2024 (10) TMI 699 - AT - Income Tax

Income deemed to accrue or arise in India - taxability of bandwidth charges remitted by the assessee to foreign telecom service providers - royalty income u/s 9(1)(vi) - assessee is a resident corporate entity providing mobile telecom services in India - HELD THAT - Having examined the relevant facts and nature of payments made, we find that the issue stands conclusively decided in favour of the assessee by the decision of Telstra Singapore Pte. Ltd. 2024 (7) TMI 1340 - DELHI HIGH COURT While seized with an identical issue relating to taxability of bandwidth charges as royalty income, the Hon ble Jurisdictional court had occasion to interpret the provisions contained under section 9(1)(vi) of the Act and, more specifically, what is meant by secret formula/process etc. as used in Explanation 2, 5 and 6 under section 9(1)(vi) of the Act. After a detailed analysis, the Hon ble Court finally came to the conclusion that bandwidth charges cannot be treated as royalty for use or right to use of an equipment, secret formula or process. The Hon ble Court held that the amendment made to domestic law, cannot automatically be imported to the treaty provisions without making corresponding changes in them. Hon ble Court has observed, the consideration that the service recipient pays also cannot possibly be recognized as being intended to acquire a right in respect of a patent, invention, process or equipment. Thus, the ratio laid down by the Hon ble Jurisdictional High Court as noted above will not only apply to the payees located in treaty countries but also to payees located in non-treaty countries. Thus, in the ultimate analysis, we hold that the bandwidth charges remitted by the assessee to the service providers cannot be treated as royalty either under the treaty provisions or under section 9(1)(vi) of the Act. Therefore, the assessee was not required to deduct tax at source. Grounds are allowed. Taxability of annual maintenance charges (AMC) paid to certain foreign companies as FTS requiring deduction of tax at source - demands under section 201(1)/201(1A) - HELD THAT - It is relevant to observe that before the departmental authorities, the assessee has never made any substantive argument disputing the nature of service as technical service. In fact, the assessee has taken a stand that since the AO has treated the services as technical in nature, therefore, it is incumbent upon him to establish that the make available condition is satisfied. Therefore, to some extent, there was a tacit acceptance by the assessee before the departmental authorities that the services are of technical nature. Though, learned first appellate authority has held that one need not go to examine the applicability of make available condition as payment made would qualify as FTS, being payment made towards services for ancillary and subsidiary to royalty, however, in our view, such finding of learned CIT(A) is without properly examining the nature of services. Because of assessee s single dimensional stand taken before the departmental authorities that due to non-fulfillment of make available condition, the payments do not qualify as FTS, the basic issue, whether the services rendered fall within the ambit of technical, managerial or consultancy services, have not at all been examined in the context of facts on record. Before us, because of the subsequent change in legal position regarding applicability of MFN clause, the assessee has fairly given up its claim of applicability of MFN clause and the make available condition. This stand having been taken for the first time before us, have not been examined either by the Assessing Officer or by learned CIT(A). The nature of services rendered by the service providers, whether are of technical nature, has to be decided based on examination of specific facts relating to the services rendered. In our view, because of assessee s singular stand relating to non-fulfillment of make available condition, the preliminary issue regarding the nature of services have not been examined at any stage earlier. Therefore, we are inclined to restore this issue to the file of the Assessing Officer to factually verify assessee s claim that the services rendered do not fall withing the ambit of technical, managerial or consultancy services. Ground is allowed for statistical purposes. Demand raised on account of non-deduction of tax on payment of agency fees - FAA held that since the Indian branch of the payee has not played any role in the transaction of arranging loan or reimbursement of interest etc., no part of the receipt towards agency fee can be attributed to the Indian Branches. Therefore, there was no liability on the assessee to deduct tax at source - HELD THAT - FAA has given a clear factual finding that the payee banks though have branches in India, however, the Indian Branches had not played any role either arranging loan or reimbursement of loan. He has given a finding that the Assessing Officer has not recorded any factual finding regarding the role played by the Indian Branches. In the context of the aforesaid factual position, he held that since Indian Branches have not played any role of facility agent, no part of the agency fee can be attributed to the Indian Branches, even if they are held as PE. Revenue has failed to bring any material before us to controvert the aforesaid factual position brought on record by learned first appellate authority. No valid reason to interfere with the decision of learned first appellate authority. Ground is dismissed.

Summary

Issues Involved:

1. Taxability of bandwidth charges as royalty income under Section 9(1)(vi) of the Income-tax Act, 1961.
2. Taxability of annual maintenance charges (AMC) as Fee for Technical Services (FTS).
3. Non-deduction of tax on payment of agency fees.

Issue-wise Detailed Analysis:

1. Taxability of Bandwidth Charges as Royalty Income:

The primary issue was whether the bandwidth charges remitted by the assessee to foreign telecom service providers should be treated as royalty income under Section 9(1)(vi) of the Income-tax Act, 1961. The Assessing Officer held that these payments were in the nature of royalty, as they involved the use or right to use equipment or process, thus requiring tax deduction at source at 20%. However, the first appellate authority partially disagreed, stating that such payments could only be considered royalty if the foreign service providers were located in non-treaty countries. The Tribunal, relying on the Delhi High Court's decision in CIT Vs. Telstra Singapore Pte. Ltd., concluded that bandwidth charges do not constitute royalty either under domestic law or relevant DTAAs, as they do not involve a transfer of rights over technology or infrastructure. Therefore, the assessee was not required to deduct tax at source on these remittances.

2. Taxability of Annual Maintenance Charges (AMC) as FTS:

The second issue concerned the taxability of AMC payments to foreign entities as FTS, which would necessitate tax deduction at source. The Assessing Officer considered these payments as FTS, while the first appellate authority examined the 'make available' condition under the DTAAs with Israel and Sweden. The authority found that AMC services did not 'make available' technical knowledge, as they primarily involved repair and replacement. However, the Tribunal noted that the nature of services, whether technical, managerial, or consultancy, had not been thoroughly examined due to the assessee's focus on the 'make available' condition. Consequently, the Tribunal remanded the matter back to the Assessing Officer for a detailed factual verification, allowing the assessee to present evidence that the services were non-technical.

3. Non-deduction of Tax on Payment of Agency Fees:

The final issue dealt with the non-deduction of tax on agency fees paid to foreign banks. The assessee argued that these payments were business income for the recipients, who lacked a Permanent Establishment (PE) in India, thus not attracting tax deduction. The first appellate authority agreed, noting that the Indian branches of the banks did not participate in the transactions, and therefore, no part of the agency fee could be attributed to them. The Tribunal upheld this decision, as the Revenue failed to provide evidence countering the factual findings of the first appellate authority.

Conclusion:

The Tribunal allowed the assessee's appeal in part, holding that bandwidth charges were not royalty and remanding the AMC issue for further examination. It dismissed the Revenue's appeal, affirming the non-taxability of agency fees due to the lack of involvement by Indian branches of the foreign banks. The order was pronounced in the open court on 9th October, 2024.