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

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 Includes lump sum consideration Excludes capital gains Excludes bundled payment under Computer Software Policy

Royalty – Definition as per OECD and UN Model As per OECD Model As per UN Model Consideration for use of right to use 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

Taxability of Royalty Taxability under Income tax Act 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

Taxability of Royalty (contd.) Taxability as per OECD and UN Model OECD Model UN Model PE Exists? PE Exists? No No Article 12 Yes Yes Yes Article 7 Article 7 (If arising in business carried through PE) Article 14 (Arising on performance of independent personal services from fixed base)

Taxability of Royalty –Tax Rates Tax Treaty Income-tax Act 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

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

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)

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)

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)

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)

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)

Rulings on satellite charges (contd.) Post amendment 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)

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

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

Non Exclusive license for distribution End user license agreement 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

Issues 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 ? 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 ?

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