India and United States: Indian decision – retrospective amendments to the income tax act do not affect tax treaty between India and USJanuary 22, 2013
The Income Tax Appellate Tribunal (ITAT) delivered a decision on 14 December 2012, in the case of WNS North America Inc vs. ADIT (ITA No.8621/Mum/2010), that retrospective amendments to the definition of royalties under the Indian Income Tax Act 1961 (ITA) would not affect the definition of royalties under article 12 of the India–United States Income Tax Treaty (tax treaty).
The taxpayer (WNS North America Inc.), a company incorporated in the US, provides marketing, management and sales support services to WNS Global Services Private Limited (WNS India).
WNS India was in the business of providing software and information technology-enabled services to clients located outside India. WNS India availed the services of the domestic as well as international telecom operators for the purposes of transmitting the data to the customers located outside India.
The taxpayer paid the international telecom connectivity charges to the international telecom operators for the services utilized by WNS India outside India and, hence, WNS India reimbursed the same to the taxpayer.
The tax authorities contended that the reimbursement of such expenses should be considered as “royalty” liable to tax under article 12 of the tax treaty.
Whether the payment of telecom connectivity charges by the taxpayer on behalf of WNS India to the international telecom operators, which was later reimbursed by WNS India to the taxpayer, could be taxable as royalty under article 12 of the tax treaty, given the amendments to the ITA.
The reimbursement of lease line charges would be considered royalty under the retrospectively amended ITA.
The ITAT held that, if a particular term has been specifically defined in the tax treaty, the retrospective amendment to the definition of such term under the ITA would have no bearing on the interpretation of such term in the context of the tax treaty.
Therefore, amounts received as reimbursement of lease line charges by the taxpayer from WNS India were held to be not chargeable to tax in India as royalty.
The ITAT observed that:
- Any amendment, carried out in the provisions of the ITA, with retrospective effect, will have the effect of altering the provisions of ITA, but will not per se have the effect of automatically altering the analogous provision of the treaty.
- If the tax treaty is contrary to ITA, the provisions of the treaty will prevail.
- Article 3(2) of the tax treaty will apply only when a term is not defined in the tax treaty. If, however, a particular term has been specifically defined in the tax treaty, the amendment to the definition of such term under ITA would have no bearing on the interpretation of such term in the context of the said treaty. The ITA cannot unilaterally alter the provisions of the treaty.
- The term “royalty” has been defined in article 12(3) of the tax treaty and no amendment has been made in the treaty to bring the definition of royalty at par with that provided under the ITA.
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