Section 9(1)(vi) – Payment towards interconnect usage charges and capacity transfer for provision of bandwidth amounts to “process royalty” under the Income-tax Act, 1961 (Act) and the relevant DTAA
Facts:
Taxpayer, an Indian company, was engaged in providing international long distance services to its subscribers. For such services Taxpayer availed the assistance of non-resident (NR) telecom operators (NTO ) located in different jurisdictions and payments were made to NTOs without withholding taxes on the same.
The Tax Authority contended that the payments made to NTO ’s are in the nature of royalty/Fee for Technical services (FTS) under the provisions of the Act as also the relevant Double Taxation Avoidance Agreement (DTAA ) and hence held the Taxpayer to be an assessee in default for failure to withhold taxes at source.
On appeal, the First Appellate Authority upheld the Tax Authorities contention. Aggrieved, the Taxpayer appealed before the Tribunal.
Held:
Under the Act
Under the Act, the term “royalty” includes any payment for the use of a process. The term process has also been defined under the Act to include transmission through cable, optic fibre etc., whether or not such process is secret. Further the Act provides that royalty shall include consideration in respect of a right or property whether or not the possession or control of the right is with the payer and whether or not the right or property is used directly by the payer.
On a combined reading of the above it can be understood that there is no requirement to ‘transfer’ a right to use. The condition of use or right to use would be satisfied even without having a direct control or a physical possession on the activity. Any other interpretation would lead to defeating the intention of the provision.
Thus in the present case, Taxpayer made payment to NTO for the use of a “process,” and hence, the payment qualifies as “process royalty” under the Act.
Under the DTAA
The “royalty” definition under the DTAAs includes use of, or the right to use, any copyright, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. However, the term “process” has not been defined under DTAAs.
The Madras HC in Verizon Singapore Pte Ltd1 dealt with an identical issue and held that the definition of the term “process” under the Act should be read into DTAA while evaluating royalty taxation under the provisions of DTAA . The facts in the case of Taxpayer are identical to the facts before the Madras HC. Various other decisions such as Viacom 18 Media (P) Ltd2 and Cognizant Technology Solution3 have followed the Madras HC ruling while dealing on a similar issue.
Thus, the decision of the Madras High Court is accordingly followed and any process, whether secret or not, falls under the ambit of royalty even under the DTAA . Therefore payment for inter connect charges amounts to royalty for the use of process.
