstances of the case, the learned Aa has erred in determining the total taxable income of the Appellant for the subject AY at Rs. 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 Rs. 9,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn of income for A.Y 2011-12 on 28.03.2013, declaring its total income at Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 23. During the course of the assessment proceedings it was observed by the A.O that the assessee in order to facilitate distribution of its software in India had appointed its wholly owned subsidiary company viz. M/s Trimble Solutions 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 "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 Rs. 9,31,88,908/- 2. Payment received for maintenance and support services (including upgrades) Rs. 6,63,20,712/- 3. Payment received for management fees Rs. 69,62,683/-- Total Rs. 16,64,72,303/- 24. As is discernible from the orders of the lower ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (i). that, the draft assessment order having been passed by the A.O beyond the extended time period envisaged in clause (viii) of Explanation 1 to Sec. 153 was thus bared by limitation ; (ii). that, the payments received by the assessee for sale of specialized software of Rs. 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 Rs. 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 (Rs. 9,31,88,908/-) and towards maintenance and support services (including upgrades) of Rs. 6,63,20,712/- in the total income of the assessee and assessed its total income at Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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