Verizon Communications Singapore Pte. Ltd. v. ITO

SUBSCRIBE FOR FULL CONTENT


The Tax PublishersIT Appeal Nos. 1311 (Mad) of 2006 and 164 (Mad) of 2007 C.O. Nos. 20 and 21 (Mad) of 2009 2011 TaxPub(DT) 1409 (Chen-Trib) : (2011) 045 SOT 0263 : (2011) 054 DTR 0065 Verizon Communications Singapore Pte. Ltd. v. ITO INCOME TAX ACT, 1961 Income deemed to accrue or arise in India- Under section 9(1)(vi)-Business connection-Existence of PE Assessee was a non-resident company of Singapore. It was engaged in providing international connectivity services largely in the Asia Pacific Region. The Indian Telecom Regulations allow only licenced service provider to provide International Long Distance Telecommunication Services (ILDTS) in India. The assessee-company was not a licenced service provider in India, but provided only International Private Lease Circuit (IPLC). The Indian Half Circuit services were provided to the customer by the local licence provider namely, Videsh Sanchar Nigam Ltd. (VSNL). A customer interested in taking leased line between his office in India and any overseas location, entered into two separate contracts for the provision of connectivity Services. Firstly with assessee for Provision of International Connectivity; and Secondly, with VSNL for Indian Half Circuit Services Connectivity. The VSNL took the telecommunication traffic of the customer from the customer office/site in India and transmitted the traffic to a virtual point outside India. In doing this, the customer received two invoices-one, from MCI Singapore for providing the connectivity services outside India; and second, from VSNL for Indian half of the connectivity. The assessee used telecom services equipment which was situated outside the territory of India in order to provide international connectivity services and did not either own or utilize any landing station in India for providing international half-circuit-services. It was stated that the landing station of gateway in India used in transmitting the traffic within India belonged to VSNL. This was used by VSNL for providing India end services pursuant to its contract with the customer. As per assessee, none of its equipments was installed within the territory of India in connection with the services rendered to Indian customers. The assessee had a service agreement with its Indian associate enterprise. As per the assessee,associate enterprise did not have any authority to negotiate on behalf of, or to bind the assessee in any manner vis-a-vis potential customers in India. It did not have a Permanent Establishment (PE) in India. Associate enterprise was stated to be not a subsidiary of assessee and acted as a channel of communication between the customer and assessee to obtain customer feedback or telecom services provided by Singapore company. Associate enterprise was legally independent of Singapore company that there was no control on associated enterprise Singapore company, So assiciate enterprise was not a PE of Singapore company which at best could only be reference to as an agency-PE. Associate enterprise provided marketing support to Singapore company for which it was remunerated at an arms length basis. Therefore, the assessee did not have a PE in India no income could be attributed nor taxed in India and hence, payments received by it for international connectivity services were not taxable in India.But AO was of view that the payments received by the assessee on account of providing various equipments either directly or through its affiliates would amount to royalty. CIT(A) was confirmed the order of AO. Held: The assessee had not been able to satisfy the finding of AO that the customer acquired significant economic to the extent of bandwidth hired by the customer. The capacity was made available on a dedicated basis to the customer for the entire contract period, usually for a year. The physical possessory interest in the equipment was not a must, even according to TAG or OECD, the customer had to pay committed charge whether bandwidth was used or not. The agreement might be only for the provision of services but, it granted right to the extent stated above in the network of the assessee. The amount received by the assessee from the Indian customers was in a way also for the use of the process and would ultimately amount to payment of royalty. View of AO was right that the agreement entered into with VSNL for split billing was only to overcome the telecom regulatory regime prevailing in India. On going through service agreement showed that the same was with Indian customers on a standard format. It was clear that VSNL was not an affiliate of associate enterprise of assesssee. It was only sub-contractor of it i.e. VSNL was provisioning entity on behalf of assessee. The agreement entered into with VSNL showed that the circuit had been hired on lease. The media used for the service was cable. This showed that IPLC was a high technology circuit comprising transmission cable and sophisticated instrument. From a detailed analysis of various agreements, a clear picture emerged from which only irrebuttable conclusion was derived that payments for the use of the tangible equipment could be considered as a payment for the use of or the right to use industrial, commercial or scientific equipment. The total payment does not substantially exceed the rental value of the equipment for the contract period. [Para 13] In determining the nature of the payment as royalty, all the relevant factors having a bearing on the substance of the transaction should be taken into account. In the present case, the customer acquired significant, economic or possessory interest in the equipment of the assessee, to the extent of bandwidth hired by the customer. The capacity was made available or a dedicated basis to the customer for the entire contract period, usually a year. Therefore, as the assessee did not bear any risk of diminution in receipts or increase in expenditure, if the customer did not make use of the capacity. It is significant to mention that the payments made for hiring bandwidth by the customer would correspond to the rental value. The payment made by the Indian customer to Singapore company was not royalty for the use of equipment, it was the royalty for the use of process. [Para 14] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersIT Appeal Nos. 1311 (Mad) of 2006 and 164 (Mad) of 2007 C.O. Nos. 20 and 21 (Mad) of 2009
2011 TaxPub(DT) 1409 (Chen-Trib) : (2011) 045 SOT 0263 : (2011) 054 DTR 0065

Verizon Communications Singapore Pte. Ltd. v. ITO

INCOME TAX ACT, 1961

Income deemed to accrue or arise in India- Under section 9(1)(vi)-Business connection-Existence of PE

Assessee was a non-resident company of Singapore. It was engaged in providing international connectivity services largely in the Asia Pacific Region. The Indian Telecom Regulations allow only licenced service provider to provide International Long Distance Telecommunication Services (ILDTS) in India. The assessee-company was not a licenced service provider in India, but provided only International Private Lease Circuit (IPLC). The Indian Half Circuit services were provided to the customer by the local licence provider namely, Videsh Sanchar Nigam Ltd. (VSNL). A customer interested in taking leased line between his office in India and any overseas location, entered into two separate contracts for the provision of connectivity Services. Firstly with assessee for Provision of International Connectivity; and Secondly, with VSNL for Indian Half Circuit Services Connectivity. The VSNL took the telecommunication traffic of the customer from the customer office/site in India and transmitted the traffic to a virtual point outside India. In doing this, the customer received two invoices-one, from MCI Singapore for providing the connectivity services outside India; and second, from VSNL for Indian half of the connectivity. The assessee used telecom services equipment which was situated outside the territory of India in order to provide international connectivity services and did not either own or utilize any landing station in India for providing international half-circuit-services. It was stated that the landing station of gateway in India used in transmitting the traffic within India belonged to VSNL. This was used by VSNL for providing India end services pursuant to its contract with the customer. As per assessee, none of its equipments was installed within the territory of India in connection with the services rendered to Indian customers. The assessee had a service agreement with its Indian associate enterprise. As per the assessee,associate enterprise did not have any authority to negotiate on behalf of, or to bind the assessee in any manner vis-a-vis potential customers in India. It did not have a Permanent Establishment (PE) in India. Associate enterprise was stated to be not a subsidiary of assessee and acted as a channel of communication between the customer and assessee to obtain customer feedback or telecom services provided by Singapore company. Associate enterprise was legally independent of Singapore company that there was no control on associated enterprise Singapore company, So assiciate enterprise was not a PE of Singapore company which at best could only be reference to as an agency-PE. Associate enterprise provided marketing support to Singapore company for which it was remunerated at an arms length basis. Therefore, the assessee did not have a PE in India no income could be attributed nor taxed in India and hence, payments received by it for international connectivity services were not taxable in India.But AO was of view that the payments received by the assessee on account of providing various equipments either directly or through its affiliates would amount to royalty. CIT(A) was confirmed the order of AO. Held: The assessee had not been able to satisfy the finding of AO that the customer acquired significant economic to the extent of bandwidth hired by the customer. The capacity was made available on a dedicated basis to the customer for the entire contract period, usually for a year. The physical possessory interest in the equipment was not a must, even according to TAG or OECD, the customer had to pay committed charge whether bandwidth was used or not. The agreement might be only for the provision of services but, it granted right to the extent stated above in the network of the assessee.

The amount received by the assessee from the Indian customers was in a way also for the use of the process and would ultimately amount to payment of royalty.

View of AO was right that the agreement entered into with VSNL for split billing was only to overcome the telecom regulatory regime prevailing in India. On going through service agreement showed that the same was with Indian customers on a standard format. It was clear that VSNL was not an affiliate of associate enterprise of assesssee. It was only sub-contractor of it i.e. VSNL was provisioning entity on behalf of assessee. The agreement entered into with VSNL showed that the circuit had been hired on lease. The media used for the service was cable. This showed that IPLC was a high technology circuit comprising transmission cable and sophisticated instrument. From a detailed analysis of various agreements, a clear picture emerged from which only irrebuttable conclusion was derived that payments for the use of the tangible equipment could be considered as a payment for the use of or the right to use industrial, commercial or scientific equipment. The total payment does not substantially exceed the rental value of the equipment for the contract period. [Para 13]

In determining the nature of the payment as royalty, all the relevant factors having a bearing on the substance of the transaction should be taken into account. In the present case, the customer acquired significant, economic or possessory interest in the equipment of the assessee, to the extent of bandwidth hired by the customer. The capacity was made available or a dedicated basis to the customer for the entire contract period, usually a year. Therefore, as the assessee did not bear any risk of diminution in receipts or increase in expenditure, if the customer did not make use of the capacity. It is significant to mention that the payments made for hiring bandwidth by the customer would correspond to the rental value. The payment made by the Indian customer to Singapore company was not royalty for the use of equipment, it was the royalty for the use of process. [Para 14]