2015 (2) TMI 454 - AT - Income Tax

Tribunal: Capacity sales income not taxable in India. Standby maintenance revenues non-taxable.

M/s. Flag Telecom Group Limited Versus DCIT Cir-2 (1) and Asst. DIT (IT) -1 (1) Mumbia

The tribunal ruled that income from capacity sales under the Capacity Sales Agreement is classified as business income, not subject to taxation in India ... Income from capacity sales earned under the Capacity Sales Agreement - ‘royalties’ under section 9(1)(vi) - assessee and VSNL entered agreement - joint ownership of the capacity in the cable system - taxability in India as ‘business income’ or income under the head “Royalties “ or “Free for Technical Services” (FTS) - Held that:- From the clauses of the agreement it is absolutely clear that the benefit and the burdens of the ownership has shifted from seller to the buyer. Here the buyer, VSNL has all the risks and rewards of ownership which is unfettered by the Flag, inasmuch as the VSNL has not only the exclusive domain on the rights to use but also right to resale or transfer its interest in the capacity in the cable system to the exclusion of the Flag. The assessee has no right on the capacity once sold. It does not retain any ownership, control and possession of the capacity sold to the VSNL. Under the terms of the C&MA, the VSNL also has right to vote on important matters relating to the management of cable system. The VSNL in all terms becomes absolute owner after the purchase of the capacity to the exclusion of the Flag and others. Thus, under the C&MA the VSNL satisfies the characteristic of a “owner” and “ownership” in respect of the capacity in the cable system. All the facts and circumstances and the intent of the parties as evidenced from the agreements, clearly goes to show that assessee has sold the capacity with benefit and burden of ownership of the capacity to the VSNL. Thus, it can very well be inferred, that the payment received from the VSNL is from sale of capacity in the cable system. Had there been intention of giving only ‘right to use’ of capacity, the Flag would have retained the ownership, control and possession of the capacity and VSNL would have allowed to use its network. Once a right to use is given to a party, then there is no requirement of passing the ownership with all the risks, rights and obligations. Thus the payment of US $ 28.94 million received by the assessee from VSNL is on account of sales and hence constitutes business income of the assessee. The finding and the conclusion of the Ld.CIT(A) based on the terms of the agreement and facts of the case on this score, that the receipts in question is “business income” of the assessee and not “royalty” is upheld. Accordingly, the said payment cannot be taxed as “royalty” under section 9(1)(vi). Unless the deeming income falls within the parameters of section 9(1)(i), no attribution can be made. Thus, so far as payment of US $ 28.94 million received by the assessee from sales of capacity made to VSNL is not taxable either as ‘royalty’ u/s 9(1)(vi) or ‘business income’ accruing or arising in India within the deeming provision of section 9(1)(i). Accordingly, assessee’s ground no.1 on this score is allowed. It cannot be held that payment in question falls within the realm of FTS - Decided in favour of assessee Taxability of ‘standby maintenance charges’ as fees for technical services u/s 9(1)(vii) - Held that:- On the facts and circumstances of the case as well as looking to the nature of standby maintenance cost, we hold that the receipts from standby maintenance charges from VSNL cannot be taxed as FTS, within the definition and meaning of section 9(1)(vii) as there is no rendering of services. However, whenever payment is received on account of actual repair or maintenance carried out, then same would definitely fall within the ambit of FTS chargeable to tax u/s 9(1)(vii). Accordingly the order of the CIT(A) is set aside - Decided in favour of assessee Interest u/s 234B - Held that:- As assessee has not committed any default in payment of advance tax and hence there is no liability to pay interest u/s 234B. - Decided in favour of assessee Issues Involved:1. Taxability of income from capacity sales under the Capacity Sales Agreement (CSA).2. Method of computing revenue chargeable to tax in India.3. Taxability of standby maintenance revenues as fees for technical services (FTS).4. Liability to pay interest under section 234B of the Income Tax Act, 1961.Detailed Analysis:1. Taxability of Income from Capacity Sales under the Capacity Sales Agreement (CSA):The primary issue was whether the income from capacity sales earned under the CSA between the assessee and VSNL is taxable in India as 'business income' or 'royalty income/fees for technical services' (FTS). The tribunal analyzed the agreements and concluded that the payment received by the assessee from VSNL is on account of the sale of capacity, constituting business income. The tribunal held that the assessee had transferred ownership, risks, and rewards of the capacity to VSNL, making it a sale rather than a right to use. Therefore, the payment could not be taxed as 'royalty' or 'FTS' under section 9(1)(vi) or 9(1)(vii) of the Act.2. Method of Computing Revenue Chargeable to Tax in India:The tribunal examined whether the revenue chargeable to tax in India should be computed based on the proportion of the cable length situated in India vis-`a-vis the total cable length worldwide or based on the proportion of capacity sales earned from VSNL to the worldwide capacity sales earned by the assessee. It was concluded that the income attributable to India should be worked out on the basis of proportionate worldwide profit. However, the tribunal found that no income has accrued or arisen in India as the sale was concluded outside India on a principal-to-principal basis, and there was no business connection, asset, or source of income in India.3. Taxability of Standby Maintenance Revenues as Fees for Technical Services (FTS):The tribunal analyzed whether standby maintenance revenues earned by the assessee from VSNL under the Construction and Maintenance Agreement (C&MA) are taxable in India as FTS under section 9(1)(vii). It was found that standby maintenance charges are in the nature of reimbursement of fixed costs and not for actual rendering of services. Therefore, such charges could not be taxed as FTS. However, any payment received for actual repair or maintenance services would fall within the ambit of FTS.4. Liability to Pay Interest under Section 234B of the Income Tax Act, 1961:The tribunal addressed whether the assessee is liable to pay interest under section 234B of the Act. It was concluded that the issue is covered by the decision of the jurisdictional High Court in the case of DIT (International Taxation) Vs. NGC Network Asia LLC, where it was held that the assessee has not committed any default in payment of advance tax, and hence, there is no liability to pay interest under section 234B.Conclusion:The tribunal concluded that the payment received from VSNL for capacity sales is business income and not taxable in India due to the absence of a business connection, asset, or source of income in India. The standby maintenance charges are not taxable as FTS, and the assessee is not liable to pay interest under section 234B. The appeals for the subsequent assessment years were decided based on the findings for the assessment year 1998-99, with similar conclusions.