Amendments relating to royalty Sunil D Shah Deloitte

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

Agenda q Background q Amendments by the Finance Act 2012 relating to royalty q Some issues q Case study 2 © 2012 Deloitte Haskins & Sells

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 44 BB • 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 consideration Excludes capital gains Excludes bundled payment under Computer Software Policy © 2012 Deloitte Haskins & Sells

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 5 © 2012 Deloitte Haskins & Sells

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 44 DA If arising out of PE/ fixed place of profession Section 115 A No PE and in pursuance of agreement with the government or Indian concern Section 28 6 Royalty Other cases © 2012 Deloitte Haskins & Sells

Taxability of Royalty (contd. ) Taxability as per OECD and UN Model OECD Model PE Exists? Yes No No PE Exists? Article 12 Yes Article 7 (If arising in business carried through PE) 7 Article 14 (Arising on performance of independent personal services from fixed base) © 2012 Deloitte Haskins & Sells

Taxability of Royalty –Tax Rates Income-tax Act Tax Treaty Section 115 A Gross Basis @ 10%* Article 7 Net Basis @ 40% Section 44 DA Net Basis @ 40%* Article 14 Net Basis @ 40% Other Net @ 40%* Article 12 Gross Basis At treaty rates *Plus applicable surcharge & Education Cess 8 © 2012 Deloitte Haskins & Sells

Amendments relating to Royalty

Amendments by the Finance Act 2012 q 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 q 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 q Explanation 6 § "process" includes transmission by satellite , cable, optic fibre, etc. whether or not secret Retrospective w. e. f. 1 June 1976 10 © 2012 Deloitte Haskins & Sells

CBDT Clarifications q 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) q No withholding under section 194 J 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 © 2012 Deloitte Haskins & Sells

Controversies on Royalty

Issue 1: Taxability of Software Payments

Rulings on software Pre-amendment q CIT v. Dynamic Vertical Software India P. Ltd, 322 ITR 222 (Del) (payment by reseller) q DIT v. Ericsson 343 ITR 470 (Del) (bundled software) q TII Team Telecom International 60 DTR 177 (bundled software) q Dassault Systems K. K. v. DIT (AAR No. 821/2009) (payment by re-seller) q DDIT v Solid Works Corporation, 18 taxmann. com 189 (payment by reseller) 14 © 2012 Deloitte Haskins & Sells

Rulings on software (contd. ) Pre-amendment q CIT v. Samsung Electronics Co. Ltd. , 345 ITR 494 (Kar) (payment by reseller) q CIT v. Synopsis International Old Ltd. (Licensing of shrink wrapped software) q Citrix Systems Asia Pacific Pty Limited v. DIT, 205 Taxman 320 (AAR) (payment by reseller) q Microsoft/ Gracemac 42 SOT 550 (Del) (payment by reseller) q Millennium IT Software Ltd 338 ITR 391(AAR) (Licensing of shrink wrapped software) q ING Vysya Bank Ltd 61 DTR 401( Bang) (Licensing of shrink wrapped software) 15 © 2012 Deloitte Haskins & Sells

Rulings on software (contd. ) Post Amendment q CIT, International Taxation v. P. S. I Data System Ltd, 23 taxmann. com 432 (Kar. ) q DIT v. Nokia Networks OY (ITA 512 of 2007) (Delhi) (bundled software) 16 © 2012 Deloitte Haskins & Sells

Issue 2: Transmission by satellite /telecommunication

Rulings on satellite/telecommunication charges Pre-amendment q Asia Satellite Telecommunications Co. Ltd. v. DCIT, 332 ITR 340 (Del) q ISRO Satellite Centre, In re [2008] 175 Taxman 97 (AAR) q Infosys Technologies Ltd v. DCIT , 45 SOT 157 (Bang. ) q New Skies Satellite NV v. ADIT, 121 ITD 1 (Del)(SB) 18 © 2012 Deloitte Haskins & Sells

Rulings on satellite charges (contd. ) Post amendment q q B 4 U International Holdings Ltd. v. DCIT, 23 taxmann. com 372 (Mum. Trib) (transponder charges) q 19 Dishnet Wireless Ltd. , In re [2012] 24 taxmann. com 298 (AAR) (cable capacity) Channel Guide India Ltd. v. ACIT, 25 taxmann. com (Mum Trib) (transponder charges) © 2012 Deloitte Haskins & Sells

Issues q Amendments whether clarificatory q Software payments – reseller, end-user, bundled software q Telecommunication charges – satellite, telephone, internet, etc. q E-commerce and cloud computing – server space rentals, web hosting q Database access q Impact on other sections e. g. 40(a), 115 A, 194 J q Withholding tax on past and current payments to non-residents or to residents q Impact on tax treaties 20 © 2012 Deloitte Haskins & Sells

Case Study

Facts q US Co grants a non-exclusive license to Sing Co to reproduce, market and distribute US Co software products in India to endusers. q All the intellectual property rights products vest with US Co q End-users sign an End-User License Agreement with US Co q Sing Co pays US Co a fee on each product sublicensed. q Sing Co receives payments from the Indian end-users against the sublicenses 22 © 2012 Deloitte Haskins & Sells

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 23 © 2012 Deloitte Haskins & Sells

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 India-Singapore DTAA ? 3. 24 © 2012 Deloitte Haskins & Sells

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