February 2020

Article 12 of India-Finland DTAA – Consideration for distribution, updation and maintenance of software, without right of exploitation of intellectual property, was not in nature of royaltyunder India-Finland DTAA

GEETA JANI | DHISHAT B. MEHTA
Chartered Accountants

17. TS-810-ITAT-2019 (Mum.)
Trimble Solutions Corporation vs. DCIT
ITA No. 6481/Mum/2017; 6482/Mum/2017
A.Y.: 2011-12

Date of order: 16th December, 2019

Article 12 of India-Finland DTAA – Consideration for distribution, updation and maintenance of software, without right of exploitation of intellectual property, was not in nature of royaltyunder India-Finland DTAA

FACTS

The assessee, a company incorporated in Finland, was engaged in the business of developing and marketing specialised off-the-shelf software products. The assessee appointed non-exclusive distributors for the distribution of the software to end-customers in India. In addition, the assessee also provided software upgrades, maintenance and support services with regard to such software.

During the year under consideration, the assessee received income from the sale of software as well as payments for maintenance and support services from the distributors in India. The assessee contended that the software was provided to its distributors for the purpose of resale / distribution to the end-customers for use as copyrighted article but no right was granted to use copyright in software. Further, the payments received for software upgrades, maintenance and support services with regard to software were also not for transfer of any right in copyright of a copyrighted article. Thus, payments received from distributors cannot be characterised as royalty under the India-Finland DTAA.

The AO, however, was of the view that distribution of software to end-customers through distributors resulted in transfer or use of copyright in software. In any case, postinsertion of Explanations 4 and 5 to section 9(1)(vi), grant of a license was also ‘royalty’. The AO read the definition of royalty under the Act into the India-Finland DTAA and held that payments received from distributors would qualify as royalty even under the India-Finland DTAA. The AO further held that payments received for maintenance and support services (including upgrades) were part of, and inextricably linked to, supply and use of software. Hence, payment for such services was also in the nature of royalty.

Aggrieved, the assessee approached the Dispute Resolution Panel (DRP), which rejected the objections of the assessee.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

  •  Article 12 of the India-Finland DTA

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