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TMI Blog2020 (1) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - SHRI SAKTIJIT DEY ( JUDICIAL MEMBER ) AND SHRI N. K. PRADHAN ( ACCOUNTANT MEMBER ) Assessee by : Mr. Divesh Chawla, AR Revenue by : Mr. Avaneesh Tiwari, DR Date of Pronouncement : 07/10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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: Sr. No. Particulars Amount 1 Payment received for sale of off-the shelf software 10,61,12,437/- 2 Payment received for maintenance and support services (including upgrades) 8,56,35,946/- 3 Payment received for management fees 74,16,621/- Total 19,91,65,004/- The AO held that the payments received for sale of specialized software and maintenance and support services (including upgrades) are in the nature of royalty and the payment received for management fees is in the nature of fees for technical services vide India Finland tax treaty. Accordingly, the AO taxed the same at 10% of gross receipts, as per Clause 2 of Article 12, of the new India-Finland tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplied, remain the exclusive property of the assessee. The assessee at all times has the title to all rights to Intellectual Property, software and proprietary information including all components, additions, modifications and updates; and the distributors do not have any authority to negotiate or to conclude contracts on behalf of the assessee company, act as its agent or in any way represent the assessee so as to bind it under any transaction. The modus operandi of the distribution of software products transaction is set out in brief as follows: The transaction may be initiated due to the marketing efforts of the Distributors or by way of Customers approaching the Distributors for purchase of software products. Upon acceptance of the order by the Customer, the Distributor enters into a COSLA with the Customer. COSLA is an agreement between the Customer and the Distributor, whereby the Customer accepts the terms of use of the assessee's software products. The Distributor prepares and forwards a Repurchase Order ('REPO') to the assessee on the centralized customer relationship management system, thereby placing an order for the software product. The Customer does not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee for the year under consideration. 12. On a perusal of Article 12 of the India-Finland tax treaty, we find, that the definition of the term royalty therein envisage payments received as a consideration for the use of, or the right to use certain specific works which could include intellectual properties (such as copyright, patents etc.) by the owner of such intellectual properties from any other person. For the sake of clarity, Article 12 of the India- Finland tax treaty is 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 conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, having regard to the use, right or information for which they are paid, exceeds the amount which would 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 lastmentioned 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 arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee so as to bind it under any transaction. As is borne from the records, the software provided by the assessee to its distributors was for the purpose of resale/distribution to the end user customers and there was no right to use the copyright embedded in the said copyrighted 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 assessee from its distributors could not be stamped as royalty in the hands of the assessee. We also fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax treaty provides that as regards the application of the Agreement at any time by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grades, 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 of ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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