By Geeta Jani, Dhishat B. Mehta, Chartered Accountants
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21 Dell International Services India Pvt.
Ltd. Bangalore
(2008) TIOL 09 ARA IT
S. 9(1)(vi) of the Act
Article 12 of India-US DTAA
Dated : 18-7-2008
Issue :
Payment to USCO towards telecom bandwidth in the form of
private leased line telecom circuits is for availing standard services which is
not chargeable as equipment royalty. Such services are not fees for included
services.
In terms of S. 9(1)(vi)(b), source of income is not outside
India only because customers are located outside India.
Facts :
The applicant, Dell India, an Indian Company (ICO) was
engaged in the business of providing call centre, data processing and
information technology support services to its group companies. For providing
the services, ICO entered into agreement with US Company by name BT America (BTA)
for two-way transmission of voice and data through telecom bandwidth. For this
purpose, ICO was provided private leased line circuit for full country coverage
in the USA and in India. ICO established privity with BTA though the rates of
services were fixed pursuant to Master Services Agreement signed by ICO’s parent
with BTA for all the group concerns. BTA raised invoices for monthly recurring
charges on ICO. The invoice also described the amount as rent for dedicated
private telecom leased circuits.
BTA had its own network up to certain point while it tied up
with other service providers such as VSNL and Bharati for the balance part of
the connectivity. It was however a common ground that ICO had privity only with
BTA, while BTA was responsible for arrangements with VSNL/Bharati, etc. The
following chart depicts the flow of the arrangement.
The applicant sought ruling on TDS implications in respect of
remittance made on account of recurring charges to BTA.
The AAR noted the following to be the features of arrangement
entered into between ICO and BTA :
- Agreement described that BTA provided dedicated, point-to-point, international
links directly connecting two customers sites via digital circuits for
transmission of voice & data.
- The services provided by BTA was an end-to-end offering between the specific
site in country A and the specific site in country B.
- BTA has huge network of optical fibres cables laid under sea, other equipments
and infrastructure which were controlled and operated by BTA for the purpose
of rendering such services. Additionally, BTA had tied up with other service
providers for taking care of the segment in which BTA did not have its own
network.
- BT provided similar services to others also. Incidentally, similar services
were provided by other service providers also. The services were standard
services akin to telephone connection.
- The agreement made it clear that the arrangement was for provisioning of
services. BTA was responsible for maintenance of service levels. The agreement
was clear that the ownership, right and responsibility of operating and
maintaining assets and infrastructure was that of BTA. The agreement made it
clear that ICO had no control, possession or right of operating the
infrastructure, while BTA had control, possession, dominion over the assets of
its network.
- For establishing connectivity, certain instruments were placed at the location
of ICO. While the agreement contemplated recovery of one-time installation
charges, actually the same were waived.
The applicant contended that the remittance did not attract
tax implications either in terms of domestic Act provisions or in terms of
India-USA treaty.
As against that, the Department’s contention was
that the remittance was towards rental of equipment, hence subject to
withholding taxes in India as royalty income both in terms of provisions of S.
9(1)(vi) and in terms of provisions of India-USA treaty.
Held :
AAR held that the contract was for rendition of services
which was admittedly not in the nature of fees for included services and was
therefore not liable to tax in India in terms of India-USA treaty. The AAR held
that the amount was not in the nature of royalty for use or right to use the
equipment. For this purpose, the AAR concluded :
- The use or the right to use equipment covers only those arrangements where
there is some positive act of utilisation, application or employment of
equipment for the desired purpose by the payer. Merely because
facility/service is provided to the customer from sophisticated equipment
installed and operated by the service provider does not result in grant of
right of use of equipment to the service recipient.
- To determine whether the arrangement involves right of user, the question to be asked is whether the payer is required to do positive act in relation to the equipment such that he operates and controls the equipment in order to enjoy the facility. The right of adapting the equipment for the use by the payer is essential to characterise the transaction as that of equipment rental. The fact that the service availer exercises no possessory rights in relation to the network and merely enjoys facilities/services rendered from the infrastructure, supports that the transaction is that of service and not that of rent.
- The fact that BTAmaintains the entire infrastructure for offering services to various other cus-tomers also indicates that use of equipment is by BTA. The AAR likened and compared the arrangement with the use of bridge, road or telephone connection.
- The AAR referred to following extract from Professor Klaus Vogel’s commentary to make distinction between service and rent of equipment.
“……the use of a satellite is a service, not rental; this would not be the case only in the event that the entire direction and control over the satellite such as piloting, steering were transferred to the user” (at page 802)”.
The use of expression rentals or the fact that certain part of the instruments were installed at the premises of the assessee were held to be of no relevance.
The AAR also held that the amount was not royalty as consideration for use of secret process. In view of AAR, the treaty triggered royalty taxation only in the event when consideration was for use of secret process and the fact that services were of standard nature and provided by multiple other service providers supported that the arrangement was not for use of secret process.
The AAR did not accept the applicant’s contention that the amount remitted was protected from taxation in India on account of exception of S. 9(1)(vi)(b). In view of AAR, the assessee had its business principally carried out in India and the fact that the export was made to the US counterpart did not lead to conclusion that the source of income was situated outside India. In view of AAR, source is the starting point or the origin from where something springs or comes into existence and the fact that the customers were located outside India did not make the source of income to be outside India.
