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Payments to foreign cos by BPOs taxable: ITAT
September, 08th 2008

Foreign companies providing connectivity and other technical services to domestic call centres through their overseas offices are liable to pay tax on their income in India, the sectoral tribunal has said.

As per the decision by Income Tax Appellate Tribunal (ITAT) in two cases filed by the Hyderabad-based Frontline Software and Call World Technologies, the domestic call centres have to deduct tax at source on payments made to foreign companies on support services from abroad.

Referring to the payments made to overseas companies for providing call connectivity and maintenance services, the tribunal said, "The transaction clearly falls under the definition of 'royalty'...and royalty payment to NRI is deemed to accrue and arises in India and therefore payment is subject to tax deducted at source".

Besides, the tribunal also clarified that a company availing the connectivity service has the responsibility to deduct TDS despite the location of the foreign firm's equipments.

In the case concerned, Hyderabad-based Frontline Software and Call World Technologies had not deducted TDS while making payments to the US-based IGTL Solutions and True Dial Technologies Inc.

The tribunal also rejected the argument of the companies that the entire activity for availing the connectivity facilities from IGTL and True Dial took place in US and therefore the income of foreign firms has no link to India and thus not taxable here.

Dismissing the appeal of the companies, the tribunal confirmed the decision of Commissioner of Income Tax  (appeals) who had held that the payments made by the two companies to the US firms 'is nothing but royalty'.

The services were taken by the two Hyderabad companies to generate and also cater to the outbound PSTN calls within the US through the equipments of the foreign companies.

PSTN is Public switched telephone network or the normal phone network or land line. It is a phone connection which is 'hard wired' used by industrial premises routed through the switchboard. BPO's use this technology for inbound calls and local calls.

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