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India: Ruling on payment for dedicated bandwidth taxed as royalty



Rajendra Nayak

Aastha Jain

As per the Indian Tax Law (ITL) as well as tax treaty, consideration for use of or right to use any industrial, commercial or scientific equipment or any process qualifies as royalty. By virtue of retroactive amendments in ITL in 2012, the definition of royalty was expanded pursuant to which consideration would be royalty irrespective of the possession/control with the payer or use by the payer or the location in India. Verizon Communications Singapore (taxpayer) is a Singapore company providing international connectivity/telecom services by way of international private lease circuit (IPLC), which is an end-to-end dedicated bandwidth service providing internet services to customers. As the taxpayer was not a licensed service provider under Indian laws, it engaged Videsh Sanchar Nigam (VSNL) to provide the Indian leg of the above services. The Indian tax authorities (TA) contended that payment received by the taxpayer from Indian customers is taxable in India as equipment/process royalty under the ITL as well as the India-Singapore tax treaty. The issue of taxation of bandwidth charges was adjudicated by the Madras High Court (HC).

The HC observed that the agreements between the taxpayer and VSNL, taxpayer and customers and VSNL and customers are the part and parcel of one composite agreement. They are split into various agreements for the sake of convenience and to achieve a common goal of giving the customers point-to-point telecom services. Further, the taxpayer has provided the necessary equipment to ensure that the customer gets uninterrupted connectivity, the bandwidth for transmission of data/voice which provides the internet access. It was held that the payment by the Indian customers for using such equipment falls within the ambit of equipment royalty. The retroactive amendments in the ITL give an expansive meaning to royalty, because of which the earlier decisions (Asia Satellite v. DIT [332 ITR 340]; Dell International Services (India) Pvt. Ltd. [305 ITR 37]; Cable and Wireless Networks India (P) Ltd. [315 ITR 72]) relied on by the taxpayer no longer hold good. The HC also observed that bandwidth capacity was made available to the customers on a dedicated basis for the entire contract period and amount received by the taxpayer is for the use of the process which provides an integrated communication system to the customers. Hence, apart from equipment royalty, the payment for bandwidth amounts to process royalty under the ITL as well as the tax treaty.

The issue of whether the payment for bandwidth services is royalty has been a subject matter of tax controversy in India. This decision of Madras HC rejects the case of the taxpayer that the nature of transaction is that of a service and it 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 tax treaty relief available.

Rajendra Nayak ( and Aastha Jain (


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