TaxTMI 
TaxTMI 
2019 (5) TMI 276
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....venue of Rs. 1,31,74,984/-. The question in this appeal is as to whether the aforesaid sum received by the assessee as maintenance revenue is chargeable to tax in India or not? The nature of maintenance to be rendered by the assessee as explained in the Maintenance Agreement between the assessee and the client is as follows: "Maintenance : Upon payment by Customer of maintenance fees ("Maintenance Fees"), i2 shall provide Customer with corrective maintenance, updates, enhancements or modifications to the Licensed Software which i2 incorporates into and makes part of the Licensed Software and does not separately price or market (collectively, the "Enhancements '') and telephone support during i2 's regular business hours (8 am -5pm CST, Monday -Friday) for the sole purpose of reporting problems with the System (collectively referred to herein as "Maintenance). Telephone support shall be provided to only one Customer designated representative or alternate at one central site as designated by Customer. Such telephone support will be provided only to those Customer designates who have attended the System training class. i2 shall not be obligated t....
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....ical, industrial, commercial or scientific knowledge, experience or skill; (v) the use of right to use any industrial, commercial or scientific equipments but not including the amount referred to in section 44BB; (vi) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or vide tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vii) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)". 3.1. The case of the assessee on the other hand is that the maintenance revenue received is not in the nature of royalty as per the definition of royalty as given in Explanation-2 to Section 9(1)(vi) of the of the Income Tax Act, 1961 (Act). The further plea of the assessee is that as per the definition of royalty as contained in Article 12(3)(4) of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as "DTAA"), the mainte....
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....the DTAA. Since the maintenance services are in relation to right to use in respect of a copy right, the maintenance services performed in respect of software sold by the assessee would be services in connection with the right to use copy right in the software and would therefore be royalty within the definition of the term as given in Explanation-2(vi) of the Act. The AO did not deal with the argument of the Assessee on Article 12(4) of the DTAA. 4. On appeal by assessee, the CIT(A) noticed that the software was originally sold by i2 Technologies (Netherlands) BV, which is also another group entity, but nevertheless a different entity. With effect from 01-04-2005, i2 Technologies (Netherlands) BV, transferred the entire maintenance contract in respect of the software sold by them in India to the assessee. These facts are clear from reading of para 4.3.2 of the order of CIT(A) in which the CIT(A) has noticed the terms of the Software License Agreement between i2 Technologies (Netherlands) BV and the Indian customers to whom software was supplied by the said entity, which is as follows: "4.3.2 In the course of appellate proceedings, the appellant has furnished copies of ....
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....for included services' in Article 12 of the relevant DTAA shows that in order for a service fee to be considered ancillary and subsidiary to the application or enjoyment of some right, property or information for which a royalty payment is received, the service must be related to the application or enjoyment of the right, property or information. In addition, the clearly predominant purpose of the arrangement under which the payment of the service fee and such other payments are made must be the application or enjoyment of the right, property or information described in paragraph 3 of Article 12. In the instant case, it is evident that the Maintenance Services provided by the appellant facilitate the effective application and implementation of the software licensed to its clients. Without such Maintenance Services, the customers of the appellant will not know how to deal with bugs or defects in the software which may seriously affect the application of such software as well as business operations of the clients. Nor will the customers be entitled to updates, enhancements or modifications to the licensed software which is provided by the appellant as part of Maintenance Services....
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....are, which was made by i2 Technologies (Netherlands) BV, was regarded as in the nature of royalty and taxed in the hands of i2 Technologies (Netherlands) BV. In the case of assessee, the conclusion is that the maintenance revenue is also royalty, based only on the fact that the revenue from supply of software was regarded as royalty and therefore, maintenance services are also be considered as royalty as they are ancillary to the supply of software. Ld. Counsel for the assessee brought to our notice the decision of the Hon'ble ITAT of Mumbai Bench in the case of M/s. i2 Technologies (Netherlands) BV Vs. ACIT (International Taxation) in ITA Nos. 2410/Mum/2007 and 6449/Mum/2008, AYs. 2002-03 & 2004-05, wherein the ITAT, Mumbai came to the conclusion that the supply of software by i2 Technologies (Netherlands) BV to Indian Customers and to whom the Assessee rendered maintenance services, cannot be taxed as royalty and was in the nature of business income and since i2 Technologies (Netherlands) BV, did not have a Permanent Establishment (PE) in India, the sum-in-question cannot be taxed in India. It may be mentioned that the Tribunal while coming to the above conclusion that rev....