Sections 9(1)(i), 9(1)(vii) – Transaction of
acquisition of full ownership rights and obligations in respect of
capacity purchased in the cable system is ‘sale’ and not ‘royalty’;
payment not taxable in the absence of business connection; fee for
standby facility, which does not involve actual rendering of services,
does not amount to FTS under the Act.
Facts:
Taxpayer,
a company incorporated, controlled and managed from Bermuda, was set up
to build a high capacity undersea cable for providing telecommunication
link between the UK and Japan. For this purpose, it had entered into an
memorandum of understanding (MOU) with 13 parties world over, including
an Indian Company (I Co), for planning and implementation of the said
telecommunication link cable system linking western Europe (starting
from the UK), Middle East, South Asia, South East Asia and Far East
(ending in Japan).
ICo accordingly entered into a Cable Sales
Agreement (CSA) and thereafter into a Construction and Maintenance
Agreement (C&MA) with the Taxpayer. Pursuant to these agreements,
ICo purchased certain capacity in the said cable system for a lump sum
consideration. The C&MA was for a period of 25 years, which
coincided with the life of the cable system.
Further, as per the
terms of C&MA, the Taxpayer had agreed to arrange for maintenance
to keep the cable system in proper working condition at all times. One
of the maintenance activity involved providing of standby cover, i.e.,
having the cable ships on standby to repair any breaks or damages in the
submarine cable.
The Taxpayer argued that the payment for
standby maintenance was not in the nature of FTS. The Taxpayer further
claimed that its receipt from ICo for cable capacity purchase is a sale
transaction that was executed outside India on a principal to principal
basis and, hence, was not taxable in India in absence of business
connection in India. The Tax Authority argued that the payment by ICo is
for “right to use” in the cable, hence, taxable as “Royalty” in India.
The
First Appellate Authority agreed with the Taxpayer that the payment for
cable capacity was a sale transaction. However, the payment for standby
maintenance was held to be FTS. Aggrieved, both the Taxpayer as well as
the Tax Authority appealed before the Tribunal.
Held:
Whether payment for telecom capacity is a transaction of ‘sale’ or ‘royalty’? Held that the transaction is a sale.
Transaction
of sale is a fact based exercise which can be only ascertained from the
intention of the parties concerned as evidenced by written agreements
between them in light of the facts and circumstances. For determining
whether the telecom capacity agreement is for provision of “right to
use” or “sale” of a capacity in the cable network, one needs to examine
whether the owner had retained ownership control and possession of the
property.
From the terms of the clauses given in CSA and
C&MA, it is clear that ICo has got all the ownership rights and
obligations in respect of the capacity purchased in the cable system.
Further, it was provided that the management committee which also
included ICo would make all decision on behalf of the signatories to
implement the purpose of the agreement. ICo, therefore, had unrestricted
right to transfer its assigned capacity, though such a transfer had to
be with the consent of each signatory/telecommunication entity to whom
such capacity was assigned.
It was also clear that the benefit
and burden of ownership had shifted from the seller (i.e. the Taxpayer)
to the buyer. ICo had all the risks and rewards attached to ownership;
ICo not only had the exclusive domain on the rights to use but also
right to resale or transfer its interest in the capacity in the cable
system. Thus under the C&MA, ICo satisfied the characteristic of an
“owner” and “ownership” in respect of the capacity in the cable system.
Further, ICO has treated the capacity as “Fixed Asset” in its books and
had claimed depreciation, indicating that it had treated the capacity
purchased as an asset owned by it. All these points lead to the
conclusion that the intention of the parties to the agreement was sale
and purchase of capacity. Accordingly, the payment is in the nature of
sale.
In case of a “royalty” agreement, the complete ownership
is never transferred to the other party. What is envisaged is that there
should be transfer of rights, or imparting of any information in
respect of various kinds of property, or use of rights to any equipment
etc. If the consideration has been received for transferring ownership
with all rights and obligations then such payment cannot be treated as a
“royalty” payment. In the present case, capacity has been transferred
to ICo along with complete ownership. Accordingly the payment is not in
the nature of royalty.
Is there a business connection? Held No.
The
term business connection connotes some type of establishment, agency or
subsidiary or dependent agent or the like. The connection in India must
be in the form of any concern in the nature of trade, commerce or
manufacture by which the NR earns income.
In the facts of the
present case, there is no asset of the Taxpayer that is situated in
India. The assets in India (landing station) belong to ICo. Further,
once the Taxpayer sells the capacity in the cable system, it also
belonged to ICo. The capacity thus sold, is no longer an asset that
belongs to the Taxpayer. Hence, there is no income accruing or arising
though or from asset of the Taxpayer in India.
The sale of
capacity in the cable system does not arise through or from business
connection in India, because sale has been made to ICo which is an
independent entity and on a principal to principal basis. Thus, there is
neither a business connection of the Taxpayer in India, nor is there
any asset or source of income of the Taxpayer in India. Therefore, the
Taxpayer is not taxable in India on the sale transaction.
Whether nature of payment for standby maintenance is FTS? Held No.
For
a payment to be classified as FTS there needs to be “rendition” of
services in the nature of “managerial”, “technical” or “consultancy”
Rendering services means actual performance of service. The standby
charges paid are not for performance of service. In case the Taxpayer is
providing some kind of repair services, it can be termed as “technical”
in nature and hence falling within the purview of FTS. However, if
there is no actual rendering of services, but mere collection of an
annual charge to recover the cost of standby facility, then it cannot be
said that the payment is for providing technical services. Therefore,
the payment for standby maintenance charges does not qualify as FTS and
hence is not taxable in India.
