The effect of the judgements in Tata Consultancy Services vs. State of AP 271 ITR 401 (SC), Samsung Electronics Co 94 ITD 91 (Bang), Motorola Inc 95 ITD 269 (SB) & Dassault Systems 229 CTR 105 (AAR) is that the primary condition for coming within the definition of ‘royalty’ is that the payment must be received as consideration for the use of or right to use any copyright of a literary, artistic or scientific work etc. A ‘right to use the copyright’ is totally different from the ‘right to use the programme embedded in a CD’. In acquiring a ready made off-the-shelf computer programme, no right was granted to the assessee to utilize the copyright of the computer programme. The assessee had merely purchased a copy of the copyrighted article, namely, a computer programme which is called ‘software’. Computer software when put into a media and sold becomes goods like any other audio cassette or painting on canvas or book. Accordingly, the amount paid by the assessee towards purchase of the software cannot be treated as payment of “royalty” so as to be taxable in India under Article 12 of the DTAA and the assessee was not liable to deduct tax at source.

As the ‘non-compete agreement’ is part & parcel of the entire transaction of acquisition of business, it falls under the first test which is that if the expenditure is made for the initial outlay or for the expansion of business or a substantial replacement of the equipment, then, it is capital expenditure. The incurring of expenditure also brought enduring benefit to the assessee. In Assam Bengal Cement Company a period of five years was regarded as providing enduring advantage to the assessee irrespective of the fact that the payment was to be made annually. The argument that this was a case of acquiring monopoly rights is not right because in Coal Shipment it was held that even payment made to ward off competition from a rival dealer would constitute capital expenditure

Failure to deduct or deposit tax as per s. 194C or Chapter-XVII makes the assessee liable to the consequences provided under the said Chapter-XVII. However, s. 40(a)(ia) is in addition to Chapter XVII. S. 40(a)(ia)(A) provides that if tax is deducted during the last month of the previous year and paid on or before the due date of filing of return as per s. 139(1), then such sum shall be allowed as deduction. In cases where tax is deducted other than the last month of previous year but is deposited before the last day of the previous year, then it will be allowed as deduction. Therefore, the conditions for allowability of deduction are prescribed u/s 40(a)(ia) itself and Chapter-XVII and s. 194C are not relevant. If the condition of deduction and payment prescribed u/s 194C / Chapter XVII are held applicable for disallowance of deduction u/s 40(a)(ia), then s. 40(a)(ia) will be rendered meaningless, absurd and otiose. Since the assessee had (belatedly) deducted tax in the last month of the previous year i.e. March 2005 and deposited the same before the due date of filing the return u/s 139(1), deduction had to be allowed u/s 40(a)(ia) (A)

In Veerabhadra Rao 155 ITR 152 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been “taken into account in computing the income of the assessee” and qualifies for deduction u/s 36(1)(vii). The effect of the judgement is that in order to satisfy the condition stipulated in s. 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of shares and once such brokerage is credited to the P&L account and taken into account in computing his income, the condition stipulated in s. 36(2)(i) gets satisfied. Whether the gross amount is reflected in the credit side of the P&L A/c or only the net amount is finally reflected as profit after deducting the corresponding expenses or only the net amount of brokerage received by the share broker is reflected in the credit side of the P&L account makes no difference because the ultimate effect is the same

As regards the quantum of profits attributable to the PE, Article 7 (1) provides for the taxability of profits “directly or indirectly attributable” to the PE. The words “profits indirectly attributable to the PE” incorporates the “force of attraction” principle. To give effect to the “force of attraction” principle, in addition to taxability of income in respect of services rendered by the PE in India, any income in respect of the services rendered to an Indian project, which is similar to the services rendered by the PE is also to be taxed in India in the hands of the assessee – irrespective of whether such services are rendered through the PE or directly by the GE. There cannot be any professional services rendered in India which are not, at least indirectly, attributable to carrying out professional work in India. This indirect attribution is enough to bring the income from such services within ambit of taxability in India. The two conditions to be satisfied for taxability of related profits are (i) the services should be similar or relatable to the services rendered by the PE in India; and (ii) the services should be ‘directly or indirectly attributable to the Indian PE’ i.e. rendered to a project or client in India. The result is that the entire profits relating to services rendered by the assessee, whether in India or outside, in respect of Indian projects is taxable in India.

Assuming the payment for obtaining cricket telecast rights is “royalty”, under the first limb of Article 12(7) of the DTAA, royalties can be said to have arisen in India only if the payer is a resident of India. This condition is not fulfilled as the assessee was a non-resident. Under the second limb of Article 12(7), payments made by a non-resident are deemed to arise in India if the non-resident has a PE in India with which the liability to pay the royalties is incurred and such royalties are borne by the PE. This condition is also not fulfilled because the mere existence of a PE in India does not mean that royalties arise in India. In addition to the existence of PE, it is essential that liability to pay such royalties has been “incurred in connection with” and is “borne by” the PE of the payer in India. There must be an “economic link” between the liability for payment of such royalties and PE. As there was no economic link between the payment of royalties and the PE of the assessee in India, the payments to GCC are not incurred “in connection” with the PE in India. Further, the PE was also not involved in any way with the acquisition of the right to broadcast the cricket matches, nor did the PE bear the cost of payments to GCC. Thus the payments to GCC were not “borne by” the PE in India