Article 12

A U.S. company (PepsiCo) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (the “Bottler”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to the Bottler, for bottling and sale, and granted the Bottler the right to use the Pepsi and Mountain Dew trademarks in this regard. In fact, the concentrate was sold by an Australian company in the PepsiCo group (the “Seller“) to the Bottler. There was a similar arrangement for the licensed bottling and sale by the Bottler of Gatorade pursuant to an EBA with another U.S. company in the Pepsi group (“SVC”).

Perram and Jackman JJ stated (at para. 11) that “where parties to a conveyance have agreed the purchase price for a transfer on sale then the consideration for the transfer is that agreed price” and that the “ordinary meaning of the language used by the parties [in the EBA] … suggests that what was to be paid by the Bottler to PepsiCo/SVC or their nominated seller was a price being paid for the concentrate and therefore ‘as consideration for’ the sale of the concentrate” (para. 13). In rejecting the Commissioner’s submission that this meant that the trademark licence provided to the Bottler under the EBA was “being granted for nothing” (para. 17), they noted (at para. 19) that “the grant of the licence was also a significant benefit to PepsiCo/SVC.”

Thus, “the payments made by the Bottler to the Seller did not include an element which was a royalty for the use of the trade marks (since the payments were not in consideration for the right to use the trade marks)” (para. 37), so that no withholding tax could be imposed by the Commissioner on such consideration. Furthermore, such payments were derived by the Seller rather than by PepsiCo/SVC. These conclusions arose under the domestic withholding tax provision, so that no reference was required to the terms of the Australia-US tax treaty.

In his reasons, Colvin J stated (at para. 197):

[T]he EBAs … are properly construed as agreements to bottle, sell and distribute branded products, not as agreements for the supply of concentrate. It follows … that the amounts provided for by the EBAs as the prices for units of concentrate were partly amounts in consideration for the use of the trade marks which the Bottler was licensed to use.

However, he agreed with the majority that the amounts paid by the Bottler to the Seller were not owed to PepsiCo or SVC, and accordingly agreed with the majority that the PepsiCo and SVC appeals should be allowed.

BLM was a substantial Irish-resident investment company, which started acquiring proved claims in the administration of Lehman Brothers International (Europe) ("LBIE" – a UK resident) in 2011 and came to own 443 such claims. In February 2018, a Caymans company (“SICL”), which was unrelated to BLM and was then in liquidation, instructed a third-party broker to market its claim for post-administration interest from LBIE (the “SAAD Claim”). As a result, BLM purchased the SAAD Claim for a cash amount which exceeded what it expected to receive from LBIE after taking into account UK withholding tax of 20% but, after receiving a refund of such withholding tax pursuant to Art. 12(1) of the UK-Ireland Treaty, would generate an 8% profit. Art. 12(1) provided:

Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.

There would have been no refund of the UK withholding tax had the SAAD Claim continued to be held by SICL.

HMRC denied BLM’s refund claim on the basis of Art. 12(5) of that Treaty, which excluded the application of Art. 12 “if it was the main purpose or one of the main purposes of any person concerned with the … assignment … to take advantage of … Article [12].”

In confirming the conclusion of the First-tier Tribunal (Tax Chamber) (the "FTT") that the assignment did not engage Art. 12(5), the Upper Tribunal (“UTT”) indicated that it did not discern reviewable errors in the findings of the FTT, which most relevantly, and as summarized by the UTT, were that:

• It was evident from the OECD commentaries that Art. 12(5) should be regarded as aimed at transactions involving conduits or treaty shopping (see paras. 114-115).
• Here, by contrast, SICL did not retain any direct or indirect entitlements in respect of the SAAD Claim, and it “was Ireland who had full taxing rights over the interest beneficially owned by BLM [and] BLM assumed that those taxing rights would be engaged” (para. 100), and "for BLM the existence of the UK-Ireland treaty was simply the setting in which the Assignment took place” (para. 100).
• Furthermore, “from BLM's perspective, it regarded its beneficial ownership of the interest in respect of the SAAD Claim in the same way as it regarded its beneficial ownership of all the other interest in respect of all the other debt claims in the LBIE administration” which it had acquired and whose eligibility for the Treaty reduction had not been challenged (para. 99).
• “It was appropriate for the FTT to have had regard to the fact that there were potential purchasers of the SAAD Claim for whom UK WHT would not have been an issue and for whom the UK-Ireland treaty would not have been relevant [e.g., UK purchasers with tax losses] … who were prepared to pay a price higher than 80% of the interest on the SAAD Claim for reasons wholly unconnected to the UK-Ireland treaty” (para. 78).
• “SICL's only purpose in entering into the transaction was to sell the SAAD Claim for the best available price” (para. 37), and similarly the “’SICL's only purpose in entering into the transaction was to sell the SAAD Claim for the best available price;’” (quoting the FTT at para. 32).

A U.S. company (“PepsiCo”) entered into an “exclusive bottling appointment” (“EBA”) with an independent Australian bottling company (“SAPL”). PepsiCo agreed in the EBA to sell, or cause a related entity to sell, beverage concentrate to SAPL for bottling and sale, and granted SAPL the right to use the Pepsi and Mountain Dew trademarks in this regard. A Singapore company (“CMSPL”) in the PepsiCo group produced the concentrate, and sold it to another Australian company in the PepsiCo group (“PBS”) which, in turn, supplied it to SAPL and invoiced SAPL therefor. Similar facts applied to an ERB between SAPL and another U.S. corporation (Stokely-Van Camp, Inc., or “SVC”) respecting the bottling of Gatorade under a licence of that trademark.

The definition in Art. 12(4) of the Australia-U.S. treaty (the “DTA”) of “royalties” referred inter alia to:

payments or credits of any kind to the extent to which they are consideration for the use of or the right to use any:

(i) copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right … .

Moshinsky J found that Australia was permitted under the DTA to impose withholding tax of 5% on a portion of the purchase price paid by SAPL to PBS on the basis that it constituted consideration for the use, or right to use, the trademarks to which PepsiCo or SVC were beneficially entitled, stating (at paras. 244, 255-256, and 258):

[W]hile the payments made by SAPL were, on their face, payments for the purchase of concentrate, this is not determinative of their characterisation for the purposes of Art 12(4) … .

… PepsiCo and SVC, as the parties to the EBAs, were entitled to receive the payments made by SAPL under the EBAs. This follows as a matter of contract from the fact that PepsiCo and SVC were the parties to the EBAs and SAPL’s payment obligations under the EBAs were owed to them. …

PepsiCo and SVC nominated PBS to be the seller of the concentrate under the EBAs for the relevant years. This constituted a direction to SAPL to pay PBS rather than PepsiCo or SVC (as applicable). In these circumstances, the relevant portions of those payments (being the portions that were consideration for the use of, or the right to use, the relevant items) “came home” to PepsiCo/SVC … by being applied as they directed. The relevant portions were therefore income derived by PepsiCo/SVC. …

Further, in the circumstances, PepsiCo and SVC … were entitled to receive the payments under the EBAs and directed SAPL to pay PBS. In these circumstances, PepsiCo and SVC were beneficially entitled to the relevant portions of the payments.

Moshinsky J then determined, based on expert evidence as to the terms of licence agreements that were presented as comparables, that the portion of the purchase price for the concentrate that was to be treated as a royalty was 5.88%, subject to a specified adjustment.

At issue were numerous joined appeals involving the application of withholding tax by the Commissioner of consideration paid by residents of India to non-residents under four broad categories of licensing and sale transactions described below and involving the application of 18 income tax conventions (listed at para. 40, and described at para. 41 as being relevantly “substantially similar”) including that with Canada:

Category 1: Computer software purchased directly by an end-user, resident in India, from a foreign, non-resident supplier or manufacturer (for example, a non-exclusive licence to use Samsung software on the end-user’s Samsung mobile device, with a prohibition against making the software available to any other person, or copying it other than for backup purposes).

Categories 2 and 3: Computer software purchased by resident (Category 2) or non-resident (Category 3) distributors or resellers from non-resident suppliers or manufacturers for resale to resident end-users or other Indian distributors (for example, under a “Remarketer Agreement” between IBM Singapore and IBM India for the resale of computer programs, with IBM India not being accorded any rights or interest in the software copyright, but authorized to market the programs to end-users.)

Category 4: Equipment into which software was integrated, that was sold by non-resident suppliers to resident distributors or end-users.

Nariman J noted (at paras. 47, 52):

In all these cases … no vestige of copyright is at all transferred, either to the distributor or to the end-user. …

What is “licensed” by the foreign, non-resident supplier to the distributor and resold to the resident end-user, or directly supplied to the resident end-user, is in fact the sale of a physical object which contains an embedded computer programme, and is therefore, a sale of goods.

Nariman J quoted (at para 152) the “instructive” OECD Commentary on Article 12, including the statements (at para. 14.4 thereof) that:

[I]n a transaction where a distributor makes payments to acquire and distribute software copies (without the right to reproduce the software), the rights in relation to these acts of distribution should be disregarded in analysing the character of the transaction for tax purposes. Payments in these types of transactions would be dealt with as business profits in accordance with Article 7. This would be the case regardless of whether the copies being distributed are delivered on tangible media or are distributed electronically (without the distributor having the right to reproduce the software) … .

Although India (in the capacity of an OECD non-member) had expressed a reservation regarding various of the OECD interpretations on Article 12 (quoted at para. 153) “that some of the payments referred to may constitute royalties”, he noted that none of the wording of the Treaty definitions of “royalty” had been renegotiated following the making of these reservations, and stated (at para. 159):

[P]ersons who pay [withholding] and/or assessees in the nations governed by a DTAA have a right to know exactly where they stand in respect of the treaty provisions that govern them. Such persons and/or assessees can thus place reliance upon the OECD Commentary for provisions of the OECD Model Tax Convention, which are used without any substantial change by bilateral DTAAs, in the absence of judgments of municipal courts clarifying the same, or in the event of conflicting municipal decisions.

Accordingly, none of the payments in issue were subject to withholding.

The Danish-resident taxpayer had set up and maintained a global telecommunication facility connected to computers in Denmark to assist all of its appointed agents in various countries in booking and tracking of cargo and servicing customers in those countries. The expenses of this “Maersk Net” system were shared by all the agents through charges made to them by the taxpayer. Three of them were resident in India. The Indian Revenue authority assessed on the basis that the taxpayer’s receipts from the three agents was fees for technical services rather than income arising from the taxpayer’s international shipping business. At issue were Article 13 of the India-Denmark Double Taxation Agreement (the “DTA”), which permitted India to impose tax of 20% on the gross amount of fees for technical services (essentially defined as “consideration for the services of technical or other personnel”); and Article 9 of the DTA, which provided for a reduced rate of Indian tax on “profits derived from the operation of ships in international traffic.”

In finding for the Art. 9 characterization, Sikri J stated (at paras 11 and 12):

…It is clearly held that no technical services are provided by the assessee to the agents. … It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. … Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.

…'[P]rofit' from operation of ships under Article…9 … would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited, (2016) 383 ITR 1 (SC) has categorically held that use of [a] facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all.

The taxpayer was a wholly-owned Indian subsidiary within the Bombardier group, that was engaged in the business of manufacturing and supply of rail transportation systems. A Canadian Bombardier company ("BT Canada") provided it with and charged (based on a calculation of the taxpayer's share of globally incurred costs) for information system support services, such as e-mail database, control tools and time management systems, bar coding solutions, an HR payroll system, a finance reporting system, and management software systems, none of which resulted in the taxpayer obtaining control or use of the hardware or server involved. The assessing officer treated the payments as fees for technical services that were subject to withholding.

In addition to finding in the taxpayer’s favour on a domestic withholding issue, Kumar J also addressed Article 12 of the Canada-India Treaty, which assimilated services to royalties as follows:

4. For the purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or

(b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.

In finding that the "make available" test in subpara. 4(b) was not satisfied, so that the fees were not royalties under Art. 12, Kumar J stated (at paras. 15-17):

The services provided by BT Canada were simply management support or consultancy services which did not involve any transfer of technology. ...

…De Beers [CIT v. De Beers India Pvt. Ltd (2012) 346 ITR 467 (Kar), I.T.A. No. 35/2010]...posed the question, as to “what is [the] meaning of make available”… and proceeded...as follows:

… [T]o fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. …

The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. … [P]ayment of consideration would be regarded as "fee for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.

… [I]t is not even the case of the Assessing Officer that the assessee, i.e. recipient of services was enabled to use these services in future without recourse to BT Canada. The...mere fact that there were certain technical inputs or that the assessee immensely benefited from these services...is wholly irrelevant.

The Indian-resident taxpayer performed services for its Australian customers from its offices in India and through an Australian permanent establishment. Art. 12(4) of the Royalty Article of the Australia-India Treaty provided:

The provisions of paragraphs (1) and (2) [of Art 12] shall not apply if the person beneficially entitled to the royalties, being a resident of one of the Contracting States, carries on business in the other Contracting State, in which the royalties arise, through a permanent establishment situated therein…and the property, right or services in respect of which the royalties are paid or credited are effectively connected with such permanent establishment…. In such a case, the provisions of Article 7 … shall apply.

The Indian taxpayer argued that the royalties received by it in India (which were accepted by Australia as not being attributed under Art. 7 to the Australian PE) nonetheless were “effectively connected” to that PE in the sense that the work in India advanced the common goal with the Australian PE of servicing the Australian customers. The taxpayer then argued that the quoted statement - that Art. 12(2) “shall not apply” - meant that Australia was precluded from imposing withholding tax on these royalties.

In rejecting this submission, and finding that the royalties were subject to Australian withholding tax, the Court stated (at paras 31, 43):

Article 12(4) is to be construed in the context that Art 7(7) gives priority to Art 12 over Art 7. Without Article 12(4), royalties forming part of the business profits of an enterprise attributable to a permanent establishment in the source State would be taxable by the source State but subject to a limit on the amount of tax that may be charged. No evident object or purpose is indicated, and none was suggested by the Appellant, for construing Art 12(4) in a way that would disentitle the source State from the right at all to tax a payment otherwise within the scope of Art 12(2) but outside the scope of Art 7. To the contrary, the evident purpose of Art 12(4) is to relieve the source State from the limitation on taxing rights imposed under Art 12 by taxing such royalties under Art 7, not to disentitle the source State from any taxing rights where otherwise Art 7 would not give such taxing rights. Such a construction gives effect to the language of Art 12(4) and is consistent with the extrinsic materials. …

Used as an adverb in conjunction with “connected”, “effectively connected with” should be understood to mean having a real or actual connection with the activities carried on through the permanent establishment. Whether or not such a connection exists is not answered merely on the basis that the property, rights or services provided “serve to effect the purposes of the permanent establishment”.

The taxpayer was a Singapore company which installed a marine crude oil receiving facility over a 41-day period for Indian Oil Corporation Ltd (“IOCL‟) at a contract price of U.S.$18.6 million. Although the facility belonged to IOCL, its installation required the taxpayer to use its own barges containing specialized equipment, with 68% of the contract price allocated to this use (referred to as the “the mobilisation/demobilisation charges.”)

The definition of “royalties” in Art. 12.3(b) of the Singapore-India Double Taxation Avoidance Agreement (DTAA) included payments for the use of or the right to use any “industrial, commercial or scientific equipment.” In rejecting a submission on behalf of the Director of Taxation that the mobilisation/demobilisation charges were royalties, Dr Muralidhar J stated (at paras. 24, 36):

...IOCL did not have dominion or control over the equipment.

There is a difference between the use of the equipment by the Petitioner ‘for’ IOCL and the use of the equipment ‘by’ IOCL. Since the equipment was used for rendering services to IOCL, it could not be converted to a contract of hiring of equipment by IOCL.

The taxpayer had previously paid royalties under a licence agreement with an affiliated Netherlands corporation ("VIBV"). When VIBV became a resident of the Netherlands Antilles, VIBV assigned the licence agreement (but not the patents or trade-marks) to its newly-incorporated Netherlands-resident subsidiary ("VHBV"). Under the assignment agreement, VHBV was required to pay to VIBV 90% of the royalty fees earned by it. The taxpayer withheld Part XIII tax at the Treaty-reduced rate of 10% on the royalty fees paid to VHBV on the basis that VHBV was the "beneficial owner" of the royalties under Article 12 of the Canada-Netherlands Convention. The Minister assessed the taxpayer on the basis that VIBV was the beneficial owner, so that Part XIII tax had been required to be withheld by the taxpayer at the non-Treaty reduced rate of 25% (Canada having no tax treaty with the Netherlands Antilles).

In allowing the taxpayer's appeal, Rossiter ACJ. found that VHBV was the beneficial owner of the royalties. Despite a contractual obligation for VHBV to transfer 90% of the royalties to VIBV, the flow was not automatic in practice. Moreover, VHBV had been established to manage licensing royalty stream, and had independent discretion as to how its 10% share of revenue should be spent. The royalty fees were also co-mingled with other accounts before going to VIBV, and the amounts received and paid by VHBV were different, so that it was not clear that the amounts paid to VHBV were the same funds as those paid to VIBV. VHBV also assumed risk in respect of the royalties because the incoming and outgoing amounts were denominated in different currencies.

International subscribers to the registrant's internet website were granted a "non-exclusive, limited and revocable licence to download and view the content of the website" on their computer. In finding that the subscription fees were not zero-rated consideration, Sharlow J.A. quoted with approval a statement of the OECD Model Tax Convention on Income and Capital that:

"Thus, in a transaction that in essence is an acquisition of data or images transmitted electronically, any incidental copying is merely the means by which the data is captured and stored. The essential consideration for the payment in that case is the data, not the use of the copyright, even though copyright is incidentally used."

A lump-sum payment made for a non-exclusive licence to source code to be used by the taxpayer in manufacturing software to be sold by it was exempt under s. 212(1)(d)(vi) and under Article XII, para. 3 of the Canada-U.S. Income Tax Convention.