“tax treaty”
The decision most relied on for tax treaty is Union of India v. Azadi Bachao Andolan (263 ITR 706), cited in 691 judgments on BharatTax.
Leading authorities on tax treaty
A citizen is free to carry on business within the law, and mere tax planning without a motive to evade taxes through colorable devices is not frowned upon. The liability to taxation, for the purpose of tax treaty application, is a legal situation, not the fiscal fact of actual payment.
Payments for the use of equipment, such as satellite transponders, do not constitute 'royalty' under Section 9(1)(vi) of the Income-tax Act, 1961, or under applicable tax treaties, especially when there is no transfer of the right to use a process or underlying technology.
An amendment to the Income Tax Act, such as the Finance Act, 2012 amendment to Section 9(1)(vi) defining royalty, does not automatically override or alter the definition of 'royalty' as provided in a Double Taxation Avoidance Agreement (DTAA) unless the DTAA itself is bilaterally amended. The definition of royalty in a DTAA remains unaffected by unilateral changes to domestic law.
Legitimate tax planning is permissible, allowing taxpayers to arrange their affairs to minimize tax liabilities while respecting the "look at test" for transaction genuineness and the separate entity principle in corporate taxation. The source of funds for treaty-beneficial structures does not automatically invalidate the transaction.
Payments for the use of copyrighted software, without the transfer of any rights in the underlying copyright itself, do not constitute 'royalty' under the Income-tax Act or tax treaties. Such payments are often treated as business income, taxable only if a permanent establishment exists.
Revenue must demonstrate the existence of a Permanent Establishment (PE) of a foreign enterprise in India, including establishing that transactions underlying a Dependent Agent PE were not at arm's length. Income from the sale of goods is not taxable in India if title and risk in the goods pass outside India.
This case provides foundational principles that illuminate the contours of the concept of 'Permanent Establishment' (PE) under tax treaties, especially regarding a 'fixed place' PE.
For fees for technical services to be taxable under a tax treaty's 'make available' clause, a transfer of technology enabling the recipient to independently perform the service in the future is necessary, beyond mere service rendition. The case also clarifies that re-insurance services do not constitute 'imparting' of information taxable as royalty.
