The Delhi High Court ruled that the bandwidth services provided outside India are not taxable as royalty.
The court opined that the legal position in New Skies Satellite constitutes a resounding negation of the submission that was addressed based on Article 3(2) of the DTAA.
“All that need be additionally observed is that the broad intent of the amendments comprised in Explanation 6 would not override the use and the right to use tests which form the bedrock of the royalty Article comprised in the DTAA. In any event, the essay of Explanation 6 cannot be interpreted in a manner which would essentially amount to a reintroduction of Section 9(1)(vi) yet again through a secretive back door”, the court said.
The court stated that Section 9(1)(vi) speaks of situations where income by way of ―royalty‖ would be deemed to have accrued or arisen in India. Explanation 2 of Section 9(1)(vi) while defining the word ―royalty‖ in Clause (i), provides for taxation of consideration received for the transfer of all or any rights (including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or trademark for similar property). In clause (iii), the word ―royalty‖ is conferred a further expansive meaning, extending its coverage to the use of any patent, invention, model, design, secret formula or process.
The court observed that explanation 6 of Section 9(1)(vi) stipulates by way of a purported clarification that the expression ―process‖ would include and shall be deemed to have always included transmission by satellite, cable, optic fibre or by any other similar technology irrespective of whether or no such process was secret.
It was further observed that the Court in New Skies Satellite while expressing serious doubt‘ as to whether the amendments could either be viewed as being clarificatory, ultimately desisted from rendering a conclusive answer to that question, since it ultimately came to hold that the amendments would have no impact on the provisions of the DTAA.
The court found no justification to either draw a different line or doubt the correctness of the decisions handed down in Asia Satellite and New Skies.
The bench held that that the issues which were sought to be canvassed on these set of appeals stand conclusively answered and settled by the Court in Asia Satellite and New Skies Satellite. Any doubt that could have been possibly harboured with respect to the amendments introduced in Section 9 stand laid to rest by virtue of the binding declaration of the law by the Supreme Court in Engineering Analysis.
The bench was of the firm opinion that even if one were to assume that Explanations 2 and 6 to Section 9 of the Act applied, the position would remain unaltered. This since there was no transfer or conferment of a right in respect of a patent, invention or process.
The court observed that Customers and those availing of the services provided by Telstra were not accorded a right over the technology possessed or infrastructure by it. The underlying technology and infrastructure remained under the direct and exclusive control of Telstra.
“A person who is provided mobile communication services or access to the internet does not stand vested with a right over a patent, invention or process. The consideration that the service recipient pays also cannot possibly be recognised as being intended to acquire a right in respect of a patent, invention, process or equipment. The word ―process‖ being liable to be construed ejusdem generis is lent added credence by clause (iii) employing the expression “or similar property” which follows. It thus clearly appears to be intended to extend to a host of intellectual properties”, the court observed.
The bench held that neither the concept of process nor equipment royalty stand attracted and the consideration is thus not taxable as per Article 12 of the DTAA.
Issue Raised
- Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in holding that the receipts from Indian customers for services provided outside’ Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty as per section 9(l)(vi) of the Act and Article 12 of the DTAA between India and Singapore?
- Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in interpreting the meaning of Royalty under Article 12 of the India Singapore DTAA without considering Article 3(2) of the said DTAA when the word ‘process’ is not defined in the said DTAA?
- Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in not adopting the meaning of royalty as per Explanation 2 and Explanation 6 of section 9(1)(vi) of the Income Tax Act in view of the Article 3(2) of the India Singapore DTAA?
- Whether on the facts and in the circumstances of the case, the ld. IT AT has erred in holding that provision of DT AA being beneficial to the Assessee is to be followed as per section 90(2) of the Income Tax Act even though there is no difference in scope of taxation of Royalty as per DT AA and that in Income Tax Act in view of the Article 12 read ‘with Article 3(2) of the India Singapore DTAA and section 9(1)(vi) of the Income Tax Act, 1961?
Facts
The respondent-Telstra Singapore Pte Ltd.4 is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions.
As per the appellants, in order to facilitate the provision of bandwidth services in India, Telstra Singapore had also entered into a One Stop Shopping Service Agreement5 with Bharti Airtel Ltd.6 and other related telecom operators. In terms of the aforenoted OSS Agreement, the respondent-assessee is obliged to provide bandwidth services to the customers of Bharti outside India with a corresponding obligation being placed on Bharti to provide those services within India. The OSS Agreement essentially envisages reciprocal services being provided by the respondent assessee and Bharti dependent upon the location of their customers.
Apart from the OSS Agreement, Telstra Singapore also entered into a Global Business Services Agreement7 with various telecom operators in India. The question which principally arises is whether the services of Telstra Singapore when utilized outside the territories of India and the consideration received by it from Indian customers in that regard would amount to a process or equipment royalty taxable under Section 9(1)(vi) of the Act read along with article 12 of the DTAA.
Case Information
Case Name : The Commissioner Of Income Tax – International Taxation -3 V/S Telstra Singapore Pte Ltd.
Judicial Level & Location : High Court Delhi
Appeal Number :ITA 334/2022
Date of Ruling : 2024-07-24
Ruling in favour of: Respondent
Judges: Justice Yashwant Varma And Justice Purushaindra Kumar Kaurav
Counsel For Tax Payer: Mr. Aseem Chawla, SSC with Ms. Monica Benjamin, JSC along with Ms. Pratishtha Chaudhary, Mr. Naveen Rohila, and Ms. Simran Jha, Advs.
Counsel for Respondent: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs.
