On July 18, 2008, the Authority for
Advance Rulings (“AAR”) pronounced, while
considering the application of Dell International Services
(India) Pvt. Ltd. (“Dell India”), that the
payments made to a non-resident service provider for providing
two-way transmission of voice and data through telecom bandwidth
could not be considered as royalty payments or payments made for
fees for included services and were hence not taxable in India.
Dell India is engaged in the
business of providing call centre, data processing and
information technology support services to its group companies.
The parent company of the Dell India, Dell USA had entered into
a Master Services Agreement with BT America (“BTA”),
a company incorporated in USA, for provision of two-way
transmission of voice and data through telecom bandwidth. Dell
India has confirmed to the terms of the said agreement and makes
recurring monthly payments to BTA pursuant to the same. While
BTA provides the international half-circuit from the US and
Ireland, the Indian half circuit is provided by an Indian
telecom company, namely, VSNL with whom BTA has a tie-up.
Facts in Picture
Questions before the AAR
The significant questions considered by the AAR are as follows:
1. Whether the recurring charges
paid to BTA would be considered as ‘royalty’ within the meaning
of (i) Article 12(3) of the India-USA Double Tax Avoidance
Agreement (“Treaty”) or (ii) Explanation 2 to
section 9(1) (vi) of the Income-tax Act, 1961 (“ITA”)?
2. Whether the recurring charges paid to BTA would be in the
nature of “fees for included services” within the meaning of the
term in Article 12 of the Treaty or “fees for technical
services” under Explanation 2 to clause (vii) of section 9(1) of
the ITA.
Analysis
1. It was Dell India’s contention that the agreement did not
involve the use or right to use any equipment nor was any
equipment installed for /kept at the disposal of Dell India. On
the other hand, the Indian Income-tax Department (“Revenue”)
argued that the services were merely incidental to BTA granting
Dell India the right to use or permitting the “use” of its point
to point circuit and therefore, the consideration paid partakes
the character of “royalty”.
The AAR considered the issue in detail, and held that the
emphasis in the agreement was on service element and nowhere the
use of equipment or the grant of rights for such use is
contemplated. It was a rendition of service by BTA, using its
own network and equipment. An important distinction was made
between the expressions “use” and “right to use”. The decision
of the A.P. High Court in the case of Rashtriya Ispat Nigam
Limited1
was relied upon, which was subsequently also affirmed by the
Supreme Court. It held that mere custody or possession of
equipment without effective control can only result in use of
the equipment whereas a right to use the equipment implies
control over the equipment.
The AAR compared the present transaction to using a road bridge
or a telephone connection. Usage of equipment connotes that the
grantee of right has possession and control over the equipment,
but no part of the present arrangement could lead to such an
inference. It was a plainly a case of BTA utilizing its own
network and providing a service that enables Dell India to
transmit voice and data through the media of telecom bandwidth.
Further, there was also no question with respect to use of a
secret process to qualify the payments as ‘royalty’. Therefore,
the payments made were held not to be in the nature of “royalty”
payments.
2. As regards the question of the recurring charges being
considered as ‘fees for included services’, the AAR held that
the requirement in Article 12(4) of the Treaty that technical
knowledge, experience, skill, etc. should be ‘made available’ so
as to enable the recipient of the service to apply such
technology, was not satisfied in the present case and thus, the
payments cannot be considered as ‘fees for included services’.
Further, since Dell India gets the advantage of Treaty
provision, the question of the applicability of the relevant
provision of the ITA does not arise..
Other issues
Notwithstanding the above, the AAR
also considered Dell India’s contention that amounts paid by
Dell India are for the purpose of making or earning any income
from any source outside India and hence covered within the
exception carved out in sections 9(1)(vii)(b) or 9(1)(vi)(b) of
the ITA. Dell India claimed that its business principally
comprises of export revenue, as it provides data processing and
information technology support services to its group companies
abroad. However, the AAR concluded that nothing precluded Dell
India from making use of the facility for the purpose of its
business in India, nor was any evidence produced before the AAR
to support Dell India’s contention.
The other questions put forth
before the AAR were regarding the withholding tax liability of
Dell India and whether BTA could be considered to have a
permanent establishment in India. The AAR held that Dell India
may approach the appropriate authority under the relevant
provisions of the ITA to decide its withholding tax liability.
The issue relating to the permanent establishment due to
inadequate evidence was left open for determination in
appropriate proceedings.
Conclusion
In line with the various earlier
judgments, the present AAR decision rightly differentiates
between the consideration paid for use of equipment or for
availing any service and concludes that unless Dell India is
required to do a positive act of operation or control of the
equipment in order to avail the facility, the payment under
consideration cannot be considered a royalty payment for use of
equipment. This decision removes ambiguities surrounding
taxation of payments for leased lines particularly in the case
of business process outsourcing units, especially call centers
