NO TDS liability on software purchases on basis of retro-amendment in definition of ‘royalty’

Facts

a)       The assessee had purchased software from residents of different countries for its business of oil and gas exploration. It made payment for such purchases without deducting tax at source.

b)       Assessing Officer (AO) was of the view that the Explanation 4 has been inserted with retrospective effect in section 9(1)(vi) which specifically includes computer software in the definition of royalty. These payments would be liable for TDS deduction u/s 195. Thus, assessee was to be treated as assessee-in-default.

c)       On appeal, the CIT(A) held that the payment made by the assessee for purchase of software would not amount to royalty.

d)       The aggrieved-revenue filed an instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)    A perusal of the definition of royalty as provided in Article 12 of the India-USA 'DTAA' reveals that it is the payment which is received as consideration for the 'use of' or the 'right to use' 'any copyright of literary, artistic, scientific work including….'(emphasis supplied)

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Companyas distinguished from a mere payment for simply user of capacity,the consideration would not be taxable as royalty.

Facts:

a)The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.

b)It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East.

c)Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibreoptic Cable System.Videsh Sanchar Nigam Limited (‘VSNL’) was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties.

d)The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royaltyincome-tax Act?

The Tribunal held in favour of assessee as under:

1)The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.

2)One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights.

3)Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party.

4)All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case.

5)This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party.What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments,etc

6)If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'. -Flag Telecom Group Ltd. v. DCIT - [2015] 54 taxmann.com 154 (Mumbai - Trib.)

Perpetual transfer of satellite rights of a film for 99 years is a sale; excluded from definition of ‘royalty’

Transfer of satellite right to assessee under an agreement for a period of 99 years is a sale and, therefore, excluded from definition of 'royalty' under clause (5) of Explanation 2 to section 9(1)(vi).

Facts:

a) The assessee was dealings in film satellite rights by taking them on assignment basis and reassigning to channels.

b) He did not deduct tax at source on purchase of copyright of film as he was of the view that such purchase was neither covered under section 194J nor under section 194C. However, the Assessing Officer held that the payments debited as purchase warranted TDS under section 194J and worked out disallowance under section 40(a)(ia).

c) The CIT(A) allowed the appeal of assessee by holding that the consideration paid did not attract section 194J.

d) On appeal, the Tribunal held that the payments made would fall within the definition of 'royalty' and as the assessee had failed to deduct tax under Section 194J rigour of section 40(a)(i) stood attracted. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1) Perusal of the facts and circumstances of the instant case and case of Mrs. K. Bhagyalakshmi v Dy.CIT [2013] 40 taxmann.com 350 (Madras) would show that the substantial question of law raised were the one and same in both the cases.

2) The earlier division bench of this court in case of Mrs. K. Bhagyalakshmi (supra) after considering the perpetual transfer of rights for a period of 99 years [in terms of Section 26 of Copy Right Act and also the definition under clause (5) to Explanation 2 to section 9(1)] held that it was a sale and, therefore, excludible from definition of royalty.

3) Following the decision rendered in the case of Mrs. K. Bagyalakshmi (supra) it was to be held that transfer of satellite right to assessee under an agreement for a period of 99 years would be a sale and excludible from definition of 'royalty'. Therefore, the Tribunal had erred in concluding that the payment made by the assessee was royalty and not sale. - S.P.Alaguvel v. DY. CIT [2014] 52 taxmann.com 231 (Madras)

Sum received by international news agency on distribution of news and related photos in India is royalty

Facts:

a)The assessee, an International News Agency, was having its headquarter in France. It had been distributing its news and photos connected with news in India through various Indian News agencies.

b)There were two categories of payments received by assessee from India - one for transmission of news and the other for transmission of related photos.

c)The Assessing Officer (‘AO’) as well as the CIT(A) held that copyright subsisted in news-reports and photographs circulated by the assessee in terms of Copyright Act, 1957. Hence, the payments received by the assessee would qualify as 'royalties' under section 9(1)(vi) and Article 13(3) of the India-France Treaty (‘DTAA’).

d)The assessee submitted that no copyright subsisted in the work of the assessee as news reports as well as photographs provided by the assessee lacked originality and were devoid of any creativity.

The Tribunal held in favour of revenue as under:

1)On a perusal of Article 13 of DTAA, it was evident that 'royalty' cover within its fold payments pertaining to copyright of literary, artistic work, etc. Since these terms had neither been defined nor illustrated under Income-tax Act nor under DTAA, reliance was to be placed on relevant provisions of the Indian Copyright Act, 1957 to understand their true meaning and context.

2)To appreciate the distinction between mere reporting of facts from news stories, it would be worthwhile to analyse the recent reporting about Malaysia Airlines Flight 370 flight that disappeared on 8 March, 2014. In one of the newspapers i.e. 'Strait Times', the catchline read as Malaysia's MH 370 report shows delayed response, offers no new clues' while, another newspaper 'The New York Times' reported this incident with the catchline Questions Over Absence of Cellphone Calls From Missing Flight's Passengers'. It was to be pointed out that, the piece reported by the first newspaper consisted of news inputs as well as photographs from AFP while as the latter one consisted of news inputs from 'New York Times News Service'.

3)From a reading of the above news-item, it is evident that, even though the factum or news remains to be imbedded in a fact its reporting or form of an expression makes it unique. Thus, such news-reports as well as archived data being in the nature of 'original literary works' meet the statutory requirements for copyright outlined under section 13(1)(a) of the Indian Copyright Act, 1957. Hence, copyright subsisted in such news item/news story.

4)Section 2(c)(i) of the Indian Copyright Act, 1957 categorically includes photographs as artistic work. As per terms of usage of assessee's photos for news items or non-news items, it could not be denied that it had an intrinsic value of its own and when used for 'news items'; it helped to assist in conveying the message in the news story. Hence, copyright subsisted in such photographs/ image under consideration. Therefore, sum received by international news agency on distribution of its news and related photos in India was taxable as royalty. – Agence France Presse v. ADIT, International Taxation, New Delhi [2014] 51 taxmann.com 186 (Delhi - Trib.)

Payment for transponder service is ‘royalty’; ITAT refers Explanation 6 to Sec. 9(1)(vi) to interpret ‘process’

Payment for use of transponder service for broadcasting of programme held as ‘royalty’ as it involves transmission by satellite which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi) of the I-T Act

Facts:

1)    The assessee, engaged in broadcasting television channels from India, received transponder service from Intelsat, a tax resident of USA, in lieu of a fee.

2)    The assessee approached to the AO under 195(2) of I-T Act for Nil withholding tax certificates, for such payment of fees to Intelsat, which was denied by the AO.

3)    On the question of whether fee payable to Intelsat is in the nature of ‘Royalty’ in the light of amended provisions of section 9(1)(vi) as well as under Article 12 of Indo-US DTAA, the Tribunal held in favour of revenue as under.

Held:

a)    The Explanation 6 introduced by Finance Act, 2012 was only clarificatory in nature and, therefore, it did not amend the definition of royalty per se.

b)    There was no quarrel on the point that any payment for use or right to use of process is in the nature of royalty as per the provisions of Article 12(3) of DTAA between India and USA as well as per the Explanation 2 of section 9(1)(vi) of the Act.

c)    Since the term ‘process’ is not defined under the DTAA, therefore, by virtue of Article 3(2) of the India-US DTAA,the meaning of term ‘process’ as defined in the Act would apply for this purpose.

d)    The use of transponder by the assessee for telecasting/broadcasting the programme involves the transmission by the satellite including up-linking, amplification, conversion for downlinking of signals which falls in the expression ‘process’ as per Explanation 6 of Section 9(1)(vi).

e)    Hence the payments made for use/ right to use of process falls in the ambit of expression ‘royalty’ as per DTAA as well as per provisions of Income Tax Act.

f)    The decision of Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 197 Taxman 263 (Delhi)was not applicable in present case as it was pronounced prior to the insertion of Explanation 6 and Explanation below section 9(2).

Scope of retro-amendments couldn’t be curtailed by treaty - HC’s passing remarks; denies stay on recovery of demand

The scope and effect of the legislation cannot be curtailed by the DTAA, if after it comes into force an Act of Parliament is passed which contains contrary provision. This issue could have been discussed further had the petitioner questioned the legality of the Finance Act, 2012 inserting Explanations 5 and 6 in section 9(1)(vi) of the Act.

Facts:

a)  The assessee, engaged in business of providing telecom services to its subscribers in India, entered into agreements with non-resident telecom operators ('NTOs') for providing bandwidth and inter-connects capacity outside India.

b)  It also entered into a capacity transfer agreement with 'Belgacom' (a tax resident of Belgium) for acquisition of capacity over the Europe-India gateway (EIG) cable system.

c)  The assessee argued that the payments to NTOs and Belgacom couldn't be termed as 'royalty' under the provisions of Income-tax Act. Accordingly, it filed the instant writ with the High Court against the impugned order of Tribunal granting limited stay on recovery of tax.

The High Court held in favour of revenue as under:

1)  Section 9(1)(vi) makes it clear that payments for rendering any services in connection with activities referred to in clauses (iv) and (v) of the Explanation 2 to section 9(1)(vi) would attract the definition of 'Royalty;

2)  Explanations 5 and 6 to section 9(1)(vi) inserted by the Finance Act, 2012 provide that royalty includes consideration in respect of any right, property or information. As these Explanations are in the book of statute, unless they are declared ultra vires or their legality is tested, it is indispensable for the Assessing Officer to apply these Explanations while determining tax liability under the Act;

3)  The petitioner had not questioned the validity of the said amendments in this writ. Thus, the Assessing Officer was bound to apply such provisions in determining the taxability of the payments made by the petitioner to the NTOs;

4)  The scope and effect of the legislation can't be curtailed by the DTAA if after its entry into force an Act of Parliament is passed which contains contrary provision. The DTAA is entered into pursuant to the power conferred upon the Government under section 90;

5)  Thus, a detailed discussion was required as to whether section 90(2) was of such nature so as to nullify all Acts of the Parliament which create tax liability under the Act? This issue could be debated further had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6in section 9(1)(vi) of the Act;

6)  Any observation made on the above issues would not be construed as an expression of opinion on merit in view of the fact that all these issues are sub judice in the two appeals filed before the Tribunal. Thus, it needed to be examined whether the petitioner had made out a case for grant of stay in its entirety;

7)  There was no material placed before the Court to show that the petitioner would suffer irreparable hardship and injuries to his favour due to order of Tribunal granting limited stay on recovery of tax. The Tribunal had answered the grounds urged by the petitioner seeking grant of interim stay and had reached the logical conclusion by directing the petitioner to deposit 50% of the tax liability. The order of the Tribunal could not be interfered with.- Vodafone South Ltd. v. Dy. DIT (International Taxation) [2014] 43 taxmann.com 444 (Karnataka)