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TMI Blog2021 (2) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income Tax Act, 1961 (the Act) as well as Article 12(3)(b) of the India - US tax treaty 1.1. On the facts and circumstances of the case and in law, the learned AO, pursuant to the directions of the Hon'ble DRP erred in holding that cloud hosting system is combination of hardware, software and networking elements that constitutes industrial / commercial / scientific equipment and the income of INR 6,23,14,703 earned by the Appellant from cloud hosting services is for use of or right to use industrial / commercial / scientific equipment which would constitute royalty under section 9(1)(vi) of the Act. 1.2. On the facts and circumstances of the case and in law, the learned AO, pursuant to the directions of the Hon'ble DRP, erred in holding that the income earned by the Appellant is for use of or right to use industrial / commercial / scientific equipment and constitutes royalty under Article 12(3)(b) of the India - US tax treaty. 1.3. On the facts and circumstances of the case and in law, the learned AO, pursuant to the direction of the Hon'ble DRP, erred in holding that the definition of royalty under the Act (as retrospectively amended by Finance Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any way alter the software products including its documentation; The Distributors are not permitted to create the source code of the software products supplied under the Agreements; The Distributors are not expressly permitted to reproduce or make copies of the software products under the agreements (except a backup copy as required by the customer); No right of any nature whatsoever has been granted to the Distributors in the Intellectual Property developed and owned by the assessee in the software products; All the trademarks and trade names, which the Distributors use in connection with the products supplied, 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: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd.); and (ii). M/s DowCoMax Services India Limited : Sr. No Particulars Amount 1 Payment received for sale of off-the shelf software 7,81,72,583/- 2 Payment received for maintenance and support services (including upgrades) ₹ 2,22,46,237/- 3 Payment received for management fees 31,86,724/- Total 10,36,05,544/- Observing, that the payments received by the assessee from its distributors for sale of specialized software and maintenance and support services (including upgrades) were in the nature of royalty as per Article 12 of the India-Finland tax treaty, and also as per the Explanation 2 to Sec. 9(1)(vi) of the Act, the A.O/DRP had included the same in the total income 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 receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 Contracting State when the payer is that State itself, a political subdivision, a local authority, or a resident of that State. Where, however, the right or property for which the royalties are paid is used within a Contracting State or the fees for technical services relate to services performed, within a Contracting State, then such royalties or fees for technical services shall be deemed to arise in the State in which the right or property is used or the services are performed. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not permitted to modify, translate or recompile, add to or in any way alter the software products including its documentation; the distributors were not permitted to create the source code of the software products supplied under the agreements; the distributors were not expressly permitted to reproduce or make copies of the software products under the agreements (except a backup copy as required by the customer); the distributors were not vested with any right of any nature in the Intellectual Property developed and owned by the assessee company in the software products; that all the trademarks and trade names which the distributors used in connection with the products supplied, remained the exclusive property of the assessee company which at all times had the title to all rights to Intellectual Property, software and proprietary information including all components, additions, modifications and updates; and the distributors did 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. As is borne from the records, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of Article 12(3) of the DTAA between India and the USA. Also, the ITAT, Mumbai L Bench in DDIT Vs. Reliance Communications Ltd. (2018) 52 CCH 292 (Mum) had in its recent order held, that as the payment made by the assessee was for copyrighted article i.e software and there was no transfer of copyright of the software in any manner, thus the same did not amount to royalty within the definition of Article 12/13(3) of the respective tax treaties and resultantly the assessee remained under no obligation to deduct tax at source while making the remittances. 14. We shall now advert to the observations of the A.O/DRP, wherein they had through Article 3(2) of the India-Finland tax treaty tried to read the Explanation 4 , Explanation 5 and Explanation 6 to Sec. 9(1)(vi) as had been made available in the Income-tax Act, 1961 by the legislature vide the Finance Act, 2012 w.e.f 01/04/1976, into the definition of royalty contemplated in Article 12 of the India-Finland tax treaty. We are unable to persuade ourselves to subscribe to the aforesaid view of the lower authorities. Article 3(2) of the IndiaFinland tax treaty provides that as regards the application of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. Also, similar view had been taken by a coordinate bench of the ITAT Mumbai I Bench, Mumbai in the ACIT (IT)- 4(1)(1), Mumbai vs. Reliance Jio Infocomm Ltd. [ITA No. 6331 to 6334/Mum/2018, dated 15/11/2019] and the ITAT Delhi Bench B‟ in Datamine International Ltd. Vs. Addl. DIT, Range 1, International Taxation, New Delhi [2016] 158 ITD 84 (Delhi). In the backdrop of our aforesaid deliberations, we are unable to persuade ourselves to subscribe to the view taken by the lower authorities that Explanation 4 , Explanation 5 and Explanation 6 to Sec. 9(1)(vi) as had been made available in the Income-tax Act, 1961 by the legislature vide the Finance Act, 2012 w.r.e.f 01/06/1976, are to be read into the definition of royalty as envisaged in Article 12 of the IndiaFinland tax treaty. 15. As observed by us hereinabove, the assessee in addition to distribution of software products in India had also provided software upgrades, maintenance and support servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.2 Similar view has been taken by the Tribunal in assessee s own case for AYs 2013-14 and 2014-15. Facts being identical, we respectfully follow the above orders of the Co-ordinate Bench in assessee s own case for AYs 2010-11, 2011-12, 2013- 14 and 2014-15. Accordingly, we allow the 2nd, 3rd, 4th and 5th grounds of appeal. 6. The Ld. counsel submits that the assessee would not press the 6th and 7th grounds of appeal. Accordingly, the 6th and 7th grounds of appeal are dismissed as not pressed. The 8th and 9th grounds of appeal being charging of interest u/s 234A and 234B are consequential in nature. As the penalty has been initiated only, the 10th ground of appeal is premature. 7. In the result, the appeal is party allowed. 4. We see no reasons to take any other view of the matter then the view so taken by the coordinate bench. Respectfully following the same, we uphol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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