Services Provided Outside To Indian Customers In Connection With Right To Use Of Process Can't Be Taxed : Delhi High Court

The Delhi High Court has held that the receipts from Indian customers for services provided outside' Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty.

The bench of Justice Yashwant Varma and Justice Purushaindra Kumar Kaurav, while dismissing the department's appeal, held that a person who is provided mobile communication services or access to the internet does not stand vested with a right over a patent, invention, or process. 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. The word “process” being liable to be construed ejusdem generis is lent added credence by clause (iii) employing the expression “or similar property,” which follows. It thus clearly appears to be intended to extend to a host of intellectual properties.

The respondent, Telstra Singapore Pte Ltd., is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions. Amongst the range of services with which we are concerned are the provision of international private leased circuits and multi-protocol label switching, which are essentially used to facilitate high-speed data connectivity. The data connectivity service has been described as bandwidth services. Telstra Singapore holds and owns the infrastructure and equipment outside India that is utilized in connection with providing bandwidth services to customers.

In order to facilitate the provision of bandwidth services in India, Telstra Singapore had also entered into a one-stop shopping service agreement with Bharti Airtel Ltd. and other related telecom operators. In terms of the aforenoted OSS Agreement, the respondent-assessee is obliged to provide bandwidth services to the customers of Bharti outside India, with a corresponding obligation being placed on Bharti to provide those services within India. The OSS Agreement essentially envisages reciprocal services being provided by the respondent assessee and Bharti dependent upon the location of their customers.

For Assessment Year 2012-13, the respondent-assessee had furnished Returns of Income declaring ̳nil' income. Those returns were selected for scrutiny assessment, as a consequence of which notices under Section 143(2) came to be issued. Following the route of assessment as prescribed by Section 144C of the Act, a Draft Assessment Order framed with the Assessing Officer proposing that the amount received by the respondent from Indian customers for the provision of bandwidth services outside India be liable to be construed as constituting equipment/process royalty taxable under Section 9(1)(vi) of the Act read along with Article 12(3) of the DTAA.

The respondent-assessee filed its objections before the Dispute Resolution Panel. Consequent to the DRP upholding the proposed assessment, a final assessment order came to be framed with the AO determining the total taxable income of the assessee at INR 26,75,15,533/-. It is this final order of assessment that was assailed before the Tribunal.

The Tribunal has held in favor of the respondent-assessee and has come to conclude that the consideration received by Telstra Singapore from Indian customers would not be taxable as royalty bearing in mind the beneficial provisions of the DTAA and which had remained unamended notwithstanding the changes that had come to be introduced in Section 9 of the Income Tax Act.

The issue raised was whether the receipts from Indian customers for services provided outside the territory of India would be taxable under Section 9(1)(vi) of the Income Tax Act, 1961, read along with Article 12 of the Double Taxation Avoidance Agreement between India and Singapore.

The department submitted that the receipts become taxable under the Act since the services provided are liable to be viewed as being in connection with the “use” or “right to use” of process or equipment. They thus seek to invoke the concepts of process and equipment royalty and would bid us to hold that the income in question would be taxable under the Act.

The department argued that the receipts from Indian customers for services provided outside Indian territories are liable to be viewed as those being in connection with the “use” or “right to use” of process or equipment. According to learned counsel, the Tribunal clearly erred in failing to construe royalty in light of Explanations 2 and 6, which form part of Section 9(1)(vi) of the Income Tax Act.

The assessee contended that it is a foreign telecom operator engaged in the business of providing data transmission and bandwidth services from outside India, facilitating high-speed data connectivity. It entered into contracts for transmission of voice and data to customers. For rendering telecom services in India, it is incumbent upon an operator to obtain a telecom license, which the assessee does not hold since it does not render any service in India. The entire infrastructure and equipment with the aid of which the assessee provides transmission/bandwidth services is situated outside India, and at no point in time does it rent out that equipment.

The court noted that there was no transfer or conferment of a right in respect of a patent, invention, or process by the assessee. Customers and those availing of the services provided by Telstra were not accorded a right over the technology possessed or infrastructure by it. The underlying technology and infrastructure remained under the direct and exclusive control of Telstra. Parties availing of Telstra's services were not provided a corresponding general or effective control over any intellectual property or equipment. The agreements merely enabled them to avail of the services offered by it.

The court held that a person who is provided mobile communication services or access to the internet does not stand vested with a right over a patent, invention, or process. 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.

Counsel For Petitioner: Aseem Chawla

Counsel For Respondent: Manuj Sabharwal

Case Title: The Commissioner Of Income Tax - International Taxation Versus Telstra Singapore Pte Ltd.

Citation: 2024 LiveLaw (Del) 839

Case No.: ITA 334/2022

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