Sections 9(1)(i) and 9(1)(vii) – Standby maintenance charges does not amount to Fee for technical services (FTS) under the Act. Restoration services for restoring the telecommunication traffic is in the nature of business income and income would be attributable to the extent of length of cable situated in territorial waters of India.
Facts 1
The Taxpayer, a company incorporated in Bermuda, was engaged in the business of building high capacity submarine fiber optic telecommunication link cable system. The Taxpayer had built under-sea cable to link between United Kingdom and Japan for providing telecommunication link to various countries. The Taxpayer entered into a Capacity Sales Agreement (CSA) with an Indian Company (I Co). As per CSA, the Taxpayer was required to provide standby maintenance services to I CO.
The Tax Authority contended that the payment for standby maintenance is for rendering technical services and hence it is in the nature of Fee for technical services (FTS) under the Act.
Held 1:
U/s. 9(1)(vii) of the Act, FTS is defined to mean any payment in consideration of managerial, technical, or consultancy services.
Payment made for standby maintenance is a fixed annual charge payable for arranging standby maintenance arrangement which is required in a situation when undersea cable is being repaired. It is for keeping facility or infrastructure ready for rendering repair services, when required. Such charges are not for rendering of any services. Thus, receipt on account of standby maintenance charges is not FTS under the Act.
Facts 2:
The Taxpayer had sold certain cable capacity to various parties including I Co. The balance capacity remained with the taxpayer as its stock. The Taxpayer also entered into another agreement with certain telecom cable operators who carried telecommunication traffic for I CO. As per this agreement, the taxpayer was required to restore traffic to telecom cable operators’ customer (I Co) in the event of disruption in the traffic on their cable system by providing an alternative telecommunication link route through its own spare capacity in the cable. For these services, I Co directly made payments to the Taxpayer.
The Tax Authority contended that payment made by ICo to the Taxpayer for restoration services was in the nature of FTS under the Act. On appeal, First Appellate Authority held that income was not in the nature of FTS but it was in the nature of business income and treated 10% of the global receipts of the Taxpayer as income taxable in India. The Taxpayer contended that restoration services were not in the nature of managerial or consultancy services. They merely involved provision of standard facility of carrying telecommunication traffic and accordingly income from such services was in the nature of business income. Further, as no operations were carried on in India except for the fact that small part of the entire cable system, about 12 nautical miles from the shore, was laid down by the Taxpayer in territorial waters of India, the amount of income attributable only to such portion should be taxed in India.
Held 2:
Restoration services does not fall within the ambit of ‘managerial’ or ‘consultancy services’, in the absence of direction, regulation, administration or supervisory or advisory activities by the Taxpayer.
The Taxpayer has a cable system network in which it has spare capacity, which is being provided to I Co on behalf of telecom cable operators in case of disruption in their cable network. This amounts to provision of a standard facility for carrying telecommunication traffic to other telecom service providers. It does not involve transfer of technology or rendering of technical services.
Simple use of sophisticated technical equipment for providing the capacity in the cable to I CO ipso facto does not lead to any inference that any technical service is being provided by the Taxpayer to I Co. The Taxpayer earned business income.
Since part operations are carried on in India, only that income which is reasonably attributable to the proportion of the length of the cable in the territorial waters in India to the segments on which restoration have been provided should be taxed in India.
