Payments for Bandwidth Services Not Royalty under India–UAE DTAA: ITAT Mumbai Deletes ₹1.55 Crore Addition [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that payments received by UAE-based iSAT Africa Ltd. for providing VSAT bandwidth and network connectivity to BT Global Communications India Pvt. Ltd. did not constitute royalty under Section 9(1)(vi) or Article 12 of the India–UAE DTAA, as no right to use equipment or process was transferred.

The assessee, iSAT Africa Limited FZC, is a non-resident company based in the UAE, engaged in providing integrated communication and network connectivity services. During assessment proceedings, the Assessing Officer (AO) noticed that BT Global Communications India Pvt. Ltd. (BTGC) had made remittances amounting to ₹1.55 crore to the assessee without deducting tax at source.

The AO observed that the payments were in the nature of royalty under Section 9(1)(vi) of the Income Tax Act, 1961, as they represented consideration for the use or right to use equipment and process related to VSAT and optical fibre connectivity.

The AO initiated proceedings on the ground that income chargeable to tax in India had escaped assessment. Rejecting the assessee’s explanation, the AO treated the receipts as royalty taxable in India both under the Act and Article 12 of the India–UAE DTAA, on the premise that the payments were for the use of a process and scientific equipment.

The Dispute Resolution Panel (DRP) upheld the AO’s view, holding that payments for providing VSAT bandwidth and connectivity constituted royalty for use of digital infrastructure and process facilities. Accordingly, a final assessment order under Section 143(3) r.w.s. 144C(13) was passed, and penalty proceedings under Section 270A were also initiated. Aggrieved of this order the assessee filed an appeal before the Tribunal.

The assessee argued that it is a tax resident of the UAE and does not have any Permanent Establishment (PE) in India; hence, its income is governed by the provisions of the India–UAE DTAA. The services were rendered entirely outside India, primarily in African countries, and therefore, the income did not accrue or arise in India.

It was also submitted that the contract with BTGC was for the provision of network connectivity and bandwidth services, and no right or control over equipment or process was ever transferred to the Indian company. The assessee retained full ownership, operation, and risk of the equipment used in providing the services.

It further contended that under Article 12 of the DTAA, royalty covers payments for the use or right to use industrial, commercial, or scientific equipment or process, but such right must involve transfer of effective control or dominion over the equipment or process.

Since BTGC only availed network connectivity and did not operate or control the equipment, the payments could not be treated as royalty.

The assessee relied on judicial precedents, including Asia Satellite Telecommunications Co. Ltd. (Delhi HC), Reliance Jio Infocomm Ltd. (ITAT Mumbai), BT Global Communications India Pvt. Ltd. (ITAT Delhi), and Telstra Singapore Pte Ltd. (Delhi HC), to argue that payments for bandwidth or transmission services do not qualify as royalty where control over equipment remains with the service provider.

The Revenue relied on Explanations 5 and 6 to Section 9(1)(vi) of the Act, which clarify that “royalty” includes consideration for transmission by satellite, cable, optic fibre, or similar technology, irrespective of whether the payer has possession or control over the process.

The Revenue further argued that the payments made by BTGC to the assessee were for the use of a process involving transmission of signals and connectivity, and thus were squarely covered within the expanded definition of royalty under domestic law.

It contended that the assessee had effectively ceded the right to use its communication infrastructure to the Indian company, making the receipts taxable in India.

The ITAT Mumbai observed that under the contract, the entire control, operation, and maintenance of the network and related equipment remained with the assessee, and no possessory rights or control were given to BTGC.

The services provided were standard network connectivity services, and not a lease or transfer of the right to use equipment or process. Relying on the rulings of the Delhi High Court in Telstra Singapore Pte Ltd. and Asia Satellite Telecommunications Co. Ltd., the Tribunal held that “use” or “right to use” under Article 12 of the DTAA requires transfer of effective control or dominion, which was absent in this case.

The two-member bench of Padmavathy S (Accountant Member) and Raj Kumar Chauhan (Judicial Member) further followed the decision of Reliance Jio Infocomm Ltd., holding that the retrospective amendments under Section 9(1)(vi) cannot override treaty provisions unless incorporated into the DTAA.

Since the assessee’s services were rendered and utilised outside India, and it had no PE in India, the income could not be taxed in India either as royalty or business profits. Accordingly, the Tribunal deleted the addition of ₹1.55 crore and set aside the final assessment order, rendering the interest and penalty issues academic.

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