2013 (11) TMI 1058 - HC - Income Tax

Bandwidth/Telecom Services outside India internet sharing - whether the consideration paid for providing IPLC is towards service and not towards equipment; - Held that - the receipts are liable to be treated as royalty for the use of IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly Article 12(3) of DTAA between India and Singapore. We also agree with the Tribunal that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer is guaranteed the transmission of the data and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is royalty within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. Decided against assessee. Levy of interest u/s 234A, 234B, 234C where no TDS was deducted u/s 195 - Held that - The Tribunal has not considered the grounds on the levy of interest under Section 234A 234B and 234D inspite of grounds raised therein. - matter remanded back on the issue of charging of interest.

Issues Involved:
1. Taxability of payments received for Bandwidth/Telecom Services as 'royalty' under Section 9(1)(vi) of the Income Tax Act.
2. Taxability of payments received for Bandwidth/Telecom Services as 'royalty' under Article 12(3)(b) of the Tax Treaty.
3. Alternative consideration of payments as 'royalty' for the use of process under Section 9(1)(vi) of the Act.
4. Alternative consideration of payments as 'royalty' for the use of process under Article 12(3) of the Tax Treaty.
5. Judicial discipline and adherence to precedents.
6. Classification of payments as Fees for Technical Services (FTS) under Article 12(4) of the Tax Treaty and Section 9(1)(vii) of the Act.
7. Levy of interest under Section 234D of the Act.
8. Levy of interest under Section 234B of the Act.

Detailed Analysis:

1. Taxability of Payments as 'Royalty' under Section 9(1)(vi) of the Income Tax Act:
The court examined whether the payments received by the assessee for providing Bandwidth/Telecom Services outside India could be classified as 'royalty' for the use of equipment under Section 9(1)(vi) of the Income Tax Act. The court analyzed the agreements between the assessee and the customers, the role of VSNL, and the technological infrastructure involved. The court concluded that the payments were indeed for the use of or the right to use industrial, commercial, or scientific equipment, thus falling within the definition of 'royalty' as per the Income Tax Act.

2. Taxability of Payments as 'Royalty' under Article 12(3)(b) of the Tax Treaty:
The court also considered whether the payments could be classified as 'royalty' under Article 12(3)(b) of the Tax Treaty between India and Singapore. It was determined that the definition of 'royalty' under the DTAA was consistent with the Income Tax Act, and the payments for the use of equipment or process would be taxable as 'royalty' under the treaty provisions.

3. Alternative Consideration of Payments as 'Royalty' for Use of Process under Section 9(1)(vi):
The court examined whether the payments could alternatively be considered as 'royalty' for the use of a process under Section 9(1)(vi). The court referred to the Explanation 6 introduced by the Finance Act, 2012, which clarified that 'process' includes transmission by satellite, cable, optic fibre, or similar technology. The court held that the payments for bandwidth services could be considered as payments for the use of a process, thus qualifying as 'royalty'.

4. Alternative Consideration of Payments as 'Royalty' for Use of Process under Article 12(3) of the Tax Treaty:
Similarly, the court considered the alternative classification under Article 12(3) of the Tax Treaty. Given the broad definition of 'process' in the treaty, the court concluded that the payments for the use of the process (bandwidth services) would be taxable as 'royalty'.

5. Judicial Discipline and Adherence to Precedents:
The assessee argued that the Tribunal's decision disregarded judicial discipline by not following precedents such as Skycell Communications Ltd. vs. DCIT. The court noted that the precedents cited by the assessee were rendered before the insertion of Explanation 5 and 6 to Section 9(1)(vi) by the Finance Act, 2012. The court upheld the Tribunal's decision, emphasizing the relevance of the amendments.

6. Classification of Payments as Fees for Technical Services (FTS):
The court considered whether the payments could alternatively be classified as Fees for Technical Services (FTS) under Article 12(4) of the Tax Treaty and Section 9(1)(vii) of the Act. The court found that the payments were primarily for the use of equipment or process and did not constitute FTS.

7. Levy of Interest under Section 234D:
The court remanded the issue of the levy of interest under Section 234D to the Tribunal for consideration on merits, as the Tribunal had not addressed this ground raised by the assessee.

8. Levy of Interest under Section 234B:
The court also remanded the issue of the levy of interest under Section 234B to the Tribunal. The assessee argued that since tax was deductible at source, there was no liability to pay advance tax, and thus, interest under Section 234B could not be levied. The Tribunal was directed to consider this issue on merits.

Conclusion:
The court affirmed the Tribunal's decision that the payments received by the assessee for providing Bandwidth/Telecom Services were taxable as 'royalty' under Section 9(1)(vi) and Article 12(3) of the Tax Treaty. The issues regarding the levy of interest under Sections 234D and 234B were remanded to the Tribunal for further consideration.

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