Case Law Details
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.
RELEVANT PARAGRAPH
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:-
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