Facts :- Cable & Wireless Networks India Private Limited (‘the applicant’) is engaged in the business of providing international and domestic long distance telecommunication services in India.
It proposes to enter into an agreement with its group company, Cable and Wireless UK (‘C&W UK’) to provide end to end international long distance telecommunication services to its Indian customers. Under the proposed agreement, the applicant would provide the Indian leg of the service by using its own network and equipments and network of other domestic operators and the international leg of the service would be provided by C&W UK, using its international infrastructure and equipment. The applicant will carry the calls and data within India and C&W UK will further carry those calls and data to the recipients outside India. The network and equipments of C&W UK will not be used in India and the applicant?s network and equipment will not be used outside India. For the above services, the applicant will pay fees to C&W UK.
Issues before the Authority for Advance Ruling (‘AAR’)
- Whether the amount payable by the applicant to C&W UK would be in the nature of “royalties” or “fees for technical services” (‘FTS’) either under the Income-tax Act, 1961 (‘ITA’) or under the Double Tax Avoidance Agreement entered into between India and the United Kingdom (‘India-UK DTAA’)
- Whether C&W UK has a Permanent Establishment (‘PE’) in India under Article 5 of the India-UK DTAA
- Whether the payment to be made by the applicant would suffer withholding tax or not, and if yes, at what rate?
Contentions of the applicant
- The service to be provided by C&W UK is a standard facility, not technical in nature and hence the payment would not amount to FTS under the ITA.
- C&W UK does not make any technical knowledge, skill or experience available to the applicant and hence the payment would not amount to FTS under the India-UK DTAA.
- The payment is not for the use of any intellectual property or equipment and hence it would not fall within the purview of royalty either under the ITA or under the India-UK DTAA.
- C&W UK does not have any PE in India.
Contentions of the Revenue
- The services provided by C&W UK are not in the nature of standard facility as these use secret process and hence the applicant is paying for using such secret process. Therefore, the payment is in the nature of royalty, both under the ITA as well as under the India-UK DTAA.
- The Revenue conceded that the services in question cannot be regarded as FTS under the India-UK DTAA since no transfer of technology was involved.
- The contract between the applicant and its Indian customers indirectly binds C&W UK and as such the applicant acts as an agent of C&W UK and therefore C&W UK has agency PE in India.
Ruling of the AAR
- In carrying telecom signals, C&W UK is not providing any managerial, technical or consultancy service, nor is it providing the services of its technical or other personnel to the applicant and hence the same is not taxable as FTS under the ITA.
- The same is also not taxable as FTS under the India-UK DTAA since no technical service is rendered and also there is no transfer of technology.
- No material has been placed by Revenue to show that C&W UK uses any secret process in the transmission of the international leg of service or that the applicant pays towards the use or right to use that secret process.
- The arrangement between the applicant and C&W UK is for rendition of services and the applicant pays for the same. Moreover, telecom services are standard services.
- Based on the reasoning given by the AAR in its earlier ruling in the case of Dell International Services India Pvt. Ltd. (305 ITR 37), the payment is not in the nature of royalty.
- The agreements entered into by the applicant with its customers and the agreement entered into by the applicant with C&W UK are independent agreements and the breach of one type of contract does not affect the rights and obligations arising under the other type of contract.
- The payment made by the applicant to C&W UK is in the nature of business profit and in the absence of any PE of C&W UK in India, the income is not taxable in India.
- Since the income is not chargeable to tax in India, there is no question of any deduction of tax at source under section 195 of the ITA.