TDS on Royalty and Fees for Technical Services(“FTS”)
It should be noted that TDS on royalty and FTS will not only be dependent on the particular payment but will also be affected by the provisions of the relevant Double Tax Avoidance Agreement (“DTAA”)which India has with the country to which the payment is being made and the judicial decisions and the Advance rulings on the subject must be interpreted after considering this factor also.
Further the Apex court in the case of Tata Consultancy Services has also distinguished between the assignment of Copyright and the sale of a copyrighted article (ie a book or a CD containing software licenced to the purchaser). While in the former case,the payment will be in the nature of royalty and attract TDS in the latter case it will not being in the nature of the sale of goods.In the following decisions it was held that the transaction in question amounted to a mere sale of a copyrighted article and hence not liable to TDS
Lucent Technologies Ltd 270 ITR 62 (Bangalore ITAT)
Ericsson- Motorola –Nokia case 95 ITD 269 (Del ITAT)
Further it was also held that the mere payment of connectivity charges was not royalty or FTS and hence not liable to TDS as held in Skycell Communications Ltd 251 ITR 53 (MP)
Even payment made for an access to a database on an overseas server will not attract TDS as held in Dun & Bradstreet Advance ruling reported in 272 ITR 99 (AAR)
FTS which covers only Fees for Included Services (“FIS”) in the relevant DTAA (eg USA) will attract TDS if the fees paid only fall under the definition of included services and not otherwise as held in the case of Calcutta Electric Supply Corporation Ltd 80 TTJ 806 (Kol). Such treaties usually have a “make available “ clause in the definition of FTS and the relevant treaty will have to be scrutinized in detail along with the nature of payment to determine whether TDS is applicable or not. The old adage that one man’s food is another mans poison may well apply here so that one man’s FTS is not taxable while the other ones may well be.
Payment for any subsidiary/ ancilliary services to sale of Capital equipment will also not attract TDS especially if the services payment is non severable and forms part of the main contract for the supply of Capital Goods (Hindalco Ltd 94 TTJ 944 (Mum). No discussion on this issue will be complete without some discussion on the Samsung case as decided by the Karnataka High Court
6. Samsung Case
In this landmark case, the Karnataka High Court has ruled that TDS u/s 195 is applicable on all payments of “shrink wrapped software” and further gone on to state that all payments to Non residents would need to suffer WHT and the only measure available to the payer of such sums to get out of this obligation would be to apply to the assessing Officer for a certificate of lower WHT under section 195(2).The position seems to have been further exacerbated with the withdrawal of the circular 23 of 1969 which had fettered the IT department from agitating on the issue of WHT on the payments which were covered within it. Transmissions corporation’s case 239ITR 587SC also seems to have been misconstrued by the Hon’ble High Court. This case also overturns the principle of the TCS case (supra) that sale of a shrink wrapped software amounts to the sale of a Copyrighted product and not to license of the copyright
Though the Apex Court has granted a stay of demand on this case, prima facie the payers of amounts to Non residents are a worried lot due to this decision as it has had the McDowell effect in the realm of TDS u/s 195.
Despite this aura of gloom, there are certain defenses which may be available to assesses and these are briefly discussed below
Section 195(1) covers WHT on interest and other sums chargeable to tax under the provisions of this (the IT Act).With due respect to the bench, this fact emphasized above seems to have been totally ignored
The Karnataka High Court in the earlier case of Jindal Power dealing with EPC contracts has categorically ruled that amounts not having the character of income are not subject to WHT u/s 195. This case was not cited during the hearing of the Samsung case and therefore the latter may be easily to have been decided per incuriam. Further there is a well settled principle of tax law that in case where there are two interpretations , the one favourable to the taxpayer will prevail
Last but not least sec 195(6) gives the power to the CBDT to ask for information from persons effecting remittances offshore and in exercise of this power has prescribed Forms 15CA and 15CB (a CA’s certificate) as an alternative to section 195(2). This fact is not considered in the Samsung case
Though the above arguments will be far harder to sustain in areas subject to the jurisdiction of the Karnataka High Court, they do have some substance in cases where the I T department adopts a Procrustean approach (literally) to WHT post Samsung, which they are very likely to do.
Post Samsung, one would have expected the CBDT to issue a clarification (one way or the other) and removed the Damocles sword of TDS from over the assessee’s head.
Income by way of interest/royalty/ FTS [Section 9(1)(v)/(vi)/(vii)]: Vide Finance Act, 1976, a source rule was provided in section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia , that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein.
The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India.
By the Finance Act, 2010; the Legislature retrospectively amended the Explanation to section 9 of the Act from 01.07.1976 ( which was inserted retrospectively only vide the Finance Act, 2007 ) to reiterate the taxability of income by way of interest, royalty and FTS, under the principle of 'source rule of taxation'. This was done with a view to reverse the findings of the Apex Court in the cases of Ishikawajima-Harima Heavy Industries Ltd. v. DIT, (288 ITR 408) - (2007-TII-01-SC-INTL) and the Karnataka High Court in the case of Jindal Thermal Power Company Ltd. v. DCIT (TDS),- (2009-TII-16-HC-KAR- INTL) on the issue of taxability of FTS in India u/s 9 of the Act. The Legislature amended the language of the Explanation to provide that situs of rendering of services was not relevant in determining the taxability of the aforesaid income u/s.9 of the Act. The Memorandum explaining the Finance Bill, 2010 specifically stated the intention of the Legislature to tax the fees from technical services which are provided from outside India as long as they are utilised in India. So, if it is utilised in India, tax has to be deducted.