M/S.SANDVIK TOOLING SVERIGE AB,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX, (INTERNATIONAL TAXATION) CIRCLE - 2, PUNE

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the final assessment order dated 24.08.2017 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2014-15.

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issue is against treating sum of Rs.1,48,54,717/- as Royalty under

the Act as well as the Double Taxation Avoidance Agreement

between India and Sweden (DTAA).

a Non-resident (Foreign) company incorporated in Sweden. It filed

its return declaring total income at Nil. The assessee reported two

international transactions including “IT Support Service fees” of

Rs.1,87,52,134/- received from Sandvik Asia Private Limited

(SAPL). This amount of Rs.1.87 crore has two components viz.,

Rs.1,48,54,717/- towards CAD/CAM monthly cost and

Rs.38,97,417/- towards GSS Maintenance charges. The first issue

that we are espousing is in relation to CAD/CAM monthly cost of

Rs.1.48 crore received by the assessee from SAPL, which was

claimed to be not chargeable to tax in the absence of the assessee

having any Permanent Establishment (PE) in India. The Assessing

Officer (AO) observed that the assessee provided limited user

access to the software application CAD/CAM utility to the Tooling

Division of SAPL as a quid pro quo for the said payment. Treating

the same as Royalty u/s. 9(1)(vi) of the Act as well as under the

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DTAA, the AO held the amount to be chargeable to tax in the

hands of the assessee. In reaching this conclusion, he observed that

the Dispute Resolution Panel (DRP) has also taken similar view

vide its direction dated 29-09-2016 for the A.Y. 2013-14. The ld.

DRP in its direction for the year under consideration reproduced its

own order for the immediately preceding assessment year 2013-14

and held that the receipt from SAPL for granting access to

CAD/CAM software application was Royalty as per the provisions

of the Act as well as the DTAA. Aggrieved thereby, the assessee

has approached the Tribunal.

material on record. Firstly, we will examine the taxability of the

amount under the Act. The claim of the assessee is that the amount

received by it from SAPL for allowing limited access to CAD/CAM

is a consideration for copyrighted article and not use of a copyright.

In this regard, it is observed that the Hon’ble Delhi High Court in

DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Delhi) considered

almost similar issue in which consideration was received by the

assessee on grant of licence for use of software. The AO held that

the software was licensed and not sold in as much as the copyright

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of the software remained with the assessee which simply allowed

the use of copyright to the person making payment to it. In view of

the fact that the assessee authorized use of the copyright of the

software to customers in India, which was a patented software, he

held that the consideration for allowing the use of such patented

software fell within the definition of ‘Royalty’ u/s. 9(1)(vi) of the

Act. No relief was allowed in the first appeal. However, the

Tribunal held that the amount received by the assessee under the

licence agreement for allowing the use of the software was not

Royalty either under the Act or under the DTAA. The Revenue

approached the Hon’ble High Court, which held that the

consideration received by the assessee for grant of licence for use of

software was not taxable as ‘Royalty’ within the meaning of Article

12(3) to the DTAA between India and USA and hence accepted the

assessee’s claim on the basis of the relevant DTAA.

Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar.) has held

that import of shrink wrapped software/off-the-shelf software from

non-resident company under software licence agreement, whereby a

licence is granted to the assessee for taking copy of the software,

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store the same in the hard disk of the designated computer and to

take a back up copy while the ownership of the copyright continues

to vest in the supplier, is nothing but Royalty under the provisions

of section 9(1)(vi) of the Act as well as under Article 12 of the

concerned DTAA. The Hon’ble Delhi High Court in Infrasoft

(supra) recorded its dissent with the decision in Samsung (supra)

and the matter is now sub-judice before the Hon’ble Supreme Court.

Delhi and the Hon’ble Karnataka High Court, it transpires that the

Hon’ble Delhi High Court in Infrasoft (supra) examined the

taxability of the amount received by the assessee on the touchstone

of the provisions of the DTAA and held the same to be not

constituting Royalty. It did not specifically examine the position

under the Act. However, in para 63, it did mention that: `What is

thus required to be examined is whether income of the Assessee is

royalty income as covered by Article 12 of the DTAA if not then the

same would be taxable as business income as covered by the

provisions of Article 7 of the DTAA.’ A close reading of the above

para fairly reveals that the Hon’ble High Court held, in principle,

that if the income is not royalty, then it would be taxable as a

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business income. Since it held that the amount in question did not

constitute Royalty within the relevant DTAA, it laid down in para

95 that : `We have not examined the effect of the subsequent

amendment to section 9 (1)(vi) of the Act and also whether the

amount received for use of software would be royalty in terms

thereof for the reason that the Assessee is covered by the DTAA,

the provisions of which are more beneficial.’ In the oppugnation,

the Hon’ble Karnataka High Court in Samsung (supra) has held:

`that the payment would constitute 'royalty' … even as per the

provisions of s. 9(1)(vi).’

through both the above judgments is that the consideration is

otherwise not exempt from tax under the Act. The dispute is only as

to whether it is Business income or Royalty income under the Act.

Whereas the Hon’ble Karnataka High Court held consideration for

use of software as Royalty income u/s 9(1)(vi), the Hon’ble Delhi

High Court had not examined the effect of the subsequent

amendment to section 9 (1)(vi) of the Act.

2012 has carried out an amendment to section 9(1)(vi) dealing with

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`income by way of royalty’ by means of insertion of Expl. 4

w.r.e.f. 1.6.1976, which reads as under: -

Explanation 4.— For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

been inserted with retrospective effect from 01-06-1976, that the

transfer of all or any rights in respect of any right, property or

information includes and has always included transfer of all or any

right for use or right to use a computer software including granting

of license. With this amendment, the legislature has made it overt

and that too with retrospective effect that any consideration for the

use or right to use of computer software in any form including a

mere granting of a license will be considered as ‘Royalty’ in the

hands of recipient u/s.9(1)(vi) of the Act. The hitherto controversy

on the taxability of the income, as Business income or Royalty

income, from allowing the use of computer software in any form

under the Act has been put to rest by the legislature by clearly

roping it within the purview of u/s 9(1)(vi) of the Act. In view of

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this retrospective amendment carried out to section 9(1)(vi) also

covering the year under consideration, it is axiomatic that the

amount in question is chargeable to tax under the Act as Royalty

income in the hands of the non-resident.

may enter into an agreement with the Government of any other

country for the granting of relief of tax in respect of income on

which tax has been paid in two different tax jurisdictions. Sub-

section (2) of section 90 unequivocally provides that where the

Central Government has entered into an agreement with the

Government of any country outside India under sub-section (1) for

granting relief of tax or for avoidance of double taxation, then, in

relation to the assessee to whom such agreement applies, 'the

provisions of this Act shall apply to the extent they are more

beneficial to that assessee’. Crux of the sub-section (2) is that

where a DTAA has been entered into with another country, then the

provisions of the Act shall apply only if they are more beneficial to

the assessee. In simple words, if there is a conflict between the

provisions under the Act and the DTAA, the assessee will be

subjected to the more beneficial provision out of the two. If the

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provision of the Act on a particular issue is more beneficial to the

assessee vis-a-vis that in the DTAA, then such provision of the Act

shall apply and vice versa. The Hon’ble Supreme Court in the case

of CIT v. P.V.A.L. Kulandagan Chettiar (2004) 267 ITR 654 (SC)

has held that the provisions of sections 4 and 5 are subject to the

contrary provision, if any, in DTAA. Such provisions of a DTAA

shall prevail over the Act and work as an exception to or

modification of sections 4 and 5. Similar view has been taken by the

Hon’ble jurisdictional High Court in CIT v. Siemens

Aktiongesellschaft (2009) 310 ITR 320 (Bom.). In the light of the

above discussion, it becomes vivid that if the provisions of the

Treaty are more beneficial to the assessee vis-a-vis its counterpart in

the Act, then the assessee shall be entitled to be ruled by the

provisions of the Treaty. Here, it is made clear that the provisions

of sub-section (2A) of section 90 inserted by the Finance Act, 2013

are not relevant to the assessment year 2014-15 under consideration

as the same have been made effective w.e.f. 1.4.2016.

the hands of the assessee under the DTAA. Relevant part of

Article 12 of the DTAA with Sweden runs as under:

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“1. Royalties and 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. Notwithstanding the provisions of paragraph (1) such royalties and 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 recipient is the beneficial owner of the royalties or fees for technical services, 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 consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.”

defined in para 3(a) may also be taxed in the contacting state in

which it arises. Thus, in order to be governed by para 2, it is

essential that the receipt should first pass the test of the definition

of `Royalty’ as given in para 3 (a). On going through such

definition, it transpires that `Royalties’ is a payment of any kind

received as a consideration: `for the use of, or the right to use, any

copyright of literary, artistic or scientific work’ etc. The expression

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`the use of, or the right to use, any copyright’ has also been used in

Article 12 of the DTAA between India and the USA, which has

been discussed in the case of Infrasoft (supra). The Hon’ble Delhi

High Court in that case held that what was transferred was not

copyright or right to use copyright but a limited right to use

copyrighted material, which did not give rise to any royalty income.

It further observed that to be taxable as royalty income covered by

Article 12 of DTAA, income of assessee should be generated by

"use of or right to use of" any copyright and a License granted to

licensee permitting him to download computer programme and

storing it in computer for his own use is only incidental to facility

extended to licensee to make use of copyrighted product for his

internal business purpose. Finding that there was no transfer of any

right in respect of copyright by assessee and it was a case of mere

transfer of a copyrighted article whilst copyright remained with the

owner, the Hon’ble High Court held that the payment was for a

copyrighted article and represented purchase price of an article and

hence could not be considered as royalty in the hands of the

recipient under the DTAA.

12 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

the assessee transferred a limited right in the CAD/CAM to SAPL.

There was no transfer of copyright or use of any copyright. As

against the requirement of para 3 of the Article 12 for royalty

income to be generated by use or right to use of any copyright etc.,

what in the extant case has happened is that the assessee simply

permitted SAPL to use the software for its limited internal business

purpose only. No further right was granted to SAPL to deal with

the copyright of the software. As there is no transfer of any right in

respect of the copyright by the assessee to SAPL, going by the

definition of the term `Royalties’ given in Article 12 (3), the

consideration so received cannot be construed as `Royalties’ under

the DTAA.

the Hon’ble Karnataka High Court in Samsung (supra), which also

considered Article 12 of the DTAA between India and the USA and

eventually held that the payment for use of software constituted

Royalty under the DTAA.

jurisdiction of the Hon’ble Karnataka High Court. The Hon’ble

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Supreme Court in CIT Vs. Vegetable Products Ltd. (1973) 88 ITR

192 (SC) has held that when two interpretations are possible,

ordinarily the Court would interpret the provision in favour of a tax-

payer, and against the Revenue. Similar view has been reiterated in

a series of judgments including Manish Maheshwari Vs. ACIT

(2007) 289 ITR 341 (SC). As the view taken by the Hon’ble Delhi

High Court in Infrasoft (supra) is in favour of the assessee, we

follow the same and that is more so for the raison d`etre that the

Tribunal in its order dated 29-03-2019 in ITA Nos. 195 to

197/PUN/2017 in the assessee’s own case for the A.Yrs. 2010-11,

2011-12 and 2012-13 has also decided similar issue in favour of the

assessee.

Explanation 4 to section 9(1)(vi) engulfing consideration for use of

software in any form within the ambit of `Royalty’, there is no

corresponding amendment in the DTAA and hence the DTAA, in

the absence of the applicability of section 90(2A) to the year under

consideration, would not automatically imbibe the changes made in

the Act. We have noticed above that if the provisions of DTAA are

more beneficial to the assessee then those would apply in

14 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

supersession of the provisions of the Act. It is, therefore, held that

the sum of Rs.1.48 crore and odd cannot be construed as `Royalties’

in the hands of the assessee as per the mandate of Article 12 of the

DTAA. It is relevant to note that the assessee specifically stated

before the AO that it did not have any PE in India and further it is

not the case of the AO that the assessee has any PE in India, so as to

warrant the consideration of the amount in question as Business

profits under Article 7 of the DTAA.

which was received by the assessee from SAPL for providing

maintenance services in respect of GSS software. The AO held this

amount to be in the nature of ‘Fees for technical services’

u/s.9(1)(vii) of the Act and also under the DTAA. He, therefore,

included it in the total income of the assessee. The DRP upheld the

decision of the AO in the draft order, against which the assessee has

come up in appeal before the Tribunal.

material on record, we first need to precisely ascertain the nature of

service for which the instant consideration was received. No

agreement was produced before us to demonstrate the nature of

15 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

receipt. On a specific query, the ld. AR stated that the payment was

received for maintenance of the existing software with SAPL, which

was not controverted. Albeit a feeble attempt was made for

showing that the amount was also towards giving access to the GSS

software, but the assessee could not substantiate the same with any

cogent evidence or material. Even the concerned international

transaction has also been reported by the assessee as `GSS

maintenance charges’. Thus, it turns out that the assessee received

Rs.38.97 lakh from SAPL not for giving access to any software but

only for maintenance of existing software.

technical services’. Section 9(1)(vii) of the Act defines the term

‘fees for technical services’ as per Explanation 2 as under :-

`For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

deciphered that any consideration, inter alia, for rendering technical

16 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

or consultancy services, which is not in the nature of construction,

assembly, mining or like project undertaking by the recipient,

constitutes fees for technical services. When we apply the mandate

of the Explanation 2 to the factual panorama obtaining before us, it

clearly emerges that what the assessee received is consideration for

maintenance of the existing software with SAPL which obviously

involves use of technical knowledge and is nothing short of fees for

technical services in the nature of technical or consultancy services.

Thus, the amount in question constitutes income of the recipient-

assessee u/s.9(1)(vii) of the Act.

have reproduced above the relevant parts of the Article 12 between

India and Sweden. Para 3(b) of the Article 12 defines the expression

‘fees for technical services’ to mean payment of any kind in

consideration for rendering of managerial, technical or consultancy

services including the provision of services by technical or other

personnel. In so far as the rendering of technical or consultancy

services to constitute fees for technical services under para 3(b) is

concerned, we find that the definition of the term ‘fees for technical

services’ in the DTAA to that extent is almost similar to that

17 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

contained in Explanation 2 to section 9(1)(vii). However, at this

stage, it is pertinent to note the terms of the Protocol with reference

to Article 12 of the DTAA, which provides that : `if under any

Convention, Agreement or Protocol between India and a third State

which is a member of the OECD, India limits its taxation at source

on dividends, interest, royalties or fees for technical services to a

rate lower or a scope more restricted than the rate or scope provided

for in this Convention on the said items of income, the same rate or

scope as provided for in that Convention, Agreement or Protocol on

the said items of income shall also apply under this Convention.’

This is in the nature of the Most Favoured Nation (MFN) clause in

the DTAA between India and Sweden which seeks to provide that if

India has limited, inter alia, its scope of fees for technical services

in a DTAA with any other OECD country, then such limited scope

shall stand substituted in the DTAA with Sweden. Portuguese

Republic is a member of the OECD with which Indian has entered

into a DTAA. The relevant part of the term ‘fees for included

services’ has been defined in the Article 12(4) of the DTAA

between India and Portuguese, which is as under : -

18 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

`For the purposes of this Article "fees for included services" means payments of any kind, other than those mentioned in Articles 14 and 15 of this Convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services:….(b) make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein.’

of the expression ‘fees for included services’ in Article 12 of the

DTAA with Portuguese discloses that any consideration to qualify

as fees for included services must necessarily result into making

available technical knowledge, experience or skill etc. to the

recipient of the service. The term ‘make available’ has been

judicially interpreted by the Hon’ble Karnataka High Court in CIT

Vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 467 (Kar.)

holding that the payer of the services should be able to utilise the

acquired knowledge or knowhow at his own in future without the

aid of service provider. The Authority for Advance Ruling in

Production resources group, in Re (2018) 401 ITR 56 AAR has also

held that “make available” connotes something which results in

transmitting the technical knowledge so that the recipient could

derive an enduring benefit and utilise the same in future on his own

19 ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

without the aid and assistance of the provider. On going through

the above interpretation, it becomes palpable that in order to `make

available’ technical services, it is sine qua non that the recipient of

the services must acquire such technical know-how etc. which he

can himself use in future without any assistance of the provider and

the same is not any such act or service which vanishes or disappears

on its provision by the payee itself.

technical services provided by the assessee for maintenance of the

existing GSS software supplied to SAPL amounts to rendering of

technical or consultancy services simplicitor without `making

available’ any technical knowledge, experience, skill, know-how or

processes etc. to SAPL for use in future independently. In other

words, it is a simple case of providing services involving technical

knowledge which exhausted with its provision itself. Since such

services did not result into provision of any technical knowledge,

experience or skill etc. to SAPL, we are satisfied that the

consideration so received by the assessee cannot be categorized as

‘fees for technical services’ in terms of DTAA. Going by the

beneficial provision in the DTAA vis-à-vis the Act, this amount is

ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

directed not to be considered as fees for technical services. Similar

view has been taken by the Tribunal in its afore-referred order in the

assessee’s own case for the earlier years. Further, it is not the case

of the AO that the assessee has any permanent establishment in

India, so as to necessitate the consideration of the aspect of its

taxability as Business profits under Article 7 of the DTAA.

Order pronounced in the Open Court on 30th August, 2019.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 30th August, 2019 सतीश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “सी” / 5. DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.2523/PUN/2017 M/s. Sandvik Tooling Sverige AB

Date 1. Draft dictated on 28-08-2019 Sr.PS 2. Draft placed before author 30-08-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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