Concept of Royalty and Fees for Technical Services
Nature of Income
Condition
Illustration
If the income is received from:
A foreign company receiving
- Government of India
royalty from a non resident
- A resident assessee except
for the Indian Business of
where such payment is for
such non-resident.
Interest, Royalty and Fees for business or profession outside
A foreign company receiving
Technical Services
India
interest from a resident
- A non resident assessee
individual, for loan taken for
where the payment pertains
his business in Singapore, will
to business or profession in
not be income arising in India.
India.
Exception: Where the payment is for earning any income from any source outside India.
For example, where an Indian company borrows from a Singapore bank for a business project
in Indonesia, the interest paid by such Indian company to the Singapore bank shall not be
regarded as income accruing or arising in India.
Similarly, if a Dubai company borrows money from a Singapore bank for investment in a
business project in India, interest paid by the Dubai company to the Singapore bank shall be
regarded as income accruing or arising in India
Royalty – Explanation 2 to Sec 9(1)(vi)
Royalty means consideration (including any lump sum consideration but excluding any
consideration which would be the income of the recipient chargeable under the head “Capital
gains”) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent,
invention, model, design, secret formula or process or trade mark or similar property
(ii) the imparting of any information concerning the working of, or the use of, a patent,
invention, model, design, secret formula or process or trade mark or similar property
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or
similar property
(iv) the imparting of any information concerning technical, industrial, commercial or scientific
knowledge, experience or skill
(iva) the use or right to use any industrial, commercial or scientific equipment but not including
the amounts referred to in section 44BB (sec 44BB contains special provisions pertaining to the
business of exploration of minerals, oils etc – dealt with in the chapter
“ Profits and gains of business or profession)
(v) the transfer of all or any rights (including the granting of a licence) in respect of any
copyright, literary, artistic or scientific work including films or video tapes for use in connection
with television or tapes for use in connection with radio broadcasting, but not including
consideration for the sale, distribution or exhibition of cinematographic films ; or
(vi) the rendering of any services in connection with the activities referred to in the above
clauses.
The term, “computer software” means any computer programme recorded on any disc, tape,
perforated media or other information storage device and includes any such programme or any
customized electronic data.
Where assessee having purchased software and hardware from two different
non-resident companies, integrated them for manufacture and supply of
telecommunication equipments, it was held that the assessee’s transaction for
purchase of software was an independent transaction, payment made for it
amounted to royalty under section 9(1)(vi) - in CIT vs Sunray Computers (P.) Ltd. [2011] 16
taxmann.com 268 (KAR.)
Payment made for right to use a high capacity submarine telecommunication fibre-optic cable
system is royalty taxable in India - Dishnet Wireless Ltd., In re [2012] 24 taxmann.com 298
(AAR - New Delhi)
Subscription received by Singaporean company for imparting information concerning industrial
and commercial knowledge, experience and skill on internet is royalty - ThoughtBuzz (P.) Ltd.,
In re [2012] 21 taxmann.com 129 (AAR - New Delhi)
Payment made by assessee to non-resident for purchase of software is royalty - CIT vs. P.S.I.
Data System Ltd. [2012] 23 taxmann.com 432 (Kar.)
Income from export is regarded as a source of income outside india. Royalty paid abroad could
not be said to be deemed to have accrued or arisen in India as same was paid out of export sales
and, hence, source for royalty was sales outside India - CIT vsAktiengesellschaft Kuhnle Kopp
and Kausch W. Germany by BHEL [2002] 125 TAXMAN 928 (MAD)
Retrospective Amendments to the definition of the term royalty – by
Finance Act 2012
This is another case of legislative amendment to nullify judicial interpretations by various
Courts of this country. The following two explanations have been inserted with retrospective
effect from 01-06-1976, to ensure that software services and payments by broadcasters to
satellite television content providers are regarded as income accruing or arising in India:
“Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any
rights in respect of any right, 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 licence)
irrespective of the medium through which such right is transferred.
Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and
has always included consideration in respect of any right, property or information, whether or
not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.
Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process”
includes and shall be deemed to have always included transmission by satellite (including
uplinking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any
other similar technology, whether or not such process is secret”
Consequent to the above insertion the following transactions shall now be deemed to be
royalty:
- Purchase of software (by way of a disk or electronic download)
- Payment for cable television content
- Payment for broadband / internet charges
- Payment for smart phone, tablet application downloads
- Payment for purchase of electronic games
- Payment for use of telephone services (given the interpretation of the term process)
The more serious ramification of this amendment is the fact that the definition of the term
“royalty” u/s 9(1) is also referred u/s 194 J for the purpose of TDS on domestic transactions.
Consequently payments to cable operators, telephone operators, internet service providers etc
shall now be subject to TDS @ 10% if the transaction value exceeds the threshold limit specified.
Fees for Technical Services – Explanation 2 to Sec 9(1)(vii)
Fees for technical services means any consideration (including any lump sum consideration) for
the rendering of any managerial, technical or consultancy services (including the provision of
services of technical or other personnel).
However, it does not include consideration for any construction, assembly, mining or like
project undertaken by the recipient or consideration which would be income of the recipient
chargeable under the head “Salaries”.
Explanation to Sec 9 with retrospective effect from 1st June 1976: Income of a non resident
shall be deemed to accrue or arise in India in respect of interest, royalty and fees for
technical services paid outside India, and shall be included in his total income whether or
not.
• The non resident has residence or place of business or business connection in India or
• The non resident has rendered services in India
Rationale for the amendment:
The Hon’ble Supreme Court, in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007]
288 ITR 408, held that despite the deeming fiction in section 9, for any such income to be taxable in
India, there must be sufficient territorial nexus between such income and the territory of India. It further
held that for establishing such territorial nexus, the services have to be rendered in India as well as
utilized in India. This interpretation was not in accordance with the legislative intent that the situs of
rendering service in India is not relevant as long as the services are utilized in India.
Therefore, to remove doubts regarding the source rule, an Explanation was inserted with retrospective
effect from 1st June, 1976. However, the Karnataka High Cour t, in its judgment in the case of Jindal
Thermal Power Company Ltd. v. DCIT (TDS) [2009] 182 Taxman 252 (Kar.), has held that the
Explanation, in its present form, does not do away with the requirement of rendering of services in India
for any income to be deemed to accrue or arise to a non-resident under section 9.
It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and
the utilization of the service in India laid down by the Supreme Court in its judgment in the case of
Ishikawajima- Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the
Explanation.
Consideration paid to a UK company for rendering data processing services to applicant is
not taxable as ‘fees for technical services – AAR in R.R. Donnelley India Outsource (P.)
Ltd. In re [2011] 11 taxmann.com 94
Where resident of Japan employed with a Japanese company worked in India with an Indian company
under agreement between two companies for 273 days in previous year, salary received by assessee from
Japanese company in Japan was not taxable in India – CIT vs Sakakibara Yutaka [2012] 25
taxmann.com 557 (Delhi)
Amount received by applicant, a non-resident company, for providing mud engineering services to an
Indian company in connection with exploration of mineral oils, has to be taxed as fees for technical
services. M-1 Overseas Ltd., In re [2012] 24 taxmann.com 73 (AAR - New Delhi)
Where foreign company entered into an agreement with applicant for processing of acquired seismic data
in connection with prospecting for oil, consideration received would be construed to be in nature of ‘fees
for technical services. Spectrum Geo Ltd., In re. [2012] 25 taxmann.com 77 (AAR - New Delhi)
Where non-resident company enters into two contracts, one for supply of machinery and another for
erection thereof, charges received for erection services would be fees for technical services. HESS ACC
Systems B.V., In re [2012] 24 taxmann.com 297 (AAR - New Delhi)
India – Singapore DTAA
ARTICLE 12 : ROYALTIES AND FEES FOR TECHNICAL SERVICES - 1. Royalties
and fees for technical services arising in a Contracting State and paid to a resident of the
other Contracting State may be taxed in that other State.
1
[2. However, such royalties and fees for technical services may also be taxed in the
Contracting State in which they arise and according to the laws of that Contracting State, but
if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so
charged shall not exceed 10 per cent.]
3. The term “royalties” as used in this Article means payments of any kind received as a
consideration for the use of, or the right to use :
(a) any copyright of a literary, artistic or scientific work, including cinematograph film or
films or tapes used for radio or television broadcasting, any patent, trade mark, design or
model, plan, secret formula or process, or for information concerning industrial,
commercial or scientific experience, including gains derived from the alienation of any
such right, property or information ;
(b) any industrial, commercial or scientific equipment, other than payments derived by an
enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.
4. The term “fees for technical services” as used in this Article means payments of any kind
to any person in consideration for services of a managerial, technical or consultancy nature
(including the provision of such services through technical or other personnel) if such
services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or
information for which a payment described in paragraph 3 is received ; or
(b) make available technical knowledge, experience, skill, know-how or processes, which
enables the person acquiring the services to apply the technology contained therein ; or
(c) consist of the development and transfer of a technical plan or technical design, but
excludes any service that does not enable the person acquiring the service to apply the
technology contained therein.
For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to
include an agent, nominee, or transferee of such person.
5. Notwithstanding paragraph 4, “fees for technical services” does not include payments :
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially
linked, to the sale of property other than a sale described in paragraph 3(a) ;
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or
other equipment used in connection with the operation of ships or aircraft in
international traffic ;
(c) for teaching in or by educational institutions ;
(d) for services for the personal use of the individual or individuals making the payment;
(e) to an employee of the person making the payments or to any individual or firm of
individuals (other than a company) for professional services as defined in Article 14 ;
(f) for services rendered in connection with an installation or structure used for the
exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5 ;
(g) for services referred to in paragraphs 4 and 5 of Article 5.
6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties
or fees for technical services, being a resident of a Contracting State, carries on business in
the other Contracting State in which the royalties or fees for technical services arise, through
a permanent establishment situated therein, or performs in that other State independent
personal services from a fixed base situated therein, and the right, property or contract in
respect of which the royalties or fees for technical services are paid is effectively connected
with such permanent establishment or fixed base. In such case, the provisions of Article 7 or
Article 14, as the case may be, shall apply.
7. Royalties and fees for technical services shall be deemed to arise in a Contracting State
when the payer is that State itself, a political sub-division, a local authority, a statutory body
or a resident of that State. Where, however, the person paying the royalties or fees for
technical services, whether he is a resident of a Contracting State or not, has in a Contracting
State a permanent establishment or a fixed base in connection with which the liability to pay
the royalties or fees for technical services was incurred, and such royalties or fees for
technical services are borne by such permanent establishment or fixed base, then such
royalties or fees for technical services shall be deemed to arise in the State in which the
permanent establishment or fixed base is situated.
8. Where, by reason of a special relationship between the payer and the beneficial owner or
between both of them and some other person, the amount of royalties or fees for technical
services paid exceeds the amount which would have been paid in the absence of such
relationship, the provisions of this Article shall apply only to the last-mentioned amount. In
such case, the excess part of the payments shall remain taxable according to the laws of each
Contracting State, due regard being had to the other provisions of this Agreement.