Transcript Royalty & Fees for Technical Services (FTS) (2)
Royalties & fee for technical services
Companies paying in Millions to acquire Intangibles
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WNS acquiring Marketics for $65 million.
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Facebook acquiring Friendfeed for $50 million
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Companies paying in BILLIONs to acquire Intangibles
• Vodafone acquiring Hutch for $19.3 billion.
• Google Inc. acquiring Youtube Inc. for $1.65 billion.
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Royalties/ FTS - INTRODUCTION
• The present era is one in which Capital is devoted by less of Tangible assets like money and raw materials & more of IPRs (Intellectual Property Rights).
• Royalties & FTS (Fee for Technical Services) arise from commercialization of IPRs.
• Royalty is the sum payable for the right to use someone else’s property for the purpose of gain.
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Royalties/ FTS - introduction
• • Essential precondition for determining royalty is that Non-Resident owner of such IPR should have retained the property in them while allowing the right to use such IPR.
– CIT Vs Day Ashmore India Ltd Primary obligation of paying the tax on Royalties & FTS is not on Non-resident, but on the person making such payment to him.
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Definition of Royalty u/s. 9(1) (vi) of the Act
Use of IPRs Imparting of information on working of IPRs Imparting information on Technical/ Industrial/ Commercial/ Scientific knowledge, experience or skill Transfer of rights in respect of IPRs
Royalty
Use of Industrial/ Commercial/ Scientific Equipment except equipments mentioned in 44BB 6
Definition of Royalty under OECD model of Dta
Cinematographic films Literary, artist or scientific work Royalty is consideration for use or right to use Industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience 7
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Domestic law taxation of Royalties
Country R normally taxes worldwide income including royalties derived by its residents.
Country S normally tax royalties derived by non resident of Country S.
Typically, country S impose a FINAL non resident withholding tax on gross amount of royalty income derived from the user of the intangible property in country S by the non resident provider of that right.
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PRESUMPTIVE TAXATION
Royalties & FTS IT Act DTA No PE PE R/FTS/IPS
10% 40%
u/s 115A (1) (BB) On Gross Receipts As per Fin Act, I Sch Part II Entry No. 2 (b) (ix) On Net receipts after expenses
Concessional rate
On Gross Receipts
No PE BP PE BP/FTS/ R/IPS
No Tax 40%
As per Fin Act, I Sch Part II Entry No. 2 (b) (ix) On Net receipts after expenses
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Case study
• Albert Inc is a company resident in country X. Albert Inc leases an aeroplane from Airbus, which is a corporation resident in country Y.
Albert Inc, pays Airbus a lease payment of USD 200,000. Under its domestic law, country X levies 20% withholding tax on the lease payment made by Albert Inc. The DTA between country X and country Y exists which contains “Royalties clause” and allows the contracting states to levy a withholding tax on royalties paid by residents of their states of 10% of the gross amount of the royalty.
How much tax is to be withheld by Albert Inc?
• Take the same facts as in question above, but now assume that the DTA between country X and country Y contains no definition of “royalties”.
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Royalties/ FTS - How dept & assessee look at it Tax Authorities Classify income as Royalties/ FTS Tax @ Fixed Tax Assessees Classify income as Business Income Tax @ Low Rate/ Nil rate Tax 11
Accrual of tax on Royalties/ FTS
Reddy (Resident) Contract with Davis(US) Import of Drawings of a Plant (TDS is applicable) Payment is made TDS Iyer (Resident) Sets up Hotel in London FTS for services for setting up Hotel in London No TDS (No Payment is made in India, source of Income outside India – TDS not applicable) 12
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Accrual of tax on Royalties/ FTS
Accrual of Tax on Royalties/ FTS India follows receipt basis in respect of international taxation. i.e, liability is imposed even where income does not accrue or arise within its Indian Borders Services rendered in India Nexus Theory Services are utilized in India 13
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Accrual of tax on Royalties/ FTS
This receipt basis of Taxation is subject to criticism.
Supreme Court in Ishikawajima-Harima Heavy Industries had reversed the proposition. Nexus theory was upheld.
This judgment is sought to be nullified by amending Section 9 of the Act.
Expl is inserted stating that where income is deemed to accrue or arise in India u/s. 9(1)(v),(vi) and (vii), such income shall be included in Total Income of Non-resident whether or not Non-resident has a place of business or Business Connection in India.
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Royalties/ FTS - Composite agreements Distinctive test
Royalty/ FTS TDS Applicable.
Composite Agreements Reimbursements TDS Applicable?
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Royalties/ FTS - Composite agreements
Does the contract stand if contract were to be split Yes No No TDS on Reimbursement portion TDS to be made on Gross Amount Sultan Bros Sedeo Forex Intl 16
Royalties/ FTS - Composite agreements
Sodeo forex Intl
Is the TDS on Gross sum or net profit comprised in Gross Sum?
ACC Cement Co.
Apply to Assessing Officer for determination of embedded income 17
Royalties - challenges
Payment from Indian Company Use of Trade Mark of reputed Car Manufacturer Purchase of Software on Disk 18
Software on Disk Doctrine of Essential Character - Sprint RPG India Ltd Vs Commissioner of Customs (S.C) Copy righted article Copy rights Property contained in copyright is Software No right of distribution of copyrighted material Royalty Rights over Copyrighted material Right of distribution of copyrighted material Akin to Sale of goods TDS applicable Sonata Information Tech Ltd No Royalty Lucent Technologies 19
Royalties - Challenges
ITC paid Sherton 3% of room sales as consideration for use of : 1. Experience & expertise of Sherton 2. Providing interface between CRS & ITC hotels 3. allow to use Sherton’s Trademark Consideration paid by ITC is treated as Business Income & not as royalty because use of TM is only incidental to rendering of services
Royalties - challenge
• Subscribing to a journal – mere characteristic of being commercial in nature would not make it a thing for which royalty would be payable. Some sort of expertise or skill required.
• Payment to journal is not a royalty.
– CIT Vs HEG Ltd 21
Royalties - challenges
• Subscription to Gartner data base which publishes business data base pertaining to software technology.
• Experience should be one’s own experience in the realization of Industrial, Commercial or Scientific and not compilation of somebody else’s experience.
– Wipro Ltd Vs ITO 22
Royalties - challenges
Royalty for use of Equipment Acquiring use of equipment Acquiring service of equipment Control & Physical possession over the equipment Equipment should be available for exclusive use No Control or physical possession over equipment Equipment is available for use by anyone Royalty No Royalty 23
What is not Royalty?
• Sale, distribution or exhibition of cinematographic films.
• Capital Gains on sale of IPR 24
Royalties derived through Permanent establishment
• Royalties are to be treated as business profits or income from Independent professional services where the intangible property that produces them is effectively connected with a permanent establishment or fixed base that the non resident owner of the intangible property has in the source state.
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Royalty payments between associated enterprises
• Non taxation of royalties in Country S applies only to arm’s length of royalties paid for the right to use the intangible property granted by one party to the other.
Prima facie, the excess amount of royalties is left to be treated according to the domestic laws od each state and again that could mean that the excess amount od royalties is to be treated as deemed to be dividend and taxed as such in country R and Country S.
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Fees for Technical Services Definition
Consideration (including lump sum) for rendering Managerial Technical Consultancy Provision of services of other personnel FTS 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”.
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Fee for technical services (FTS)
We must distinguish Technical Services from Commercial, official & admin related services.
Contemplates service to the payer of the fee We must distinguish technical services with technology driven services FTS 28
FTS - India view
• Analysis of the DTAAs entered by India with Mauritius, Philippines, and Saudi Arabia will show that there is a deliberate absence of an article relating to technical services. Similarly, the DTAA signed with USA does not provide recognition for managerial services, in contrast with sec 9(1)(vii) of the IT Act.
The consequence of this is that assessees from such countries can claim profits arising by way of technical services to be business income, which is taxed at very low or nil rates by virtue of the DTAAs 29
Composite agreements & Technical Services Distinctive Test
Whether the contract still could have stood if the contract were split?
Purchase of steam generating plant along with design, manufacture & supply of imported equipment Supply of drawing is incidental to the total contract which included supply of machinery Electrical Contract & Drawings in connection thereto Both are independent No FTS Consideration for Drawings – FTS Neyveli Lignite Corp 30
FTS - challenges
• Service which employ technology as well as IPR whether service could be held to be “Technical Service” even in the absence of service?
Skycell is a mobile network service operator IT Authorities claimed that technical services involved in the business of Skycell Court held fee for use of Standard facility provided to all those willing to pay for it cannot be FTS.
Subscription to a data base of business information paid by WIPRO.
IT authorities held that technical services involved in this transaction.
Court held fee for use of Standard facility provided to all those willing to pay for it cannot be FTS.
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Diamond testing institute rendered services in connection with grading of diamonds
FTS - challenges
IT authorities held that grading constitutes “Technical Services” Court held that institute was using its experience in grading diamonds. Such grading could not be said to have transferred its experience, knowledge or skill to customer. Therefore transaction is not “TS” Contract for installation of mobile telephone system and to impart training for Indian personnel for continued operations of the system in India IT authorities held that technical services involved in this transaction.
Court upheld the views of Department.
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FTS - Make available
• The MOU entered between India and USA shows that for a service to be considered as an included service it should be not only a technical or consultancy service but it should also be ancillary and subsidiary to the application or enjoyment of a right, property or information for which a royalty payment is made; or if it makes available technical knowledge, experience, skill, know-how, or processes, or consists of the development and transfer of a technical plan or technical design.
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FTS - make available
Teach Fishing Rather than giving a Fish 34
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Limitation of Benefit (LOB) clause:
It is an anti-abuse provision Treaty benefits are extended to only those residents of contracting state for which the benefits are intended.
The purpose of LOB is to limit the ability of residents of third country to obtain benefits under the said treaty.
When resident of third country establishes companies in Contracting states with the principal purpose of obtaining treaty benefits – it is known as treaty shopping 35
Types of LOB Clauses
• • Look through approach – Pierce the corporate veil to examine country of residence of the conduit companies ultimate shareholder.
Channel Approach − Treaty benefit is denied to conduit companies that is used to channel a substantial part of its income via tax deductible expenses to a party that controls it.
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Types of LOB Clauses
• • • Bonafide Business Test – Intermediary company is allowed benefits of DTA if it is engaged in the active conduct of business in country S.
Exclusion Approach – DTA benefits are refused to companies that enjoy privileges in country R.
Subject to tax Approach – Companies that enjoy DTA benefits in country S must be subject to tax in country R on the income in respect of which DTA benefits are granted 37
Presented By CA Swatantra Singh, B.Com , FCA, MBA Email ID: [email protected]
New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com
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