2012 (8) TMI 741 - AAR - Income Tax

Tax Ruling: EIG Capacity Payments Taxable as Royalty, Maintenance Charges Exempt from Withholding

The Authority for Advance Rulings determined that payments for EIG capacity acquisition are taxable in India as royalty, requiring withholding tax under ... India and Saudi Arabia DTAC - Construction and Maintenance Agreement - assessee made the payments to Saudi Telecom Limited ('STC') under the terms of the EIG Capacity Transfer Agreement, towards acquisition of the EIG capacity - Held that:- The right to use in this case to access the particular segment of a larger system to use the capacity of the system powered by the equipments of the whole system and under paragraph 3 of Article 12 of the DTAC, consideration paid for use of or the right to use a design or model plan, commercial or scientific equipment would be royalty - if the consideration is royalty it is taxable in the country of the prayer according to the laws of the State of the payer. Here, that would be according to the laws of India, thus the ruling on question No.1 is that the payment made by the applicant to STC under the EIG Capacity Transfer Agreement towards acquisition of EIG capacity is chargeable to tax in India as royalty in terms of paragraph 2 of Article 12 of the DTAC between India and Saudi Arabia. As the payment by the applicant would suffer withholding tax under section 195, since the applicant is a resident, the payee is a non-resident and the payment is chargeable to tax in India under the Act. Treatment for Payment of annual operations and maintenance charges - Held that:- As it appears that this is a share of the annual operations and maintenance charges incurred for maintaining the entire system it cannot be treated as fees for technical services and can be treated as the share of costs for maintenance incurred for the right to use the system acquired by the applicant - in favour of assessee. Issues Involved:1. Taxability of payments for EIG capacity acquisition.2. Withholding tax applicability on payments for EIG capacity acquisition.3. Nature of payments for annual operations and maintenance charges.4. Withholding tax applicability on payments for annual operations and maintenance charges.Detailed Analysis:Issue 1: Taxability of Payments for EIG Capacity AcquisitionThe applicant, an Indian subsidiary engaged in telecommunication services, entered into an EIG Capacity Transfer Agreement with STC, a Saudi Arabian company, to acquire 40% of STC's allocated capacity in the Europe India Gateway submarine cable system. The applicant contended that this was a transfer of a capital asset, not taxable in India under the Double Taxation Avoidance Convention (DTAC) between India and Saudi Arabia. However, the Revenue argued that the payment was for the right to use the EIG capacity, constituting royalty under Article 12 of the DTAC.The Authority concluded that the agreement between STC and the applicant did not transfer ownership of the system but only the right to use the capacity. Therefore, the payment was not for a capital asset but for the right to use the system, making it royalty. Consequently, the payment was chargeable to tax in India as royalty under paragraph 2 of Article 12 of the DTAC.Issue 2: Withholding Tax Applicability on Payments for EIG Capacity AcquisitionGiven the ruling that the payment for EIG capacity acquisition is considered royalty and taxable in India, the Authority determined that the applicant must withhold tax under section 195 of the Income-tax Act. Since the applicant is a resident and the payee (STC) is a non-resident, the payment is subject to withholding tax.Issue 3: Nature of Payments for Annual Operations and Maintenance ChargesThe applicant argued that the payments for annual operations and maintenance charges were not for technical services but were related to the ownership of capacity in the EIG Cable System. The charges ensured the right to use the system without interruptions. The Authority observed that these charges appeared to be a share of the costs incurred for maintaining the entire system and not fees for technical services. Therefore, they could be treated as the share of maintenance costs for the right to use the system.Issue 4: Withholding Tax Applicability on Payments for Annual Operations and Maintenance ChargesSince the Authority ruled that the payments for annual operations and maintenance charges were not fees for technical services, there was no basis for withholding tax on these payments under section 195 of the Act. The ruling favored the applicant, and no other basis for withholding tax was presented by the Revenue.ConclusionThe Authority for Advance Rulings concluded that:1. Payments made by the applicant to STC for EIG capacity acquisition are chargeable to tax in India as royalty.2. The applicant must withhold tax on these payments under section 195 of the Income-tax Act.3. Payments for annual operations and maintenance charges are not considered fees for technical services but are maintenance costs.4. No withholding tax is required on payments for annual operations and maintenance charges.