Data Connectivity Services provided outside India Cannot be Taxed as Royalty under Article 12 of India-Singapore DTAA: Delhi HC [Read Order]

The Delhi High Court ruled that data connectivity services provided outside India cannot be taxed as royalty under Article 12 of the India-Singapore Double Taxation Avoidance Agreement ( DTAA ). The respondent-Telstra Singapore Pte Ltd.is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions.

Among the range of services provided are international private leased circuits and multi-protocol label switching, which are essential for facilitating high-speed data connectivity, commonly referred to as bandwidth services; it is also acknowledged that Telstra Singapore owns and holds the infrastructure and equipment outside India that is utilized to deliver these bandwidth services to customers..

As per the assessee, 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.

Mr. Chawla, representing revenue / appellant submitted 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.

Chawla highlighted the fact that Explanation 6 had come to be introduced with retrospective effect from 01 June 1976 by virtue of Finance Act, 2012. It was contended by Mr. Chawla that Explanation 6 to Section 9(1)(vi) is clearly clarificatory in character and stipulates that the expression ―process‖ would be deemed to have always included transmission by satellite, cable, optical fiber or any other similar technology, including the provision of services, such as, uplinking, amplification, conversion for down-linking irrespective of whether or not such process were a secret.

Mr. Sabharwal representing the assessee / respondent submitted that undisputedly, the assessee is a foreign telecom operator engaged in the business of providing data transmission/ bandwidth services from outside India facilitating high speed data connectivity. It entered into contracts for transmission of voice and data to customers. Mr. Sabharwal pointed out that for rendering telecom services in India, it is incumbent upon an operator to obtain a telecom license and which the assessee, admittedly, does not hold since it does not render any service in India.

It was asserted that the entire infrastructure and equipment with the aid of which the assessee provides transmission/bandwidth services is situate outside India and that at no point of time does it rent out that equipment.

It was submitted that the issue of bandwidth services and its taxability has also been ruled upon by the Karnataka High Court in its decision in Vodafone Idea Ltd. vs. Deputy Director of Income Tax18 and while dealing with an identical question, the issue came to be answered in favor of the revenue.

The division bench of Justice Yaswanth Varma and Justice Purushaindra Kumar Kaurav held that neither the concept of process nor equipment royalty stand attract and the consideration was thus not taxable as per Article 12 of the DTAA.The appeal consequently failed and shall stand dismissed.

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