TMI Blog2020 (7) TMI 99X X X X Extracts X X X X X X X X Extracts X X X X ..... Pramod Kumar, Vice President And Shri Ravish Sood, Judicial Member For the Appellant : Sh. Divesh Chawla, A.R For the Respondent : Sh. Avaneesh Tiwari, Sr. D.R ORDER PER RAVISH SOOD, JM The captioned appeals filed by the assessee company are directed against the respective orders passed by the A.O under Sec. 144C(13) r.w.s 143(3) of the Income Tax Act, 1961 (for short Act ) for Assessment Years 2013-14 and 2014-15, dated Nil and 13.07.2028, respectively. As the issues involved in the captioned appeals are inextricably interlinked or in fact interwoven, therefore, the same are being taken up and disposed off by way of a common order. We shall first advert to the appeal of the assessee for A.Y 2013-14. The assessee has assailed the impugned order on the following grounds of appeal before us : Based on the facts and circumstances of the case, Trimble Solutions Corporation (hereinafter referred to as the' Appellant' or 'Trimble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Section 9(1)(vi) of the Act. 7. On the facts and the circumstances of the case, the learned A.O has erred in holding that the payment of ₹ 97,65,680/- received by the Appellant towards management fees are taxable as Fees for Technical Services under Article 12 of the India-Finland Tax Treaty. Interest under Section 234A of the Act 8. On the facts and circumstances of the case, the learned AO has erred in upholding the levy of interest under Section 234A of the Act; Interest under Section 234B of the Act 9. On the facts and circumstances of the case, the learned AO has erred in upholding the levy of interest under Section 234B of the Act; and Penalty proceedings under Section 271(1)(c) of the Act 10. On the facts and circumstances of the case, the learned AO has erred in initiating penalty proceedings under Section 27I(l)(c) of the Act. The Appellant respectfully submits that the above grounds of appeal are independent and without prejudice to each other. The Appellant further prays that any other relief as the Hon'ble ITAT may deem fit be granted. The Appellant craves leave to add, alter, omit or substitute any or all of the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 scope of royalty . As such, it was the claim of the assessee that the software products provided to its distributors was for the purpose of resale/distribution to the end user customers for use as a copyrighted article (i.e software products) and there was no right to use the copyright embedded in the software. On the basis of the aforesaid facts, it was submitted by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scribe 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 any right in a copyright as mentioned in Sec. 14 of the Copyright Act would suffice to fulfil the condition of clause (v) of Explanation 2 to Sec. 9(1)(vi) of the Act. It was observed by the A.O, that the acts of the assessee and the distribution under the agreements to the end user customers through its distributors indicated the transfer or use of some of the copyrights as mentioned in Sec. 14 of the Copyright Act by the assessee to the distributors. Also, rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 14.12.2016 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 14.12.2016, before the Dispute Resolution Panel-2, Mumbai (for short DRP ). As regards the view taken by the A.O that the payments received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) were in the nature of royalty which thus were to be taxed at 10% as per Clause 2 of Article 12 of the India-Finland tax treaty, the DRP did not find any infirmity in the same and rejected the objection of the assessee. 8. After receiving the order of the DRP under Sec. 144C(5), dated 21.09.2017, the A.O vide his final assessment order under Sec. 144C(13) r.w.s 143(3), dated Nil, therein treating the amounts received by the assessee from its distributor for sale of specialized software of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation 2 to Sec. 9(1)(vi) of the Act, the A.O/DRP had included the same in the total income of the assessee for the year under consideration. 11. The ld. A.R submitted that the solitary issue involved in the present appeal of the assessee i.e as to whether or not the payments received by the assessee from its distributor for sale of specialized software and maintenance and support services (including upgrades) could be held as royalty as per Article 12 of the India-Finland tax treaty, and also as per the Explanation 2 to Sec. 9(1)(vi) of the Act, was squarely covered by the order of the Tribunal in the assessee s own case for A.Y 2010-11 (ITA No. 6481/Mum/2017) A.Y 2011-12 (ITA No. 6482/Mum/ in Trimble Solutions Corporation Vs. Deputy Commissioner Of Income-tax, Circle (IT)(4)(1)(2), Mumbai. Dated 16.12.2019. It was submitted by the ld. A.R, that the Tribunal in its aforesaid consolidated order had after exhaustive deliberations concluded that that the amount received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) cannot be held as royalty under Article 12 of the India-Finland tax treaty. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Trimble Solutions India Private Limited (earlier known as Tekla India Pvt. Ltd.); and (ii). M/s DowCoMax Services India Limited : 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/- Observing, that the payments received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) were in the nature of royalty as per Article 12 of the India-Finland tax treaty, and also as per the Explanation 2 to Sec. 9(1)(vi) of the Act, the A.O/DRP had included the same in the total income of the assessee for the year under consideration. 12. On a perusal of Article 12 of the India-Finland tax treaty, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with such permanent establishment or fixed base. In such case the provisions of article 7 or article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the right or property for which the royalties are paid is used within a Contracting State or the fees for technical services relate to services performed, within a Contracting State, then such royalties or fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source code of such software products; the distributors were not permitted to modify, translate or recompile, add to or in any way alter the software products including its documentation; the distributors were not permitted to create the source code of the software products supplied under the agreements; the distributors were not expressly permitted to reproduce or make copies of the software products under the agreements (except a backup copy as required by the customer); the distributors were not vested with any right of any nature in the Intellectual Property developed and owned by the assessee company in the software products; that all the trademarks and trade names which the distributors used in connection with the products supplied, remained the exclusive property of the assessee company which at all times had the title to all rights to Intellectual Property, software and proprietary information including all components, additions, modifications and updates; and the distributors did not have any authority to negotiate or to conclude contracts on behalf of the assessee company, act as its agent or in any way represent the assessee so as to bind it under any t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces for use of software is not taxable as royalty within the meaning of Article 12(3) of the DTAA between India and the USA. Also, the ITAT, Mumbai L Bench in DDIT Vs. Reliance Communications Ltd. (2018) 52 CCH 292 (Mum) had in its recent order held, that as the payment made by the assessee was for copyrighted article i.e software and there was no transfer of copyright of the software in any manner, thus the same did not amount to royalty within the definition of Article 12/13(3) of the respective tax treaties and resultantly the assessee remained under no obligation to deduct tax at source while making the remittances. 14. We shall now advert to the observations of the A.O/DRP, wherein they had through Article 3(2) of the India-Finland tax treaty tried to read the Explanation 4 , Explanation 5 and Explanation 6 to Sec. 9(1)(vi) as had been made available in the Income-tax Act, 1961 by the legislature vide the Finance Act, 2012 w.r.e.f 01/04/1976, into the definition of royalty contemplated in Article 12 of the India-Finland tax treaty. We are unable to persuade ourselves to subscribe to the aforesaid view of the lower authorities. Article 3(2) of the India-Fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was observed that clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. Also, similar view had been taken by a coordinate bench of the ITAT Mumbai I Bench, Mumbai in the ACIT (IT)- 4(1)(1), Mumbai vs. Reliance Jio Infocomm Ltd. [ITA No. 6331 to 6334/Mum/2018, dated 15/11/2019] and the ITAT Delhi Bench B in Datamine International Ltd. Vs. Addl. DIT, Range 1, International Taxation, New Delhi [2016] 158 ITD 84 (Delhi) . In the backdrop of our aforesaid deliberations, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities that Explanation 4 , Explanation 5 and Explanation 6 to Sec. 9(1)(vi) as had been made available in the Income-tax Act, 1961 by the legislature vide the Finance Act, 2012 w.r.e.f 01/06/1976, are to be read into the definition of royalty as envisaged in Article 12 of the India-Finland tax treaty. 15. As observed by us hereinabove, the assessee in addition to distribution of software products in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the assessee. 16. In terms of our aforesaid observations, we are of the considered view that the 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 Nos. 4 to 7 are allowed in terms of our aforesaid observations. We have perused the aforesaid order of the Tribunal, and being in agreement with the claim of the ld. A.R that the issue therein involved squarely covers the issues involved in the present appal before us, respectfully follow the same. Accordingly, in the same terms, we herein conclude that that amount received by the assessee from its distributor 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 Nos. 2 to 5 are allowed in terms of our aforesaid observations. 14. The Ground of appeal No. 1 being general is disposed off in terms of our aforesaid observations. 15. The assessee has as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case, the learned Aa has erred in holding that payments of ₹ 19,15,13,567/- received by the Appellant towards sale of 'off-the shelf software products and maintenance and support services are in the nature of 'Royalty' under the India-Finland Tax Treaty; Taxability of receipt of management fees of ₹ 1,04,10,922/- as Fees for Technical Services 4. On the facts and the circumstances of the case, the learned A.O has erred in holding that the payment of ₹ 1,04,10,922/- received by the Appellant towards management fees are taxable as Fees for Technical Services under the provisions of Section 9(1)(vi) of the Act. 5. On the facts and the circumstances of the case, the learned A.O has erred in holding that the payment of ₹ 1,04,10,922/- received by the Appellant towards management fees are taxable as Fees for Technical Services under the India-Finland Tax Treaty. Initiation of Penalty proceedings under Section 271(1)(c) of the Act 6. On the facts and circumstances of the case, the learned AO has erred in initiating penalty proceedings under Section 27I(l)(c) of the Act. The Appellant respectfully submits that the above grounds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been assessed as royalty by the A.O, were however rejected by the DRP. 23. After receiving the order of the DRP under Sec. 144C(5), dated 14.06.2018, the A.O passed the final assessment order under Sec. 144C(13) r.w.s 143(3), dated 13.07.2018. The A.O included the amounts received by the assessee on sale of specialized software and maintenance and support services (including upgrades) of 19,15,13,567/-in the total income of the assessee. Apart from that, the A.O also assessed the management fees of ₹ 1,04,10,922/- received by the assessee as FTS. In the backdrop of his aforesaid deliberations the income of the assessee was assessed at a total income of ₹ 20,19,24,489/-. 24. The assessee being aggrieved with the assessment framed by the A.O under Sec. 144C(13) r.w.s 143(3), dated 13/07/2018 has carried the matter in appeal before us. It was submitted by the ld. A.R that the Grounds of appeal Nos. 4 5 were not being pressed. Accordingly, as per the concession of the ld. A.R the Grounds of appeal Nos. 4 5 are dismissed as not pressed. As regards grounds of appeal nos. 2 3, it was submitted by the ld. authorised representatives for both the parties that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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