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TMI Blog2014 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... ay. 2. On issuance of notice regarding Rule, Mr .K.V. Arvind has entered appearance for the Revenue. 3. I have heard persuasive arguments of Mr. Abhishek Manu Singhvi, learned advocate for the petitioner and also Mr. K.V. Aravind, standing counsel for the Revenue-Income Tax Department and perused records in supplementation thereto from which the following factual matrix manifests and is relevant for consideration: (a) Petitioner claims to be a company of repute engaged in the business of providing telecom services to its subscribers in India and has entered into agreements with Non-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, attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is used exclusively by NTOs themselves to which the petitioner company has no access. The NTOs provide services only outside India and hence the services are rendered not only outside India but also consumed/utilized outside India, thereby spelling out there is no territorial nexus insofar as India is concerned. 6. Petitioner claims it has entered into agreements with NTOs, viz., (a) Emirates Integrated Telecommunications Company PJSC, Dubai - United Arab Emirates (b) Emirates Telecommunications Corporation, Abu Dhabi - United Arab Emirates (c) Telkom South Africa 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 acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and describing the payments made by the petitioner company to Belgacom are by way of purchase of rights to use EIG cable system. It denied such payments are 'income' coming within the taxability/income under the Income Tax Act. Thus the contention of the petitioner is, the provision of Section 201 of the Act was not attracted but the 2nd respondent has invoked the provision to issue notices on 26.6.2011, 7.12.2012 and 17.12.2012 requiring the petitioner to show-cause why taxes were not withheld from the amount paid to NTOs for providing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred by limitation since the proceedings under Section 201 of the Act for the subject financial years were initiated and completed beyond a reasonable period of time. 14. Mr. Abhishek Singhvi would submit, raising the above referred grounds as also several other legal propositions against the impugned order of the tax assessing officer, petitioner preferred an appeal before the Commissioner of Income Tax (Appeals) who, without considering the merit of the contentions, dismissed the appeal by order dated 25.3.2013. He would submit, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was not made out by the petitioner to stay in entirety the assessment order and demand notice. 17. He would submit, the tax assessing officer as also the first appellate authority-Commissioner of Income Tax had failed to notice or appreciate the legal propositions urged by the petitioner necessitating the petitioner to file two appeals wherein the question of jurisdiction of the tax assessing officer is raised to invoke the provisions of Section 201(1) and 201(1A) of the Act to describe the petitioner as an assessee in default. 18. Learned counsel drawing my attention to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to consider the retrospective amendments made to the Income Tax Act would not be applicable to DTAAs. He submits, the term Royalty' has been defined in Explanation 2 of Section 9(1)(vi) which 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 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; (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 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the Tribunal has stayed 50% recovery of tax liability determined by the assessing officer. He submits the Revenue has filed W.Ps.13564-13568/14 against the impugned order-Annexure-G as it has deprived of the State revenue which it has to recover by way of tax from the petitioner. 28. Learned counsel relies on the decision of the Madras High Court in the case of Verizon Communications Singapore Pvt. Ltd., v. Income Tax Officer (2013) 39 Taxmann.Com 70 (Madras) wherein the Bench of the Madras High Court held as follows: Payments made by 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 Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 9(1)0) of the Act also. Consequently even that provision is not applicable. It is the further case of the petitioner that since the amount paid by the petitioner to NTOs is not taxable under Section 9(1)(i) of the Act, it is not open to tax the income under Section 5 of the Act. 34. The answer to these propositions is in the admitted facts and the provisions referred to above. It is not in dispute India follows source-based taxation system for non-residents. This is implemented in the Act through Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is payment Accruing' or Arising' in India. Petitioner has made such 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. 38. What we are concerned is the services rendered by the NTOs and payments made. Under the agreements between the petitioner and NTOs/Belgacom, it is noticed the terms spell out NTO has the right to receive income. The right to receive income' is relatable to services rendered by it abroad for the benefit of the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... always included consideration in respect of any right, property or information. As Explanations 5 and 6 are in the book of statute, unless it is declared to be ultra vires or its legality is tested, for all intent and purposes, these Explanations are required to be applied by the assessing officer in determination of tax liability under the Act. 42. At this juncture, it is material to note though learned counsel, Sri Abhishek Singhvi has commented much on the legality of the Finance Act of 2012 by which Explanations 5 and 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are more beneficial to that assessee. Thus it is clear that the terms of DTAA will prevail over the provisions of the Act if it is shown that the provisions of the amendment are not beneficial to the NTO. No doubt Section 90(2) caters to such contingency, but first of all, the question is whether DTAA caters to all situations and all issues that are covered by the Income Tax Act or amendments made by the Parliament. The Sovereign power of the Parliament extends not only to the making but also breaking a treaty. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acie case to substantiate that payments made by petitioner to NTO do not qualify as Income' or Royalty', he gained citational support from the following decisions" (a) GVK Industries Ltd., & another v. Income Tax Officer & another reported in [2011]239 CTR (SC) 113 wherein the Apex Court considering the legislative power of the Parliament to enact the legislation with respect to extra - territorial aspects or cases referred to Clause (1) of Article 245 of the Constitution, held: Parliament 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 An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain decisions to oppose grant of stay as sought for by the petitioner. 52. He would submit when tax liability is assessed by the statutory authority in exercise of statutory duty, the Court would be inclined to hold that such an order is sustainable unless it is interfered with any judicial pronouncement. He would submit grant of stay is not a Rule but is an exception. Therefore, the petitioner must make out a strong prima facie case and also substantiate that non grant of interim stay 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest. In cases where denial of interim relief may lead to public mischief, grave irreparable private injury or shake a citizen's faith in the impartiality of public administration, a Court may well be justified in granting interim relief against public authority." 57. It must be observed that granting interim orders which practically give the principal relief sought in the petition for no better reason than that a prima facie case has been made out, without being concerned 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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