DTAA – A sigh of relief for Royalty cases доклад по теме Экономика и Финансы

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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.
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.
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. 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,
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
Mumbai Tribunal decided this issue in favour of the assessee holding that, 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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