Wednesday, February 11, 2015

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Companyas distinguished from a mere payment for simply user of capacity,the consideration would not be taxable as royalty.


a)The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.

b)It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East.

c)Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibreoptic Cable System.Videsh Sanchar Nigam Limited (‘VSNL’) was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties.

d)The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royaltyincome-tax Act?

The Tribunal held in favour of assessee as under:

1)The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.

2)One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights.

3)Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party.

4)All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case.

5)This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party.What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments,etc

6)If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'. -Flag Telecom Group Ltd. v. DCIT - [2015] 54 154 (Mumbai - Trib.)