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Retrospective Amendment To 'Royalty'
The Finance Act 2012 has inserted an explanation in section 9 of the Income tax Act 1961 (the Act) by way of a retrospective clarification. This explains that the transfer of all or any rights in respect of any right, property or information includes and has always included, the transfer of all or any right to use a computer software, irrespective of the medium through which such right is transferred. The implications of this explanation on the meaning of the term 'royalty' under the Act means the Tax Treaties have come into sharp focus. Taxand India focuses on the case which led to this legislative amend.
Nokia Network OY (Nokia) manufactured telecom equipment (which was used in fixed and mobile phone networks), and exported them to Indian telecom operators on a principal to principal basis, under independent buyer-seller arrangements.
Amongst other issues such as whether Nokia has a permanent establishment in India, attribution of profits in India etc., the Revenue Authorities, during audits of Nokia, also held that a portion of the revenues earned by it from sale of its telecom equipment to Indian telecom operators ought to be attributed towards supply of software and taxed as royalty on a gross basis under section 9 of the Act, as well as Article 13 of India-Finland DTAA.
The Revenue Authorities missed a vital point; Nokia had opted to be governed by the Treaty, the language of which, where royalty is concerned, differs from the post 2012 position of royalty under the Act. The meaning of royalty under the Treaty is narrower than that in the Act.
The verdict of Delhi HC would usefully illustrate the principles of interpretation of bilateral treaties signed by India with other countries vis-?-vis the provisions of the Act. It is important for multinationals to note that while the definition of a word may be clarified retrospectively under the provisions of the Act, this is not the same for treaties and therefore the treaty language is at variance to the Act until such time that the treaties are renegotiated.