WIRC Basic Course on International Taxation
Yogesh Thar
Synopsis…
 Meaning of Royalty
 As per DTAAs
 As per Act
 Amendments by FA, 2012
 Comparison of Act and DTAA
 Meaning of FTS
 As per DTAAs
 As per Act
 Taxability in India of Royalty/FTS
 As per Act
 As per DTAA
 Treaty override
 Taxability in case of Business Connection/PE in India
 Rate of tax on royalty/FTS
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…Synopsis
 Issues and Controversies
 Equipment Royalty
 Use of satellite
 Leased line circuit/connectivity /satellite-link charges
 Payment for software
 Subscription Charges/supply of information
 Payment for designs and drawings
 Indivisible Contracts
 Payment of Commission
 Payment for technical reports
 Case Studies
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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
Model
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…Meaning of Royalty – DTAA
Certain Specific Provisions/Exceptions
DTAAs
Even gains from alienation of the rights or properties USA
which are contingent on the productivity, use, or
disposition thereof regarded as Royalty
Even gains from alienation of the rights or properties Singapore
regarded as Royalty
Payment for use or right to use of any industrial, Israel, Greece, Netherland, and
commercial or scientific equipment not covered
Sweden and Belgium
Specifically includes consideration for use of computer Morocco, Nambia, Russia,
software/ Computer programs
Trinidad
&
Tobago,
Turkmenistan, Kazakhstan &
Kyrgyz Republic
Rentals and other income from cinematographic films Libya
considered as business profits and not royalty
FTS included in Royalty itself
Australia,
Protocol)
Brazil
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Exclusion
shipping transactions
inCo.case of equipment USA, UK, Singapore
(through
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Meaning of Royalty – Act…
 Explanation 2 to section 9(1)(vi)
 Wider definition than that in DTAAs
 In addition to that covered in DTAA, includes consideration for
 Transfer of all or any rights in respect of patent, invention, model,




design, secret formula or process or trade mark or similar property
imparting of any information concerning working of or use of patent,
invention, model, design, secret formula or process or trademark or
similar property
Transfer of all or any rights in respect of any copyright, literary, artistic
or scientific work
imparting of any information concerning technical, industrial,
commercial or scientific knowledge, experience or skill
Rendering of any services in connection with the activities referred to
in the other clauses of the definition
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…Meaning of Royalty – Act
 Exclusions under the Act:
 Income chargeable under the head ‘Capital Gains’
 Consideration for sale, distribution or exhibition of
cinematographic films
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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.
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…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)
reversed
 Explanation 6 to section 9(1)(vi):
 Consideration for transponder Leasing, Communication by
Satellite, Optic Fiber, etc. is Royalty, irrespective of whether process
is secret
 Asia Satellite Telecommunications Co. Ltd. v DIT (332 ITR
340)(Del) reversed
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…Amendments by the FA, 2012
 Circular F. No. 500/111 12009 – FTD – 1 (Pt.) dated 29-5-2012 -
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 amendments
 Favourable Treaty provisions would still override
 DIT v. Nokia Networks OY [2012] 25 taxmann.com 225 (Del HC);
 CIT v. Siemens Aktiongesellschaft (310 ITR 320)(Bom);
 Convergys Customer Management Group Inc v. ADIT [2013]58
SOT 69(URO)(Delhi)(Trib.);
 B4U International Holdings Ltd. Vs. DCIT [2012] 21 taxmann.com
529 (Mum. Trib.)`
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Comparison of Act and DTAA
Royalty as per Act
Royalty as per DTAA
Consideration for transfer of ‘all or any Consideration for use or right to use
rights’
only
Consideration for sale, distribution or Specifically covered in most of the
exhibition of cinematographic films DTAAs except Libya
excluded
Scope of Software transactions widened Only copyright in software covered
Process is deemed to mean all process Only secret process covered
even if not secret
Meaning of ‘right to use’ widened to Meaning of ‘right to use’ to be
cover even cases where the payer does construed in narrow sense
not have effective domain or control
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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.
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…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.
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…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 DTAAs
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…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 ; or
 to 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.
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…Meaning of FTS-DTAA
Certain Specific Provisions/Exceptions
DTAAs
DTAAs with no FTS clause
Mauritius, UAE, Brazil,
Indonesia, Libya, Nepal,
Philippines, Sri Lanka,
Syria, Thailand, UAR,
Bangladesh, etc.
DTAAs not covering ‘managerial services’
USA, UK
Rate limitation applicable only in respect of contract
signed after date of entry into force of DTAA.
Norway
Treaty wordings suggests that it is treated as FTS only
if rendered in India for inbound services.
China
Contrary decision: Ashapura Minechem vs.. ADIT
(40 SOT 220)(Mum Trib)
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Meaning of FTS - Act
 Explanation 2 to section 9(1)(vii)
 Exhaustive definition
 Definition 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 clause
 Exclusion
 consideration 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 recipient
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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; or
 A 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; or
for the purpose of making or earning any income from any source
outside India; or
 Payable 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; or
for the purposes of making or earning any income from any source in
India
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…Taxability in India as per Act
 Explanation to section 9


Confirms the source rule of taxation, irrespective of whether services
rendered in India or not
Sufficient territorial nexus established.
 Inserted by FA 2010
 Ishikawajima – Harima Heavy Industries (288 ITR 408)(SC)
reversed
 Explanation upheld by:
 Clifford Chance vs. DCIT (318 ITR 237)(Mum HC);
 Jindal Thermal Power Company vs. DCIT (225 CTR 220)(Kar HC)
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Taxability in India as per DTAA…
 Generally taxable in both the contracting states, i.e.
country of source as well as country of residence
 Generally two rates of tax is provided:
 Higher rate for all residents;
 Concessional rate in case of ‘beneficial owner’
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…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 country
 India has MFN clauses in tax treaties with Netherlands, Belgium,
France, Sweden, Norway, Switzerland, Spain, Kazakhstan, Philippines
and Hungary
 Illustration: 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.
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…Taxability in India as per DTAA
 MFN may –
 Directly amend the treaty or may trigger re-negotiation for the amendment
 With respect to scope or rate or both
 May cover taxation of some of the items of income
 Illustrations:
 In Netherland, MFN clause applies automatically where any other OECD
nation favoured in respect of rate or scope of taxation
 In Israel, MFN clause triggered if any other country favored after 1-1-1995,
Based on DTAA with Finland, Malta, Portugal, restricted scope applies taxable only if it make available technology
 In Swiss Confederation and Philippines, MFN clause triggered only for renegotiation, cannot apply automatically
 In Norway, applies immediately, but only for rate of tax and not scope
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Treaty Override
 Section 90(2)
 Beneficial DTAA provision override domestic provisions
 UOI 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 Servanda
 Article 51(b) of the Constitution of India
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Taxability in case of Business Connection/PE in India
 Section 44DA
 Tax at normal rates
 Deductions for expenses is allowed, except


Where not incurred wholly or exclusively for the business of the
BC/PE
Payments, other than reimbursement of actual expenses, made to
HO or its other offices
 Books of accounts needs to be maintained u/s. 44A
 Such 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.
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Rate of tax
 Rate of tax is determined based on rate in Act or DTAA, whichever is
beneficial, subject to the provisions of section 206AA
 Section 115A(1)(b)(A)/(B)
 W.e.f. AY 2014-15
– 25%
 Prior to AY-2014-15 – 10%
 Section 44DA: 40%, taxable as business profits
 DTAAs – generally ranges between 10 to 15%
 In case of absence of PAN – rate as per section 206AA
 Section 195A – grossing up provisions
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Equipment Royalty
 ‘use’ or ‘right to use’ any industrial, commercial or scientific ‘equipment’
 Equipment
 Not defined
 there 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 equipment
 Rashtriya 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. [2009]308 ITR 37 (AAR)
 Cable & Wireless Networks India Pvt Ltd ., In re vs. [2009] 315 ITR 72 (AAR)
 Position after Retrospective amendment via Explanation 5 of section 9(1)(vi)
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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 process
 DCIT vs. PanAmSat International Systems (9 SOT 100) - fav
 New Skies Satellite N. V. vs. ADIT [2011] 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)
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Leased line circuit/connectivity
/satellite-link charges…
 Whether use of equipment
 Dell International Services Pvt Ltd In re vs. [2009]308 ITR 37 (AAR
 Infosys Technologies Limited vs. DCIT (139 TTJ 18)(Bang)(UO)
 Whether process
 Favourable


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)
 Unfavourable

Verizon Communications Singapore Pte Ltd. vs ITO (45 SOT 263)(Chn)
 Explanations 5 and 6 to Section 9(1)(vi)
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…Leased line circuit/connectivity/
satellite-link charges
 Whether use of standard facility
 Skycell Communications Limited vs. DCIT (251 ITR 53)(Mad)
 CIT vs. Estel Communications (P) Ltd. [2009] (318 ITR 185)(Del HC)
 Pacific Internet (India) Pvt Ltd v ITO [2009] 27 SOT 523 (MumT)
 Expeditors International (India) Pvt. Ltd. Vs. ACIT [2010]2 ITR (Trib.)( 153)
(Delhi)
 Cable & Wireless Networks India Pvt Ltd., In re vs. [2009] 315 ITR 72
(AAR)
 HFCL Infotel Limited v. ITO’s case (99 TTJ 440) (Chd)
 Wipro Limited vs. ITO [2004] 1 SOT 758 (BangT)
 ACIT V. Infosys Technologies Ltd (MumT)(39 - E Bombay Chartered
Accountant Journal, March 2008 at Page 638)
 Whether involves human intervention
 CIT V. Bharti Cellular and Others [2009] 319 ITR 139 (DELHI) - SC in
[2010]330 ITR 239 held that technical expert’s opinion to be obtained
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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 12.2. 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.
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…Payment for software…
 Various software arrangements:
 Where it is a shrink-wrapped software
 Where
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)
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…Payment for software…
 Decisions in favour of assessee:
 DIT v. Infrasoft Ltd. [2013] 39 taxmann.com 88 (Delhi HC);
 DIT v. Nokia Networks OY [2012] 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 [2013] (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.);
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…Payment for software…
 Kansai Nerolac Paints Ltd. v. Addl. DIT [2010] 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 [2011] 43 SOT 506 (MumT)
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…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. [2012] 345 ITR
494 (Kar);
 Cosmic Circuits (P.) Ltd. v ITO(2013)(58 SOT 364)
(Bang.)(Trib.)
 Microsoft Corporation vs. ADIT (ITA No. 1392 of 2005)(DelT)
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Subscription
information
Charges/supply
of
 Subscription for information of pure commercial nature
without any special feature is not royalty
 Favourable:
 CIT vs. HEG Ltd. (263 ITR 230)(MP HC)
 P.T. McKinsey Indonesia . v v DDIT [2013] (141 ITD 357)(Mum.)(Trib.)
 Online subscription of database
 Whether royalty
 Unfavourable:


CIT vs. Wipro Ltd. (203 Taxmann 621)(Kar HC)
ADIT v. Globus Stores P. Ltd. (2013) (140 ITD 103) (Mum.) (Trib.);
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Subscription
information
Charges/supply
of
 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 FTS
 Depends on make available clause
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Payment
for
drawings…
designs
and
 Sale of know-how/designs/drawing
 Whether outright sale can be equated with a royalty
arrangement


For royalty, only right to use the know-how is given
But, on sale, the seller retains no control or rights in the property
 Favourable 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)
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…Payment
drawings…
for
designs
and
 Favourable to revenue
 DCIT 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 designs
 If the arrangement is in the nature of sale and not service, mere
customization of the design before sale would not make it FTS

Abhishek Developers v. ITO (110 TTJ 698 )(Bang)

Hindustan Aeronautics Limited vs. ITO (121 TTJ 242)(Bang)
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…Payment
drawings
for
designs
and
 However, furnishing of reports covering detailed designs, which are
not in nature of sale, would be FTS

AEG 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 [2010] 321 ITR 411 (AAR)
 Make available clause also relevant
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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 whole
 CIT 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 analysed
 Airports 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)
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Payment of Commission…
 Erstwhile Circular No. 786, dated 7-2-2000 – now withdrawn
 Commission for advertising, publicity and promotion outside India not
FTS
 CIT vs. Toshoku Ltd. (125 ITR 525)(SC)
 Sherton International vs. DDIT (107 ITD 12)(Del) upheld by Del HC in
313 ITR 267
 A.B. Hotel Ltd. v. DCIT (25 SOT 368)(Del)
 ITO v. Faizan Shoes (P.) Ltd. (2013) 58 SOT 245 (Chennai)(Trib.)
 Commission to lead manager
 No make available
 Raymond 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).
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…Payment of Commission
 Referral/procurement fees/commission
 Adidas 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 brokers
 No make available - DIT vs. Guy Carpenter & Co. Ltd (2012)(346 ITR
504)(Del HC)
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Payment for technical reports
 Depends on make available clause
 Favourable decisions due to make available clause:







CIT vs. De Beers India Minerals Pvt. Ltd. [2012] 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 clause
 Cochin Refineries Ltd. Vs CIT (222 ITR 354)(Ker)
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November 30, 2013
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