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

Amendments relating to royalty

Sunil D Shah

Deloitte Haskins & Sells

Indian Merchants' Chamber

21 September 2012

© 2012 Deloitte Haskins & Sells

Agenda

Background

Amendments by the Finance Act 2012 relating to royalty

Some issues

Case study

2

Background


Royalty – DefinitionRoyalty as per the Income-tax ActConsideration 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

4

Includes lump sum considerationExcludes capital gains

Excludes bundled payment under Computer Software Policy


Royalty – Definition as per OECD and UN Model

5

As per OECD Model 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

Consideration for use of

right to use


Taxability of Royalty Taxability under Income tax Act

6

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

7

No

Yes

Yes

Yes

OECD Model

PE Exists?

PE Exists?

Article 7

Article 7(If arising in business carried through PE)

Article 14(Arising on performance of independent personal services from fixed base)

UN Model

Article 12

No


Taxability of Royalty –Tax Rates

8

Income-tax Act

Section 115AGross Basis @

10%*

Article 14Net Basis @ 40%

Article 12Gross Basis

At treaty rates

Article 7Net Basis @ 40%

Other Net @ 40%*

Section 44DANet Basis @ 40%*

Tax Treaty

*Plus applicable surcharge & Education Cess

Amendments relating to Royalty


Amendments by the Finance Act 2012

10

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 5Includes 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)

11

Controversies on Royalty

Issue 1: Taxability of Software Payments


Rulings on software

14

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.)

15

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.)

16

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

18

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.)

19

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

20

Case Study


Facts

22

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


Facts (contd.)

23

US Co

Sing Co

End Users

Non Exclusive license for distribution

Payments

Non Exclusive license

End user license agreement

US

Singapore

IndiaPayments


Issues

24

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 India-Singapore DTAA ?

25

This material prepared by Deloitte Haskins & Sells (DHS) is intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s). Further, the views and opinions expressed herein are the subjective views and opinions of DHS based on such parameters and analyses which in its opinion are relevant to the subject.

Accordingly, the information in this material is not intended to constitute accounting, tax, legal, investment, consulting, or other professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. Neither DHS nor its affiliates shall be responsible for any loss whatsoever sustained by any person who relies on this material.


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