Sec. 9(1)(i)- "Explanation 4‟ is to be inserted retrospectively from 1st April, 1962 whereby the expression through‟ used in section 9(1) shall mean and include "by means of" "in consequence of" or "by reason of". The same interpretation of through‟ was propagated by the Revenue before the Supreme Court in the recent case of Vodafone. The Revenue argued that if transfer of a capital asset situated in India happens "in consequence of" something which has taken place overseas, then all income derived even indirectly from such transfer, even though abroad, becomes taxable in India. The Supreme Court found no merit in this argument.
However, with the retrospective amendment, the Revenue will be able to tax income from indirect transfer of Indian assets including the transaction in the Vodafone Case.
"Explanation 5‟ is to be inserted retrospectively from 1st April, 1962 and will provide that the situs of shares or interest in a foreign entity shall be India if the share or interest derives its value, directly or indirectly, substantially from assets located in India. This retrospective amendment has also been inserted as a reaction to the Vodafone judgment. Therefore, India will have the jurisdiction to charge capital gains tax on transfer of shares of a foreign entity if the value of the shares is derived substantially from assets situated in India.
Royalty- Sec. 9(1)(vi) Explanation 4 is being retrospectively inserted, w.e.f 1st June, 1976 to extend the meaning of Royalty‟ to include all or any right for use or right to use a computer software‟ irrespective of the medium through which such right is transferred. Therefore, income from sale of a copyrighted object (such as a CD containing software) and not just on assignment of license in a copyrighted article, would be taxed as royalty.
Therefore, there will be income in the nature of royalty arising in the hands of the persons selling a CD of computer software, persons selling shrink-wrap software, subscription to online database etc.. This retrospective amendment is being made as a response to various cases lost by the Department recently on this point such as Sonata Information Technology Ltd., Dun & Bradstreet Espana S.A. v ITAT etc.
The new Explanation 5‟ will widen the scope of the term royalty‟with retrospective effect, to include consideration in respect of any right, property or information regardless of whether or not the taxpayer holds possession or control of such right or uses such right directly or the location of such right is in India.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
