Tribunal rules against taxing payments as Royalty or Technical Services under India-Sweden DTAA

The Tribunal ruled that the amount of Rs. 1,48,54,717/- could not be taxed as Royalty under the Double Taxation Avoidance Agreement (DTAA) between India and Sweden, as it did not involve the transfer of copyright. Additionally, the Tribunal held that the sum of Rs. 38,97,417/- could not be classified as 'Fees for Technical Services' under the DTAA, as the maintenance services provided did not impart technical knowledge for future use. The appeal was allowed, and the decision was rendered on 30th August 2019.

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Issues Involved:
1. Taxability of Rs. 1,48,54,717/- as Royalty under the Income-tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and Sweden.
2. Treatment of Rs. 38,97,417/- received for providing maintenance services as 'Fees for Technical Services' under the Income-tax Act and the DTAA.

Issue-wise Detailed Analysis:

1. Taxability of Rs. 1,48,54,717/- as Royalty:

The assessee, a non-resident company incorporated in Sweden, received Rs. 1,48,54,717/- from Sandvik Asia Private Limited (SAPL) for CAD/CAM monthly costs. The Assessing Officer (AO) treated this amount as Royalty under Section 9(1)(vi) of the Income-tax Act and the DTAA between India and Sweden, arguing that the payment was for limited user access to the CAD/CAM software application. This view was supported by the Dispute Resolution Panel (DRP) based on a similar decision for the assessment year 2013-14.

The Tribunal examined the taxability under both the Act and the DTAA. Under the Act, the Tribunal noted the retrospective amendment to Section 9(1)(vi) by the Finance Act, 2012, which clarified that any consideration for the use or right to use computer software, including granting a license, constitutes Royalty. This amendment, effective from 01-06-1976, made it clear that the amount in question is chargeable to tax as Royalty under the Act.

Under the DTAA, Article 12 defines 'Royalties' as payments for the use of or the right to use any copyright. The Tribunal referred to the Delhi High Court's decision in DIT Vs. Infrasoft Ltd., which held that payments for a license to use software did not constitute Royalty under the DTAA as it was for a copyrighted article, not the use of a copyright. The Tribunal found that the assessee only transferred a limited right to use the CAD/CAM software for internal business purposes without transferring any copyright. Therefore, the amount could not be construed as 'Royalties' under the DTAA.

The Tribunal also considered the Karnataka High Court's decision in CIT Vs. Samsung Electronics Co. Ltd., which held that payments for software constituted Royalty under the DTAA. However, since the assessee was not under the jurisdiction of the Karnataka High Court, the Tribunal followed the Delhi High Court's decision, which was more favorable to the assessee. Consequently, the Tribunal held that the amount could not be considered Royalty under the DTAA.

2. Treatment of Rs. 38,97,417/- as 'Fees for Technical Services':

The second issue involved the treatment of Rs. 38,97,417/- received from SAPL for providing maintenance services for GSS software. The AO treated this amount as 'Fees for Technical Services' under Section 9(1)(vii) of the Act and the DTAA. The DRP upheld this decision.

The Tribunal first examined the nature of the service, confirming that it was for maintenance of existing software, which involves technical knowledge. Under Section 9(1)(vii) of the Act, 'Fees for Technical Services' includes consideration for rendering technical or consultancy services. The Tribunal concluded that the amount received for software maintenance constituted 'Fees for Technical Services' under the Act.

Under the DTAA, Article 12 defines 'fees for technical services' similarly to the Act. However, the DTAA with Sweden includes a Most Favoured Nation (MFN) clause, which means that if India has a more restricted scope of 'fees for technical services' in a DTAA with another OECD country, that restricted scope applies. The DTAA with Portugal, an OECD member, defines 'fees for included services' as payments for services that 'make available' technical knowledge, experience, skill, or know-how.

The Tribunal noted that 'make available' means the recipient can use the acquired knowledge or skill independently in the future. In this case, the maintenance services provided by the assessee did not 'make available' any technical knowledge or skill to SAPL for future use. Therefore, the amount did not qualify as 'fees for technical services' under the DTAA. The Tribunal directed that the amount should not be considered as 'fees for technical services' under the DTAA, following the beneficial provisions of the DTAA over the Act.

Conclusion:

The Tribunal allowed the appeal, holding that Rs. 1,48,54,717/- could not be taxed as Royalty under the DTAA and Rs. 38,97,417/- could not be treated as 'Fees for Technical Services' under the DTAA. The decision was pronounced in the Open Court on 30th August 2019.

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