Our Indian company pays its US group parent for time on the group's mainframe computers and for use of the group data network. Is that royalty taxable in India?
Yes. The Authority ruled that the charges paid by the Indian company to its US group company for access to and use of the group's mainframe computers and consolidated data network were taxable in India, and fell within article 12(3)(a) of the India-US convention rather than article 12(3)(b). The Indian company was billed by reference to CPU utilisation time, email usage, bandwidth and network management. The Authority held the payment was for the use of a secret process - the embedded, customised, encrypted software through which the data was processed - and so was royalty on the first limb, not a payment for equipment. The ruling binds only that applicant.
Pronounced by the Authority for Advance Rulings (Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members) on 1999-04-28, reported as [1999] 238 ITR 296 (AAR). It bears on section 9(1)(vi), section 9(1)(vii), section 195, section 245Q, section DTAA art 12, section DTAA art 7 of the Income Tax Act 1961, in Residence & Treaty Benefit and TDS Defaults matters.
This is the earliest sustained AAR analysis of computer-access and data-network payments, and it matters because of which limb it chose. The Authority did not decide the case as an equipment-use royalty; it went to the secret-process and industrial-experience limb, holding that the value paid for lay in proprietary encrypted software embedded in the processing, not in the hire of a machine. Practitioners on both sides of a cloud, hosting or data-centre dispute still argue on that ground. But the ruling is old and the law around it has moved a long way, both by the retrospective widening of section 9(1)(vi) in 2012 and by a line of High Court authority holding that transmission and process payments under an unamended treaty are not royalties.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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A United States company, Y, part of a multinational group, operated a world wide information processing telecommunication centre with mainframe computers in the United States and a consolidated data network with a hub in Hong Kong. An Indian company, XT, was a wholly owned subsidiary of Z, itself a subsidiary of Y. XT was a hundred per cent export oriented unit providing data management and information analysis for group companies across the Asia-Pacific region. XT accessed Y's central processing units and the consolidated data network over VSNL links, and paid charges computed by reference to CPU utilisation time, email usage, bandwidth taken and network management. The software through which the processing was done had been developed by Y, was customised and encrypted, and was embedded in the system. Two questions were put: whether the payment by XT to Y for the CPU and data network access was taxable in India; and, if it was, whether it fell within article 12(3)(a) or article 12(3)(b) of the double taxation avoidance agreement between India and the United States.
The Authority answered the first question yes and the second by choosing article 12(3)(a). The payments were taxable in India as royalties. On the choice of limb, the Authority held the transaction was covered by article 12(3)(a), which brings in consideration for the use of, or the right to use, a secret formula or process, or for information concerning industrial, commercial or scientific experience, rather than by article 12(3)(b), which deals with consideration for the use of industrial, commercial or scientific equipment. The reason was that what the Indian company obtained and paid for was not simply time on a machine but the use of the embedded secret software - an encryption product developed by the US company - through which the data was processed. Because the receipt answered the description of royalty under article 12, it was chargeable in India at the treaty rate, and the business profits article, which would have required a permanent establishment, did not govern.
The Authority approached the question by asking what the Indian company was really paying for. The billing metrics - CPU seconds, email traffic, bandwidth, network management - looked at first sight like a charge for the use of equipment, which would have taken the payment into article 12(3)(b). But the Authority looked past the measure of the charge to the thing supplied. The mainframes and the network were of no use to XT without the software that made them do what XT needed, and that software had been developed by Y, was customised to the group's requirements and was encrypted. It was proprietary and it was secret, and it was embedded in the very process by which XT's data was handled. On that finding the payment was consideration for the use of a secret process and for information concerning commercial and scientific experience, which is the first limb of the royalty definition. The Authority treated the choice between the two limbs as substantive rather than formal, because the two are differently worded and the equipment limb would have invited an argument that XT never had possession or control of anything. Having characterised the receipt as royalty under article 12, chargeability followed without any inquiry into a permanent establishment, since article 12 taxes royalties at source on a gross basis irrespective of one.
The transaction would be covered by article 12(3)(a) of the DTAA between India and U.S.A.
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Handle my notice → Ask a CA on WhatsAppYes. The Authority ruled that the charges paid by the Indian company to its US group company for access to and use of the group's mainframe computers and consolidated data network were taxable in India, and fell within article 12(3)(a) of the India-US convention rather than article 12(3)(b). The Indian company was billed by reference to CPU utilisation time, email usage, bandwidth and network management. The Authority held the payment was for the use of a secret process - the embedded, customised, encrypted software through which the data was processed - and so was royalty on the first limb, not a payment for equipment. The ruling binds only that applicant. This was decided by the Advance Ruling (Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members) and bears on section 9(1)(vi), section 9(1)(vii), section 195, section 245Q, section DTAA art 12, section DTAA art 7 of the Income Tax Act 1961. It is reported as [1999] 238 ITR 296 (AAR). This is the earliest sustained AAR analysis of computer-access and data-network payments, and it matters because of which limb it chose. The Authority did not decide the case as an equipment-use royalty; it went to the secret-process and industrial-experience limb, holding that the value paid for lay in proprietary encrypted software embedded in the processing, not in the hire of a machine. Practitioners on both sides of a cloud, hosting or data-centre dispute still argue on that ground. But the ruling is old and the law around it has moved a long way, both by the retrospective widening of section 9(1)(vi) in 2012 and by a line of High Court authority holding that transmission and process payments under an unamended treaty are not royalties. If it applies to you, the first step is this: Identify precisely what the customer pays for - machine time, bandwidth, or the use of proprietary software embedded in the process - because the limb decides the answer.
A United States company, Y, part of a multinational group, operated a world wide information processing telecommunication centre with mainframe computers in the United States and a consolidated data network with a hub in Hong Kong. An Indian company, XT, was a wholly owned subsidiary of Z, itself a subsidiary of Y. XT was a hundred per cent export oriented unit providing data management and information analysis for group companies across the Asia-Pacific region. XT accessed Y's central processing units and the consolidated data network over VSNL links, and paid charges computed by reference to CPU utilisation time, email usage, bandwidth taken and network management. The software through which the processing was done had been developed by Y, was customised and encrypted, and was embedded in the system. Two questions were put: whether the payment by XT to Y for the CPU and data network access was taxable in India; and, if it was, whether it fell within article 12(3)(a) or article 12(3)(b) of the double taxation avoidance agreement between India and the United States. The matter was decided on 1999-04-28 by the Advance Ruling (Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members). On those facts the Advance Ruling held as follows. The Authority answered the first question yes and the second by choosing article 12(3)(a). The payments were taxable in India as royalties. On the choice of limb, the Authority held the transaction was covered by article 12(3)(a), which brings in consideration for the use of, or the right to use, a secret formula or process, or for information concerning industrial, commercial or scientific experience, rather than by article 12(3)(b), which deals with consideration for the use of industrial, commercial or scientific equipment. The reason was that what the Indian company obtained and paid for was not simply time on a machine but the use of the embedded secret software - an encryption product developed by the US company - through which the data was processed. Because the receipt answered the description of royalty under article 12, it was chargeable in India at the treaty rate, and the business profits article, which would have required a permanent establishment, did not govern.
The Authority approached the question by asking what the Indian company was really paying for. The billing metrics - CPU seconds, email traffic, bandwidth, network management - looked at first sight like a charge for the use of equipment, which would have taken the payment into article 12(3)(b). But the Authority looked past the measure of the charge to the thing supplied. The mainframes and the network were of no use to XT without the software that made them do what XT needed, and that software had been developed by Y, was customised to the group's requirements and was encrypted. It was proprietary and it was secret, and it was embedded in the very process by which XT's data was handled. On that finding the payment was consideration for the use of a secret process and for information concerning commercial and scientific experience, which is the first limb of the royalty definition. The Authority treated the choice between the two limbs as substantive rather than formal, because the two are differently worded and the equipment limb would have invited an argument that XT never had possession or control of anything. Having characterised the receipt as royalty under article 12, chargeability followed without any inquiry into a permanent establishment, since article 12 taxes royalties at source on a gross basis irrespective of one. In the words reproduced by the source cited on this page: "The transaction would be covered by article 12(3)(a) of the DTAA between India and U.S.A."
It was decided by the Advance Ruling on 1999-04-28 and is reported as [1999] 238 ITR 296 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 9(1)(vi), section 9(1)(vii), section 195, section 245Q, section DTAA art 12, section DTAA art 7, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Authority answered the first question yes and the second by choosing article 12(3)(a). The payments were taxable in India as royalties. On the choice of limb, the Authority held the transaction was covered by article 12(3)(a), which brings in consideration for the use of, or the right to use, a secret formula or process, or for information concerning industrial, commercial or scientific experience, rather than by article 12(3)(b), which deals with consideration for the use of industrial, commercial or scientific equipment. The reason was that what the Indian company obtained and paid for was not simply time on a machine but the use of the embedded secret software - an encryption product developed by the US company - through which the data was processed. Because the receipt answered the description of royalty under article 12, it was chargeable in India at the treaty rate, and the business profits article, which would have required a permanent establishment, did not govern. It arises in Residence & Treaty Benefit and TDS Defaults matters, on section 9(1)(vi), section 9(1)(vii), section 195, section 245Q, section DTAA art 12, section DTAA art 7 of the Income Tax Act 1961, and was decided by Suhas C. Sen, J. (Chairman), Subhash C. Jain and Mohini Bhussry, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Get the contract and the billing metrics on the record; this ruling turned on how the charge was measured. Where a treaty applies, argue its own royalty definition: Explanations 5 and 6 to section 9(1)(vi) do not rewrite it. Do not rely on this ruling without checking the later High Court and Supreme Court authority on process and software payments.
Superseded by amendment. The domestic footing has been rewritten: the Finance Act 2012 inserted Explanations 4, 5 and 6 to section 9(1)(vi) with retrospective effect, Explanation 5 making consideration royalty irrespective of possession, control or location of the equipment and Explanation 6 defining process to include transmission by satellite, cable or optic fibre whether or not secret. Those amendments cut across both limbs the Authority weighed. On the treaty side the position has moved the other way: the Delhi High Court in DIT v. New Skies Satellite BV (8 February 2016) held that no amendment to the Act can extend to the terms of a treaty, and the Supreme Court in Engineering Analysis Centre of Excellence v. CIT (2 March 2021) held the treaty definition governs where more beneficial - so a payment of this kind is now fought on unamended treaty wording, and the secret-process characterisation the Authority adopted is contested. The Authority itself was replaced by the Board for Advance Rulings from 1 September 2021 (Finance Act 2021; Notification 96/2021), whose rulings are appealable to the High Court under section 245W, and the Income-tax Act 1961 was replaced by the Income-tax Act 2025 from 1 April 2026. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The note we were given says the ruling's 'equipment-royalty limb' has been altered by the 2012 amendments. The Authority did not decide the case on the equipment limb - it expressly chose article 12(3)(a), the secret process and industrial experience limb, over article 12(3)(b). The parties are anonymised, so no names are available. Whether the ruling has been followed or doubted by the Tribunal was not traced case by case, and the reported citation comes from the Indian Kanoon text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority answered the first question yes and the second by choosing article 12(3)(a). The payments were taxable in India as royalties. On the choice of limb, the Authority held the transaction was covered by article 12(3)(a), which brings in consideration for the use of, or the right to use, a secret formula or process, or for information concerning industrial, commercial or scientific experience, rather than by article 12(3)(b), which deals with consideration for the use of industrial, commercial or scientific equipment. The reason was that what the Indian company obtained and paid for was not simply time on a machine but the use of the embedded secret software - an encryption product developed by the US company - through which the data was processed. Because the receipt answered the description of royalty under article 12, it was chargeable in India at the treaty rate, and the business profits article, which would have required a permanent establishment, did not govern.
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