2020 (10) TMI 604 - AT - Income Tax

Income accrued in India - amount received from Indian customers for the provisions of bandwidth services outside India - whether equipment/process royalty under section 9(1)(vi) of the Act read with Article 12(3) of the India Singapore Tax Treaty - As per assessee mere receipt of service using equipment under the control, possession and operation of service provider would only be transaction of a service and not to use or right to use an equipment, and would not attract Royalty under the Act or the Tax Treaty - HELD THAT - Where the Tax Treaty between India Singapore specifically does not include transmission by satellite, cable, optic fiber or similar technology in the definition of Royalty under the Tax Treaty and also where the Tax Treaty had not undergone any amendment, the provisions of DTAA being more beneficial to the assessee are attracted and the assessee is not liable to be taxed on the amount received from Indian customers for the provision of bandwidth services outside India. There is no merit in the orders passed by the authorities below and the same are reversed. The assessee company is a tax resident of Singapore, which is providing band width services to the various Indian Telecom Operators like Bharti Airtel in India and the services are being provided outside India and the consideration received by the assessee company is not taxable as Royalty in view of the beneficial provisions of DTAA between India and Singapore under which the definition of Royalty has not been amended. Thus, Ground of appeal Nos. 1 2 raised by the assessee are allowed.

Summary

Issues Involved:
1. Taxability of payments received for bandwidth services as "Royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-Singapore Tax Treaty.
2. Application of Explanations 5 and 6 to Section 9(1)(vi) of the Act to the definition of "Royalty" under the Tax Treaty.
3. Levy of interest under Section 234B of the Act.

Detailed Analysis:

1. Taxability of Payments for Bandwidth Services as "Royalty":
The primary issue was whether payments received by the assessee from Indian customers for providing bandwidth services outside India qualified as "Royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-Singapore Tax Treaty. The assessee argued that the payments were for bandwidth services and did not involve the use or right to use any equipment or process by the customers. The Assessing Officer, however, treated these payments as "Royalty" based on the reliance on the Madras High Court decision in Verizon Singapore Pte Ltd. vs ITO and the Special Bench of Delhi ITAT in New Skies Satellite NV vs ADIT.

The Tribunal referred to the Delhi High Court's decisions in Asia Satellite Telecommunications Co. Ltd. vs DCIT and New Skies Satellite BV, which held that payments for data transmission services do not qualify as "Royalty" under the Act or the Tax Treaty. The Tribunal concluded that the payments for bandwidth services did not result in the use or right to use any equipment or process by the customers, and thus, did not qualify as "Royalty" under the India-Singapore Tax Treaty.

2. Application of Explanations 5 and 6 to Section 9(1)(vi) of the Act:
The Tribunal addressed the applicability of Explanations 5 and 6 to Section 9(1)(vi) of the Act, which were inserted by the Finance Act, 2012, with retrospective effect. The assessee contended that these explanations could not alter the tax treatment of service transactions under the Tax Treaty. The Tribunal noted that unilateral amendments to the Income Tax Act could not override the provisions of the Tax Treaty, as the definition of "Royalty" under the India-Singapore Tax Treaty had not been amended. The Tribunal relied on the Delhi High Court's decision in New Skies Satellite BV, which held that the definition of "Royalty" under the Tax Treaty would continue to hold the field despite amendments to the Act.

3. Levy of Interest under Section 234B of the Act:
The Revenue's appeal raised the issue of whether the levy of interest under Section 234B of the Act was consequential. The Tribunal referred to the Delhi High Court's decision in DIT vs G.E. Packaged Power Inc., which held that the provisions of Section 234B were not attracted for non-residents whose income was subject to withholding tax. Consequently, the Tribunal dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the payments received for bandwidth services did not qualify as "Royalty" under the India-Singapore Tax Treaty. The Tribunal also dismissed the Revenue's appeal regarding the levy of interest under Section 234B, following the Delhi High Court's precedent. The Tribunal's decision emphasized the primacy of the Tax Treaty over unilateral amendments to the Income Tax Act in determining the taxability of cross-border transactions.