Presentation on theme: "Taxation of Royalty / FTS / Other Important Payments"— Presentation transcript:
1 Taxation of Royalty / FTS / Other Important Payments WIRC Basic Course on International TaxationYogesh Thar
2 Synopsis… Meaning of Royalty Meaning of FTS As per DTAAsAs per ActAmendments by FA, 2012Comparison of Act and DTAAMeaning of FTSTaxability in India of Royalty/FTSAs per DTAATreaty overrideTaxability in case of Business Connection/PE in IndiaRate of tax on royalty/FTSNovember 30, 2013Bansi S. Mehta & Co.
3 …Synopsis Issues and Controversies Case Studies Equipment Royalty Use of satelliteLeased line circuit/connectivity /satellite-link chargesPayment for softwareSubscription Charges/supply of informationPayment for designs and drawingsIndivisible ContractsPayment of CommissionPayment for technical reportsCase StudiesNovember 30, 2013Bansi S. Mehta & Co.
5 Meaning of Royalty – DTAA… Generally defined to mean “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, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.”Indian DTAAs generally based on the UN Convention ModelNovember 30, 2013Bansi S. Mehta & Co.
6 …Meaning of Royalty – DTAA Certain Specific Provisions/ExceptionsDTAAsEven gains from alienation of the rights or properties which are contingent on the productivity, use, or disposition thereof regarded as RoyaltyUSAEven gains from alienation of the rights or properties regarded as RoyaltySingaporePayment for use or right to use of any industrial, commercial or scientific equipment not coveredIsrael, Greece, Netherland, and Sweden and BelgiumSpecifically includes consideration for use of computer software/ Computer programsMorocco, Nambia, Russia, Trinidad & Tobago, Turkmenistan, Kazakhstan & Kyrgyz RepublicRentals and other income from cinematographic films considered as business profits and not royaltyLibyaFTS included in Royalty itselfAustralia, Brazil (through Protocol)Exclusion for shipping transactions in case of equipment royaltyUSA, UK, SingaporeNovember 30, 2013Bansi S. Mehta & Co.
7 Meaning of Royalty – Act… Explanation 2 to section 9(1)(vi)Wider definition than that in DTAAsIn addition to that covered in DTAA, includes consideration forTransfer of all or any rights in respect of patent, invention, model, design, secret formula or process or trade mark or similar propertyimparting of any information concerning working of or use of patent, invention, model, design, secret formula or process or trademark or similar propertyTransfer of all or any rights in respect of any copyright, literary, artistic or scientific workimparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skillRendering of any services in connection with the activities referred to in the other clauses of the definitionNovember 30, 2013Bansi S. Mehta & Co.
8 …Meaning of Royalty – Act Exclusions under the Act:Income chargeable under the head ‘Capital Gains’Consideration for sale, distribution or exhibition of cinematographic filmsNovember 30, 2013Bansi S. Mehta & Co.
9 Amendments by the FA, 2012… Retrospective amendments w.e.f. 1-6-1976 “For the removal of doubts”… “it is hereby clarified”Explanation 4 to section 9(1)(vi):All types of Software Transaction is Royalty.Decision in Director of Income-tax v. Ericsson A.B. (16 taxmann.com 371)(Del HC) reversed.November 30, 2013Bansi S. Mehta & Co.
10 …Amendments by the FA, 2012… Explanation 5 to section 9(1)(vi): Definition of Royalty widened, irrespective of whether :The physical possession/control of property is with the payer;The property is directly used by the payer;The property is located in India or not.Asia Satellite Telecommunications Co. Ltd. v DIT (332 ITR 340) (Del HC) and Standard Chartered Bank vs. DDIT (45 SOT 494)(Mum) reversedExplanation 6 to section 9(1)(vi):Consideration for transponder Leasing, Communication by Satellite, Optic Fiber, etc. is Royalty, irrespective of whether process is secretAsia Satellite Telecommunications Co. Ltd. v DIT (332 ITR 340)(Del) reversedNovember 30, 2013Bansi S. Mehta & Co.
11 …Amendments by the FA, 2012Circular F. No. 500/ – FTD – 1 (Pt.) dated Assessments completed u/s. 143(3), in respect of which no reopening notice issued before April 1, 2012 cannot be reopened on account of these amendmentsFavourable Treaty provisions would still overrideDIT v. Nokia Networks OY  25 taxmann.com 225 (Del HC);CIT v. Siemens Aktiongesellschaft (310 ITR 320)(Bom);Convergys Customer Management Group Inc v. ADIT 58 SOT 69(URO)(Delhi)(Trib.);B4U International Holdings Ltd. Vs. DCIT  21 taxmann.com 529 (Mum. Trib.)`Convergys Customer Management Group Inc v. ADIT(2013) 58 SOT 69(URO)(Delhi)(Trib.) - retrospective amendment to s. 9(1)(vi) by the Finance Act, 2012 widens the scope of the term “royalty” but does not impact the provisions of the DTAA in any mannerCIT v. Siemens Aktiongesellschaft (310 ITR 320)(Bom) - The rule of referential incorporation or incorporation cannot be applied when one is dealing with a Treaty between two sovereign nations. Though it is open to a sovereign legislature to amend its laws, a DTAA entered into by the Government in exercise of the powers conferred by section 90(1), while considering section 90(2), has to be reasonably construed.November 30, 2013Bansi S. Mehta & Co.
12 Comparison of Act and DTAA Royalty as per ActRoyalty as per DTAAConsideration for transfer of ‘all or any rights’Consideration for use or right to use onlyConsideration for sale, distribution or exhibition of cinematographic films excludedSpecifically covered in most of the DTAAs except LibyaScope of Software transactions widenedOnly copyright in software coveredProcess is deemed to mean all process even if not secretOnly secret process coveredMeaning of ‘right to use’ widened to cover even cases where the payer does not have effective domain or controlMeaning of ‘right to use’ to be construed in narrow senseNovember 30, 2013Bansi S. Mehta & Co.
14 Meaning of FTS-DTAA… Two types of definition General wider definition: “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”Eg: DTAAs with Armenia, Austria, Germany, Japan, Korea, Malaysia, etc.November 30, 2013Bansi S. Mehta & Co.
15 …Meaning of FTS-DTAA… General restricted definition: “means payments of any kind to any person in consideration for the services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or technical design.”Eg: DTAAs with USA, UK, Switzerland, Australia, Canada, Cyprus, Finland, Malta, Netherlands, Portugal and Singapore, etc.November 30, 2013Bansi S. Mehta & Co.
16 …Meaning of FTS-DTAA… MoU dated 15-5-1989 between India and USA: “Generally speaking, technology will be considered “made available” when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b).”Raymond Ltd. vs. DCIT (86 ITD 791) (Mum.) “mere rendering of services is not roped in unless the person utilising the services is able to make use of the technical knowledge, etc., by himself in his business or for his own benefit and without recourse to the performer of the services in future”.The MoU can be used to understand the make available clauses of even other DTAAsNovember 30, 2013Bansi S. Mehta & Co.
17 …Meaning of FTS-DTAA… General Exclusions: services ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph relating to royalty;services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ;teaching in or by educational institutions ;services for the personal use of the individual or individuals making the payments ; orto an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Independent Personal Services.November 30, 2013Bansi S. Mehta & Co.
18 …Meaning of FTS-DTAA Certain Specific Provisions/Exceptions DTAAs DTAAs with no FTS clauseMauritius, UAE, Brazil, Indonesia, Libya, Nepal, Philippines, Sri Lanka, Syria, Thailand, UAR, Bangladesh, etc.DTAAs not covering ‘managerial services’USA, UKRate limitation applicable only in respect of contract signed after date of entry into force of DTAA.NorwayTreaty wordings suggests that it is treated as FTS only if rendered in India for inbound services.Contrary decision: Ashapura Minechem vs.. ADIT (40 SOT 220)(Mum Trib)ChinaAshapura Minechem, Mumbai ITAT held that these words are in contrast to provisions of Article 12(6). It further held that in order to avoid absurdity and keeping in mind the amendment by Finance Act, 2010 such narrow meaning should not be taken.November 30, 2013Bansi S. Mehta & Co.
19 Meaning of FTS - Act Explanation 2 to section 9(1)(vii) Exhaustive definitionDefinition similar to the wider definition in the DTAAs‘Consideration for rendering any managerial, technical or consultancy services (including the provision of services of technical or other personnel) ’No make available clauseExclusionconsideration for construction, assembly, mining or like project undertaken by the recipient;or consideration which is chargeable under the head ‘salaries’ in the hands of the recipientNovember 30, 2013Bansi S. Mehta & Co.
20 Taxability in India of Royalty/FTS November 30, 2013Bansi S. Mehta & Co.
21 Taxability in India as per Act… Deemed to accrue or arise in India - Section 9(1)(vi)/(vii) – where it is payable by:the Government; orA resident unless it is payable in respect of any right, property or information used or services utilized :for the purpose of or in the business or profession carried on by such resident outside India; orfor the purpose of making or earning any income from any source outside India; orPayable by non-resident, where it is payable in respect of any right, property or information used or services utilized:for the purpose of or in the business or profession carried on by such non-resident in India; orfor the purposes of making or earning any income from any source in IndiaA sale to India without any operations being carried out in India would amount to business with India and not business in India. For the business to be carried out in India there should be some activity carried out in India. - Qualcomm Incorporated v. Additional Director of Income-tax (International Taxation)  30 taxmann.com 30 (Delhi - Trib.)Similarly, the ‘source’ is the activity that gives raise to income. Hence, in case of sale of manufactured goods, the source is the activity of manufacturing of goods and not sale of goods The source of the royalty is the place where patent (right, property or information) is exploited, viz. where the manufacturing activity takes place and the not place where the manufactured goods is sold. - Qualcomm Incorporated v. Additional Director of Income-tax (International Taxation)  30 taxmann.com 30 (Delhi - Trib.), Rhodesia Metals Ltd. (Liquidator) v. CIT  9 ITR 45 (Supp)(PC)CIT v. Havells India Ltd. (2013)(352 ITR 376)(Del HC) - IT : In order to fall within second exception provided in section 9(1)(vii)(b), source of income, and not source of receipt, should be situated outside India. In view of decision in CIT v. Anglo French Textiles  199 ITR 785 (Mad.), the export activity having taken place or having been fulfilled in India, the source of income was located in India and not outside. Mere fact that the export proceeds emanated from persons situated outside India did not constitute them as the source of income.In Lufhtansa Cargo India (P) Ltd. Vs DCIT (92 TTJ 837)(Del) it was held that payments for repair of aircrafts which were acquired for operating on international routes only was not taxable as FTS since it was paid for earning income from a source outside IndiaS.9(1)(vii): Income deemed to accrue or arise in India-Fees for technical services–Fees paid to non-resident divers [S. 40(a)(i), 195]In Aqua Omega Services P. Ltd v. ACIT (2013) 23 ITR 191 (Chennai)(Trib.), it is held that the fees paid to non-resident divers outside India who rendered technical services in Saudi Arabia for the business of underwater diving services provided by the assessee there, it was held that the business was carried out outside India for source of income outside IndiaPerforming Right Society Ltd. vs. CIT (93 ITD 44)(CAL):In that case, the petitioner was an English Company comprising of an association of composers, authors and publishers of copyright musical works. The petitioner entered into an agreement with All India Radio for broadcasting western music in India for which All India Radio was to pay royalty to the petitioner in London.The question arose as to whether the income so earned by the Petitioner from All India Radio can be said to arise from a source in India and be taxable in India.The Calcutta High Court held that ‘in the instant case, the source of income was broadcasting by the All India Radio of western music for which the petitioner had a right to receive royalty from the All India Radio in London’.Thus, in that case, the contract from which the assessee was in receipt of income was considered as the source of income of the assessee and accordingly, it was held that since such contract was enforced in India, it was that place where the income therefrom would be chargeable to tax.While rendering the decision, reliance was placed on the decision of the Privy Council in Rhodesia Metals Ltd. v. Commissioner of Taxes  9 ITR (Supp.) 45 (PC) wherein the Judicial Committee observed that "source" means not a legal concept but which a practical man would regard as a real source of income. In addition to the Rhodesia Metals case (supra), reliance was also placed on the decision of the Supreme Court in CIT v. Lady Kanchanbai  77 ITR 123 (SC) which has supported the view of Rhodesia Metals (supra).First Income-tax Officer v. Automobile Peuggeot (30 ITD 229)(Bom):In that case, the assessee, a foreign company entered into an agreement with an Indian company for supply of technical data for manufacture of diesel engine. Only right to use the technology was granted to Indian company. While considering the question of where was the source of income of the foreign company, it was held as under:“As regards the question whether having regard to the facts of the case it could be said that source of receipt from the Indian company was in India, the agreement or for that matter the technology by itself could not give rise to any income unless the same was transferred. It was the exploitation of the assets that was the source of income. The agreement was for transfer of technology for use in India. It was the user that was relevant and that took place in India. The source was the user of the technology or its exploitation and since the user or exploitation took place in India. The source should be deemed to be in India. It was the activities resulting in exploitation that gave rise to the income. Having regard to the agreement it would be evident that the source was in India and the amount became taxable in India. Thus, the payment in question was made for user of technology and not transfer simpliciter thereof; the payment by its very character was in the nature of royalty; and the source was in India. Accordingly, the said payment received by the assessee was taxable.”(underlined for emphasis)In the foregoing decision, reference was also made to the decision in Performing Right Society (supra) to support the contention that income accrues where the services are rendered.From the foregoing, it would appear that it is the place where the client is based and where the services are actually performed that would be regarded as the ‘source of income’ of the assessee.Accordingly, since in the present case, the client is based outside India and the software development services are also rendered and utilised outside India, it can be argued that the income of Citius India is from a source outside India and accordingly, the software development fees paid by it would be covered under the second exemption under section 9(1)(vii)(b) of the Act.However, attention is also invited to the decision in ACIT v. IIC Systems (P.) Ltd. (127 TTJ 435)(Hyd) where the assessee had entered into a contract with IBM to provide software personnel for projects of IBM across globe (including USA). For this purpose, the assessee, in turn, entered into a contract with ACSC of USA for procuring software personnel in USA for projects of IBM in USA and payments were made by assessee to ACSC for recruitment/placement services. The question which arose before the Hyderabad Tribunal was whether such payments to ACSC can be regarded as ‘fees for technical services’. Though the Tribunal did not give any specific reasoning on the question as to whether such payments would fall within the exceptions under section 9(1)(vii)(b) of the Act, it did hold that such payments would not be covered by the exceptions under section 9(1)(vii)(b) of the Act. The relevant extract reads as under:“Explanation to section 9(1), which defines the scope of the term 'technical services' has provided for two exceptions. The first exception relates to the fees for technical services payable for services utilised in a business carried on by the payer outside India and the second exception relates to fees for technical services payable for earning any income from any source outside India. It is true, as observed by the CIT(A) that in the case under consideration the payer is a resident in India and the payment is being made in connection with earning of income by the assessee company from a source inside India and to this extent; the exceptions provided in section 9(1) do not apply to the case of the assessee., Since the payments are made by a person, who is a resident for the purposes of making or earning income from a source inside India, the remittances can come within the ambit of fee for technical services.”November 30, 2013Bansi S. Mehta & Co.
22 …Taxability in India as per Act Explanation to section 9Confirms the source rule of taxation, irrespective of whether services rendered in India or notSufficient territorial nexus established.Inserted by FA 2010Ishikawajima – Harima Heavy Industries (288 ITR 408)(SC) reversedExplanation upheld by:Clifford Chance vs. DCIT (318 ITR 237)(Mum HC);Jindal Thermal Power Company vs. DCIT (225 CTR 220)(Kar HC)November 30, 2013Bansi S. Mehta & Co.
23 Taxability in India as per DTAA… Generally taxable in both the contracting states, i.e. country of source as well as country of residenceGenerally two rates of tax is provided:Higher rate for all residents;Concessional rate in case of ‘beneficial owner’November 30, 2013Bansi S. Mehta & Co.
24 …Taxability in India as per DTAA… Taxability also depends on Most favored Nation Clause (MFN)It binds the contracting country (‘A’) to offer to the other contracting country (‘B’) the same benefits which A may offer to a third countryIndia has MFN clauses in tax treaties with Netherlands, Belgium, France, Sweden, Norway, Switzerland, Spain, Kazakhstan, Philippines and HungaryIllustration: In Finland DTAA, India has agreed for ‘performance rule’ of taxation of FTS as against source rule, where the services are performed in either of the states, in which case, the same is taxable only in the state of performance. Hence, this restricted scope also applies to some of the countries with MFN Clause, such as Netherlands, Belgium, France, Sweden, Switzerland and Spain.November 30, 2013Bansi S. Mehta & Co.
25 …Taxability in India as per DTAA MFN may –Directly amend the treaty or may trigger re-negotiation for the amendmentWith respect to scope or rate or bothMay cover taxation of some of the items of incomeIllustrations:In Netherland, MFN clause applies automatically where any other OECD nation favoured in respect of rate or scope of taxationIn Israel, MFN clause triggered if any other country favored after , Based on DTAA with Finland, Malta, Portugal, restricted scope applies - taxable only if it make available technologyIn Swiss Confederation and Philippines, MFN clause triggered only for re-negotiation, cannot apply automaticallyIn Norway, applies immediately, but only for rate of tax and not scopeNovember 30, 2013Bansi S. Mehta & Co.
26 Treaty Override Section 90(2) Beneficial DTAA provision override domestic provisionsUOI vs. Azadi Bachao Andolan (263 ITR 706)(SC)Mahindra & Mahindra Ltd. vs. DCIT (30 SOT 374)(SB)Maharashtra State Electricity Board vs. DCIT (90 ITD 793)(MumT)Pacta Sund ServandaArticle 51(b) of the Constitution of IndiaNovember 30, 2013Bansi S. Mehta & Co.
27 Taxability in case of Business Connection/PE in India Section 44DATax at normal ratesDeductions for expenses is allowed, exceptWhere not incurred wholly or exclusively for the business of the BC/PEPayments, other than reimbursement of actual expenses, made to HO or its other officesBooks of accounts needs to be maintained u/s. 44ASuch BoA to be audited and report to be filed with the Department in Form 3CE.The DTAAs too provide that where the income is attributable to a PE, such income would be regarded as Business Profit and not royalty/FTS.November 30, 2013Bansi S. Mehta & Co.
28 Rate of taxRate of tax is determined based on rate in Act or DTAA, whichever is beneficial, subject to the provisions of section 206AASection 115A(1)(b)(A)/(B)W.e.f. AY – 25%Prior to AY – 10%Section 44DA: 40%, taxable as business profitsDTAAs – generally ranges between 10 to 15%In case of absence of PAN – rate as per section 206AASection 195A – grossing up provisionsNovember 30, 2013Bansi S. Mehta & Co.
29 Issues/Controversies November 30, 2013Bansi S. Mehta & Co.
30 Equipment Royalty‘use’ or ‘right to use’ any industrial, commercial or scientific ‘equipment’EquipmentNot definedthere has to be a nexus between the equipment and the ultimate activity, i.e. the equipment should enable the performance of the ultimate activity.“the use of, or the right to use”Positive act of utilization, application or employment of the equipmentRashtriya Ispat Nigam Limited (126 STC 114)(SC) and BSNL vs. UOI (282 ITR 273)(SC) - expression “the right to use” means transfer of effective domain/control of an asset.Decisions:Dell International Services Pvt Ltd In re vs. 308 ITR 37 (AAR)Cable & Wireless Networks India Pvt Ltd ., In re vs.  315 ITR 72 (AAR)Position after Retrospective amendment via Explanation 5 of section 9(1)(vi)November 30, 2013Bansi S. Mehta & Co.
31 Use of Satellite Whether use of equipment Whether process Asia Satellite Telecommunications Ltd. V. DCIT (85 ITD 478)(DelT)ACIT vs. Sanskar Info. T.V.P. Ltd. (24 SOT 87)(TMum)Whether secret processDCIT vs. PanAmSat International Systems (9 SOT 100) - favNew Skies Satellite N. V. vs. ADIT  121 ITD 1(Delhi)(SB) – process need not be “secret”Explanation 6 of Section 9(1)(vi)Whether amounts to ‘use or right to use’ISRO Satellite Centre vs. DIT (307 ITR 59)(AAR)Asia Satellite Telecommunications vs. DIT (332 ITR 340)(Del HC)Explanation 5 of section 9(1)(vi)1. In these decisions it is held that it amounts to use of “process”- Asia Satellite (85 ITD 478)(DelT)ACIT vs. Sanskar Info. (24 SOT 87)(TMum)2. In ACIT vs. PanAmSat International Systems (9 SOT 100), Art 12 of Indo-USA DTAA was considered and it was held that as per the DTAA only secret process is coveredNovember 30, 2013Bansi S. Mehta & Co.
32 Leased line circuit/connectivity /satellite-link charges… Whether use of equipmentDell International Services Pvt Ltd In re vs. 308 ITR 37 (AARInfosys Technologies Limited vs. DCIT (139 TTJ 18)(Bang)(UO)Whether processFavourableDell International Services Pvt Ltd In re vs. (308 ITR 37) (AAR)Cable & Wireless Networks India Pvt Ltd., In re vs. (315 ITR 72) (AAR)UnfavourableVerizon Communications Singapore Pte Ltd. vs ITO (45 SOT 263)(Chn)Explanations 5 and 6 to Section 9(1)(vi)November 30, 2013Bansi S. Mehta & Co.
33 …Leased line circuit/connectivity/ satellite-link charges Whether use of standard facilitySkycell Communications Limited vs. DCIT (251 ITR 53)(Mad)CIT vs. Estel Communications (P) Ltd.  (318 ITR 185)(Del HC)Pacific Internet (India) Pvt Ltd v ITO  27 SOT 523 (MumT)Expeditors International (India) Pvt. Ltd. Vs. ACIT 2 ITR (Trib.)( 153) (Delhi)Cable & Wireless Networks India Pvt Ltd., In re vs.  315 ITR 72 (AAR)HFCL Infotel Limited v. ITO’s case (99 TTJ 440) (Chd)Wipro Limited vs. ITO  1 SOT 758 (BangT)ACIT V. Infosys Technologies Ltd (MumT)(39 - E Bombay Chartered Accountant Journal, March 2008 at Page 638)Whether involves human interventionCIT V. Bharti Cellular and Others  319 ITR 139 (DELHI) - SC in 330 ITR 239 held that technical expert’s opinion to be obtainedNovember 30, 2013Bansi S. Mehta & Co.
34 Payment for software… Copyright vs. copyrighted article Whether software is a good - Tata Consultancy Services vs. State of Andhra Pradesh (271 ITR 401)(SC)Para and 14 of commentary on Article 12 of the OECD Model Tax Convention – question whether royalty depends on the nature of the rights that the transferee acquires under the particular arrangement regarding use and exploitation of the program.November 30, 2013Bansi S. Mehta & Co.
35 …Payment for software… Various software arrangements:Where it is a shrink-wrapped softwareWhere software is embedded in the machinery/equipment purchased;Where software purchased for internal use;Whether software purchased for commercial exploitation;Where no right for duplication provided.Explanation 4 to section 9(1)(vi)November 30, 2013Bansi S. Mehta & Co.
36 …Payment for software… Decisions in favour of assessee:DIT v. Infrasoft Ltd.  39 taxmann.com 88 (Delhi HC);DIT v. Nokia Networks OY  25 taxmann.com 225 (Del HC);Director of Income-tax v. Ericsson A.B. (16 taxmann.com 371)(Del HC);ADIT v. Siemens Aktiengesellschaft (2013) 142 ITD 614 (Mum.)(Trib.);Qualcomm Incorporated v. ADIT  (58 SOT 97) (Delhi - Trib.);Sonic Biochem Extractions P. Ltd. v. ITO (2013)(23 ITR 447)(AT)(MumT);DDIT (IT) v. Solid Works Corporation (2013)(152 TTJ 570/82 DTR 316 (Mum.) (Trib.);Convergys Customer Management Group Inc v. ADIT (2013))(58 SOT 69)(URO)(Delhi)(Trib.);SKOL Breweries Ltd v. A CIT (2013)(153 TTJ 257) (Mum.) (Trib.);ACIT v. Sonata Information Technology Ltd. (2013) (55 SOT 455)(MumT.);The decision in Infrasoft has been rendered in last week on November 22, It is held therein that the amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA. It held that what was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in a copyright. It further held that the right that was transferred was not a right to use the copyright but was only limited to the right to use the copyrighted material and the same would not give rise to any royalty income and would be business income. The Delhi High Court expressed its disagreement with the decision of the High Court in the case of CIT v. Samsung Electronics Co. Ltd.  203 Taxman 477 (Kar.) that right to make a copy of the software and storing the same in the hard disk of the designated computer and taking backup would amount to copyright work.Further, the decisions in DIT v. Nokia Networks OY  25 taxmann.com 225 (Del HC) and ADIT v. Siemens Aktiengesellschaft (2013) 142 ITD 614 (Mum.)(Trib.) also have been rendered after the amendment under the ActIn ADIT v. Siemens Aktiengesellschaft (2013) 142 ITD 614 (Mum.)(Trib.) and Sonic Biochem Extractions P. Ltd. v. ITO (2013)(23 ITR 447)(AT)(MumT) - samsung’s decision has been distinguished on the ground that it does not deal with embedded softwareQualcomm Incorporated v. ADIT  (58 SOT 97) (Delhi - Trib.) – embedded software not royaltyDirector of Income-tax v. Ericsson A.B. (16 taxmann.com 371)(Del HC)- ‘In order to constitute 'royalty' payment should be dependent upon user of copyright and not a lump sum payment made for acquisition of a copyrighted article’Convergys Customer Management Group Inc v. ADIT(2013) 58 SOT 69(URO)(Delhi)(Trib.) – held that the amendment does not affect the DTAAIn Dy. DIT v. Solid Works Corpn.  51 SOT 34/18 taxman.com 189 and ACIT v. Sonata Information Technology Ltd. (2013) (55 SOT 455)(MumT.) – after considering the decision in Nokia Del HC and Samsung Kar HC, Del HC decision has been followed on the ground that view favourable to the assessee should be consideredNovember 30, 2013Bansi S. Mehta & Co.
37 …Payment for software… Kansai Nerolac Paints Ltd. v. Addl. DIT  41 SOT 3 (URO);Motorola vs. DCIT (96 TTJ 1)(SB);DDIT v. Alcatel USA International Mktg Inc (43 SOT 31)(Mum.) (URO)Sonata Information Technology Ltd. Vs. ACIT (103 ITD 324)(TBAN);Sonata Software Ltd vs. ITO (6 SOT 700)(TBAN);Hewlett-Packard (India) (P.) Ltd. V. ITO (5 SOT 660)(TBAN);DCIT Vs M/S CIT Alcatel (ITA No.407/Del/2001);Lucent Technologies International Inc Vs DCIT. (92 ITD 366)(Del)DCIT vs. Metapath Software Intl. (9 SOT 305)(Del);ADIT vs. TII Team Telecom International (60 DTR 177)(MumT)DDIT vs. Reliance Industries Limited  43 SOT 506 (MumT)November 30, 2013Bansi S. Mehta & Co.
38 …Payment for software Decision in favour of revenue: CIT v. Synopsis International Old Ltd. (2013) 212 Taxman 454 (Karn.) (HC);CIT vs. Samsung Electronics Co. Ltd.  345 ITR 494 (Kar);Cosmic Circuits (P.) Ltd. v ITO(2013)(58 SOT 364) (Bang.)(Trib.)Microsoft Corporation vs. ADIT (ITA No of 2005)(DelT)CIT v. Synopsis International Old Ltd. (2013) 212 Taxman 454 (Karn.) (HC) - It is not necessary that there should be a transfer of exclusive right in copyright and where consideration paid was for rights in respect of copyright and for user of confidential information embedded in software/computer programme, it would fall within mischief of Explanation (2) of section 9(1)(vi) and there would be a liability to pay taxCIT vs. Samsung Electronics Co. Ltd. (245 vs. 481)(Kar) – right to copy software even for internal use amounts to royaltyCosmic Circuits (P.) Ltd. v ITO(2013)(58 SOT 364) (Bang.)(Trib.) - IT/ILT: Payment made by assessee to non-residents for downloading their licenced software amounted to payment of royalty and, thus, assessee was liable to deduct tax at source while making said paymentMicrosoft Corporation vs. ADIT (ITA No of 2005)(DelT) - even payments made by end-users towards license of computer software amounts to ‘royalty’November 30, 2013Bansi S. Mehta & Co.
39 Subscription Charges/supply of information Subscription for information of pure commercial nature without any special feature is not royaltyFavourable:CIT vs. HEG Ltd. (263 ITR 230)(MP HC)P.T. McKinsey Indonesia . v v DDIT  (141 ITD 357)(Mum.)(Trib.)Online subscription of databaseWhether royaltyUnfavourable:CIT vs. Wipro Ltd. (203 Taxmann 621)(Kar HC)ADIT v. Globus Stores P. Ltd. (2013) (140 ITD 103) (Mum.) (Trib.);CIT vs. HEG Ltd. (263 ITR 230)(MP HC)-Any information cannot earn the status of royalty. To have the status of royalty, it has to have some special features. Solely because an entry of the commercial nature would not make it royalty. That cannot be the exclusive base or foundation. Some sort of expertise or skill is required. The aforesaid factor would be the requisite one. It cannot be accepted that every information if it concerns the industries or commercial venture will be royalty. That would tantamount to state the law quite broadly. That does not seem to be the purpose of the statute or that of the treaty.P.T. McKinsey Indonesia . v Dy.CIT (2013) (141 ITD 357))(Mum.)(Trib.)- Where information supplied was in nature of data and did not arise out of exploitation of know-how generated by skills and innovation of persons who possessed such talent, payment received will be business receipt and not royaltyWipro Ltd. V. ITO  278 ITR 57 (Bang. - Trib) followed MP HC and held Subs charges to access database are not info/ advice given and thus, does not mean ‘Royalty’. Karnataka HC reversed this Decision of Bang Trib holding that access to journal is a ‘license/ right to use’ and thus, is Royalty. Kar HC followed in ADIT v. Globus Stores P. Ltd. (2013) 140 ITD 103/81 DTR 225/153 TTJ 248 (Mum.) (Trib.)Factset Research Systems INC, in Re (317 ITR 169) (AAR) - on the question as to whether subscription fees collected for accessing database located outside India would be chargeable to tax as “royalties”, it has been held that no proprietary right and no exclusive right which the applicant had was to be made over to the customer : the copyright or the proprietary rights over the "literary work" remained intact with the applicant notwithstanding the fact that the right to view and make use of the data for internal purposes of the customer was conferred. The copyright of the applicant was not to be assigned or otherwise transferred so as to enable the subscriber to have certain exclusive rights over the applicant's works as contemplated by section 14(a) of the Copyright Act, Nor was any right of “adaptation” of the work within the meaning of section 2(a) of the Copyright Act conferred. Also, it was held that the DTAA in Article 12(3) spoke of payment received for "information concerning industrial, commercial or scientific experience". And the applicant did not share the experiences, the techniques or methodology employed in evolving the database with the subscribers. The argument of the Department that payment is for use of equipment was also disapproved.Accordingly, the subscription fees received by the applicant from the licensee (user of the database) were held to be not falling within the scope of clause (v) of Explanation 2 to section 9(1)(vi) of the Act dealing with “royalty”.ACIT vs. Infosys Technologies Limited (ITA No. 653 & 969/Bang./2006) wherein it has been held that no tax is required to be deducted from payments made in respect of subscription fees paid by way of an access fee to database maintained outside India.However, it would also be worthwhile to note an earlier ruling in the case of P. No. 30 of 1999, In re (238 ITR 296)(AAR), where the Applicant had maintained a central processing unit for the purpose of storage and process of the data related to its own business. Such CPU was accessed and used by various group entities of the Applicant located worldwide (like in your case). While examining the issue as to whether the remittance made for such access to the database would amount to “royalties” as defined Article 12.3 of the DTAA, it was inter alia, held that such access to the data stored in the CPU not merely amounts to use of equipments, it is the use of embedded secret software (an encryption product) developed by the Applicant for the purpose of processing of raw material transmitted by its group companies, and this clearly falls within the ambit of the Article 12.3 of the DTAA, and therefore the same is liable to be taxed as “royalties” in the hands of the Applicant.November 30, 2013Bansi S. Mehta & Co.
40 Subscription Charges/supply of information Favourable:Hughes Escort Communications Ltd. Vs. DCIT (51 SOT 356)(DelT);Factset Research Systems INC, in Re (317 ITR 169) (AAR)ACIT vs. Infosys Technologies Limited (ITA No. 653 & 969/Bang./2006)Whether FTSDepends on make available clauseNovember 30, 2013Bansi S. Mehta & Co.
41 Payment for designs and drawings… Sale of know-how/designs/drawingWhether outright sale can be equated with a royalty arrangementFor royalty, only right to use the know-how is givenBut, on sale, the seller retains no control or rights in the propertyFavourable to assessee:CIT v Davy Ashmore India Ltd 190 ITR 626 (Cal)Pro-quip corporation v. CIT 255 ITR 354 (AAR)DCIT v. Finolex Pipes Ltd 106 TTJ 741 (Pune)CIT vs. Maggronic Devices (P) Ltd. (329 ITR 442)(HP)CIT v. Koyo Seiko Co. Ltd 233 ITR 421 (AP)CIT v. Klayman Porcelains Ltd 229 ITR 735 (AP)November 30, 2013Bansi S. Mehta & Co.
42 …Payment for designs and drawings… Favourable to revenueDCIT vs. Mahestic Auto Ltd. (51 ITD 313)(Chd);Union Carbide Corporation vs. Inspecting ACIT (50 TTJ 535)(Cal)DCIT v. All Russia Scientific Research Institute (98 ITD 69) (Mum)Leonhardt Andra Und Partner GmbH v. CIT (249 ITR 418)(Cal)Development and sale of designsIf the arrangement is in the nature of sale and not service, mere customization of the design before sale would not make it FTSAbhishek Developers v. ITO (110 TTJ 698 )(Bang)Hindustan Aeronautics Limited vs. ITO (121 TTJ 242)(Bang)November 30, 2013Bansi S. Mehta & Co.
43 …Payment for designs and drawings However, furnishing of reports covering detailed designs, which are not in nature of sale, would be FTSAEG Aktiengesllschaft vs. CIT (267 ITR 209)(Kar HC)SNC-Lavalin International Inc. vs DDI T(118 TTJ 802)(Del)Dr. Hutarew & Partner (India) (P) Ltd. Cs. ITO (123 TTJ 951)(Del)GMP International GnbH, In re  321 ITR 411 (AAR)Make available clause also relevantNovember 30, 2013Bansi S. Mehta & Co.
44 Indivisible Contracts In case of comprehensive contracts, a single component cannot be segregated so as to tax it as royalty/FTS - contract to be looked at as wholeCIT vs. Neyveli ignite Corporation Ltd (243 ITR 459)(Mad HC);CIT vs. DCM (336 ITR 599)(Del HC);DIT vs. Ericsson A.B. (204 Taxman 192)(Del HC);CIT vs. Sundwiger EMFG & Co. (262 ITR 110)(AP HC)ITO vs. Prasad Productions (125 ITD 263)(Chn SB)However, in these decisions, the contract was split into parts and each component was separately analysedAirports Authority of India, In re (304 ITR 216)(AAR)International Tire Engineering Resources LLC, In re (319 ITR 228)(AAR)Rotem Company, In re (279 ITR 165)(AAR)CIT vs. Neyveli ignite Corporation Ltd (243 ITR 459)(Mad HC) – In this case the amount paid was for total contract of design, manufacture, supply, erection, and commissioning.November 30, 2013Bansi S. Mehta & Co.
45 Payment of Commission… Erstwhile Circular No. 786, dated – now withdrawnCommission for advertising, publicity and promotion outside India not FTSCIT vs. Toshoku Ltd. (125 ITR 525)(SC)Sherton International vs. DDIT (107 ITD 12)(Del) upheld by Del HC in 313 ITR 267A.B. Hotel Ltd. v. DCIT (25 SOT 368)(Del)ITO v. Faizan Shoes (P.) Ltd. (2013) 58 SOT 245 (Chennai)(Trib.)Commission to lead managerNo make availableRaymond Ltd. Vs. DCIT (86 ITD 791)(Mum)Mahindra & Mahindra Ltd. Vs. DCIT (30 SOT 374) (Mum)Gujarat Ambuja Cements Ltd. Vs. DCIT (2 SOT 784).November 30, 2013Bansi S. Mehta & Co.
46 …Payment of Commission Referral/procurement fees/commissionAdidas Sourcing Ltd. v. ADIT (2013) (55 SOT 245) (Delhi)(Trib.)CEAT International S.A. vs. CIT (237 ITR 859) (Mum)Cushman and Wakefield (S) Pte Ltd., In re (305 ITR 208)(AAR)Commission to reinsurance brokersNo make available - DIT vs. Guy Carpenter & Co. Ltd (2012)(346 ITR 504)(Del HC)November 30, 2013Bansi S. Mehta & Co.
47 Payment for technical reports Depends on make available clauseFavourable decisions due to make available clause:CIT vs. De Beers India Minerals Pvt. Ltd.  346 ITR 467 (Kar HC)Romer Labs Singapore Pte. Ltd v. ADIT (IT) (2013)141 ITD 50 (DelT)ACIT vs. Paradigm Geophysical Pty Ltd. (122 ITD 155)(DelT)National Organic Chemical Industries Ltd vs. DCIT (96 TTJ 765)(Mum)Anapharm Inc. In re (305 ITTR 394)(AAR)Intertek Testing Services India P Ltd, In re (307 ITR 418)(AAR)Worley Parsons Services Pty. Ltd. (313 ITR 74)(AAR)Unfavorable in absence of make available clauseCochin Refineries Ltd. Vs CIT (222 ITR 354)(Ker)November 30, 2013Bansi S. Mehta & Co.