Retrospective amendment in “Royalty” u/s 9 of the I.T. Act made redundant in view of DTAA

B4U International Holdings Ltd. v DCIT I.T.A.No. 3326/Mum/2006 (Mum ITAT)

Finance Act, 2012 introduced a retrospective amendment in the definition of the term ‘royalty’ by inserting Explanation 4 to 6 in s. 9(1)(vi) with retrospective effect from 1.6.1976. The same reads as under:  

Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or
any rights in respect of any right, property or information includes and has always
included transfer of all or any right for use or right to use a computer software (including
granting of a licence) irrespective of the medium through which such right is transferred.


Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes
and has always included consideration in respect of any right, property or information,
whether or not—

(a) the possession or control of such right, property or information is with the payer;

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

(c) the location of such right, property or information is in India.


Explanation 6.—For the removal of doubts, it is hereby clarified that the expression
“process” includes and shall be deemed to have always included transmission by satellite
(including 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.

However, no such amendment is incorporated in the various Double Taxation Avoidance Agreements (‘DTAA’) entered by the Government of India with various countries. The definition of royalty as provided in various treaties is on the same lines as provided in the pre-amended definition in section 9(1)(vi).

Facts of the case:

The assessee, a Mauritius company, made payment to Panamsat, USA, for hire of a “transponder satellite”. The AO held that the said hire charges constituted “royalty” and that the assessee ought to have deducted TDS u/s 195 and that as it had not done so, the amount was to be disallowed u/s 40(a)(ia). Before the Tribunal, the department argued that though as per Asia Satellite 332 ITR 340 (Del), the hire charges were not assessable as “royalty”, this verdict was no longer good law in view of the amendment to s. 9(1)(vi) by the Finance Act 2012 w.r.e.f. 1.4.1976 to provide that such hire charges shall be assessable as “royalty”.

HELD by the Tribunal:

(i) In Asia Satellite 332 ITR 340 (Del) it was held that in order to constitute “royalty”, the payer must have the right to control the equipment. A payment for a standard service would not constitute “royalty” merely because equipment was used to render that service. A similar view was taken in Skycell Communications 251 ITR 53 (Mad). In De Beers (Kar) & Guy Carpenter (Del) it was held that to “make available” technical knowledge, mere provisions of service was not enough and the payer had to be enabled to perform services himself. The department’s argument that the amendments by the Finance Act, 2012 changes the position is not acceptable because there is no change in the DTAA between India and USA and the DTAA prevails where it is favourable to the assessee;

(ii) Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, s. 195 will not apply as held in Vodafone International Holdings B.V. 341 ITR 1 (SC). As s. 195 did not apply, no disallowance can be made u/s 40(a)(i);

(iii) Further, as prior to the insertion of s. 40(a)(ia) in AY 2004-05, payments to a resident did not require TDS, under the non-discrimination clause in the DTAA, the disallowance u/s 40(a)(i) in the case of non-residents cannot be made as held in Herbalife International 101 ITD 450 (Del), Central Bank of India & Millennium Infocom Technologies 21 SOT 152 (Del).

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