2020 (10) TMI 708 - AT - Income Tax

Tribunal: 'Off-the-shelf' software sales not 'Royalty' under tax law

Trimble Solutions Corporation C/o SRBC & Associates LLP Versus Deputy Commissioner of Income Tax (International Taxation) -4 (1) (2), Mumbai

The Tribunal ruled in favor of the assessee, determining that payments for the sale of 'off-the-shelf' software and maintenance/support services were not ... Income accrued in India - Royalties and Fees for Technical Services - payment received by the Appellant towards sale of ‘off-the shelf’ software - assessee is a tax resident of Finland - India-Finland DTAA - HELD THAT:- As decided in own case [2020 (7) TMI 99 - ITAT MUMBAI]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 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. Issues Involved:1. Whether the payments received by the assessee towards the sale of 'off-the-shelf' software are in the nature of 'Royalty' as per Section 9(1)(vi) of the Income Tax Act.2. Whether the payments received by the assessee towards the sale of 'off-the-shelf' software are in the nature of 'Royalty' under the India-Finland Tax Treaty.3. Whether the payments received by the assessee towards maintenance and support services (including upgrades) are in the nature of 'Royalty' as per Section 9(1)(vi) of the Income Tax Act.4. Whether the payments received by the assessee towards maintenance and support services (including upgrades) are in the nature of 'Royalty' under Article 12 of the India-Finland Tax Treaty.Issue-wise Detailed Analysis:1. Payments for Sale of 'Off-the-Shelf' Software as 'Royalty' under Section 9(1)(vi) of the Income Tax Act:The Assessing Officer (AO) classified the payments received by the assessee for the sale of 'off-the-shelf' software as 'Royalty' under Section 9(1)(vi) of the Act. However, the Tribunal, referencing the assessee's own cases for AYs 2010-11, 2011-12, 2013-14, and 2014-15, concluded that the payments were not 'Royalty'. The Tribunal noted that the distributors were granted a non-exclusive license to market and distribute the software without rights to the source code, modification, or reproduction of the software, thus constituting sales revenue rather than 'Royalty'.2. Payments for Sale of 'Off-the-Shelf' Software as 'Royalty' under the India-Finland Tax Treaty:The AO also classified these payments as 'Royalty' under the India-Finland Tax Treaty. The Tribunal observed that the definition of 'Royalty' in Article 12 of the treaty pertains to payments for the use of intellectual property rights, which was not the case here. The Tribunal emphasized that the distributors were only granted rights to distribute the software, not to use the copyright embedded in it. Consequently, the payments were determined to be sales revenue and not 'Royalty'.3. Payments for Maintenance and Support Services as 'Royalty' under Section 9(1)(vi) of the Income Tax Act:Similarly, the AO considered the payments for maintenance and support services (including upgrades) as 'Royalty' under Section 9(1)(vi). The Tribunal, however, found that these payments were for software updates and support services provided to the distributors, who then offered these to end-user customers. The Tribunal ruled that these payments were akin to sales revenue and not 'Royalty' as the distributors did not gain rights to use the copyright in the software.4. Payments for Maintenance and Support Services as 'Royalty' under Article 12 of the India-Finland Tax Treaty:The AO also classified these payments as 'Royalty' under Article 12 of the India-Finland Tax Treaty. The Tribunal, referencing its earlier findings, concluded that the payments for maintenance and support services were not 'Royalty' as defined in the treaty. The Tribunal highlighted that the services provided did not grant the distributors any rights to use the copyright in the software, thus categorizing the payments as sales revenue.Conclusion:The Tribunal consistently ruled in favor of the assessee, determining that the payments received for the sale of 'off-the-shelf' software and for maintenance and support services were not 'Royalty' under both Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Finland Tax Treaty. These payments were classified as sales revenue. The Tribunal's decisions were based on the nature of the agreements between the assessee and its distributors, which did not grant rights to use the copyright in the software. Consequently, the appeal was partly allowed, and the grounds related to the classification of payments as 'Royalty' were upheld in favor of the assessee.