Abstract
Even though payments for royalty and technical services would normally come within the remit of business income, most of the tax treaties signed by India provide for a separate tax regime for royalties and technical services. The provision on business income gives way to the provisions on royalty and technical services. Therefore, when a UK company earns India sourced income from royalty or technical services, it cannot make use of the permanent establishment exception to shield its income from Indian taxation. India has similar but more stringent domestic tax provisions regarding royalty and technical services. Normally, income from royalty and technical services would come under the ambit of business income under the ITA. However, in 1976, the ITA was amended to introduce section 115A, which imposes a special rate of tax on income from royalty and technical services earned by non-resident companies. Section 115A does not define what amounts to royalty or fee from technical services, instead it defers to section 9 of the ITA on these issues, which is the section that decides what is deemed to be Indian source income for Indian tax purposes. Therefore it transpires that the provisions in section 9 relevant to royalties and technical services determine the source of these payments as well as, confusingly, define royalty and fees for technical services.
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Notes
- 1.
Article 7 (7) of the India UK DTAA states that the provisions on business income will not apply in the case of income from royalties and technical services (termed as fees for included services), which are addressed separately in Article 12.
- 2.
Section 9(vi)(b) and (vii)(b).
- 3.
Section 9(1)(vi)(b).
- 4.
Explanation 2(i) to section 9(1)(vi).
- 5.
Explanation 2(iii) to section 9(1)(vi).
- 6.
Explanation 2(ii) to section 9(1)(vi).
- 7.
Article 12. The article describes intangible property as copyright, patent, trademark, design, model plan, secret formula or process and information concerning industrial, commercial or scientific experience.
- 8.
In Tata Consultancy Services v State of Andhra Pradesh, 271 ITR 401, the Supreme Court ruled that off the shelf software was ‘goods’, which might then provide credence to the idea that the transfer of such software for consideration is akin to the sale of goods. However, Tata Consultancy was decided in the context of a legislation on sales tax. By its very nature, this decision cannot decide whether, for purposes of the income tax legislation, payment for software rights would be characterised as royalty or business income.
- 9.
2011 SCC OnLine Kar 3973 (Hereafter Samsung).
- 10.
Samsung, para 32.
- 11.
Ibid, para 32, where the court stated that ‘the contention of the learned senior counsel appearing for the respondents (the buyers of shrink wrapped software) that there is no transfer of copyright or any part thereof under the agreements entered into by the respondents with the non-resident supplier of software cannot be accepted.’.
- 12.
Tata Consultancy Services v State of Andhra Pradesh, (2004) ITR 401. The question of the classification of canned software as goods arose under the Andhra Pradesh General Sales Tax Act, 1957.
- 13.
Samsung, para 34.
- 14.
Samsung, para 37, where the court points out that it is because of the licence granted that the licencee is able to claim that making a copy of the software or using the software on the computer does not give rise to an infringement of the copyright in the computer.
- 15.
Director of Income Tax vs. Infrasoft Ltd., 2013 SCC OnLine Del 4694.
- 16.
Infrasoft, para 11.
- 17.
Infrasoft, para 87.
- 18.
Exclusivity is recognised explicitly in the language of the CA. Section 14 of The CA begins with the words, ‘For the purposes of this Act, “copyright” means the exclusive right, subject to the provisions of the Act…’.
- 19.
Infrasoft, para 86.
- 20.
Infrasoft, para 65 citing Motorola Inc v. Deputy CIT, para 159.
- 21.
Infrasoft, para 74 citing Dassault Systems KL, IN RE (2010) 322 ITR 125 (AAR).
- 22.
Explanation 5 to section 9(1)(vi) states: “For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section.
(1) and shall be included in the total income of the non-resident, whether or not,—
(i) the non-resident has a residence or place of business or business connection in India; or
(ii) the non-resident has rendered services in India.”.
- 23.
Explanation 3 to section 9(1)(vi).
- 24.
Explanation 4 to section 9(1)(vi).
- 25.
2011 SCC OnLine Del 507.
- 26.
Ibid, para 68.
- 27.
Ibid, paras 72 and 73.
- 28.
2017 SCC OnLine ITAT 78.
- 29.
Ibid, para 38 onwards. See in particular, para 52, where the Tribunal states: ‘On the basis of above, in our view the agreement between the assessee and the Google Ireland was not in the nature of providing the space for advertisement and display the advertisement to the consumers.’.
- 30.
Ibid, paras 53–55.
- 31.
Ibid, para 60.
- 32.
Article 12A, UN Model Double Taxation Convention (2017 update).
- 33.
Contrast this with article 14 on capital gains, which, subject to certain exceptions mentioned therein, allows capital gains to be taxed according to the law of the respective contracting party. Since Article 14 does not define capital gains, the definition of capital gains is also left to be decided under the law of the respective contracting party.
- 34.
2015 SCC OnLine ITAT 9865.
- 35.
The make available specification in the definition of technical services is a standard clause in many of India's tax treaties including the India-US DTAA.
- 36.
Nokia India, para 9.
- 37.
Id.
- 38.
(2007) 3 SCC 481.
- 39.
Id para 90.
- 40.
Whether the business carried out in India by the American company would result in a permanent establishment under the ITA or for the purposes of a tax treaty is an additional tax issue which is not considered here.
- 41.
Ishikawajma, para 90.
- 42.
The explanatory memorandum to the Finance Bill 2010 referenced the Karnataka High Court decision in Jindal Thermal Power Company Ltd. vs DCIT (TDS), which had opined that the Ishikawajma ratio will survive the 2007 amendments to the following extent: A non resident would have to render his technical services in India for such services to be subject to Indian taxation.
- 43.
Deputy Commissioner of Income Tax (International Taxation) v. Welspun Corporation Limited, 2017 SCC OnLine ITAT 334.
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Nuggehalli, N. (2020). Royalty and Fees for Technical Services. In: International Taxation. SpringerBriefs in Law. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3670-2_5
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