Amendments relating to
royalty
Sunil D Shah
Deloitte Haskins & Sells
Indian Merchants' Chamber
21 September 2012
Agenda
 Background
 Amendments by the Finance Act 2012 relating to royalty
 Some issues
 Case study
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Background
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
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Includes lump sum consideration
Excludes capital gains
Excludes bundled payment under Computer Software
Policy
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Royalty – Definition as per OECD and UN Model
As per OECD Model
Consideration
for use of
right to use
As 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
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Taxability of Royalty
Taxability under Income tax Act
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Section
Payer
Whether Taxable
9(1)(vi)(a)
Government
All
9(1)(vi)(b)
Resident
All except payments for
business/profession/source of income of the
payer outside India
9(1)(vi)(c)
Non Resident
Only payments for business/profession/source of
income of the payer in India
Section
Royalty
Section 44DA
If arising out of PE/ fixed place of profession
Section 115A
No PE and in pursuance of agreement with the government
or Indian concern
Section 28
Other cases
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Taxability of Royalty (contd.)
Taxability as per OECD and UN Model
UN Model
OECD Model
PE
Exists?
Yes
No
No
PE
Exists?
Article 12
Yes
Yes
Article 7
Article 7
(If arising in business
carried through PE)
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Article 14
(Arising on performance
of independent personal
services from fixed base)
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Taxability of Royalty –Tax Rates
Income-tax Act
Tax Treaty
Section 115A
Gross Basis @
10%*
Article 7
Net Basis @ 40%
Section 44DA
Net Basis @ 40%*
Article 14
Net Basis @ 40%
Other
Net @ 40%*
Article 12
Gross Basis
At treaty rates
*Plus applicable surcharge & Education Cess
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Amendments relating to Royalty
Amendments by the Finance Act 2012
 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
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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)
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Controversies on Royalty
Issue 1: Taxability of Software Payments
Rulings on software
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)
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Rulings on software (contd.)
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)
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Rulings on software (contd.)
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)
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Issue 2: Transmission by satellite
/telecommunication
Rulings on satellite/telecommunication charges
Pre-amendment
 Asia Satellite Telecommunications Co. Ltd. v. DCIT, 332 ITR 340 (Del)
 ISRO Satellite Centre, In re [2008] 175 Taxman 97 (AAR)
 Infosys Technologies Ltd v. DCIT , 45 SOT 157 (Bang.)
 New Skies Satellite NV v. ADIT, 121 ITD 1 (Del)(SB)
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Rulings on satellite charges (contd.)
Post amendment
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
Dishnet Wireless Ltd., In re [2012] 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)
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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
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Case Study
Facts
 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
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Facts (contd.)
US
US Co
Non Exclusive
license for
distribution
Payments
Singapore
End user license agreement
Sing Co
Non Exclusive
license
Payments
India
End Users
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Issues
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 IndiaSingapore DTAA ?
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