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2019 (5) TMI 276 - AT - Income TaxRoyalty receipt - maintenance fees from customer - sale of software by itself by group company - the group company transferred the entire maintenance contract in respect of the software sold by them in India to the assessee - right to use contemplated by the Article 12(3) of the DTAA - fees for included services - HELD THAT - In the light of the conclusions in the case of M/s. i2 Technologies (Netherlands) BV Vs. ACIT (International Taxation) 2017 (3) TMI 1748 - ITAT MUMBAI which would hold good for AY. 2006-07 also as the facts are identical, the sum-in-question cannot be regarded as royalty because the receipts in question cannot be said to be ancillary to supply of software which was regarded as royalty. The assessee directly sold software and also carried out maintenance services under agreements with the persons to whom software licenses were sold. Consequently, the maintenance services which were also in connection with the supply of software were regarded as royalty. In the present case, however, the supply of software has already been held to be not in the nature of royalty by the decision of ITAT, Mumbai. We have not gone into the question regarding the applicability of Article 12(3) and also the definition of royalty is given in Explanation-2 to Section 9(1)(vi) and our conclusions in these appeals and are guided only by the ruling of the Mumbai Bench of the ITAT in the case of M/s. i2 Technologies (Netherlands) BV Vs. ACIT (International Taxation) (supra). We are of the view that the maintenance revenue received by the assessee cannot be regarded as a royalty chargeable to tax in India. The addition made is therefore directed to be deleted. - Appeal of assessee is allowed.
Issues Involved:
1. Whether the maintenance revenue received by the assessee is chargeable to tax in India as royalty. 2. Whether the maintenance revenue can be considered as "fees for included services" under the Double Taxation Avoidance Agreement (DTAA) between India and USA. Detailed Analysis: Issue 1: Chargeability of Maintenance Revenue as Royalty The assessee, a non-resident company from the USA, engaged in supplying software and providing maintenance services in India, received maintenance revenue of ?1,31,74,984/-. The Assessing Officer (AO) considered this maintenance revenue as royalty, chargeable to tax in India under the definition provided in Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961. The AO's rationale was that the maintenance services were connected to the right to use the software, which is categorized as royalty. On appeal, the CIT(A) upheld the AO's decision, reasoning that since the software supply by i2 Technologies (Netherlands) BV (another group entity) was taxed as royalty, the maintenance revenue should also be considered royalty. The CIT(A) also noted that the maintenance charges were incidental to the software receipts and shared the same character. The Tribunal, however, referred to the decision of the ITAT Mumbai in the case of M/s. i2 Technologies (Netherlands) BV Vs. ACIT, where it was concluded that the supply of software was not taxable as royalty but as business income. Since i2 Technologies (Netherlands) BV did not have a Permanent Establishment (PE) in India, the revenue from software sales was not chargeable to tax in India. Consequently, the Tribunal held that the maintenance revenue received by the assessee, being ancillary to the software supply, could not be regarded as royalty for AY 2006-07. Issue 2: Maintenance Revenue as "Fees for Included Services" under DTAA The assessee argued that the maintenance revenue did not qualify as "fees for included services" under Article 12(4) of the DTAA between India and the USA. The AO did not address this argument, but the CIT(A) considered the maintenance services as ancillary and subsidiary to the software use, thus falling under Article 12(4)(a) of the DTAA. The Tribunal noted that the maintenance services provided by the assessee were essential for the effective application and implementation of the software but did not make available technical knowledge, experience, skill, know-how, or processes to the customers. Therefore, the services did not qualify as "fees for included services" under Article 12(4)(b) of the DTAA. Conclusion: The Tribunal concluded that the maintenance revenue received by the assessee could not be regarded as royalty chargeable to tax in India for AY 2006-07, based on the ITAT Mumbai's decision in the case of M/s. i2 Technologies (Netherlands) BV. The Tribunal also clarified that its decision was guided by this ruling and did not delve into the applicability of Article 12(3) of the DTAA or the definition of royalty under Explanation 2 to Section 9(1)(vi) of the Act. Consequently, the addition made by the AO was directed to be deleted, and the appeal of the assessee was allowed.
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