2009 (6) TMI 24 - AAR - Income Tax

Permanent Establishment P/E Nature of Income Business Profit - 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. The network and equipments of C&W UK will not be used in India and the applicant s network and equipments will not be used outside India. Thus in telecom parlance domestic half circuit will be provided by the applicant and international half circuit will be provided by C&W UK. In respect of the aforesaid services rendered by C&W UK the applicant will pay fees to the former. Held 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 u/s 195.

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.

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