TMI Blog2020 (1) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. - Decided in favour of assessee. - ITA No. 6483/MUM/2017 - - - Dated:- 7-1-2020 - SHRI SAKTIJIT DEY ( JUDICIAL MEMBER ) AND SHRI N. K. PRADHAN ( ACCOUNTANT MEMBER ) Assessee by : Mr. Divesh Chawla, AR Revenue by : Mr. Avaneesh Tiwari, DR Date of Pronouncement : 07/10/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stribute its software in India, the assessee appointed Trimble Solutions India Private Limited (earlier known as Tekla India Private Limited) (hereinafter referred to as 'Trimble Solutions India'), its wholly owned subsidiary, vide agreement dated 28 January 2008 and DowCoMax Services India Limited ('DCMIPL') vide agreement dated, 23 June 2008 (collectively referred to as 'Distributors ), as its non-exclusive resellers / distributors for the Indian territory. During the impugned assessment year, the assessee received the following payments from the Distributors: Sr. No. Particulars Amount 1 Payment received for sale of off-the shelf software 10,61,12,437/- 2 Payment received for maintenance and support services (including upgrades) 8,56,35,946/- 3 Payment received for management fees 74,16,621/- Total 19,91,65,004/- The AO held that the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not expressly permitted to reproduce or make copies of the software products under the agreements (except a backup copy as required by the customer); No right of any nature whatsoever has been granted to the Distributors in the Intellectual Property developed and owned by the assessee in the software products; All the trademarks and trade names, which the Distributors use in connection with the products supplied, remain the exclusive property of the assessee. The assessee at all times has the title to all rights to Intellectual Property, software and proprietary information including all components, additions, modifications and updates; and the distributors do 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 transaction. The modus operandi of the distribution of software products transaction is set out in brief as follows: The transaction may be initiated due to the marketing efforts of the Distributors or by way of Customers approaching the Distributors for purchase of software products. Upon acceptance of the order by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived 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 find, that the definition of the term royalty therein envisage payments received 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer is that State itself, a political subdivision, 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 the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 transaction. As is borne from the records, the software provided by the assessee to its distributors was for the purpose of resale/distribution to the end user customers and there was no right to use the copyright e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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.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- Finland tax treaty provides that as regards the application of the Agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 India had also provided software upgrades, maintenance and support services with regard to its software to the distributors, who in turn provided the same to the end user customers who had entered into a maintenance agreement with th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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