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 DTAA envisages 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.
- The Tribunal noted the following factors from the agreement entered into between the assessee and the distributors:
• Distributors were granted non-exclusive license to market and distribute software products developed by the assessee;
• Distributors did not have the right to use the source code of such software products;
• Distributors were not permitted to modify, translate or recompile, add to, or in any way alter software products (including its documentation);
• Distributors were not permitted to create source code of software products supplied under the agreements;
• Distributors were not expressly permitted to reproduce or make copies of software products under the agreements (except backup copy as required by the customer);
• Distributors were not vested with rights of any nature in intellectual property developed and owned by the assessee in software products;
• All trademarks and trade names which distributors used in connection with products supplied, remained the exclusive property of the assessee. At all times, the assessee had title to all rights to intellectual property, software and proprietary information, including all components, additions, modifications and updates.
The assessee had granted only the right to distribute software products and not the right to reproduce or make copies of software. Thus, in the absence of vesting of any right of commercial exploitation of intellectual property contained in copyrighted article (i.e., software product), the amount received by the assessee from its distributors was in the nature of business income.
In terms of Article 3(2) of the India-Finland DTAA, the definition of a term under domestic law can be applied only if it is not defined in the DTAA. Royalty is defined in the India-Finland DTAA. Hence, amendment of its definition under domestic law had no bearing on the definition under the DTAA. Therefore, the contention of the AO / DRP that the definition of ‘royalty’ under the Act was to be read into the DTAA was incorrect.
Accordingly, payments received by the assessee from distributors were not in the nature of royalty under Article 12 of the DTAA.
