The income by way of royalty accruing to the Japanese company is liable to be taxed in terms of Article 12 of the DTAA between India and Japan at a rate not exceeding 10 per cent from the assessment year 2008-09 onwards.
1. The applicant is a company incorporated in Japan. It is engaged in construction activities and provides architectural and civil engineering services. SMCC Construction India Limited (SMCI) is an Indian Company and a subsidiary of the applicant and is operating as a construction company involved in general construction and civil engineering. The said Company provides industrial construction and related engineering consultancy services.
2. The applicant had entered into a technical collaboration agreement with SMCI on 10th December 1997. It may be mentioned that the names of the two Companies have undergone a change. As per the Agreement, the applicant had agreed to furnish to SMCI under a license the technical know-how and technical information covering the provision of contract services and assistance for the marketing. It has also granted exclusive right to SMCI to provide contract services in India and non exclusive rights to provide contract services outside India. The applicant held patents in respect of basic designs, methods and turnkey contract management techniques. The applicant has been getting royalty from SMCI towards transfer of know-how and technical information @ 5% of the SMCI’s turnover and such royalty payable by SMCI constitutes 5% of the ‘net sales of SMCI separately for domestic as well as export market for a period of 7 years from the date of commercial production of SMCI. This agreement was renewed on 12.08.2004 for a period of 10 years, with the approval of Ministry of Commerce & Industry, Govt. of India. However, the percentage of royalty payable has been varied.
3. The income by way of royalty has been offered to tax in India by the applicant and returns have been filed. Further, SMCI while paying the royalty to the applicant has been deducting the tax @ 20% which is the rate originally prescribed under Article 12 of the India-Japan DTAA (Refer Note Below) . The DTAA has been amended by reducing the maximum rate (Refer Note Below) The Convention between the Govt. of the Republic of India and the Govt. of Japan for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income 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%. Accordingly, the applicant seeks the ruling of this Authority in respect of the following question:-
Whether in the facts and circumstances of the case and in law, the income by way of royalties arising to the applicant in India in terms of Article 12 of the Agreement for avoidance of double taxation and prevention of fiscal evasion between India and Japan should be taxed in terms of the paragraph (2) of the Article as amended by Article III of Protocol dated 24.02.2006 at a rate not exceeding 10% from assessment year 2007-08 onwards?
4. The applicant’s counsel has stated in the course of arguments that the reference to the year 2007-2008 is an inadvertent mistake and it ought to be 2008-09. In the written submission filed on dt 17th November 2009, this was again made clear. The applicant sought for substitution of the assessment year 2007-08 with the assessment year 2008-09 (financial year 2007-08). This amendment has been permitted.
5. The relevant part of Art.12 of the DTAA between India and Japan reads thus:
1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.
2. However, such royalties and fees for technical services may also be taxed in the Contacting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.
3. The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.
4. The term “fees for technical services” as used in this article means payment of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14 in consideration for the services of a managerial, technical or consultancy nature including the provisions of services of technical or other personnel.”
6. The figure 10% occurring in paragraph 2 was substituted for 20% in the year 2006, as stated above. Article III of the Protocol reads thus:
Paragraph 2 of Article 12 of the Convention shall be deleted and replaced by the following :
“2. However, such royalties and fees for technical services
may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.”
Then, Article V provides for the effective date of operation of the said amendment in the following terms:
2. This Protocol shall be applicable :
(a) in Japan :
(i) xx xx xx xx xx
(b) in India :
(i) with respect of taxes withheld at source, for amounts paid or credited on or after 1st April of the calendar year next following that in which the Protocol enters into force; and
(ii) with respect to taxes on income for any previous year beginning on or after 1st April of the calendar year next following that in which the Protocol enters into force.”
7. It is clear from the wording of clause (ii) or para 2(b) of Article V that the amended rate of tax of 10 % will be applicable for the previous year beginning on or after 1st April 2007 (relevant to the assessment year 2008-09). There is no doubt nor any dispute on the point that the payments received by the applicant from the SMCI are in the nature of royalties within the meaning of Article 12(3) of the DTAA. The Technical Collaboration Agreement makes it clear that the applicant (licensor) will be furnishing to the licensee the know-how and technical information and assistance for the marketing and provision of contract services. The term ‘contract services’ is defined in detail in AnnexureA. The term ‘technical information’ is that related to “basic design methods and turn-key construction management techniques as also other technical information available for the provision of the contract services as are applicable to the operations of the licensee”. Some of the services or part of the assistance rendered may also fall under para 4 of Article XII which deals with “fees for technical services” but it is not necessary to demarcate and pin-point the items which fall within paras 3 & 4 respectively because the rate of taxation is the same. The Revenue has in its comments agreed with the contention of the applicant that the reduced rate of 10% will be applicable, while making it clear that the said rate will be applicable only for the assessment year 2008-09 onwards but not 2007-08. Now that the applicant has amended the question by substituting the year 2008-09, there is no point of dispute between the applicant and the Revenue.
8. The question is therefore answered in the affirmative holding that the 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. We make it clear that we are not concerned here with the deduction of taxes during the earlier years by the applicant’s subsidiary Company, namely SMCI.
Accordingly, the ruling is given on this the 20th day of November, 2009.
F.No. AAR/830/2009 dated 20/11/2009
This copy is certified to be a true copy of the Ruling and is sent to:
(Batsala Jha Yadav) Addl. Commissioner of Income-tax, AAR