2 Article 12 of India-USA DTAA; Section 9(1)(vi), 40(a)(i), 195 of the Act – payments made to the parent company on a cost to cost basis for availing lease line services from third party service provider does not qualify as royalty; it qualifies as a reimbursement, not subject to tax in India.

Facts

Taxpayer, an Indian company, was an affiliate of FCo. FCo had entered
into an agreement with a third party service provider for providing
bandwidth/lease line services for the global business of the FCo’ group
including the Taxpayer. FCo raised back to back invoices on Taxpayer in respect
of Taxpayer’s share of lease line charges.

The Taxpayer contended that payment made to FCo was not in the nature of
royalty but in the nature of reimbursement and hence there was no obligation to
withhold taxes on such payments.

AO contended that the amount remitted to the third party was not a
reimbursement of expenses but was in the nature of payment made to the service
provider for lease line services through its associated enterprise (AE).
Further, it contended that such lease line charges constituted royalty under
the Act as well as the DTAA basis the amended definition of royalty under the
Act and hence would be subject to withholding u/s. 195 of the Act.

Aggrieved by the order of AO, Taxpayer appealed before CIT(A). CIT(A)
observed that in case payments were directly made to third party service
provider, it would have been taxable in the hands of the service provider and
would attract withholding obligations for the Taxpayer. Merely because the
payment is routed through FCo on back to back basis, it cannot be treated as
reimbursement of expenses. Payment made by Taxpayer is taxable in India and
will be subject to withholding.

Aggrieved, the Taxpayer appealed before the Tribunal

Held

– The
agreement with the service provider was a commercial transaction, in terms of
which FCo contracted the service provider to provide lease line services for
global business of FCo group and was not limited to the Taxpayer alone.

–   The understanding
was between FCo and the service provider. Though the Taxpayer benefited from
the negotiated price under the agreement, it was not a party to the agreement.

–  The
privity of the agreement was between FCo and service provider, whereby FCo obtained
the services from the service provider and passed it to its affiliates
including the Taxpayer on cost to cost basis. Thus there was no income element
involved in payments made by Taxpayer to FCo.

–   Without
prejudice, the contention of AO that it is not case of reimbursement but a case
of payment to third party through its AE and hence qualifies as royalty, cannot
be accepted. This is because the term ‘royalty’ is defined under the DTAA and
it does not cover payments made towards lease line charges.

–  Further,
the amended definition of royalty u/s 9(1)(vi) of the Act cannot be read into
the DTAA. Reliance in this regard was placed on Delhi HC decision in the case
of New Skies Satellite BV.