TaxTMI 
TaxTMI 
2020 (1) TMI 1227
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....of 'off-the shelf' software are in the nature of 'Royalty' as per the provisions of Section 9(1)(vi) of the Act; 3. On the facts and circumstances of the case, the AO has erred in holding that payments of Rs. 10,61,12,437/- received by the Appellant towards sale of 'off-the shelf' software are in the nature of 'Royalty' under India-Finland Tax Treaty; 4. On the facts and circumstances of the case, the AO has erred in holding that payments of Rs. 8,56,35,946/- received by the Appellant towards maintenance and support services (including upgrades) are in the nature of 'Royalty' as per the provisions of Section 9(1)(vi) of the Act; 5. On the facts and circumstances of the case, the AO has erred in holding that payments of Rs. 8,56,35,946/- received by the Appellant towards maintenance and support services (including upgrades) are in the nature of 'Royalty' under Article 12 of the India-Finland Tax Treaty;" 3. Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2012-13 on 30.11.2012 declaring total income of Rs. Nil. The assessee is a tax resident of Finland. It has....
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....s that the said decisions of the Tribunal are applicable to the impugned assessment year. On the other hand, the Ld. Departmental Representative (DR) supports the order passed by the AO u/s 144C(13) r.w.s. 143(3) of the Act. 5. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. In order to distribute its software in India, the assessee has appointed Trimble Solutions India, its wholly owned subsidiary, and DCMIPL as its non-exclusive resellers/distributors for the Indian territory. (Trimble Solutions India and DCMIPL are collectively referred to as 'Distributors' and the agreements are collectively referred to as 'Agreements' for the purposes of this discussion). The key features of the Agreements with respect to the distribution of software products in India are as follows: The Distributors have been granted a 'non-exclusive' license to market and distribute the software products developed by the assessee; The Distributors do not have a right to the source code of such software products; The Distributors are not permitted to modify, translate or recompile,....
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....nt for the software products supplied, sends the permanent password to the Distributor, who in turn forwards it to the Customer, on their final payment. In a case where the Customer does not pay the final amount, the Distributor has a right to sell the licensed software to other Customer without paying any further price to the assessee. The responsibility of collection of the invoiced amount from the Customers, i.e. credit risk for sales made by the Distributors, remains with the Distributors. 5.1 We find that the Tribunal in assessee's own case for AYs 2010-11 and 2011-12 has held that : "11. 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 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. The assessee during the year had received the following payments from its non-exclusive resellers/distributors for the Indian territory viz. (i). M/s Trimble Soluti....
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....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 owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of article 7 or article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Co....
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.... 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 received by the assessee from its distributors were in the nature of sales revenue and not "royalty". On a perusal of the respective "agreements" entered into by the assessee with its resellers/distributors the rights which were vested with them can briefly be culled out as under : the distributors were granted a non-exclusive license to market and distribute the software products developed by the assessee company; the distributors did not have a right to the source code of such software products; the distributors were not permitted to modify, translate or recompile, add to or in any way alter the software products including its documentation....
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....ily 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, therefore, the payments received by the assessee on such sale of software would be its "business income" and cannot be regarded as "royalty" income under the provisions of India-Finland tax treaty. Our aforesaid view is fortified by the judgments of the Hon'ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del). In the said judgment the Hon'ble High Court had observed that the consideration received by the assessee on grant of licences for use of software is not taxable as "royalty" within the meaning of Article 12(3) of the DTAA between India and the USA. Also, the ITAT, Mumbai "L" Bench in DDIT ....
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....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.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 Finance Act, 2012 w.r.e.f 01/06/1976 cannot be read into the India-Finland tax treaty. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Delhi in DIT vs. New Skies Satellite BV (2016) 382 ITR 114 (Del). In the said case it was observed by the Hon'ble High Court that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend its operation to the terms of an international treaty. Further, it was observed that clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the sam....