2009 (6) TMI 24 - AAR - Income Tax

Payments to Overseas Telecom Carrier are Business Profits Not Fees or Royalties; No TDS Under Section 195

Cable & Wireless Networks India Private Limited, In re

AAR held that payments by the applicant to the overseas supplier for carriage of international telecom traffic are business profits, not fees for ... Deduction at source u/s 195 - Nature of Amount received by C&W UK under the proposed agreement - applicant acts as an agent of C&W UK and so C&W UK has agency PE in India - Double Taxation Avoidance Agreement (DTAA) between India and the UK - nature of 'fees for technical services' ('FTS') within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) Or 'royalty' within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) - Permanent Establishment - Nature of Income - Business Profit - whether the applicant pays fees to C&W UK for rendering 'technical services' under the Act or under the treaty - M/s Cable and Wireless UK (C &W UK) is providing end to end international long distance telecommunication services to its Indian customers. Whereas the applicant will carry the calls and data within the country, C&W UK will further carry those calls and data to the recipients outside India. HELD THAT:- In the present case, in carrying telecom signals from Marseilles to other countries, C&W UK is not providing any managerial, technical or consultancy services, nor is it providing the services of its technical or other personnel to the applicant. C&W UK performs this part of service itself without the involvement of the applicant. The applicant has thus rightly urged that the fees paid by it to C&W UK is not in the nature of fees for technical services under the Act. So far as article 13(4) of DTAA is concerned, the first part of it defines 'technical services' in a manner similar to Explanation 2 to section 9(1)(vii), but it further qualifies this expression in clauses (a), (b) & (c). Clause (c) is relevant for the present consideration. From the description of service presented before us, we do not find that the requirements of clause (c) are fulfilled here. First, no technical service is rendered and secondly, there is no transfer of technology. The Revenue also concedes that this is not a case of payment of fees for technical services. Nature of royalty - No material has been placed before us to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. We are of the view that on the same reasoning the applicant does not pay for using any secret process in the present case also. Whether C&W UK will install any equipment at the premises of the applicant in India - It is beyond Marseilles that the network and equipment of C&W UK will be used for transmission of the signal. We also notice from the draft agreement that there is neither any stipulation for provision of any equipment nor payment of any fee for the same. On the basis of the records placed before us, we are of the view that no case is made out to presume that any equipment will be installed by C&W UK at the premises of the applicant in India and the applicant will pay for the same. The averment of the Commissioner is based merely on the doubt entertained by him for which he has not shown any basis. The affidavits filed by the applicant after first hearing clarify the factual position in this regard. In the light of the view taken by us, it is not necessary to examine the TAG report. The Revenue has thus failed to show how the payments made by the applicant will be royalty income in the hands of C&W UK. Permanent establishment - The applicant states that it does not act on behalf of the C&W UK in India, nor does it conclude any contract on behalf of that company. The applicant in its independent capacity negotiates and concludes contracts with its customers on principal-to-principal basis, to which C&W UK is not a party. Similarly, the agreement with C&W UK is also on principal-to-principal basis, the Indian customer not being a party to the same. The breach of one type of contract does not affect the rights and obligation arising under the other type of contract. Thus, we have come to the conclusion that the payments made by the applicant to C&W UK are in the nature of business profits. In the absence of there being any permanent establishment of C&W UK In India, this income is not at all taxable here. Since this income is not chargeable to tax under the Act, there is no question of making any deduction at source under section 195. In the result, we answer all the questions in negative. Issues Involved:1. Nature of amounts payable by the Applicant to Cable & Wireless UK (C&W UK) under the proposed agreement.2. Classification of amounts as 'fees for technical services' (FTS) under the Income-tax Act, 1961.3. Classification of amounts as 'royalty' under the Income-tax Act, 1961.4. Classification of amounts as FTS under Article 13 of the Double Taxation Avoidance Agreement (DTAA) between India and the UK.5. Classification of amounts as 'royalty' under Article 13 of the DTAA.6. Determination of Permanent Establishment (PE) of C&W UK in India under Article 5 of the DTAA.7. Taxability of income received by C&W UK in India and applicability of withholding tax under section 195 of the Income-tax Act, 1961.Detailed Analysis:1. Nature of Amounts Payable:The applicant, Cable & Wireless Networks India Private Limited, proposes to pay fees to C&W UK for providing the international leg of telecommunication services. The applicant will handle the domestic leg using its own network, while C&W UK will manage the international leg using its infrastructure. The agreement is termed as 'Service and Revenue Share Agreement' and involves reciprocal provision of national and global telecommunications services.2. Fees for Technical Services (FTS) under the Income-tax Act:The Authority ruled that the fees paid by the applicant to C&W UK do not constitute 'fees for technical services' under Explanation 2 to section 9(1)(vii) of the Act. The services provided by C&W UK do not involve managerial, technical, or consultancy services, nor do they involve the provision of technical or other personnel. The revenue also conceded that no transfer of technology is involved, thus the fees are not considered FTS under the Act.3. Royalty under the Income-tax Act:The Authority examined whether the fees paid by the applicant to C&W UK could be classified as 'royalty' under section 9(1)(vi) of the Act. The applicant argued that no intellectual property rights or equipment use is involved. The Revenue contended that the payment is for using a secret process. However, the Authority found no evidence that C&W UK uses any secret process or that the applicant pays for such use. The services are standard telecom services, and the payment is for the rendition of service, not for the use of any secret process.4. Fees for Technical Services (FTS) under Article 13 of the DTAA:Article 13(4) of the DTAA defines 'technical services' similarly to the Act but adds that the service should make available technical knowledge, experience, skill, know-how, or process. The Authority found that the services provided by C&W UK do not meet these criteria as they do not involve the transfer of technology or making available technical knowledge. Therefore, the fees are not considered FTS under the DTAA.5. Royalty under Article 13 of the DTAA:The Authority considered whether the fees could be classified as 'royalty' under Article 13(3) of the DTAA. The Revenue argued that the services involve the use of a secret process. However, the Authority found no material evidence supporting this claim. The services provided are standard telecom services, and the payment is for service rendition, not for the use of a secret process or equipment.6. Permanent Establishment (PE) under Article 5 of the DTAA:The Revenue suggested that the applicant might act as an agent of C&W UK, creating a PE in India. The Authority found that the applicant and C&W UK operate on a principal-to-principal basis, with no agency relationship. The applicant negotiates and concludes contracts independently. There is no evidence that C&W UK has a fixed place of business or personnel in India, thus no PE is established.7. Taxability and Withholding Tax:Given the above findings, the Authority concluded that the payments made by the applicant to C&W UK are in the nature of business profits. In the absence of a PE in India, this income is not taxable in India. Consequently, there is no requirement for withholding tax under section 195 of the Income-tax Act, 1961.Conclusion:All the questions posed by the applicant were answered in the negative, indicating that the payments to C&W UK are not taxable in India and no withholding tax is applicable. The ruling was pronounced in the open Court on June 30, 2009.