TMI Blog2023 (12) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... NATAKA HIGH 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 (P.) Ltd [ 2021 (3) TMI 138 - SUPREME COURT] . 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aka, wherein the Hon'ble High court has held that the process royalty is not applicable without as much as considering the agreements between the assessee and payees, opinion of experts in the field of telecommunication and provisions governing royalty in the act and DTAA? 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka, wherein the Hon'ble High relied on the case of Engineering analysis as the reasoning of the case would not apply to the case on hand because retrospective amendments to section 9 of the act by insertion of Explanation 6 does not affect the definition of royalty. Moreover, the Engineering analysis case was rendered in the context of section 14 of the Copyright Act, 1957 whereas the Submarine cable system and the telecom network falls under the Patents Act, 1970? 5. Whether the Ld.CIT(A) has erred in not making any observations with regard to the merits of the case or without making any negative inference on the arguments made by the A.O. in the assessment order? 6. Whether the Ld.CIT(A) has erred in treating the assessment order d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, the assessee informed the Ld.AO that it could not file its return electronically and hence had filed a manual return, The Ld.AO did not accept this return as a valid return. 2.2. The Ld.AO proceeded to pass the assessment order, in which the following observations regarding the interconnect charges received by the assessee from VSL were made: Interconnect arrangement is a complex procedure involving a bundle of services including basic interconnection services, use or network elements, ancillary services, enabling services, rental of physical components and infrastructure sharing. Interconnection involves the grant of access to and right to use of network of the assessee company. Agreements of VSL with the Non-resident telecom operators (NTOs) have a confidentiality clause wherein the receiving party has to use confidential information (includes information, know-how), ideas, concepts, technology, discussions, documents, papers, drawings etc.) of the disclosing party for the purpose of Interconnection Agreement. The charges received by the assessee company allowing the usage of its network would fall under the arena of 'royalty', which is taxable in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submarine cables are situated overseas. Toprovide ILD calls, assessee had availed certain services from NTOs. it is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any permanent establishment in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue's reply to his contention Is that, the Income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable, 17. The first question is whether the ITAT was correct In holding that DTAA cannot be considered under Section 201 of the Act. It was argued by Shri. Percy Pardiwala that this Issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows: 7 .While deciding the scope of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessees own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc 35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. Assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telefonica De Espana S.A, vs. ACIT(IT)/DIT reported in (2023) 154 taxmann.com 436 Al Telekom Austria Aktiengesellschaft vs. DCIT in reported in (2023) 156 taxmann.com 155 2.7. We note that the assessee has submitted before the authorities below that the services rendered the assessee are standard telecom services which are automated requiring no human intervention. It has been submitted that the issue of taxability of interconnectivity charges as FTS has been decided by Hon ble Karnataka High Court in case of Vodafone South Ltd. reported in (2016) 72 taxmann.com 347 and that, the revenue has accepted the said decision of Hon ble Karnataka High Court which has been categorically noted by Hon ble Delhi High Court in case of CIT vs. Tata Teleservices Ltd. in ITA No. 1417/2018 by order dated 30.05.2022. 2.8. The assessee by placing reliance on various decision of Coordinate Bench of this Tribunal referred to hereinabove submitted that the treatment of interconnectivity utility charges as royalty stands squarely covered by the decision of Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. vs. DCIT (supra). 2.9. The Ld.DR relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation also use identical terms. 5.2.2 The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression 'similar property' used at the end of the list, further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. 5.2.3 We also note that 'Intellectual property' as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. 5.2.4 We refer to the commentary in Prof.Klaus Vogel's Commentary on Double Taxation Convention, wherein, the term 'Royalty' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of such right, property or information is in India. Explanation 6: For the removal of doubts, it is hereby clarified that the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. 5.2.9 By insertion of Explanation 5 6, meaning of word 'Process' has been widened. As per these explanations, the word 'Process' need not be 'secret', and situs of control possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of 'Royalty' as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to, transfer of all or any rights or 'use of, in the domestic law. As per Explanation 5 6, the word 'proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on following decisions: Decision of Hon'ble Supreme Court in case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 Decision of AAR in case of Dell International Services India (P.) Ltd. In re (supra) Decision of Hon'ble Madras High Court in case of Neyveli Lignite Corpn. Ltd. (supra) Decision of coordinate bench of this Tribunal in case of WIPRO Ltd. v. ITO [2003] 86 ITD 407 (Bang.-Trib.) 5.2.13 The AAR relying on its view in case of Dell International Services India (P.) Ltd. In re (supra) held as under: 12.5 It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in praesenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in prasenti but under a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. The word 'use' - what it means: 12.7 Let us now explore the meaning of the key word 'use'. The expression 'use' has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal Co. v. Secretary to Government of Punjab [1998] 5 SCC 574, the Supreme Court noted that 'in its ordinary meaning', the word 'use' as a noun, is the act of employing a thing; putting into action or service, employi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network. 13.1 There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment -whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are: Does the av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Satellite Tele-communication Co. Ltd. (supra) which is also a case of a non-resident company based in Hongkong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held in the context of the provisions of clause (iii) of Explanation 2 below section 9(1)(vi), that a process is involved when the signals that are uplinked through the earth stations to the transponder get converted into different frequencies and fit for being down-linked via earth stations over the footprint area. It was therefore held that the payment was for the use of a process and hence royalty within the meaning of the aforesaid clause. The clause reads as follows : (iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property; It was not disputed before us on behalf of the assessee that the nature of the activity carried on by it is the same as in the case of Asia Satellite Tele-communication Co. Ltd. (supra). If that is so, we have to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and In Asia Satellite Tele-communication Co. Ltd.'s case (supra) the Tribunal pointed out, while repelling the argument that the word secret also qualifies the word process appearing in clause (iii) of Explanation 2, that there is no comma after the word secret till the end of the clause and had the intention been to qualify the word process also with the word secret there would have been a comma after the word process (by mistake mentioned in the order as formula ). The Tribunal was thus prepared, with respect, to accept the argument that both the words formula and process can be said to be qualified by the word secret had the clause been drafted as under : the use of any patent, invention, model, design, secret formula or process, or trademark or similar property What the Tribunal has pointed out stands fulfilled in article 12.3(a) of the treaty with USA. From the article quoted above, it may be seen that there is a comma after the words secret formula or process which indicates that both the words formula and process are qualified by the word secret . The requirement thus under the treaty is that both the formula and the process, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process involved, for which the payment is being made, should be a secret process. But in the view we have taken on the language employed by article 12.3(a) of the treaty coupled with the punctuation and the setting and surrounding words, the payment would be considered as royalty only if it is made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process assuming it to be so does not amount to royalty. 5.2.14 Similar issue came up before Hon'ble Delhi Tribunal in case of Bharti Airtel Ltd. (supra). The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein, on applying ratios pronounced in the above referred decisions, held it not as 'Royalty'. Therefore in our opinion, the Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of 'Royalty' under section 9(1)(vi) Explanation 5 6. 2.10. Further on perusal of the agreement dated __________ between the assessee and the end users, it is noted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable. 17. The first question is whether the ITAT was correct in holding that DTAA cannot be considered under section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows: 7. ...While deciding the scope of section 195(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the chargeable sum. This is the underlying principle of section 195. Hence, apart from section 9(1), sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment is made to nonresident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income-tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. Assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. 23. The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was conten ..... X X X X Extracts X X X X X X X X Extracts X X X X
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