In the facts of the case, payments made for transfer of allocated capacity in telecommunication submarine cable system does not constitute transfer of ownership right in the system. In the facts of the case, payment for transfer of capacity was consideration for right to use a process and/or right to use commercial or scientific equipment. Payment was therefore ‘royalty’ under the IT Act as well as the India-Saudi Arabia DTAA.

In the facts of the case, payment for transfer of capacity was consideration for right to use a process and/or right to use commercial or scientific equipment. Payment was therefore ‘royalty’ under the IT Act as well as the India-Saudi Arabia DTAA.

The Applicant, a company incorporated in India, was engaged in the business of providing telecommunication services in India. A company registered in Saudi Arabia, (FCO), was engaged in operating telecommunication paths, facilities and network infrastructures in Saudi Arabia and other countries (except India). FCO was part of a consortium which entered into an agreement to plan and lay the Europe India Gateway cable (EIG Cable System), linking Indian subcontinent and the UK as part of telecommunication system. Each member of the consortium was entitled to a capacity allocation in the EIG Cable System, based on the proximity to the country to which the consortium member belonged. Further, the member was entitled to transfer its allocated capacity in the EIG Cable System to other telecommunication entities on a private basis, subject to a condition that the transferee should agree to the terms of the consortium arrangement. FCO entered into a Capacity Transfer Agreement (CTA) with the Applicant for transfer of 40% of its total allocated capacity in the EIG Cable System and received consideration of INR1,252 million from the Applicant. The total investment of FCO was agreed at INR3,129M in the project, out of which the Applicant contributed INR1,252M, as consideration for transfer of 40% capacity by FCO. The Applicant approached the AAR on the taxability of the consideration paid to FCO for capacity transfer.

AAR Ruing

The following features of CTA were considered by AAR to conclude that agreement was for grant of use of capacity and not for transfer of ownership rights in the system.

(1) A member of consortium held the allotted capacity on an ownership basis and was entitled to transfer the capacity to other telecommunication entities;

(2) Transfer of the capacity meant ‘making available to a non-member the right of use of capacity’, though primary responsibility to meet consortium obligations continued with the member;

(3) Right to use the agreed capacity is granted only for use by the transferee and it is not-transferable to any third party;

 (4) CTA did not result in transfer of the entire rights and obligations of FCO;

(5) No right of ownership, property in or title to the capacity, facilities or network infrastructure, equipment or software were conveyed to or vested in the Applicant;

(6) In the event of termination of the CTA, all rights of the capacity transferred were to revert to FCO unless mutually agreed otherwise.

In view of clarificatory amendment vide Finance Act 2012 and even otherwise, there is not much doubt that the amount paid was for right to use a process and/ or a right to use commercial or scientific equipment. Under the DTAA, consideration paid for use of or right to use a design or model plan, commercial or scientific equipment is royalty. Further, such royalty would be taxable in India as the payer is located in India. Payments made by the Applicant do not constitute reimbursements of FCO’s costs.

Such payments are not made by the Applicant to the consortium on behalf of FCO. The obligation towards consortium is and continues to be that of FCO. The payment, therefore, can neither be regarded as reimbursement nor cost recoupment.