Article 7, 12 of India-Singapore DTAA – Provision of standard bandwidth services could not be classified as FTS or royalty under India-Singapore DTAA

18. TS-305-ITAT-2019 (Mum.)

DCIT vs. Reliance Jio Infocomm Ltd.

ITA No.: 936/Mum/2017

A.Y.: 2016-17

Date of order: 10^th May, 2019

Article 7, 12 of India-Singapore DTAA – Provision of
standard bandwidth services could not be classified as FTS or royalty under
India-Singapore DTAA

FACTS

Taxpayer, an Indian company, was engaged in the business of
providing telecom services in India. During the year under consideration,
Taxpayer entered into an agreement with a Singapore Company (FCo) for availing
bandwidth services. As per the terms of the agreement, Taxpayer withheld taxes
on payments made to FCo for rendition of services.

However, Taxpayer subsequently appealed before the CIT(A) u/s
248 of the Act on the ground that the amount paid for bandwidth services was
not taxable in India and hence was not subject to withholding u/s 195 of the
Act on the basis of the following:

Bandwidth charges were in the nature of business income for
FCo and in the absence of permanent establishment (PE) or business connection
in India, it was not taxable under Article 7 of the India-Singapore DTAA.

Provision of the bandwidth services was fully automated and
did not involve any human intervention. Hence, such services did not qualify as
FTS under the Act or the DTAA.

Payments made to FCo were merely for receiving standard
bandwidth services and not for making any use of a ‘process’, whether secret or
not; therefore, it does not qualify as ‘royalty’ under the Act as well as the
DTAA.

CIT(A) observed that
Taxpayer had only received an access to service and all the infrastructure and
processes required for provision of bandwidth services were always used and
remained under the control of FCo and were never given either to Taxpayer or to
any person availing such services. It was thus concluded that the payments made
by Taxpayer to FCo for provision of bandwidth services could not be classified
as FTS or royalty either under the Act or the DTAA. The payment made was in the
nature of business profits, not taxable in India in the absence of PE or any
business connection of FCo in India.

Aggrieved, the AO appealed before the Tribunal¹ .

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1.  The
AO did not assail the observation of the CIT(A) that payment made for bandwidth
services did not qualify as FTS and hence this aspect was not discussed before
the Tribunal.

HELD

The consideration paid by Taxpayer to FCo for provision of
bandwidth services was in the nature of business income and cannot be
classified as ‘royalty’ under the Act or the DTAA for the following reasons:

Pursuant to the terms of the agreement, Taxpayer had only
received standard facilities, i.e., bandwidth services from FCo.

All infrastructure and processes required for provision of
bandwidth services were always used and under the control of FCo and the same
were never given either to Taxpayer or to any person availing the said service.

Taxpayer did not have access to any process used in providing
the bandwidth services. Besides, since the process involved in providing the
bandwidth services was a standard commercial process that was followed by the
industry players, and the IPR in the process was not owned / registered in the
name of FCo, it did not qualify as a ‘secret process’. Besides, as the payment
was neither towards the use of any equipment nor secret formula or process, it
did not qualify as royalty under the DTAA.

Further, the amendment to
explanation 6 of section 9(1)(vi)² 
will not override the treaty and hence will have no bearing on the
definition of ‘royalty’ as contained in the DTAA.  

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2. 
Explanation 6 to section 9(1)(vi) defines a process to include transmission by
satellite, cable, optic fibre or any other similar technology whether or not
such process is secret