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Source: www.allindiataxes.com [ AIT-2011-61-ITAT] (Judgement Date: 7 January
2011)
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The taxpayer uses telecom services equipment situated outside India
in order to provide IPLC services from the aforesaid virtual point up
till the overseas customer’s destination.
The tax payer does not either ‘own’ or ‘utilize’ any landing station/
equipments in India for providing international half-circuit-services.
The customer receives two invoices – one from VSNL for providing
connectivity within India and second from the tax payer for
providing connectivity outside India.
Issue before the Tribunal
Whether amounts received by the tax payer for provision of IPLC/
bandwidth services outside India is royalty for use of ‘equipment’ or
‘process’ under section 9(1)(vi) of the Act read with Article 12(3)(b)
of the India-Singapore DTAA?
Tax payer’s contention
The contract between the tax payer and its customers is for the
provision of services and not for providing any right in any
equipment and/or network used by the tax payer for providing
telecom services
2
The Technical Advisory Group (TAG) of OECD had formulated the following tests in
its report titled “Tax Treaty Characterization Issues Arising from E-Commerce” dated
February 1, 2001 for determining whether the payments are for use of or right to use,
industrial, commercial or scientific equipments:
The provider does not bear any risk of substantially diminished receipts or
increased expenditure in case of non performance or does not use the property
concurrently to provide significant services to the entities unrelated to the
services recipients; and
The total payment does not substantially exceed the rental value of the
equipment for the contract period.
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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- The customer does not hold/possess own, operate, maintain or
control tax payer’s telecom network infrastructure/equipment
and they also do not possess significant economic/possessory
interest in the telecom network infrastructure/equipment
Revenue’s contention
In the alternative, the payments made for IPLC services are towards
connectivity through dedicated bandwidth to Indian customers and
would constitute payment for use of ‘process’ and hence, would
qualify as ‘Royalty’.
Tribunal’s Ruling
The Tribunal held that while determining the nature of payment all
relevant facts having bearing on the substance of the transaction
should be taken into account.
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
3
Even if the bandwidth is not used, the customer has to pay the
committed charges. Thus, the tax payer does not bear any risk of
diminution in receipts or increase in expenditure if the customer
does not make the use of the capacity. Therefore the payment made
for hiring bandwidth would correspond to the rental value.
The amount received by tax payer from Indian customers is also for
the use of a ‘process’ and would therefore qualify as royalty.
Reliance in this regard is placed on the decision of Special Bench,
New Delhi in the case of New Skies Satellites N.V v. ADIT (Int.
Tax) [319 ITR 269] and the decision of ITAT Mumbai in the case of
Sanskar Info TV(P) Ltd [24 SOT 87]
Our comments
The Chennai Tribunal has held that payments towards IPLC / dedicated
bandwidth are towards use of ‘equipment’ or ‘process’ and therefore
would qualify as royalty under the Act as well as DTAA.
It may be noted that the proposition on ‘process’ element under a
service contract, similar to the one laid down by ITAT Special Bench in
the case of New Skies Satellite N.V (which has been relied on by the
© 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Chennai Tribunal in this case) has been not been adopted by the recent
Delhi High Court judgment in case of Asia Satellite Communications
Co. Ltd. v. DIT [2011-TII-05-HC-DEL-INTL]
This judgment also comes close on the heels of the Bangalore Tribunal
decision in the case of Infosys Technologies wherein, it has been held
on similar facts that payments will not be considered as Royalty/ FTS.
In this judgment the Chennai Tribunal has observed that the case of
provision of dedicated bandwidth is different from that of provision of a
standard facility. Further it has interpreted the TAG Report of OECD to
mean that physical possession of the equipment is not mandatory to
qualify as ‘equipment’ royalty. Whereas a contrary view have been
adopted in the Advance Rulings in the case of M/s Dell International
Services India (P) Ltd. [305 ITR 37] and M/s Cable & Wireless [315
ITR 072].
The judgment is therefore expected to have significant impact on the
taxability of remuneration from provision of bandwidth/ IPLC services
especially from the perspective of equipment royalty. Considering the
plethora of diverse judicial precedents, finality of the issue may take
some more time.
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KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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