Category Archives: Backdated TDS Pitch- Explanations to an Explanation

Backdated TDS Pitch- Explanations to an Explanation- Beware of unjustified Law in the passing

The Finance Bill 2012 conspicuously proposes a new definition clause in section 9 (1) (vi) by way of insertion of new explanations 4, 5 & 6 rather than as additional sub-clause in the existing royalty definition contained under Explanation 2 thereto. In other words the bill proposes to add new explanations to the existing explanation which are an unknown find in the history of Income tax law framing. The existing Explanation 2 and newly drafted Explanations 4, 5 & 6 go in the following order:

Existing Explanation

“Explanation 2.--For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for--

(i) the transfer of all or any rights (Including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v).”

Proposed Explanations

“‘Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—
(a) the possession or control of such right, property or information is with the payer;
(b) such right, property or information is used directly by the payer;
(c) the location of such right, property or information is in India.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;’” (Unquote)

If I were to summarize the three new explanations they mean the following additions to the existing royalty definition in Explanation 2:
1. the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred;
2. any right, property or information, whether or not—
a) the possession or control of such right, property or information is with the payer;
b) such right, property or information is used directly by the payer;
c) the location of such right, property or information is in India.

3. transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

Now if I were to merge these three additions to the existing Explanation 2 sub-clauses the new Explanation 2 would look as under:

Explanation 2.--For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for--

(i) the transfer of all or any rights (Including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
(iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB ;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ;
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v);
(vii) the transfer of all or any rights in respect of any right, property or information includes and