Article 13 of India UK-DTAA – Payment for Interoute connectivity facility helping in connecting the calls to telecom operators in the end jurisdiction is neither for any scientific work nor for any patent, trademark, design, plan or secret formula or process. Payment is for a service and not for use of scientific equipment. Since service does not satisfy ‘make available’ condition, it does not qualify as Fee for technical services (FTS) under the DTAA .
Facts
The Taxpayer was a company incorporated in, and tax resident of UK. The Taxpayer was engaged in the business of providing international telecommunication network connectivity to various telecom operators around the world. The Taxpayer received certain amount from Indian customers towards the provision of virtual voice network (VVN). VVN is a standard inter-connect service provided to third party carriers. The Taxpayer contented that the income for use of VVN is in the nature of business income and since there was no PE in India, such income is not taxable in India.
The AO held that the Taxpayer provides use of its facilities/equipment/infrastructure to enable customers to interconnect with each other. Such facility includes proprietary software and hardware, technical expertise and other intellectual property. The AO observed that usage of such facilities amounted to usage of the Intellectual property held by the Taxpayer and hence, the payments received by the Taxpayer were in the nature of Royalty, or alternatively, FTS. Hence, the same was taxable in India. On further appeal, the First Appellate Authority also upheld the order of AO.
Aggrieved, the Taxpayer preferred an appeal before the Tribunal.
Held
Essentially, provision of VVN was connecting the call to the end operator, and, in that sense, it worked like a clearing house.
Payment made by the Indian entities can be held to be royalty only when it is payment for scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience (‘specified items’).
In the present case, the payment is not for a scientific work nor is there any patent, trademark, design, plan or secret formula or process for which the payment is being made. The payment is made for a service, which is rendered with the help of certain scientific equipment and technology. The Taxpayer is providing a facility which is a standard facility used by other telecom companies as well. Also, merely because the payment involves a fixed as also a variable payment, the same does not alter the character of service.
Though the Taxpayer may charge a fixed amount to cover its costs in employing enhanced capacity so as not to incur losses when this capacity is not used, but what the customer is paying for is a service and not the use of equipment involved in additional capacity, nor for any scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.
The payment for a service can be brought to tax under Article 13 of DTAA only when it makes available the technology in the sense that recipient of service is enabled to perform the same service without recourse to the service provider. Though the service rendered by the Taxpayer requires technical inputs, there is no transfer of technology. Hence, the make available condition is not satisfied. Therefore such payment is outside the ambit of fees for technical services (‘FTS’) taxable under Article 13 of the DTAA .
Further, since there is no dispute that the Taxpayer does not have any permanent establishment (‘PE’) in India, the payment made by Indian customers cannot be brought to tax in India.
