1. Amendments relating to royalty
Sunil D Shah
Deloitte Haskins & Sells
Indian Merchants' Chamber
21 September 2012

2. Agenda
Background
Amendments by the Finance Act 2012 relating to royalty
Some issues
Case study

3. Background

4. 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

5. 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

6. 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

7. 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)

8. Taxability of Royalty –Tax Rates
Tax Treaty
Income-tax Act
Section 115A
Gross 10%*
Article 7
Net 40%
Section 44DA
Net 40%*
Article 14
Net 40%
Other
40%*
Article 12
Gross Basis
At treaty rates
*Plus applicable surcharge & Education Cess

9. Amendments relating to Royalty

10. 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

11. 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/ 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)

12. Controversies on Royalty

13. Issue 1: Taxability of Software Payments

14. 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)

15. 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)

16. 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)

17. Issue 2: Transmission by satellite /telecommunication

18. 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)

19. 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)

20. 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

21. Case Study

22. 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

23. 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

24. 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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