TRIMBLE SOLUTIONS CORPORATION,MUMBAI vs. DCIT (INTERNATIONAL TAXATION)-4(1)(2), MUMBAI

Trimble Solutions Corporation ……………….………Appellant (Earlier Known as Tekla Corporation) 14th Floor, The Ruby, 29th Senapati Bapat Marg, Dadar (W), Mumbai 400028 [PAN: AADCT2639Q] Vs. Deputy Commissioner of Income Tax International Taxation 4(1)(2), Mumbai ……………………Respondent Appearances by Divesh Chawla for the appellant Vijay Kumar Subramaniyam for the respondent Date of concluding the hearing : January 7, 2021 Date of pronouncement : January18,2021 O R D E R Per Pramod Kumar, VP:

2. Grievances raised by the appellant are as follows: Ground no. 1: Income from cloud hosting services is erroneously held as royalty within the meaning of explanation 2 to section 9(l)(vi) of 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 Page 2 of 11 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, 2012) can be applied even for the purposes of determination of royalty income under Article 12 of the India - US tax treaty in the absence of any corresponding amendment in the India - US tax treaty. 1.4. 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 Appellant is providing license to clients for use of third party software and the income earned there from is also royalty under the Act as well as the India - US tax treaty. Ground no. 2: Income from cloud hosting services is also erroneously held as fees for technical services within the meaning of section 9(1)(vii) of the Act as well as fees for included services under Article 12(4)(a) of the India - US tax treaty 2.1 On the facts and circumstances of the case, the learned AO further erred in holding that the income from cloud hosting services is in the nature of Fees for Technical Services within the meaning of explanation (2) to clause (vii) of subsection (1) of section 9 of the Act. 2.2 On the facts and circumstances of the case, the learned AO erred in holding that the income from cloud hosting services also qualifies as fees for included services within the meaning of Article 12(4)(a) of the India-US tax treaty. Ground no. 3: Erroneous levy of interest under section 234B of the Act 3.1 On the facts and circumstances of the case and in law, the learned AO erred in levying interest of INR 24,29,388 under section 234B of the Act.

Page 3 of 11 3. Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2012-13 on 30.11.2012 declaring total income of Rs. Nil. The assessee is a tax resident of Finland. It has its registered office at Metsanpojankuja 1, FI-02131 Espoo, 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 (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: Amount Sr. No Particulars 1 Payment received for sale of off-the shelf 10,61,12,437/- software 2 Payment received for maintenance and 8,56,35,946/- support services (including upgrades) 3 Payment received for management fees 74,16,621 Total 19,91,65,004/- 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. We are concerned here with Sl. No. 1 and 2 hereinabove.

4. Before us, the Ld. counsel for the assessee submits that the issues emanating from the 2nd, 3rd, 4th and 5th grounds of appeal

have been decided in favour of the assessee by the Tribunal in assessee’s own case for AY 2010- 11 (ITA NO. 6481/Mum/2017) and AY 2011-12 (ITA No. 6482/Mum/2017). Also it is stated by him that the above issues have been decided in favour of the assessee by the Tribunal in assessee’s own case for AY 2013-14 (ITA No. 7410/Mum/2017), AY 2014-15 (ITA No. 5271/Mum/2018). Facts being identical, the Ld. counsel submits that the said decisions of the Tribunal are applicable to the impugned assessment year. On the other hand, the Ld. Departmental Representative (DR) supports the order passed by the AO u/s 144C(13) r.w.s. 143(3) of the Act.

5. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. In order to distribute its software in India, the assessee has appointed Trimble Solutions India, its wholly owned subsidiary, and DCMIPL as its non-exclusive

Page 4 of 11 resellers/distributors for the Indian territory. (Trimble Solutions India and DCMIPL are collectively referred to as 'Distributors' and the agreements are collectively referred to as 'Agreements' for the purposes of this discussion). The key features of the Agreements with respect to the distribution of software products in India are as follows:  The Distributors have been granted a ‘non-exclusive’ license to market and distribute the software products developed by the assessee;  The Distributors do not have a right to the source code of such software products;  The Distributors are not permitted to modify, translate or recompile, add to or 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:  The transaction may be initiated due to the marketing efforts of the Distributors or by way of Customers approaching the Distributors for purchase of software products.  Upon acceptance of the order by the Customer, the Distributor enters into a COSLA with the Customer. COSLA is an agreement between the Customer and the Distributor, whereby the Customer accepts the terms of use of the assessee's software products.  The Distributor prepares and forwards a Repurchase Order ('REPO') to the assessee on the centralized customer relationship management system, thereby placing an order for the software product. The Customer does not have any knowledge of the REPO, since it is an arrangement between the Distributor and the assessee.  Where the assessee accepts the order placed by the REPO, it then sends a CD / DVD or a temporary password (in the case of direct download from the internet) along with its invoice to the Distributor, Page 5 of 11  The Distributor then forwards the CD / DVD or the temporary password to the customers. The Distributor raises its invoice on the Customers.  The assessee, on receiving the payment for the software products supplied, sends the permanent password to the Distributor, who in turn forwards it to the Customer, on their final payment.  In a case where the Customer does not pay the final amount, the Distributor has a right to sell the licensed software to other Customer without paying any further price to the assessee.  The responsibility of collection of the invoiced amount from the Customers, i.e. credit risk for sales made by the Distributors, remains with the Distributors 5.1 We find that the Tribunal in assessee’s own case for AYs 2010-11 and 2011-12 has held that : “11. We shall now advert to the contentions advanced by the ld. A.R as regards the merits of the case. As observed by us hereinabove, the assessee which is a foreign company incorporated in Finland is engaged in the business of developing and marketing specialized off- the-shelf software products which are used in industries like building and construction, energy distribution and infrastructure management. The assessee during the year had received the following payments from its non-exclusive resellers/distributors for the Indian territory viz. (i). M/s Trimble Solutions India Private Limited (earlier known as Tekla India Pvt. Ltd.); and (ii). M/s DowCoMax Services India Limited : Sr. No Particulars Amount 1 Payment received for sale of off-the shelf 7,81,72,583/- software 2 Payment received for maintenance and Rs. 2,22,46,237/- support services (including upgrades) 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.

Page 6 of 11 “ARTICLE 12 Royalties and Fees for Technical Services 1. Royalties or 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.

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 Page 7 of 11 fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

Page 8 of 11  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 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). In our considered view, as 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 (i.e software products) 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. In sum and substance, 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. We also find substance in the claim of the ld. A.R that as per the Copyright Act, a transfer of the copyrighted article (i.e. the software product) which is the subject of copyright would not necessarily involve a transfer of the copyright. As can be gathered from a perusal of the “agreements” between the assessee and its distributors, the rights acquired by the transferee on the sale of the copyrighted article (i.e software products) is to use the copyrighted article and not the right to use the copyright embedded in the software. On the basis of our aforesaid observations, we are of the considered view that as the sale of the copyrighted article (i.e. software products) by the assessee company cannot be regarded as a sale of copyright in the software, therefore, the payments received by the assessee on such sale of software would be its “business income” and cannot be regarded as “royalty” income under the provisions of India-Finland tax treaty. Our aforesaid view is fortified by the judgments of the Hon’ble High Court of Delhi in the case of DIT Vs. Infrasoft Ltd. (2014) 264 CTR 329 (Del). In the said judgment the Hon’ble High Court had observed that the consideration received by the assessee on grant of licences for use of software is not taxable as “royalty” within 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 Page 9 of 11 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.

Page 11 of 11 16. In terms of our aforesaid observations, we 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 uphold the plea of the assessee in the terms indicated above.