In Post BEPS era and with unprecedented technological advancement, the characterization of royalty payments and its subsequent taxation has gained paramount importance. With this, the tax structures have also undergone sea change. This presentation discusses the treaty interpretation through analysis of various case laws relating to characterization and taxability of royalty payment.

1. TAXATION OF ROYALTY
GLOBAL CHAMBER OF PROFESSIONALS
7 DAY COURSE ON INTERNATIONAL TAX
CA PARUL AGGARWAL
June 27, 2020

2. ROYALTY DEFINITION
Basic Concept
Section 5 – Scope of Income
- Income received / deemed to be received in India
- Income accruing / arising in India or deemed to accrue or arise in India
Section 9 – Income deemed to accrue or arise in India (Also called source Rule)
- Royalty - Section 9(1) (vi) defines source Rule
- Explanation 2,3,4 5 and 6 define ‘Royalty’
Tax rate for Royalty
- Section 115A - Taxation of royalty and FTS received by NR from Government or Indian concern – 10* per cent
- Section 44DA - Taxation of royalty and FTS received by NR from Government or Indian concern, where such
royalty/ FTS is effectively connected to PE of NR in India, if any – 40* Per cent
*Surcharge and Education Cess shall be applicable on tax rate u/s 115A. However, on rate as per tax treaty, surcharge and education cess shall
not apply.

3. TAXATION OF ROYATY
Framework of Source Rule
Payee’s Taxability
Payer is Government
- Taxable since “Deemed to accrue/ arise in India”
Payer is resident
- Taxable since “Deemed to accrue/ arise in India”
- Except where generated from business/ profession/ source outside India
Payer is Non-resident
- Not taxable since does not accrue in India
- Taxable where generated from business/ profession/source in India

4. TAXATION OF ROYATY
Definition of Royalty under IT Act – Section 9(1)(vi)
Imparting of any Information
concerning:
- Working of or use of patent,
model, design, secret
formula, process, trademark
or similar property
- technical, industrial,
commercial or scientific
knowledge, experience or skill
Use or right to use:
- Any IP
- Industrial, commercial or
scientific equipment
(excluding those covered
under Section 44BB)
[Introduced from AY 2002-
03]
Transfer of all or any rights
(including license) in:
- Patent, invention, model,
design, secret formula or
process or trademark, etc.
(IP)
- Copyright, literary, artistic or
scientific work including films
or video tapes/ tapes for us in
TV/ broadcasting
• Rendering of any services in connection with the above
Notes:
- Capital gains and consideration for sale, distribution and exhibition of cinematographic films excluded
- In case payment is made for acquisition of a partial right in the intangible property or know-how without the transferor fully alienating
as the ownership rights, the payment received would be treated as 'royalty'. Where, however, full ownership rights are alienated as intellectual
property of the transferee, the payment made is not royalty, but sale consideration paid for acquisition of the intangible rights

5. ROYALTY DEFINITION
Amendments brought in Finance Act 2010
Explanation to Section 9*
As per Explanation to section 9 of the Act, royalty income will be deemed to accrue or arise in India, whether or
not:
- the non-resident recipient has a residence/place of business/ business connection in India; or
- the non-resident recipient has rendered services in India.
Territorial Nexus not necessary. Earlier, the SC in Ishikawajima-Harima Heavy Industries‘ case (288 ITR 408)
case held that Offshore services to be regarded as accruing in India if rendered in India as well as used in India.
*Finance Act 2010 overrides the above position retrospectively since June 01, 1976

6. ROYALTY DEFINITION
Amendments brought in Finance Act 2012
Explanation 4
Transfer of rights in respect of any rights, property or information includes and has always included transfer of all
or any right for use or right to use a computer software (including granting of a license) irrespective of the
medium through which such right is transferred.
Explanation 5
Royalty shall include consideration in respect of any right, property or information whether or not such right,
property or information (a) is under the control of the payer, (b) is used by the payer, (c) is located in India
Explanation 6
“Process” includes transmission by satellite (including uplinking, amplification, conversion for down-linking of any
signal), cable, optic fiber or by any other similar technology, whether or not such process is secret.
*Finance Act 2012 broadens the definition of royalty retrospectively from June 01, 1976

7. TAXATION OF ROYATY
Gross Basis of Taxation
Passive incomes taxed on Gross Basis
- Section 115A – Withholding tax @ 10 per cent on gross basis
- Section 206AA - Higher initial withholding tax in absence of PAN
Del HC in Dansico / Special Bench of Hyderabad Tribunal in case of Nagarjuna Fertilizers & Chemicals Ltd.
2017, 55 ITR(T) 1, Del ITAT in Emerson International and Pun AT in Serum Institute held that DTAAs override
section 206AA
- Recent Development
Rule 37BC - w.e.f. June 26, 2016, Section 206AA shall not apply ‘specified payments’ made to non resident
deductees who do not have a PAN if the following conditions are satisfied:
- Name, email id and contact number of non-resident deductee;
- Address in country of residence
- Tax Residency certificate (TRC)
- Tax Identification Number (TIN) in country of residence

8. TAXATION OF ROYATY
Benefit under Tax Treaty (1)
- Treaty benefit available
• Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8/238 Taxman 577/382 ITR 114 decided that
the amendment made by the Finance Act 2012 will not affect Article 12 of the DTAA and therefore, the income earned by the assessee cannot
be held to be royalty and consequently to chargeable to tax in India.
• Mum. ITAT in case of Baan Global BV (2016) - 'Royalty' has been specifically defined in the treaty and amendment to the definition of such
term under the Act would not have any bearing on the definition of such term in the context of DTAA since, a treaty which has entered
between the two sovereign nations, then one country cannot unilaterally alter its provision
- No more concessional tax rate in Treaties with USA and UK (15 per cent to 20 per cent)
Tax rate under section 115A is 10 per cent (Changed vide Finance Act 2015 w.e.f. April 01, 2016)
- GAAR Provisions w.e.f. April 01, 2016
Insertion of section 90(2A) - Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A of the Act shall apply to
the assessee even if such provisions are not beneficial to him.
- Requirement of TRC*
Section 90(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim
any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as
the case may be, is obtained by him from the Government of that country or specified territory.
*Mere non-furnishing of a Tax Residency Certificate (“TRC”) cannot disentitle a taxpayer from claiming tax treaty benefits. TRC is merely a
procedural requirement. Absent a non-obstante clause, the provision for obtaining a TRC (section 90(4)) cannot be said to override section 90(2)
of the ITA. (Ahmedabad ITAT in case of Skaps Industries India (P.) Ltd. vs ITO (2018) (94 taxmann.com 448)

9. TAXATION OF ROYATY
Benefit under Tax Treaty - MFN clause (2)
- MFN Clause
In case where India enters into any tax treaty with an OECD country or has entered into such treaty, the restrictive rate or
scope given under subsequent tax treaty may apply over apply over the first tax treaty. In light of the same, where a DTAA
entered into by India has a restrictive rate or scope for payment of Royalty/ FTS and the treaty has an MFN clause, then the
favourable rate or scope of the treaty which has been entered earlier can be applied to such payments.
MFN obligation exists only when a treaty clause creates it. Without a treaty obligation, each country retains the option of
discriminating economically among foreign investors.
- MFN Clause under India Netherlands tax treaty
….If after the signature of this convention under any Convention or Agreement between India and a third State which is a
member of the OECD, India should limit its taxation at source on dividends, interests, royalties, fee for technical services or
payments for the use of equipment to a rate lower or scope more restricted than the rate or scope provided for in this
Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement
enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall
also apply under this Convention.

10. TAXATION OF ROYATY
Benefit under Tax Treaty - MFN clause (3)
Page 32 in the commentary by Klaus Vogel on Double Taxation Conventions states that
Final Protocols and in some cases other completing documents are frequently attached to treaties. Such documents elaborate and complete the
text of a treaty, sometimes even altering the text. Legally they are part of the treaty, and their binding force is equal to that of the principal treaty
text. When applying a tax treaty, therefore, it is necessary carefully to examine these additional documents.
High Court of Karnataka in case of Apollo Tyres Ltd. (2018) 92 taxmann.com 166, the court held that
……As far as the issue of there being a requirement of issuing a separate Notification for enforcing the later Treaty with another OECD country,
viz., Finland, in the present case is concerned, this Court does not find any justification in the contentions raised on behalf of the Revenue, that
such a Notification was required to be issued by the Government of India to enforce such later Treaty between India - Finland in the present case.
The Protocol clause quoted above in the India- Netherlands DTAA itself provide for such automatic application of subsequent Treaty, to the India-
Netherlands Treaty in hand and therefore, no such separate Notification was envisaged to be issued for enforcing such subsequent Treaty with
another OECD country, viz., Finland, to be made applicable to the facts of the present case.
Notes:
• Payment for use of equipment still outside the ambit of ―royalty under India‘s tax treaties with Greece, Israel and Sweden, Belgium, France,
Kazakhstan, Netherlands and Spain (by virtue of restrictive MFN clause)
• If the taxpayer is in the business of providing equipment on hire, then, equipment rentals not subject to tax in India if the recipient does not
have a PE in India

11. TAXATION OF ROYATY
How to decide Withholding tax rate
Case Study
- UK Company is the foreign collaborator that supplies license/ right to
use brand name/ trademark to Indian Co.
- As per Indian Domestic tax law, consideration for transfer of rights
(including granting of a licence) in respect of a trade mark or similar
property) in respect of any copyright, literary, artistic or scientific work,
falls under the definition of 'Royalty'.
- India UK Tax treaty - the license fees received by the foreign
collaborator qualifies as 'royalty' payments as defined under Article
13(3)(a) of the Indian-UK DTAA,
- Article 13(2) of the India-UK DTAA provides that 'royalties' arising in
India and paid to a UK resident can be taxed in India according to the
laws of India, provided the tax charged does not exceed 15% (or 10%
where payments is for use of industrial, commercial or scientific
equipment) of the gross amount of such royalties.
- Assuming that foreign collaborator would not have any business
connection or permanent establishment in India, royalty payments
made to the foreign collaborator would be subject to TDS @ 10% (plus
surcharge and cess, as may be applicable) under the IT Act rather than
the prescribed maximum rate of 15% under the India-UK DTAA1)
- TRC required if PAN of UK Co. not available
License/right to use
the brand
name/trademark of
the foreign
collaborator
UK Co.
Indian Entity
Royalty @ ??

12. TAXATION OF ROYATY
Concept of Beneficial Ownership
Concept of Beneficial Ownership - Article 12(2) & 12 (4) of Tax Treaty
- Article 12(1) -“Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed
in that other State.
- Article 12(2) – Ceiling of gross taxation by source State
…….“However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that
State, but if the beneficial owner of the royalties is a resident of the other Contracting State, the tax so charged shall not
exceed ___ per cent of the gross amount of the royalties.
- Article 12(4)
The provisions of paragraphs (1) and (2) shall not apply if
- the beneficial owner of the royalties, being a resident of a Contracting State,
(a) carries on business in the other Contracting State in which the royalties arise, through a permanent establishment situated
therein or
(b) performs in that other State independent personal services from a fixed base situated therein and the right or property in
respect of which the royalties are paid is effectively connected with such permanent establishment or fixed base.
In such case, provisions of Article 7 or Article 14, as the case may be, shall apply.

13. TAXATION OF ROYATY
Beneficial Ownership as Anti-Avoidance Measure
Concept of Beneficial Ownership as an Anti-Avoidance Measure
- Term 'beneficial owner', which has neither been defined under the Act nor the DTAA.
- Sometimes, a beneficial owner may turn out to be a person different from the immediate recipient or formal owner or recipient
of income.
- Commentary on the Double Taxation Convention states that the 'Beneficial ownership' is 'an ownership which is not merely
the legal ownership by the mere fact of being on the register but the right at least to some extent to deal with the property as
your own'. Beneficial Owner‘ is he who is free to decide:
• Whether or not the capital or other assets should be used or made available for use by others or
• On how the yields there from should be used or
• Both
- Concept of BO as Anti-Avoidance measure - Vodafone Ruling while did not focus on beneficially ownership of shares. The
Supreme Court laid the law that one has to respect the structure and that simply having layer of companies with very little
business objective does not automatically calls for rejection of structure. Each company has authority to decide their
activities and unless and until these rights are surrendered.
- In case of JC Bamford Investments Rocester, Delhi ITAT, royalty was first paid by JCBI (India) to the assesse (UK
entity), who, in turn, passed on the same to JCBE (UK entity) in full less 0.50%. The case of the Revenue is that since
99.5% of the royalty received by the assessee has been passed on to JCBE, the assessee ceased to be the beneficial
owner of the royalty paid by JCBI. The revenue argued that Article 13(2) of the DTAA will cease to apply and resultantly, the
assessee should be subjected to tax as provided under the domestic law. Decided in favour of taxpayer.

14. TAXATION OF ROYATY
Beneficial Ownership
Case Study II**
- Dutch company was in receipt of “royalty” income from an Indian company
- Dutch Co. had acquired certain musical recording rights from other group
companies and had licensed the same to the Indian company against payment
of royalty
- Concessional tax rate of 10 per cent as per Article 12 of India Netherlands tax
treaty
- The Indian Tax Authorities alleged that the Dutch company was a mere
collecting agent for its group companies and hence, benefits of the India
Netherlands DTAA should not be available to it.
- Dutch company submitted certificate issued by Netherlands Tax Authorities
stating it was regularly filing tax returns in Netherlands, including on the
“royalty” income received from India. The certificate clearly stated that the
Dutch company was a tax resident of Netherlands. Accordingly, it was a
“beneficial owner” of the “royalty” income received.
- Held in favour of taxpayer proving beneficial ownership.
- ITAT relied on Circular no. 789 of 2000 issued by CBDT and the SC ruling in
the case of UOI & another v/s Azadi Bachao Andolan [2003] (263 ITR 706) and
12 of the India-Netherlands DTAA.
Dutch Co. acquired
music recording
rights
Group Co. of
Dutch Co.
Indian Entity
Royalty payment
Dutch Co.
**ADIT v/s M/s. Universal International Music B.V. [2011]
(Mumbai ITAT) (unreported)
Affirmed by the Mumbai High Court in 214 Taxman 19 ( 2013)

15. TAXATION OF ROYATY
Analysing Article 12 (3)
Article 12(3) – Meaning of the term ‘Royalty’ / ‘FTS’
Definition under OECD Model Convention:
Payments of any kind received as a consideration for:
– Use of or right to use:
• Patent, trademark design or model, plan, secret formula or process,
• Copyright of literary, artistic or scientific work including cinematograph films
– Information concerning • industrial, commercial or scientific experience
Definition under UN Model
Payments of any kind received as a consideration for:
– Use of or right to use:
• Copyright of literary, artistic or scientific work including cinematograph films or films or tapes used for radio or
television broadcasting
• Patent, trademark design or model, plan, secret formula or process
• industrial, commercial or scientific equipment
– Information concerning • industrial, commercial or scientific experience

16. TAXATION OF ROYATY
Different guidance on royalty under Model Conventions
- UN MC and the Indian Act include Lease of Equipment.
- OECD and UN MC does not include ―transfer of all rights in a patent etc. which is contained in ITA, It
only includes right to use a patent etc. or copyrights, etc.
- All the MCs specifically include consideration for use of or the right to use cinematographic films
whereas the Act specifically excludes the same.
OECD Model – Exclusive Residence state taxation - Definition under OECD narrow as compared to
the UN MC and the Act. The main difference is that OECD model would recommend that royalty is not
taxed in the country which uses the technology for which royalty is paid, unless the lender has PE in the
borrower‘s country.
UN Model – Shared Taxation - The recommendation of UN Model enables tax on royalty in both
countries, subject to agreement that the rate of tax should be fixed at agreed rate in the borrowing
country, from where royalty is payable, by bilateral negotiations.
US Model – Exclusive Residence state taxation. Does not include equipment lease.

17. TAXATION OF ROYATY
Analysing Article 12(5)
Analysing Article 12 (5) of Tax Treaty
Article 12(5) – Where does Royalty / FTS arise as per tax treaty ?
- Royalties shall be deemed to arise in a Contracting State when the payer is a resident of that State.
- Where, however, the person paying the royalties, whether he is a resident of a Contracting State or not,
(a) has in a Contracting State a permanent establishment or a fixed base in connection with which the liability
to pay the royalties was incurred, and
(b) such royalties are borne by such permanent establishment or fixed base,
then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment or
fixed base is situated.

18. TAXATION OF ROYATY
Analysing Article 12(6)
Analysing Article 12 (6) of Tax Treaty
- Article 12(6) – Adjustments for related party transactions
• Where, owing to a special relationship between the payer and the person beneficially entitled to the
royalties….., the amount of the royalties paid or credited, exceeds the amount which might have been
expected to have been agreed upon by the payer and the person so entitled in the absence of such
relationship (referred to as APL), the provisions of this Article shall apply only to ALP.
• In that case, the excess part of the amount of the royalties paid or credited shall remain taxable according to
the law, of each Contracting State…

19. TAXATION OF ROYATY
How MLI may come into picture?
Article 6 of MLI
Preamble – Minimum standard
Intending to eliminate double taxation with respect to taxes covered by this agreement without creating
opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty
shopping arrangements ) aimed at obtaining reliefs under the agreement for the indirect benefit of residents in
third jurisdictions.
Article 7 of MLI (BEPS Action Plan 6)
- Anti-avoidance measure under Article 7 include PPT, PPT supplemented with SLOB and detailed LOB.
- PPT provides that no benefit under the CTA shall be granted if it is reasonable to conclude that obtaining that
benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly
in that benefit.
- India opted for PPT plus SLOB for all CTAs. India’s SLOB applicable only if other treaty partners choose to
apply SLOB. Japan, UK, Singapore, Netherlands does not subscribe to SLOB.
- Mauritius has signed MLI but not notified India as CTA.
- China not notified India as CTA.

20. TAXATION OF ROYATY
Software Payments (1)
Shrink wrapped software
Payments made for off the shelf software is taxable as ‘royalty’ as per section 9(1)(vi) and under Article
12 of DTAA
Favorable cases:
Mumbai ITAT (2018; 90 taxmann.com 94) in case of Intec Billing Ireland
• The assessee company was a tax resident of Ireland. During relevant year assessee had inter alia supplied billing software to 'Reliance' for
the purpose of billing their customers
• The software licensed to Reliance under the software licence agreement was an 'off the shelf'/'shrink wrapped' software which assisted
telecom companies in an efficient, profitable billing operation with strong focus on customers and revenue management
• Assessee exclusively owned all the Intellectual Property Rights (IPR) in the software and it had merely granted a copyrighted article to
Reliance and not the 'copyright' in the article
• Rroyalty under the Indo-Ireland Tax Treaty is pari materia as that under Indo-US Tax Treaty and the Coordinate Bench of the Tribunal had
already decided the issue of taxability of supply of software under the same agreement in favour of the assessee with reference to the Indo-
US Tax treaty
Mumbai ITAT (2018; 90 taxmann.com 94) in case of AVEVA Information Technology India (P) Ltd.
Where assessee, an Indian company entered into a software license agreement with a British company, since said agreement did not permit
assessee to modify and develop software products and UK company was sole owner of IPR of patents, copyrights and trademarks and assessee
was not given any of these proprietary rights, payments by assessee to ASL for procuring and distributing copyrighted software could not be
treated as payment towards royalty
Unfavorable Cases:
- Reliance Infocomm Ltd & Lucent Technology Ltd (64 SOT 137) (MA filed by the Reliance infocomm is pending)
- Samsung Electronics 345 ITR 494 (Kar)

21. TAXATION OF ROYATY
Software Payments (2)
Bundled up software
Payments made for software which is embedded with the hardware is not taxable as ‘royalty’ as per section 9(1)(vi) and under
Article 12 of DTAA
Favourable cases:
• Infrasoft Ltd (96 DTR 113) (Delhi HC) (2013)
- Assessee was developing customized software to be used for designing highways, railways, airports, ports, mines, etc.
- Software so customized was then licensed to an Indian customer and branch office of assessee in India performed services involving
interface to peripheral installation and training etc.
- AO taxed receipts on licensing software as 'royalty' as per article 12 of Indo-US DTAA - Tribunal, however, held that amount received by
assessee under license agreement for allowing use of software was not royalty either under Act or under DTAA
- In terms of license agreement, licensee was allowed to make only one copy of software and associated support information for backup
purposes with a condition that such copyright would include 'Infrasoft' copyright and all copies of software would be exclusive properties of
'Infrasoft' –
- Software was to be used only for licensee's own business and without consent of assessee, software could not be loaned, rented, sold, sub-
licensed or transferred to any third party
- Whether on facts, it was a case of mere transfer of right to use copyrighted material i.e., software programme, and, therefore, amount
received by assessee from its Indian customer did not give rise to any royalty income in terms of article 12(3) of India-USA DTAA - Held, yes
• Bartronics India Ltd (52 SOT 188)(Hyderabad Tribunal)
• Financial Software & Systems (P.) Ltd. [2014] 47 taxmann.com 410 (Chennai - Trib.)

22. TAXATION OF ROYATY
Software Payments (3)
Copyright vs Copyrighted
Copyright is a negative right. The licensee acquires only a copy of the copyright article and the copyright remains with the owner. The right that is
transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to
any royalty income and would be business income.
Tata Consultancy Services v/s State of Andhra Pradesh [2004] (271 ITR 401) (SC)
Above decision was pronounced in the context of sales tax.
• It was held that software embedded on a CD is a “good” and is liable to sales tax. An analogy from this ruling is often drawn to contend that
sale of a CD with software, music, etc. embedded on it cannot give rise to “royalty” income (since it does not give the buyer a right to use the
underlying copyright in the software or the content of the CD). Rather, it is in the nature of sale of “goods” and only enables the buyer to use
the contents of the CD.
Motorola Inc. [2005] (95 ITD 269) (Delhi ITAT)
• A holder of a “copyright” can exploit the same commercially. If the right to commercially exploit the “copyright” is absent, what one has
acquired would not be regarded as a “copyright”. In such a case, it can only be said that one has acquired a “copyrighted article” and hence,
the amount paid for the same (without the right to commercially exploit the “copyright”) cannot be characterized as “royalty”.
Divergent views found in Karnataka HC in case of CIT v. Samsung Electronics Co., AAR in Citrix Systems Asia Pacific Pty, Bangalore
ITAT in case of Cosmic Circuits (P.) Ltd v ITO.

23. TAXATION OF ROYATY
Retrospective Amendments (1)
Legal validity of Retrospective Amendments
• “This Parliament is competent to pass legislation which will have retrospective effect and no court and nobody can take away this
authority of the Indian Parliament.” - Mr. Yashwant Sinha, Chairman, Parliamentary Standing Committee on Finance (Source:
Lok Sabha Debates, May 7, 2012)
• Part XIII contains provisions which constitute a self-contained code and we need not really travel outside the said provisions in
determining the validity of the tax imposed by the Act. Since we have come to the conclusion that the challenge to the validity of the
retrospective operation of the Act cannot be sustained, we do not think it necessary to pursue this matter any further. (SC in case of
Rai Ramanakrishna v. State of Bihar) [1963] (50 ITR 171)
• A Competent legislature can always validate a law which has been declared by court to be invalid provided the infirmities and
vitiating factors noticed in the declaratory-judgment are removed for cured. Such a validating law can also be made retrospective. If
in the light of such validating and curative exercise made by the legislature---granting legislative--competence--the earlier judgment
becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision. All that
the legislature does is to usher in a valid law with retrospective effect in the light of which earlier judgment becomes irrelevant. Such
legislative expedience of validation of laws is of particular significance and utility and is quit often applied, in taxing statutes. It is
necessary that the legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a
statute and seek a wind-fall from the legislature's mistakes. (SC in case of Sri Prithvi Cotton Mills Ltd. & Anr. v. Broach
Borough Municipality & Ors.) [1970] (1 S.C.R. 388)
• Validity of legislations retroactively curing defects in taxing statutes is well recognised and courts, except under extraordinary
circumstances, would be reluctant to override the legislative judgment as to the need for and wisdom of the retrospective legislation.
(SC in case of Ujagar Prints v. Union of India) [1989] 179 ITR 317 / [1989] 3 SCC 488 [1970] 1 S.C.R. 388

24. TAXATION OF ROYATY
Retrospective Amendment to section (2)
Constitutional validity of Retrospective Amendments
• Tax law amendments need not be just and reasonable. Is the amendments are otherwise valid. There is no morality in law
so long as it is not oppressive and confiscatory to such an extent that it violates the fundamental rights in the Constitution.
• The imposition of any fresh tax with retrospective effect for years for which there was no such levy is bound to operate
unduly harshly on every assesse imposing an unjust and unwarranted accumulated burden on the assessee for no fault on
his part.In such cases, the taxpayer has to face unnecessarily with out any just reason very serious financial and other
problems. Such retrospective taxation is likely to disturb and unsettle the settled position. (SC in case of Lohia Machines
Ltd. vs Union of India)[1985] (20 Taxman 9)
• Where the retrospective amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory,
curative or made 'small repair' in Act, but took away accrued and vested right of the taxpayer, the amendment of
withdrawing tax benefit from an anterior date was clearly a substantive law which could not apply retrospectively. Therefore,
the amendment was unconstitutional and violative of article 14 of Constitution and had to be struck down (Gujarat HC in
case of Niko Resources Ltd. vs. UOI) [2015] (55 taxmann.com 455)
Whether reopening proceedings can be initiated through Retrospective Amendments
• Amendment to section 149 by Finance Act, 2012, which extended limitation for reopening assessment to sixteen years,
could not be resorted for reopening proceedings concluded before amendment became effective. (Delhi HC in case of
Brahm Datt v. Assistant Commissioner of Income-tax) [2018] 100 taxmann.com 324

25. TAXATION OF ROYATY
Retrospective Amendment to section (3)
Tribunal & High Court can not decide the validity of Retrospective Amendment
• The validity of a provision cannot be considered or adjudicated upon by the Tribunal constituted under the Act. Section 260A
provides for an appeal from every order passed by the Appellate Tribunal. If it involves a substantial question of law, such
question of law should arise from the order of the Tribunal. If the Tribunal cannot consider the validity of a retrospective
amendment, no doubt such question does not arise from its order and the jurisdiction conferred on the High Court under section
260A cannot also enable the High Court to consider such validity or otherwise. Consequently, High Court cannot determine
constitutional validity of amendment u/s 260A. (Kerala HC in case of M. Abdul Rehuman Kunju vs ACIT( [2012] (25
taxmann.com 568)
Whether treaty to be interpreted following ‘static approach’ or ‘ambulatory approach’
• Assessing Officer examined article 13(14) of India-UK DTAA and held that capital gains were taxable as per the domestic laws of
respective countries. Hence, the beneficial provisions of DTAA were not applicable (ITAT Delhi in case of Cairn U K Holdings
Ltd. vs DCIT) [2017] 79 taxmann.com 128
Basis of rejection of benefit under DTAA was due to dynamic interpretation of Article 13 of tax treaty as below:
• (i) Provision in the Double Taxation Avoidance Agreement cannot make the domestic law static with respect to taxability of a particular
income when unequivocally both sates have left it to the domestic laws of the countries.
• (ii) Suppose if there is an exemption provided with retrospective effect under the domestic law can non-resident assessee be also denied
the benefit as it was also not the law at the time of notification of Double Taxation Avoidance argument, the answer is in negative

26. TAXATION OF ROYATY
Retrospective Amendment to section (4)
• Retrospective Applicability of Prohibition of Benami Property Transactions (Prohibition) Amendment Act 2016 (PBTA), 2016 is
pure question of law and jurisdictional issue. It held that High Court has jurisdiction under Article 226 to entertain writ petition
when condition precedent to the exercise of jurisdiction under statutory provisions did not exist even at a stage of notice.
(Rajasthan High Court in case of Niharika Jain v. Union of India [S.B. Civil Writ Petition No. 2915/2019 dated 12th July
2019) 107 taxmann.com 272
• Rajasthan HC in the above case held that Benami Transactions (Prohibition) Amendment Act, 2016 amending Prohibition of
Benami Property Transactions Act, 1988 can't have retrospective effect on following basis:
• It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended.
The language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective.
• The amendment neither purports to be merely clarificatory nor is there any material to suggest that it was intended by Parliament.
Furthermore, an amendment made to a taxing statute can be said to be intended to remove 'hardships' only of the Assessee, not
of the Department.
• What is crucial here is, in the first place, whether the change effected by the legislature in the Benami Act is a matter of
procedure or is it a matter of substantial rights between the parties. If it is merely a procedural law, then, of course, procedure
applicable as on the date of hearing may be relevant. If, on the other hand, it is a matter of substantive rights, then prima facie it
will only have a prospective application unless the amended law speaks in a language "which expressly or by clear intention,
takes in even pending matters

27. TAXATION OF ROYATY
Equipment Royalty (1)
• OECD TAG Report - Criteria for determination of right to use or use of equipment
- Customer has physical control / possession over the equipment;
- Customer has significant interest in the equipment;
- Provider does not guarantee revenues;
- Provider does not use the property concurrent to provide services to others.
• A Singapore company entered into a contract with Indian company. Under contract for installation, the equipment was supplied by Indian company
and it was used for rendering services to Indian company, control over it was with Singapore company. It was held that for the payment to be
characterised as one for the use of the equipment, factually, the equipment must be used by Indian company. There is a difference between the use
of the equipment by a Singapore company ‘for’ Indian company and the use of the equipment 'by' the Indian company. Since the equipment was
used for rendering services to Indian company, it could not be converted to a contract of hiring of equipment by Indian company. Hence,
consideration received for mobilisation/demobilisation should not be considered as royalty. (Delhi HC in case of Technip Singapore Pte. Ltd. v.
DIT) [2016] (385 ITR 408)
• A payment cannot be said to be consideration for use of scientific equipment when person making the payment does not have an independent right
to use such an equipment and physical access to it. Payment received for providing web hosting services though use of certain scientific equipment
cannot be treated as 'consideration for use of, or right to use of, scientific equipment' which is a sine qua non for taxability under section 9(1)(vi),
read with Explanation 2 (iva) thereto and also under article 12 of Indo-US DTAA. (Mumbai ITAT in case of DDIT v. Savvis Communication
Corporation) [2016] (158 ITD 750)
• Payment for Customer Premises Equipment (CPE) installed at customer's premises to access network connection was not for use of scientific or
commercial equipment within the meaning of 'royalty' under the Act since the CPE was not a personalised equipment for specific and exclusive use.
(Hyderabad ITAT in case of Qualcomm India vs ADIT) [ 2017] (162 ITD 493)

28. TAXATION OF ROYATY
Equipment Royalty (2)
(Mumbai ITAT in case of DCIT vs Reuters Transaction Services Ltd. [2018] (96 taxmann.com 354)
• Reuters Transaction Services Ltd., is a company incorporated under the laws of England (‘the assesse’). The assessee is in the business of
providing Reuters Dealing 3000, which is an electronic deal matching system enabling authorised dealers in foreign exchange such as banks and
other financial institutions, etc. to effect deals in spot foreign exchange with other foreign exchange dealers. The main server of the assessee is
located in Geneva.
• The assessee has executed a Dealing Services Marketing Agreement with Reuters India Pvt. Ltd. whereby the Reuters India Pvt. Ltd. has
undertaken marketing services of the assessee to subscribers in India.
• The system facilitates the Indian subscribers i.e. Banks to deal in the foreign exchange with the other counterparts who are ready for the transaction
of purchase and sale of foreign currency. Thus the role of the deal matching system is to provide a platform where both purchaser and seller find the
respective match for the intended transaction of purchase and sale.
• The platform of transacting the purchase and sale is commercial equipment allowed to be used by clients/subscribers for commercial purposes. The
payments made by Indian clients/subscribers to the Assessee for use and right to use of such equipment and information for processing their
request of purchase and sale of foreign exchange constitute royalty.
• As per the terms of agreement, Indian clients/subscribers accepted individual non-transferable and non exclusive license to use the licensed
software programme for the purpose of carrying out the purchase and sale of foreign exchange
• Indian clients are not permitted to access the portal of the Assessee from any other computer system other than the computer provided by the
Assessee and by use of software provided in the said computer system.
• Accordingly, the income received by the assessee from the Indian Banks is in the nature of royalty

29. TAXATION OF ROYATY
Equipment Royalty (3)
(Delhi AAR in case of MasterCard Asia Pacific Pte. Ltd. [2018] (94 taxmann.com 195)
• Singapore based MasterCard Asia Pacific Pte. Ltd. (‘Assessee’), incorporates an Indian subsidiary which owns and maintains MasterCard Interface
Processor (‘MIP’) placed at customers' locations in India for processing of electronic payment transactions processing using MasterCards global
network and infrastructure, part of fees received/to be received by applicant from Indian Customers (Indian banks) would be classified as royalty.
However, since it is effectively connected to PE, it would be taxed under article 7 and not under article 12 of India-Singapore DTAA
• Till December 2014, MasterCard International Incorporated (MCI) had a Liaison office in India. Thereafter, the LO was shut down and the work of LO
was transferred to Indian subsidiary, Master Card India Services Private Limited (‘MISPL’).
• The services are provided by the applicant to customers pursuant to Master License Agreements ('MLA'). Applicant charges from its customers,
transaction processing fee for authorisation, clearing and settlement of transactions.
• The system facilitates the Indian subscribers i.e. Banks to deal in the foreign exchange with the other counterparts who are ready for the transaction
of purchase and sale of foreign currency. Thus the role of the deal matching system is to provide a platform where both purchaser and seller find the
respective match for the intended transaction of purchase and sale.
• A MIP is about the size of a standard personal computer and is placed at the customers' locations in India. It is through the network and processing
centres outside India that the assessee is able to facilitate the authorization, clearing and settlement of payment transactions.
• The applicant has a subsidiary in India, namely, MISPL (Indian subsidiary), in which it owns 99 per cent of the shareholding. The remaining 1 per
cent is held by the applicant's immediate holding company MasterCard Singapore Holding Pte Ltd.
• The Indian subsidiary owns and maintains the MIPs placed at the customers' locations in India. In view of Explanation 5 to section 9(1)(vi), there is
no requirement of control with the user. There is no treaty requirement of control with the user as well.

30. TAXATION OF ROYATY
Equipment Royalty (4)
(Delhi AAR in case of MasterCard Asia Pacific Pte. Ltd. [2018] (94 taxmann.com 195) (Contd…2)
• It is an accepted fact that actual authorization is done by the issuer bank and the applicant facilitates customer banks in doing that work.
Facilitation work by MIP involves preliminary validation. Subsequently, security/fraud detection/add-on service is performed by the
applicant in Singapore. Data transmission, which is crucial to authorization, happens both in India and outside through MIP and
MasterCard network. Thus, the initial verification/validation of PIN, card codes, names and address etc. are important and crucial function
in the context of overall functions performed by the applicant. These functions cannot be called preparatory or auxiliary.
• Transaction processing fees paid by Banks to MCA carried a disguised charge for use of trademark / logo/ brand whose use is a dominant
purpose for sales / marketing by Banks and there is no incidental, limited or restricted use and influenced further by various other factors.
Accordingly, payment made by various customer banks in India to the applicant is also for the use of these IPs and, hence, is royalty.
• The agreement between the applicant and customer banks is quite clear that the dominant purpose is to license the trademark/mark. The
agreement has no reference to transaction processing.
• The use of trademark/mark is not for a limited period and also not for use in a restricted manner.
• Under the licensing agreement between the applicant and MCI US, who is the real owner of the Intellectual Property (IP), the applicant is
paying royalty to MCI for use of IP in various countries, including India. This licensing agreement and payment of royalty for use of IPs in
India further establishes that a part of payment made by the customer banks in India to the applicant is for use of these IPs.

31. TAXATION OF ROYATY
Equipment Royalty (5)
(Delhi AAR in case of MasterCard Asia Pacific Pte. Ltd. [2018] (94 taxmann.com 195) (Cont’d….3)
Equipment Royalty:
• There is no compliance of sales tax at the time of transfer of ownership in Dec 2014 - In fact, even till today, there is no transfer of
ownership under the eyes of law, and, hence, the MIPs continue to be owned by the overseas AEs of the applicant (as before
reorganization) and that AEs have given the MIPs to the applicant under a license.
• One time On-boarding fee - The applicant charges MasterCard one-time license fee to an affiliate member as a one-time on boarding
fee for availing of transaction processing services. This fee is paid for the cost of MIP installation, for establishing connectivity and set-up
of processors. Hence, it is clear that MIPs are de-facto owned by the applicant as it is charging fee for cost of MIP installation. Thus, the
first test for equipment royalty is held to be satisfied.
• There is no dispute that control is not with the Banks even if the MIP was in their possession. Applicant is the real owner or licensee of
MIP, though on paper it is shown to be owned by MISPL. In TP study of MISPL, it is admitted that all intangibles are owned by the
applicant and not by MISPL.
• MCI is owner of IP - Intellectual property in the MIP and in the MasterCard network (in the form of software and process technology) is
used for authorization, clearance and settlement. This process works only with the help of patented tools, software and process
technology owned by MCI and licensed to the applicant. Without the use of these intangibles, the entire process of authorization,
clearance and settlement would not happen. The intellectual property in MIPs and MasterCard Network vest in the MCI (US Company)
which has licensed it to the applicant.
• Secret Process - The above stated activities also use a secret process which is not in public domain. Thus, use of brand name,
intellectual property and secret process of MasterCard by the Indian customers clearly falls under the definition of royalty, both under the
Act as well as under the DTAA. Hence, the payment is held to be in the nature of royalty.

32. TAXATION OF ROYATY
Case Study – Google India (1)
(Bangalore ITAT in case of Google India . [2018] (93 taxmann.com 183) (Cont’d….3)
Google India entered into the following arrangements with its affiliate entity, Google Ireland:
1. Information technology (“IT”) services and information technology enabled services (“ITeS”) under a services agreement dated April 1,
2004 (“Services Agreement”). Google India is remunerated at a cost plus 17.5% basis for the IT services and a cost plus 15.5% basis
for the ITES.
2. Google India to function as a non-exclusive authorized distributor of Google Ireland’s AdWords program in India under an agreement
dated December 12, 2005 (the “Distribution Agreement”). In addition to its marketing and distribution services provided to Google
Ireland, under the Distribution Agreement, Google was also required to provide pre-sale and post-sale / customer support services to the
advertisers.
Google India received separate payments from Google Ireland for providing the IT services and ITeS under the Services Agreement and
made payments to Google Ireland for the purchase of AdWords Space under the Distribution Agreement. Google India did not pay any
withholding taxes on these payments to Google Ireland as it was of the view that these payments should not lead to any India tax
consequences (on basis of ITO v. Right Florist (2013) 25 ITR (T.) 639; Pinstrom Technology Ltd., v. ITO (2012) 54 SOT 78 (Mum. Trib.) and
Yahoo India Pvt. Ltd., v. CIT 140 TTJ 195 (Mum.Trib.))
Tribunal went into a detailed examination of the Distribution Agreement and the Services Agreement and held that Google India was required
to provide on-sale and post-sale technical services to the advertisers and Google Ireland which could not be possible without resorting to the
Services Agreement. Further, it was found that it the ITES division of Google India which was responsible for providing support to the
advertisers and Google Ireland. Hence, the Tribunal considered these contracts to be interdependent and held that they must be read
together.

33. TAXATION OF ROYATY
Case Study – Google India (2)
(Bangalore ITAT in case of Google India . [2018] (93 taxmann.com 183) (Cont’d….2)
Incidental Use of Technology - Google India had been given access to the trademarks, brand features, derivate works, confidential information
and other intellectual property of Google Ireland for the discharge of its functions under the Distribution Agreement and the Services Agreement.
On this basis, the Tribunal held that the payments being made to Google Ireland were being made for the use of these intangibles and therefore
should be considered to be in the nature of “royalty”
Beneficial Ownership - Article 12 of the Treaty prescribes a reduced rate of withholding tax at 10% in India in case the Irish resident taxpayer is
also the beneficial owner of the royalty income being paid. The Revenue took a stance that Google Ireland was not the beneficial owner of the
royalty received from Google India
Onus on Payer - Google follows a four layers of entity structure for entering into its license agreements and no access was given to agreements
beyond the layer of Google Netherlands Holdings BV-Google Ireland to the tax department. ITAT found that the shared license agreement
contained a clause for license fee payable by Google Ireland to the upstream company, though the quantum was not clear. Accordingly, ITAT held
that without all the agreements and details in place, it was not possible to predict the manner in which the revenue received by Google Ireland
was being distributed to the upstream companies. Held that burden of proof was on the assessee to clarify based on evidence that Google Ireland
was indeed the beneficial owner since it retained a substantial portion of the payment received from Google India
Whether TRC conclusive for proving BO - Mere TRC or a Tax Residency Certificate, while acting as proof of residency of a company, will not
amount to proof of beneficial ownership
Case for Equalization Levy - Google Indian contended that payments made by residents to non-residents without a permanent establishment in
India are subject to an equalization tax @ 6%, under the Finance Act, 2016. ITAT rejected this argument by holding that the “equilization levy is to
charged only on consideration for specified services and not others where there is use of IPR, copyright and other intangibles”. Hence,
introduction of equalisation levy would not convert the nature of payment made.

34. TAXATION OF ROYATY
Case Study – Godaddy
(Delhi ITAT in case of Godaddy.com LLC vs ACIT [2018] (92 taxmann.com 241)
Whether payment on account of domain name registration charges subject to WHT under royalty ?
• US Company but not Tax Resident of USA therefore decision solely under the Act.
• Offered web hosting service income to tax in India as Royalty but claimed domain name registration charges as non-taxable.
• Domain Name Registration is a tool which equips the customer with the right to use the server of Godaddy and web hosting
charges are ancillary and subsidiary to domain registration.
• SC decision in Satyam Infoway Ltd (AIR 2004 SC 3540) held that the domain name is a valuable commercial right and it has all
the characteristics of a trademark and accordingly, it was held that the domain names are subject to legal norms applicable to
trademark.
• Rediff Communications Ltd. v. Cyberbooth AIR 2000 Bombay 27 also relied upon. In the aforesaid case, the user of the Website
"www.radiff.com" was injuncted as it was held deceptively similar to the plaintiff's website "www.rediff.com". In the above decision,
the Court held that the Internet domain names are of importance and can be a valuable corporate asset and such domain name
is more than an Internet address and is entitled to protection equal to a trade mark.
• Accordingly, it was held that Domain registration is rendering of services in connection with the use of an intangible property
which is similar to trademark and the underlying charges are Royalty

35. TAXATION OF ROYATY
Case Study – Imparting of Knowledge
Whether Meaning of ‘imparting of information concerning technical, industrial, commercial or scientific knowledge,
experience or skill’ (‘know-how’) shall be subject to WHT under royalty ?
• Every information concerning the industries or commercial ventures does not qualify as royalty. Some sort of expertise or skill is
required. Some sort of confidentiality/ secrecy & exclusivity is required. It should not be something readily available in the market.
(Madhya Pradesh HC in case of CIT vs. HEG Ltd.) [2003] (130 Taxmann 72)
• The assesse was in the business of providing various products to businesses across the globe. One of their products was a
business information report, which it was also selling to a group subsidiary in India. Based on a detailed analysis, the AAR
concluded that sale of a business information report could be equated with the sale of a book (i.e. there is no transfer / grant of
right to use the intellectual property rights associated with the book). Accordingly, payments received towards sale of a business
information report cannot be characterized as “royalty” as defined in Article 13 of the India-Spain DTAA. Allowing access and
downloading business information reports, which is a compilation of publicly available commercial information is not royalty. (AAR
in case of Dun & Bradstreet Espana SA )(272 ITR 99)
• Indian company was granted license by two foreign companies (licensors) and licensors provided data relating to geophysical
and geological information and they were not responsible for accuracy or usefulness of such data, since licensors had only made
available data acquired by them but did not make available any technology available for use of such data, payments made to said
licensors was not in nature of 'Royalty' as per respective DTAA. (Hyderabad ITAT in case of GVK Oil & Gas Ltd. vs. ADIT
[2016] (158 ITD 215)

36. THANK YOU!