DIRECT TAX - Nangia & Co

More documents

Recommendations

Info

Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun was not liable to pay tax under the MAT regime on sale of shares of a listed Indian company that was exempt from capital gains tax under the Indian Tax Law. [Source: AAR No. 836 of 2009 dated July 23, 2010] Profits from supply of ‘shrink-wrapped’ software is not ‘Royalty’ Velankani Mauritius Limited, *“the taxpayer”+, a Mauritian company engaged in the supply of software supplied ‘off-the-shelf’ ‘shrinkwrapped’ software to Infosys Technologies, an Indian company and took the view that the profits there from were not taxable in India as it did not have a Permanent Establishment in India. The Assessing Officer as well as the Commissioner of Income Tax (Appeals) disagreed with the taxpayer and proceeded to assess the profits as ‘Royalty’ under Section 9(1)(vi) of the Income Tax Act, 1961. The Income Tax Appellate Tribunal upon appeal held that - In the case of CIT vs. Samsung Electronics [227 CTR 335], which was relied upon by the Tax Authority, the Karnataka High Court had confined its decision to the issue of responsibility of the assessee under Section 195 in deducting tax at source before making remittances to Non Residents. Even though the Court had ruled in favour of the Revenue on the application of the TDS provisions, it was made clear that it has not examined the question of tax liability of the Non Resident assessee in respect of the payments received from assesses in India; On the question whether income from supply of software could be assessed as ‘Royalty’, reference was drawn to the case in Motorola Inc vs. DCIT [95 ITD 269] wherein the Delhi Special Bench had held that the crux of the issue was whether the payment was for a copyright or for a copyrighted article. If it was for a copyright, it had to be classified as ‘Royalty’ under the Income Tax Act, 1961 and the DTAA and if it was for a copyrighted article, then it only represented the purchase price of an article and could not be considered as ‘Royalty’ either under the Act or the DTAA; This principle was also laid down by the Authority for Advance Ruling in a ruling applied by the Airport Authority of India as well as by the Income Tax Appellate Tribunal in the case of Sonata Software [6 SOT 700] wherein it was held that the payments partook the character of purchase and sale of goods, and as there was no Permanent Establishment in India, no income accrued or deemed to accrue or arise in India; The case of Tata Consultancy Services Vs. State of AP [271 ITR 401 (SC)] was also referred to wherein it was held that even though the copyright in a software programme remained with the Page | 5
Tax & Regulatory Newsletter Issue 05 – AUGUST, 2010 NANGIA & CO. Chartered Accountants New Delhi – Mumbai - Dehradun originator of the programme, the moment copies were made and marketed, it became ‘goods’ which were assessable to Sales Tax. It was held that even intellectual property became ‘goods’ once put onto a media whether in the form of books or computer disks or cassettes. Accordingly, profits on sale of software could not be assessed as ‘Royalty’ either under the Indian Tax Law or under the DTAA. [Source: Velankani Mauritius Limited Vs. DDIT (ITAT Bangalore) dated July 08, 2010] Royalty paid by Non Resident does not ‘arise’ in India if there is no ‘economic link’ between the PE and the Royalty SET Satellite (Singapore) Limited *“the taxpayer”+, a tax resident of Singapore, was engaged in the business of acquiring television programs, motion pictures and sports events and exhibiting the same on its television channels from Singapore. The taxpayer entered into a contract with the Global Cricket Council, another company based in Singapore for obtaining the right to broadcast, distribute and exhibit cricket matches through territories of various countries including India. An Indian company of the taxpayer was also engaged for undertaking the marketing activities for the taxpayer. The Assessing Officer concluded that the taxpayer had a Permanent Establishment in India under the ‘Agency Permanent Establishment rule’ of the Indo-Singapore tax treaty on account of the marketing activities undertaken by the Indian company. Upon appeal the first appellate authority ruled in favour of the taxpayer to which the tax authority preferred an appeal before the Income Tax Appellate Tribunal. Before the Income Tax Appellate Tribunal the taxpayer contended that even if the payments constituted ‘Royalty’, they did not arise in India as per the DTAA as the payment was made by a tax resident of Singapore. Also, the ‘Royalty’ was not incurred in connection with the taxpayer’s Permanent Establishment in India, it was incurred in connection with its broadcasting activities in Singapore and was independent of the activities of the Indian company. It was also stated that the ‘Royalty’ was also not borne by the Permanent Establishment because for it to be construed as being borne by the Permanent Establishment it should have had an economic link with the taxpayer’s Permanent Establishment in India. Reliance was also placed on the OECD commentary on Article 11 dealing with taxation of interest which stated that for interest to arise, it should have an ‘economic link’ with the Permanent Establishment. Page | 6
Page 1 and 2: Tax & Regulatory Newsletter Issue 0
Page 5: Tax & Regulatory Newsletter Issue 0
Page 17: OUR OFFICES NEW DELHI Suite ‐ 4A,

DIRECT TAX - Nangia & Co

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?