TMI Blog2015 (6) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical services’ within the scope of section 9(1)(vii). - Decided in favour of assessee. Income earned from Restoration activity - liable for tax in India either as ‘Fees for Technical Services’ (‘FTS’) under section 9(1)(vii) or as business income under section 9(1)(i) - Held that:- From the perusal of the restoration agreement and various clauses, it cannot be inferred that there is any actual rendering of technical services by the assessee. Nothing is suggestive of the fact that under the restoration agreement some kind of technical skill, technical services are being provided, except for the kinds of restorations which can be undertaken and terms thereof for the connectivity and payment. Thus on these facts, we hold that revenue received from restoration activities is not taxable as FTS u/s 9(1)(vii). The assessee has provided the chart of the segments on which the restoration activities have been undertaken by way connection to the cable landing station in the territorial waters in India, which was from Fujirah to Mumbai, Miura to Mumbai and Mumbai to Singapore. The assessee has also filed a statement showing the details of restoration charges over the years giving the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the issues involved, the facts of the cross appeals for the assessment year 2001-02 are taken-up first. In the assessee s appeal, being ITA No. 2255/Mum/2006, following grounds have been raised: Ground No.1: On the facts and circumstances of the case, the learned Commissioner of Income-Tax (Appeals) XXXI [CIT(A)] erred in holding that income from standby maintenance revenues earned by the Appellant under the Construction and Maintenance Agreement (C MA) from VSNL are taxable in India . Ground No. 2: On the facts and circumstances of the case, the learned CIT(A) further erred in treating that the standby maintenance revenues earned by the Appellant are in the nature of fees for technical services under section 9(1)(vii) of the Act . Ground No.3: On the facts and circumstances of the case, without prejudice to Ground no.1, the learned CIT(A) erred in not accepting the Appellant s contention that the revenues chargeable to tax in India, be computed as per Explanation to Section 9(1)(i) of the Act, by applying the proportion of the cable length situated in India vis- -vis the total cable length world-wide . Ground No.4: On the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act? (iii) Whether the assessee is liable to pay interest under section 234B of the Act? (iv) Whether the assessee is liable to pay interest under section 234D of the Act? 4. The brief facts of the case are that the assessee, FLAG Limited is a company incorporated in Bermuda, which was set-up to build high capacity submarine Fiber Optic Telecommunication Link Cable System. It has build under-sea cable for providing telecommunication link between United Kingdom Japan. In India, Videsh Sanchar Nigam Limited (VSNL) was one of the original landing party in the FLAG cable system. For the purpose of selling the capacity in the cable system to various landing parties, including VSNL, Capacity Sales Agreement (CSA) was entered into amongst Landing Parties and FLAG on 31.03.1995, which was further amended on 29th April, 1998, by which, VSNL has bought the capacity in the said cable system. The entire procedure for the ownership of capacity in the cable system and also for providing standby maintenance activities contains in the Construction and Maintenance Agreement (C MA) separately entered between the parties. The CSA C MA was for the period of 25 years, which coincides w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Explanation 2 to Sec. 9(1)(vii) of the I.T. Act. He has followed his finding in AY 1999-00 and 2000-01 and has held similarly. I have examined the facts. There is no difference in the facts during the AY 2001-02 compared to previous assessment years. The appellant company is maintaining fiber optic cable in good condition for use by viz. VSNL other parties. VSNL having purchased capacity has further agreed to pay minimum amount of charges to be paid to the appellant so that the appellant maintains cable system for error free use by VSNL. The fiber optic cable as modern technological system cable is submerged in the seas. The maintenance of the same is highly technical expertise work. The cable having been sold to the VSNL Other parties for the period of 25 years. The appellant is charging standby maintenance charges from VSNL for technical services rendered by it towards maintenance of such cable maintenance. Accordingly, I find no force in the arguments of the appellant and hold that the standby maintenance as fees for Technical Services within the meaning of Explanation (2) to Sec. 9(1)(vii) and agree with my predecessor in this regard. Accordingly, the appeal on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department s consistent plea had been that, such a standby maintenance charges are for rendering of technical services . It has also been admitted that there is no difference in the facts of the earlier years, present year as well as of the subsequent years and accordingly, this has to be decided in light of the findings given in the earlier years. This issue had come up for consideration before the Tribunal, wherein, it was held that standby maintenance charges do not fall within the realm of Technical Services . After considering the entire facts of the cases, the relevant finding of the Tribunal on this issue are as under: 68. The second issue relates to taxability of standby maintenance charges as fees for technical services u/s 9(1)(vii), as raised by the assessee in ground no. 4. As stated earlier, the assessee along with consortium of other parties has built the submarine fiber optic cable providing telecommunication link between UK and Japan. Under the terms of C MA the FLAG cable system is to be jointly operated and maintained in efficient working condition or along with the founding signatory i.e. Flag and the landing party signatories. The operation and maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arrangement for standby cover and maintenance and operation of FNOC. So far as standby maintenance charges is concerned, it is not in respect of any actual rendering of services but to maintain infrastructures for co-ordination and setting up conditions for efficient rendering of services in relation to maintenance and repairs of cable system. There is a separate charge for repair and maintenance under the C MA whereby, the assessee is actually required to undertake repair and maintenance and for which the assessee separately charges. Such a repair and maintenance is separate from standby maintenance cost, which is in the nature of reimbursement of fixed cost. The standby maintenance is a fixed annual charge which is payable not for providing or rendering services but for arranging standby maintenance arrangement which is required for a situation whenever some repair work in the undersea cable or terrestrial cable is actually to be performed or rendered. It is a facility or infrastructure maintained for ready to use or render the technical services or repair services, if required. On these facts we have to examine whether assessee is providing any service to VSNL in respect of st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint which has to be seen is firstly, whether there is any actual rendering of services; secondly, is there any mark up or element of profit in the charge received for standby maintenance; and lastly whether it is in the nature of fixed annual charge which is to be recovered as proportionate cost of maintaining the standby facility ready for carrying out any maintenance or repair services. This charge is different from an annual maintenance contract, whereby repairs and maintenance is covered for a certain period or services. In the present case as evident from the clause 11.1, that so far as standby maintenance charges is concerned, it is in the form of fixed annual charge which is in the nature of reimbursement. It has been also brought on record that only actual cost incurred has been recovered from VSNL in providing the standby maintenance services. There is no profit element or mark up involved. The assessee has also provided the details of receipt and cost involved in providing standby maintenance services to VSNL for A.Ys. 1998-99, 1999-2000 and 2000-01 which are as under:- Particulars Amount in US $ A.Y. 1998-99 A.Y. 1999-00 A.Y. 2000-01 Revenues from standby maintenance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c between and amongst Western Europe, Middle East, South Asia, South East Asia and Far East. The capacity in the said cable system has been sold to various landing parties, which are mostly National Telecommunication Companies belonging to different nations. The unsold capacity rests with the assessee as its stock. This entire issue of sales of capacity and its taxability in India has been dealt in detail by the Tribunal in the appeal of the earlier years. The assessee in this year had entered into an arrangement with certain telecom cable operators to provide restoration of traffic to their customers in the event of disruption in the traffic on their cable system. Under these arrangements, if there is disruption in the traffic on a particular segment of the other cable operator, the assessee provides the alternative telecommunication link route through its own capacity in the cable. In India, VSNL had an arrangement with SEA-ME-WE3, herein referred to as (SMW3), for carrying its telecommunications traffic on segments to and from India and between the segments not connected to India. In case of a disruption in the traffic on a particular segment on SMW-3 Cable, the operator SMW3 ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a disruption in the SEA-MEWE3 cable system, FLAG will provide the connectivity to VSNL, on its own cable system, utilizing its available spare/free capacity. (iv) This is possible as VSNL is already linked with FLAG system, and FLAG is having utilized excess capacity. (v) It is VSNL, who is making the payment to FLAG, and not SEA-ME-WE3, as it is VSNL, which is benefiting from the end-to-end connectivity on spare capacity of FLAG, which it is using to impart facilities to its users. 4.2.5 In effect, what has been termed as restoration activity is basically rendering of technical service by allowing the utilization of spare capacity on its submarine fiber-optic cable system by FLAG. The assessee has claimed that if at all it has to be taxed, then the revenue attributable to India should be derived by using the ratio Length of cable in India , and applying this Total Length of cable Worldwide Method, it has submitted that the revenues attributable to India would be USD 943.7 out of USD 441854, as paid by VSNL. The above method begs for the question as to why, at all, VSNL has to FLAG the amount of USD 441854, if only USD 943.7 could be attributed to it. The fact r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied by another. In the present case, the assessee is not providing any services to manage the affairs of VSNL. The consultancy services imply providing of advisory services, which here in this case no such service is being provided to VSNL, while arranging for restoration activities. Regarding technical services, he submitted that the assessee is merely providing a standard facility of carrying telecommunications traffic to other capacity provider, such as SMW3 on temporary basis in the event of disruption in its traffic. When a restoration calling party i.e. VSNL decides to avail of the connectivity from the assessee, there is neither transfer of technology nor rendering of any technical services. Customers like VSNL only receive end-toend connectivity to enable it to carry on its normal transmission business activity. Simply using highly sophisticated technical equipment or cable for providing capacity to the customer does not make it a provision for a technical service to the customer. In support of his contention, he strongly relied upon a decision of Madras High Court in the case of Sky-Cell Communications Ltd vs DCIT, reported in 254 ITR 53 and ITAT Bangalore Bench decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... axable as business income in India u/s 9(1)(i), then attribution of income has to be made in terms of Explanation 1(a) to section 9(1)(i), which provides that in case of the operation of entity are not carried out in India, then only such part of income as is reasonably attributable to the operations carried out in India shall be taxable in India. Here, in this case the only activity carried out by the assessee in India if at all can be attributed, is that, it has small portion of cable system laid in the territorial waters of India. In such a situation, the most appropriate basis for identifying the income, which can be reasonably attributed to India, would be on the basis of a fraction of a length of the entire cable system, which falls within territorial waters of India, which is only 12 nautical miles. Hence, only 12 nautical miles cable system ought to be considered in India. He submitted that, during the relevant years under consideration, there were three segments in which restoration activities were undertaken, that were connected to the cable landing station in the territorial water in India i.e. Fujairah to Mumbai, Miura to Mumbai and Mumbai to Singapore. He also filed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MW3 cable network and cable system of the FLAG. He submitted that VSNL who is already a customer of the assessee is using cable system of the FLAG as well as also the cable of SMW3 for transmission telecommunication data. The agreement has been entered into between FLAG and SMW3 to allow the VSNL to use the system of FLAG in the case of disruption in SMW3 cable, so as to ensure un-interrupted transmission of telecommunication data. He submitted that, if VSNL bought the capacity in the submarine cable system of the FLAG and is also a co-owner, how can then VSNL make payment to the assessee towards use of the capacity on the cable system owned by it. After referring to the various clauses of the restoration agreement, he submitted that services provided by the assessee to the VSNL are purely technical services. He further reiterated that the assessee retains the coownership of the system till Mumbai and is also the owner of the equipment in the cable landing station for monitoring the submarine cable system. This cable landing station provides point of power to the submarine cable system and receiving and processing of signals for communication to the domestic network system of VSN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive route for transmission of data using its spare capacity available with it in its cable system. 21. Now, whether such an activity of providing restoration services is in the nature of technical services within the ambit of section 9(1)(vii) or not. Section 9(1)(vii) r.w. Explanation (2) provides that the payment made in consideration for the rendering of managerial, technical or consultancy services falls within the category of fees for technical services which is taxable in India u/s 9(1)(vii). In this case, such a restoration activity does not fall within the nature of managerial or consultancy services , because there was no rendering or managing by direction, regulation, administration or supervision of activities by the FLAG to the VSNL. Neither it is providing any advisory services for arranging of restoration activities to the VSNL. The assessee already has a cable system network in which it has spare capacity, which is being provided to the VSNL on behalf of SMW3 in case of disruption in SMW3 cable network. It is a kind of providing a standard facility for carrying telecommunication traffic to other telecommunication/capacity provider. When a restoration calling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of Sky Sales Communications Ltd (supra). Thus, in our opinion such a standard facility for transmission of data and telecommunication traffic by cable operators cannot be termed as rendering of technical services. Accordingly, finding of the ld.CIT(A) that it is not fee for technical services is upheld. The other arguments of Shri Dave that landing station belongs to the assessee is not acceptable as this aspect of the matter has already been dealt in detail in our earlier years order. 22. Further, from the perusal of the restoration agreement and various clauses, it cannot be inferred that there is any actual rendering of technical services by the assessee. Nothing is suggestive of the fact that under the restoration agreement some kind of technical skill, technical services are being provided, except for the kinds of restorations which can be undertaken and terms thereof for the connectivity and payment. Thus on these facts, we hold that revenue received from restoration activities is not taxable as FTS u/s 9(1)(vii). 23. Now coming to the issue, whether providing of such restoration services is in the nature of business income or not. The assessee s ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income from such operations has to be done. In such a situation, Explanation 1A to section 9(1)(i) provides that, in case of a business of which all operations are not carried out in India, then the income of the business shall be deemed to accrue or arise in India only such part of the income, which can be reasonably attributable to the operations carried out in India. In other words, attribution of such income has to be made in accordance with Explanation 1A. The Ld. CIT(A) though held that it is a business income of the assessee to which we fully endorse, however has allocated the income in India by estimating 10% of the global income from restoration activities. Such an apportionment by the CIT(A) cannot be held to be tenable at all, firstly, the Ld. CIT(A) himself has stated that the working of the loss given by the assessee to show that it has incurred huge loss at global level, cannot be corroborated because there is no availability of certified global statement; and secondly, the global income cannot be the basis for attributing the income in India, when only small portion of cable passes through territorial waters of India and the majority length of the cable is situate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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