No tax on foreign firm to licence copyrighted product

dubai - Any amount received by a foreign company for licensing its copyrighted product does not fall within the definition of royalty

Q: I am an agent for a British company which wants to give a non-exclusive, non-transferable software licence to an Indian party. Would the British company have to pay tax in India on the consideration which it receives for giving this licence to the Indian company?

A: If the British company is giving a licence for a copyrighted product, there would be no tax liability in India in respect of the consideration received by the British company. The reason is that this consideration is not in the nature of royalty because it is not for use of a copyright. The licence for the copyrighted product is given to the Indian customer only for a limited period. The Indian customer would not have the right to lease, assign, transfer or sub-license this product to any third party.

Courts have taken the view that any amount received by a foreign company for licensing its copyrighted software product does not fall within the definition of royalty either under the Income-tax Act or under the Double Tax Avoidance Agreement. Therefore, the British company can receive the full amount without deduction of any tax at source in India.

Q: On returning to India, I want to set up a multiplex theatre. The state government has a scheme whereby it would waive the tax/duty collected by the theatre owner for a stipulated period. This incentive is given to encourage setting up of this business. Would I have to pay income tax on the amount which I collect but do not pay to the government?

A: Such subsidies are deemed to be on capital account. The state government which is entitled to recover the tax/duty has waived its right to do so for a stipulated period of time to encourage investors to put up multiplexes. Hence, the subsidy has been treated as a capital receipt because it is meant to promote this business.

However, if the subsidy is linked with the capital assets purchased for the cinema theatre/multiplex, such amount will be reduced from the cost of the capital assets you acquired. Depreciation would be granted on the net value of the assets.
Therefore, you need to study the scheme of the state government to determine whether the subsidy is linked with the capital investment or whether the amount you collected by way of tax/duty is waived by the state government to promote setting up of the business. In the latter case, the full amount would be a capital receipt which would be exempt from tax.

Q: I own an apartment in Mumbai. A co-operative society has been formed by the apartment owners. The society owns some surplus land which can be developed. A builder has approached the society with a proposal to enter into a joint development agreement under which the apartment owners will be entitled to receive a share of the profits. Would I be liable to pay tax and, if so, at what point of time?

A: A transfer is deemed to take place when possession of immovable property is given in part performance of a contract. Once the transfer takes place, capital gains would arise and tax would be payable thereon. If you have held the property for more than three years, tax would be payable at the rate of 20 per cent on the capital gains you earn.

However, a transfer will be deemed to take place only when the joint development agreement is registered as held by the Supreme Court of India. Therefore, the capital gains will be assessable only in the financial year when the agreement is registered and not before that, though you may receive part of the consideration earlier. Hence, you must ensure that you have kept sufficient funds with you to pay the capital gains tax in the year in which the joint development agreement is registered.

The writer is a practising lawyer specialising in tax and exchange management laws of India. Views expressed are his own and do not reflect the newspaper's policies.