Tapuriah Jain & Associates

DTAA BETWEEN INDIA & IRELAND

Agreement For Avoidance Of Double Taxation And Prevention Of Fiscal Evasion With Ireland.

Whereas the annexed Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to taxes on income and capital gains has entered into force on 26th December, 2001, thirty days after the receipt of the later of the notifications by both the Contracting States to each other of the completion of the procedure required by their respective laws, as required by Article 28 of the said Convention.

Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.

Notification: No. 45/2002 [F. No. 503/6/99-FTD], dated 20-2-2002.

ANNEXURE

CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND FOR THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS

The Government of the Republic of India and the Government of Ireland, desiring to conclude a Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income and capital gains and with a view to promoting economic co-operation between the two countries, have agreed as follows :

ARTICLE 1 : Personal Scope - This Convention shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2 : Taxes Covered -

1. This Convention shall apply to taxes on income and capital gains imposed on behalf of a Contracting State or of its political sub-divisions or local authorities irrespective of the manner in which they are levied.

2. There shall be regarded as taxes on income and capital gains all taxes imposed on total income, or on elements of income including taxes on gains from the alienation of movable or immovable property.

3. The existing taxes to which the Convention shall apply are in particular :—

(a) In India : the income-tax including any surcharge thereon; (hereinafter referred to as “Indian tax”);

(b) In Ireland :

(i) the income-tax;

(ii) the corporation tax; and

(iii) the capital gains tax (hereinafter referred to as “Irish tax”).

4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes referred to in paragraph 3. The competent authorities of the Contracting States shall notify each other of significant changes which have been made in their respective taxation laws.

ARTICLE 3 : General Definitions -

1. For the purposes of this Convention, unless the context otherwise requires :—

(a) the term “India” means the territory of India and includes the territorial sea and airspace above it, as well as any other maritime zone in which India has sovereign rights, other rights and jurisdiction, according to the Indian law and in accordance with international law, including the U.N. Convention on the Law of the Sea;

(b) the term “Ireland” includes any area outside the territorial waters of Ireland which, in accordance with international law, has been or may hereafter be designated under the laws of Ireland concerning the Continental Shelf, as an area within which the rights of Ireland with respect to the sea and subsoil and their natural resources may be exercised;

(c) the term “person” includes an individual, a company, a trust, a partnership which is treated as a taxable unit under the Income-tax Act, 1961 (43 of 1961) of India, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States;

(d) the term “company” means any body corporate or any entity which is treated as a body corporate for tax purposes;

(e) the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State;

(f) the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State;

(g) the term “competent authority” means :

(i) in the case of India : the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative;

(ii) in the case of Ireland : the Revenue Commissioners or their authorised representative;

(h) the term “national” means :

(i) in relation to Ireland, any citizen of Ireland and any legal person, association or other entity deriving its status as such from the laws in force in Ireland;

(ii) in relation to India (A) any individual possessing the nationality of India; (B) any legal person, partnership or association deriving its status as such from the laws in force in India;

(i) the term “fiscal year” means :

(i) in the case of India, “previous year” as defined under section 3 of the Income-tax Act, 1961;

(ii) in the case of Ireland, a year beginning with the sixth day of April in one year and ending with the fifth day of April in the following year;

(j) The term “tax” means Indian tax or Irish tax, as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty or fine imposed relating to those taxes;

(k) the terms “a Contracting State”, “one of the Contracting States” and “the other Contracting State” mean Ireland or the Republic of India, as the context requires, and the term “Contracting States” means Ireland and the Republic of India.

2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.

ARTICLE 4 : Resident -

1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows :

(a) he shall be deemed to be a resident of the State in which he has a permanent home available to him; if he has a permanent home available to him in both States, he shall be deemed to be a resident of the State with which his personal and economic relations are closer (centre of vital interests);

(b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode;

(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national;

(d) if he is a national of both States or of neither of them the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. If the State in which its place of effective management is situated cannot be determined, then the competent authorities of the Contracting States shall settle the question by mutual agreement.

ARTICLE 5 : Permanent Establishment -

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially :

(a) a place of management;

(b) a branch;

(d) a factory;

(e) a workshop;

(f) a mine, an oil or gas well, a quarry or any other place of extraction or exploration of natural resources;

(g) an installation or structure used for the exploration or exploitation of natural resources;

(h) a sales outlet;

(i) a warehouse in relation to a person providing storage facilities for others; and

(j) a farm, plantation or other place where agricultural, forestry, plantation or related activities are carried on.

3. A building site or construction or assembly project or supervisory activities in connection therewith constitute a permanent establishment only if such site, project or activity last more than six months.

4. An enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in connection with, or supplies plant and machinery on hire used for or to be used in, the prospecting for, or extraction or exploitation of mineral oils in that State.

5. Notwithstanding the previous provisions of this Article, the term “permanent establishment” shall be deemed not to include :

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information for the enterprise;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

(f) the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

6. Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 8 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State in respect of any activities which that person undertakes for the enterprise, if such a person:

(a) has and habitually exercises in that State an authority to conclude contracts in the name of the enterprise, unless the activities of such person are limited to those mentioned in paragraph 5 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph; or

(b) has no such authority, but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or

(c) habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same control as that enterprise.

7. Notwithstanding the preceding provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to re-insurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 8 applies.

8. An enterprise shall not be deemed to have a permanent establishment in a Contracting State merely because it carries on business in that State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, if the activities of such an agent are carried out wholly or almost wholly for the enterprise and the conditions made or imposed between them in their commercial and financial relations differ from those which would have been made or imposed if this had not been the case, that agent shall not be considered to be an agent of an independent status for the purpose of this paragraph.

9. The fact that a company which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

ARTICLE 6 : Income from immovable property -

1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may also be taxed in that other State.

2. The term “immovable property” shall have the meaning which it has under the laws of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, live stock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships, boats, aircraft and motor vehicles shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

ARTICLE 7 : Business profits -

1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may also be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, whether in the State in which the permanent establishment is situated or elsewhere. Executive and general administrative expenses shall be allowed as deductions in accordance with the taxation laws of that State. Nothing in this paragraph shall, however, authorise a deduction for expenses which would not be deductible if the permanent establishment were a separate enterprise.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

ARTICLE 8 : Shipping and air transport -

1. Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.

2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

3. For the purposes of this Article, interest on funds connected directly with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft; and the provisions of Article 11 shall not apply in relation to such interest, provided that such funds are incidental to that operation.

4. Notwithstanding the preceding provisions of this Article, profits derived by an enterprise of a Contracting State from the operation of ships between the ports of the other Contracting State and the ports of third countries may be taxed in that other Contracting State, but the tax imposed in that other State shall be reduced by an amount equal to two-thirds thereof.

ARTICLE 9 : Associated Enterprises -

1. Where—

(a) an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

(b) the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State, and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

2. Where a Contracting State includes in the profits of an enterprise of that State and taxes accordingly profits on which an enterprise of the other Contracting State has been charged to tax in that other State and the profits so included are profits which would have accrued to the enterprise of the first-mentioned State if the conditions made between the two enterprises had been those which would have been made between independent enterprises, then that other State shall make an appropriate adjustment to the amount of the tax charged therein on those profits. In determining such adjustment, due regard shall be had to the other provisions of this Convention and the competent authorities of the Contracting States shall if necessary consult each other.

ARTICLE 10 : Dividends -

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the recipient is the beneficial owner of the dividends the tax so charged shall not exceed 10 per cent of the gross amount of the dividends. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term “dividends” as used in this Article includes income from shares or other rights, not being debt-claims, participating in profit, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividend is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

ARTICLE 11 : Interest -

1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

3. Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by, or derived in connection with a loan or credit extended, guaranteed or insured by:

(a) the Government, a political sub-division, a statutory body or a local authority of the other Contracting State; or

(b) (i) in the case of India, the Reserve Bank of India, the Industrial Finance Corporation of India, the Industrial Development Bank of India, the Export-Import Bank of India, the National Housing Bank, the Small Industries Development Bank of India and the Industrial Credit and Investment Corporation of India (ICICI); and

(ii) in the case of Ireland, the Central Bank of Ireland; or

(c) any other similar institution as may be agreed from time to time between the Competent Authorities of the Contracting States.

4. The term “interest” as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, but does not include any income which is treated as a dividend under Article 10. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationships, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 12 : Royalties and fees for technical services -

1. Royalties or 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 State.

2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that 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. (a) 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 or 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, other than an aircraft, or for information concerning industrial, commercial or scientific experience;

(b) The term “fees for technical services” means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 13 : Capital gains -

1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may also be taxed in that other State.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may also be taxed in that other State.

3. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in that State.

4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that State.

5. Gains from the alienation of shares other than those mentioned in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that Contracting State.

6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.

ARTICLE 14 : Independent personal services -

1. Income derived by a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State except in the following circumstances, when such income may also be taxed in the other Contracting State:

(a) if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or

(b) if his stay in the other State is for a period or periods aggregating 183 days or more in any 12-month period commencing or ending in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in that other State.

2. The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, surgeons, dentists and accountants.

ARTICLE 15 : Dependent personal services -

1. Subject to the provisions of Articles 16, 18, 19 and 21, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:

(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned, and

(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and

(c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.

3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that State.

ARTICLE 16 : Directors’ fees - Directors’ fees and other similar payments derived by a resident of a Contracting State in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State may also be taxed in that other State.

ARTICLE 17 : Artistes and sportspersons -

1. Notwithstanding the provisions of Articles 14 and 15, income derived by a resident of a Contracting State as an entertainer, such as a theatre, motion picture, radio or television artiste, or a musician, or as a sportsperson, from his personal activities as such exercised in the other Contracting State, may be taxed in that other State.

2. Where income in respect of personal activities exercised by an entertainer or a sportsperson in his capacity as such accrues not to the entertainer or sportsperson himself but to some other person, that income may, notwithstanding the provisions of Articles 7, 14 and 15, be taxed in the Contracting State in which the activities of the entertainer or sportsperson are exercised.

3. The provisions of paragraphs 1 and 2, shall not apply to income from activities performed in a Contracting State by entertainers or sportspersons if the visit to that State is substantially supported by public funds of one or both of the Contracting States or of political sub-divisions or local authorities thereof. In such a case, the income is taxable only in the Contracting State of which the entertainer or sportsperson is a resident.

ARTICLE 18 : Pensions and annuities -

1. Subject to the provisions of paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment and any annuity paid to such a resident in consideration of past employment shall be taxable only in that State.

2. The term “annuity” means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.

ARTICLE 19 : Government service - 1. (a) Remuneration, other than a pension, paid by a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State.

(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

(i) is a national of that State; or

(ii) did not become a resident of that State solely for the purpose of rendering the services.

2. (a) Any pension paid by, or out of funds created by, a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that State or sub-division or authority shall be taxable only in that State;

(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.

3. The provisions of Articles 15, 16 and 18 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political sub-division or a local authority thereof.

ARTICLE 20 : Students and apprentices -

1. A student or business apprentice who is or was a resident of a Contracting State immediately before visiting the other Contracting State and who is present in that other Contracting State solely for the purpose of his education or training shall be exempt from tax in that other State on:

(a) payments made to him by persons residing outside that other State for the purposes of his maintenance, education or training; and

(b) remuneration from employment in that other State to the extent that it does not exceed the amount which is exempt from tax under the laws of that other Contracting State for any fiscal year; provided that such employment is directly related to his studies or is undertaken for the purposes of his maintenance.

2. The benefit of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken, but in no event shall any individual have the benefits of this Article for more than six consecutive years from the date of his first arrival in that other Contracting State.

ARTICLE 21 : Professors, teachers and research scholars -

1. A professor, teacher or research scholar who is or was a resident of one of the Contracting States immediately before visiting the other Contracting State for the purpose of teaching or engaging in research, or both, at a university, college or other similar institution in that other Contracting State shall be exempt from tax in that other State on any remuneration for such teaching or research for a period not exceeding two years from the date of his first arrival in that other State for such purpose.

2. This Article shall not apply to income from research, if such research is undertaken primarily for the private benefit of a specific person or persons.

3. For the purposes of this Article and Article 20, an individual shall be deemed to be a resident of a Contracting State if he is a resident in that Contracting State in the fiscal year in which he visits the other Contracting State or in the immediately preceding fiscal year.

ARTICLE 22 : Other income -

1. Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2. The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14 as the case may be, shall apply.

3. Notwithstanding the provisions of paragraph 1, if a resident of a Contracting State derives income from sources within the other Contracting State in the form of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever such income may be taxed in the other Contracting State.

ARTICLE 23 : Elimination of double taxation -

1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention.

2. Subject to the provisions of the laws of India regarding the allowance as a credit against Indian tax of tax paid in a territory outside India (which shall not affect the general principle hereof), the amount of Irish tax paid, under the laws of Ireland and in accordance with the provisions of this Convention, whether directly or by deduction, by a resident of India, in respect of income from sources within Ireland which has been subjected to tax both in India and Ireland shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax.

3. Subject to the provisions of the laws of Ireland regarding the allowance as a credit against Irish tax of tax payable in a territory outside Ireland (which shall not affect the general principle hereof)-

(a) Indian tax payable under the laws of India and in accordance with this Convention, whether directly or by deduction, on profits, income and gains from sources within India (excluding in the case of a dividend tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any Irish tax computed by reference to the same profits, income and gains by reference to which Indian tax is computed.

(b) In the case of a dividend paid by a company which is a resident of India to a company which is a resident of Ireland and which controls directly or indirectly 25 per cent or more of the voting power in the company paying the dividend, the credit shall take into account [in addition to any Indian tax creditable under the provisions of sub-paragraph (a)] Indian tax payable by the company in respect of the profits out of which such dividend is paid.

4. (a) For the purposes of sub-paragraph (b) of paragraph 3, the term “Indian tax payable” shall be deemed to include 75 per cent of the Indian tax which would have been paid but for any exemption or reduction of tax granted under incentive provisions contained in Indian law designed to promote economic development to the extent that such exemption or reduction is granted for profits from industrial or manufacturing activities, or from the development, maintenance and operation of infrastructure facilities, or from agriculture, fishing or tourism (including restaurants and hotels), provided that such incentive provisions remain in substance unchanged since the date of signature of this Convention and that the activities have been carried out within India.

(b) The provisions of sub-paragraph (a) shall cease to apply after twelve years from the date of entry into force of this Convention.

(c) Should India amend in substance its incentive provisions in relation to the activities specified in sub-paragraph (a) or introduce any new incentive provisions in relation to such activities, India may request in writing that this paragraph should apply to such amended or new provisions. Likewise, India may request in writing an extension of the time-limit in sub-paragraph (b). Upon receipt of such request, Ireland shall enter into negotiations with India for such purposes.

5. For the purposes of paragraphs 2 and 3, profits, income and gains owned by a resident of a Contracting State which may be taxed in the other Contracting State in accordance with the provisions of this Convention shall be deemed to arise from sources in that other Contracting State.

6. Income which in accordance with the provisions of this Convention is not to be subjected to tax in a Contracting State may be taken into account for calculating the rate of tax to be imposed in that Contracting State on other income.

ARTICLE 24 : Non-discrimination -

1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. This provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities.

3. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned State to any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned State are or may be subjected.

4. Except where the provisions of paragraph 1 of Article 9, paragraph 7 of Article 11, or paragraph 6 of Article 12, apply, interest, royalties and other disbursements paid by an enterprise of a Contracting State to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.

ARTICLE 25 : Mutual agreement procedure -

1. Where a person considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with the provisions of this Convention, he may, irrespective of the remedies provided by the domestic laws of those States, present his case to the competent authority of the Contracting State of which he is a resident or, if his case comes under paragraph 1 of Article 24, to that of the Contracting State of which he is a national. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to the avoidance of taxation which is not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the domestic law of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.

ARTICLE 26 : Exchange of information -

1. The competent authorities of the Contracting States shall exchange such information including documents, as is necessary for carrying out the provisions of this Convention or of the domestic laws of the Contracting State concerning taxes covered by the Convention insofar as the taxation there under is not contrary to the Convention in particular for the prevention of fraud or evasion of such taxes. The exchange of information is not restricted by Article 1.

Any information so exchanged by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of the State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes covered by the Convention. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

(b) to supply information or documents which are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State;

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy.

ARTICLE 27 : Diplomatic agents and consular officials - Nothing in this convention shall affect the fiscal privileges of diplomatic agents or consular officials under the general rules of international law or under the provisions of special agreements.

ARTICLE 28 : Entry into force -

1. The Contracting States shall notify each other in writing, through diplomatic channels, of the completion of the procedure required by the respective laws for the entry into force of this Convention.

2. This Convention shall enter into force thirty days after the receipt of the later of the notifications referred to in paragraph 1.

3. The provisions of this Convention shall have effect :

(a) in India, in respect of income arising in any fiscal year beginning on or after the first day of April next following the calendar year in which the Convention enters into force; and

(b) in Ireland :

(i) in respect of income-tax and capital gains tax, for any year of assessment beginning on or after the sixth day of April in the year next following the date on which this Convention enters into force;

(ii) in respect of corporation tax, for any financial year beginning on or after the first day of January in the year next following the year in which this Convention enters into force.

ARTICLE 29 : Termination - This Convention shall remain in force indefinitely unless terminated by a Contracting State. Either Contracting State may terminate the Convention, through diplomatic channels, by giving notice of termination at least six months before the end of any calendar year beginning after the expiration of five years from the date of entry into force of the Convention. In such event, the Convention shall cease to have effect :

(a) in India, in respect of income arising in any fiscal year on or after the first day of April next following the calendar year in which the notice is given :

(b) in Ireland :

(i) in respect of income-tax and capital gains tax, for any year of assessment beginning on or after the sixth day of April in the year next following the calendar year in which the notice is given ;

(ii) in respect of corporation tax, for any financial year beginning on or after the first day of January next following the calendar year in which the notice is given.

In witness whereof the undersigned, being duly authorised thereto, have signed this Convention.

Done in duplicate at New Delhi on this 6th day of November in 2000, in the Hindi and English languages, both the texts being equally authentic. In case of divergence between the two texts, the English text shall prevail.

PROTOCOL

At the signing of the Convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to taxes on income and capital gains, the undersigned have agreed that the following shall form an integral part of the Convention :

With reference to Articles 3 and 23

1. Where a person resident in Ireland is a member of a partnership which is resident in India and by virtue of this Convention any profits, income or gains of the partnership are relieved from tax in Ireland, the Convention shall not affect any liability to tax in Ireland of such person in respect of such person’s share of any profits, income or gains of the partnership; any such share of profits, income or gains shall be treated for the purposes of Article 23 as profits, income or gains from sources in India and the appropriate part of the Indian tax borne by the partnership shall be allowed as a credit against any Irish tax computed by reference to the said share of the profits, income or gains.

With reference to Article 7

2. If, in accordance with the laws of a Contracting State, profits are attributed to a permanent establishment of an enterprise carrying on insurance business, on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in Article 7.

With reference to Article 24

3. The provisions of this Article shall not be construed as preventing India from charging the profits of a permanent establishment of an Irish company in India at a rate of tax which is higher than that imposed on the profits of a similar Indian company, nor as being in conflict with the provisions of paragraph 3 of Article 7 of this Convention.

With reference to collection assistance

4. It is understood that at the date of signature of this Convention, the laws of Ireland do not permit it to lend assistance in the collection of taxes on income, profits or gains of another country. However, if after the date of signature of this Convention, the laws of Ireland in this respect change and Ireland enters into an arrangement with another country to permit such assistance in collection, then Ireland shall inform the Indian competent authority and, if requested by such authority, shall immediately enter into negotiations for the purpose of incorporating provisions with regard to collection assistance in this Convention.

In witness whereof the undersigned, being duly authorised thereto, have signed this Convention.

ADDENDUM TO NOTIFICATION 45/2002 [F. NO. 503/6/99-FTD], DATED 20-2-2002.

In the Notification No. 45/2002 of the Government of India, in the Ministry of Finance (Department of Revenue), Number G.S.R. 105(E), dated the 20thFebruary, 2002 published in the Gazette of India, (Extraordinary), in Part-II, section 3, sub-section (i), dated the 20th February, 2002, the Exchange of Letters between the Indian and the Irish authorities as annexed shall form part of the aforesaid notification.

ANNEXURE

The Department of Foreign Affairs presents its compliments to the Embassy of India and has the honour to refer to the Convention between the Government of Ireland and the Government of the Republic of India for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains which was signed in New Delhi on 6th November, 2000 and ratified by the Government of the Republic of India on November 9, 2000 and which has yet to be ratified by the Irish Government, and to make, on behalf of the Government of Ireland, the following proposal for the purpose of its application.

The Government of Ireland proposes that the references in Article 3(1)(ii) to “a year beginning with the sixth day of April in one year and ending with the fifth day of April in the following year” should read “the calendar year”.

The Government of Ireland also proposes that the references in article 28(3)(b)(i) to “the sixth of April in the year next following” should be read as “the first day of January in the year next following”. By reason of the amendment, the Convention between the Government of Ireland and the Government of the Republic of India would then take effect for all taxes covered by it from January 1, 2002.

Finally, the Government of Ireland also proposes that the references in Article 29(b)(i) to “the sixth of April in the year next following” should be read as “the first day of January in the year next following”.

If the foregoing proposals are acceptable to the Government of the Republic of India, the Department of Foreign Affairs has the honour to suggest that the present Note and the reply of the Government of the Republic of India to that effect shall be regarded as constituting an agreement between the two Governments in this matter which shall enter into force at the same time as the entry into force of the Convention.

The Department of Foreign Affairs avails itself of this opportunity to renew to the Embassy of India the assurances of its highest consideration.

The Embassy of India, Dublin, presents its compliments to the Department of Foreign Affairs of the Government of Ireland and with reference to their Note Verbale No. 348/764, dated 3rd September, 2001, regarding the Convention for Avoidance of Double Taxation and the Prevention of Fiscal Evasion, signed between India and Ireland, has the honour to convey that the concerned authorities in India have informed that the Government of India has accepted the amendments to the convention suggested by the Government of Ireland vide the Note Verbale under reference above.

This information may please be conveyed to the Department of Revenue, Government of Ireland, so that these amendments can come into effect from the date as stipulated in the Note Verbale dated 3rd September, 2001, from the esteemed Department.

The Embassy of India avails itself of this opportunity to renew to the Department of Foreign Affairs, Government of Ireland the assurances of its highest consideration.

Notification : No. GSR 212(E), dated 19-3-2002.

supply information which is not obtainable under the laws or in the normal course of administration of that or of the other Contracting State ;

ARTICLE 28 : Diplomatic agents and consular officers - Nothing in this Convention shall affect the fiscal privileges of diplomatic agents or consular officers under the general rules of international law or under the provisions of special agreements.

ARTICLE 29 : Entry into force -

1. The Contracting State shall notify the other Contracting State in writing, through diplomatic channels, upon the completion of their respective legal procedures to bring this Convention into force.

2. The Convention shall enter into force on the date of the letter of such notifications and its provisions shall have effect :

(a) in the Republic of India :

(i) in respect of taxes withheld at source on dividends, interest, royalties and fees for technical services, as defined in Articles 10, 11, 12 and 13, respectively, for amounts paid or credited on or after the first day of the month next following that in which the Convention enters into force ;

(ii) in respect of taxes on income, and taxes on capital, for fiscal years beginning on or after the first day of April, 1994 ; and

(b) in the State of Israel :

(ii) in respect of taxes on income, and taxes on capital, for taxable periods beginning on or after the first day of January, 1994.

ARTICLE 30 : Termination - This Convention shall remain in force indefinitely but either of the Contracting States may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of the entry into force of the Convention, give the other Contracting State through diplomatic channels, written notice of termination and, in such event, this Convention shall cease to have effect :

(a) in the Republic of India :

(i) in respect of taxes withheld at source on dividends, interest, royalties and fees for technical services, as defined in Articles 10, 11, 12 and 13, respectively, for amounts paid or credited on or after the first day of April, next following the calendar year in which the notice of termination is given ; and

(ii) in respect of taxes on income, and taxes on capital, of fiscal years beginning on or after the first day of April, next following the calendar year in which the notice of termination is given ; and

(b) in the State of Israel :

(i) in respect of taxes withheld at source on dividends, interest, royalties and fees for technical services, as defined in Articles 10, 11, 12 and 13, respectively, for amounts paid or credited on or after the first day of January, next following the calendar year in which the notice of termination is given ; and

(ii) in respect of taxes on income, and taxes on capital, for taxable periods beginning on or after the first day of January, next following the calendar year in which the notice of termination is given.

In witness whereof the undersigned, duly authorised hereto, have signed this Convention.

Done at New Delhi on 29th January, 1996 in two original copies, each in the Hindi, Hebrew and English languages, all the texts being equally authentic. In the case of any divergence in interpretation, the English text shall prevail.

PROTOCOL

At the signing today of the Convention between the Republic of India and the State of Israel for the Avoidance of Double Taxation and for the Prevention of Fiscal Evasion with respect of Taxes on Income and on Capital, the undersigned have agreed upon the following provisions, which shall form an integral part of the Convention.

1. Nothing in the provisions of paragraph 3 of Article 7 shall be interpreted as precluding a Contracting State from determining executive and administrative expenses of a head office incurred outside that Contracting State according to the provisions of internal laws as they exist at the time of the signing of this Convention. However, should future changes in the domestic law of a Contracting State further restrict the deduction of such expenses in any manner, then the two Contracting States shall consult each other for purposes of amending this paragraph.

2. The competent authorities of the Contracting States shall initiate the proper procedure to review the provisions of Articles 12 and 13 (Royalties and fees for technical services, respectively) after a period of five years from the date of entry into force of this Convention. However, if under any Convention or Agreement between India and any third State which enters into force after 1-1-1995, India limits its taxation at source or Royalties or Fees for Technical Services or Interest or Dividends to a rate lower or a scope more restricted than the rate or scope provided for in this Convention, the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention with effect from the date on which the present Convention comes into force or the relevant Indian Convention or Agreement, whichever enters into force later.

3. In respect of paragraph 2 of Article 25, it is understood that if India enters into an Agreement or Convention for the avoidance of double taxation with a third State after 1-1-1995, whereby the difference in the rates of tax between enterprises of a permanent establishment of a company of a country other than India and that of India is removed or reduced, then, a corresponding reduction shall be effected in respect of rates of taxes on profits according to the enterprises of a company which is a resident of Israel.

In witness whereof the undersigned, duly authorised hereto, have signed this Protocol.

Done at New Delhi on 29th January, 1996, in two original copies, each in the Hindi, Hebrew and English languages, all the texts being equally authentic. In the case of any divergence in interpretation, the English text shall prevail.

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CASE LAW

ROYALTY IS NOT TAXABLE UNDER INDIA – IRELAND DTAA – ITAT BANGALORE DATED -11^TH MAY 2018

Recently, the Bangalore Bench of the Income Tax Appellate Tribunal (“Tribunal”) has passed its judgment on the issue of taxability of payments made by Google India Private Limited (“Google India”) in favour of Google Ireland Limited (“Google Ireland”) for the purchase of advertisement space for resale to Indian advertisers, as per a distribution agreement entered between the said parties.

The Tribunal ruled that these payments were in the nature of “royalties” as Google India was using the intellectual property of Google Ireland for this purpose and was hence, subject to tax in India as per the provisions of the Income Tax Act, 1961 (“ITA”) and the India Ireland Double Taxation Avoidance Agreement (“Treaty”) and further, that Google India was required to withhold taxes on these “royalty” payments to Ireland. Within a couple of weeks of the order in the Google case, on a very similar fact situation relating to Akamai Technologies Inc, the AAR has pronounced a judgment that appears to be diametrically opposite to the Tribunal judgment in many ways. The background to these decisions, the analysis of their findings and the impact are set out below.

BACKGROUND

Google AdWords is an online advertising service developed by Google, where advertisers pay to display brief advertising copy, product listings, and video content within the Google ad network to web users. The program uses the keywords to place advertisements on pages where Google thinks they might be most relevant. Advertisers pay when users divert their browsing to click on an advertisement. AdWords enables an advertiser to change and monitor the performance of an advertisement and to adjust the content of the advertisement. Till financial year 2004-05, it would appear that Google Ireland was directly selling advertisement space to customers in India. The payments made by Indian customers to Google Ireland directly were sought to be subjected to withholding taxes by the tax department.

When an online florist in India that bought the ad-space from Google Ireland challenged this stand of the tax department, the Kolkata Bench of the Tribunal ruled in its favour, in the Rights Florist case, and held that the transaction is not taxable in India, since it constituted business income of Google Ireland and such business income could not be taxed in accordance with the terms of the Treaty unless Google Ireland had some form of physical presence in India that constituted a ‘permanent establishment’ (“PE”). The Tribunal further categorically held that there was no attempt made by the Revenue authorities to first establish taxable nexus under domestic law before going to the Treaty and that in any case, after a careful consideration, there could be no taxable nexus under domestic law under any limb of Section 9 of the Income Tax Act, 1961 (“ITA”) including that of royalty.

Therefore, according to the Tribunal the payment made to Google Ireland could not be taxed as royalties in India and therefore there was no obligation on the Indian resident to withhold any taxes.

The tribunal also observed that while it is possible that the conventional PE tests fail when applied to virtual businesses, it was still a policy decision of the Government to continue with such a test for establishing taxable nexus and that any inertia in fixing this would only be at the cost of tax certainty.

Against this background, Google India entered into the following arrangements with its affiliate entity, Google Ireland:

Ø Information technology (“IT”) services and information technology enabled services (“ITeS”) under a services agreement dated April 1, 2004 (“Services Agreement”). Google India is remunerated at a cost plus 17.5% basis for the IT services and a cost plus 15.5% basis for the ITES.

Ø Google India also functions as a non-exclusive authorized distributor of Google Ireland’s AdWords program in India under an agreement dated December 12, 2005 (the “Distribution Agreement”).

Ø In addition to its marketing and distribution services provided to Google Ireland, under the Distribution Agreement, Google was also required to provide pre-sale and post-sale / customer support services to the advertisers. Therefore, it would now appear that Google Ireland switched from its earlier model to a re-distribution model after 2005. Under this arrangement, Google India received separate payments from Google Ireland for providing the IT services and ITeS under the Services Agreement and made payments to Google Ireland for the purchase of AdWords Space under the Distribution Agreement.

Ø Google India did not pay any withholding taxes on these payments to Google Ireland as it was of the view that these payments should not lead to any Indian tax consequences, presumably based on the Rights Florist ruling since the nature of the payment had not changed and only Google India was making the payments instead of another company or business in India.

Ø The Revenue contested this in multiple assessment years and the Tribunal adjudicated upon multiple appeals filed by Google India and the Revenue against the orders of the Commissioner of Income Tax (Appeals) (“CIT(A)”) for these assessment years together as the underlying issue was the same. On 23^rd October, 2017, the Tribunal at Bangalore issued a judgment in respect of certain assessment years on the issue of categorization of this income which is now pending in appeal before the Karnataka High Court. The Tribunal in the 23^rd October, 2017 ruling had made a factual finding that both the Service Agreement and the Distribution Agreement are to be read together since many obligations under the Distribution Agreement could not be discharged without access to IP that was provided under the Services Agreement and on this basis the business income was held to be actually royalty income and hence taxable. The High Court in its wisdom directed that similar issues that were pending before the Tribunal in respect of other assessment years be decided without being influenced by this decision. The decision of the Tribunal dated 11^th May, 2018 have broadly upheld the findings of the earlier decision and have raised several new issues as well.

RULING

CHARACTERIZATION OF PAYMENTS

Google India explained that the payments for purchase of AdWords Space under the Distribution Agreement would be characterized as business income in Google Ireland’s hands. In the absence of a PE of Google Ireland in India, such income would not be liable to tax in India under the ITA read with the Treaty. Google India highlighted the inconsistent approach followed by the revenue in these cases by highlighting how the Assessing Officer (“AO”) had taken a stance that Google India was a dependent agent PE of Google Ireland for the AY 2008-09 and had never even suggested that these payments were in the nature of “royalty” for this assessment year. Historically, the Indian courts have consistently held that advertising revenue and payments made under distribution arrangements are in the nature of business income. Hence, such payments being made to a non-resident are only taxable in India in case it is demonstrated that such non-resident has a PE in India and such income is attributable to this PE. Further, Google India referred to multiple case law which accepted that mere incidental use of or access to intellectual property while providing services under an agreement would not result in the payments being made under such agreement being considered as royalty. However, the Tribunal distinguished the instant case from all these landmark rulings on the basis of the facts involved and refused to apply the same ratio here. Interestingly, the Tribunal went into a detailed examination of the Distribution Agreement and the Services Agreement and held that Google India was required to provide on-sale and post-sale technical services to the advertisers and Google Ireland which could not be possible without resorting to the Services Agreement. Further, it was found that it the ITES division of Google India which was responsible for providing support to the advertisers and Google Ireland. Hence, the Tribunal considered these contracts to be interdependent and held that they must be read together.

The Tribunal relied upon the judgment of the Hon’ble High Court of Karnataka in the case of CIT v. Synopsis International Ltd. where it was decided that the mode adopted or the terminology given is not decisive to decide the nature of transfer, but rather it is the substance which must be looked into.

In this case, the High Court held that while there was no transfer of exclusive right of copyright there was a transfer of certain rights which the owner of a copyright possesses and any consideration paid for use or for the right to use confidential information would amount to royalty income.

The Tribunal held that the facts of this case were similar to that of the instant case as Google India had been given access to the trademarks, brand features, derivate works, confidential information and other intellectual property of Google Ireland for the discharge of its functions under the Distribution Agreement and the Services Agreement.

On this basis, the Tribunal held that the payments being made to Google Ireland were being made for the use of these intangibles and therefore should be considered to be in the nature of “royalty” and not business income and applied the ratio of Synopsys International (supra) to the facts of the instant case.

BENEFICIAL OWNERSHIP:

Article 12 of the Treaty prescribes a reduced rate of withholding tax at 10% in India in case the Irish resident taxpayer is also the beneficial owner of the royalty income being paid. The Revenue took a stance that Google Ireland was not the beneficial owner of the royalty received from Google India and discussed the controversial “Double Irish Dutch Sandwich” structure which is used by Google to book its profits in a low tax jurisdiction like Bermuda.

On this basis the Revenue sought to deny Google India’s claim to a reduced rate of withholding as available under the Treaty. Google India referred to multiple case law to argue that once a taxpayer presents a Tax Residency Certificate (“TRC”) which is accepted by the AO, it is not open to the AO to challenge the legal structure of the taxpayer and in the absence of any evidence, cannot adopt a look through approach to contend that the taxpayer is not the beneficial ownership of royalty, technical fees, etc. The Tribunal referred to the fact that there are four layers of holdings of this AdWords program to decide that it was unclear as to how much right in license were conferred to different holdings and how the revenue collected on AdWords program is to be distributed amongst the above holdings. It further held that Google India had the onus of proving that Google Ireland was the beneficial owner of these royalties which it had failed to do by not placing all agreements entered into between the offshore Google entities before the AO and the Tribunal. The Tribunal did not accept Google India’s explanation that it did not have access to these offshore agreements on the basis that all Google entities are inter-related.

TRANSFER PRICING:

The Revenue department looked at the Services Agreement and contended that data collection and data analysis is being conducted in India which creates significant value. On this basis they argued that the services performed by Google India are not mere IT services by rather Knowledge Process Outsourcing services (‘KPO’) and therefore, a higher attribution of income to India is required. The Revenue also sought to increase the value attributed to India by arguing that valuable human intangibles and customer related intangible assets such as customer list, customer contracts, customer relationship, etc., were being created in India.

The Tribunal held that neither the Revenue department nor Google India were correct in their transfer pricing analyses and therefore remanded this issue along with the rest of the transfer pricing file to the tax department for a review on the basis of a profit spilt method. Further, the Tribunal also asked that the tax authorities to examine afresh the question as to whether Google India’s functions resulted in the creation of unique marketing intangibles or technological intangibles and whether these intangibles had been transferred to Google Ireland as part of their review of the transfer pricing issues.

IMPACT AND ANALYSIS

The Tribunal’s ruling goes against a catena of case law where advertisement revenue, and payments made under distribution arrangements had been characterized as being in the nature of business income. In these cases, the courts have refused to bring such income of a non-resident entity to tax in India unless it is demonstrated that such non-resident has a PE in India and such income is attributable to this PE. As a result, the primary issue in such cases has been the determination of a PE on account of a fixed place or dependent agent rather than whether such an arrangement will result in royalty income.

In fact, as mentioned above, even in the instant case, for one of the assessment years in question, the AO had taken a stance that Google India was a dependent agent PE of Google Ireland and that the payments were in the nature of business income. This clearly highlights the inconsistency being shown by the department when it comes to considering the taxability of such cases. While the Tribunal did not consider the impact of the Equalization Levy (“EL”) in the instant case (since the EL was not applicable to the assessment years in question), this ruling could lead to unforeseen situations in future once the EL is applied. This is because a taxpayer may be asked to pay both a 6% EL and a 10% royalty tax on the same transaction while conceptually, it can only be either business income (and be subject to EL) or be only royalty (and be subject to taxes as royalty) but not both.

This should be a concern for businesses as the Government has publicly announced that the scope of the EL is likely to be expanded in the future to cover other digital payments as well. Thus, instead of seeking to tax non-resident taxpayers at a rate of 2-3% on the gross income (assuming a 15% profit margin and factoring for a 25% attribution to the non-resident’s Indian PE), it is possible that the tax authorities may expect these non-residents to pay a 16% tax on a gross basis. Such an increase in the quantum of tax may have a significant adverse impact on the growth of India’s digital economy.

The ruling could have far reaching implications for all distribution businesses and especially those engaged in the digital economy. On the basis of this ruling, it is possible that the tax authorities may seek to classify business income as royalty even in cases where there is just a mere use of, or access, to intellectual property of a non-resident where they are unable to build a case for existence of a PE of such non-resident. Utilization of IP such as customer data, confidential information for performing services is a fairly common industry practice and the ruling raises concerns for taxpayers operating on the basis of these type of arrangements.

Further, the refusal of the Tribunal to accept the submission of the TRC as a conclusive evidence of Google Ireland exercising the beneficial ownership of the “royalty” income being received from Google India is a matter of concern as it goes against the trend of courts respecting the TRC and not looking through the corporate structure. With the General Anti-Avoidance Rules (“GAAR”) now being in force, tax authorities might be further emboldened by this judgment to disregard corporate structures without any clear case of a tax fraud. This is evident from statements made by senior revenue department officials welcoming the ruling and expressing the hope that other courts also adopt a substance over form approach.

A far reaching aspect of this ruling lies in the arguments made by the tax department and the finding of the Tribunal with respect to allocation of profits in relation to the services provided by Google India to Google Ireland. Currently customer lists, customer contracts, customer relationship, open purchase orders have not been recognized as assets internationally due to a lack of consensus and therefore have not really been used for functions, assets, and risks analysis for transfer pricing analysis. This move of the Indian tax authorities to unilaterally move ahead on this increased attribution of value creation on the basis of these intangibles without waiting for international consensus is of concern to multinational companies operating in India and will likely lead to more transfer pricing disputes, something which India has been trying to reduce by promoting advance pricing agreements (APAs). Google India has issued a public statement conveying its intention to appeal the ruling.

CONTRADICTORY RULING BY AAR ON SIMILAR FACTS

Recently, the Authority for Advance Ruling (“AAR”), in the case of Akamai Technologies Inc., In Re, when faced with a similar fact pattern, has taken a contrary stance from the one taken by the Tribunal in the instant case. This case involves the resale of content delivery solutions (“CDS”) by an Indian subsidiary of a US company under a reseller agreement. The Indian company was required to pay a fee to the US Company as consideration for the CDS purchased for resale. The AAR was called upon to adjudicate on whether this fee amounted to royalty (amongst other issues). The reseller agreement allowed the Indian company to make use of the trademark of the US parent for the purposes of marketing and reselling the CDS.

It is pertinent to note that the Revenue department presented similar arguments and relied upon the same case law (including Synopsys International (supra)) before the AAR as they did in the instant case concerning Google. However, the AAR distinguished the matter before it from these cases on the basis of the facts involved and commented that the landmark rulings being relied upon by the Revenue department had been delivered in the context of software distribution transactions where it was a copy of software that was being resold or distributed to the end customer. In the Akamai case, while the Indian subsidiary obtained a right to resell the CDS to end customers, the program itself was not sold to it. This is strikingly similar to the factual scenario in the case of Google India and Google Ireland. In a significant departure from the approach adopted by the Tribunal, the AAR held that the reseller agreement should be interpreted holistically in the light of the facts and circumstances and the intent with which the agreement was entered into between the parties.

The AAR found that from a perusal of the entire tenor of the agreement, the conduct of the parties, the business model and the various agreements with end customers, it was not borne out that the parties intended to enter into a license agreement for use of trademark for which payment has been made by the Indian company to its US parent. In view of the same, the AAR held these payments are in the nature of business income and cannot be covered within the definition of royalty and taxed as such. This AAR ruling could not have come at a better time and is a heartening example of a taxpayer obtaining the benefit of a favourable advance ruling on a subject in which the lower courts seem to be taking adverse views which are against established precedents. It is hoped that Karnataka High Court would follow the reasoning adopted by the AAR in Akamai Technologies Inc., In Re while adjudicating upon the appeal which Google India has promised to file against the order of the Tribunal. For instance, the ITeS Agreement has clauses that state that the IP provided under the agreement should not be used for any other purpose other than for discharge of obligations under the ITeS Agreement. Hence the question of use of IP for discharge of obligations under the Distribution Agreement is at best similar to any incidental use of IP in the Akamai distribution agreement and should therefore not be taxed as royalty.

However, it is likely that ambiguity on the taxability of similar transactions and business models shall prevail till such time this issue is judicially determined by the Karantaka High Court or by the Supreme Court of India and other businesses operating similar models should expect tax notices till such time this issue is settled.

Conclusion:

In the above case it was ordered by ITAT that sale of software is not treated as Royalty. So it is not taxable as Royalty as per Income Tax Act of India, 1961.

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