Getting connected but avoiding the tax loop
Payment for using telecom network and equipment outside India not royalties
The Authority for Advance Ruling (“AAR”) recently in the case of Cable & Wireless Networks India Pvt. Ltd. (“Applicant”) held that fees paid by an Indian company to its UK based group company for providing telecommunication services would be in the nature of business profits and could not be categorized as royalty payments or fees for technical services.
Facts and Issues
The Applicant was engaged in the business of providing international long distance telecommunication services to Indian customers. For this purpose, it intended to enter into a Service and Revenue Share Agreement (“Agreement”) with a group company Cable & Wireless UK (“C&W UK”) for providing the international leg of the service through the use of C&W UK infrastructure.
The main issue for consideration before the AAR was whether the fees paid to C&W UK would be considered as ‘fees for technical services’ or ‘royalty’ within the meaning of the India-UK Double Tax Avoidance Agreement (“Treaty”) or section 9 of the Income-tax Act, 1961 (“ITA”).
Ruling and Analysis
The Applicant contended that the services rendered by C&W UK were standard services and not technical in nature, nor was any technical knowledge, skill or experience made available to the Applicant. Hence, the payments to C&W UK should not be categorized as fees for technical services within the meaning of sec. 9(1)(vii) of the ITA as well as under Article 13(4) of the Treaty. The Revenue also agreed with the contention of the Applicant that the services rendered by C&W UK should not be categorized as fees for technical services.
The AAR, in agreement with the Applicant observed that C&W UK is not providing any managerial, technical or consultancy services, nor is it a case of transfer of technology to the Applicant and therefore the fees paid are not fees for technical services. Further Clause (c) of Article 13(4) of the Treaty which defines ‘technical services’, requires that the technical service in question should make available technical knowledge, experience, skill, know-how or process, or consist of the development and transfer of a technical plan or technical design, and the AAR opined that from the description of the services rendered, the following requirements could not be considered to be fulfilled.
The Applicant also contended that the payments made to C&W UK are not for the use of any intellectual property or equipment, and hence should not be categorized as royalty under sec. 9(1)(vi) of the ITA or Article 13(3) of the Treaty. The Applicant placed reliance upon the Report of the Technical Advisory Group constituted by the Organization for Economic Cooperation and Development that draws a distinction between transactions for the use of equipment and those for rendering of services.
The Revenue, on the other hand, contended that the services rendered by C&W UK were not in the nature of a standard facility but for the use of a secret process and hence it should qualify as royalty under the ITA as well as under Article 13(3) of the Treaty.
The AAR held that the telecom services rendered by the Applicant are standard services and that the arrangement between the Applicant and C&W UK would be for mere rendition of service. It also held that the use of secret process was never contemplated by the parties and in fact a number of other telecom operators were providing similar services. The royalty provisions in the Treaty would only apply if the process qualified as a secret process and not otherwise. Thus, the AAR ruled that there would be no element of royalty in the fees paid by the Applicant to C&W UK. The AAR accordingly followed its ruling in Dell International Services India Pvt. Ltd.1 and held that as no part of the fees paid would be for using or for the right to use any equipment utilized for rendering services the test of royalty would fail on that count.
Further, the Revenue also contended that the Applicant would qualify as an ‘agency’ Permanent Establishment of C&W UK in India. The AAR observed that the Applicant in its independent capacity negotiates and concludes contracts with its customers on a principal-to-principal basis, and does not act on behalf of C&W UK. Thus, the Applicant does not constitute an agency PE of C&W UK in India and accordingly the fees paid to C&W UK would be categorized as business profits thus not taxable in India in the absence of a PE of C&W UK in India.
The AAR ruling is in line with the earlier judgments and restricts the scope of fees for technical service or royalties. The decision is also interesting in that the AAR has followed the judgment of the Income Tax Appellate Tribunal in Panamsat International Systems Inc.2 in stating that only the right to use a secret process would be covered under the scope of royalty payments and not payments for the right to use any process.