The Income Tax Appellate Tribunal (ITAT), Mumbai Bench held that the amount received from distributors for sale of specialized software, maintenance and support services can not be “royalty” under India-Finland Tax Treaty.
The assessee, Trimble Solutions Corporation C/o SRBC & Associates LLP filed its return of income for the assessment year 2012-13 declaring total income as Nil. The assessee is a tax resident of Finland.
It is engaged in the business of development and marketing of specialized software products which are used in industries like building and construction, energy distribution and infrastructure 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, its wholly owned subsidiary and DCMIPL as its non-exclusive resellers/distributors for the Indian territory.
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 treaty.
The two member bench of Saktijit Dey and N.K. Pradhan noted that 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.
The Tribunal opined that 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 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.
“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,” the ITAT said.
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