TaxTMI 
TaxTMI 
2020 (7) TMI 99
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.... 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-tax (International Taxation) - 4(1)(2), Mumbai (hereinafter referred to as the 'AO') dated 16 October 2017 (received on 30 October 2017) in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, Mumbai (hereinafter referred to as the 'DRP') on the following grounds: General Ground 1. On the facts and circumstances of the case, the learned Aa has erred in determining the total taxable income of the Appellant for the subject AY at Rs. 29,95,51,758/- as against 'Nil' income reported in the return of income filed by the Appellant for the subject AY; Taxability of receipt from sale of 'off-the shelf' software amounting to Rs. 28,39,87,816/- as 'Royalty' 2. On the facts and circumstances of the case, the learned At) has erred in holding that payments of Rs. 28,39,87,816/- received by the Appellant towards sale of 'off-the shelf software are in the nature of 'Ro....
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....nt 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 above grounds of appeal, at any time before or at the time of the appeal, to enable the Hon'ble ITAT to decide the appeal according to law." 2. Briefly stated, the assessee which is a foreign company incorporated in Finland is engaged in the business of developing and marketing specialized off-the-shelf software products which are used in industries like building and construction, energy distribution and infrastructure management. In India, the assessee markets and distributes the specialized software products to the end user customers through a distribution channel which inter alia consisted of its subsidiary. Return of income for A.Y 2013-14 was filed by the assessee company on 29.11.2013, declaring its total income at Rs. Nil. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. During the course of the assessment proceedings it was observed by the A.O that the assessee in order to facilitate distribution of its software products in India had appointed....
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.... revenue that was collected from it. It was submitted by the assessee, that for the purpose of categorizing an income from a transaction as amounting to 'royalty' what is to be seen is as to whether the transferee has the right of commercial exploitation of the Intellectual property contained therein. It was claimed that as the assessee had only granted the right to distribute the software products and not any right to reproduce or make copies of the software product, therefore, the amounts received from its distributors could not be held as 'royalty' in its hands. Also drawing support from the Copyright Act, it was submitted by the assessee that a transfer of the material object (i.e the software product) which is the subject of copyright did not necessarily involved a transfer of the copyright. Accordingly, it was the claim of the assessee that the right acquired by the transferee from the sale of the software was to use the 'copyrighted article' (i.e software product) and not the 'right to use' the copyright embedded in the software. In order to support its aforesaid claim, the assessee also relied on Para 14.4 of the OECD Commentary. As such, it was the claim of the assessee th....
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....e Act, 2012 w.r.e.f 01.06.1976, the A.O was of the view that after the amendment it could safely be concluded that transfer of all or any rights to use a computer software (including the grant of a license) fell within the ambit of the term 'royalty' under Sec. 9(1)(vi) of the Act. Further, the A.O was of the view that the definition of 'royalty' under Article 12(3) of the India-Finland tax treaty was similar to the definition of 'royalty' under the provisions of the Act, and the insertion of Explanations 3, 4, 5 and 6 to the definition of 'royalty' under the Act had not expanded the scope of 'royalty' under the India-Finland tax treaty. Further, the A.O observed that the doctrine of updating construction was required to be applied to the tax treaty and to the terms appearing in the tax treaty which not having been expressly defined in the treaty were to be understood with the changing environment. 5. Further, it was observed by the A.O that the assessee had also provided software upgrades, maintenance and support services with regard to its software, viz. "Trimble software" to the distributor, who in turn provided the same to the end user customer, as and where such end user cust....
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....rein included the same in the total income of the assessee. Apart from that, the A.O treated the management fees of Rs. 97,65,680/- received by the assessee as FTS. On the basis of his aforesaid deliberations the income of the assessee was determined at 29,95,51,758/- 9. The assessee being aggrieved with the order of the A.O under Sec. 144C(13) r.w.s 143(3), dated Nil, has carried the matter in appeal before us. The ld Authorised Representative (for short 'A.R') for the assessee at the very outset of the hearing of the appeal submitted, that he was not pressing Grounds of appeal Nos. 6 & 7. Accordingly, as per the concession of the ld. A.R the Grounds of appeal No. 6 & 7 are dismissed as not pressed. 10. We shall now advert to the contentions advanced by the ld. A.R as regards the merits of the case. As observed by us hereinabove, the assessee which is a foreign company incorporated in Finland with its registered office at Metsanpojankuja 1, P1-02131 Esp, Finland, is engaged in the business of developing and marketing specialized software products which are used in industries like building and construction, energy distribution and infrastructure management. The assessee during th....
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....he India-Finland tax treaty. 12. Per Contra, the ld. Departmental representative (for short "D.R') relied on the orders of the lower authorities. 13. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As is discernible from the records, we find that the issue involved in the present appeal i.e as to whether 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, had came up for adjudication before the Tribunal in the assessee's own appeals for A.Y 2010-11 (ITA No. 6481/Mum/2017) & A.Y 2011- 12 (ITA No. 6482/Mum/2017) viz. Trimble Solutions Corporation Vs. Deputy Commissioner Of Income-tax, Circle (IT)(4)(1)(2), Mumbai. The Tribunal after deliberating at length on the issue therein involved had in its aforesaid order, had concluded, that the amount received by the assessee from its distributors ....
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.... Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services. 3. (a) The term "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, and films or tapes for television or radio broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience, (b) The term "fees for technical services" as used in this article means payments of any kind, other than those mentioned in articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owne....
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....from the records, we find, that the assessee company as per the terms and conditions of its respective 'agreements' with its non-exclusive resellers/distributors for the Indian territory, viz. (i). M/s Trimble Solutions India Private Limited, WOS of the assessee company; and (ii). M/s DowCoMax Services India Limited, had merely granted to the said distributors the right to distribute the copyrighted article (i.e software products) and not the copyright in the said article. In fact, we find that the assessee exclusively owned all the Intellectual Property Rights (IPR's) in relation to the software, viz. "Trimble software". As per the respective "agreements" entered into by the assessee with its resellers/distributors, we find, that the distributors did not use or had any right to use the copyright in the software programme. In our considered view as the software provided by the assessee to its resellers/distributors was only for the purpose of resale/distribution to the end user customer for use as a 'copyrighted article' (i.e software product) with no right to use the copyright embedded in the software, therefore, it can safely or rather inescapably be concluded that the payments r....
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....ture of sales revenue and could not be held as 'royalty' in its hands. In sum and substance, we find that as the right acquired by the transferee from the sale of the software was to use the 'copyrighted article' (i.e software products) and not the right to use the copyright embedded in the software, therefore, the payments received by the assesee from its distributors could not be stamped as 'royalty' in the hands of the assessee. We also find substance in the claim of the ld. A.R that as per the Copyright Act, a transfer of the copyrighted article (i.e the software product) which is the subject of copyright would not necessarily involve a transfer of the copyright. As can be gathered from a perusal of the 'agreements' between the assessee and its distributors, the rights acquired by the transferee on the sale of the copyrighted article (i.e software products) is to use the copyrighted article and not the right to use the copyright embedded in the software. On the basis of our aforesaid observations, we are of the considered view that as the sale of the copyrighted article (i.e software products) by the assessee company cannot be regarded as a sale of copyright in the software, ....
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.... the provision of the treaty can be made bilaterally after entertaining deliberations from both the countries who signed it. Accordingly, if there is no amendment to the provisions of the tax treaty but there is some amendment adverse to the assessee in the Act, which provision has been specifically defined in the tax treaty or there is no reference in the tax treaty to the adoption of such provision from the Act, then such amendment will have no effect on the tax treaty. On a perusal of the India-Finland tax treaty, we find, that the term 'royalty' has been defined in Article 12(3)(a). Such definition of the term 'royalty' as per the said article is exhaustive. We find that pursuant to the insertion of Explanation 4, Explanation 5 and Explanation 6 by the Finance Act, 2012 w.r.e.f 01/04/1976, no corresponding amendment has been made in the India-Finland tax treaty to bring the definition of 'royalty' therein envisaged at par with that provided under Sec. 9(1)(vi) of the Act. Accordingly, we are of the considered view that the retrospective insertion of Explanation 4, Explanation 5 and Explanation 6 to Sec. 9(1)(vi) of the Act as had been made available on the statute by the Financ....
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....ain release i.e an update to the existing software product with enhanced features, which the customers would prefer instead of buying new licensed software. Accordingly, the end user customers by entering into a maintenance agreement could access and download the updates offered by the assessee. As 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 resolv....
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....011-12. The assesee 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-tax (International Taxation) - 4(1)(2), Mumbai (hereinafter referred to as the 'AO') dated 13 July 2018 (received on 24 July 2018) in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel - 2, Mumbai (hereinafter referred to as the 'DRP') on the following grounds: General Ground 1. On the facts and circumstances of the case, the learned Aa has erred in determining the total taxable income of the Appellant for the subject AY at Rs. 20,19,24,489/- as against 'Nil' income reported in the return of income filed by the Appellant for the subject AY; Taxability of receipt from sale of 'off-the shelf' software products and maintenance and support services amounting to Rs....
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....d subsidiary company viz. M/s Trimble Solutions India Private Limited (earlier known as Tekla India Pvt. Ltd.), vide an 'agreement' dated 28.01.2008, as its non-exclusive reseller/distributor for the Indian territory. On a perusal of the records, it was observed by the A.O that the assessee had during the year received the following payments from its distributor : Sr. No. Particulars Amount 1. Payment received for sale of off-the shelf software and maintenance and support services (including upgrades) Rs. 19,15,13,567/- 3. Payment received for management fees Rs. 104,10,922/- Total Rs. 20,19,24,489/- 21. The A.O, vide his draft assessment order passed under Sec. 144C(1) r.w.s 143(3), dated 14.11.2017, being of the view that the payments received by the assessee for sale of specialized software and maintenance and support services (including upgrades) of 19,15,13,567/- were in the nature of royalty, proposed to include the same in the scope of the total income of the assessee. Also, the A.O proposed to add the management fees of Rs. 1,04,10,922/- as FTS in the hands of the assessee. 22. Objections filed by the assessee before the DRP that the payments received ....