TaxTMI 
TaxTMI 
2020 (7) TMI 99
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....ons 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 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 Ap....
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....nder Section 27I(l)(c) of the Act. The Appellant respectfully submits that the above grounds of appeal are independent and without prejudice to each other. The Appellant 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....
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....t to use the copyright embedded in the software. On the basis of the aforesaid facts, it was submitted by the assessee that the amounts received from its distributor was not in the nature of 'royalty' but in the nature of sales 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 softw....
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.... of some of the copyrights as mentioned in Sec. 14 of the Copyright Act by the assessee to the distributors. Also, relying upon the Explanation 4 and 5 to Sec. 9(1)(vi), as had been made available on the statute vide the Finance 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 h....
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....il, therein treating the amounts received by the assessee from its distributor for sale of specialized software of Rs. 28,39,87,816/- and towards maintenance and support services (including upgrades) of Rs. 57,98,262/-, as 'royalty', therein 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, P....
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....y covered by the aforesaid order of the Tribunal, and on the same reasoning the amount received by the assessee from its distributor for sale of specialized software and maintenance and support services (including upgrades) cannot be held as 'royalty' as per Article 12 of the 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.....
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.... reproduced as under : "ARTICLE 12 Royalties and Fees for Technical Services 1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the 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 fo....
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.... have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement." 13. As is discernible 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 t....
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....righted article (i.e software products). In our considered view, 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, in the absence of vesting of any right of commercial exploitation of the Intellectual property contained in the copyrighted article (i.e software products) with the transferee, the amounts received by the assessee from its distributors was clearly in the nature 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 perusa....
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....f that State for the purposes of the taxes to which the Agreement applies. As such, if a particular term has been specifically defined in the tax treaty, then the amendment to the definition of such term under the Act would have no bearing on the definition of such term in the context of the convention, unless the tax treaty is also correspondingly amended. In our considered view, a country which is a party to the tax treaty cannot unilaterally alter its provisions. In fact, an amendment to 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 ....
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....butors. The assessee during the year had received an amount of Rs. 2,22,46,237/- from its distributors towards maintenance and support services (including upgrades). On a perusal of the records, we find, that the assessee would grant to its distributors a right of new official sub-release i.e a modification to a licensed software product which would incorporate the correctness and provide a functional or performance improvement. Also, the assessee would grant to its distributors a right of new official main 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 produc....
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....e of the A.O. Grounds of appeal Nos. 8 & 9 are disposed off in terms of our aforesaid observations. 16. The assessee has assailed the initiation of the penalty proceedings u/s 271(1)(c), vide ground of appeal No. 10. As the said grievance of the assessee is premature, therefore the same is dismissed. Ground of appeal No. 10 is dismissed. 17. The appeal of the assessee is partly allowed in terms of our aforesaid observations. ITA No. 5271/Mum/2018 A.Y 2014-15 18. We shall now advert to the appeal of the assessee for A.Y 2011-12. 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 Ho....
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.... 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." 19. Briefly stated, the assessee company had filed its return of income for A.Y 2014-15 on 29.11.2014, 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. 20. 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 in India had appointed its wholly owned 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 rec....