Taxability of Income from cloud/web hosting services as per the India-USA Treaty
Fact and issue of the case
Grievances raised by the appellant are as follows:
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 or right to use industrial / commercial / scientific equipment which would constitute royalty under section 9(1)(vi) of the Act.
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. 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.
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. 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.
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.
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:
|1||Payment received for sale of off-the shelf software||10,61,12,437/-|
|2||Payment received for maintenance and support services (including upgrades)||8,56,35,946/-|
|3||Payment received for management fees||74,16,621|
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 assessee is concerned here with Sl. No. 1 and 2 hereinabove.
Observation of the tribunal
As observed by tribunal hereinabove, the assessee in addition to distribution of software products in India had also provided software upgrades, maintenance and support services with regard to its software to the distributors, who in turn provided the same to the end user customers who had entered into a maintenance agreement with the distributors. The assessee during the year had received an amount of Rs.2,22,46,237/- from its distributors towards maintenance and support services (including upgrades). On a perusal of the records, tribunal find, that the assessee would grant to its distributors a right of new official sub-release i.e. a modification to a licensed software product which would incorporate the correctness and provide a functional or performance improvement. Also, the assessee would grant to its distributors a right of new official main release i.e. an update to the existing software product with enhanced features, which the customers would prefer instead of buying new licensed software.
Accordingly, the end user customers by entering into a maintenance agreement could access and download the updates offered by the assessee. As the payments received by the assessee towards distribution of sub-releases and main releases were also for a right to provide a copyrighted article i.e. software updates, which was akin to the amounts received for distribution of the specialized off-the shelf software products, and not for any right to use the copyright embedded in the said copyrighted article (i.e. software products), therefore, the same too in tribunal considered view cannot be construed as “royalty” income, and would be the“business income”of the assessee. On a similar footing, tribunal find, that as per the distributors agreements, it was the responsibility of the distributors to resolve the end user customers queries. In case, the distributors would require assistance on issues as regards functionalities, trouble shooting and verifying error situations, the assessee would provide the same.
The aforesaid queries would be resolved via e-mails or telephone calls by the employees of the assessee based in Finland. In tribunal considered view, as the payments received by the assessee from rendering of the maintenance and support services does not fall within the scope and gamut of the definition of“royalty”in Article 12 of the India-Finland tax treaty, therefore, the payments received by the assessee for providing such support services cannot be held as “royalty” in the hands of the assessee. In terms of tribunal aforesaid observations, tribunal is 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.” Similar view has been taken by the Tribunal in assessee’s own case for AYs 2013-14 and 2014-15.
Facts being identical, tribunal 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, tribunal allow the 2nd, 3rd, 4th and 5th grounds of appeal. The Learned 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.
Thustribunal is 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.
Read the full order from belowTaxability-of-Income-from-cloudweb-hosting-services-as-per-the-India-USA-Treaty