TMI Blog2012 (8) TMI 741X X X X Extracts X X X X X X X X Extracts X X X X ..... ing tax under section 195, since the applicant is a resident, the payee is a non-resident and the payment is chargeable to tax in India under the Act. Treatment for Payment of annual operations and maintenance charges - Held that:- As it appears that this is a share of the annual operations and maintenance charges incurred for maintaining the entire system it cannot be treated as fees for technical services and can be treated as the share of costs for maintenance incurred for the right to use the system acquired by the applicant - in favour of assessee. - A.A.R. No. 863 of 2010 - - - Dated:- 24-8-2012 - Justice P.K. Balasubramanyan, J. RULING 1. The applicant is a company incorporated in India under the Companies Act. It is a subsidiary of another Indian company and is engaged in the business of providing telecommunication services in a number of telecom circles in India. A company registered in Saudi Arabia, STC for identification, indirectly holds 18 5% shareholding in the applicant. STC owns and/or controls and/or operates telecommunication paths, facilities and network infrastructure in the Kingdom of Saudi Arabia and elsewhere. 2. A consortium of which STC i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... After hearing both parties, this authority allowed the application under section 245R(2) of the Act to render Rulings on the following questions: (1) Whether payments by the Applicant to Saudi Telecom Limited ('STC'), under the terms of the EIG Capacity Transfer Agreement, towards acquisition of the EIG capacity, comprise income chargeable to tax in India? (2) If the answer to Question 1 is in the affirmative, whether the payments by the Applicant would suffer withholding tax under section 195 of the Act, and if so, at what rate? (3) Whether payments by the Applicant to STC under the terms of the EIG Capacity Transfer Agreement, towards annual operation and maintenance charges, would be in the nature of FTS within the meaning of the term in Explanation 2 to clause ( vii ) of section 9(1) of the Act? (4) If the answer to Question 3 is in the affirmative, whether such payments by the Applicant would suffer withholding tax under section 195 of the Act, and if yes, at what rate? 6. It is the stand of the applicant that STC the payee is engaged in the business of providing telecommunication services and the capacity in the EIG Cable System has been acquired by STC for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urope India Gateway Construction and Maintenance Agreement (EIG Agreement) dated 16.5.2008 may now be noticed. The preamble notices that the reliability of telecommunications services and its usefulness to customers required the availability of appropriate facilities and technology including EIG for diverse routing and rapid restoration of services. The parties were desirous of constructing EIG as a fully integrated network in the configuration set out in an annexure to that agreement. 'Allocated capacity' is defined as that part of the equipped capacity allocated to a party for activation of EIG, based upon investment level and applicable Tier Pricing Ratio. EIG is a submarine cable system linking India to the UK with Terminal Points and fibre pairs as provided for in an annexure and as described therein. The transmission system was divided into segments. The parties were to act as Terminal Parties of the segments. The Terminal Party of Segment T 9 is STC and that of T 13 is Bharti, an India company. Under clause 12, the parties were to own the allocated capacity on an ownership basis as shown in the schedule in that behalf. STC's allotted capacity is shown as 2,790,622. The par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lion and the applicant's indirect contribution via STC being $20 million. On this consideration, STC agreed to grant the applicant 40% of all the benefits, obligations and liabilities accrued to and/or attributed to STC as a result of STC's participation in the EIG system including through STC's signature of the EIG, C MA and the EIG Supplier contract. It is provided that the applicant would have access to the cable system as per the provisions of the C MA from EIG PoPs/Cable Landing Stations to use the capacity transferred to the applicant. STC is to transfer the applicant's share of capacity in accordance with the provisions of the C MA. It is emphasized that the parties agree that the right to use the transferred EIG capacity from STC to the applicant is exclusive to the applicant and is non-transferable to any third party. It is provided that the agreement is to continue in effect until the termination of the EIG C MA. In the event of termination of the agreement, all rights of capacity that had been transferred to the applicant shall revert back to STC immediately unless mutually agreed otherwise. 10. From a reading of the two agreements it is seen that the latter agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the applicant that by making a payment of $20 million to STC, which amounts to 40% of the total commitment of STC to the consortium, the applicant is enabled to enjoy 40% of the total rights/responsibilities/obligations of the STC in the EIG cable system. The applicant thereby steps into the shoes of STC to the extent of 40% of the allocated capacity in the EIG cable system. The EIG cable system is largely located outside India. As far as the income of that part is concerned, since it is transfer of a capital asset it would not be taxable in India. I have already found on a true construction of the two agreements that it is not the transfer of a capital asset, but it is only the right of user that is granted to the applicant. Once that conclusion is arrived at, the character of the payment made by the applicant has to be ascertained, not on the basis that it is a capital gain arising out of a sale of a right by STC but as consideration for the right to use a segment of this system. 14. It appears to me that the payment made by the applicant cannot be considered to be a payment made to the consortium on behalf of STC. The obligation of STC to the consortium is indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ruling on question No.1 is that the payment made by the applicant to STC under the EIG Capacity Transfer Agreement towards acquisition of EIG capacity is chargeable to tax in India as royalty in terms of paragraph 2 of Article 12 of the DTAC between India and Saudi Arabia. 18. In view of the above ruling, the ruling on question no. 2 is that the payment by the applicant would suffer withholding tax under section 195 of the Act, since the applicant is a resident, the payee is a non-resident and the payment is chargeable to tax in India under the Act. 19. Question No.3 is whether the payment of annual operations and maintenance charges would emerge as fees for technical services. The argument of the applicant is that the payment is on account of the ownership of certain capacity in the EIG Cable System and not as consideration in respect of any technical service being rendered by STC to the applicant. The right to use that part of the system has been farmed out to the applicant for a consideration which is found to be royalty payable by the applicant. The operations and maintenance charges are paid to ensure that right to use without break down. 20. From the facts no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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