A decision of the Mumbai Income Tax Appellate Tribunal was published on 8 June 2019 concerning whether payments for bandwidth services may be considered taxable royalties under the 1994 India-Singapore tax treaty. The case involved India-based Reliance Jio Infocomm Ltd. (RJIL), which entered into a bandwidth services agreement with Singapore-based Reliance Jio Infocomm Pte. Ltd (RJIPL). Under the terms of the agreement, RJIL remitted USD 1,345,500 to RJIPL for the provision of bandwidth services, on which INR 9,514,725 tax was withheld, applying a withholding tax rate of 11.1% (10% royalty treaty rate grossed-up).
However, RJIL later determined that the payment should be considered business income and that it was not obligated to withhold tax. This was appealed with the Commissioner of Income Tax (Appeals) (CIT(A)), which agreed with RJIL, finding that the payment should be considered business income and because RJIPL did not have any business connection or permanent establishment in India, the payment should not have been brought to tax to India. The decision of the CIT(A) was appealed to the Tribunal.
In its decision, the Tribunal upheld the decision of the CIT(A). The Tribunal agreed that, based on the terms of the agreement, RJIL only had access to the bandwidth services and did not have access to any equipment deployed by RJIPL for providing the services. Further, RJIL did not have any access to any process that aided in the provisions of the bandwidth services by RJIPL. Because the amount paid by the RJIL to RJIPL was neither towards the use of (or for obtaining the right to use) industrial, commercial, or scientific equipment, nor towards the use of (or for obtaining the right to use) any secret formula or process, the payment could not be classified as payment of royalties by RJIL under the India-Singapore tax treaty.
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