TMI Blog2023 (9) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... s required by the definition of royalty mentioned in clause 3 of Article 13 of India-Spain DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of India-Spain DTAA. As relying in case of Vodafone Idea Ltd. [ 2023 (7) TMI 1164 - KARNATAKA HIGH COURT] and Vodafone South Ltd. [ 2015 (1) TMI 1018 - ITAT BANGALORE] and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and also as per DTAA. The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Even Hon ble High Court has held that the non-resident service providers do not have any presence in India. Decided in favour of assessee. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greements are entered into between two telecom operators to provide seamless service of carrying/delivering outbound and inbound calls. The relevant agreements between assessee and the parties for the years under consideration are placed at pages 35-80 of paper book Vol.1. 2.2 It is submitted that for the relevant years under consideration, assessee received the amounts towards interconnect charges (hereinafter referred to as IUC) from Indian telecom operators, namely Bharti Infotel Limited ('BIL'), Tata Communications Limited ( TCL ) and Vodafone Essar South Limited ('VESL), to provide seamless services of carrying/delivering outbound and inbound calls for the years under consideration, the details of which are as under: S.No. Parties AY 2010-11 Page 2 of draft order AY 2011-12 Page 72-73 of PB AY 2012-13 Page 3 and 4 of draft order 1 Bharti Infotel Limited ('BIL') 288,287 835,030 6,87,993 2 Tata Communications Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-Tax Act as held by Karnataka High Court and it is further submitted that explanation 5 and 6 do not override DTAA. Hence, the subject payment received from Vodafone is not taxable as 'royalty' as per DTAA. The KHC in the aforesaid Vodafone case has reversed the ITAT judgment on this point. Substantial questions of law 2,3 and 4 in the aforesaid KHC judgment of Vodafone (as reproduced above) has answered the question that the IUC charges do not amount to 'royalty'. 3.2 Without prejudice to the above, it is submitted that there is No use of process or any use of equipment . Hence, the entire assumption of process royalty / equipment royalty does not arise in the case of the Appellant. 3.3 The provision apparently reads secret formula or process . Hence, it is submitted that the process has to be a secret process as held by Hon ble Delhi Tribunal in the case of Bharti Airtel Limited [2016] 67 taxmann.com 223 (Delhi ITAT). 3.4 Further, it is submitted that the decision of the Madras High Court in the case of Verizon Communications has been dissented by the Delhi HC in the case of New Skies and Bombay HC in the case of Neo Sports. It is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -09 to 201516 vide order dated 14.07.2023. 3.9 He thus submitted that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty / FTS in India stands squarely covered in favour of assessee. 4. On the contrary, the Ld.DR relying on the orders passed by the authorities below vehemently argued the observations as recorded by the revenue in their orders. 5. We have perused the submissions advanced by both sides in the light of records placed before us. 5.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to use the process or an equipment . 5.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term Process occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under: 'Explanation 2.: For the purposes of this clause, royalty means consideration (includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: Paragraph 2 contains definition of the term royalties . These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. 5.2.5 Thus the word process thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon ble Supreme Court in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239. 5.2.6 We refer to the decision of Hon ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon ble High Court observed as under: 10. The term (royalty' normally connotes the payment made to a person who has exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding uplinking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party. 5.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase use or right to use has been explained. The meaning attached to phrase use or right to use has been explained in following decisions: Decision of Authority For Advance Ruling(hereinafter referred to as AAR), in case of Cable Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76 Decision of AAR in case of ISRO Satellite Centre reported in 2008) 307 ITR 59 Decision of AAR in case of Dell International Services (India) P. Ltd.In.re. reported in (2008) 172 Taxman 418. 5.2.11 The above decisions, lay down that, in order to satisfy 'use or right to use', the control and possession of right, property or information should be with payer. 5.2.12 In the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression transfer of right to use any goods occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase 'right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state of being used; application or conversion to some purpose . Another meaning given is Make use of (a thing), especially for a particular end or purpose; utilize, turn to account... cause (an implement, instrument etc.) to work especially for a particular purpose; manipulate, operate . The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below : The word 'use' means to make use of; convert to one's service; to avail oneself of; to employ . (Miller v. Franklin County) The word 'use' means the purpose served, a purpose, object or end for useful or advantageous nature . (Brown v. Kennedy) 'Use' means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one's service or to put to one's use or benefit. (Beach v. Liningston) 'Use', as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's service or to put to one's use or benefit . (Esfeld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to utilize the service or facility ? Does the applicant deal with any BT equipment for adapting it to its use ? Unless the answer is 'yes', the payment made by the applicant to BTA cannot be brought within the royalty clause (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the applicant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iva) of Explanation 2. We also refer to the commentary relied by the Ld.Counsel form Prof. Klaus Vogel's Commentary on Double Taxation Convention, wherein Secrete formulae or process is defined as under: Secret formulae or processes: This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they enjoy at least relative protection or are capable of being protected. That is why Article 12(2) v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the word secret appearing in clause (iii) above qualifies only the word formula but not the word process and therefore even if the process involved in the operation of the transponder is in the public domain and no longer a secret known only to a few, the payment for the process would still be taxable as royalty. The reason or logic given in paragraph 6.18 of the order by the Tribunal to hold that the word secret does not qualify the word process is that there is no comma after the use of the word secret till the end of clause (iii) and if the intention has been to apply the word secret before the word process also, then a comma would have been used after the word formula and further that the word secret cannot also be applied to the word trademark because once registered there is nothing secret about the trademark and the impossibility of reading the word secret before the word trademark further strengthens the view that the word secret cannot be read before the word process also. This naturally takes us to the question whether there is anything in article 12.3(a) of the DTAA between India and USA which militates against such a view. It must be rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by itself cannot control the interpretation of a statutory provision and in fact the learned counsel for the assessee did not seriously dispute the proposition. However, the punctuation the use of the comma coupled with the setting and words surrounding the words under consideration, do persuade us to hold that under the treaty even the process should be a secret process so that the payment therefore, if any, may be assessed in India as royalty. The Tribunal in Asia Satellite Telecommunication Co. Ltd. s case (supra) have recognized that all the items referred to in clause (iii) of Explanation 2 such as patent, invention, model, formula and process etc. are intellectual properties. Similarly, the words which surround the words secret formula or process, in article 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trademark, design or model, plan, etc. Thus the words secret formula or process must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a socii. 20. That takes us to a consideration of the question whether the process carried on by the assessee is a secret process. On this questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers placed at pages 35 to 80 of paper book Vol. 1, it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of royalty as contained in clause 3 of Article 13 of India-Spain DTAA. 5.2.17 We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not secret but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a secret process , as is required by the definition of royalty mentioned in clause 3 of Article 13 of India-Spain DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of IndiaSpain DTAA. 5.2.18 The above observations are support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court also considered the various decisions by other High Courts referred to hereinabove vis-a-vis the arguments advanced by the Ld.Counsel. 5.2.19 In case of Vodafone Idea Ltd. (supra), Hon ble Court also observed that the equipments and submarine cables are situated overseas and that Vodafone Idea Ltd. had availed certain services from the non-resident telecom operators and that such agreements would not create a permanent establishment of such non-resident telecom operators in India. Thereafter Hon ble High Court after verifying the facts of the case having regards to the decision of Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 observed and held as under: 12. We have carefully considered the rival contentions and perused the records. 13. Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards interconnectivity charges. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows: 85. It is thus clear that the person mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. 100. Also, any ruling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA. 5.2.20 Respectfully following the above view, in case of Vodafone Idea Ltd. (supra) and Vodafone South Ltd. (supra), and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and also as per DTAA. 5.2.21 The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Even Hon ble High Court has in para 25, held that the non-resident service providers do not have any presence in India. Accordingly, ground nos. 3 and 4 for A.Ys. 2010-11 and 2011-12 and further ground nos. 3, 6 for A.Y. 2012-13 stands allowed in favour of assessee. 6. The Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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