2009 (11) TMI 19 - AAR - Income Tax

Tax on Royalties - The DTAA has been amended by reducing the maximum rate of tax payable on royalty at 10% and the protocol was notified by the Central Govt. under Section 90 of the Income-Tax Act, 1961 on 19th July, 2006. The applicant contends that in view of the amendment, the tax liable to be paid on the gross amount should be @ 10% instead of 20% - held that - income by way of royalty accruing to the applicant is liable to be taxed in terms of Article 12 of the DTAA at a rate not exceeding 10% from the assessment year 2008-09 onwards.

Summary

Issues:
Interpretation of Double Taxation Avoidance Agreement (DTAA) between India and Japan regarding taxation of royalties.

Analysis:
The case involved a company incorporated in Japan engaged in construction activities and providing architectural and civil engineering services. The company had a subsidiary in India, which entered into a technical collaboration agreement with the parent company for the transfer of technical know-how and information. The agreement involved the payment of royalties by the Indian subsidiary to the parent company at a rate of 5% of turnover. The issue at hand was the taxation of these royalties under the India-Japan DTAA.

The applicant sought a ruling on whether the income by way of royalties should be taxed at a rate not exceeding 10% as per the amended DTAA. The DTAA had been amended to reduce the maximum tax rate on royalties from 20% to 10%. The applicant contended that the reduced tax rate should apply from the assessment year 2008-09 onwards. The DTAA defined royalties as payments for the use of copyrights, patents, trademarks, designs, or for technical information concerning industrial, commercial, or scientific experience.

The Protocol to the DTAA specified that the reduced tax rate of 10% would be applicable for the previous year beginning on or after 1st April 2007, relevant to the assessment year 2008-09. Both the applicant and the Revenue agreed that the reduced rate of 10% would be applicable from the assessment year 2008-09 onwards. The ruling clarified that the income by way of royalty would be taxed at a rate not exceeding 10% from the assessment year 2008-09 onwards, as per the amended DTAA provisions.

In conclusion, the ruling by the Authority for Advance Rulings confirmed that the income by way of royalties accruing to the applicant would be taxed at a rate not exceeding 10% from the assessment year 2008-09 onwards, in accordance with the provisions of the India-Japan DTAA. The ruling emphasized that the decision did not concern the tax deductions made by the applicant's subsidiary in previous years.