Trimble Solutions Corporation Vs DCIT (International Taxation) (ITAT Mumbai)
The issue under consideration is whether the Income received for sale of specialized software and maintenance and support services is considered as ‘Royalty’ as per India-Finland Tax Treaty?
ITAT states that, the assessee in addition to distribution of software products in India had also provided software upgrades, maintenance and support services with regard to its software to the distributors, who in turn provided the same to the end user customers who had entered into a maintenance agreement with the distributors. The assessee during the year had received an amount 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 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. In terms of our aforesaid observations, ITAT are of the considered view that the 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.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order dated 31.08.2017 passed by the Deputy Commissioner of Income Tax (IT)-4(1)(2), Mumbai [hereinafter ‘the AO’] u/s 144C(13) r.w.s. 143(3) of the Income Tax Act 1961 (the ‘Act’).
2. At the start of the hearing, the Ld. counsel for the assessee submits that the 1st ground of appeal is general in nature. We turn to the 2nd, 3rd, 4th and 5th grounds of appeal which read as under :
“2. 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’ 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 its registered office at Metsanpojankuja 1, FI-02131 Espoo, Finland. It is engaged in the business of development and marketing of specialized 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 consisting of subsidiary and a third party distributor. In order to distribute its software in India, the assessee appointed Trimble Solutions India Private Limited (earlier known as Tekla India Private Limited) (hereinafter referred to as ‘Trimble Solutions India’), its wholly owned subsidiary, vide agreement dated 28 January 2008 and DowCoMax Services India Limited (‘DCMIPL’) vide agreement dated, 23 June 2008 (collectively referred to as ‘Distributors’), as its non-exclusive resellers / distributors for the Indian territory. During the impugned assessment year, the assessee received the following payments from the Distributors:
