The Authority for Advance Rulings recently gave a ... - BMR Advisors

The Authority for Advance Rulings recently gave a ruling in the case ofDell International Services India Private Limited, Bangalore. The rulingaffirms that no tax is required to be withheld on payments made for useof telecom bandwidth service, if the non-resident recipient does not havea Permanent Establishment (PE) in India.Background and factsThe Applicant, Dell International Services India Private Limited (‘Dell India’ or ‘theApplicant’), is an Indian company engaged in the business of providing call centre, dataprocessing and information technology support services to its group companies. DellUS (parent company of Dell India) had entered into a ‘Master Services Agreement’ andtwo other agreements (all together referred to as ‘the Agreement’) with BT America(‘BTA’), a company registered and formed in USA. Under this Agreement, BTA had toprovide the Dell group companies (including Dell India) with two-way transmission ofvoice and data through telecom bandwidth. While BTA would provide internationalhalf-circuit from USA / Ireland, the Indian half-circuit is provided by Indian telecomcompanies, namely Videsh Sanchar Nigam Limited (VSNL) and Bharti Telecom withwhom BTA has a tie-up and a direct contract. As per the Agreement, Dell India wasrequired to pay installation charges and a fixed monthly recurring charge (net of taxdeduction at source) to BTA. For these charges, the bills were raised on Dell Indiadirectly and the payments were to be made by Dell India to BTA and no recharge was tobe made to Dell US.BTA (and its affiliates), jointly with VSNL, provides telecom services to Dell India to carryvoice and data traffic from US and Ireland to India and back through dedicated privatetelecom lines. This service is further provided through sub-sea cables and telecomnetwork owned or leased by BTA or VSNL. It was stated that neither any equipmentwas installed at Dell India facilities nor were any of these items at Dell India’s disposal oruse elsewhere.The telecom bandwidth is provided through a huge network of optical fiber cables laidunder seas across several countries and BTA uses a small fraction of this network. Thespace in the cable network is not dedicated to the Applicant alone but it is also used byother customers of BTA. The consideration paid by Dell India was for the provision ofsuch service by BTA, by means of point-to-point dedicated circuits owned/leased byBTA.Questions before the Authority for Advance RulingsThe key questions before the Authority for Advance Rulings (‘AAR’) were:• Whether the amounts payable to BTA under the Agreement is Fees forIncluded Services (‘FIS’), under Article 12 of the India-USA Double TaxationAvoidance Agreement (‘India-USA Treaty’), or FTS under the Income-tax Act,1961 (‘Act’)• Whether the amounts payable to BTA under the Agreement is ‘royalty’ underArticle 12 of the India-USA Treaty or the Act• Whether the amounts payable by the Applicant are for the purposes of makingor earning any income from any source outside India and hence, coveredunder the exception carved out in section 9(1)(vi) or 9(1)(vii) of the Act, asapplicableFeedbackBMR in NewsExpert SpeakEventsContentsBackground and facts……………..……………….…Questions before the AAR ……………………….....Contentions of the applicant ………….….…….......Contentions of the revenue ………….….……........Ruling of the AAR……………………………………....BMR comments and analysis...................................For more information, contact:Bobby Parikh, MumbaiPhone: +91 22 3021 7010Email ID:bobby.parikh@bmradvisors.comMukesh Butani, New DelhiPhone: +91 11 3081 5010Email ID:mukesh.butani@bmradvisors.comRajeev Dimri, New Delhi, BangalorePhone: +91 11 3081 5010Email ID:rajeev.dimri@bmradvisors.comAbhishek Goenka, BangalorePhone: +91 80 4032 0100Email ID:abhishek.goenka@bmradvisors.comContributors to this edition:Sharath RaoAnuj ShahIndustry Groups:http://bmrtax.com/industryGroups.phpCompetencies:http://bmrtax.com/competencies.php

Ruling of the AARThe AAR’s observations / conclusions were as follows:• This is a case of provision of services by BTA, using its own network andequipment. ‘Service’ is an unbroken thread running through entire fabric ofAgreement between the parties;• The expression ‘rental’ denotes the consideration paid in transaction of leaseand hire. Such transaction pre-supposes the transfer of interest in the propertyor goods. Right to exclusive possession / custody and enjoyment thereof overa stipulated period of time are its necessary attributes. There is nothing in thepresent Agreement, which indicates that particular equipment has been leasedout to the Applicant and the Applicant has been put in exclusive custody andcontrol thereof;• The word ‘use’ in relation to equipment occurring in clause (iva) of section9(1)(vi) of the Act is not to be understood in the broad sense of availing of thebenefit of an equipment. The context and collocation of the two expressions‘use’ and ‘right to use’ followed by the words 'equipment' suggests that theremust be some positive act of utilization, application or employment ofequipment for the desired purpose. If an advantage is taken from sophisticatedequipment installed and provided by another, it is difficult to say that therecipient / customer uses the equipment as such. The customer merely makesuse of the facility, though he does not himself use the equipment;• Although, one of the many circuits forming part of the network is devoted andearmarked to the Applicant, it only amounts to a part of the bandwidth capacitybeing utilized by the Applicant – it does not follow that the entire equipment andcomponents constituting the network are rented out to the Applicant, or that theconsideration in the form of monthly charges is intended for the use ofequipment owned and installed by BTA;• Usage of equipment connotes that the holder of right has possession andcontrol over the equipment and the equipment is virtually at his disposal. But,there is nothing in the Agreement, which could lead to a reasonable inferencethat the possession or control, or both, has been given to the Applicant underthe terms of the Agreement in the course of offering the facility;• Even where an earmarked circuit is provided for offering the facility, unlessthere is material to establish that the circuit / equipment could be accessed andput to use by the customer by means of positive acts, it does not fall under thecategory of ‘royalty’ in clause (iv a) of explanation 2 of section 9(1)(vi) of theAct;• The expression ‘use’ occurring in the relevant provisions does not simply meantaking advantage of something or utilizing a facility provided by another throughits own network. What is contemplated by the word ‘use’ in clause (iva) is thatthe customer comes face-to-face with the equipment, operates it or controls itsfunctioning in some manner, but if it does nothing to (or with) the equipmentand does not exercise any possessory rights in relation thereto, it only makesuse of the facility created by the service provider who is the owner of entirenetwork and related equipment;• There is nothing in any part of the Agreement which could lead to a reasonableinference that the possession or control or both has been given to the Applicantunder the terms of the Agreement in the course of offering the facility;• In the context of whether facility provided constitutes use of ‘secret process’,the AAR observed that since many other telecom operators are providingsimilar bandwidth services through private circuits, the ‘royalty’ definition underthe India-USA Treaty relating to secret process is not attracted here;• As there is no ‘make available’ element in the services provided, the paymentdoes not constitute a ‘fee for included service’ under Article 12;• Once the Applicant gets the Treaty advantage there is no need to enter into adiscussion on the applicability of the relevant provisions of the Act;• The income which the Applicant earns by data processing and other softwareexport activities cannot be said to be from a source outside India. The ‘source’of such income is very much within India and the entire business activities andoperations leading to the exports, take place within India. The source whichgenerates income must necessarily be traced to India. Having regard to thefact that the entire operations are carried on by the Applicant in India and theincome is earned from such operations taking place in India, it would be futile

to contend that the source of earning income is outside India, ie, in the countryof the customer. Source is referable to the starting point or the origin or thespot where something springs in existence. The fact that the customer and thepayer is a non-resident and the end product is made available to that foreigncustomer does not mean that the income is earned from a source outside India;and• Since the necessary details to ascertain whether BTA has a PE in India werenot available, the question of existence of PE may be kept open for decision bythe appropriate authority and since the determination of a PE has not beenmade, Dell India would have to continue to withhold tax on the payments.BMR comments and analysisThough an Advance Ruling is binding only on the person seeking such Ruling and onthe Revenue in respect of such a person, it does have persuasive value. This rulingcomes as a relief to users of dedicated bandwidth facilities, especially the BPO and CallCentre industry, where the lease line costs are quite substantial. This is also a welcomeclarification from the AAR to the overseas providers of similar dedicated bandwidthfacilities that their income will be taxed in India only if the services are related to aPermanent Establishment (PE) in India. The detailed analysis on the meaning of‘royalty’ establishes clear principles that could be applied in other cases. Theconclusion in this ruling is similar to the conclusion arrived at by the Bangalore Incometax Appellate Tribunal on the issue of whether similar payments require tax withholdingat source. The finding on the source of income being in India is however, contrary toanother judgment of the Bangalore Tribunal.EVENTSTopUPCOMING EVENTSTwo-day interactive workshops on International Transfer Pricing for Oil &Gas in Singapore and DubaiConference Connection is hosting transfer pricing event at Singapore and Dubai withBMR as the knowledge partner. The workshops are planned for August 25-26, 2008(Singapore) and November 23-24, 2008 (Dubai). The two-day courses titled‘International transfer pricing: Towards seamless borders’ are specifically centred onInternational Transfer Pricing for Oil & Gas.The workshops are a part of a continuing focus on short courses for the oil and gasindustries. A comprehensive and practical course, the subject coverage will provide amulti-jurisdictional, instructional and hands-on exposure to transfer pricing legislationand practices by BMR experts – Mukesh Butani, Gokul Chaudhri and Sanjiv Malhotra.For more details, please click here.RECENT EVENTSConference on ‘Investing in India: Opportunities and constraints’ in Parison June 25, 2008Arsene Taxand, the French member firm of the TAXAND network, organised aconference titled ‘Investing in India: Opportunities and constraints’ on June 25, 2008 athotel Meurice in Paris.The round-table had an impressive list of experts discussing various facets related to thesubject matter. Mukesh Butani, Partner, BMR, was invited as a panelist in thediscussion. The other pre-eminent panelists included Ms Manju, First Secretary,Economic & Commercial, Embassy of India, Paris; Karim Vissandjee, CFO of ArevaT&D; Jean-Pascal Tranié, Co-founder of Aloe Private Equity and Frederic Donnedieu deVabres, Chairman of the TAXAND Board.For more details, please click here. To access presentation, click here.

International Tax Review’s annual Asia Tax Forum 2008, in Singapore onJune 5-6, 2008International Tax Review, a Euromoney Legal Media Group publication, hosted theannual Asia Tax Forum on June 5-6, 2008, in Singapore. Leading Asian Taxandmember Firms – BMR Advisors, India; KhattarWong, Singapore; and Kojima Law fromJapan, supported the event.The annual Tax forum saw participants comprising heads and regional heads of tax ofleading companies in Singapore, Japan, North America and Europe.For more details, please click here.TopDisclaimerThis newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation anddoes not express views or expert opinions of BMR & Associates. The newsletter is meant for general guidance and no responsibility for loss arising toany person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR & Associates. It isrecommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need to referto the original pronouncements.© Copyright 2008, BMR & Associates. All Rights Reserved.Bangalore2 nd FloorEmbassy Icon Annexe2 / 1, Infantry RoadBangalore 560 001Tel : +91 80 4032 0000Fax: +91 80 4032 0001Mumbai3F, Contractor Building41, R. Kamani MargBallard EstateMumbai - 400 001Tel :+ 91 22 3021 7000Fax: +91 22 3021 7070New DelhiThe Great Eastern CentreFirst Floor70, Nehru PlaceNew Delhi 110 019Tel : +91 11 3081 5000Fax:+ 91 11 3081 5001