Payments for bandwidth cost allocation services don't constitute royalty or technical fees under India-UK tax treaty

ITAT Bangalore ruled in favor of the assessee regarding payments made to J P Coats for bandwidth services. The Tribunal held that payments for cost allocation of bandwidth services provided by BT to J P Coats group companies worldwide did not constitute royalty under section 9(1)(vi) or Article 13 of India-UK DTAA, as no intellectual property transfer or exclusive rights were granted. The payments also did not qualify as fees for technical services since no technical knowledge or processes were made available to the assessee for independent use. Since J P Coats had no permanent establishment in India, the payments were not taxable in India. Consequently, the assessee was not liable for TDS deduction and could not be treated as assessee in default under section 201(1).

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Issues Involved:
1. Whether the payment made by the assessee to J&P Coats Ltd. for bandwidth charges constitutes 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA.
2. Whether the payment can be classified as 'Fees for Technical Services' (FTS) under Section 9(1)(vii) of the Income Tax Act and Article 13 of the India-UK DTAA.
3. Whether the assessee is liable to be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS on the payments made to J&P Coats Ltd.

Detailed Analysis:

1. Royalty under Section 9(1)(vi) and Article 13 of India-UK DTAA
The primary issue was whether the payments made by the assessee to J&P Coats Ltd. for bandwidth charges could be classified as 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 13 of the India-UK DTAA. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payment constituted 'royalty' because it involved the use of a process or equipment. They relied on Explanation 2, 5, and 6 to Section 9(1)(vi), which broadened the definition of 'royalty' to include payments for the use of any process, whether secret or not, and irrespective of the location or control of the process.

However, the Tribunal found that the term "process" under Explanation 2 to Section 9(1)(vi) implies a process that is an item of intellectual property. It was noted that the payment was made for bandwidth services provided by British Telecom (BT) to J&P Coats, which in turn provided these services to the assessee. The Tribunal emphasized that there was no transfer of any intellectual property or exclusive rights to the assessee. The Tribunal also referred to various judicial precedents, including the decisions of the Authority for Advance Rulings (AAR) and the Delhi High Court, which held that payments for bandwidth services do not constitute 'royalty'.

The Tribunal concluded that the payments made by the assessee to J&P Coats Ltd. could not be classified as 'royalty' under Section 9(1)(vi) or Article 13 of the India-UK DTAA. The Tribunal also noted that the definition of 'royalty' under the DTAA had not been amended to align with the broader definition under the Income Tax Act.

2. Fees for Technical Services (FTS)
The AO also considered the payments as FTS under Section 9(1)(vii) of the Income Tax Act. The CIT(A) upheld this view, stating that the services provided by J&P Coats were ancillary and subsidiary to the application or enjoyment of the right, property, or information in connection with and for processes and software.

The Tribunal, however, noted that for a payment to be classified as FTS under the India-UK DTAA, it must 'make available' technical knowledge, experience, skill, know-how, or processes to the recipient. The Tribunal found that the services provided by J&P Coats did not make any technical knowledge or skill available to the assessee that could be independently used. The Tribunal referred to the decision of the Delhi Tribunal in the case of J.C. Bamford Excavators Ltd., which involved a different context and facts, including the existence of a service PE and transfer of technology.

The Tribunal concluded that the payments made by the assessee to J&P Coats Ltd. could not be classified as FTS under Article 13 of the India-UK DTAA.

3. Assessee in Default under Section 201(1)
Since the Tribunal held that the payments made by the assessee to J&P Coats Ltd. did not constitute 'royalty' or FTS, the assessee could not be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS. Consequently, the disallowance and interest computed under Section 201(1A) on the payments made by the assessee were deleted.

Conclusion:
The Tribunal allowed the appeals filed by the assessee for the assessment years 2016-17 and 2017-18, holding that the payments made to J&P Coats Ltd. for bandwidth charges did not constitute 'royalty' or FTS under the Income Tax Act or the India-UK DTAA. Consequently, the assessee was not liable to be treated as an 'assessee in default' under Section 201(1) for non-deduction of TDS.

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