S. 9(1)(vi) Royalty: Payment for 'bandwith services' is not assessable as 'royalty' if the assessee only has access to services and not to any equipment. The assessee also did not have any access to any process which helped in providing of such bandwith services. All infrastructure & process required for provision of bandwith services was always used and under the control of the service provider and was never given either to the assessee or to any other person availing the said services

The present appeal filed by the revenue is directed against
the order passed by the CIT(A)-57, Mumbai, dated 21.10.2016 that
was passed by him while disposing off the appeal filed by the assessee
under Sec. 248 of the Income Tax Act,1961 (for short „I-T Act). The
revenue assailing the order of the CIT(A) has raised before us the
following grounds of appeal:
“ 1. Whether on the facts and in the circumstances of the case
and in law, the Ld. CIT(A) erred in holding that an amount paid by
Reliance Jio Inf o comm L td. („RJ IL o r „the As s e s se e ) to
Rel iance Jio I n f o c o mm P t e L t d . , ( „ R J P I L ) , Singapore for
availing bandwidth services was not liable to tax in India, as
Royalty as per the provisions of the Income-tax Act, 1961
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
( ‘ the Ac t ‘ ) and the Ind ia – Sing ap o r e Do ubl e T ax at io n
Agreement (‘DTAA’)?
2. Whether on the facts and in the circumstances of the case
and in law, the Ld.CIT(A) er red in conc luding that the
payments made by the assessee to RJIPL for provision of
bandwidth services wil l be in the nature of business prof its
and cannot be classif ied as Royalty either under the Act or
the India-Singapore DTAA ?
3. The Appellant prays that the- order of the CIT(A) be set aside on the
above ground(s) and of the Assessing Officer be restored.
4. The Appellant craves leave to amend or alter any ground or add a new
ground which may be necessary.”
2. Briefly stated, the assessee is a company incorporated in India
and is engaged in the business of rolling out telecom services in India.
In order to avail bandwith services the assessee had entered into a
“bandwith services” agreement (for short “agreement”) dated 01.06.2015
with Reliance Jio Infocomm Pte. Ltd. (for short “RJIPL”) i.e a company
incorporated and a tax resident of Singapore. RJIPL was holding a
facility based operator license in Singapore which enabled it to
establish, install, maintain, operate and provide telecommunication
services in Singapore and also provide bandwith services to the service
recipients across the globe. As per the terms of the aforesaid „agreement
dated 01.06.2015, the assessee remained under an obligation to
withhold tax, if any, on the payments which were to be made to RJIPL
for provision of bandwith services. In pursuance of the aforesaid terms,
the assessee which had remitted USD 13,45,500 to RJIPL for provision
of bandwith services had deposited taxes of INR Rs. 95,14,725/- on
07.08.2015 @ 11.11% [i.e rate of 10% under Article 12 of the DTAA duly
grossed upon in terms of Sec.195A] in terms of Sec.195 of the I-T Act.
However, the assessee thereafter holding a conviction that it was not
obligated to deduct tax at source under Sec.195 from the aforesaid
payment made to RJIPL carried the matter by way of an appeal before
the CIT(A) under Sec. 248 of the I-T Act, therein claiming that no tax
was required to be deducted on the aforesaid amount paid to RJIPL.
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
3. The assessee in the course of the appellate proceedings
submitted before the CIT(A) that the amount remitted by it to RJIPL
for provision of bandwith services was the latters business income. It
was averred by the assessee that as RJIPL did not have any business
connection or a Permanent Establishment (for short „PE) in India,
therefore, as per Article 7 of the India-Singapore DTAA the amount
remitted by the assessee to RJIPL could not have been brought to tax
in India. In sum and substance, it was the contention of the assessee
that as the payments made to RJIPL towards bandwith services was
the latters business profits, therefore, the same in the absence of its
PE or a business connection in India could not be taxed in India as
per Article 7 of the India-Singapore DTAA. Insofar the nature of the
bandwith services rendered by RJIPL to the assessee was concerned, it
was submitted that as the provision of the said services were fully
automatic and did not involve any human intervention, therefore, the
same did not fall within the realm of „fees for technical services (for
short „FTS) as defined under Sec.9(1)(vii) of the I-T Act. In fact, it was
the contention of the assessee that as the remittance towards
bandwith services was a simpliciter payment of a „fee for use of a
standard facility that was provided to all those willing to pay for it,
therefore, the same could not be held as fees received for rendering of
technical services. In support of his aforesaid contention reliance was
placed by the assessee on the judgement of the Honble Supreme
Court in the case of CIT Vs. Bharti Cellular Ltd. (2010) 193 taxman 97
(SC). Alternatively, it was the contention of the assessee that as
rendering of the bandwith services by RJIPL to the assessee did not
“make available” any technical knowledge or experience to the
assessee, thus the same on the said count also could not be brought
within the sweep of the definition of FTS under Article 12 of the India-
Singapore DTAA. Apart there from, it was submitted that the payment
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
made by the assessee to RJIPL could also not be construed as
“royalty” under the I-T Act, as well as under the India-Singapore
DTAA. In order to buttress his aforesaid claim, it was submitted by the
assessee that neither RJIPL had in any way transferred all or any
rights in respect of any “process” to the assessee, nor was the assessee
making use of any such “process”. In sum and substance, it was the
claim of the assessee that it was merey receiving standard bandwith
services from RJIPL. It was the contention of the assessee that as the
amount paid to RJIPL was neither towards use of (or obtaining right to
use) industrial, commercial or scientific equipment nor towards use of
(or obtaining right to use) any process, therefore, the same could not
be brought within the definition of the term “royalty” as envisaged in
the I-T Act. Apart there from, it was submitted by the assessee that
the consideration received by RJIPL also did not qualify as royalty as
per its narrow definition under the India-Singapore DTAA. It was
submitted by the assessee that for a payment to qualify as “royalty”
under the India-Singapore DTAA, it was indispensably required that
the consideration paid for the process, if any, was for a “secret
process” i.e the IPR in the process was owned/registered in the name
of the payee. It was thus submitted by the assessee that as it had
made the payment to RJIPL for availing bandwith services which were
standard telecom services and not for making any use of a “process”,
whether secret or not, therefore, the same clearly fell beyond the realm
of the definition of “royalty” both under the I-T Act and the India-
Singapore tax treaty.

4. The CIT(A) after deliberating on the contentions advanced by the
assessee observed that RJIPL did neither have any business
connection or a PE in India. Accordingly, it was observed by him that
in the absence of any business connection or PE in India the income
earned by the said foreign entity under the „agreement for provision of
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
bandwith services would not be liable to tax in India. Insofar the
contentions advanced by the assessee that the payments made to
RJIPL were for availing standard telecom services and not by way of
FTS were concerned, the same did find favour with the appellate
authority. In fact, the CIT(A) after deliberating on the terms of the
„agreement observed that as the assessee was only availing standard
bandwith services which did not require any human intervention,
therefore, the same could not be regarded as „technical services, and
thus the payment made by the assessee for the same could not be
characterised as FTS under Sec.9(1)(vii) of the I-T Act. Insofar the
definition of FTS envisaged in India-Singapore DTAA was concerned,
the CIT(A) taking cognizance of Article 12(3) of the tax treaty observed
that as RJIPL by providing bandwith services did not “make available”
any technical knowledge, experience, skill, knowhow or process to the
assessee which was simply availing the said standard facility, thus the
same could also not be construed as FTS under the India-Singapore
tax treaty.
5. It was further observed by the CIT(A) that the assessee had only
received an access to service and not any access to any equipment
that was deployed by RJIPL for providing the bandwith services. Apart
there from, it was observed by the CIT(A) that the assessee also did
not have any access to any process which helped in providing such
bandwith services. In fact, it was noticed by him that all infrastructure
and process required for provision of bandwith services was always
used and had remained under the control of RJIPL and was never
given either to the assessee or to any person availing such services.
Further, it was observed by the CIT(A) that as the process involved to
provide the bandwith services was not “secret” i.e the Intellectual
Property Rights (for short “IPR”) in the process was not
owned/registered in the name of RJIPL, but was a standard
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
commercial process followed by the industry players, thus the same
could not be classified as a “secret process” as was required under the
India-Singapore DTAA for the same to qualify as “royalty. The CIT(A)
taking cognizance of the definition of “royalty” under the India-
Singapore DTAA, observed that as the amount paid by the assessee to
RJIPL was neither towards use of (or for obtaining right to use)
industrial, commercial, scientific equipment, nor towards use of (or for
obtaining right to use) any process, therefore, the payments made by
the assessee for availing bandwith services could not be held as
“royalty” either under the I-T Act or the tax treaty. In the backdrop of
his aforesaid observations the CIT(A) concluded that the payments
made by the assessee to RJIPL for provision of bandwith services were
in the nature of “business profits” and could not be classified as FTS
or royalty either under the I-T Act or India-Singapore DTAA. On the
basis of his aforesaid deliberations, it was further observed by him
that as RJIPL did not have any business connection or a PE in India,
therefore, the business profits could not be taxed in India. In the
backdrop of his aforesaid observations the CIT(A) finding favour with
the claim of the assessee that no tax was deductible on the
payment/credit made to RJIPL, allowed the appeal.
6. Aggrieved, the revenue has assailed the order of the CIT(A) in
appeal before us. The ld. Authorized Representative (for short „A.R) for
the assessee adverted to the facts of the case and took us through the
relevant observations of the CIT(A) in context of the issue under
consideration. The ld. A.R took us through the “Grounds of appeal”
raised by the revenue before us and submitted that the order of CIT(A)
has been assailed before us only to the extent he had concluded that
the payment made by the assessee to RJIPL for providing bandwith
services were in the nature of “business profits” and could not be
classified as “royalty” either under the I-T Act or the India-Singapore
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax(IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
DTAA. In sum and substance, it was the contention of the ld. A.R that
the revenue has accepted the observations of the CIT(A) that the
payment made by the assessee to RJIPL could not be held as FTS.
Insofar the issue as to whether the CIT(A) was right in law and facts of
the case in concluding that the amount remitted by the assessee to
RJIPL was not to be held “royalty” was concerned, the ld. A.R took us
through the definition of „royalty as envisaged in Explanation 2 to
Sec.9(1)(vi) of the I-T Act. It was averred by the ld. A.R that as the
consideration was not paid by the assessee for the use or right to use
any industrial, commercial or scientific equipment of RJIPL, thus the
same was not covered by the definition of “royalty” as defined in clause
(iva) to Explanation 2 of Sec.9(1)(vi) of the I-T Act. Apart there from,
the ld. A.R in order to buttress his claim that the payment made by
the assessee for the bandwith services also did not fell within the
realm of the definition of the term „royalty under Article 12(3) of the
India-Singapore DTAA, took us through the same. In fact, the ld. A.R
in order to fortify his aforesaid contention submitted that unlike the
definition of term “royalty” as used in India-Hungary DTAA wherein
“transmission by satellite, cable, optic fibre or similar technology…”
was specifically included within the definition of “royalty” under Article
12(3) of the said tax treaty, no such mention was available in the
definition of the same as envisaged in the India-Singapore Tax Treaty.
It was further submitted by the ld. A.R that though the legislature in
all its wisdom had vide the Finance Act, 2012 with retrospective effect
from 01.06.1976 incorporated “Explanation 6” to Sec. 9(1)(vi) of the I-T
Act, which therein clarifies that the expression “process” includes and
shall be deemed to have always included transmission by satellite
(including up-linking, amplification, conversion for down linking of
any signal), cable, optic fibre or by any other similar technology,
whether or not such process is secret, however, no such mention was
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
available in the narrow meaning of the term “royalty” in the India-
Singapore tax treaty. In sum and substance, it was the contention of
the ld. A.R that now when the definition of „royalty as envisaged in
Article 12(3) of the India-Singapore tax treaty does not provide for
inclusion of transmission by satellite, cable, optic fibre or by any other
similar technology within the realm of the definition of “royalty”,
therefore, the consideration received by RJIPL from the assessee for
rendering of the bandwith services could not be characterised as
royalty in its hands.
7. Per contra, the ld. Departmental Representative (for short „D.R)
submitted that the CIT(A) while disposing off the appeal had failed to
consider the definition of the term „royalty in the backdrop of
Explanation 5 and Explanation 6 of Sec.9(1)(vi). In sum and
substance, it was the contention of the ld. D.R that as the Explanation
5 and Explanation 6 of Sec. 9(1)(vi) were declaratory in nature and had
only clarified the intent of the legislature, therefore, the consideration
paid by the assessee to RJIPL was clearly covered by the definition of
„royalty. Apart there from, it was averred by the ld. D.R that even if it
was to be assumed that RJIPL had provided standard telecom services
to the assessee, even then the same as per Explanation 2 to
Sec.9(1)(vi) and also Article 12 of the India-Singapore DTAA would
qualify as a payment of royalty by the assessee company. The ld. D.R
further adverting to the business model of RJIPL submitted that the
latter in order to facilitate the provision of bandwith services had
established international connectivity points through the network of
sea-cables across the globe. It was submitted by the ld. A.R that for
providing such international connectivity points industrial,
commercial or scientific equipment in the form of sea cable network
system(optic fibre telecommunication network) and other sophisticated
scientific apparatus was deployed and used in Indian Sea and Indian
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
territory called „landing points systems. It was submitted by the ld.
D.R that as RJIPL would require association of domestic companies in
order to work as an intermediary for interconnecting offshore sea cable
network and associated infrastructure/equipment systems in India,
therefore, it could safely be concluded that it had a fixed place of
business in India. In the backdrop of his aforesaid contention, it was
submitted by the ld. D.R. that the observations of the CIT(A) that all
infrastructure and process required for providing of bandwith services
was always used under the control of RJIPL and the same was never
given to the assessee or to any other person availing such services,
was found to be incorrect. Apart there from, it was the contention of
the ld. D.R that as the assessee company had the “right to use” and
had used “the process” during the course of bandwith network
transmission/receiving bandwith services, therefore, as per Article 12
of the DTAA and Explanation 5 and Explanation 6 of Sec. 9(1)(vi) of
the I-T Act, the payment made by the assessee to RJIPL for availing
such bandwith services was clearly in the nature of royalty. Further,
the ld. D.R also did put up an effort to distinguish the case laws relied
upon by the assessee in the course of hearing of the appeal.
8. We have heard the authorized representatives for both the
parties, perused the orders of the lower authorities and the material
available on record and the judicial pronouncements relied upon by
them. We find that our indulgence in the present appeal has been
sought by the revenue to adjudicate as to whether the CIT(A) is correct
in concluding that the amount paid by the assessee for availing
bandwith services to RJIPL did not constitute “royalty” and was its
“business profits”. Admittedly, as the revenue has not assailed the
observation of the CIT(A) that the payments made by the assessee to
RJIPL cannot be held as FTS, therefore, we confine ourselves to the
issue to the extent the same has been assailed by the revenue before
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
us. As is discernible from the record, the assessee pursuant to the
terms of the „agreement had only received standard facilities i.e
bandwith services from RJIPL. In fact, as observed by the CIT(A), the
assessee only had an access to services and did not have any access to
any equipment deployed by RJIPL for providing the bandwith services.
Apart there from, the assessee also did not have any access to any
process which helped in providing of such bandwith services by RJIPL.
As a matter of fact, all infrastructure and process required for
provision of bandwith services was always used and under the control
of RJIPL, and the same was never given either to the assessee or to
any other person availing the said services. We are persuaded to
subscribe to the observations of the CIT(A) that as the process
involved to provide the bandwith services was not a “secret” i.e IPR in
the process was not owned/registered in the name of RJIPL, but was a
standard commercial process that was followed by the industry
players, therefore, the same could not be classified as a “secret
process” which would have been required for charactering the
aforesaid payment made by the assessee to RJIPL as “royalty” under
the India-Singapore DTAA. We are further in agreement with the view
taken by the CIT(A) that as the amount paid by the assessee to RJIPL
was neither towards use of (or for obtaining right to use) Industrial,
commercial or scientific equipment, nor towards use of (or for
obtaining right to use) any secret formula or process, therefore, the
same could not be classified as payment of “royalty” by the assessee.
Insofar the ld. D.R had tried to press into service Explanation 6 to Sec.
9(1)(vi), in order to drive home his contention that the payment made
by the assessee to RJIPL for availing the bandwith services would fall
within the sweep of „royalty is concerned, we are unable to persuade
ourselves to accept the same. In our considered view, the amendment
in Sec. 9(1)(vi) will not have any bearing on the definition of „royalty as
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
contemplated in the India-Singapore DTAA. Our aforesaid view is
fortified by the order of the Honble High Court of Bombay in the case
of The Commissioner of Income-tax (IT)-4 Vs. M/s Reliance Infocomm
Ltd. (ITA No, 1395 of 2016, dated 05.02.2019). The Honble High Court
in its aforesaid judgment had after referring to the judgments of the
Honble High Court of Delhi in the case of DIT Vs. New Skies Satellite
BV (2016) 382 ITR 114 (Del) and CIT Vs. Aktiongesellschaft (2009)
310 ITR 320 (Del), had after deliberating on the amendment made
available on the statute by the Explanation 6 to Sec. 9(1)(vi), observed
that mere amendment in the I-T Act would not override the provisions
of DTAA treaties. In the backdrop of our aforesaid observations, we
shall now further deliberate on the definition of „royalty as
contemplated in the India-Singapore tax treaty. In our considered view
there is substantial force in the contention advanced by the ld. A.R
that though the term “royalty” as used in Article 12 of India-Hungary
DTAA takes within its sweep “…transmission by satellite, cable, optic
fibre or similar technology”, however, the definition of „royalty in the
India-Singapore tax treaty with which we are concerned has a narrow
meaning. In fact, we find that despite the fact that the India-Singapore
tax treaty was amended by Notification No. SO 935(E), dated
23.03.2017, however, the definition of „royalty therein envisaged had
not been tinkered with and remains as such. We thus in terms of our
aforesaid observations are of the considered view that the amount
received by RJIPL from the assessee for providing standard bandwith
services could not be characterised as „royalty as per the India-
Singapore DTAA, and as rightly observed by the CIT(A), was in fact the
“business profits” of RJIPL. Insofar the taxability of the aforesaid
“business profits” is concerned, we find that as RJIPL did not have any
business connection or a PE in India, therefore, the same as per
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ITA No. 936/Mum/2017 A.Y. 2016-17
Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd.
Article 7 of the India-Singapore DTAA could not have been brought to
tax in India.
9. The order of the CIT(A) that amount received by RJIPL from the
assessee for providing standard bandwith services was its „business
profits, which in the absence of its business connection or PE in India
could not be brought to tax in India is upheld in terms of our aforesaid
observations and the appeal of the revenue is dismissed.
10. The appeal of the revenue is dismissed in terms of our aforesaid
observations.