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2020 (1) TMI 1227 - AT - Income TaxIncome accrued in India - Royalty OR business income - Royalties and Fees for Technical Services - Amount received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) - India-Finland tax treaty - HELD THAT - As decided in own case 2019 (12) TMI 1315 - ITAT MUMBAI 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. 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. 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. - Decided in favour of assessee.
Issues Involved:
1. Classification of payments received for the sale of 'off-the-shelf' software as 'Royalty' under Section 9(1)(vi) of the Income Tax Act. 2. Classification of payments received for the sale of 'off-the-shelf' software as 'Royalty' under the India-Finland Tax Treaty. 3. Classification of payments received for maintenance and support services (including upgrades) as 'Royalty' under Section 9(1)(vi) of the Income Tax Act. 4. Classification of payments received for maintenance and support services (including upgrades) as 'Royalty' under Article 12 of the India-Finland Tax Treaty. Detailed Analysis: Issue 1: Classification of Payments for 'Off-the-Shelf' Software as 'Royalty' under Section 9(1)(vi) of the Income Tax Act The AO held that the payments received for the sale of specialized software are in the nature of royalty as per the provisions of Section 9(1)(vi) of the Act. The Tribunal, however, found that the software provided by the assessee to its distributors was for resale/distribution to end-user customers without any right to use the copyright embedded in the software. The Tribunal noted that the distributors were granted a non-exclusive license to market and distribute the software products, without rights to the source code, modification, or reproduction of the software. The Tribunal concluded that the payments received by the assessee were in the nature of sales revenue and not royalty, thus reversing the AO’s decision. Issue 2: Classification of Payments for 'Off-the-Shelf' Software as 'Royalty' under the India-Finland Tax Treaty The AO also classified these payments as royalty under the India-Finland Tax Treaty. The Tribunal referred to Article 12 of the India-Finland tax treaty, which defines royalty as payments for the use of, or the right to use, any copyright. The Tribunal reiterated that the distributors did not have the right to use the copyright in the software, only the right to distribute the copyrighted article. Consequently, the payments were deemed to be business income and not royalty under the tax treaty. This conclusion was consistent with previous Tribunal decisions in the assessee’s own case for AYs 2010-11, 2011-12, 2013-14, and 2014-15. Issue 3: Classification of Payments for Maintenance and Support Services as 'Royalty' under Section 9(1)(vi) of the Income Tax Act The AO classified payments received for maintenance and support services (including upgrades) as royalty under Section 9(1)(vi) of the Act. The Tribunal found that the payments for software upgrades and support services were for providing copyrighted articles and not for the right to use the copyright. The Tribunal noted that the distributors were responsible for resolving customer queries, with the assessee providing support only when necessary. Thus, the payments for these services were considered business income rather than royalty. Issue 4: Classification of Payments for Maintenance and Support Services as 'Royalty' under Article 12 of the India-Finland Tax Treaty The AO also classified these payments as royalty under Article 12 of the India-Finland Tax Treaty. The Tribunal held that the payments for maintenance and support services did not fall within the scope of the definition of royalty in Article 12 of the tax treaty. The Tribunal emphasized that the services provided were for the distribution of copyrighted articles (software updates) and not for the use of the copyright itself. Therefore, these payments were also considered business income and not royalty. Conclusion: The Tribunal allowed the 2nd, 3rd, 4th, and 5th grounds of appeal, reversing the AO’s classification of the payments as royalty. The 6th and 7th grounds of appeal were dismissed as not pressed, and the 8th and 9th grounds were deemed consequential. The 10th ground of appeal regarding penalty was considered premature. The appeal was partly allowed.
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