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Amendments relating to royalty Sunil D Shah Deloitte Haskins & Sells Indian Merchants' Chamber 21 September 2012
© 2012 Deloitte Haskins & Sells Agenda Background Amendments by the Finance Act 2012 relating to royalty Some issues Case study 2
© 2012 Deloitte Haskins & Sells Royalty – Definition Royalty as per the Income-tax Act Consideration for: Transfer of all or any rights (including granting of a licence) in respect of: ‒ Patent, invention, model, design, secret formula or process or trade mark or similar property ‒ Copyright, literary, artistic or scientific work, etc. Use of: ‒ patents, invention, model, design, secret formula or process or trade mark or similar property; ‒ industrial, commercial or scientific equipment excluding amounts referred in Section 44BB Imparting of any information concerning: ‒ working of or use of patent, invention, model, design, secret formula or process or trade mark or similar property ‒ technical, industrial, commercial or scientific knowledge, experience or skill Rendering of services in respect of the above 4 Includes lump sum consideration Excludes capital gains Excludes bundled payment under Computer Software Policy
© 2012 Deloitte Haskins & Sells Royalty – Definition as per OECD and UN Model 5 As per OECD ModelAs per UN Model 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 Copyright of films or tapes used for radio or television broadcasting industrial, commercial or scientific equipment Consideration for use of right to use
© 2012 Deloitte Haskins & Sells Taxability of Royalty Taxability under Income tax Act 6 SectionPayerWhether Taxable 9(1)(vi)(a)GovernmentAll 9(1)(vi)(b)ResidentAll except payments for business/profession/source of income of the payer outside India 9(1)(vi)(c)Non ResidentOnly payments for business/profession/source of income of the payer in India SectionRoyalty Section 44DAIf arising out of PE/ fixed place of profession Section 115ANo PE and in pursuance of agreement with the government or Indian concern Section 28Other cases
© 2012 Deloitte Haskins & Sells Taxability of Royalty (contd.) Taxability as per OECD and UN Model 7 No Yes OECD Model PE Exists? Article 7 (If arising in business carried through PE) Article 14 (Arising on performance of independent personal services from fixed base) UN Model Article 12 No
© 2012 Deloitte Haskins & Sells Taxability of Royalty –Tax Rates 8 Income-tax Act Section 115A Gross Basis @ 10%* Article 14 Net Basis @ 40% Article 12 Gross Basis At treaty rates Article 7 Net Basis @ 40% Other Net @ 40%* Section 44DA Net Basis @ 40%* Tax Treaty *Plus applicable surcharge & Education Cess
Amendments relating to Royalty
© 2012 Deloitte Haskins & Sells Amendments by the Finance Act 2012 10 Explanation 4 Transfer of all or any rights includes right for or to use a computer software (including granting of a license) irrespective of the medium Explanation 5 Includes consideration in respect of any right, property or information, whether or not— the possession or control is with the payer; it is used directly by the payer; the location is in India Explanation 6 "process" includes transmission by satellite, cable, optic fibre, etc. whether or not secret Retrospective w.e.f. 1 June 1976
© 2012 Deloitte Haskins & Sells CBDT Clarifications No re-opening of completed assessments on account of retrospective clarificatory amendments if: Assessment proceedings completed before 1 April 2012; and No notice for reassessment been issued prior to 1 April 2012. Assessment or any other order which stands validated due to the clarificatory amendments would be enforced. (Letter F. No. 500/111 12009-FTD-l (Pt.) dated 29 May 2012) No withholding under section 194J on transfer of software to a resident where: Software acquired on subsequent transfer without any modification; Tax has been deducted on payment on any previous transfer; Transferee obtains a declaration that the tax has been deducted and PAN of the transferor. Effective from 1 July, 2012. (Notification No. 21/2012 dated 13 June 2012) 11
Controversies on Royalty
Issue 1: Taxability of Software Payments
© 2012 Deloitte Haskins & Sells Rulings on software 14 Pre-amendment CIT v. Dynamic Vertical Software India P. Ltd, 322 ITR 222 (Del) (payment by reseller) DIT v. Ericsson 343 ITR 470 (Del) (bundled software) TII Team Telecom International 60 DTR 177 (bundled software) Dassault Systems K.K. v. DIT (AAR No. 821/2009) (payment by re-seller) DDIT v Solid Works Corporation, 18 taxmann.com 189 (payment by reseller)
© 2012 Deloitte Haskins & Sells Rulings on software (contd.) 15 Pre-amendment CIT v. Samsung Electronics Co. Ltd., 345 ITR 494 (Kar) (payment by reseller) CIT v. Synopsis International Old Ltd. (Licensing of shrink wrapped software) Citrix Systems Asia Pacific Pty Limited v. DIT, 205 Taxman 320 (AAR) (payment by reseller) Microsoft/ Gracemac 42 SOT 550 (Del) (payment by reseller) Millennium IT Software Ltd 338 ITR 391(AAR) (Licensing of shrink wrapped software) ING Vysya Bank Ltd 61 DTR 401( Bang) (Licensing of shrink wrapped software)
© 2012 Deloitte Haskins & Sells Rulings on software (contd.) 16 Post Amendment CIT, International Taxation v. P.S.I Data System Ltd, 23 taxmann.com 432 (Kar.) DIT v. Nokia Networks OY (ITA 512 of 2007) (Delhi) (bundled software)
Issue 2: Transmission by satellite /telecommunication
© 2012 Deloitte Haskins & Sells Rulings on satellite/telecommunication charges 18 Pre-amendment Asia Satellite Telecommunications Co. Ltd. v. DCIT, 332 ITR 340 (Del) ISRO Satellite Centre, In re  175 Taxman 97 (AAR) Infosys Technologies Ltd v. DCIT, 45 SOT 157 (Bang.) New Skies Satellite NV v. ADIT, 121 ITD 1 (Del)(SB)
© 2012 Deloitte Haskins & Sells Rulings on satellite charges (contd.) 19 Post amendment Dishnet Wireless Ltd., In re  24 taxmann.com 298 (AAR) (cable capacity) B4U International Holdings Ltd.v. DCIT, 23 taxmann.com 372 (MumTrib) (transponder charges) Channel Guide India Ltd. v. ACIT, 25 taxmann.com (Mum Trib) (transponder charges)
© 2012 Deloitte Haskins & Sells Issues Amendments whether clarificatory Software payments – reseller, end-user, bundled software Telecommunication charges – satellite, telephone, internet, etc. E-commerce and cloud computing – server space rentals, web hosting Database access Impact on other sections e.g. 40(a), 115A, 194J Withholding tax on past and current payments to non-residents or to residents Impact on tax treaties 20
© 2012 Deloitte Haskins & Sells Facts 22 US Co grants a non-exclusive license to Sing Co to reproduce, market and distribute US Co software products in India to endusers. All the intellectual property rights products vest with US Co End-users sign an End-User License Agreement with US Co Sing Co pays US Co a fee on each product sublicensed. Sing Co receives payments from the Indian end-users against the sublicenses
© 2012 Deloitte Haskins & Sells Facts (contd.) 23 US Co Sing Co End Users Non Exclusive license for distribution Payments Non Exclusive license End user license agreement US Singapore India Payments
© 2012 Deloitte Haskins & Sells Issues 24 1.Whether the payment received by US Co from Sing Co is taxable as income from royalties under the Income-tax Act and under the India-US DTAA ? 2.Whether the payment received by Sing Co from Indian customers is taxable as income from royalties under the Income-tax Act and under the India- Singapore DTAA ?
25 This material prepared by Deloitte Haskins & Sells (DHS) is intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Further, the views and opinions expressed herein are the subjective views and opinions of DHS based on such parameters and analyses which in its opinion are relevant to the subject. Accordingly, the information in this material is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Neither DHS nor its affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this material. © 2012 Deloitte Haskins & Sells
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