Income Tax Notes

Taxation of International
Transactions
V. Vikram, Advocate
M/s Subbaraya Aiyar, Padmanabhan & Ramamani (S.A.P.R) Advocates
http://www.saprlaw.com
[email protected]
Agenda
Part I : Introduction to International Taxation
Part II : Two spheres of International taxation
Part III: Indian Income Tax Act vs. DTAA
Part IV: Business connection / PE
Section 9(1)(i) and Article 7 r.w. Article 5
Part V : Royalty
Section 9(1)(vi) and Article 12
Agenda…..
Part VI : FTS
Section 9(1)(vii) and Article 12/13
Part VII : TDS provisions
S.40(a)(i), S.201(1)
Part VIII : Transfer Pricing (TP)
Introduction to TP & CHAPTER X
Part I. Introduction to
International Taxation
Introduction to
• Money flow between India and abroad is
enormous
• Key question to always keep in mind:
– “How is the taxation pie shared?” (between the
countries)
– Each country will naturally want their share
enhanced and there in lies the rub….
• Treaties are negotiated to arrive at sharing of
rights
Part II. Two Spheres of
Two spheres of International
Taxation
• Indian Income Tax Act
– Section 5 – scope of total income
– Section 9 – deeming provision
• Double Tax Avoidance Agreements
– Notified Treaties of India with various Countries
– Based on OECD/UN/US Model conventions,
mutually negotiated between Countries
– Source vs. Residence country taxation rights
under Indian IT Act
• Section 5, both for residents in sub-section (1)
and for non-residents in sub-section (2),brings
within the fold of chargeable total income, all
income which is
– Received or is deemed to be Received in India or
– Accrues or Arises or is deemed to Accrue or Arise
in India to the assessee in particular previous year
International Taxation under Indian IT Act
(Section 9 – an Introduction)
• Section 9 of the Act defines the term "Income
deemed to accrue or arise in India".
– There are certain income, which generally
remains outside the scope of taxable income, by
virtue of section 9 comes within the ambit of
taxation. Classic example of “deeming provision”
– CIT v R.D.Aggarwal & Co. and others 56 ITR 20
(SC) - it must in all cases be remembered that the
fiction embodied in section 9 does not apply to
the income which actually accrues or arises to the
assessee in India.
Section 9 – An Introduction
• Similar views has been expressed in case of
• Sakalchand Babulal v ITO 47 ITR 673 (Mad)
• Annamalais Timber Trust & Co. v CIT 41 ITR 781 (Mad),
• Turner Morrison & Co. Ltd. v CIT 23 ITR 152 (SC)
• Hira Mills Ltd. v ITO 14 ITR 417 (All) and
• Anglo-French Textile Company Ltd. v CIT 25 ITR 27 (SC).
– The income which has been included in the total
income of a person on the basis that it has accrued
or arisen or deemed to have accrued or arisen shall
not again be included on the basis that it is received
or deemed to be received by him in India.
Section 9 – An Introduction
• Section 9 enumerates various categories of
income which shall be deemed to accrue or
arise in India under certain circumstances.
– The income dealt with in each clause is distinct
and independent of the other.
– In case of specific class of income one
must look at the specific clause and not
to general provisions of clause (i).
– Meteor Satellite Ltd. v ITO 121 ITR 311 (Guj)
– CIT v Copes Vulcan Inc. 167 ITR 884 (Mad)
under the DTAA’s
• The genesis of individual DTAA’s or Treaties
are from the Model Conventions (MCs)
– The OECD Model Convention, the US Model
Convention and the UN Model Convention
– All Model Conventions, and hence DTAA’s, consists
of a number of Articles with each Article
• In this talk we are concerned with Article 12
(Royalties & FTS) and also Article 7 (Business
Profits) r.w. Article 5 (PE)
Articles of Model Convention
Chapter Article Topic covered
Chapter I : Scope of Article 1 Persons covered
Convention
Article 2 Taxes covered
Chapter II : Definitions Article 3 Definitions
Article 4 Residence
Article 5 Permanent Establishment
Chapter III : Taxation of Article 6
Income
Article 7 Business Profits
Article 8 Shipping & air transport
Article 9 Associated Enterprises
Article 10 Dividends
Chapter III: Taxation of Article 11 Interest
Income (contd.)
Article 12 Royalties & Fees for Technical
Services
Article 13 Capital Gains
Article 14 Independent Personal Services
Article 15 Dependent Personal Services
Article 16 Director’s Fees
Article 17 Artistes and sportsmen
Article 18 Pensions
Article 19 Government service
Article 20 Students
Article 21 Other Income
Chapter III: Taxation of Article 22 Capital
Income (contd.)
Chapter IV: Methods for Article 23 Method for elimination of double
the elimination of double taxation (tax credit / exemption)
taxation
Chapter V : Special Article 24 Non-discrimination
Provisions
Article 25 Mutual Agreement Procedure
Article 26 Exchange of Information
Article 27 Assistance in collection of taxes
Article 28 Diplomatic mission
Chapter VI: Final Provisions Article 29 Entry into force
Article 30 Termination
under the DTAA’s
• Typically income of non-resident is its business income i.e.,
Article 7
– If it is rendered through a P.E in India then Article 7 r.w.
Article 5 applies
• However, if income of non-resident has specific character
such as Royalty or FTS etc. , then those specific Articles apply
and not Article 7
– This is enshrined in Article 7 itself i.e., Article 7(4) which
states
“Where profits include items of income which are dealt with
separately in other Articles of this Convention, then the
provisions of those Articles shall not be affected by the
provisions of this Article”
under the DTAA’s
• Similarly we jump out of Article 12 into Article 7 r.w. Article 5
if there is a P.E involved in providing the Royalties or Fees for
Technical Services.
– This is enshrined in Article 12 itself i.e., Article 12(3) which
states
“The provisions of paragraph 1 shall not apply if the
beneficial owner of the royalties, being a resident of a
Contracting State, carries on business in the other
Contracting State in which the royalties arise through a
permanent establishment situated therein and the right or
property in respect of which the royalties are paid is
effectively connected with such permanent establishment. In
such case the provisions of Article 7 shall apply”
Part III. Indian Income Tax vs. DTAA
Indian Income Tax Act vs
DTAA
• Section 90(2)
“(2) Where the Central Government has entered into an
agreement with the Government of any country outside India or
specified territory outside India, as the case may be, under sub-
section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to
whom such agreement applies, the provisions of this Act shall
apply to the extent they are more beneficial to that assessee”
Income Tax Act vs. DTAA
• In case of conflicting provisions between DTAA
and Act, the more beneficial to the assessee
can be taken
– Confirmed by numerous judgments including
• UoI vs. Azadi Bachao Andolan [263 ITR 706 SC]
• CIT vs. Davy Ashmore India Ltd. [190 ITR 626 Cal.]
• CIT v. Visakhapatnam Port Trust [144 ITR 146 (AP)]
– Also refer CBDT Circular 333 dated 1982
Part IV. Business connection / PE
Section 9(1)(i)
Section 9(1)(i)
Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :—
(i) all income accruing or arising, whether directly or indirectly,
through or from any business connection in India, or through or from any
property in India, or through or from any asset or source of income in India, or
through the transfer of a capital asset situate in India.
[Explanation 1].—For the purposes of this clause—
(a) in the case of a business of which all the operations are not
carried out in India, the income of the business deemed under this clause to
accrue or arise in India shall be only such part of the income as is reasonably
attributable to the operations carried out in India;
b) in the case of a non-resident, no income shall be deemed to accrue
or arise in India to him through or from operations which are confined to the
purchase of goods in India for the purpose of export ;
The Vodafone case
• Issues:
– Taxability over Capital Gains on an overseas transaction between 2
foreign companies (having non residential status in India) of sale of
investments comprising of shares of an Indian Company;
– Withholding Tax obligations of the Non Resident Buyer while making
payment of lump sum consideration to Non Resident Seller
• Facts of the Case
– Vodafone International Holdings BV, Netherlands (“VIH“) entered into
a Share Purchase Agreement with Hutchison Telecom, Cayman Islands
for purchasing equity shares of its subsidiaries CGP, Cayman Islands
– CGP in turn, directly and indirectly, owned ~52% share capital of Indian
Company named as Hutchison Essar Limited (“HEL"). The acquisition
meant VIH acquired control over CGP and subsidiaries, including HEL
– The Revenue Authorities held that the gains were taxable in India as
there was transfer of controlling stake / business situated in India
and accordingly alleged failure on part of VIH to withhold tax on
gains arising to HTIL on the transfer of shares of CGP
Vodafone judgment synopsis
• The transaction for transfer of shares of a Foreign Company (though
directly or indirectly holds shares of an Indian Company) between two
non-residents on principal to principal basis abroad cannot be deemed
as “Transfer of Capital Asset” situated in India and accordingly, cannot
result into levy of capital gains tax in India.
• The provisions of Section 9 of Act will be attracted only when capital asset
• is located / situated in India.
• The transaction should not be structured in a manner for avoidance of
income tax. The investment structure should be examined and seen in a
holistic manner.
• The lumpsum consideration for purchase of an entire investment cannot
be allocated or dissected in order to calculate the value of specific rights
and entitlements.
• The withholding tax obligations in India would arise only when such
income is taxable in India
Vodafone judgment – Retrospective Amendments in
Finance Act 2012
• Explanation 4 has been inserted in section 9(1) (i), w.e.f. A.Y. 1962-63 to
clarify that the expression ‘through’ (used in section 9(1) (i) in relation to
any asset or source of income in India) shall mean and include and shall be
deemed to have always meant and included “by means of”, “in
consequence of” or “by reason of”
• Explanation 5 has been inserted in section 9(1)(i), w.r.e.f. A. Y. 1962-63 to
clarify that an asset or a capital asset being any share or interest in a
company or entity registered or incorporated outside India shall be
deemed to be and shall always be deemed to have been situated in India if
the share or interest derives, directly or indirectly, its value substantially
from the assets located in India.
• Consequent to insertion of above explanations, the following
explanations have also been added to clarify the meaning of (a) “capital
asset” given in section 2(14), (b) “transfer” given in section 2(47) and (c)
to widen the scope of section 195(1).
Sanofi Pasteur Holdings SA vs. Dept. of Revenue, GOI
(WP 1421 of 2010 dated 15-02-2013, Andhra HC)
• Two French companies named “Murieux Alliance” (‘MA’) and
“Groupe Industrial Marcel Dassault” (“GIMD”) held shares in
another French company named “ShanH”.
• MA & GIMD acquired shares in an Indian company named “Shantha
Biotechnics Ltd” (“Shantha”). The shares in Shantha were
transferred to ShanH.
• MA and GIMD subsequently sold the shares in ShanH to another
French company named “Sanofi Pasteur Holding”.
• The assessees filed an application for advance ruling claiming that
as the two French companies had sold the shares of another French
company to a third French company, the gains were not chargeable
to tax in India.
• AAR upheld Dept.’s plea and on appeal AP High Court held in favour
of assessee that no capital gains was chargeable to tax in India
under India-France Treaty, even after Amendments to S.9(1)
Sanofi Pasteur Holdings SA vs. Dept. of Revenue, GOI
• Article 14(5) of the India-France DTAA which exempts capital gains
from shares representing more than 10% holding from tax in India
does not permit a see through on whether the alienation of shares
by ShanH is an alienation of the control, management or assets of
the Indian company. It cannot be said that an actual alienation of
the ShanH shares amounts to a deemed alienation of the Indian
company’s shares.
• The fact that the value of the shares of ShanH was because of the
value of the Indian company’s assets is irrelevant;
• The retrospective amendment to s. 9(1) so as to supersede the
verdict in Vodafone International and to tax off-shore transfers
does not impact the provisions of the India-France DTAA because
the DTAA overrides the Act
• Hence no capital gains chargeable to tax in India and hence no
withholding required
Payments to Foreign Commission Agents
(u/S.9(1)(i))
 CBDT Circular No.23 of 1969 dt 23.07.1969
– A foreign agent of Indian exporter operates in his own country and no
part of his income arises in India.
– His commission is usually remitted directly to him and is, therefore,
not received by him or on his behalf in India.
– Such an agent is not liable for income tax on this commission.
 CBDT Circular No.786 dated 07.02.2000
 The deduction of tax at source under s.195 would arise if the payment
of commission to the non-resident agent is chargeable to tax in India
– In this regard attention to CBDT Circular No. 23, dated 23rd July, 1969
is drawn. It had been clarified then that where the non-resident agent
operates outside the country no part of his income arises in India.
 Such payments were therefore, held to be not taxable in India.
 CIRCULAR NO. 7 OF 2009, DT. 22ND OCT., 2009
 Withdrawal of Circular No. 23 dated 23rd July, 1969, No.
163 dated 29th May, 1975 and No. 786 dated 7th February,
2000
 Withdrawal of Circular does not change the statute!
 Assuming there is ‘business connection’ between principal
and foreign agent, there can be no “attribution of income
to operations carried out in India” as per Explanation 1 to
S.9(1)(i) . In other words there is no PE of foreign agent in
India
 Income not taxable in India and is business profits under
Article 7. Hence no TDS ought to be necessary
Case Laws
• CIT v Toshoku Ltd (125 ITR 525, SC) the Hon’ble Supreme
Court held that when a non-resident, with no operation of
business in India, rendered services outside India to an Indian
concern , then provisions of Section 9 of the I.T Act 1961 are
not attracted.
• CIT vs. Eon Technology (P) Ltd – 343 ITR 366 wherein the
Hon’ble Delhi High Court has held that foreign commission
agent payments do not require tax withholding
• CIT vs. Sheraton International Inc ((2009) 313 ITR 267) where
the Delhi High Court has reversed the order of Tribunal by
holding that the main service rendered by the U.S Company to
Indian company was advertisement, publicity and sales
promotion and these would neither fall under the category of
‘Royalty’ nor ‘Fees for Technical Service’
Case Laws
• CIT vs Indopel Garments (P) Ltd. Vs DCIT (2001 72 TTJ Mad 702)
where ITAT Chennai held no disallowance under s. 40(a)(i) could be
made for commission payment to foreign concern without acting as
a selling agent of assessee for canvassing orders outside India
• DCIT vs. Ardeshi B. Cursetjee & Sons Ltd (2008 115 TTJ Mumbai
916) where ITAT Mumbai held commission payment made to non-
resident for services rendered outside India not being chargeable to
tax in India could not be disallowed under Section 40(a)(i)
• JCIT vs. George Williamson (Assam) Ltd. (2009 116 ITD 328) where
in the ITAT Guwahati Bench held that with respect to payment of
selling commission, brokerage and other related charges to non-
resident agents in respect of sale of tea outside India, no income
had accrued or arisen in India either under Section 5(2) or under
Section 9 and therefore no tax was deductible under Section 195.
Case Laws
• TVS Motor Company vs. ACIT (ITA Nos.697 &757/Mds/2009)
where the ITAT Chennai in an order dated 22nd December 2010,
amongst other issues, has affirmed that export commission
payments made to non-resident agents will not be liable to tax
deduction at source and disallowance u/s 40(a)(i) is to be deleted
• DCIT vs. Sanjiv Gupta (2011 135 TTJ Lucknow 641) where the ITAT
Lucknow had held that disallowance under Section 40(a)(i) for the
A.Y 2007-08 on the commission payments made to non-residents
was not called for as the withdrawal of Circulars 23 of 1969 and
786 of 2000 by Circular 7 of 2009 dated 22-10-2009 was only
operative from the date of issue of Circular 7 and did not have
retrospective effect
PE under the Act
(u/S.9(1)(i))
• Concept of “business connection” was explained in CIT vs.
R.D.Agarwal (56 ITR 120)
“The expression ‘business connection’ undoubtedly means
something more than ‘business’. The expression ‘business
connection’ postulates a real and intimate relation between the
trading activity carried on outside the taxable territories and the
trading activity within the territories, the relation between the two
contributing to the earning of income by the non-resident in the
trading activity”
• “Reasonably attributable to operations in India” means
attributable to Permanent Establishment (PE) in India
– PE defined in Act u/s S. 92F(iiia) as "permanent establishment",
referred to in clause (iii), includes a fixed place of business
through which the business of the enterprise is wholly or partly
carried on”
PE under the DTAA
(Article 5)
• Article 5 of MC’s and India’s Treaties deals with Permanent
Establishment
• Article 5(1) “For the purposes of this Convention, the term
“permanent establishment” means a fixed place of business through
which the business of an enterprise is wholly or partly carried on.”
• Article 5(2). “The term “permanent establishment” includes
especially:
• (a)A place of management;
• (b)A branch;
• (c)An office;
• (d)A factory;
• (e)A workshop;
• (f)A mine, an oil or gas well, a quarry or any other place of
extraction of natural resources.”
PE under the DTAA
(Article 5)
• Article 5(3) “3.The term “permanent establishment” also
encompasses:
(a) A building site, a construction, assembly or installation project or
supervisory activities in connection therewith, but only if such site,
project or activities last more than six months;
(b) The furnishing of services, including consultancy services, by an
enterprise through employees or other personnel engaged by the
enterprise for such purpose, but only if activities of that nature
continue (for the same or a connected project) within a Contracting
State for a period or periods aggregating more than 183 days in any
12-month period commencing or ending in the fiscal year concerned”
• Certain Treaties also define “Service” PE’s , Dependent Agent PE’s
(DAPE’s) , “force of attraction” clauses etc. - highly litigated area!
PE under the DTAA
(Article 5)
• Note that for a PE, the income minus expenses i.e., net
income is taxable (as opposed to say Royalty or FTS where
withholding is on gross receipts)
• The Andhra Pradesh High Court, in CIT v. Visakhapatnam Port
Trust(144 ITR 146), held that:
"The words "permanent establishment" postulate the
existence of a substantial element of an enduring or
permanent nature of a foreign enterprise in another country
which can be attributed to a fixed place of business in that
country. It should be of such a nature that it would amount to
a virtual projection of the foreign enterprise of one country
into the soil of another country.“
Part V. Royalty
Royalty under the Act
Section 9(1)(vi) – Royalty under IT Act
• The key part of the Royalty sub-section is

the Explanation 2 which defines Royalty
• Similar, not identical, to the Model
Convention definition found in Article 12(2)
and the definition in various Treaties
• Bottomline: Every word matters (!!) in the

Royalty definition as we will find out…..
Explanation 2 – Definition of Royalty
“”“Explanation 2.—For the purposes of this clause, "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 ;
Explanation 2 (contd..)
(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;
(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 sub-
clauses (i) to (iv), (iva) and (v)
Royalty Cases
TOPIC – (AREA OF DISPUTE) ROYALTY CLAUSE
Payments for off-the-shelf software Explanation 2, clause (i)
Payments for online access to databases (journal Explanation 2, clause (i)
subscriptions, magazines etc.)
Fees for use of Satellite Explanation 2, clause (iii), (iv), (iva)

Payment for leased line / internet connectivity Explanation 2, clause (iii), (iv), (iva)
Payment for know-how, designs, drawings Explanation 2, clause (i), (iv), (vi)
Divisibility of contracts, Composite Agreements Explanation 2
Payment for off-the-shelf software
• A highly controversial and litigated issue in recent
times!!
• The Department takes view that “the transfer of all
or any rights (including the granting of a licence)”
includes the right to use by the purchaser and hence
these are Royalty payments and not business profits
• The taxpayers argue that purchase of such software
is like buying a book off the shelf and is akin to a sale.
When one buys a book, one buys a copyrighted
article (i.e., the copyright is embedded in the article
which has been bought) and there is no transfer of
copyright itself.
• In other words, one buys a book (or software) and reads it (or uses
it) and has no permission to re-print or reproduce it further for
commercial use and hence the payment for such book (or
software) cannot be termed as Royalty but merely a payment for
buying the book (or software).
• The fact that software tends to have End-User License Agreements

(EULA) which are boilerplate contracts does not change the
substance of the issue in question that the transfer is of the
copyrighted article and not the transfer of copyright itself.
• That a backup copy of the software can be made to use in case of

emergencies comes under fair use
• SECTION 14 of the COPYRIGHT ACT, 1957 states:
“14. Meaning of copyright.— For the purposes of this Act, “copyright” means the
exclusive right subject to the provisions of this Act, to do or authorize the doing of
any of the following acts in respect of a work or any substantial part thereof,
namely:—
(a) in the case of a literary, dramatic or musical work, not being a computer
programme,—
(i) to reproduce the work in any material form including the storing of it in any
medium by electronic means;
(ii) to issue copies of the work to the public not being copies already in
circulation;
(b) in the case of a computer programme,—
(i) to do any of the acts specified in clause (a);
(ii) to sell or give on commercial rental or offer for sale or for commercial rental
any copy of the computer programme:
Provided that such commercial rental does not apply in respect of computer
programmes where the programme itself is not the essential object of the rental”
• Tata Consultancy Services Vs. State of AP (271 ITR 401 SC)
• Issue was whether branded software amounts to “goods” (for sales
tax). The court held that the moment copies are made and
marketed, it becomes goods, which are susceptible to sales tax
• Motorola Vs. DCIT (2005) 96 TTJ Delhi 1 (SB)

• An important decision where software supplied was a copyrighted
article and not a copyright right the payment received by the assessee
in respect of the software cannot be considered as royalty either
under the Income‐tax Act or the DTAA.
• Lucent Technologies Hindustan Ltd. Vs. ITO (120 TTJ (Del.) 929)
• Software was such that it was customized for each of the machines
imported and could not have been duplicated for commercial purpose.
The contract also forbids the assessee from copying the software. No
copyright in the software could be said to have accrued to assessee
 IMPORTANT decision in CIT Vs. Samsung Electronics Co. Ltd. & Others
(245 CTR (Kar) 481) where in Karnataka HC has upheld the view of the
Revenue Department that the payments for off- the-shelf software to non-
residents is Royalty and hence liable to withholding of taxes in India.
 Samsung(supra) is a controversial decision for both S.195(2) as well as
Royalty for payment to acquire software
 Overturned multiple decisions wherein the Tribunals and Courts have
upheld the distinction between ‘copyright’ and ‘copyrighted article’
and decided in favour of the assessee saying payments made for
shrink-wrapped licensed software not to be characterized as Royalty
(Samsung decision - Karnataka HC)
“Accordingly, we hold that right to make a copy of the software and
use it for internal business by making copy of the same and storing
the same in the hard disk of the designated computer and taking
back up copy would itself amount to copyright work under s. 14(1) of
the Act and licence is granted to use the software by making copies,
which work, but for the licence granted would have constituted
infringement of copyright and licencee is in possession of the legal
copy of the software under the licence. Therefore, the contention of
the learned senior counsel appearing for the respondents that there
is no transfer of any part of copyright or copyright and transaction
only involves sale of copy of the copyright software cannot be
accepted……”
 The Delhi Tribunal in Gracemac Vs. ADIT 134 TTJ (Del) 257 held that :
 The term ‘copyrighted article’ is not defined anywhere OECD
Commentary and would not be a correct guide for interpreting
domestic provisions
 TCS case (supra) was in context of sales tax
 The amended definition of Royalty in the domestic provisions of the
Act will override any Treaty definition (relied on Gramophone
Company Vs. V.B. Pandey (AIR 1984 SC 667))
 The Mumbai Tribunal in ADIT Vs. TII Team Telecom International (60 DTR
177) considered the Gracemac decision (supra) in detail and arrived at a
contrary conclusion stating that the software payments were not Royalty
Payment for online access to database
PAYMENTS FOR ONLINE ACCESS TO DATABASE (SUBSCRIPTIONS)
(subscriptions, journals etc.)

• The key issue here is whether the payments received for the
subscription access to an online database, reports, journal, e-zine
etc. came under the ambit of Royalty and hence deemed to be
taxable in India.
• This issue has been consistently litigated in various Tribunals and

Courts with disparate results. Few decisions below:
 CIT Vs. HEG Ltd. (263 ITR 230 MP High Court) :

• Payment for a compilation of technical information (“Carbon
databank”) to a US company cannot be construed as Royalty.
• In order to withhold tax on payments for information
received, the information should have some special features
and should not merely be of a pure commercial nature.

• Similar view was taken by Tribunal in :
• Gartner Ireland Ltd v. DDIT (ITA No. 452/Mum/08 )
• TIS Two Administration(Sing.) Pte Ltd. vs. DDIT (Mumbai ITAT)
• Hughes Escort Communications Ltd. (HECL) vs. DCIT (21
taxmann.com 171)
• Another well-considered decision was Wipro Ltd. Vs. ITO [2004]
278 ITR 57 (Bang. ITAT) which held that annual subscription for
providing access to database through the web by US company is
not information or advice given individually and cannot be
considered as Royalty.

• However post-Samsung decision, the Karnataka High Court in
Wipro’s case (203 Taxmann 621) reversed decision of ITAT and
held:
• Though subscription access to journal may seem different from
software licence, it is in fact nothing but a licence to use ('right
to use') the journal and it will come under S.9(1)(vi) of Act!
• Note also decision of the AAR in Cargo Community Network Pte
Ltd (289 ITR 355 AAR) held that payments for online access to
travel portal is Royalty
Fees for use of satellite – Whether royalty?
• The key issue is whether the payments received for the use of
satellite were taxable as royalty under Section 9(1)(vi) .
• Explanation 2 Clauses (iii), (iv) and (iva) have all been

variously used to fight over this issue;
• The main questions to be answered are:
• Whether the use of the satellite is a “process”?
• Whether the use of a satellite transponder for uplinking

and downlinking is a use of (or right to use of) commercial,
industrial or scientific equipment.
• Asia Satellite (85 ITD 478 Delhi ITAT) :
• Receipts were taxable as Royalty having been paid in respect of

a “process” as envisaged in Section 9(1)(vi)(iii).
• This decision was also applied in ACIT Vs. Sanskar Info. TVP Ltd.
(24 SOT 87 Mumbai ITAT)
• However, in DCIT Vs. PanAmSat International Systems Inc. (9 SOT
100) it was held that :
• The term “royalty” in Art. 12 of the India-USA DTAA has a
‘comma’ after the words “secret formula or process”!
• it was only a ‘secret process’ which would qualify as royalty and
not what was provided by the assessee.
• The Delhi Special Bench in New Skies Satellite N.V. Vs. ADIT (319 ITR
269) was constituted to resolve the conflict and held reversing the
PanAmSat decision (supra) that :
• The transponder provision through which uplink and downlink

happens in the desired area is a “process”
• To constitute “royalty”, it is not necessary that the process should be

a “secret process”.
• The fact there is a ‘comma’ after the words “secret formula or

process” in the DTAA does not mean that a different interpretation
has to be given to the DTAA as compared to Act
• To be Royalty it is not necessary that the instruments through which

the process is carried on should be in the possession of the payer.
 Subsequently, the Delhi High Court in Asia Satellite Telecommunications
Co. Vs. DIT (332 ITR 340) has held that :
• NO income is deemed to accrue in India from use of satellite outside
India to beam TV signals into India even if bulk of revenue arises due to
viewers in India
• The satellite was used by the assessee for providing services to its
customers
• There is a well known distinction between “lease of equipment” and
“use of equipment” (ISRO Satellite Centre vs. DIT (307 ITR 59 (AAR))
• The transponder was in orbit and merely because its footprint was on
India did not mean that the “process” had taken place in India
• OECD and Klaus Vogel commentaries stating that the use of a satellite
is a service and not a rental cannot be discarded because the technical
terms in the DTAA are the same as that in s. 9(1)(vi)
Payment for leased line/ connectivity charges
• The key issue here is regarding the payment for dedicated internet
connectivity typically via ‘leased line’ or dedicated circuits or VSAT
(via uplink/downlink) by a non-resident telecom provider.
• Similar to the issue surrounding lease of transponder as the question is
whether there is a use of process and/or use of scientific, commercial or
industrial equipment.
 Moreover, in this issue there is significant overlap between the FTS and
Royalty issues because the Revenue’s contention has been two-fold –
 That there is a technical service provided by the telecom provider to the

assessee (AND)
 That payment is for a process and the payment is for the use of
industrial, commercial or scientific equipment.
• Infosys Technologies Ltd. Vs. DCIT (139 TTJ (Bang.)(UO) 18) :
• Payment towards bandwidth charges is not use of or right to use of

industrial, commercial or scientific equipment.
• Wipro Ltd. Vs. ITO (80 TTJ (Bang.) 191) :
• Held that payment for transmission of data and software through uplink
and downlink services is not Royalty as no process has been made
available to the assessee and Explanation 2 clause (iii) cannot apply.
• Dell International Services India (P) Ltd., In Re (305 ITR 37 AAR) hed that
providing telecom bandwidth by US company does not mean “the use or right
to use any industrial, commercial or scientific equipment” and under the
DTAA the term ‘secret’ covers both formula and process and there is no secret
process here used by the applicant.
• However in Verizon Communications Singapore Pte Ltd. Vs. ITO
(45 SOT 263 ITAT Chennai),
• The Tribunal in a very elaborate decision came to the conclusion that
the payment for providing international connectivity services is
Royalty under both Act and DTAA as it is for the use of ‘process’.
• The same has been approved by the Madras High Court in Verizon’s case on
7th Nov, 2013 and the Court has held that:
“In the circumstances, we affirm the order of the Tribunal holding that the
consideration paid by the customer to the assessee is ‘royalty’ within the
meaning of Explanation 2(iva) or in the alternative under Explanation 2(iii) of
Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between
India and Singapore.”
Payment for know-how, designs, engg. drawings etc.
• The difference between Sale and Royalty transaction is based on

whether the sellor/licensor retains the ownership rights in the property
being sold/licensed i.e., is it an outright sale or does it fall under one of
the Royalty clauses in Explanation 2 ?
• CIT Vs. Davy Ashmore India (190 ITR 626) : Sale of know-how cannot
be taxed as royalty
• Pro-Quip Incorporation Vs. CIT (255 ITR 354) : Royalty payment must
be in respect of a right to use designs and drawings, and not for the
purchase thereof.
• CIT Vs. Klayman Porcelains Ltd. (229 ITR 735 AP HC) : Amount paid by
Indian company to the non-resident company as payment for technical
drawings towards engineering for a kiln would not amount to imparting
any information concurring the working of, or the use of patent,
invention, model, design, secret formula or process and hence will not
constitute Royalty under Section 9(1)(vi) of the Act
• CIT Vs. Magronic Devices (P) Ltd., 329 ITR 442 HP HC : The foreign
company was to supply plant know-how and product know-how.
Agreement was concluded & data was delivered abroad. High Court
held that the transaction was that of a sale, hence, no income could be
deemed to accrue or arise to non-resident.
• ADIT Vs. Zimmer AG (2008 22 SOT 97 Kol) :
• Engineering documents were handed to the Indian purchaser

company SAPL by the German assessee company outside India
under a ‘Know-how and Engineering Agreement’
• These documents were an integral part of plant and machinery

and the transfer of engineering was complete with the handover
of the documents
• The payment for these documents could not constitute Royalty

under the Act or the DTAA as the German assessee sold and
transferred ownership, title and risk in the engineering
documents to SAPL at Germany for consideration paid outside
India
• However, the Chandigarh ITAT in DCIT Vs. Majestic Auto Ltd. (51 ITD
313 (CHD)) took a contrary view and held that payment for supply of
drawings, designs etc. was taxable as Royalty.
• ITAT Calcutta Bench in Union Carbide Corporation Vs. Inspecting ACIT

(50 TTJ (Cal) 535) held that :
• The words “similar property” in clauses (ii), (iii) and (iv) of

Explanation 2 to Section 9(1)(vi) do not require, to constitute
‘royalty’, that there should be any legally protected right and
these words include specialized information and knowledge
• In other words, the absence of copyright or patent or one-time

parting with information does not mean the payment cannot be
Royalty under Explanation 2 to Section 9(1)(vi).
Divisibility of Contracts, Composite Agreements and Royalty
• In many cases contracts between parties are such that a number of

activities are carried both offshore and onsite and are essentially
turnkey or EPC contracts.
• The issues relating to Royalty might be with respect to only one or few
components of the overall contract. The agreements and facts of each
contract are important
• The key takeaway is that if it is a composite, indivisible contract the

entirety of the transaction ought to be taken. If there are divisible,
identifiable parts, it is likely for the Revenue and the Courts thereafter
to call for the contract parts to be split and taxed independently on
their individual merits.
Divisibility of Contracts, Composite Agreements and Royalty
• CIT Vs. Neyveli Lignite Corporation Ltd. (243 ITR 459 Mad HC) :
• The Court held amount paid by assessee to foreign company under
a comprehensive contract for design, manufacture, supply,
erection and commissioning of machinery not involving a transfer
of any licence or patent, invention, model or design could not be
regarded as Royalty under the Act
• CIT Vs. DCM Ltd. 336 ITR 599 :

• Delhi High Court held that payment to UK non-resident for
comprehensive technical know-how on non-exclusive basis and
supply of equipments with a right to sub- license the technology
and know-how subject to the approval of the non-resident is not
Royalty under Explanation 2 to Section 9(1)(vi).
Divisibility of Contracts, Composite Agreements and
Royalty
• DIT Vs. Ericsson A.B (204 Taxman 192 Delhi HC) :
• The supply contract of a non-resident to an Indian company
of a “GSM system” including hardware and software is not
divisible separately so as to tax the software component as
Royalty
• The definition of Royalty in the India-Sweden DTAA (Article
13(3)) is narrower than the Act and has to be considered.
No part of the payment can be classified as Royalty.
• It affirmed the decision of Special Bench in Motorola Inc.
Vs. DCIT (96 TTJ Del(SB) 1)
• Roxair Maximum Reservoir Performance WLL (AAR 977/2010) :

• The contract should be looked at as a whole and not
“looked through” following the Vodafone International
Holdings BV case (345 ITR 1 SC).
Divisibility of Contracts, Composite Agreements & Royalty
• Raytheon Company Vs. DCIT 142 TTJ (Del) 137 :
• In a turnkey project for supply and installation of equipment,

composite contract could be conveniently segregated into
different components (milestones)
• Supply of equipment and software were taxable in the year prior

to relevant year as it was earlier milestone but installation
contract/services milestone profits were taxable in current year
• Ansaldo Energia Spa Vs. IT (2009-TIOL-62-HC-MAD-IT) :
• The Madras HC held that the four contracts which the assessee
entered into with Indian JV company under single-bid system
were to be consolidated and read as single composite contract
and the divisibility into 4 contracts for tax was incorrect!
Amendments made to S.9(1)(vi)
• Important amendments made to Section 9(1)(vi) over time starting with
Finance Act 2001 up to current Finance Act 2012
• Finance Act 2001 amendment
– W.e.f. 1-4-2002, clause (iva) was added to Explanation 2 to read as

follows: “(iva) the use or right to use any industrial, commercial or
scientific equipment but not including the amounts referred to in
section 44BB”
– Use or right to use any equipment is not found in the UN and US MC

and the OECD MC also deleted the same in the early 1990’s.
– However India’s treaties do have this clause present though the India-
US, India-UK and India-Singapore treaties provides exclusion clauses
for Article 8 related transactions.
Finance Act 2010
• In Finance Act 2010, w.e.f 1-6-1976, an Explanation was added which
applied to both Royalties and Fees for Technical Services which read:
“Explanation.—For the removal of doubts, it is hereby declared that for

the purposes of this section, income of a non-resident shall be deemed to
accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-
section (1) and shall be included in the total income of the non-resident,
whether or not,—
(i) the non-resident has a residence or place of business or business

connection in India; or
(ii) the non-resident has rendered services in India.”

Finance Act 2012
• Finance Act 2012, w.e.f 1-6-1976
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
Finance Act 2012
• Finance Act 2012, w.e.f 1-6-1976
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.

Finance Act 2012
• Finance Act 2012, w.e.f 1-6-1976
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 up-linking, amplification, conversion
for down-linking of any signal), cable, optic fibre or by any other similar
technology, whether or not such process is secret;
 These retrospective amendments have been introduced in the Finance

Act 2012 w.e.f 1-6-1976 i.e., the start of the Royalty chapter.
Finance Act 2012
• These amendments came after a number of decisions (we have
seen already!) to nullify their effect
• With these amendments, the definition of Royalty under OECD MC

and Prof.Klaus Vogel’s treatise differs from India’s stance on Royalty
• OECD TAG Report specifically sets down criteria which have been
addressed by Explanation 5
• India is the only country which has reservations against so many of

the updated Model Commentary paragraphs under Article 12
Finance Act 2012
 Responding to the outcry from the industry, the CBDT has issued a
Circular F. No. 500/111 12009-FTD-l (Pt.) dated 29th May 2012:
“The Finance Act 2012 has introduced certain clarificatory amendments in
Section 2 clause (14), Section 2 clause (47), Section 9 and Section 195, of
the Income Tax Act, 1961 (“Act”), with retrospective effect from
01.04.1962 or 01.04.1976, whereby meaning of various terms used in
these sections have been clarified in order to remove any doubt regarding
their interpretations.
2. These amendments have been introduced retrospectively in order to
clarify the legislative intent and state the position of law from the date of
coming into effect of these sections in the Act
…
4. The Board, after due consideration, hereby directs that in case

where assessment proceedings have been completed under section
143(3) of the Act, before the first day of April, 2012, and no notice for
reassessment has been issued prior to that date; then such cases shall
not be reopened under Section 147/148 of the Act on account of the
abovementioned clarificatory amendments introduced by the Finance
Act, 2012. However, assessment or any other order which stand
validated due to the said clarificatory amendments in the Finance Act
2012 would of course be enforced…”
Royalty under DTAA’s
Royalty (Article 12) of Model Conventions
OECD MC US MC UN MC
1. Royalties arising in a 1. Royalties arising in a 1. Royalties arising in a

Contracting State and Contracting State and Contracting State and paid to a
beneficially owned by a beneficially owned by a resident of the other Contracting
resident of the other resident of the other State may be taxed in that Other
Contracting State shall be Contracting State may be State.
taxable only in that other taxed only in that other
State. State. 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 beneficial owner
of the royalties is a resident of
the other Contracting State, the
tax so charged shall not exceed
___ per cent (the percentage is to
be established through bilateral
negotiations) of the gross amount
of the royalties
Royalty (Article 12) of Model Conventions
Source vs. Residence tax rights
• The OECD and US MCs are much the same in substance .
• Both exclude the Source State’s right to tax. Under these models, the
Licensor’s State of Residence alone is entitled to tax Royalties
• On the other hand, the UN MC allows the Source State to impose tax well
while restricting its rate of tax
• In fact, nearly all DTAA’s with developing countries allow some sort of
restricted taxation at source
• It is because of this dichotomy between the Model Conventions on the
source vs. residence taxation that the OECD Model has been held to favour
the developed countries and the UN Model to favour the developing
countries.
Royalty definition under Model Conventions
(Article 12(2) )
OECD MC US MC UN MC
2. The term ‘royalties’ as used 2. The term ‘royalties’ as used 3. The term “royalties” as used
in this Article means payments in this Article means: in this article means payments
of any kind received as a a) payments of any kind of any kind received as a
consideration for the use of, or received as a consideration for consideration for the use of, or
the right to use, any copyright the use of, or the right to use, the right to use, any copyright
of literary, artistic or scientific any copyright of literary, artistic of literary, artistic or scientific
work including cinematograph or scientific or other work work including cinematograph
films, any patent, trade mark, (including cinematograph films), films, or films or tapes used for
design or model, plan, secret any patent, trade mark, design radio or television broadcasting,
formula or process, or for or model, plan, secret formula any patent, trademark, design
information concerning or process, or for information or model, plan, secret formula
industrial, commercial or concerning industrial, or process, or for the use of, or
scientific experience commercial or scientific the right to use, industrial,
experience commercial or scientific
b) gain derived from the equipment or for information
alienation of any property concerning industrial,
described in subparagraph a), to commercial or scientific
the extent that such gain is experience.
contingent on the productivity,
use, or disposition of the
property.
A note on the updated OECD Model Commentary
• The OECD Model Commentary (OECD MC) provides a detailed explanation
of the clauses of the Model Convention. The MC was updated recently in
July 2010
• India has been one of the countries which have expressed a number of
“reservations” over the updates to Article 12 (Royalties).
• India has expressed a reservation on the interpretation relating to
• Satellite and transponder leasing, roaming cell network and
• Spectrum licences
• The right to use licensed computer software
• Mere purchase of a software license and using the purchased
software will not constitute royalty
• The transfer of full ownership of rights
• Exclusive rights in a geographical region, usage consideration etc
Royalty in India’s DTAAs
• India has basically adopted the UN Model Convention wherein it
provides restricted taxation for the source country i.e., India
• The main reason for this being that India is a developing country and
consumes a huge amount of know-how, technical information, designs
& drawings etc. from developed countries as it emerges a world leader.
• It is dealt with in Article 12 of India’s treaties, except in some cases like
the India – UK DTAA, where it is Article 13.
• Most of the Royalty Articles are combined with the Fees for Technical
Services (FTS) and are similar to each other
• Certain exceptions are found in India-Singapore, India-USA and India-UK
treaty relating to additional clauses, definitions/exceptions
Effect of Amendments to S.9(1)(vi)
(Act vs. DTAA)
• Payment for leased line / connectivity:
• In B4U International Holdings Ltd. vs. DCIT (ITA
No.3326/Mum/2006 dated 28th May 2012) it was held that:
• “17. Coming to the argument of learned Departmental
Representative that the amendment to the Finance Act, 2012
changes the position, we find that there is no change in the
DTAA between India and USA. Thus, the amendments have no
affect on our decision”
• Payment for off-the-shelf software

• ADIT vs. Siemens Aktiengesellschaft 142 ITD 614 (Mumbai HC)
• Assessee engaged in the business of sale of equipment supplied
software embedded in the hardware. Software cannot function
independent of the corresponding hardware.
• Equipment along with the embedded software was sold at a
place which is outside India. Did not amount to royalty either
under Income-tax Act or DTAA
(Act vs. DTAA)
• DIT Vs Infrasoft Ltd ITA 1034/2009 dt 22nd Nov 2013 (Delhi HC)
• Clear distinction between royalty paid on transfer of copyright
rights and consideration for transfer of copyrighted articles.
• A non-exclusive and non-transferable licence enabling the use of a
copyrighted product cannot be construed as an authority to enjoy
any or all of the enumerated rights ingrained in Article 12 of DTAA.
• Convergys Customer Management Group Inc Vs ADIT dt 10-05-2013
• As regards the taxability of software license fees, the retrospective
amendment to s. 9(1)(vi) by the Finance Act, 2012 widens the
scope of the term “royalty” but does not impact the provisions of
the DTAA in any manner.
• Consequently, the purchase of software falls within the category of
copyrighted article and not towards acquisition of any copyright in
software and hence the consideration is not assessable as Royalty
(Act vs. DTAA)
• DIT vs. Nokia Networks OY (ITA 512 of 2007 dated 7.9.2012, Delhi HC)
• Ishikawajima-Harima still good law!
• Amendments cannot be read into the Treaty (DTAA)
• Distinction between supply of “copyright” and supply of “copyrighted
article”
• Poompuhar Shipping Corporation Ltd Vs ITO dt 9/10/2013 :
• Foreign ship hired for transporting coal between Indian ports; usage of
ship held as use of equipment. HC held such equipment rental is
taxable as “royalty” even if payer does not have control.
• The retrospective insertion of Explanation 5 to s. 9(1)(vi) is purely
clarificatory!!
• Bottomline: Most judicial forums have held that the retrospective
amendments of Finance Act 2012 made to Royalty definition in Act cannot
override Treaty!
FTS under the Income Tax Act
(Explanation 2 of Section 9(1)(vii))
 Explanation 2:
For the purposes of this clause, "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) but 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".
Evolution of FTS under the Act
(The Ishikawajima-Harima case)
Ishikawajima-Harima Heavy Industries Ltd. Vs DIT [(2007)
288 ITR 408 (SC)]
• The notion of “Territorial Nexus” was expounded by the
SC.
• It ruled that Section 9(1)(vii) envisaged dual condition
which need to be met simultaneously namely:
1. Services had to be rendered in India.
2. And the said services should be utilized in India
• It held that mere “source” of income would not be
sufficient to tax an income.
• The Apex Court held that there should be Direct Link
between the services rendered and India.
(Amendment in Finance Bill 2007)
• In response to the decision of SC in Ishikawajima-Harima

Heavy Industries Ltd. Vs DIT which is as follows
Explanation.—
For the removal of doubts, it is hereby declared that for the purposes
of this section, where income is deemed to accrue or arise in India
under clauses (v), (vi) and (vii) of sub-section (1), such income shall be
included in the total income of the non-resident, whether or not the
non-resident has a residence or place of business or business
connection in India
(Post-2007 Amendment)
• Not surprisingly, there were many conflicting decisions in the wake of
Ishikawajima case and the amendment made thereafter.
– However at least two High Courts held that twin condition of
rendering & utilization still held sway and hence Ishikwajima-Harima
holds good even after 2007 amendment
• Jindal Thermal Power Company Ltd. Vs. DCIT [182 Taxman 252
Karnataka HC] The Karnataka High Court had to decide whether the
technical services carried off-shore were FTS even after the amendment
to Section 9(1)(vii) by Finance Act, 2007.
• Clifford Chance Vs. DCIT [176 Taxmann 458 Mumbai HC] In this case,
the Bombay HC discussed the SC decision in the case of Ishikawajima-
Harima case and the amendment passed in the Finance Act, 2007.
• Both decisions were in favour of the assesse averring that, even after the
2007 amendment, only income from services rendered and utilized in
India is taxable in India.
• A new revised Amendment in Finance Bill, 2010 was passed.
The Memorandum to finance Bill elaborately explained the
intention of the legislature which is as follows:
– The ‘Source Rule’ means the situs of rendering services is
irrelevant
– The interpretation in the case of Ishikawajima was NOT
IN accordance with law as it expounded that there should
be ‘Territorial Nexus’ to classify a payment as FTS.
– To clarify the position, an amendment was inserted
below Section 9 vide the Finance Act, 2007.
– However, even after the amendment, the Karnataka HC
in the case of Jindal Thermal Power Company Ltd. has
held that the amendment does not do away the
requirement of rendering services in India
Evolution of FTS
• The new retrospective Explanation which substituted the
earlier explanation is as follows:
Explanation.—For the removal of doubts, it is hereby declared that for the

purposes of this section, income of a non-resident shall be deemed to
accrue or arise in India under clause (v) or clause (vi) or clause (vii) of
sub-section (1) and shall be included in the total income of the non-
resident, whether or not,—
(i) the non-resident has a residence or place of business or business
connection in India; or
(ii) the non-resident has rendered services in India.
FTS In India’s DTAAs
DTAAs having FTS with DTAAs having FTS/FIS DTAAs having NO FTS
BROAD Definition with NARROW definition clause
• Similar to IT Act. i.e., • It will have the ‘make • The payments will be
managerial, technical or available’ clause. treated as ‘Business
consultancy services • In some cases, Profits’ (or under Misc.
would have been managerial services are Income Article)
included under FTS. excluded • DTAAs with Mauritius,
• Typically does not have • Therefore, makes the UAE, Brazil, Philippines,
the ‘make available scope of FTS very Indonesia, Egypt,
clause’ restricted. Thailand, Srilanka, etc.
• DTAAs with US, UK, • Also, Malaysia and
Switzerland, Singapore, Israel DTAAs etc. are
Australia, Netherlands, few DTAA’s which have
Finland etc. embedded FTS in to
Royalty Clause.
DTAAs having FTS with broad
Definition
 Similar to the IT Act definition

 “The term “fees for technical services” means
payment of any kind in consideration for the
rendering of any managerial, technical or
consultancy services including the provision
of services by technical or other personnel
but does not include payments for services
mentioned in Article 14 and Article 15 of this
Agreement.”
DTAA’s having FTS/FIS with narrow definition
(Article 12(4) - the “make available” clause)
 “Article 12(4): For the purposes of this Article, ‘Fees for

Included Services’ means payments of any kind to any person
in consideration for the rendering of any technical or
consultancy services (including through the provision of
services of 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 the payments
described under paragraph 3 is received.
b) make available of technical knowledge, experience, skill,

know-how or process or consist of the development and
transfer of technical plan and design. “
Analysis of “make available” clause - India-USA MOU
(Article 12(4))
Article 12(4)(b) – the ‘make available’ clause
• The India – USA MoU concisely defines how to interpret
the much talked about and most important ‘make
available’ clause.
• It narrows down the definition provided in Article12(4)(a)
because it excludes the service which does not make
available the technology to the person who acquires it.
• “made available” means the person who is acquiring the
service should be able to use the service/ apply the
technology.
• Provision of technical input or using a technology
embodied product will not be considered as ‘make
available’.
The “make available” clause
(Article 12(4) & MOU of India-USA DTAA)
• In naive terms, the idea of not making available
vs. make available can be equated with giving
man a fish vs. teaching him to fish! Let us now
proceed to the India-USA MoU’s examples:
Example 3: Facts:
A U.S. wallboard manufacturer sends technicians
to an Indian builder to show its engineers the
process of manufacturing strong wall board. Are
the payments to the U.S. manufacturer
considered to be payments for included services?
Analysis
The services are of technical nature and it makes available to
the Indian company technical knowledge, skill and process.
Example 4:
Facts:
The Indian company hires and provides raw materials to the
U.S. manufacturer to produce strong wall boards in its plant
using advanced technology. Are the fees paid for these
services can be considered as FIS?
Analysis: No. Although the services are clearly technical in
nature it did make the technology available to the Indian
company to produce the wallboard on its own.
Example 5:Facts: An Indian retail outlet engages an U.S. firm to
modify its inventory control software to suit its newly expanded
business. Are these payments constitute FIS?
Analysis: Yes. The U.S. firm clearly performs a technical service and
it transfers the technical plan (i.e., computer program) also.
Example 6: Facts: An Indian oil manufacturing company engages an

U.S. Company modify the formula so as to produce cholesterol free
oil and also to train its employees for applying the formula.
Whether the payments made for the above service constitutes FIS?
Analysis: Yes. It is a technical service and technical knowledge is
made available to the Indian company.
Example 7: Facts: The Indian cholesterol free
vegetable oil manufacturer engages an U.S. firm
to do a computer stimulation of the world
market for such oil and advice it on marketing
strategies.
Analysis: No. Although the U.S. company
performs an substantial amount of technical
service it did not transfer the skill, technical
knowledge or know-how but only the
commercial information.
The Indian Judiciary on the ‘make available’
clause
Raymond Ltd. Vs. DCIT [(2003) 86 ITD 791 (Mum)]
• Commission payments were made to lead managers of a

GDR issue and the Mumbai ITAT in its detailed order held
that though the services are managerial and consultancy in
nature cannot be held as FTS under India –UK DTAA.
• The term ‘managerial services’ was deliberately excluded
from the ambit of technical services in the later DTAA
(1993).
• No technical knowledge was made available to the
assessee.
• MoU of India-USA can be used to understand the scope of
FIS.
clause
Diamond Services Intl. Ltd. Vs UOI (2007) 304 UTR 201 Bom.
HC)
• Payments made to Gemological Institute for grading and
certification of diamonds.
• Held that the payments cannot be treated as neither FIS
(nor Royalty). because it does impart any technical
knowledge, experience, skill, etc.
Mahindra & Mahindra Vs. DCIT (2009) 313 ITR 263 (Mum SB)
• The Mumbai Special Bench held that the management
commission cannot be considered as FTS under India- UK
DTAA since it did not make available the technical
knowledge.
clause
CESC Ltd Vs. DCIT (2003) 80 TTJ 806 (Kol)
• An UK Company was engaged as a technical advisor to the Indian
financial institution who were to hold equity in the Indian
company.
• Held that the UK company did not make available any technology
as its role was limited to review and giving opinion rather that
providing design and direct the project.
Similar type of judgements had been passed in

• Anapharm Inc. (2008) 305 ITR 394 (AAR)
• Intertek Testing Services Pvt. Ltd Vs (2008) 307 ITR 418 (AAR)
• NQA Quality Systems Ltd. Vs. DCIT (2004) 92 TTJ 946 (Del)
clause
DIT Vs Guy Carpenter & Co. Ltd. (2012) 346 ITR 504 (Del. HC)
• Several Indian insurance company made commission payments to
the UK based reinsurance company for arranging rearranging
contracts.
• Held that these payments did not fit in to ‘make available’ under
Article 13(4)(c).
CIT v. De Beers India Minerals (P) Ltd. [2012] 346 ITR 467 (Kar HC).
• Payments made to carry out geographical survey i.e., conduct air
borne survey for providing high quality, high resolution,
geophysical data suitable for kimberlite targets was not FTS.
• The payments will be considered as FTS only if it satisfies the dual
condition i.e., rendering technical service and making that technical
available to the payee.
The Indian Judiciary on ‘make available’ clause
• Let us now look in to the decisions which are against the assesse:
Perfetti Van Melle Holding B.V. (204 Taxman 166 AAR)

• Held that the support services relating heads of accounting,
budgeting and reporting, forex management, global credit facility,
etc were in nature of technical services which were made available
to the service recipient.
ITO Vs. Sinar Mas Pulp And Paper (India) (85 TTJ Delhi 794)
• Payment for feasibility report under India-Singapore DTAA was FTS.
Maruti Suzuki Vs. ADIT (130 TTJ Del. 66)

• Impact testing fees and fees for testing reports under India-France
DTAA was FTS and taxable in India.
Services which are not FTS
(Article 12(5))
“Article 12(5): Notwithstanding paragraph 4, “fees for included

services” does not include amounts paid :
(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 payments ; or
(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 15 (Independent Personal
Services).”
(Article 12(5))
• And again, India-USA MoU provides excellent, self-
explanatory examples to bring clarity to the clause.
Example 8 Facts: An Indian company purchases the

computers from an U.S. Company and the U.S. company
agrees to provide installation service such as setting up of the
computers and install operating system in order to make the
employees use computer and also agrees to provide updates
for ten consecutive years as a part of the agreement.
Analysis: Installation services cannot be considered as FIS
because installing software is inextricably related to the sale
of the computers without which computer cannot be used.
However, provision for updates will amount to FIS because
even without the updates the computers can perform.
(Article 12(5))
Example 9 Facts: The U.S. Company agrees to do initial installation
services as well as periodical services for the first two years to the
Indian company on purchase of X-ray machines. Also, the U.S.
Company agrees to do life-time service to the X-ray machine and
also advising hospital new developments in the field for a separate
consideration.
Analysis: Initial installation services including the periodical
services are not FIS but the life-time service and technical advice
will be considered as FIS.
Example 10 Facts: An Indian helicopter manufacturer sends its

engineers to MIT for two years to study aeronautical engineering.
Analysis: Fee paid for teaching by an educational institution is not
considered as an FIS under Article 12(5)(c).
(Article 12(5))
Example 11 Facts: An Indian university enters in to an agreement with
MIT to send its professor of aeronautical engineering as a visiting
faculty to the Indian institute.
Analysis: No. The payments made for teaching in an educational
institution as per Article 12(5)(c).
Example 12 Facts: An Indian hires an American company to design the

necessary wiring system, adapt standard software and provide
instruction for installation of computerised system in his home to
control lightning, heating and air-conditioning, a stereo sound
system and a burglar and fire alarm system.
Analysis: Under normal conditions it would have an FIS. However,
because the services are for personal use of the individual making
payments, it is not taxable under Article 12(5)(d). i.e., Independent
Personal Services.
FTS vs. PE
(Article 12(6))
 Article 12(6) The provisions of paragraphs 1 and 2 shall

not apply if the beneficial owner of the royalties or fees
for included services, being a resident of a Contracting
State, carries on business in the other Contracting State,
in which the royalties or fees for included 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
royalties or fees for included services are attributable to
such permanent establishment or fixed base. In such
case the provisions of Article 7 (Business Profits) or
Article 15 (Independent Personal Services), as the case
may be shall apply.
FTS case laws
S.No TOPIC
1 Payments made for Commission Agents
2 Payments made for technical reports
3 Payments for use of ‘Standard Facility’
4 Payments for Satellite up linking charges, use of internet bandwidth, etc.
5 Payments for hosting websites abroad, subscribing to online portals, etc.
6 Payments made accreditation, certification, etc.
7 Payments made for mineral oil exploration and related activities
8 Payments towards reimbursement of expenses
9 Payments made for manpower supply outside India
10 Human Intervention Test
11 Re-opening u/s 147 based on FTS
12 Exception clause in Section 9(1)(vii) of the Act
Payments made for Commission Agents (advertising,
promotion, publicity, management, referral, underwriting, etc.)
• Typically most of the payments paid to the foreign agents are for
advertising, promotion and publicity activities of Indian companies
abroad. The other type of payments are for management, selling,
underwriting commission to financial entities abroad and
payments made to foreign reinsurance brokers.
• Sheraton International Vs. DDIT (2007 107 ITD 120 Del.) In this
case, the ITC Hotels had made commission payments to the
assessee (foreign agent) for making room reservations from
abroad. The ITAT held that the assessee did not make available the
technical knowledge to the Indian hotel chains.
• Later the decision of ITAT was upheld by the Delhi High Court in DIT
Vs. Sheraton International Inc. (313 ITR 267)
• Raymond International Vs. DCIT (2003 86 ITD 791 (Mum)) – In this case,
the Mumbai ITAT elaborately discussed the concept of ‘make available’
and held that payments made to lead managers of a GDR issue cannot be
called as FTS under make available clause of India-UK DTAA.
• Mahindra & Mahindra Ltd. Vs. DCIT (122 TTJ 577 (Mum. SB)) – Indian
company paid management, selling and underwriting commission to the
UK non-resident company for bringing out the FCCB issue. The ITAT held
that though the services can be classified as technical service but did not
make available the technical knowledge and hence, cannot be termed as
FTS.
• CEAT International SA Vs. CIT (237 ITR 859) – The Bombay HC has held
that the assessee did not do technical service u/s 9(1)(vii) of the Act by
entering in to non-compete agreement with the Indian company.
• Cushman & Wakefield P. Ltd. In re (305 ITR 208) – referral fee received
by the Singapore company for referring potential customers to the Indian
company is not FTS as it did not make available the technical knowledge
to the Indian company.
• Mckinsey A Co. Inc. (Philippines) Vs ACIT 248 ITR 227 (Mum) – In this
case again, the Mumbai ITAT had held that payments are not FTS since
there were no material evidence to prove that the technology was made
available to the service recipient.
• Finally, when it comes to FTS and ‘make available’ we turn to CIT Vs. Guy
Carpenter [(2012) 346 ITR 504 (Del.HC)] where the HC have held that the
commission paid by the Indian insurance companies to the foreign
reinsurance companies for arranging reinsurance contracts is not FTS asit
did not make available the technology to the service recipient.
Payments made for technical reports (i.e., test reports, survey
reports, data processing reports, etc.)
• The second most important aspect of FTS is whether the payments made
for technical reports, whether surveys or analysis or detailed scientific or
testing reports, constitutes FTS or not? Let us analyze this proposition.
• CIT Vs De Beers India Minerals P. Ltd. (346 ITR 467) – The Karnataka HC
has held that the geophysical airborne conducted and the output
provided to the service recipient by the Netherland Co. did not amount to
FTS as the Netherland Co. did not make available the technology to the
assessee.
• ACIT Vs Paradigm Geophysical Pty. Ltd (122 ITD 155) – In this case, the
Australian Co. processed the seismic data collected by the Reliance India
Ltd., Australia and provided output to RIL. The Delhi ITAT has held that the
above service amounts to FTS under Section 9(1)(vii) of the IT Act.
However, due to the presence of ‘make available’ clause in the DTAA, the
payments cannot be treated as FTS.
• In Anapharm Inc., In re (305 ITR 394 ARR) – A Canadian company

tested efficacy of the drugs developed by the Indian Company
using sophisticated bio-analytical processes and provided final
output i.e., testing result to the Indian company. In a very clear
and well laid out decision, the AAR held that the payments made in
this regard are not FTS since the Canadian company did not make
available the technology to the assessee.
• Intertek Testing Services P. Ltd., In re (307 ITR 418 AAR) – another

oft-quoted decision relating to ‘make available’ clause, the AAR
held that inspection charges paid to foreign associate entities
which carried out inspection on behalf of the applicant were not in
the nature of fees for technical services.
• It is worthwhile to note that most of the services mentioned in the

abovementioned case laws were technical services indeed and will
fall under FTS u/s 9(1)(vii) of the Act but are saved by the ‘make
available’ clause.
• It is also pertinent to note that not all the DTAAs have ‘make
available’ clause and in those circumstances, these will be classified
as FTS. Let us see some case laws in the light of above proposition.
• There are also cases where only the IT Act was in play and not
DTAA and the reports prepared by non-residents are held to be
taxable as FTS. They are
• Cochin refineries Ltd. Vs CIT (222 ITR 354), Kerala and
• Steffen, Robertson & Kirsten Consulting Engineers & Scientists In re.
(AAR 359 of 1997)
• Maruti Udyog Vs. ADIT (130 TTJ Del. 66) - In this case, the Indian assessee
entered into an agreement with a French agreement (UTAC) and had
impact testing fees and fees for testing reports. The Delhi ITAT held:
– The impact tests performed were to be performed so as to pass the
quality tests. Therefore, they are in the nature of technical services
which enhanced the product development capacity of the Indian
Company.
 And, as reports were used by the Indian Company for modification of
its products, it would amount of rendering of technical services.
 that India-France DTAA is much wider in scope when compared to
India-USA & India-UK DTAA . Hence, the amounts paid would be in the
nature of fees for technical or consultancy services.
 Similar decision once again rendered by same Delhi ITAT in ITO Vs. Sinar
Mas Pulp And Paper (India) Ltd. (85 TTJ Delhi 794) where it held
provision of feasibility report is FTS.
Payments for use of ‘Standard Facility’
• Skycell Communications Ltd. Vs. DCIT (251 ITR 53) - The Madras
HC held that payments made for providing a cellular mobile phone
services was not taxable as FTS because it was a fee for the use of a
‘standard facility’ provided to all those willing to pay and mere
collection of such fee for use of standard facility cannot be termed
as FTS.
• CIT Vs Bharti Cellular Ltd. (319 ITR 139) - where the Delhi HC
followed the decision of Madras HC in the case of Skycell
communications Ltd. (Supra) and has held that the payment of
internet charges to MTNL/other telecommunication companies
does not come under fees for technical services.
• Similar view was followed in Pacific Internet (India) P. Ltd. Vs ITO

(125 TTJ 966) by the Mumbai ITAT.
Payments for Satellite up linking charges, use of internet
bandwidth, etc.
• The moot point with regard to the proposition is whether payments made
by the Indian telecast operators (TV channels) to the foreign satellite
operators to use the satellite located in the Space can be treated as FTS or
not? (Of course, the other important question is whether this amounts to
Royalty or not? As that aspect was already discussed we will concentrate
only of FTS for now.)
• In Expediators International (India) Pvt. Ltd. Vs. ACIT (2 ITR(Trib.) 153) –

the Delhi ITAT held that VSAT up linking is not in the nature of FTS as FTS
as well as the mere fact that the service provider has installed
sophisticated equipment which the tax payer cane use does not by itself
make it FTS.
• In CIT Vs. Estel Communications (P) Ltd. (318 ITR 185) – the Delhi High
Court held that payment for use of internet bandwidth will not amount
to FTS and there was no privity of contract between customers of
assessee and the US company.
bandwidth, etc.
• There is a never-ending debate as to how contracts which involve supply

of designs, drawings and material with related services thereof have to be
interpreted.
– Should the contracts be split-up or are they indivisible?
– Is the preponderance of the activity that of a sale and are the services just
incidental hence not taxable?
• In Abishek Developers Vs ITO (110 TTJ (Bang.) 698) – The Bangalore ITAT
held that a Singapore Company which had no PE In India and which
developed design and drawings for its Indian customers wholly outside
India i.e., Singapore and the transferred the same to clients in Singapore
was in the nature of sale and not FTS.
• In SNC-Lavalin International Inc. Vs. DDIT (118 TTJ Del. 802) – It was held
in this case that the payments made for furnishing project report covering
detailed design for rehabilitation of the existing carriage ways as well as
for designing the new carriage ways are FTS as per India-Canada DTAA.
bandwidth, etc.
• Hindustan Aeronautics Ltd Vs ITO (121 TTJ 242) – The Indian assessee
wanted engine and its prototype for its 3 aircrafts. The Russian Company
supplied the same but restricted the assessee from using prototypes for
any other use. The Delhi ITAT had held that the payments made was for
outright purchase of engines and prototypes were only used for testing
purposes and cannot be treated as FTS as per 9(1)(vii) and the India-
Russia DTAA.
• CIT Vs Neyveli Lignite Corporation (243 ITR 459 (Madras HC)) – The
Madras HC has held that the payments made for manufacturing, design,
supply erection and commissioning to the foreign agents are not FTS
because all of them are incidental to the sale of machine itself to the
Indian Company.
• CIT Vs Sundwiger EMFG (262 ITR 110) - The payments made to a

specialist foreign employee sent on purchase of a capital equipment
cannot be considered as FTS as it is a part of sale.
bandwidth, etc.
• AEG Aktiengesllschaft Vs CIT (267 ITR 209) – payments made for

engineering services rendered as enumerated in the Agreement
between Indian company and German company could be
considered as FTS u/s 9(1)(vii).
– The court held that payments made for design and drawings cannot,
in all circumstances, be treated as cost of plant and machinery.
• ITO Vs Prasad Productions (125 ITD 263) – Indian company

entered in to an agreement with the foreign non-resident company
for purchase, installation and maintenance of IMAX theaters as
well as train four projectionists. The Chennai Special Bench has
held that these were incidental to the sale of the product and
cannot be classified as FTS.
– This decision is also important for another reason that it had held that
the application u/s195(2) is not mandatory for the assessee.
bandwidth, etc.
• GMP International company GmbH, In Re (AAR NO. 837 of 2009)

– The applicant was a German company which was selected for
supplying the architectural design and diagram for the complex
TN legislative assembly. The sub-contractor of the German
company followed the diagram and designs of German company. It
was held that the payment constitutes FTS.
• Airports Authority of India, In re (304 ITR 216) – In this case, the

USA company supplied hardware, software, software
documentation, installation, testing and training to the Indian
company. The AAR splitted-up the composite agreement and held
as follows: a) supply of hardware amounts to Business Profits, b)
supply of software amounts to Royalty and c) installation, testing
and training will amount to FTS. Similar type was also rendered in
International Tire Engineering Resources LLC, In re (319 ITR 228
AAR)
Payments for hosting websites abroad, subscribing to online
portals, etc.
• The moot point with regard to this proposition is whether the

payments made for website hosting and whether
accessing/subscribing to the foreign journals and databases is FTS
or not?
• Millennium Infocom Technologies Ltd. Vs ACIT (2008 117 ITD 114)

– It was held that the payments made for website hosting is not
FTS by following the case of Skycell(supra) where it was held that
installation of sophisticated device for allowing customers to avail
the benefits of the device will not amount to FTS.
• TIS Two Administration (Sing.) P Ltd Vs DDIT (ITA NO.

8464/Mum/04) – It was held that subscription fees received for
providing information regarding forex, commodity and hence, not
taxable under India-Singapore DTAA.
Payments for hosting websites abroad, subscribing to online
portals, etc.
• Cargo Community Network P. Ltd., In re (AAR No.688 of

2006) – The AAR took a view that payments made for
subscribing to a journal will amount to FTS as it amounts to
training subscribers and acts as a helpdesk in India.
• CIT Vs Samsung Electronics (320 ITR 209) – It was held that

the payment for use of online database amounts to Royalty
and the same has been followed by CIT Vs Wipro Ltd. (203
Taxman 621).
Payments made accreditation, certification, etc.
• Value of the Indian company goes up in the minds of general public

if it has been accredited and certified by the foreign company. The
question here is, whether the payments made to these
accreditation providing companies can be termed as FTS or not?
• NQA Quality Systems Pvt. Ltd Vs DCIT (92 TTJ 946) – It has been
held that the accreditation company did not make available the
technical knowledge/know-how to the Indian company and hence,
cannot be taxable.
• Joint Accreditation System of Australia and Newzealand, In re

(AAR No. 838 of 2009) – The applicant merely evaluates and grants
accreditation and does not transfer any technical knowledge to the
service recipient. Hence, cannot be taxable as FTS.
Payments made for mineral oil exploration and related activities
• In ONGC Vs ACIT (12 SOT 584) – In this case, the non-resident company
trained the Indian assessee on ‘ceased hole and production log
evaluation’ and ‘ceased hole and production log analysis’. The Delhi ITAT
has held that the consideration received was chargeable u/s 44BB (not
S.44D) instead of FTS following the CBDT circular No.1862.
• In CIT Vs ONGC (299 ITR 438) – HC held that non-resident assessee

supplied supervisory staff and experts in operation and management of
drilling rigs and hence taxable under Section 44D r.w.s 115A of the Act.
• DIT Vs Rio Tinto Technical Services (278 ITR 599) – Delhi HC has held that
the payment made for conducting feasibility reports and evaluating coal
and iron ore deposits was FTS and S.44D is applicable as the income
earned by assessee is taxable as FTS.
Payments made for mineral oil exploration and related activities
• In ABC, In re (234 ITR 371 AAR) – UK company rendered consultancy to

Indian oil company under various agreements wherein it gave technical
services to ear marked areas to enable the Indian company to perform the
job by itself. The payment was considered as FTS and taxable under the
provision 44D.
• Bourbon Offshore Asia P. Ltd., In re (AAR 937 of 2010)- It was held that
receipts on account of provision of supply of vessels on hire cannot have
the character of FTS u/s 9(1)(vii) of the Act and tax is to be with held under
Section 44BB.
Payments towards reimbursement of expenses
• The proposition of whether reimbursement of expenses constitutes FTS

or not? - is entirely dependent on the facts and circumstances of the case.
• In IDS Software (India) Pvt. Ltd Vs ITO (122 TTJ 410) - it was held that the
reimbursement of salary to the employee seconded by the USA company
cannot be brought under FTS as the employee is in the control of USA
company.
• In AT&S India P. Ltd., In re (AAR NO. 670 of 2005) & Cholamandalam
General Insurance Co. IN Re (309 ITR 356 AAR)– The AAR in this case
basically followed the principle laid down in the IDS Software (Supra)
case.
• However, Verizon Data Services Pvt. Ltd In re (AAR 865 of 2010) – It was
held that since the seconded employee performed managerial services,
the reimbursement is taxable u/s 9(1)(vii) of the Act and Article 12 of
India-USA DTAA
Payments made for manpower supply outside India
• In ACIT Vs IIC Systems P. Ltd. (127 TTJ 435)- Assessee company

entered in to an agreement with IBM,USA for supply of manpower.
ITAT Hyd. held that neither the assessee nor its parent company
were engaged in software programming, software development
and that the developed work by the manpower supplied did not
belong to the assessee or its parent company. Hence, not FIS under
India-USA DTAA.
• In Tekniskil (Sendirian) Berhard Vs CIT (222 ITR 551 AAR) – another
case of supplying manpower held in favour of assessee, held as not
FTS
• In Steel Authority of India Ltd Vs ITO (120 TTJ 297)- Held by Delhi
ITAT that the payments made for training of employees by foreign
company amounts ‘making available’ technical knowledge, know-
how and skills to the assessee company. Hence, taxable as FTS.
Human Intervention Test
• It has been first held by the Madras HC in the case of Skycell

Communications (Supra) that in order to classify a service as
technical service under 9(1)(vii) of the Act, presence of human
intervention is mandatory otherwise it cannot be taxable as FTS u/s
9 of the Act.
• Recently, the Mumbai ITAT in the case of Siemens Ltd Vs CIT (ITA
No. 4356 of 2010) has elaborated the term ‘human intervention’
and held that mere presence of human intervention is not enough
to classify a service as FTS but there should be substantial
involvement of human in that particular service.
• However, the Agra ITAT in a very recent Judgement of Metro &
Metro Vs ACIT (ITA No. 393 of 2012) had held that the liberal
interpretation provided in the case of Siemens (Supra) is not
correct.
Re-opening u/s 147 based on FTS
• Artech Infosystems Pvt. Ltd. Vs CIT (206 Taxman 432) – In this

case, the department re-opened the case on the basis that it
felt the payments are for FTS and during the assessment
proceedings it did not hold so.
The Delhi HC held that this amounted to mere change of
opinion and quashed the order u/s147 of the Act by relying on
CIT VS Kelvinator (320 ITR 723 SC)
Exception clause in Section 9(1)(vii) of the Act
• We see that in Section 9(1)(vii)(b) of the Act, there is an exception clause

which states that an income by way of FTS is payable by a resident for the
purposes of earning income outside India then it will not be treated as FTS
deemed to accrue or arise in India.
Section 9(1)(vii) income by way of fees for technical services payable

by—
(a) the Government ; or
(b) a person who is a resident, except where the fees are
payable in respect of services utilised in a business or profession carried
on by such person outside India or for the purposes of making earning
any income from any source outside India ;
• The exception clause has been subjected to lot of debate and

contrasting decisions has been rendered by Tribunals and
HCs.
• CIT Vs. Aktiengesellschaft Kuhnle Kopp & Kausch
W.Germany by BHEL (262 ITR 513 Madras HC)
– where it was held that the exports of goods represented a source
outside India.
– The High Court in this case was concerned with Section 9(1)(vi) of the
Act relating to payment of royalty by a person resident in India to a
non-resident.
– Though the said decision was rendered in the context of royalty yet
the exception provided from taxability of royalty are the same as in
the case of FTS.
• Lufthansa Cargo India P. Ltd. Vs DCIT (92 TTJ (Del) 837) –

payments made for repair of aircrafts which are used only for
international routes only will fall under this exception clause.
• Titan Industries Ltd Vs ITO (11 SOT 206) – charges incurred
for registering the IP rights in Singapore by the associate
company (which is located in Singapore) of Indian company
can avail this exception clause.
• The Delhi HC in the case of CIT Vs Havells India Ltd. (73 DTR
57 (Delhi High Court)) dismissed the applicability of the
exception clause under Section 9(1)(vii)(b) made from export
sales
– Disagreed with Madras HC decision and held that the export sales is
NOT a source of income outside India and that the payments are
taxable as FTS u/s 9(1)(vii) of the Act.
Part VII. TDS provisions
TDS provisions
• Failure to deduct tax
– Section 40(a)(i)
– Section 201(1) and 201(1A)
– Section 163
• Machinery provision for TDS on payments to
non-residents (i.e., intl. taxation)
– Section 195
S.40(a)(i)
40. Notwithstanding anything to the contrary in Sections 30 to 38, the following

amounts shall not be deducted in computing the income chargeable under the
head "Profits and gains of business or profession",—
(a) in the case of any assessee—
(i) any interest (not being interest on a loan issued for public
subscription before the 1st day of April, 1938), royalty, fees for
technical services or other sum chargeable under this Act, which is
payable,—
(A) outside India; or
(B) in India to a non-resident, not being a company or to a
foreign company,
on which tax is deductible at source under Chapter XVII-B and such tax has not
been deducted or, after deduction, has not been paid during the previous year,
or in the subsequent year before the expiry of the time prescribed under sub-
section (1) of section 200:
S.40(a)(i)
• Most payments today made without TDS are disallowed u/s
40(a)(i)
– HUGE amount of demand and litigation today is centered
around this single section!
• It is a harsh provision which should be read down
– Entire expenditure is disallowed; not a portion
– Applies even if recipient has shown the income and paid
taxes on it
• Madras High Court held its twin sister S.40(a)(ia) to be
constitutionally valid in Tube Investments of India Ltd [325
ITR 610]
• Taxpayer looking at 30% disallowance at time of assessment
– Better to go with 10-15% TDS and apply for NIL
withholding (u/s 195(2)) !
Proviso to S.40(a)(i)
Provided that where in respect of any such sum, tax has been deducted in any
subsequent year or, has been deducted in the previous year but paid in any
subsequent year after the expiry of the time prescribed under sub-section (1)
of section 200, such sum shall be allowed as a deduction in computing the income
of the previous year in which such tax has been paid.
Explanation.—For the purposes of this sub-clause,—
(A) "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of
sub-section (1) of section 9;
(B) "fees for technical services" shall have the same meaning as
in Explanation 2 to clause (vii) of sub-section (1) of section 9;
Proviso S.40(a)(i)
• Proviso to S.40(a)(i) allows payment after 31st March before IT
return due date
– Similar proviso in S.40(a)(ia) held to be retrospectively
applicable in CIT vs. Virgin Creations (Calcutta HC,
ITANo.302 of 2011 dated 23-11-2011)
• What if the payee/recipient had offered inome & paid taxes ?
– S.40(a)(ia) has been amended by addition of new Proviso
which finally tracks S.201(1) status i.e., whether the
asessee is an assessee-in-default
– This should also apply to S.40(a)(i) and be held
retrospective in effect!
S.201 – “Assessee in default”
• S.201(1) – Failure to deduct or pay
– Finance Act 2012 w.e.f 1-7-2012 allows holding of assessee
not in default as long as there is prescribed proof of
recipient offering & paying tax on the amount paid without
withholding
• Follows from Hindustan Coca-Cola Beverages (P.) Ltd. v. Joint
CIT [2004] 90 ITD 720 (SC)
“We have also carefully examined the Circular No. 275, dated 29-
1-1997, which was relied on by the assessee and appearing at
page No. 1 of the compilation and we find that through this
circular it has been clarified by the Board that no demand
visualized under section 201(1) of the Act should be enforced
after the tax depositor has satisfied the official in-charge of the
TDS that tax due had been paid by the deductee-assessee”
Non-deduction of TDS vs.
RetrospectiveAmendments
 Courts have held that such payments (payments affected
by retrospective amendment) being already paid cannot
be made taxable by virtue of subsequent amendment
carried out by Finance Act, 2010.
Hence, disallowance u/s 40(a)(i) r.w.s Section 9
cannot be made by virtue of retrospective
amendments.
 The above view was upheld by the following judgements:
 Sterling Abrasives Ltd. Vs ACIT (140 TTJ 68 Ahd.)
 Channel Guide India Ltd Vs ACIT (139 ITD 49)
The “paid” vs. “payable” controversy
• Controversially, in Merilyn Shipping & Transport vs. ACIT (136 ITD
23 Vizag-SB) it was held that u/s. 40(a)(ia) TDS Disallowance
applies only to amounts “payable” as at 31st March and not to
amounts already “paid” during the year
– Upheld by CIT vs. Vector Shipping (P) Ltd. (Allahabad HC);
struck down by CIT vs. Sikandhar N.Tunvar (Gujarat HC) and
CIT vs. Md. Jakir Hossain Mondal (Calcutta HC)
• In the case of Metro& Metro vs. ACIT (ITA No.393/Agra/2012) -
– It has held that the total disallowance u/s 40(a)(i) can be made
irrespective of whether the amount has been already paid or
not.
– Decisions in the case of Merilyn Shippings (supra) will not hold
good because those decisions has been rendered in the context
of S. 40(a)(ia).
Controversy on tax withholding certificate
(u/s 195(2) )
• U/s.195(2), where the payer considers that the whole of such
sum so payable to a non-resident would not be income
chargeable of the recipient, he can make an application to
the Assessing Officer to determine the appropriate
proportion of such sum chargeable to tax, and thereupon
shall deduct tax u/s.195(1) only on that proportion of the
sum chargeable to tax.
• Similarly, sections 195(3) and 197 provide for the payee
making an application to the Assessing Officer for issue of a
certificate that income-tax may be deducted at lower rates of
tax or not deducted on payment to be received by him,
where such lower rate or non-deduction is justified.
Controversy on tax withholding certificate
(u/s 195(2) )
• The issue is where payment to nonresident does not comprise
any income chargeable to tax in India at all whether the payer
has necessarily to apply to tax authorities for certificate
u/s.195(2) or whether the payment can be made without any
TDS, and without obtaining any such certificate u/s.195(2) or
u/s.195(3) or u/s.197?
• Controversial decision of CIT v. Samsung Electronics Co. Ltd.
(320 ITR 209) holding S.195(2) certificate was mandatory
– Reliance was placed on (wrong!) interpretation of the
Supreme Court in the case of Transmission Corporation of
A.P. Ltd. v. CIT, 239 ITR 587.
• Controversy set to rest by Apex Court in GE India Technology
Centre (P) Ltd. vs CIT (327 ITR 456) (SC).
– Samsung verdict set aside. Principle explained that when
no tax is payable in India there is no necessity for TDS
Part VIII. Transfer Pricing
What is Transfer Pricing?
• Global trade consists of international transfers of goods and services,
capital and intangibles within an multinational enterprise (MNE)
group. Such transfers are called “intra-group transactions”
• The structure of transactions within an MNE group can be
determined by a combination of the market and group driven forces
which can differ from the open market conditions operating between
independent entities.
• In such situations, its important to establish appropriate price, called
“transfer price” for intra-group transfers of goods and services
• “Transfer pricing” is the general term for the pricing of cross-
border, intra-firm transactions between related parties.
• Transfer pricing therefore refers to the setting of prices for
transactions between associated enterprises involving the transfer
of property or services.
Rationale behind Transfer Pricing
• When unrelated entities deal with each other,
the price of transactions for services or goods
are determined by market forces
• When related entities of a group deal with
each other the prices may not be affected by
market forces in the same way
• Hence it is important to arrive at the
appropriate “transfer price” for the intra-
group transactions between related parties.
Crux of Transfer pricing
The crux of TP is that the transaction between

related parties should be at the same price
which would have been established if the
transaction had happened between two
unrelated parties in the open market (i.e., the
Arm’s Length Price)
Basic TP Glossary
• “Associated Enterprises” (AE) – Also called “related
parties” wherein there is direct or indirect
relationship via management, control or capital
between them
• “Controlled” transactions - Transactions between
related parties
• “Uncontrolled” transactions – Transactions between
parties that are not associated i.e., independent
parties
• “Arm’s Length Price” (ALP) – Price of the
uncontrolled transactions i.e., price in the open
market
A TP Example
Watch mfg. company • Country B tax authorities
In Country A want Transfer Price set at
$1400 so that $100 profit
is brought to tax in
Mfg. Cost in Transfer country B
country A = $1400 price
$1500 • This approach is a
problem for Country A
Subsidiary which is already paying
tax on $100 profit!
company in
Distribution
country B cost $100
Retail price
$1600
Thumb Rule of Transfer Pricing
• Tax authority (of any country!) will seek the answer to
the following questions:
– If you are a taxpayer of that country who exports goods,
services, capital or intangibles to a foreign Associated
Enterprise (AE), have you received too less of
consideration compared to open market?
– If you are a taxpayer of that country who imports goods,
services, capital or intangibles from a foreign Associated
Enterprise (AE), have you paid too much consideration
compared to open market?
• Bottomline: Has there been a revenue (and hence tax)
deficit due to the intra-group transaction being
conducted at a price different from the ALP?
Introduction to basic issues underlying TP
• “Transfer price” influences the tax base of the

countries involved in cross-border transactions
– The parties involved are the relevant entities of
the MNE group along with the tax authorities
involved in the transaction
• When one country’s tax authority adjusts the profit
of a member of the MNE group, this may have an
effect on the tax base of another country.
– In other words, cross-border tax situations involve
issues related to jurisdiction, allocation of income
and valuation
Jurisdiction issues in TP
• Key issue is which government should tax the
income of the group entities engaged in the
transaction, and what happens if both
governments claim the right to tax the same
income?
– If the tax base arises in more than one
country, should one of the governments
give tax relief to prevent double taxation of
the relevant entities’ income, and if so,
which one?
Jurisdiction issues in Transfer Pricing
• The aim of non-arm’s length transfer pricing in such cases
is usually to reduce an MNE’s worldwide taxes.
– Achieved by shifting profits from AE’s in higher tax
countries to AE’s in relatively lower tax countries
through either under- charging or over-charging the
associated entity for intra-group trade.
Parent company ACo

(situated in country Widgets sold by
BCo to ACo
A with tax rate 30%)
Subsidiary BCo
(situated in country B with
Price paid by ACo tax rate 20%)
(overcharged by BCo,
profits shifted to country B)
Jurisdiction Issues in Transfer Pricing
• While most obvious motivation may be to reduce the MNE’s
worldwide taxation, other factors may influence transfer pricing
decisions
– Such as imputation of tax benefits in parent company’s country of
residence
• Another motivation for an MNE to engage in such practices is to use a
tax benefit (such as a tax loss) in a jurisdiction in which it operates.
– Maybe current year loss or a loss that has been carried forward
from a prior year by an associated company. In some cases an
international enterprise may wish to take advantage of an
associated company’s tax losses before they expire, in situations
where losses can only be carried forward for certain num. of years.
– Even if there are no restrictions on carrying forward tax losses,
there is incentive to use the losses as quickly as possible.
– In other words profits may sometimes be shifted to certain
countries in order to obtain specific tax benefits
Allocation Issues in Transfer Pricing
• Perspective of MNE: MNEs are global structures sharing common
resources and overheads. From MNE’s perspective these resources
need to be allocated with maximum efficiency in an optimal
manner.
– Any trade or taxation barriers in the countries in which MNE
operates raise the MNE’s transaction costs while distorting the
allocation of resources.
– Also many of common resources which are a source of
competitive advantage to MNE cannot be separated from the
income of the MNE’s group members for tax purposes.
• Perspective of Government: From Governments’ perspective,
allocation of costs and income from MNE’s resources is essential in
calculating tax payable.
• There can thus be a dispute between countries in the allocation
of costs and resources, owing to their objective of maximizing the
tax base in their respective jurisdictions.
Valuation issues in Transfer Pricing
• Mere allocation of income and expenses to one or more members
of the MNE group is not sufficient; the income and expenses must
also be valued.
– Hence valuation of intra-group transfers is a key TP issue
• MNE’s are integrated structure with the ability to exploit
international differentials and to utilize economies of integration
not available to a stand-alone entity
– Therefore transfer prices within the group are unlikely to be
the same prices that unrelated parties would negotiate.
• TP rules are essential for countries in order to protect their tax
base, to eliminate double taxation and to enhance cross-border
trade.
– For developing countries, TP rules essential to provide climate
of certainty and environment for increased cross-border trade at
the same time ensuring country is not losing out on tax revenue.
Evolution of Transfer Pricing
OECD Report on Transfer UN “International Income

Pricing (1979) Taxation and Developing
Countries” (1988)
OECD Report on Transfer UNCTAD Report on Transfer
Pricing (1984) Pricing (1999)
OECD Transfer Pricing UN Practical Manual on

Guidelines (1995, 2010) Transfer Pricing (2013)
We have to note the importance of the USA Transfer Pricing Regulations (26
USC 482), EU Common Consolidated Tax Base (CCTB) and the EU Council
“Codes of Conduct” (2011) in the evolution of TP worldwide
Concepts in Transfer Pricing
• The Arm’s Length Principle
• Applying the Arm’s Length Principle
• Global Formulary Apportionment - Alternative
to ALP
The Arm’s Length Principle
Article 9(1) - UN Model Convention
Where:
(a) an enterprise of a Contracting State participates directly or
indirectly in the management, control or capital of an enterprise of
the other Contracting State, or
(b) the same persons participate directly or indirectly in the
management, control or capital of an enterprise of a Contracting
State and an enterprise of the other Contracting State, and in
either case conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ
from those which would be made between independent
enterprises, then any profits which would, but for those conditions,
have accrued to one of the enterprises, but, by reason of these
conditions, have not so accrued, may be included in the profits of
that enterprise and taxed accordingly
The Arm’s Length Principle
• Transaction between two related parties must be at ALP
– ALP is not a term used in Article 9 but it is well accepted by all
countries as encapsulating the approach in Article 9
• The Arm’s-Length Principle is thus the guiding principle in
establishing a transfer price under Article 9
• The marketplace comprising independent entities thus is
the benchmark for verifying the transfer prices between
related parties
• ALP is claimed to be geographically neutral
– Conditional on consistent rules and administration of ALP
throughout jurisdictions
• Easy to describe ALP but establishing guidelines on practical
application of ALP is a complex task
Need for applying ALP– An Example
PCorp in country A
If tax rate of country A > country B,
PCorp may want to undercharge SCorp
Car seats sold If tax rate of country B > country A,
to SCorp PCorp may want to overcharge SCorp
Bottomline: Need to establish the ALP

for determining correct transfer price of
SCorp in country B PCorp to SCorp transaction
Car seats sold to

public in country
B
The Arm’s Length Principle –
Assumptions
• There are many factors affecting the arm’s length price
– Government policies, regulations, cash-flow of entities, tax
benefits etc.
• NO implicit assumption should be made that there is
profit manipulation by MNE just because there is
adjustment to approximate the ALP
• Also incorrect to assume that commercial or financial
transactions between AE’s and the marketplace will
ALWAYS be different and at odds with each other
– MNE’s may even set arm’s-length price to judge true
performance of underlying entities!
• Bottomline: The Arm’s Length Principle has been widely
accepted and has found its way into most TP legislation
Applying the Arm’s Length
Principle
• Comparability analysis
• Evaluation of transactions
• Evaluation of separate and combined transactions
• Use of an arm’s length range or a central point in the range
• Use of multiple year data
• Losses
• Location savings and location rents
• Intentional set-offs
• Use of customs valuation.
Refer to Chapter 5 of the UN TP Manual for more details

Global Formulary Apportionment –
Alternative to ALP
• Formulary Apportionment would allocate the global profits of an
MNE group amongst the associated enterprises on the basis of a
multi-factor weighted formula
– Using factors such as property, payroll and sales for example, or
such other factors as may be defined
• Current use of Formulary Apportionment
– Used by some states of USA, cantons of Switzerland and
provinces of Canada.
– Brazilian TP rules sets maximum ceiling on deductible expenses of
imports and lays down minimum level for gross income in
relation to exports – effectively using set formula to allocate
income to Brazil.
– The EU is also considering a formulary approach, at the option of
taxpayers, to harmonize its corporate taxes under the Common
Consolidated Corporate Tax Base (CCCTB) initiative
Transfer Pricing Methods
• Comparable Uncontrolled Price Method (CUP)
• Resale Price Method (RPM)
• Cost-Plus Method (CP)
• Transactional Net Margin Method (TNMM)
• Profit-Split Method (PSM)
• Use of unspecified methods….
Transfer Pricing Methods
• First three in the list (CUP, RPM and C+) are called
“traditional methods”
• Last two in the list (TNMM, PSM) are called
“transactional profit methods”
• No hierarchy or preference of methods is formally
prescribed.
• Bottomline: No single TP method is prescribed
for every possible situation – depends on the
characteristics of the particular transactions
involved. Most appropriate method must be
found and used
Comparable Uncontrolled Price (CUP)
• Compares the price charged for a property or
service transferred in a controlled transaction
to the price charged for a comparable
property or service transferred in a
comparable uncontrolled transaction in
comparable circumstances.
• Maybe “internal” CUP where the tested party
has similar transaction with AE as well as non-
AE (or) “external” CUP where two unrelated
parties have similar transactions with each
other
Comparable Uncontrolled Price
(CUP)
• ACo & BCo are “related parties” / “associated enterprises”
• ACo & CCo, DCo & ECo are independent parties
BCo CCo BCo ECo
Identical Similar Widgets

Widgets supplied by both
supplied ACo and DCo
ACo ACo DCo

ALP is the ACo to CCo price
ALP is the DCo to ECo price
Internal CUP example External CUP example
Resale Price Method (RPM)
• Used to determine the price to be paid by a
reseller for a product purchased from an
associated enterprise and resold to an
independent enterprise.
• The purchase price is set so that the margin
earned by the reseller is sufficient to allow it
to cover its selling and operating expenses and
make an appropriate profit
Cost-Plus Method (CP)
• Used to determine the appropriate price to be
charged by a supplier of property or services
to a related purchaser.
• The price is determined by adding to costs
incurred by the supplier an appropriate gross
margin so that the supplier will make an
appropriate profit in the light of market
conditions and functions performed.
Transactional Net Margin Method
(TNMM)
• TNMM (and Comparable Profits Method of USA TP
Regulations) are called “Profit comparison” methods
• As their name suggests, they seek to determine the
level of profits that would have resulted from
controlled transactions by reference to the return
realized by the comparable independent enterprise.
• The TNMM determines the net profit margin relative
to an appropriate base realized from the controlled
transactions by reference to the net profit margin
relative to the same appropriate base realized from
uncontrolled transactions
Profit Split Method (PSM)
• Profit-split methods take the combined profits
earned by two related parties from one or a
series of transactions and then divide those
profits using an economically valid defined basis
that aims at replicating the division of profits that
would have been anticipated in an agreement
made at arm’s length.
• Arm’s length pricing is therefore derived for both
parties by working back from profit to price
Indian Transfer Pricing provisions
Indian TP provisions
• Indian TP provisions were introduced under
“Chapter X : Special Provisions Relating to
Avoidance of Tax”
– Chapter X, Section 92 of the Income Tax Act (1961)
and Rule 10A-D of the Income Tax Rules (1962)
– TP regime was introduced via Finance Bill 2001 w.e.f
April 1st 2001.
– In other words, India is a relatively new entrant into
the TP vortex!
• Birds-eye, one-line overview of Indian TP: OECD-
Lite
Indian TP Provisions – Chapter X, Section 92
Sections/Rules Provisions
s 92 Computation of Income, expenses, CCA
s 92A Associated Enterprises (“AE”)
s 92B International Transactions
s 92C(1) (Rule 10B, 10C) Computation of Arm’s Length Price (“ALP”)
s 92C/92CA Powers of Assessing Officer (“AO”) and
Transfer Pricing Officer(“TPO”)
s 92CB Power of Board to make Safe Harbor Rules
s 92CC Advance Pricing Arrangement (APA)
s 92D (Rule 10D) Documentation requirements
s 92E (Rule 10E, Form 3CEB) Accountant’s report
s 92F (Rule 10A) Definitions
s 94A Transactions in notified jurisdictional areas

Transfer Pricing Penal provisions
Reference under the Particulars Penalty

Income-tax Act
271AA Failure to maintain 2% of the value of each

documentation international transaction
271G Failure to furnish/submit 2% of the value of the
any information / international transaction
document to the transfer for each such failure
pricing officer
271BA Failure to furnish INR 100,000
accountant’s report
271(1)(c)(iii) read with Transfer pricing adjustment 100-300% of amount of tax
Explanation 7 considered as concealed on adjustments
income
Indian TP vs. OECD Guidelines
Concepts Indian regulations OECD Guidelines
Associated Very wide definition Restricted to controlled
Enterprises entities
Comparable range (FY 2013)Allows 3% range band on Allows for range of
avg. results of comparables comparable data
Multiple year data Only allows data for current year Permitted
(earlier 2 years only in special cases)
Foreign Not permitted in practice Permitted
comparables
Priority of methods “Most appropriate method” rule Originally, a preference
for “traditional” methods
Use of unspecified A sixth method….allowing any other Permitted
method method recently prescribed
Documentation Stringent Prudent business
principles
Intangibles Definition added only in Finance Act Definition, discussion,
2012. Lack of guidelines/discussion reports, guidance etc.
on Intangibles
TP ASSESSMENT TIMELINE
Indian TP Supreme
EXAMPLE
2011+
Assessment & Court
Litigation
2011+
High Court
May 2011
Income Tax Appellate Tribunal
(ITAT)
Appeal against Appeal against

CIT(A) order Final Asst. Order
May 2010
Commissioner of Income Tax
Dispute Resolution panel (DRP)
(Appeals)
Appeal against Appeal against

Set-aside /
Asst. order Draft Asst. order
Remanded back
to AO AO:Dec. 2009
TPO reference
Assessing Transfer Pricing
Officer (AO) Officer (TPO) TPO: Dec. 2008
TPO Order
u/s 92CA(3)
Form 3CEB
Sept.2006
FY 2005-06
Few observations about Indian TP
• Five (now six!) methods – NO preferred method
– CUP, Cost-Plus, RPM, TNMM and Profit-split are the FIVE usual
suspects and a sixth “method” allowing any other quantifiable
method was recently notified
– TNMM (and CUP) rules the roost in practice
• ALP is calculated via arithmetic mean of comparable prices
• Threshold limit of international transactions for reference to
TPO reference is Rs.15 crores (Rs.150 million)
• Prowess™ & CapitalLine™ company databases are used for
TP reports by all parties including Revenue Dept.
• High volume of transfer pricing litigation today; most TP
litigations have not reached High Courts/Apex Court
– “Litigation loop” – many cases remanded back to AO/TPO
Recent TP “earthquakes”
Finance Acts 2012 & 2013
• Many new TP changes with recent two Finance Acts
– A reaction to recent judicial rulings!
• Summary of main changes in Finance Bill 2012/2013
– Domestic TP introduced for the first time
– Increase in scope of powers of Transfer Pricing Officer (TPO)
– Increased penalty provisions for TP
– Allow “re-opening” of certain TP assessments
– Arm’s-length range is restricted to +/- 3% tolerance band
– Retrospectively enlarge the scope of ‘international transactions’ to
include guarantees, any debts, business restructuring etc.
– GAAR introduced but then postponed to 2016
Evolution of Indian TP
• INITIAL YEARS
– First TP assessments made –ambiguity as it was a new area
– ALP concept was being understood and put to practice
• DISPUTE RESOLUTION PANEL (DRP) initiated to handle TP cases
– TP fundamentals tested and explained by many judgments by DRP and
various Tribunals.
– Controversies on Arm’s-length range, international transactions etc.
– Comparability analysis (FAR) was deep-dived into
• CATCHING UP WITH THE WORLD…..
– GAAR provisions, APA , Safe Harbor Rules ….
• ERA OF INTANGIBLES : CURRENT PHASE
– Financial txns: Corporate Guarantee / Interest-free loans to foreign AE
– BRAND: reimbursement with markup from AE
• DOMESTIC TRANSFER PRICING INTRODUCED
Bottomline: Evolution and maturing of Indian TP……

TP theory meets reality
A look at Indian TP in practice

Issue #1
Comparables: Whither art thou?
• There is a lack of comparables in many segments
– Problem especially acute in developing countries where there
are a number of ‘sunrise’ or emerging industries
• Result of this data paucity is not merely a lack of comparables
but the serious consequence of using incorrect comparables
in the TP assessment
– International comparables data is nearly impossible to gather
and many times are rejected by Revenue or by Courts
– It often becomes a case of non-technical people trying to do
technical work (classic example - choosing KPO software
companies for comparison with BPO assessee, choosing
comparables across different software verticals etc.)
Bottomline: The whole comparability analysis exercise may at

times become unsound and indefensible
Issue #1
Example 1 : Software development industry
• Department rejected cost-plus and used TNMM with its set
A.E. of comparables
(USA network security
• Comparables in completely different software verticals – an
software company)
apples to oranges comparison.
• This is not only a problem with the TP assessment order but
also a flaw in the underlying system
X
Cost-plus + 15% – Comparable search in “software services” may yield
these companies!
TPO: Adopt TNMM with third-party Indian
Assessee
software co’s taken as comparables
Indian subsidiary
1. A transport logistics software company
(Engaged in network
2. A generic application outsourcing co.
security software
3. An ERP (SAP) software vendor
development)
4. Infosys™ - India’s a mega-IT major
Bottomline: An apple and orange are both fruits –
hence valid comparables under TP!
Issue #2
Adjustments to comparables
• TP provisions are vague!
“(iii) the net profit margin referred to in sub-clause (ii) arising in

comparable uncontrolled transactions is adjusted to take into
account the differences, if any, between the international
transaction and the comparable uncontrolled transactions, or
between the enterprises entering into such transactions, which
could materially affect the amount of net profit margin in the
open market” Rule 10B(e)(iii) on TNMM
Issue #2
Adjustments to comparables
• TP adjustments in practice is not the same as theory. In India following
are observed:
– Foreign AE’s are typically not accepted as tested party
– Foreign comparables are almost always not accepted due to data
paucity on adjustments
• What are the adjustments which will be accepted?
– No specific guidance or certainty on this
– From practice, adjustments typically disputed by Revenue are: Idle
capacity, depreciation, risk, differences in accounting policy etc..
• How to quantify any of these TP adjustments?
– Quantification of adjustments are usually ad-hoc or supported using
suitably tweaked formulae.
– Department and taxpayer spar regularly on this issue in Courts
Bottomline: Fundamental lack of clarity & guidance with respect to
Transfer Pricing Adjustments
Issue #2
Adjustments to comparables (contd.)
• Comparables are rejected using “filters” . Some popular filters
used are:
• Minimum employee cost of 25% over sales
• Different year ending filter
• Diminishing revenue filter
• Related party filter
• On-site revenue filter
• Turnover filters
• Super-profit (& loss-making) filters
• Functional difference filters
• These filters are not prescribed in any provision or Rule nor
guidance is provided for them.
Issue #2
Example 1: Adjustments to comparables
AE (USA)
• Internal CUP with company AE as
tested party rejected by TPO
– Typically foreign companies are not
allowed as tested parties.
– No good answers for India vs.
Brazil, India vs. Mexico
Axle raw
geographical market adjustments
material
import • TNMM chosen with “Auto
ancillaries”
– Only one proper comparable but
no segmental data available
– Other comparables are in “shock-
absorbers”, “battery companies”
Assessee • Moving from one incomplete
Mexico and Brazil puzzle (CUP) to an incorrect result
(Indian automotive
axle manufacturers (TNMM) is better?
axles manufacturer)
Issue #3
Data sources – TPO data gathering powers
AE (UK) • TPO has the “power to call for
information” under Section 133(6) of
Third party the Act to obtain information from any
Indian co’s firm
– This power is used often in the TP
assessment to gather data on
comparables
• Practically speaking, assessee may not
be given a chance to analyze or
provide rebuttal to the info
Tax return – Also many companies supply
Assessee information which are prone to wide
AO/TPO interpretation
(India)
TP study • This is a common issue across the
board in TP assessments in India
Issue #3
Data sources – Using customs data
AE
• Taxpayer: Internal CUP with
Non-AE Indonesian AE as the tested
(Indonesia) party was submitted
(anywhere)
• TPO:
– Rejects Internal CUP and
uses External CUP
AO/TPO Customs
Coal Data – Uses customs data of
import third-party transactions
not in public domain
– Cherry-picks data and
Assessee Third-party chooses transactions
Third-party without reference to gross-
(Indian co) Indian cos.
coal importer calorific value (quality) of
(India) coal, quantity etc.
TP study: – Assessee requests
External CUP competitors and obtains
Internal CUP (using customs data) few invoices used by TPO
which show even CIF vs.
FOB difference ignored
Issue #4
Multiple year data
Rule 10B(4) states “The data to be used in analysing the comparability
of an uncontrolled transaction with an international transaction shall
be the data relating to the financial year in which the international
transaction has been entered into
Provided that data relating to a period not being more than two years
prior to such financial year may also be considered if such data reveals
facts which could have an influence on the determination of transfer
prices in relation to the transactions being compared.”
• Not accepting multiple year data flies against the face of logic
– What about business cycles, recessionary effects, gestation
period etc.
• Onus on assessee to prove usefulness of multi-year data…..
Issue #5
The Indian arm’s-length range controversy
• ALP is computed with reference to arithmetic mean of comparables
with a uniform tolerance of 5% around the transfer price (Proviso’s to
Section 92C(1))
– Example: arithmetic mean of comparable PLI of operating profit/total
cost is 10% would mean an arm’s-length range of 4.76% to 15.79%
• It was further interpreted by taxpayers to mean that this +/-5%
standard deduction was available to the taxpayer and not a binary
band.
– Example: In case of standard deduction, if net profit margin were 4.75%
in the above scenario then only 0.01% is the adjustment and not entire
4.75% as in the case of a band where you are either in the band or out.
– Number of cases in different Tribunals in favour of and against the
assessee
Issue #5
The Indian arm’s-length range controversy
• Amendment in Finance Act 2009 tried to rest controversy about
arm’s-length range by saying the 5% tolerance is not a standard
deduction (as well as changed base of determination of allowable
band linking it to transaction price instead of arithmetic mean)
– However post 2009 period also remained ambiguous due to
conflicting judicial decisions
• Retrospective amendment recently in Finance Act 2012 w.e.f
1/4/2002 clarifying the 5% is not a standard deduction (from
1/4/2013 to be 3%)
Bottomline: Lots of litigation on simple issues due to lack of clarity

Issue #6
Practical TP oddities - Few nuggets from the field
1. TNMM Adjustments applied to all transactions of taxpayer
enterprise: (Il Jin Electronics India Pvt. Ltd. –Delhi Tribunal)
2. Adjustments resulting in illogical results : Total amount of
adjustment made, along with ALP already reported, exceeded total
revenues earned by the taxpayer and its AE from dealing with third
party clients! (Global VantEdge Pvt. Ltd – Delhi Tribunal)
3. Excess profits being disallowed under regular provisions
AO held that excess profits (above ALP) would be disallowed u/s
10B for IT companies in SEZ (Tweezerman India, Chennai ITAT)
4. “Contemporaneous” data used even if not available at
specified date : TPO empowered to determine ALP by using
public domain data even after “cut-off date” (Kodiak Networks
India vs. ACIT –Bangalore Tribunal)
Indian judiciary & TP
Assessee / Taxpayer Judicial forum Short point of ruling
DIT vs. Morgan Supreme Court Once TP analysis is undertaken, no further need
Stanley to attribute profits to a PE
E-Gain Commn. P. Ltd ITAT Pune TNMM may afford a practical solution to
otherwise insoluble transfer pricing problems if
used sensibly and with appropriate adjustments
TNT India ITAT Bangalore For arriving at the net margin of operating
income, only op. income & expenses for relevant
business activity of assessee to be taken into
consideration
Aztec Software & ITAT SB All characteristics of controlled transaction which

Technology are likely to affects its open market value must be
taken into account
Mentor Graphics Ltd. ITAT Delhi If one point in arm’s length range is satisfied,
onus shifted to Dept. ALP not mean max. price or
profit in range
UCB India (P) Ltd. ITAT Pune Method adopted by assessee is rejected,
Revenue duty bound to compute ALP and
substantiate and justify use of its method
Schefenacker Motherson Ltd. ITAT Delhi Depreciation cost may be adjusted to eliminate
material differences in ‘asset’ profile
ACIT vs. Wockhardt Ltd. ITAT Mumbai TNMM refers only to net margin realized by
enterprise from international transactions but not
operational margins of enterprise as a whole
Il Jin Electronics (India) Pvt. Ltd. ITAT Delhi Proportionate adjustment under TNMM on the
ratio of international transactions with AEs to
transactions with non-AEs
ACIT vs. Frost & Sullivan Pvt. Ltd. ITAT Mumbai No basis for excluding only loss making
comparables and not excluding high profit marging
comparables or companies which are not at all
comparable based on size, turnover and other
factors
Global Vantedge Pvt. Ltd. ITAT Delhi Total amount of adjustment made, along with ALP
already reported, cannot exceed total revenues
earned by the taxpayer and its AE from dealing
with third party clients
Genisys Integrating Systems ITAT Bangalore TP adjustment restricted to AE segment, exclusion
of super-profit making companies, application of
upper turnover filter, std. deduction of +/- 5%,
capacity utilization adj. granted. Sent-back to TPO
Trilogy, Bearing Point, Yodlee, ITAT Bangalore Set of principles being evolved for software
Curam etc. companies TP assessment. Standard set of filters
approved by ITAT.
Philips Software vs. ACIT ITAT Bangalore Rule 10A(a) means co. having even single rupee of
related party txn. not comparable
Sony India ITAT Delhi Contractual terms agreement to be looked into,
consider cos. with less related party txns & losses too
Demag Cranes & ITAT Pune Duty of AO/TPO/DRP to minimize/eliminate difference
Components which is likely to materially affect the price
Vertex Customer ITAT Delhi No penalty under S.271(1)(c) for bonafide TP
Services adjustments
Honeywell Automation ITAT Pune Under Indian TP, consideration of subsequent year or
India Ltd. average profits not permitted though OECD prescribes
the same
In Re Dana Corporation AAR No capital gains in a business reorg. if consideration not
determinate. TP law does not apply if there is no income
SSL-TTK Ltd. ITAT Chennai Penalty under 271G not to be levied for benign reasons
in nature of procedural issues
Delphi TVS ITAT Chennai Re-visit by TPO for correctly assessing the prices under
CUP for comparison after adj.
Ranbaxy Labs & Devel. ITAT Delhi Selection of overseas comparable maybe allowed
Consultants provided such data is available in public domain
Quark Systems ITAT Chandigarh Filters to be based on ‘cogent reasoning’ and not
(SB) unsound assumptions
Agnity Delhi HC Confirmed ITAT use of turnover filter to reject Infosys
Indian TP & Intangibles
Indian TP & Intangibles:
BRAND VALUATION OF FOREIGN AE
• The current hot-topic of TP discussion & litigation throughout India
is about returns to the “brand” (marketing intangible) of the
foreign AE due to advertising spend of its branded products by
Indian subsidiary in India:
– VERY common scenario is Indian subsidiary is established by big
foreign brand for entering India; Indian subsidiary spends a lot
on advertising , marketing & sales promotion (AMP)
expenditure in India….
• Questions being asked by the Revenue Department
– Does the foreign company’s brand get enhanced by the
advertising & marketing spend (AMP) of its Indian subsidiary?
– Shouldn’t the foreign AE therefore reimburse its Indian
subsidiary with markup the excess AMP spend (or subsidize
rates of products supplied to India or reduce Royalty rates)?
The India Govt’s viewpoint
• Reply in Chapter X to UN TP Manual spells Indian
Govt’s current view clearly:
– Position is that there should be reimbursement by the
foreign AE of excess Advertising & Marketing
expenditure (AMP) with a markup
– High-risk Indian subsidiaries need to get additional
returns in the form of reimbursement of AMP
– “Bright-line test” for marketing intangibles may be used
– Developer of marketing intangibles having economic
ownership IS ENTITLED to ADDITIONAL RETURNS (i.e.,
the Indian company is entitled to additional returns!)
Reading between the lines…
• The Indian Government rationale seems to be as follows:
– Indian subsidiaries sells millions of branded items but consistently
shows losses in India. Thus, no immediate benefit (i.e., taxes paid) to
India
– Main expenditure items for Indian subsidiary seems to be
advertising/marketing & sales promotion (AMP) spend
– Economic owner (typically Indian subsidiary co.) can never become
called “owner” of brand – legal owner is “owner” of the brand
– Economic owner (Indian subsidiary) spends all the money but does not
get returns - legal owner (foreign AE) getting benefit but not being
shared with Indian subsidiaries
– Indian companies are actually undertaking high-risk and should get
returns on the risk & costs
– Only available & immediately taxable indicator of value accretion to
marketing intangible is the AMP spend –this AMP spend needs to be
shared by foreign AE
OECD vs. India
• Convergence in theory
– All parties seem to basically agree that excess of
advertising expenditure (AMP) maybe reimbursed
– OECD Revised Draft on Intangibles (specifically Examples
#6, 7) similar to India’s stand
• Divergence in practice
– Indian stand on ownership for purpose of intangible
returns may not be in line with OECD as Indian Govt. &
Court seem to look only at underlying legal owner for
determining sharing of returns from intangibles
– Effective control, beneficial ownership, risk are all bones of
contention
Indian Judiciary’s tangible role
• The Government stand on brand reimbursement seems
to be supported by recent landmark Judicial judgments!
– Maruti Suzuki vs. ACIT (Delhi HC)
– L.G.Electronics vs. ACIT (Special Bench Tribunal)
– Ford India vs. ACIT (Chennai Tribunal)
– Panasonic India vs. ACIT (Chennai Tribunal)
– BMW, Diageo India, Glaxo Smithkline, Haier
Appliances India, RayBan, Reebok India, Samsung
India, Sony India etc.– the list goes on!
• Thousands of millions of Rupees tax demand for
reimbursement by foreign AE on excess AMP spend to
Indian subsidiaries currently being litigated!
Maruti-Suzuki case (Delhi Tribunal & HC)
• Maruti-Suzuki issue was whether Suzuki™ derives benefit from
advertising expenditure incurred by Indian company while
promoting the co-branded Marut-Suzuki car in India
– Court supported the “Bright-line test” of the US judiciary
– Made a distinction between mandatory and discretionary
use of brand name to decide whether AMP expenditure of
Indian AE increased brand value of foreign AE
– Gave due recognition to OECD principles relating to
intangibles
– As usual with TP, no specifics and only general guiding
principles outlined and case sent back to lower authorities
• Supreme Court however set-aside the Maruti-Suzuki
judgment! So, is it still good law….?
L.G. Special Bench decision
• Elaborate, popular judgment (~300 pages) analyzing
the concept of foreign AE returns on its “brand”
being promoted in India
• Underlying theme is that the foreign brand gets
exposed to, developed and enhanced in India and
hence this accretion of marketing intangible of
foreign AE ought to be reimbursed
• Assessee’s prima facie contention that local
advertising expenditure did not amount to an
international transaction – Rejected outright
L.G. Special Bench (contd..)
• Enumerated 14 questions/principles to determine the nature of the
relationship between the AE’s and their use and cost/value of the
intangibles shared
• Held that:
– Position taken by assessee that economic ownership (based on
developer-assistor rule) by the Indian subsidiary leads to it
becoming the “owner” of brand is flawed AND
– Position that the underlying intangible legal owner (foreign AE)
does NOT obtain returns on its “brand” is unacceptable
• Direct selling expenditure may be excluded in calculation of
reasonable AMP!
– What constitutes direct selling as opposed to brand promotion?
Confusion still prevails….
Points to ponder....
• How can valuation of the marketing intangible be tied directly to
excess of AMP spend ALONE?
– Methods for valuation of intangibles such as Income-Based
methods, Super-profit, Replacement-cost, Binomial/non-
traditional methods not being used at all.
– Quality, execution and other factors by Indian subsidiary also
matter over time; not just Brand
• What about intangible value reduction?
– Consider Blackberry™ which no longer have same brand recall in
India; consider companies which have series of flops…..
• Exception needs to be given for initial years extraordinary
advertising and marketing
Few more intangible problems…..
• CONTRACT R&D: Indian Govt’s stand (Chapter X – UN TP Manual)
– Indian subsidiaries are NOT risk-free entities and hence low
cost+ can’t be accepted
– Disputes the ability of parent to control risk remotely when core
functions of R&D and services are located in India
– Holds that Indian entity should be entitled to a higher returns
– Completely disagrees with CAPM model for risk adjustments
• Taxpayers are in total disagreement with above viewpoint!
– No risk / minimal risk borne by Indian entities
– Indian entities typically used for executing the work given to
them at low cost : that is our USP
– In most cases product vision, design, direction, innovation and
control is by foreign AE and not India – we merely get the job
done
Few more intangible problems in Indian TP….
• FINANCIAL TRANSACTIONS (Guarantees, loans, debts etc.)

– Checkered history of litigation with many different Tribunals
holding contrary positions
– Retrospective amendments to include loan, debt &
guarantee transactions under definition of “international
transaction” (S.92B) was passed in Finance Act 2012
– Position is becoming clear now:
• Notional interest or guarantee fees has to be charged
• Dispute exist as to what rate interest/fees to be charged:
Revenue Department takes view that Prime Lending Rate
(PLR) should be taken and NOT LIBROR/EURIBOR rate
– Safe harbors introduced in this area of financial transactions
Few more intangible problems in Indian TP….
• LOCATION SAVINGS
– Indian Govt. has recognized the need for allocation of
location savings and rents between AE’s using profit-split
methods.
– No clarity or TP tax demands on this issue yet
• INTRA-GROUP SERVICES
– Biggest challenge is allocation of costs using appropriate
keys which are usually disputed by the Revenue
– Whether or not it is necessary for services provider to
make a profit is another key area of dispute
– No clarity yet but has been identified as high risk area for
Indian TP by the Govt.
Streamlining current Indian TP provisions
Sector-wide safe harbors
• Hue & cry from industry resulted in “N.Rangachari
Committee” culminating in publication of Safe Harbor
rules by CBDT
S.No. International transaction Safe harbor margin
1 Software development 20% or more on oper. expenses
2 BPO 20% or more on oper. expenses
3 KPO 30% or more on oper. expenses
4 Intra-group loan (< INR 500million) State Bank rate + 150 basis pts
5 Intra-group loan (> INR 500million State Bank rate + 300 basis pts
6 Corporate Guarantee to WOS 2% per annum on amount
7 Software contract R&D 30% or more on oper. expenses
8 Pharma contract R&D 29% or more on oper. expenses
9 Mfg & export of auto components 12% or more on oper. expenses
10 Mfg & export of non-core auto 8.5% or more on oper. Expenses
Profit Splits, Formulary Apportionment etc.
• Formulary apportionment approach is promising in certain areas

and ought to be tried?
– Attacks the crux of the TP problem that at end of the day it is a tax-
sharing formula which all governments want to work out
– Correct approach of using math to solve an economics problem. Run
predictive models, tweak the formula and try again….
• Profit-split holds promise when it comes to “intangible”
transfer
– Other methods of valuation of intangibles should be accepted. Good
theory but never accepted in practice
More points to Ponder….
• Allow 3% standard deduction as arm’s-length range

• Use inter-quartile ranges instead of arithmetic mean
• Allow multiple year period data across the board
• Allow foreign comparables, allow foreign AE as tested party
• Provide clear guidance on adjustments specifically risk, idle
capacity, depreciation and working capital
• Prescribe clear turnover range filters for comparables
• Do not reject loss-making comparables outright
• Allow technical expert reference for selecting functionally
similar comparables
Streamlining current TP provisions
More points to ponder…
• Ameliorate the data gathering system by the TPO and mandatorily
involve the assessee at every step
• Use Advance Pricing Arrangements (APAs) as much as possible
• MAP process should be pursued more and made time-bound and
effective
• Clear guidance on Intangibles and their valuation methods.
• Need of the hour is more discussion, technical reports, analysis
on intangibles.
• TP assessments should NOT result in a pyrrhic exercise
Bottomline: Currently, TP is not art nor science….its magic!

Indian TP regime has to change to help both the Department and
taxpayer to achieve respective goals
Thanks!
Acknowledgments to
V.P.Thangadurai, Advocate
([email protected])
Bhavya Rangarajan, Advocate
([email protected])

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Taxation of International

Income deemed to accrue or arise in India.

• The key part of the Royalty sub-section is

• Bottomline: Every word matters (!!) in the

Fees for use of Satellite Explanation 2, clause (iii), (iv), (iva)

• The fact that software tends to have End-User License Agreements

• That a backup copy of the software can be made to use in case of

• Motorola Vs. DCIT (2005) 96 TTJ Delhi 1 (SB)

(subscriptions, journals etc.)

• This issue has been consistently litigated in various Tribunals and

 CIT Vs. HEG Ltd. (263 ITR 230 MP High Court) :

(subscriptions, journals etc.)

(subscriptions, journals etc.)

• Explanation 2 Clauses (iii), (iv) and (iva) have all been

• The main questions to be answered are:

• Whether the use of the satellite is a “process”?

• Whether the use of a satellite transponder for uplinking

• Asia Satellite (85 ITD 478 Delhi ITAT) :

• Receipts were taxable as Royalty having been paid in respect of

• The transponder provision through which uplink and downlink

• To constitute “royalty”, it is not necessary that the process should be

• The fact there is a ‘comma’ after the words “secret formula or

• To be Royalty it is not necessary that the instruments through which

 That there is a technical service provided by the telecom provider to the

• Payment towards bandwidth charges is not use of or right to use of

• Wipro Ltd. Vs. ITO (80 TTJ (Bang.) 191) :

• The difference between Sale and Royalty transaction is based on

• ADIT Vs. Zimmer AG (2008 22 SOT 97 Kol) :

• Engineering documents were handed to the Indian purchaser

• These documents were an integral part of plant and machinery

• The payment for these documents could not constitute Royalty

• ITAT Calcutta Bench in Union Carbide Corporation Vs. Inspecting ACIT

• The words “similar property” in clauses (ii), (iii) and (iv) of

• In other words, the absence of copyright or patent or one-time

• In many cases contracts between parties are such that a number of

• The key takeaway is that if it is a composite, indivisible contract the

• CIT Vs. DCM Ltd. 336 ITR 599 :

• Roxair Maximum Reservoir Performance WLL (AAR 977/2010) :

• In a turnkey project for supply and installation of equipment,

• Supply of equipment and software were taxable in the year prior

• Ansaldo Energia Spa Vs. IT (2009-TIOL-62-HC-MAD-IT) :

• Finance Act 2001 amendment

– W.e.f. 1-4-2002, clause (iva) was added to Explanation 2 to read as

– Use or right to use any equipment is not found in the UN and US MC

“Explanation.—For the removal of doubts, it is hereby declared that for

(i) the non-resident has a residence or place of business or business

(ii) the non-resident has rendered services in India.”

Explanation 4.— For the removal of doubts, it is hereby clarified

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

(b) such right, property or information is used directly by the

(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 up-linking, amplification, conversion

technology, whether or not such process is secret;

 These retrospective amendments have been introduced in the Finance