TMI Blog2014 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... there. The source of income will be from the payer - Payer is the person from whom income is received and earned - income originates from the payer and such payer becomes the source of income - the payer is in India and payment undoubtedly is made to NTOs who have received payments abroad for and towards provision of EIG capacity and IUC from the payer in India - payments become income' of the NTO arising in India which reaches the hands of the NTO - the term ‘Accrue' or ‘arise' have to be understood in the context in which it is used - payments made to NTOs is payment Accruing' or Arising' in India – assessee has made payments towards services availed by it even though there may be no territorial nexus between the facilities and infrastructure available in the hands of India - Assessee has not been able to make out prima facie case to opine that assessment of tax liability as determined by the assessing officer vide Annexure-A is wholly untenable or illegal - payments made by the assessee qualify as having been paid by the ‘payer' and the payment made to NTOs/Belgacom is the amount ‘received' and fall within the definition of income' under Section 5(2) of the Act. It must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident Telecom Operators (NTOs, for short), for providing bandwidth and interconnect capacity outside India and those foreign companies are knit with the petitioner under Double Taxation Avoidance Agreement (DTAA, for short). (b) The genesis of this writ petition is the opinion of the tax assessing officer that the petitioner has made payments to foreign companies for providing bandwidth and interconnect capacity outside India. Such payments made by the petitioner to foreign companies for providing bandwidth and interconnect capacity is liable to tax in India in the hands of foreign companies, attracting Section 9(1)(vi) and (vii) of the Income Tax Act, 1961, (hereinafter referred to as the Act, for brevity), bringing such payments within the mischief of the definition of Royalty' and 'Fees for Technical Services,' consequently treating the petitioner as an assessee in default', invoking Section 201(1) and to impose penalty and interest under Section 201(1A) of the Act, attracting Section 195 of the Act, ultimately resulting in passing of the assessment order vide Annexure-A date 28.1.2013 and consequent demand notice vide Annexure-B of the same date. 3.1 Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Limited, South Africa (d) KPN Global Carrier Services B.V., Netherlands (e) France Telecom SA, Paris - France (f) Telenor Global Services AS, Fomebu - Norway (g) VSNL Telecommunications (UK) Limited, London - UK (h) Saudhi Telecom Company, Riyadh- Saudhi Arabia (i) MCI International, Inc., Virginia, U.S.A. (j) Callforeigh Inc Pte Ltd., Singapore. Petitioner's contention is, apart from the above said agreements for providing inter-connectivity services, it has also entered into a capacity transfer agreement with Belgacom International Carrier Services SA, CBelgacom,' a tax resident of Belgium for acquisition of capacity over on the Europe-India Gateway (EIG) cable system for a price. EIG cable system is a high bandwidth optical fiber under undersea cable system installed between United Kingdom and India by certain parties including Omantel (parties collectively referred to as Consortium) by required investments, each of the consortium members are allotted certain capacity on the EIG cable system on ownership basis which entitled the respective members to transfer their telecommunication traffic on the EIG cable system upto the allocated capacity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interconnectivity services and capacity transfer agreements made by the petitioner. Petitioner was directed to explain why it should not be treated as an assessee in default for failing to deduct tax from the income' under Section 5(2) of the Act and why proceedings should not be initiated under Section 201(1) and 202(1A) of the Act. 11. Petitioner claims to have filed detailed reply/submission before the assessing officer which found no favour. Petitioner's core contention before the assessing officer was and is, payments made by the petitioner to NTOs in question are not chargeable for tax in India and there was no liability on the petitioner to deduct tax at source under Section 195 of the Act.' The assessing officer, viz., Deputy Director of Income Tax (International Taxation Circle-I) taking into consideration the submission/reply o the petitioner, by a common order dated 28.1.2013, held petitioner was an assessee in default and has, by the impugned order, directed petitioner to pay the aggregate tax and interest to the extent of Rs.2,57,57,53,136/- for the financial years 2007-08 to 02011-12 relevant to the assessment years 2008-09 to 2012-13. 12. Learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, during the pendency of the appeal, petitioner had applied to the authority seeking stay which application also was rejected by order dated 25.2.2013. Thus having no alternate remedy, petitioner had approached this court against the order of rejection of the said application in W.Ps.11494-98/13 and this court had granted interim protection by order dated 7.3.2013 staying the operation of the impugned assessment order as also demand notice and that order was continued for a further period upto 25.3.2013. 15. He submits, the petitioner enjoyed the benefit of stay during the pendency of its first appeal before the Commissioner of Income Tax (Appeals) till the appeal was dismissed on 25.3.2013. He submits, in view of dismissal of the first appeal, the writ petitions referred to above were also disposed of by this court by the following order: Learned counsel for the parties submit that the Appellate Authority has since passed an order. According to the learned counsel for petitioner, the petitioner intends to carry the said order in an appeal to the Tribunal along with an application for stay and that the interim order earlier granted be continued for two weeks o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the definition of income' as appearing in Section 5(2) of the Act submits that the petitioner is not a ^payer' in India and the amount paid by it in India to NTOs/Belgacom is not income.' He submits that the petitioner has raised legally tenable grounds against such orders of the tax assessing officer and the first appellate authority-Commissioner of Income Tax (Appeals) before the Tribunal. The Tribunal, instead of considering the grounds urged with reference to the relevant provisions of the Income Tax Act, has unjustifiably held the petitioner had made out no prima facie case to stay in entirety the impugned orders at Annexures-A and B. 19. Reiterating his submission that the payments made by the petitioner to NTOs/Belgacom did not qualify as Royalty' attracting Section 9(1)(iv) or (vi) of the Act or any of the provisions thereof, he submits it is settled proposition of law that whenever there is a treaty between the tax assessee in India and NTO based on foreign policy of the Central Government, agreements are entered into to prevent double taxation, and they are styled as DTAAs (Double Taxation Avoidance Agreements). Thus tax liability of the NTO has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el, 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; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience of skill. On the above grounds, he seeks to question the impugned order dated 6.3.2014 at Annexure-G passed by the Tribunal granting limited stay to the extent of 50% and the direction to deposit rupees hundred crores on or before 21.3.2014. 23. In negation of these grounds urged on behalf of the petitioner, Mr. K.V.Aravind, learned counsel for the Revenue would submit, the assessing officer noticing payments made by the petitioner to Belgacom and other NTOs amount to income,' issued show-cause notice and due opportunity was given to the petitioner assessee. The assessing officer has also examined the technical expert in order to appreciate the nature of services utilized by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian payer to NTO is Royalty' for services rendered by the NTO.' He submits the dictum in the said decision answers all questions raised by the petitioner and therefore the Tribunal should have declined stay in entirety. According to him, these grounds may be taken as grounds against the relief sought in the writ petition filed by the petitioner, and in support of the writ petition filed by the Revenue should be allowed, modifying the impugned order at Annexure-G dated 6.3.2014 to direct the petitioner to deposit the entire tax liability as determined by Annexure-A along with penalty imposed totaling Rs.257 crores. 29. As the Revenue/Income Tax Department has urged similar grounds against the relief sought in the writ petition filed by the assessee and to support the grounds urged in W.P.13210-13214/14, the writ petitions are heard together. 30. All contentions urged by both sides have received my serious consideration. 31. I have already referred to in the preamble of this order that there is no dispute on facts. Admittedly petitioner during the course of business of providing telecom services to its subscribers, has entered into DTAAs with the NTOs as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 which defines the scope of total income of a person under the Act. Section 5(2) defines the scope of total income of a non-resident as under: Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Sub-section (2) in its terminology reveals it covers income of non-residents from whatever source derived which is 'received' in India or accrues in India or arises in India. When such fact is proved, it is deemed to have been 'received' in India, or deemed to have Accrued' in India and deemed to have Arisen' in India. There is no dispute that the petitioner has made payments to NTOs as consideration towards utilizing EIG/IUC to complete ILD interconnect services to its subscribers. 35. The source of payment is in India. Of course for services rendered by the NTOs abroad, and towards such services utilized, petitioner has made payments. Section 5(2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payer in India. Consequently income' has Accrued and arisen' in India. It is distinct from Yeceived.' Receiving is the right for services rendered which, in this case, is utilized by the petitioner. 39. It is noticed that the tax assessing officer has kept in mind the legal propositions on this aspect and has dealt in detail the issues with reference to several case laws which I do not find need to elaborately refer to in this order. It is quite evident from the facts not in dispute that petitioner has made payments for the services utilized. 40. With reference to Section 9(1)0) and Explanations 5 and 6 inserted therein by Finance Act of 2012, it is noticed, Section 9 would apply where the income actually accrues or is received in India. A plain reading of Section 9(1)(vi) would show payments made by the assessee to NTO for provision of bandwidth and interconnect usage falls within the definition of Royalty.' Explanation 2 reads thus: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 6 have been inserted to Section 9(1)(vi) of the Act, petitioner has not questioned the validity or legality of the said amendment in this writ action nor in any other proceedings the legality of this amendment is questioned. It was open to the petitioner to question the vires of these provisions which, on its own volition, is not done. In the resultant position, the provision as referred to above glares at us and the assessing officer is bound to apply it in determining the taxability of the payments made by the petitioner to the NTOs. 43. The third lap of the argument of Mr. Abhishek Singhvi is, no law permits retrospective amendments. As Explanation 5 makes the definition of process' applicable retrospectively, he described it as legally untenable. May be it is a good ground for the petitioner, but unless the legality of these provisions is questioned and adjudged by the court, the provision remains in the book of statute and has to be applied to understand the meaning of Royalty' with which Section 9 deals. 44. At this juncture, I am also compelled to refer to the fourth submission of Mr. Singhvi with regard to Section 90(2) of the Act. Learned counsel would subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Unilateral cancellation of tax treaty through an amendment to the internal law subsequent to conclusion of the treaty is a recognized sovereign power. It after the agreement has come into force, an Act of Parliament is passed which contains contrary provision, the scope and effect of the legislation cannot be curtailed by the reference to the agreement. The agreement is entered into pursuant to the power conferred upon the Government by section 90. Subsequent legislation cannot be controlled by the agreement. 46. In view of this, a detailed discussion is required as to whether Section 90(2) of the Act is of such nature as to nullify all acts of Parliament which create tax liability under the Act, may be not in terms of the rights determined under the DTAA. However, petitioner has not raised that issue for adjudication in these writ petitions. Therefore I do not wish to dwell more on this aspect which would have been possible had the petitioner questioned the legality of the Finance Act, 2012, inserting Explanations 5 and 6 to Section 9(1)(vi) of the Act. 47. I need to emphasize that the above discussion with regard to what is income' as defined under Section 5(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is empowered to make laws for the whole or any part of the territory of India referring to the word was a preposition would suggest that the Parliament is empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India and such laws which are bereft of any benefit of India. This proposition can well be used by the petitioner if it questions the constitutional validity of Finance Act, 2012 whereby the Explanation 5 and 6 inserted to Section 9(1)(vi) of the Income Tax Act. It has not done so. (b) He also relied on the decision in the case of Jagran Prakashan Ltd., v Deputy Commissioner of Income-Tax (TDS) in [2012] 345 ITR 288, where the Bench of Andhra Pradesh held Commission or brokerage paid by an assessee must have been received as an agent of principal and for services rendered. It has distinguished trade discount from the word payment'. In the said decision, while considering the allegation of failure to deduct tax at source, the Bench held when the payer deemed to be in default fails to pay tax directly, tax cannot be recovered from the payer. The liability of payer is only for the interest and penalty. Sri Sanghvi, learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tay would cause irreparable injury to the petitioner or his legal rights. He submits that the petitioner has filed to make out a prima facie case against the impugned order of assessment Annexure-A and demand notice Annexure 'B'. 53. I have already observed in the paragraphs supra that the petitioner has not called in question the legality of the order of assessment Annexure TV or demand notice Annexure 'B' in these writ petitions. The petitioner has also not questioned the validity of Finance Act, 2012 or the amendment to Section 9(1)(vi) whereby, explanations 5 and 6 have been inserted. The petitioner's main grievance and the relief sought is against the limited stay granted by the Income Tax Appellate Tribunal vide Annexure 'G'. Therefore, I restrain myself from making any observation with regard to the grounds urged by the petitioner's counsel in these writ petitions against Annexures TV and 'B', lest, it may be used as expression of opinion on merit. Be that as it may. We are required to consider the sustainability of Annexure 'G' dated 6.3.2014 by which the Income Tax Appellate Tribunal has, while staying the operation of Ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned about the balance of convenience, the public interest and a host of other relevant considerations is unwarranted. 58. In the case of Municipal Corporation of Delhi v. C.L. Batra in [1994] 121 CTR (SC) 92, it was observed interim orders like stay should not be granted in revenue matters merely because a prima facie case had been shown. Further, grant of an interlocutory order like stay of recovery of demand in the case of a municipality would paralyse the administration and dislocate the entire working. 59. In the case of ITA 31/2013, the Division Bench of this Court dealing with similar applications for grant of stay of the recovery proceedings of the tax assessing authority observed that 50% of the tax liability determined could be stayed while directing the assessee to deposit 50% of the amount. 60. In the case of Vish Technical Unviersity v. Assistant Commissioner of Income Tax, this Court granted staying only 50% of the tax liability determined under the assessment orders. 61. In fact, the decision in the case of Assistant Collector of Central Excise v. Dunlop India Limited [1985] 154 ITR 172 (SC), there are guidelines to be followed in deciding the applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
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