Skip to content

CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Kaveri Tech Ltd, an Indian company, pays Rs 50 lakh to Brightwave Inc., a non-resident, for software. Brightwave is a tax resident of Country Y. The India-Y treaty defines royalty narrowly and excludes payment for software licensed for end use without rights to copy it commercially. The Act's Explanation to section 9(1)(vi) is wider and covers such payments. Brightwave has a TRC and Form 10F. What is the correct position for Brightwave's tax liability in India on this payment?

The payment is not taxable in India as royalty. Under section 90(2) Brightwave can rely on the narrower treaty definition, which excludes such software payments, so the receipt is business profits and, absent a permanent establishment in India, is not taxable here.

  1. ATaxable as royalty at domestic rates because the Act's wider definition prevails over the treaty
  2. BTaxable at the treaty rate of 10% as royalty
  3. CNot taxable as royalty in India, as the more beneficial narrower treaty definition can be applied, so it is treated as business profits without a permanent establishmentCorrect
  4. DTaxable only if the payment exceeds Rs 1 crore

Explanation

Section 90(2) allows the assessee to opt for the treaty where more beneficial. The treaty definition of royalty excludes such software payments, so the amount is not royalty under the treaty. It falls under business profits, taxable in India only if Brightwave has a permanent establishment, and none is stated. Domestic widening of definition does not override a beneficial treaty.

Did you get it right without looking?

One question tells you little. A timed set on Application and Interpretation of Tax Treaties shows your real accuracy, how long you take and where you lose marks.

Practise Application and Interpretation of Tax TreatiesFree diagnostic mock

More Application and Interpretation of Tax Treaties questions