Facts of the Case

Telstra Singapore Pte Ltd., a Singapore-incorporated company, provided international data connectivity services such as private leased circuits, MPLS, and bandwidth solutions to customers, including Indian telecom operators. The infrastructure and equipment used for these services were located outside India.

To facilitate seamless connectivity, Telstra entered into a One Stop Shopping Service Agreement (OSS Agreement) with Bharti Airtel Ltd. and other telecom operators. Under this arrangement, each party provided services within its own territory, enabling end-to-end connectivity for customers across jurisdictions. The agreements expressly stated that the parties were independent entities and not agents of each other.

Issues Involved

  1. Whether consideration for offshore bandwidth and connectivity services amounts to royalty under Section 9(1)(vi) of the Income Tax Act.
  2. Whether such payments qualify as royalty under Article 12 of the India-Singapore DTAA.
  3. Whether customers obtained “use” or “right to use” equipment or process owned by the non-resident service provider.
  4. Whether retrospective amendments to domestic law (Finance Act 2012) expand taxability under a DTAA.

Petitioner’s (Revenue’s) Arguments

The Revenue argued that bandwidth services necessarily involve the use of telecom infrastructure, satellite links, cables, and transmission processes. Relying on Explanations 2 and 6 to Section 9(1)(vi), it contended that transmission via satellite, cable, or optical fibre constitutes a “process,” and payments for such services therefore qualify as royalty.

It was also argued that under Article 3(2) of the DTAA, undefined treaty terms should be interpreted according to domestic law, thereby incorporating the expanded definition of royalty introduced by the Finance Act, 2012.

Respondent’s (Assessee’s) Arguments

Telstra contended that it merely provided connectivity services and did not grant customers any right to use its equipment or infrastructure. Customers neither possessed nor controlled the network facilities; they only received a service outcome.

It further argued that the DTAA definition of royalty is narrower than domestic law and prevails where beneficial. Since the services were rendered using infrastructure located outside India and did not involve transfer of rights in equipment or process, the payments constituted business income, not royalty.

 Court Order / Findings

  • Bandwidth services provided from infrastructure located outside India do not amount to granting “use” or “right to use” equipment or process to Indian customers.
  • Customers merely receive connectivity; they do not operate, control, or possess the underlying infrastructure.
  • The OSS Agreement confirms that the parties remain independent entities and do not act as agents of one another.
  • Under the DTAA, royalty requires actual use or right to use intellectual property, equipment, or process—not mere provision of services utilizing such assets.
  • Retrospective amendments to domestic law cannot override treaty provisions that are more beneficial to the taxpayer.
  • The Tribunal correctly held that the receipts were not taxable as royalty in India.

Important Clarification

  • Mere use of a service does not equate to use of equipment or process.
  • DTAA provisions prevail over domestic law where more beneficial.
  • Retrospective legislative amendments cannot unilaterally expand treaty obligations.
  • Offshore infrastructure-based services without PE or equipment usage in India generally fall outside royalty taxation.

Link to download the order – https://www.mytaxexpert.co.in/uploads/1772176588_THECOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION3VsTELSTRASINGAPOREPTELTD..pdf 

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