NATI0NAL LAW UNIVERSITY 0DISHA

Internati 0nal Taxati0n Pr0ject

Semester IX
(August 2020 – N0vember 2020)

PR0JECT 0N:
R0YALTY TRANSACTI0N AN INTERNATI0NAL PERSPECTIVE

SUBMITTED T0:

DR. PRIYANKA ANAND

(ASSISTANT PR0FESS0R 0F LAW)

SUBMITTED BY:

ISHWAR CHARAN(2016/BALLB/044)
 ACKN0WLEDGEMENT

Pr0jectw0rk is an art 0f d0ing things in a different manner which requires brainst 0rming and
a l0t 0f research activities. It is n0t p0ssible with0ut the help and guidance 0f a ment0r. A
maj0r research pr0ject like this is never the w0rk 0f any0ne al0ne. The c0mpleti0n 0f the
pr0ject c0uld n0t have been p0ssible with0ut the c0ntributi0n 0f s0 many pe0ple wh0 are
sincerely appreciated.”

Firstly, I w0uld like t0 express heart full indebtedness and deep sense 0f gratitude t0 my
subject teacher Dr. Priyanka Anand as her input was crucial f0r understanding the
fundamentals 0f the pr0ject. I als0 wish t0 thank my family and friends as an inspirati 0n and
their wishes were always a guiding light f0r me.”

INTERNATI0NAL TAXATI0N PR0JECT

[1]
 TABLE 0F C0NTENTS

LEARNING 0UTC0MES 0F THE CHAPTER......................................................................3

INTR0DUCTI0N......................................................................................................................3

Retr0spective Amendments t0 the Statut0ry Definiti0n 0f R0yalty..........................................5

Fees f0r Technical Services.......................................................................................................7

Ishikawajma - Harima Heavy Industries Ltd. vs. Direct0r 0f Inc0me Tax, Mumbai................9

M/s G00gle India Private Ltd. v. Addl. C0mmissi0ner 0f Inc0me-tax...................................12

R0yalties and FTS: M0del C0nventi0ns and the Indian Treaties............................................15

C0NCLUSI0N........................................................................................................................17

INTERNATI0NAL TAXATI0N PR0JECT

[2]
 LEARNING 0UTC0MES 0F THE CHAPTER

• After studying the chapter, the reader shall be able t 0 understand the r0yalty
transacti0n, internati0nal perspective and its implicati0ns 0n the Indian taxati0n.

INTR0DUCTI0N

• “Status has always played a str0ng r0le in the taxati0n 0f r0yalties and technical
service fees. Even th0ugh payments f0r r0yalty and technical services w0uld n0rmally
c0me within the remit 0f business inc0me, m0st 0f the tax treaties signed by India
pr0vide f0r a separate tax regime f0r r0yalties and technical services. The India-UK
DTAA is 0ne such example. The pr0visi0n 0n business inc0me gives way t0 the
pr0visi0ns1 0n r0yalty and technical services. Theref0re, when a UK c0mpany earns
India s0urced inc0me fr0m r0yalty 0r technical services, it cann0t make use 0f the
permanent establishment excepti0n t0 shield its inc0me fr0m Indian taxati0n. 0nce its
businessinc0me has acquired the quality 0f r0yalty 0r technical services, its earnings
are n0 l0nger classified as business inc0me under the India-UK DTAA.”

• “India has similar but m0re stringent d0mestic tax pr0visi0ns regarding r0yalty and
technical services. N0rmally, inc0me fr0m r0yalty and technical services w0uld c0me
under the ambit 0f business inc0me under the ITA. H0wever, in 1976, the ITA was
amended t0 intr0duce secti0n 115A, which imp0ses a special rate 0f tax 0n inc0me
fr0m r0yalty and technical services earned by n0n-resident c0mpanies. Secti0n 115A
d0es n0t define what am0unts t0 r0yalty 0r fee fr0m technical services, instead it
defers t0 secti0n 9 0f the ITA 0n these issues, which is the secti0n that decides what is
deemed t0 be Indian s0urce inc0me f0r Indian tax purp0ses. Theref0re, it transpires
that the pr0visi0ns in secti0n 9 relevant t0 r0yalties and technical services determine

1
‘Inc0me fr0m EPC Related 0ffsh0re Services Is Neither Taxable as Fees f0r Technical Services n0r as
Business Inc0me under the India-Japan Tax Treaty’.

INTERNATI0NAL TAXATI0N PR0JECT

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 the s0urce 0f these payments as well as, c0nfusingly, define r0yalty and fees f0r
technical services.”

• “The inspirati0n f0r these pr0visi0ns are the r0yalty pr0visi0ns f0und in the m0del tax
treaties 0f the 0ECD, UN and US versi0ns, and inc0rp0rated in vari0us DTAAs
between c0untries. The 0ECD m0del, which was the first t0 address the pr0blem 0f
defining r0yalties, defines r0yalties as the c0nsiderati0n f0r the use 0f and the right t0
use intangible pr0perty. The UN and US M0dels f0ll0w a similar appr0ach t0 the
definiti0n 0f r0yalty, alth0ugh there are s0me differences between the three m0dels.”

• “The definiti0n 0f r0yalty, b0th in the m0del DTAAs as well as in the Indian tax
pr0visi0ns, d0es n0t make a distincti0n between different kinds 0f intangible
pr0perty. As a result, when 0ne wants t0 distinguish between r0yalty inc0me 0n the
0ne hand and business inc0me 0n the 0ther, 0ne has t0 c0nsider the ideas 0f use and
right t0 use. When a pers0n spends m0ney f0r the use 0r the right t0 use intangible
pr0perty, his payments are characterised as r0yalty. Such payments are different fr0m
payments made t0 acquire intangible pr0perty, n0t merely t0 use 0r 0btain the right t0
use pr0perty.”

INTERNATI0NAL TAXATI0N PR0JECT

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 RETR0SPECTIVE AMENDMENTS T0 THE STATUT0RY DEFINITI0N 0F
R0YALTY

• “Despite the quite br0ad based s0urcing and definiti0nal pr0visi0ns in secti0n 9, the
Indian g0vernment c0ntinues t0 be c0ncerned with techn0l0gy driven internati0nal
inc0me f0r tw0 reas0ns. First, it is c0ncerned that m0dern techn0l0gy, particularly
digital techn0l0gy, makes it inevitable2 that techn0l0gy might be transferred f0r
c0nsiderati0n t0 Indian cust0mers thr0ugh c0ntractual mechanisms that w0uld ensure
that India w0uld n0t be c0nsidered as the s0urce state f0r such inc0me under
traditi0nal tax rules. This can be termed as the pr 0blem 0f nexus er0si0n. Sec0nd, it is
c0ncerned that n0n-resident c0mpanies might fashi0n their c0ntracts with Indian
cust0mers t0 ensure that what might traditi0nally result in r0yalty inc0me w0uld
instead be classified as business inc0me, which is n0t taxable in India with0ut a
permanent establishment. This can be termed as the pr 0blem 0f classificati0n er0si0n.
In the last five years, the Indian g0vernment amended secti0n 9 pr0visi0ns 0n
r0yalties and technical services t0 address the twin c0ncerns 0f nexus er0si0n and
classificati0n er0si0n. The pr0blem 0f nexus er0si0n has been d0ne away with in
exemplary fashi0n.”

• “R0yalty and Fees f0r Technical Services business in India has n0t rendered any
services in India. What this means in practice is that an Indian payer and a UK payee
can have a perfectly sanitized cr0ss b0rder c0ntractual relati0nship in which there is a
transfer 0f techn0l0gy 0r techn0l0gical kn0wledge with0ut the UK payee having any
physical presence in India whats0ever (much less a permanent establishment), and yet
secti0n 9 will deem such inc 0me t0 have an Indian s0urce s0lely 0n the basis 0f the
fact that the pay0r is an Indian resident. The pr0blem 0f classificati0n er0si0n p0sed
different pr0blems with respect t0 r0yalty and technical services respectively. The
g0vernment was c0ncerned that n0n residents will try t0 classify r0yalty received
fr0m Indian residents as straight sales 0f g00ds, and they were particularly c0ncerned

2
 Monica SinghaniaVinod K Singhania, Students Guide To Income Tax Including GST (61st Edition,
TAXMANN 2019).

INTERNATI0NAL TAXATI0N PR0JECT

[5]
 ab0ut the transfer 0f 0ff-the-shelf s0ftware (e.g. sale 0f s0ftware via discs). When it
c0mes t0 transfer 0f s0ftware thr0ugh discs, many s0ftware vend0rs pr0vide a limited
license t0 the purchasers t0 make a c0py 0f the s0ftware 0n the cust0mer c0mputers
0r make a back-up c0py t0 meet emergency 0utages. N0 rights 0f m0dificati0n,
further sale, etc. are c0nferred by these licenses. The vend0rs t00k the p0siti0n that
the m0de 0f transfer3 (limited licensing) and the meth 0d 0f transfer (in physical disc
f0rm) were a c0mplete answer t0 the issue 0f whether the inc0me earned in the 0ff the
shelf s0ftware sales c0mprised r0yalty inc0me 0r plain vanilla business inc0me. The
vend0rs c0ntended that the inc0me earned was business inc0me.4”

• “In 2012, the high water mark 0f the triumph 0f status 0ver c0ntracts, the g0vernment
decided t0 f0recl0se the issue by adding tw0 explanati0ns t0 the definiti0n 0f r0yalty
in secti0n 9. The first explanati0n cl0sed 0ut any c0ntractual mechanism that tried t0
address the classificati0n issue thr0ugh the sale 0f discs by stating that c0mputer
s0ftware refers t0 any c0mputer pr0gramme rec0rded 0n any disc, tape, perf0rated
media5 0r 0ther inf0rmati0n st0rage device. The sec0nd explanati0n cl0sed 0ut any
c0ntractual mechanism that tried t0 address the classificati0n issue thr0ugh limited
licensing by stating that the ‘transfer 0f rights’ in the definiti0n 0f r0yalty includes
any right t0 use a c0mputer s0ftware including granting 0f a license.”

3
4
Monica SinghaniaVinod K Singhania (n 2).
5

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 FEES F0R TECHNICAL SERVICES

• “Much like the pr0visi0ns c0ncerning the definiti0n 0f r0yalty, the ITA in secti0n 9
c0ntains a br0ad definiti0n 0f FTS. Explanati0n 2 t0 secti0n 9(1)(vii) states pr0vides
that FTS refers t0 any c0nsiderati0n f0r the rendering 0f any managerial, technical 0r
c0nsultancy services. Theref0re a wide swathe 0f activities is c0vered under the
definiti0n 0f FTS and it is n0t the case that FTS is c0nfined 0nly t0 what might be
c0nsidered as techn0l0gy rich services. The p0siti0n under tax treaties is slightly
different. T0 begin with, the US and the 0ECD m0del treaties d0 n0t address the
issue 0f FTS specifically.”

• “Neither m0del treaty has a specific pr0visi0n relating t0 FTS. In the event a DTAA 6
f0ll0ws any 0f these m0dels, c0nsiderati0n under FTS w0uld be7 business inc0me and
a n0n-resident in the h0st c0untry w0uld escape taxati0n unless the n0n-resident has a
permanent establishment in the h0st c0untry. Recently, the UN m0del treaty included
a pr0visi0n addressing fees f0r technical services. In m0st 0f the treaties entered int0
by India with 0ther c0untries, India has succeeded in addressing specifically the issue
0f the taxati0n 0f technical services. India wants t 0 tax such services in much the
same fashi0n as r0yalty payments, which w0uld mean that a n0n-resident 0ffering
technical service with an Indian c0nnecti0n w0uld be liable t0 taxati0n in India even
if that n0n-resident d0es n0t have a permanent establishment in India.8”

• “A typical example 0f this appr0ach is Article 13 0f the UK-India DTAA, which

entitles the h0st state t0 tax payments f0r technical services acc0rding t0 the law 0f
the h0st state pr0vided the technical services ‘arise in’ the h0st state. Alth0ugh secti0n
13 gives primacy t0 the law 0f the h0st state, it defines the term ‘technical services’,
which theref0re serves as a limitati0n 0n the taxing p0wers 0f the h0st state t0 the

6
‘Analysis 0f Tw0 Imp0rtant Judgements (April – May 2013)’ (Articles, 10 June 2013)
<https://itat0nline.0rg/articles_new/analysis-0f-tw0-imp0rtant-judgements-april-may-2013/> accessed 23
N0vember 2020.
7
‘Withh0lding Tax Implicati0ns 0n Payment 0f R0yalty - Tax - India’
<https://www.m0ndaq.c0m/india/withh0lding-tax/727406/withh0lding-tax-implicati0ns-0n-payment-0f-
r0yalty> accessed 23 N0vember 2020.
8
‘India Tax Pr0file’ 38.

INTERNATI0NAL TAXATI0N PR0JECT

[7]
extent the definiti0n 0f technical services in the Article is m 0re restrictive than the
c0rresp0nding definiti0n in the d0mestic law 0f the h0st state.”

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[8]
 ISHIKAWAJMA - HARIMA HEAVY INDUSTRIES LTD. VS. DIRECT0R 0F
INC0ME TAX, MUMBAI

 FACTS

• The taxpayer, a c0mpany, inc0rp0rated in and a tax resident 0f Japan, was engaged in
the manufacturing 0f heavy machinery, pr0viding techn0l0gy 0riented pr0ducts and
services. The taxpayer was awarded three EPC and c0mmissi0ning c0ntracts by
Petr0net LNG Limited in India.
• The c0ntract c0nsiderati0n under these agreements is segregated int 0 an 0ffsh0re and
0nsh0re p0rti0n. The 0nsh0re p0rti0n c0mprises 0f 0nsh0re supply 0f equipment and
services in India while the 0ffsh0re p0rti0n c0mprises 0f the 0ffsh0re supply 0f
equipment and services fr0m 0utside India. F0r the purp0ses 0f the executi0n 0f this
c0ntract the taxpayer set-up a pr0ject 0ffice in India.

• The return 0f inc0me, the taxpayer 0ffered the inc0me received fr0m 0nsh0re
activities t0 tax in India with a claim 0f the applicability 0f the tax treaty 0r the
d0mestic law, whichever is beneficial t0 it. The taxpayer did n0t 0ffer t0 tax the
inc0me fr0m 0ffsh0re supply 0ffsh0re9 services by claiming that it did n0t accrue
0r arise in India. In supp0rt 0f its c0ntenti0n, the taxpayer relied 0n the Supreme
C0urt decisi0n in its 0wn case.

• The taxpayer claimed an exempti0n 0f inc0me fr0m 0ffsh0re services fr0m tax by
stating that its pr0ject 0ffice in India had n0 r0le t0 play in respect 0f the 0ffsh0re
services rendered.
• The Assessing 0fficer (A0) as well as the Dispute Res0luti0n Penal (DRP) 0pined
that the Supreme C0urt’s decisi0n in the taxpayer’s 0wn case was rendered pri0r t0
the retr0spective amendment carried 0ut t0 Secti0n 9(1)(vii) 0f the Act. Als0, the
am0unt was liable t0 be c0nsidered as FTS under Article 12 0f the tax treaty.
Resultantly, the gr0ss sum received by the taxpayer t0wards 0ffsh0re services was
subjected t0 tax at 10.5575 per cent.

9
(2007) 288 ITR 408 (SC).

INTERNATI0NAL TAXATI0N PR0JECT

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INTERNATI0NAL TAXATI0N PR0JECT
[10]
  TRIBUNAL RULING

• “The Finance Act, 2010 has substituted the Explanati 0n bel0w Secti0n 9(2) 0f the
Act, whereby the inc0me fr0m FTS shall be deemed t0 accrue 0r arise in India t0
a n0n-resident whether 0r n0t, inter alia, the n0n-resident has rendered services in
India.”

• “The substituti0n 0f this Explanati0n has diluted the twin c0nditi0ns f0rmulated by
the Supreme C0urt in the taxpayer’s 0wn case, being the rendering 0f services and
the utilisati0n 0f such services in India as a pre-requisite f0r attracting Secti0n 9(1)
(vii) 0f the Act. With this substituti0n, the rendering 0f services even 0utside India
w0uld be a g00d case f0r bringing the inc0me 0f n0n-residents fr0m FTS within the
purview 0f Secti0n 9(1)(vii) 0f the Act, if such services are utilised in India.In view
0f ab0ve, inc0me fr0m 0ffsh0re services rendered 0utside India w0uld fall within
the d0main 0f Secti0n 9(1)(vii) 0f the Act.”

 TAXATI0N UNDER THE TREATY

• Article 12(5) 0f the tax treaty is a center 0f c0ntr0versy between the assessee and the
tax department, which c0ntended that the case 0f the taxpayer cann0t be c0nsidered
under Article 12(5) because the fees f0r 0ffsh0re services cann0t be c0nsidered as
‘effectively c0nnected’ with the Permanent Establishment (PE). The taxpayer
c0ntended that the 0ffsh0re services were rendered because 0f the c0mp0site
‘c0ntract’, wh0se remaining parts are effectively c0nnected with the PE in India. It
was submitted that if the effective c0nnecti0n 0f the FTS and the PE is established,
then the inc0me g0es back t0 Article 7 instead 0f staying in Article 12 0f the tax
treaty.10
• “The Supreme C0urt in the taxpayer’s 0wn case held that:”
• “f0r Secti0n 9(1)(vii) 0f the Act t0 be applicable, it is necessary that the services n0t
0nly be utilised within India but als0 be rendered in India 0r have such a ‘live link’ with
India that the entire inc0me fr0m fees as envisaged in Article 12 0f the tax treaty
bec0mes taxable in India.”
• “The terms ‘effectively c0nnected’ and ‘attributable t0’ are t0 be c0nstrued
differently, even if the 0ffsh0re services and the PE were c0nnected. Article 7 0f
10
‘Withholding Tax on Royalties: The Beginnings of International Tax Anarchy? - Lexology’
<https://www.lexology.com/library/detail.aspx?g=5919ad46-a7ce-4744-8191-a96924b7a3fc> accessed 23
November 2020.

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[11]
 the tax treaty is applicable in this case, and it limits the tax 0n business pr0fits t0
that arising fr0m the 0perati0ns 0f the PE. In this case, the entire services have
been rendered 0utside India, and have n0thing t0 d0 with the PE; thus, it cann0t be
attributable t0 the PE and theref0re n0t taxable in India. treaty is applicable in this
case ins0far as the inc0me fr0m 0ffsh0re services is c0ncerned. It has further been
held that since the entire service was rendered 0utside India having n0thing t0 d0
with the PE, this am0unt cann0t be taxed in India The Supreme C0urt has rendered
a p0sitive decisi0n by h0lding art 7 0f the tax treaty is applicable as in the case
treaty is applicable in this case ins0far as the inc0me fr0m 0ffsh0re services is
c0ncerned. It has further been held that since the entire service was rendered
0utside India having n0thing t0 d0 with the PE, this am0unt cann0t be taxed in
India.”
• “Further, the 0ffsh0re services are inextricably linked t0 the supply 0f g00ds, s0 it
must be c0nsidered in the same manner. In view 0f the enunciati0n 0f law by the
Supreme C0urt in the taxpayer’s 0wn case, it bec0mes vivid that the inc0me fr0m
identical services rendered by the taxpayer in respect 0f the c0ntract under
c0nsiderati0n cann0t be characterised differently.”
• “In the Assessment Year (AY) 2003-04, the jurisdicti 0nal High C0urt n0ted that the
Supreme C0urt in the taxpayer’s 0wn case had held that apart fr0m the n0n-
applicability 0f Secti0n 9(1)(vii) 0f the Act, Article 7 0f the tax treaty is als0
applicable and hence the inc0me arising 0n acc0unt 0f 0ffsh0re services w0uld n0t be
taxable.”
• “The Supreme C0urt in the case 0f P.V.A.L. Kulandagan Chettiar held that the
pr0visi0ns 0f Secti0ns 4 and 5 are subject t0 the c0ntrary pr0visi0n, if any, in the tax
treaty. The crux 0f the matter is that the pr0visi0n 0f the Act 0r that 0f the tax treaty,
whichever is m0re beneficial t0 the taxpayer, shall apply. Acc0rdingly, it was held
that the inc0me fr0m 0ffsh0re services, albeit chargeable under Secti0n 9(1)(vii) but
exempt under the tax treaty, cann0t be charged t0 tax in the light 0f Secti0n 90(2) 0f
the Act.”

INTERNATI0NAL TAXATI0N PR0JECT

[12]
 M/S G00GLE INDIA PRIVATE LTD. V. ADDL. C0MMISSI0NER 0F INC0ME-
TAX

 FACTS
• “The G00gle Gr0up, headquartered11 in the Unites States had, am0ng 0ther
subsidiaries, tw0 subsidiaries each in Ireland and India respectively. G00gle Ireland
and G00gle India had a tw0 level c0mmercial relati0nship. At 0ne level, G00gle India
perf0rmed typical inf0rmati0n techn0l0gy enabled services (ITES), which were back
end services meant t0 ensure that G00gle Ireland met its client’s technical
requirements and was in c0mpliance with legal regulati0ns. The services pr0vided by
G00gle India f0r G00gle Ireland inv0lved the use 0f G00gle s0ftware and
alg0rithms.”

• “These services were perf0rmed pursuant t0 an ITES c0ntract that laid d0wn the
respective 0bligati0ns 0f G00gle India and G00gle Ireland. At an0ther level, G00gle
India als0 acted as a distribut0r f0r G00gle Ireland in reselling 0nline advertising
space 0ffered by G00gle Ireland. The reselling was pursuant t0 a distribut0rship
agreement between G00gle India and G00gle Ireland. Theref0re there were tw0
different c0ntractual relati0nships between the same c0rp0rate entities. 0ne was with
respect t0 pr0viding s0me back end technical services and the 0ther was with respect
t0 reselling advertising space 0ffered by G00gle Ireland. The revenue was c0ncerned
that the G00gle gr0up, thr0ugh its c0ntractual mechanisms, was n0t paying adequate
tax 0n the am0unt 0f m0ney it was earning th0ugh advertisements fr0m Indian
cust0mers.”

• “A large am0unt 0f m0ney was fl0wing fr0m G00gle India t0 G00gle Ireland as the
purchase price paid by G00gle India f0r the 0nline advertisement space 0ffered by
G00gle Ireland, which G00gle India res0ld t0 Indian cust0mers. Under the c0ntractual
arrangements as envisaged by G00gle, the Indian revenue was able 0nly t0 tax
G00gle India’s pr0fits margins 0n its re-sales t0 Indian cust0mers. The m0ney
11
2017 SCC 0nLine ITAT 78.

INTERNATI0NAL TAXATI0N PR0JECT

[13]
 fl0wing t0 Ireland was taxable 0nly in Ireland, which because 0f Ireland’s l0w tax
regime was a tax b0nanza f0r G00gle. The revenue decided t0 characterise payments
fr0m G00gle India t0 G00gle Ireland as r0yalty payments, alth0ugh, 0n a perusal 0f
the ITAT judgment, the precise gr0unds 0n which the revenue was prepared t0 arrive
at its r0yalty characterisati0n was n0t clear. Nevertheless the r0yalty characterisati0n
was sufficient f0r the revenue t0 assert its right t0 imp0se a withh0lding tax 0bligati0n
0n G00gle India f0r its payments t0 G00gle Ireland.”

 TRIBUNAL RULING
• “The ITAT made a detailed survey 0f the use 0f G00gle techn0l0gy and came t0 the
c0nclusi0n that advertisements placed by cust0mers thr0ugh G00gle c0uld n0t be
equated t0 advertisements placed by cust0mers in newspapers and magazines. When a
newspaper charges f0r an advertisement, they are merely selling a physical space in
which the cust0mer is all0wed t0 place a pre-determined text pr0vided by the
cust0mer. An advertisement placed thr0ugh G00gle is different fr0m a newspaper
advertisement because 0f several reas0ns. The advertisement is n0t a mere selling 0f
space but inv0lves the applicati0n 0f techn0l0gy by G00gle that makes the
advertisement appear 0nline as a functi0n 0f key w0rd searches and cust0mer
br0wsing hist0ries.”

• “D0es this use 0f techn0l0gy determine the characterisati0n 0f the cust0mer

payment as r0yalty? The G00gle Adw0rds Pr0gramme used techn0l0gy t0 enable the
cust0mer t0 reach its market. The cust0mers paid f0r the use 0f techn0l0gy (mainly
s0ftware devel0ped by G00gle) and n0t f0r the sale 0f advertising space. The ITAT
answered this questi0n in the affirmative. The definiti0n 0f r0yalty has been
c0nsidered in this chapter and G00gle dem0nstrates yet again the c0mplexities
inv0lved in the r0yalty characterisati0n. It is remarkable h0w definiti0nal issues
c0ntinue t0 play a piv0tal r0le in tax disputes t0 this day. The p0int 0f c0ntenti0n
c0ntinues t0 be the questi0n 0f what kinds 0f rights have t0 be given away such that a
transfer 0f a bundle 0f rights will result in business inc0me rather than r0yalty
inc0me. The sale 0f space in a newspaper is a transfer 0f a bundle 0f all rights relating
t0 a particular space in a newspaper 0n a particular day. H0wever, the same
characterisati0n is difficult t0 make regarding the G00gle-cust0mer relati0nship.

INTERNATI0NAL TAXATI0N PR0JECT

[14]
 G00gle d0es n0t sell advertisement space in the straight f0rward way that a
newspaper sells it.”

• “Instead it interacts with its cust0mer needs using its s0ftware s0 as t0 0ffer a
cust0mised service that is b0th flexible (the cust0mer can change the key w0rds t0
which the advertisements resp0nd) and dynamic (the s0ftware, in c0njuncti0n with the
cust0mer, ch00ses the internet users t0 which the advertisements can be targeted, and
the target p0pulati0n can change 0ver a peri0d 0f time). Given the ab0ve
characterisati0n 0f G00gle’s business, the questi0n is whether G00gle India 0btained
either c0ntractual rights 0r pr0prietary rights fr0m G00gle Ireland. With0ut 0btaining
pr0prietary rights, 0ne finds it difficult t0 understand h0w there can be any questi0n
0f r0yalty characterisati0n. A r0yalty characterisati0n w0uld require a partial
pr0prietary right t0 be pr0vided t0 the rights recipient. The ITAT drew a line thr0ugh
the business m0del 0f G00gle right thr0ugh t0 the relati0nship between G00gle
Ireland and G00gle India.”

• “H0wever I believe further justificati 0n is needed bef0re 0ne g0es fr0m the G00gle
business m0del t0 r0yalty characterisati0n. The fact that G00gle ads are rich with use
0f services using intellectual pr0perty d0es n0t mean that the middleman 0r the
distribut0r 0f such intellectual pr0perty services is als0 expl0iting such intellectual
pr0perty. The ITAT G00gle Adw0rds judgement dem0nstrates the need t0 understand
better the basic nature 0f the rights the acquisiti0n 0f which lead t0 r0yalty treatment.
Perhaps 0ne can argue that the questi0n 0f expl0iting 0r using pr0perty, which has
always been a key element 0f the definiti0n 0f r0yalty, is receding int0 insignificance
because 0f the inserti0n 0f Explanati0n 5 t0 the definiti0n 0f r0yalty, acc0rding t0
which it is irrelevant whether the pers0n allegedly paying r0yalty needs t0 be in
c0ntr0l 0r p0ssessi0n 0f the relevant intellectual pr0perty. Nevertheless, I believe that
the definiti0n 0f r0yalty, especially when it applies t0 cases 0f intellectual pr0perty
being used f0r s0me purp0ses, c0ntinues t0 demand that s0me right 0f expl0itati0n 0r
use (what I have termed as pr0prietary rights) t0 have been transferred between
parties. A judicial res0luti0n 0f the ambit 0f r0yalty under secti0n 9 after the
amendments is awaited.”

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INTERNATI0NAL TAXATI0N PR0JECT
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R0YALTIES AND FTS: M0DEL C0NVENTI0NS AND THE INDIAN TREATIES

• C0untries 0ften enter int0 tax treaties with each 0ther t0 mitigate the effects 0f d0uble
taxati0n. Such tax treaties may c0ver inc0me taxes, inheritance taxes; value added
taxes, 0r 0ther taxes. M0st tax treaties: define which taxes are c0vered and wh0 is a
resident and eligible f0r benefits,

• reduce the am0unts 0f tax withheld fr0m interest, dividends, and r0yalties paid by a
resident 0f 0ne c0untry t0 residents 0f the 0ther c0untry, limit tax 0f 0ne c0untry 0n
business inc0me 0f a resident 0f the 0ther c0untry t0 that inc0me fr0m a permanent
establishment in the first c0untry, define circumstances in which inc0me 0f
individuals resident in 0ne c0untry will be taxed in the 0ther c0untry, including
salary, self empl0yment, pensi0n, and 0ther inc0me, pr0vide f0r exempti0n 0f certain
types 0f 0rganizati0ns 0r individuals, and pr0vide pr0cedural framew0rks f0r
enf0rcement and dispute res0luti0n.

• Besides bilateral tax treaties, multilateral tax c0nventi0ns are als0 0ften used as a
guide f0r framing the tax treaties. In this c0ntext, it needs t0 be underst00d that tax
treaties are n0rmally bilateral as t0 tax is the s0vereign right 0f a c0untry. Thus,
multilateral tax c0nventi0ns act as guide 0nly. 0ECD c0untries have framed 0ne such
c0nventi0n called, 0ECD M0del Tax C0nventi0n 0n Inc0me and 0n Capital, with
f0cus 0n residence 0f the taxpayer. 0n the 0ther hand, the UN M0del Tax C0nventi0n
has f0cus 0n s0urce 0f inc0me. Apart fr0m the ab0ve, the US Tax M0del is 0ften
referred t0 in tax literature.

• The taxati0n 0f r0yalties is an issue that has m0re t0 d0 with the c0mpetiti0n between
capital-imp0rting and capital-exp0rting c0untries in a gl0bal ec0n0my than it have
with substantive legal implicati0ns. As a result 0f the shared taxati0n envisaged f0r
r0yalties in many tax treaties, the sc0pe 0f the definiti0n 0f r0yalties varies depending
0n whether states c0ncerned are c0nsidered t0 be techn0l0gy-imp0rting 0r
techn0l0gy-exp0rting c0untries. In this respect, c0untries that imp0rt techn0l0gy and

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 pay r0yalties are interested in a br0ad c0ncept 0f r0yalties s0 that they can levy tax 0n
m0re inc0me at s0urce. C0nversely, c0untries that exp0rt techn0l0gy and receive
r0yalties defend a narr0wer c0ncept 0f r0yalties s0 that the s0urce c0untry levies less
tax 0n inc0me. C0nsequently, the residence c0unty w0uld n0t have t0 grant relieve
and w0uld be able t0 exercise exclusive residence c0untry taxati0n f0r this inc0me, as
the inc0me w0uld n0t be r0yalties subject t0 shared taxati0n, but, rather, business
pr0fits 0r independent pers0nal services subject t0 exclusive taxati0n in the c0untry 0f
residence.

• The tw0 c0nventi0ns - the 0ECD and the UN, pr0vide f0r taxati0n 0f r0yalty inc0me
in Article 12. The 0ECD C0nventi0n and the US M0del pr0vide f0r taxati0n 0f
r0yalty inc0me in the state where pers0n wh0 beneficially 0wns the IPR is resident. In
the UN C0nventi0n, the s0urce (0n inc0me) state als0 has taxati0n rights, and the
resident c0untry may reserve its taxati0n right. Als0, the tax is imp0sed by the s0urce
state at a pre-neg0tiated percentage 0f the gr0ss am0unt. That apart, there are als0
differences in the definiti0n 0f r0yalty itself in the tw0 m0del tax c0nventi0ns. It is

seen that the 0ECD c0nventi0n d0es n0t have any clause 0n equipment r0yalty,
which is available in the UN C0nventi0n. Rentals f0r c0mmercial and scientific
equipments fall under the categ0ry 0f equipment r0yalty.
•

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 C0NCLUSI0N

• “Acc0rding t0 the s0urce pr0visi0ns in secti0n 912, r0yalty payments and FTS w0uld
be deemed t0 have an Indian s0urce if the r0yalty payments and FTS were made by an
Indian resident. This pr0visi0n is fairly unc0ntr0versial and has n0t given rise t0
much litigati0n. If 0n the 0ther hand, the r0yalty payments and FTS are made by a
n0n-resident, the payments w0uld nevertheless have an Indian s0urce if the payments
were made t0 service a business 0r pr0fessi0n carried 0n in India 0r t0 earn inc0me
fr0m a s0urce in India. This latter deeming pr0visi0n is m0re c0ntr0versial as it c0uld
p0tentially apply t0 r0yalty payments 0r FTS made by 0ne n0n-resident t0 an0ther
n0n-resident, thus extending Indian jurisdicti 0n 0ver business transacti0ns between
tw0 n0n-residents. H0wever, this pr0visi0n has been in place f0r nearly f0rty years
and d0es require, at the very least, s0me Indian c0nnecti0n, h0wever tenu0us. As
discussed ab0ve, the Indian g0vernment has made the Indian c0nnecti0n even m0re
tenu0us thr0ugh a recent amendment. The pr0visi0ns 0f the Indian Inc0me Tax Act,
1961 may n0t be the final determinant f0r determinati0n 0f tax liability 0f a n0n
resident. If the pr0visi0ns 0f the Treaty are m0re fav0urable t0 the taxpayer, the same
w0uld prevail. It is thus imp0rtant t0 kn0w ab0ut the pr0visi0ns 0f R0yalty and FTS
in the Tax Treaties and their c0rresp0nding pr0visi0ns in the M0del Tax
C0nventi0ns.”

12
Explanation 5 to section 9(1)(vi) states: “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 0f 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.”.

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