DTAA – A sigh of relief for Royalty cases

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Customer Care No. 91-11-45562222
DTAA A sigh of relief for Royalty cases
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• Explanation 4 to section 9(1)(vi) of the
  Income-tax Act inserted retrospectively by the
  Finance Act 2012 was considered to be one of the
  worrisome amendments for many assessees.
  Especially, for those assessees dealing with the
  taxability of consideration arising on use of a
  computer software. Title to the memorandum
  explaining the objective of amending the
  provisions read as 'Rationalization of
  International Taxation Provisions'.
• Rationale behind insertion of the said
  Explanation was provided to be that the judicial
  precedents had interpreted the definition of
  royalty in a manner which had raised doubts
  whether consideration for use of computer
  software is royalty or not. Similarly, doubts had
  been raised regarding meaning of the term
  'process'. In view of the conflicting decisions
  of various courts in respect of income in the
  nature of royalty and to restate the legislative
  intent, this amendment was brought into being.

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• Thus, the stated objective of introducing these
  amendments was to resolve the doubts raised on
  interpretation of royalty subject to the
  conflicting judicial pronouncements prevailing at
  the relevant time. But, it appears that over the
  period of time, this amendment has raised more
  concerns on the interpretation of term "royalty",
  albeit to state that this has worked out to be
  one more armor in the hands of tax department to
  contest that the consideration received for the
  use of computer software is taxable as royalty.
• In such cases, it would be interesting to note
  that the provisions of tax treaties entered into
  between the countries come to rescue of the tax
  payer.
• One such recent decision is of Mumbai Tribunal in
  the case of M/s Baan Global B V, where the above
  amendments have been dwelled upon for determining
  the taxability of royalty. Facts of this case are
  briefly discussed as under-
• Assessee, a non-resident company registered in
  Netherlands was engaged in the business of
  development and sale of computer software. During
  the year under review, the assessee had entered
  into an agreement with its Indian subsidiary for
  distribution of "off the shelf" software in
  India.
• Consideration received on the supply of software,
  more specifically its characterization was a
  subject matter of dispute. The tax authorities
  alongwith other arguments and judicial
  pronouncements took support of the amendment to
  Explanation 4 to section 9(1)(vi) of the Act to
  contend that the amount received by the assessee
  is taxable as royalty.

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• Mumbai Tribunal decided this issue in favour of
  the assessee holding that,
• ? The retrospective amendments brought into the
  statute cannot be read into the tax treaty
  entered into between India and Netherlands
• ? Treaty has not been correspondingly amended in
  line with new enlarged definition of royalty
• ? The limitation clause cannot be read into the
  treaty for applying the provisions of domestic
  law like in Article 7 in some of the treaties
• ? A treaty which was entered between two
  sovereign nations, then one country cannot
  unilaterally alter its provision
• Other important observations in this decision
  were-
• ? From the terms of agreement, it may be derived
  that the Indian customer / the subsidiary except
  for the limited right to access the copyright
  software for its own business purpose did not
  acquire any kind of right to exploit the
  copyright in the software
• ? Computer software does not fit under most of
  the terms used in the Article 12 of tax treaty
  entered into between India and Netherlands

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• ? There was no 'use of process' as the customer
  does not have any access to the source code
• ? No copyrights in the computer programme or
  software as envisaged under section 14 of the
  Copyright Act, 1957 was given to the Indian
  customers
• ? The consideration is for sale of copyrighted
  product and not for use of any copyright
• In light of the above, it would be worthwhile to
  highlight that despite the attempts made by the
  revenue to overcome adverse decisions to the
  department on the issue of royalty, so long as
  the transactions are covered by the favourable
  tax treaties, it should not worry the assessee.

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Customer Care No. 91-11-45562222
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