Madras High Court rules payment for dedicated bandwidth is royalty

 

This tax alert summarizes a recent decision of the Madras High Court (HC) in the case of Verizon Communications Singapore Pte. Ltd. (Taxpayer). The issue was whether the payment made by the Indian customers to the Taxpayer for providing bandwidth/telecom services by way of International Private Lease Circuit is taxable as “royalty”. The HC confirmed the Tribunal’s ruling and held that such payments amount to “royalty” both under the Indian Tax Laws (ITL) and the Double Taxation Avoidance Agreement between India and Singapore.

The issue of whether the payment for bandwidth services is royalty has been a subject matter of tax controversy in India. The ITL was amended in 2012 to clarify with retrospective effect to expand the scope of royalty taxation. This decision of the Madras HC has opined that in view of this amendment, the earlier decisions in favor of taxpayers no longer hold good. In arriving at its conclusion, the HC held that it is difficult to accept the case of the Taxpayer that the nature of transaction is only that of service and that the transaction does not involve use of equipment. Further, the HC has held that even if the payment is not considered as equipment royalty, it should be taxable as process royalty, with no DTAA relief available.

One may recall that the Delhi HC in the case of Nokia Networks OY had observed that the retroactive amendments to the definition of “royalty” cannot be read into a DTAA.