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
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.
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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