Recently, the Chennai Bench of the Income-tax Appellate Tribunal (Tribunal), in the case of Verizon Communications Singapore Pte. Ltd (Tax-payer) held that the consideration for provision of International Private Leased Circuit (IPLC) / dedicated bandwidth qualify as Royalty under the provisions of Income-tax Act, 1961 (Act) read with the provisions of relevant Double Taxation Avoidance Agreement (DTAA). The Tribunal held that such consideration would be regarded as towards use of process or equipment.
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH ‘C’ : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A. Nos. 1311/Mds/2006 & 164/Mds/2007
Assessment years : 2002- 03 & 2003- 04
| M/s Verizon Communications Singapore Pte Ltd. (formerly MCI Worldcom Asia Pte Ltd) C/o S.R. Batliboi & Co. No.3, Cenotaph Road TPL Huse IInd Floor, Teynampet Chennai 600 018[PAN – AADCM6355L] |
Vs. |
The ITO International Taxation-I Chennai |
|---|---|---|
|
(Appellant) |
(Respondent) |
C.O.Nos.20 & 21/Mds/2009
[In I.T.A. Nos. 1311/Mds/2006 & 164/Mds/2007]
Assessment years : 2002-03 & 2003-04
| The ITO International Taxation-I Chennai
|
Vs. |
M/s Verizon Communications Singapore Pte Ltd. (formerly MCI Worldcom Asia Pte Ltd) Chennai 600 018 |
|
(Cross objector) |
(Respondent) |
Date of Judgment: 07.01.11.
O R D E R
PER HARI OM MARATHA, JUDICIAL MEMBER:
This is a bunch of four matters – two appeals by the assessee and two corresponding cross objections by the Revenue. Since identical issues are involved in these cases, we are proceeding to decide them by a common order for the sake of convenience and brevity.
I.T.A.No. 1311/Mds/2006
2. Briefly stated, the facts of the case are that the assessee-company namely, MCI Worldcom Asia Pte. Ltd. was incorporated under the Companies Act, 1956, on 15.3.1997. Subsequently, through a special resolution, its name was changed to ‘Verizon Communications Singapore Pte Ltd’ with effect from 24.3.2006 and since then it is known by its new name. The assessee-company, a non-resident company, has filed its return of income for assessment year 2002-03 on 1.10.2003, admitting ‘NIL’ income and also claimed TDS refund of ` 2,69,99,456/-. Initially, the return was processed u/s 143(1) on 4.11.2003 accepting the NIL income filed, but later, the case was scrutinized u/s 143(3) vide which positive income was computed and interest u/s 234A and 234B of the Act was also charged. The assessee-company is engaged in providing international connectivity services largely in the Asia Pacific Region. The Indian Telecom Regulations allow only licensed service provider to provide International Long Distance Telecommunication Services (ILDTS) in India. The assessee- company, is not a licensed service provider in India, but provides only International Private Lease Circuit (IPLC). The Indian Half Circuit services are provided to the customer by the local license provider, namely, Videsh sanchar Nigam Ltd (VSNL). A customer interested in taking leased line between his office in India and any overseas location, enters into two separate contracts for the provision of connectivity services – firstly with MCI Singapore for provision of international connectivity; and secondly, with VSNL for Indian Half Circuit Services Connectivity. The VSNL takes the telecommunication traffic of the customer from the customer office/site in India and transmits the traffic to a virtual point outside India. In doing this, the customer receives two invoices – one, from MCI Singapore for providing the connectivity services outside India; and second, from VSNL for Indian half of the connectivity. The case of the assessee is that it uses telecom services equipment which is situated outside the territory of India in order to provide international connectivity services and do not either ‘own’ or ‘utilize’ any landing station in India for providing international half-circuit-services. It is stated that the landing station or gateway in India used in transmitting the traffic within India belongs to VSNL. This is used by VSNL for providing India end services pursuant to its contract with the customer. As per assessee, none of its equipments is installed within the territory of India in connection with the services rendered by MCI Singapore to Indian customers. MCI Singapore has a Service Agreement with its Indian associate enterprise, namely, MCI Worldcom India (Pvt) Ltd (MCI India) as per the terms of which MCI will render the following services to MCI Singapore:
“(i) Market Development services such as assist in the development of qualitative and quantitative market research, market plan and assist in the design of a communication strategy.
(ii) Liaisoning with customers for obtaining feedback on behalf of MCI Singapore on the quality and efficiency of the services provided by the MCI Singapore and compared to its competitors in India.
(iii) Exploring new service lines/ventures for MCI Singapore in India. (iv) Providing information on potential customers to MCI Singapore.
3. As per the assessee, MCI India does not have any authority to negotiate on behalf of, or to bind MCI Singapore in any manner vis-à-vis potential customers in India. The other angle of assessee’s case is that MCI Singapore does not have a Permanent Establishment (PE) in India. MCI India is sated to be not a subsidiary of MCI Singapore and acts as a channel of communication between the customer and MCI Singapore to obtain customer feedback on telecom services provided by MCI Singapore. The sum and substance of assessee’s case is that MCI India is legally independent of MCI Singapore; that there is no control on MCI India by MCI Singapore, so MCI India is not a PE of MCI Singapore which at best can only be referred to as an ‘Agency-PE’. In the alternative, the case of the assessee is that even if MCI India is taken to be dependent agent of MCI Singapore, it does not constitute a PE of MCI Singapore in India since it does not have the authority to negotiate or conclude contracts nor it secure orders on behalf of MCI Singapore in India. MCI India provides marketing support to MCI Singapore for which it is remunerated at an arm’s length basis. Accordingly, the case of the assessee is that since, MCI Singapore does not have a PE in India no income can be attributed nor taxed in India and hence, payments received by MCI Singapore for international connectivity services are not taxable in India. To explain its case properly, the assessee also filed copies of the following documents before the Assessing Officer:
a) Copy of the agreement entered into between VSNL and MCI Worldcom Asia (Pte) Ltd for the International Private Leased Circuit.
b) Copies of the agreements entered into between MCI World com Asia (Pte) Ltd and their various customers in India.
c) Copy of the agreement entered into between VSNL and MCI Global Access Corporation, USA dated 8.2.2001 for VSNL/WCom Global Network Services.
4. After considering the explanation of the assessee, the Assessing Officer has concluded as under:
“8. Copies of agreements entered into by MCI Worldcom Asia (Pte) Ltd with various Indian customers have been obtained. They are all in a similar format. Some of the agreements have an escalation list annexed which details the service provided by MCI World com Asia (Pte) Ltd in India (directly or through their affiliates). The escalation list contains the names of the persons with phone numbers, whom the customers should contact for fault resolution service. The escalation list filed by he following companies are annexed to the assessment order and this forms part of the assessment order .
i) HCL Infinet Ltd., New Delhi – letter dated 28.02.2005.
ii) Daksh e-Services Pvt. Ltd., Gurgaon, Haryana – letter dated 15.03.2005,
iiil) Stingray Technologies Pvt. Ltd., Noida, New Delhi – letter dated 07,03.2005,
iv) Birla Global Info tech Services Pvt. Ltd., Hyderabad – letter dated 24.02.2005,
v) Jindal Trans world Pvt. Ltd., New Delhi – letter dated 25.02.2005
vi) Manipal Informatics, Manipal, Karnataka – letter dated 22.02.2005.
vii) Infosys Technologies Ltd., Bangalore – letter dated 25.02.2005.
viii) Foundations – Mega Channels Computers Ltd., Chennai – letter dated 17.10,2003,
ix) Hexaware Technologies Ltd., Chennai
x) Infotronics Pvt. Ltd., Chennai – letter dated 26.08,2003.
9. On a perusal of the various agreements entered into by the assessee it is seen that services are being provided to various customers of the assessee in India, by the affiliates of MCI such as MCI India Pte Ltd. and MCI Global Access Corporation, USA. In para 2.3 of the agreement relating to: services entered into with the customers it is stated that “MCI World com may use MCI World com Affiliates or subcontractors to perform some or all of its duties and/or obligations here under.” It is seen from a perusal of the invoices and the letter dated 18.03.2005 raised on the customers that payments for these services are made to the account of MCI Singapore outside India.
10. The payment to the assessee is in the nature of rental charges and call charges (in the preamble to the Masters Service Agreement rental charge is defined as “the fixed monthly rental charge for a Service payable in accordance with clause 4”).
11. On a perusal of the Master Services Agreement with MCI, in the Definitions to Terms and Conditions to the Master Services Agreement it is stated that “Service Equipment” shall mean the equipment, systems, cabling and facilities provided by MCI World com or an MCI World com affiliate in order to make available the service to the customer. Service Equipment shall not include the network or any equipment which is the subject of a separate supply contract between MCI World com and customer. In clause 12 relating to customer obligations, it is mentioned in sub clause 12.8 relating to service equipment that the customer shall be required to deliver, install and keep installed at the customer site, the service equipment. In the clause 12.9.1 it is mentioned that the customer should house the service equipment required to be housed at the customer site in accordance with Worldcom’s reasonable instructions as may be given from time to time. In clause 12.9.2 it is mentioned that the customer shall not move, modify, relocate or in any way interfere with the service equipment or network. In sub-clause 12.9.3 it is mentioned that the customer shall not cause the service equipment to be repaired, serviced or otherwise attended except by an authorised representative of World com. In clause 12.9.4 it is stated that customer shall insure and keep insured all service equipment installed at each customer site. In 12.9.5 it is stated that customer shall not remove, tamper with or obliterate any words or labels on the service equipment. In 12.9.6 it is stated that the title to the service equipment shall at all times belong and remain with Worldcom or the relevant World com affiliate. In 12.9.8 it is stated that customer shall permit Worldcom to inspect or test the service equipment at all reasonable times. In 12.9.9 it is stated that upon termination of the service, customer shall allow World com access to each customer site to remove the service equipment.
12. It is stated in clause 6 relating to fault resolution that World com shall respond to notification of the fault from the company in a specified time frame and that World com shall use all reasonable endeavors to correct any fault as quickly as possible.
13. It is stated in clause 25 that World com shall be entitled at any time to use World com affiliates to perform such obligations in the agreement. A copy of the Master Services Agreement entered into by Wipro with MCI World com has been obtained. This is enclosed herewith.
14. On a perusal of the copies of various agreements (and the escalation clauses annexed thereto) entered into with customers in India it is seen that services are provided in India at various levels.
15. The assessee’s contentions in para 3 cannot be accepted for the following reasons:
