TMI Blog2023 (11) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Royalty under section 9(1)(vi), Explanation 2,5 and 6. As per the decision of case of Vodafone Idea Ltd.[ 2023 (7) TMI 1164 - KARNATAKA HIGH COURT] we hold that the receipts in the hands of the assessee could be taxed as business profits as per the applicable laws of Hong Kong and cannot be brought to tax either as FTS or Royalty under the Income Tax Act in India. Decided in favour of assessee. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Appellant : Shri Piyush Chawla, CA For the Respondent : Shri P V Pradeep Kumar, CIT ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal arises out of the final assessment order dated 08.07.2022 passed by the Ld.ACIT (International Taxation), Circle 2(2), Bangalore for A.Y. 2012-13 on following grounds of appeal: 2. Brief facts of the case are as under: 2.1 Assessee is a non-resident telecommunication operator headquartered in Hong Kong. It had received a payment of Rs.3,24,63,493/- from M/s. Vodafone South Ltd., an Indian entity during the previous year 2011-12 relevant to Assessment Year 2012-13. On examination of the records, the Ld.AO was of the opinion that the assessee s income was chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has observed that a non-resident telecom operator cannot be held to be taxable as right and process appearing in the clarificatory Explanation 2,5 and 6 of section 9(1)(vi) of the act. He also referred to the decision of Coordinate Bench of this Tribunal in case of M/s. Telefonica Depreciation Espana S.A, vs. DCIT in IT(IT)A Nos. 215 216/Bang/2023 by order dated 17.08.2023 wherein this Tribunal observed and held as under: 10. We have heard the rival submission and perused the material on record. At the outset, we notice that Assessment Year 2010-11 has been considered by the AO as the base year and has been followed in the subsequent Assessment Years. The Tribunal in ITA Nos. 2657/Bang/2019, 180/Bang/2021 and 817/Bang/2022 for Assessment Years 2010-11 to 2012-13 has decided the issue in favour of the assessee vide order dated 10 August 2023. The Tribunal has passed a detailed order after considering several judicial precedents including the Hon ble Karnataka High Court judgments in the case of Vodafone in ITA No. 161/2015 and Vodafone South Ltd. (2016) 72 taxmann.com 347 which have held that interconnectivity charges are not taxable as royalty and FTS respectively. The relevant p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;' 5.2.1 The term process used under Explanation 2 to section 9(1)(vi) in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty . 5.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orted 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 decision of Authority For Advance Ruling, in case of Cable Wireless Networks India(P.)Ltd., In re(supra), a similar issue was considered wherein Cable Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable Wireless Group of companies. Cable Wireless Networks India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable Wireless Networ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of applicant that, it has neither possession nor control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words transfer of right to use the goods in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Trucking Inc. v. Metropolitan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words equipment suggests that there must be some positive act of utilization, application or employment of equip-ment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. 13. It is the contention of the revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; 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 does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iva) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the so-called equipment, solely rests with BTA or its agent being the domestic service provider. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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) very properly use, in connection with such formulae, etc., the criterion right to use , which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the right to use already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret. We note that, in case of DCIT v. PanAmSat International Systems Inc., reported in (2006) 9 SOT 100 , Hon ble Delhi High Court distinguished the decision of Asia Satellite Telecommunication Co. Ltd. v. Dy. CITT reported in (2003) 85 ITD 478 and held as under: 19. The question that first comes up for consideration is whether section 9(1)(vi) of the Income-tax Act, read with the Explanation 2 below thereto, is applicable. This also involves the subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 remembered that India had no DTAA with Hongkong and hence the view taken by the Tribunal (supra) with regard to the clause (iii) of Explanation 2 below section 9(1)(vi) would apply if we were to also interpret the same provision. But article 12.3(a) is worded as below : The term royalties as used in this article means : (a)payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and In Asia Satellite Telecommunication Co. Ltd. s case (supra) the Tribunal pointed out, while repelling the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us to a consideration of the question whether the process carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to be no secret technology , known only to a few. There is evidence adduced before us to show that the technology is even available in the form of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. This aspect of the matter was not required to be considered by the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) because the view taken by the Tribunal was that there was no requirement in clause (iii) of Explanation 2 below section 9(1)(vi) of the Act that 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
