The Authority for Advance Ruling (AAR), a quasi judicial body dealing in tax issues related to foreign companies, has held that monthly payments made by Dell India to an overseas entity for voice and data services provided through telecom networks, is not royalty and hence not taxable. Since the Income Tax Act provides for taxing royalty payments, classification of an income under the head royalty has serious revenue implication for corporates.
In this case, the I-T department made a claim that Dell Indias payment to BT America was royalty. The payments made by Dell India to BT America has been in accordance with an agreement entered into between BT America and Dell USA. According to the I-T department, since the services rendered were incidental to the agreement between Dell USA and BT America that involves the right to use its point-to-point circuit, the consideration has a character of royalty. Dell India contended that the agreement between its US parent and BT America does not involve right to use any equipment. Also no equipment was installed following the agreement. Therefore, two major features that characterise royalty payment are absent, Dell India argued.
The AAR accepted the views of the company on this matter. It said the consideration was in relation to the rendition of services. And the element of use of equipment or grant of right for such use are absent in these transactions.
BT America used its own equipment and network to render the services under question. Citing the decisions of Andhra Pradesh High Court and Supreme Court on similar issues, the AAR held that right to use equipment implies control of equipment, whereas mere possession or custody of equipment without control can only result into use of the equipment. In the present case there is no control of equipment and hence it cannot be construed.
The AAR held that grant of right implies possession and control of the equipment and the arrangement between the parties involved in this case does not point to control.