Tax Treaty Interpretation –

Focus on Royalties and

Fees for Technical
Services

Sudin Sabnis 1

12 December 2019
 Contents.....

Introduction to tax treaties

Basics of treaty interpretation
Royalty

1. Article 12 of the UN MC – Basic structure

2. Definition of Royalty
- Under the Model Conventions
- Peculiarities under DTAAs
- Under the Act
3. Illustrative cases on major controversies

2
 …..Contents

Fee for Technical Services (FTS)

1. FTS under the Act

2. FTS under the treaties

3. Case studies

4. Taxability of Royalty and FTS

3
Introduction to tax treaties

4
 • What are tax treaties
• Agreements between countries with respect to taxes on income and on
capital, wherein countries agree to:
• Be restricted from taxing
• Provide relief for taxes paid in the other treaty country
• Types of Treaties
• Bilateral / Multilateral (e.g. Nordic treaty)
Introduction to • Why are tax treaties
• Promotion of cross border trade through elimination of double
tax treaties taxation
• Providing clarity of fiscal situation of a taxpayer
• Exchange of information to combat tax avoidance / tax evasion
• Sharing of tax revenues

• Legal effect of tax treaty

• Treaties do not impose taxation since they are not given the function
of being tax instruments.
• Treaty are given effect by domestic legislations. Hence, applicability of
Tax Treaty is conditional to the applicability of the Domestic
legislations.
 • Basic principles of tax treaties
• Residence – connects to Tax Payer
• Source – connects to income
• State R (Resident) has basic rights to tax global income of its Resident
• State S (Source) shall also levy tax, however, generally lower than
normal tax

Introduction to • Allocation of taxation rights to countries

• Full rights to tax only in one jurisdiction either to Source state or
Residence State
tax treaties • Full rights to tax by both jurisdictions but with tax in the source state
limited to a specified level and residence state give credit for tax paid
in Source state
• Full right to tax by both jurisdictions without limitation and the
Residence state giving a credit for tax paid in the Source State

• Treaties can be Limited or Comprehensive

• Comprehensive Double Taxation Avoidance Agreement (‘DTAA’) cover
all income flows
• Limited DTAA covers only shipping / transport related income
Juridical Vs Economic Double Taxation
• Double taxation is Juridical when the same person is taxed twice on the same income by more than one state.
• Double taxation is Economic if more than one person is taxed on the same item of income.

Juridical Double taxation Economic Double Taxation

R R Co Co A

X Co B
Income

Income is subject to tax in two countries Two legal entities are subject to tax on same income
–Shared taxing rights in two countries –

E.g., Fees for technical services, E.g., Unilateral Transfer Pricing adjustment
Royalty
Basics of treaty interpretation

8
Basics of Treaty Interpretation

• Article 1 generally defines the scope of treaty:

“This convention shall apply to persons who are residents of one or both of the Contracting States.”

• Article 2 generally contains definitions of ‘Taxes’ or treaty terms like ‘person’:

• The term “person” includes an individual, a company and any other body of persons which is treated as a taxable unit under the
taxation laws in force in the respective Contracting State
• Taxes – not to include surcharge or cess?

• Article 3 generally contains definitions of other treaty terms

• Article 3(2) – reference to domestic law

• Article 4 of OECD / UN Model Convention usually considers with minor modifications, the term “resident of a Contracting State” means
• any person
• who under the laws of that state
• is liable to tax therein
• by reason of his domicile, residence, place of management, nationality or
• any other criterion of similar nature.

Transparent partnership qualifies for treaty benefits?

9
 Interpreting a Treaty (Vienna Convention)

• The purpose of the Vienna Conventions is basically to codify existing rules of international law rather than create new
provisions.

• Article 31 and 32 of Vienna Convention, provides a broad guideline as to what could be an appropriate manner of interpreting a
tax treaty.

• A Treaty shall be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in light of its object and purpose.” (Art. 31(1)) (Look for object and purpose in preamble & overall structure)

• The context for the purpose of the interpretation of a treaty includes Preamble, annexes, text itself, agreements, treaty
instrument, other international law provisions, etc.

• Parties’ own interpretations reflected in subsequent agreements

• History of the negotiation of the treaty (as supplementary means of interpretation)

10
Overview of Tax Treaty – Articles of Treaty

11
Royalty

12
 Article 12 – UN Model

Basic Structure

12(1) 12(2) 12(3) 12(4) 12(5) 12(6)

Maximum
Gross Rules to
Taxation, if
Rights of taxation Royalty‟ / construe Related
a PE exists
the that can be FTS‟ – where party
in source
Contracting done by definitions Royalty / transactions
State
States to Source FTS arise
tax State

Most of the Indian Treaties based on UN Model

Convention

13
 Beneficial Ownership

Article 12(2) –

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 recipient is the beneficial owner of the royalties the tax so charged shall not exceed xx per cent of
the gross amount of the royalties.
A Co (IPR Recipient of
Key Tests: registered) Income
• Legal vs beneficial ownership
Outside India

• Obligation to pass over income to anyone?

India

• Ultimate consumption of income?

India Co

14
Meaning of the term royalty – 12(3)

OECD MC UN MC US MC
Payments received as a consideration Payments of any kind received as a Consideration for the use of, or the
for the use of, or the right to use, any consideration for the use of, or the right to use, any copyright of literary,
copyright of literary, artistic, or right to use, any copyright of literary, artistic, or scientific or other work
scientific work including artistic, or scientific work, including (including computer software,
cinematograph films, any patent, trade cinematograph films, or films or tapes cinematograph films, audio or video
mark, design or model, plan, secret used for radio or television tapes or disks, and other means of
formula or process, or for information broadcasting, any patent, trade mark, image or sound reproduction), any
concerning industrial, commercial or design or model, plan, secret formula patent, trade mark, design or model,
scientific experience or process, or for the use of, or the plan, secret formula or process, or
right to use, industrial, commercial other like right or property, or for
or scientific equipment, or for information concerning industrial,
information concerning industrial, commercial or scientific experience;
commercial or scientific experience and
gain derived from the alienation of
any property described in sub-
paragraph (a), provided that such
gain is contingent on the
productivity, use or disposition of
the property.

15
Components of Royalty

• Literary, artistic or • Patents,

scientific work trademarks,
• Cinematographic design, model,
films, tapes used secret formula,
for broadcasting process
Right or
Copyright property
(use of+ (use of
right to use) +right to
use)

Information Equipment
(use of (use of
+right to +right to
use) use)
• Concerning • Industrial,
industrial, Commercial or
commercial or scientific
scientific equipment
experience

16
 Royaltiesunder
Royalties under the
thetreaties
treaties

Peculiar features Countries (Illustratively)

Specific inclusion of computer

Malaysia, Russia, Morocco
software
Does not include equipment
Greece, Israel, Sweden, Netherlands
royalty
Penal Clause – If the main
purpose is to take advantage
UK
of the Article, the Article shall
not apply
USA, Singapore (Singapore however does not make it contingent upon
Gains from alienation
productivity or use)

MFN Clause Netherlands, France, Sweden, Finland

Each treaty will have its own definition of Royalty

17
Royalty – Definition under the Act

Consideration (including lumpsum consideration) for:

− Transfer of all or any rights − Imparting of any − Use of
(including license) in: information concerning • any IP
• Patent, invention, model, • the working of or use • or right to use any
design, secret formula or of IP industrial,
process or trademark, etc.
• technical, industrial, commercial or
(„IP‟)
commercial or scientific equipment
• copyright, literary, artistic or scientific knowledge,
scientific work including experience or skill
films or video tapes/tapes
for use in TV/radio
broadcasting (Expl 2(ii) & (iv) of sec 9(1)(vi)
(Expl 2(i) & (v) of sec 9(1)(vi)
(Expl 2(iii) & (iva) of sec
9(1)(vi)
including rendering of any services in connection with above (Expl 2(vi) of sec 9(1)(vi))

Capital Gains and consideration for sale, distribution and exhibition of

cinematographic films excluded
10
Royalty
Royalty definition––retrospective
definition amendment
retrospective amendment by Finance
by Finance Act, 2012
Act, 2012
Explanations
Explanationsadded
addedto to Section 9(1)(vi)
Section 9(1)(iv) of of
thethe
ActAct

 Explanation 4: Consideration for transfer of all or any right for use or right to use a computer
software, (including grant of a license) irrespective of medium of transfer, constitutes royalty u/s
9(1)(vi)

 Explanation 5: Royalty u/s 9(1)(vi) includes consideration in respect of any right, property or
information, whether or not its possession or control is with the taxpayer, it is used directly by
the taxpayer, or its location is in India.

 Explanation 6: Term „Process‟ u/s 9(1)(vi) includes transmission by satellite (including up-linking,
amplification, conversion for down-linking of any signal), cable, optic fiber or by any other similar
technology, whether or not such process is a secret.

Several judicial precedents in favour of the assessee

19
Advertisement Services

20
 Advertisement Services

OECD Technical Advisory Group

Google / Yahoo Payment towards advertisement taxable as business profit and in

absence of PE, not taxable in source country

Rights Florists (Kolkata ITAT) 143 ITD 445 – No Royalty

Payment towards
Outside India
display or
Services of banner hosting did not involve the use or the right to use
India exhibition of
any industrial, commercial or scientific equipment by the Indian
advertisement on
entity and that there was no positive act of utilization of these
portals
portals by the Indian entity

Similar views in Mumbai ITAT cases of Pinstorm Technologies and

India Co Yahoo India

21
Distribution Rights using
Technology

22
 Distribution Rights using Technology – Google India Pvt Ltd
(Bangalore ITAT)
• Agreement for Google Adwords Program Distribution – resale
Google Ireland of online advertisement space for India region to facilitate
display and publishing of advertisement to targeted Customer

• No control over server of Google or infrastructure or process of

running of Adwords program
Ireland

India • Payment not only towards sale of advertisement space, but a

targeted advertisement program – search engine results to suit
commercial needs to advertisers
Google India (non exclusive
distributor) • Payment entails payment for use of copyrighted information,
patented technology, secret process (of determining target
Royalty under Indo – Ireland treaty:
audience based on various criteria) etc owned by Google
Payments of any kind received as a consideration for the use of, or the Ireland and used in the Adwords Programme, though the
right to use, any copyright of literary, artistic or scientific work process of placing the ad on the search engine by the
including cinematograph film or films or tapes for radio or television advertiser seems to be a highly automated process.
broadcasting, any patent, trade mark, design or model, plan, secret
formula or process or for the use of or the right to use industrial,
commercial or scientific equipment, … or for information concerning • Distributor for advertisement space, can it be considered to be
industrial, commercial or scientific experience use of technology? 23
Online subscription Charges

24
 Subscription Fees Payment

Payment towards subscription fees to include use of any experience,

skill or expertise involved or not secret and confidential
Access to Content information?

HEG Ltd (MP High Court), Factset Research System Inc (AAR) and
Dun and Bradstreet (AAR), Elsevier Information Systems (Mumbai
ITAT) – not royalty
Payment of
Outside India
subscription fees - No sharing of experience, techniques or methodology employed in
India
evolving the database with the subscribers
- No right to use copyright of any literary, artistic or scientific work to
subscribers

On other hand…

India Co
Thoughtbuzz (P) Ltd., In re (AAR), ONGC Videsh (Delhi ITAT), Wipro
Ltd (Karnataka HC) – held as royalty
- Use of information, concerning industrial and commercial knowledge,
experience and skill 25
Software Taxation – Debate on
Copyright vs Copyrighted Article

26
 Understanding the
Understanding theconcept
conceptof of
IPRIPR (Copyright
(Copyright vs Copyrighted
vs Copyrighted Article) Article)

Underlying IPR What does Licensee of What does Purchaser

product IPR get? of product get?

Medicines Patent Licence to manufacture Ownership of drugs

Publishing house gets right

Books Copyright Ownership of book
of reproduction

Franchisee gets right to

Packaged
Trademark manufacture and sell under Ownership of product
drinking water
trademark

Know-how / License to manufacture and

Washing machine Ownership of machine
experience sell.

Payment for Payment

license constitutes
constitutes price
Royalty
27
Vexed Issue ––Battle
VexedIssue Battle with
with Revenue
Revenue authorities
authorities

Characterization of
Revenue Authorities Shrink Wrap Tax payers
software payments
to Non-Residents • Supply of software does not
• Software payments
involve any use / right to

Whether Business Income?

involve use / right to
use of copyright, patent,
use of Copyright
invention or process
(license)

Royalty?
• There is distinction between
a „Copyright‟ and a
Software
• Taxable in India as „Copyrighted Article‟
Royalty on gross basis
• It is business income not
Whether
taxable in India in the
absence of any permanent
establishment in India

Issue under litigation in a number of cases

28
Software Taxation – Conflicting decisions

Pre amendment scenario After Finance Bill, 2012 but Post enactment
before enactment
- Ericsson (2011) (Del HC) - Allianz SE (2012) (ITAT, - Nokia Networks Oy (2012) (Del
- Novell Inc (2011) (Mum ITAT) Pune) HC)
- Motorola Inc. (Delhi SB) - Siemens Aktiengesellschaft - Johndeere (Pune ITAT)
- Tata Communications Ltd. (ITAT, Mum) ITAT, Mumbai (2013) -Cummins Inc (Pune ITAT)
- Dassault Systems K.K. -Infrasoft (2013) (Del HC)
- Solid Works Corporation (2012) (Mum
ITAT)
- Samsung Electronics (2011) (Kar HC) - Citrix Systems Asia Pacific - P.S.I. Data Systems (2012)
- Sunray Computers (2011) (Kar HC) Pty Ltd (2012) (AAR) (Kar HC) - relied on Samsung
- Synopsys International Old Ltd (Kar HC) - Acclerys K. K. (2012) - Reliance Infocom Ltd. (2013)
(AAR) (Mum ITAT)
- BEA Systems Inc. (2012) - Microsoft Regional Sales
(ITAT Bang) (2013) (Del ITAT)

The Basic Principle on which various adverse and favorable rulings are adjudged:
Favorable „Copyrighted article‟ is different from „Copyright‟ itself. (Ericsson)
Adverse Right to make a copy is part of the Copyright itself. (Samsung)

Currently being heard in Supreme Court 29

Transponder charges/ Transmission
and leased line Charges

30
Taxation ofSatellite/
Taxation of Satellite/ Transponders
Transponders payments
payments – Mechanics
– Mechanics

Outer Space

Outside India India

Uplinking of signal

Transponder (device for

receiving signal) hire
charges
Satellite Broadcasting
Co. Co. Signals downlinked by
CO
24
 Connectivity and transmission charges – Controversy so far
Connectivity and transmission charges – Controversy so far

REVENUE TAX PAYER

 Payments for bandwidth  No use/ right to use

services / satellite Characterization of connectivity process or industrial,
and transmission payments
transponder is use/ right to commercial or scientific
use: equipment
Connectivity/ Whether
− Process, or Whether  Neither possession nor
Transmission business
− Industrial, commercial or royalty? active use of equipment
charges income?
scientific equipment takes place in India

 Taxable in India as royalty  No taxability in absence of

on gross basis PE in India

Issue under extensive litigation

25
 Connectivity and transmission charges – Key decisions (1/2)
Connectivity and transmission charges – Key decisions (1/2)

Judgment Principle laid down

Asia Satellite (2011) Delhi Payment was not for the use of any process or equipment, since control over
HC the process or equipment was with Asia Sat only (pre amendment scenario)

In order to constitute “royalty”, the payer must have the right to control the
B4U International Holdings equipment. Payment for a standard service would not constitute “royalty”
(2012) (Mum ITAT) merely because equipment was used to
render that service.

Convergys Customer Payer does not have control or possession over the equipment hence not
(2013) (Delhi ITAT) taxable in India. DTAA is not impacted by amendment in FA, 2012

The use of transponder by the assessee involves use of a process. As the

Viacom 18 Media (2014) term process is not defined under the US treaty, the same is to be
(Mum ITAT) interpreted as per Explanation 6 of s. 9(1)(vi). The payment in question
therefore qualifies as royalty.

New Skies Satellite BV The payment for leasing of transponder facilities to broadcasters is not for
(2016) (Delhi HC) use of any process; Amendments under the Act cannot be read into DTAA
26
Effectively connected to PE

34
 Effectively Connected to PE
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.
A Co
Article 12(2) 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 recipient is the beneficial owner of the royalties, the
tax so charged shall not exceed xx per cent of the gross amount of the
royalties.
B Co
Article 12(6) - Royalties shall be deemed to arise in a Contracting State
when the payer is that State itself, a political sub-division, a local
authority or a resident of that State.
Where, however, the person paying the royalties, whether he is a
resident of a Contracting State or not, has in a Contracting State a
Use of IPR
PE of A Co in India permanent establishment or a fixed base in connection with which the
liability to pay the royalties arise and such royalties are borne by such
permanent establishment or fixed base, then such royalties shall be
deemed to arise in the State in which the permanent establishment or
fixed base is situated.
35
Fees for Technical Services

36
Fee for technical services – IT Act - inclusions

Includes,
consideration for

Provision of
services of
Managerial Technical Consultancy technical or other
personnel

37
Managerial Services

Manager administers or
Manager is involved in
supervises the business
decision making
affairs

Managerial
Services

Manager is involved in
Manager is involved in management of affairs that
Controlling, directing or are directed towards adoption
administering the business and carrying out the policies
of the organization

38
Technical Services

Oxford’s dictionary Need of special skills or

“Involving or concerned with knowledge related to a
the mechanical arts and technical field for provision
applied sciences” of services

Technical
Services

Cannot be restricted to Should be construed in a

engineering or scientific narrow sense by applying
areas of knowledge the rule of Noscitur Sociis

39
Consultancy Services

Seek advice or opinion or Advice by someone like a

recommendations of professional, having special
someone qualifications

Consultancy
Services

Consultancy services may Technological

overlap with „technical‟ and expertise/special knowledge
„managerial‟ services essential

40
FTS Exclusions under IT Act

Exclusions

Consideration
Consideration for Consideration for Consideration for chargeable under the
construction assembly mining head “Salaries” in
hands of recipient

41
FTS definition – asper
– as
FTS definition per aa typical
typical DTAA
DTAA

Payment of any kind to any person

in consideration for rendering of any

Consultancy Services (including

Managerial / Technical services provision of services by
technical or other personnel)

If such services

are ancillary and

Consist of development and
subsidiary Make available technical know how, transfer of technical plan or
to services related to skill or process technical design
Royalty

42
FTS Clause as per Different DTAA’s

Peculiar features DTAA’s

No FTS Clause Brazil, Thailand, Greece, Mauritius, UAE, Sri
Lanka (No FTS clause in old India-Sri Lanka
treaty)
Separate Article for Royalty and FTS Malaysia, Israel, Oman
FTS and Royalty Clause in same Article Austria, Belgium, China, Germany, Netherlands

Fees for Included Services (FIS) USA, Canada, Cyprus, Singapore, Netherlands

Managerial Services not included in FTS Australia, Netherlands, Canada, UK, USA
Restrictive definition of FTS- presence of ‘Make USA, UK, Singapore, Netherlands, Cyprus
Available’ clause
‘Make available’ imported through Most France, Spain, Belgium, Switzerland, Sweden
Favored Nation clause

43
 Indo – China DTAA

Article 12(4) of Indo – China DTAA

China Co The term "fees for technical services" as used in this Article means
any payment for the provision of services of managerial, technical
or consultancy nature by a resident of a Contracting State in the
other Contracting State, but does not include payment for
Rendering activities mentioned in paragraph 2(k ) of Article 5 and Article 15 of
Payment
services in / the Agreement
for
out of India
Services
• Ashapura Minichem v ITO (Mumbai ITAT)

• Guanzhau Industries (AAR)

India Co

44
FTS –Definition under the Treaties

FTS as per India-Germany Tax FTS as per India-US Tax Treaty Some treaties in which FTS
Treaty clause is not there at all
 Consideration for rendering  Bangladesh
 Consideration for the of any technical or
services of managerial, consultancy services, if  Greece
technical or consultancy such services:  Indonesia
nature, including the
provision of services by • Ancillary and subsidiary to  Kenya
technical or other personnel the application or
enjoyment of the right,  Mauritius
excluding :
property or information,  UAE
• payments for • Make available technical  Nepal
dependent personal knowledge, experience,
services  Philippines
skill, know-how, or
processes, or consist of
the development and
transfer of a technical
plan or technical design.

No “Make Available Managerial Services Conflicting Views

Clause” not included exist on taxability

FTS Definition – varies from treaty to treaty

“Make Available” clause if present – significantly narrows down the scope
46
Absence of Article on FTS in DTAA

• In DTAA‟s which do not contain FTS clause:

• Whether income would be taxed as business income under Article 7?
• Whether income would be taxed under the residuary Article „Other Income‟? Or
• Whether income would be taxed as per provisions of the Act?

View Decision Held

1st View Channel Guide India Ltd vs ACIT In absence of FTS clause in the DTAA, income
(2012) (Mum); Mckinsey & Co governed as per Article on Business Profits and
(Thailand) Co. Ltd. vs DDIT(2013) would be taxed in India only if the taxpayer had a
(Mum); Bangkok Glass Industry PE in India.
Co Ltd vs ACIT(2013) (Mad)

2nd View Lanka Hydraulik Institute Ltd, In In absence of FTS clause, income to be taxed under
Re (2011) (AAR); XYZ, In Re the „Other Income‟ Article.
(2012) (AAR)

3rd View CIT vs TVS Electronics (2012) In absence of FTS clause, income cannot be
(Chennai) – subsequently construed as business profits and reference should
overruled by High Court be made to provisions of the Act

46
Make Available Clause

47
Meaning of “make available”

• Some of the DTAA’s contain a restrictive definition of FTS/FIS requiring satisfaction of make available
condition- USA, UK, Singapore, Netherlands, Cyprus etc.

• Is the term ‘Make Available’ defined ?

MOU to India-US Treaty explains the term ‘Make-Available’

• Person acquiring the service is enabled to apply the technology.

• Use of a product which embodies technology cannot be considered to make technology available.

• Several principles discussed by way of examples in the MOU

48
Relevant
RelevantTests
Tests

„Make Available‟ clause in a treaty narrows down the scope of definition of FTS

 Relevant Test # 1  Relevant Test # 4

P-1 supplies / transfers: Person - 1 • P-2 is able to make use of
knowledge, skill by himself in his
• Technology; or
business.
• Technical knowledge
• Knowledge must remain with P-2,

Flow of consideration
Flow of service
once service has ended.
 Relevant Test # 2 • Some sort of durability or
P-2 is enabled to apply the permanency of the result must
technology remain once service is rendered.

 Relevant Test # 5
 Relevant Test # 3
P-2 is at liberty to use the
Services must have some technical knowledge, skill, know-
technical knowledge. Person - 2 how and processes.

49
Case Study 1 - Are these “Included Services

MANUFACTURER
(Possesses experience of building
superior quality wallboards)

Sends experts to India to

show how to make extra-
strong wallboards
USA

Makes payments INDIA

under a valid
contract

BUILDER
(Wishes to produce US product)

51
Case Study 2 - Are these “Included Services”

MANUFACTURER
(Operates wallboard fabrication plant)

Fabricates wallboard in
its plant using advanced
technology. USA
• Makes payments.
INDIA
• Provides raw materials

BUILDER

52
FTS Implications of Secondment of
Employees to India

52
Secondment of Employees to India

• The term ‘secondment’ describes where an employee or a group of employees is assigned on a temporary
basis to work for another, ‘host’ organisation, or a different part of their employer’s organisation.

• On expiry of the secondment term, the employee (the ‘secondee’) will ‘return’ to their original employer.

• From company perspective, the essence is to establish whether the “employer – employee relationship” lies
with Indian entity (ICo) or that with the Foreign entity (FCo).

• Where the employment is established to be held by FCo, it will be difficult to argue against taxability of
payments being done by ICo to Fco, as FTS.

• Judicial pronouncements have laid down certain key aspects to differentiate between economic employer
and real employer.

53
FTS Implications of Secondment – Key Decisions

Judgment Held

• The nature of services performed by the seconded employees i.e.

Centrica India Offshore quality control and management, falls clearly within the hold “technical
(Delhi HC) – SC SLP or consultancy”.
dismissed • The seconded employees are imparting technical expertise and know-
how onto the regular employees, or in other words, “make available”
their know-how of the field for future consumption.

• The deputed employees have come to India to ensure group policies /

Panasonic Corporation other group culture.
(ITAT Chennai) • Once the policies / processes are retained, no need for personnel
again coming to India, hence the services have “made available”
technical knowledge, skill and experience.

54
Most Favored Nation (MFN) Clause

55
Most Favored Nation(MFN) Clause

• Intention of MFN Clause in tax

treaties:
 Granting of lower rate on specified
income and/or,
 Restricting the scope of income
and/or,
 Other benefit in terms of allowance
of expense in case of business
income

56
Most Favored Nation(MFN) Clause

• Illustrative Language:

In respect of articles XX, YY and ZZ, if under any

Convention, signed after DDMMYY, between India
and a third State which is a member of the OECD,
India limits its taxation at source to a rate lower or a
scope more restricted than the rate/scope provided
for in this Convention, the same rate/scope as
provided for in that Convention shall also apply under
this Convention

57
 India-France DTAA – FTS / Royalty clause

• 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, any copyright of literary, artistic or scientific work including cinematograph films,
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.

• The term "fees for technical services" as used in this Article means payments of any kind to any person,
other than payments to an employee of the person making the payments and to any individual for
independent personal services mentioned in Article 15, in consideration for services of a managerial,
technical or consultancy nature.

• The term "payments for the use of equipment" as used in this Article means payments of any kind received
as a consideration for the use of, or the right to use, industrial, commercial or scientific equipment.

58
India-France DTAA – MFN Clause

• In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments
for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between
India and a third State which is a member of the OECD, India limits its taxation at source on dividends,
interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a
scope more restricted than the rate of scope provided for in this Convention on the said items of income,
the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income
shall also apply under this Convention, with effect from the date on which the present Convention or the
relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.

59
Taxability of Royalty and FTS

60
Basis of Charge
 Section 5 : Scope of Total Income for Non Residents
- 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

- Royalty - Section 9(1) (vi) / Explanation 2
- FTS - Section 9(1) (vii) / Explanation 2
Section 9(1) of the Act

Income by way of Royalty/ FTS shall be deemed to accrue or arise in India if payable by

Government Resident Non resident

EXCEPT WHERE

Business/ Profession outside India Business/ Profession in India

OR OR

Source of Income outside India Source of Income in India

Havells (Delhi HC) – Exception outside India 61

 Taxability of Royalty/FTS under the Act
Taxability of Royalty/FTS under the Act
Taxability of Royalty / FTS under the Act

Royalty / FTS paid by an Indian concern or NO

Government
YES
Right, property or contract effectively connected with
PE
YES NO

Whether agreement
Taxable on net basis @ YES - Approved by Central Govt.
40%* – Sec 44DA - Included in Industrial Policy

NO
Sec 115A- Taxable on gross basis @ 10% Taxable on net basis @
40%* – Sec 28 to 44
* Surcharge and
cess, as applicable

62
 Taxability of Royalty/FTS under the DTAA
Taxability of Royalty/FTS as per DTAA
Taxability of Royalty / FTS under the Treaty

Right or property effectively connected with

PE

YES NO

Article 12 – taxable on
Article 7 – taxable on net
gross basis
basis

Article 7(3) – “in

accordance with and Section44DA
Section 44DA
subject to limitations of
domestic law”

63
Thank You

64