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M/s Flag Telecom Group Limited (Erstwhile FLAG Limited) (FLAG) , Versus Dy. Director of Income Tax

2015 (6) TMI 806 - ITAT MUMBAI

Standby maintenance revenues earned under the Construction and Maintenance Agreement (C&MA) from VSNL - whether taxable in India as ‘Fees for Technical Services’ (‘FTS’) under section 9(1)(vii) - Held that:- It is not in dispute that the standby charges is a fixed annual charge, which is payable not for providing or rendering services albeit for arranging standby maintenance arrangement, which is required for a situation whenever some repair work in under-sea cable or terrestrial cable is actual .....

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andby maintenance charges is not chargeable as ‘fees for technical 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 service .....

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ertaken 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 details of segments on which the restoration has been provided; length of the segment, length of the cable in territorial waters of India and apportionment of revenue to India. In principle, we uphold the method of attributio .....

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Liability to pay interest under section 234B - Held that:- As admitted by both the parties, this issue is similar to the issue involved in the appeal for assessment year 1998-99, 1999- 2000 & 2000-01, wherein, the Tribunal after following the decision of DIT vs NGC Network Asia LLc reported in [2009 (1) TMI 174 - BOMBAY HIGH COURT] held that there was no liability to pay interest u/s 234B. - Decided in favour of assessee.

Liability to pay interest under section 234D - Held .....

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Jehangir Mistri For The Respondent : Shri Girish Dave, Spl. Counsel ORDER PER BENCH: Aforesaid Cross appeals have been filed by the assessee as well as by the revenue against separate impugned orders passed by CIT(A), Mumbai for the quantum of assessment passed u/s 143(3) for the assessment years 2001-02 to 2008-09, as per details mentioned above in the title of the case. Since common issues are involved in all the appeals arising out of identical set of the facts therefore, all these appeals w .....

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ome 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 .....

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the facts and circumstances of the case, without prejudice to Ground no.4, the learned CIT(A) erred in holding that 10% of receipts (i.e. 10% of USD 441,854) from Restoration revenues earned by the Appellant under the Restoration Agreement are taxable in India as business Income . Ground No.6: On the facts and circumstances of the case, without prejudice to Ground no.4 & Ground no. 5, the learned CIT(A) erred in accepting the Appellant s contention that the revenues earned by the appellant, .....

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nd circumstances of the case and in law, the ld. CIT(A) erred in holding that the payment received by the assessee from provision of restoration activity is not taxable as fees for technical services but is taxable as business income . 2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in holding that the payment received by the assessee from provision of restoration activity is taxable as business income is estimated at 10% of the restoration activity receipts withou .....

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income earned from Restoration activity is liable for tax in India either as Fees for Technical Services ( FTS ) under section 9(1)(vii) of the Act or as business income under section 9(1)(i) of the 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 bui .....

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rther 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 with the life of the cable. Under the terms of C&MA, the FLAG cable system is to be jointly op .....

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ld that, there is no material change in the facts of the case, as compared to the facts for AY 1998-99, wherein, it was held that receipts from standby maintenance services/charges are in the nature of fees for technical services within the meaning of section 9(1)(vii) and hence it is to be taxed accordingly in India. The relevant observation of the AO is as under: It is seen, that in the year under consideration, there is no material change in the facts of the case, as compared to the facts obt .....

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rving and holding as under: The issue is whether the standby maintenance charges paid for the maintenance of the fiber optic cable is a business receipt or it is Fees for Technical Services . The issue has been examined by the AO in AY 1998-99, 99-00 & 00- 01. The AO has consistently held in all these years that standby maintenance charges are fees for technical services within the meaning of Sec. 9(1)(vii) of the I.T. Act and therefore taxable in India. My predecessor had decided appeal for .....

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001-02 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 ca .....

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t is dismissed and finding of the AO is upheld . 7. Before us, Ld. Sr. Counsel, Shri J D Mistri submitted that exactly similar issue was involved in the assessment years 1998-99 to 2000-01 wherein, the matter has reached upto the stage of the Tribunal and Tribunal vide its order dated 06.02.2015 had decided this issue in favour of the assessee by holding that the provision of standby maintenance charges cannot be taxed as fee for Technical Services within the definition and meaning of section 9( .....

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ts finding have observed that if the payment is received on account of actual repairs and maintenance, then same would fall within the ambit of FTS chargeable to tax u/s 9(1)(vii). Secondly, it needs to be examined, whether the assessee has charged any mark-up, over and above the cost for providing standby maintenance activities. He further submitted that the revenue from these activities cannot be said to be annual charges since the amount of income from these activities are varying across vari .....

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ary from time to time depending upon the infrastructure at a given time. All these issues have been discussed in detail in the earlier years; therefore, the Tribunal order should be followed. 10. We have heard rival contentions and also the finding given in the impugned orders. Both the AO as well as CIT(A) have held that this issue had been examined in the earlier years and Department s consistent plea had been that, such a standby maintenance charges are for rendering of technical services . I .....

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e 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 signator .....

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ployment of the vessels for repairs and maintenance operation in accordance with the procedure defined. Para 11 along with various sub clauses provides the responsibility for operation and maintenance cost. Clause 11.11 gives the details of activities, expenses and cost incurred. The relevant clause reads as under:- 11.1 The cost of standby maintenance of Segments S. X-1 and X-2, including, but not limited to, the maintenance of Segments S X-1 and X-2, the FNOC, the procurement of cable ship ser .....

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ost of running charges, which shall be limited to recovery the direct incremental costs incurred in connection with a repair operation involving Segment S or Segment X-1 or Segment X-2, including, but not limited to, the cost of fuel, at sea insurance, additional crew at sea, crew overtime, victual ling, telecommunications, mobilization and demobilization expenses, consumables, replenished equipment, and remotely operated vehicles, the extent not included in the wet maintenance agreement standby .....

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ver 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 s .....

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dy 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 standby maintenance. 70. Explanation 2 to section 9(1)(vii) defines fees for technical services in the following manner:- Explanation (2)- For the purpose of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy se .....

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y . Another very important phrase preceding the word managerial, technical and consultancy services is, rendering . The word rendering qualifies the other terms used for the FTS. The word rendering connotes to provide or deliver or to do something . Thus, rendering services mean some kind of actual services is being provided or delivered which are in the nature of managerial technical or consultancy. The word managerial has to be understood in the context of running and managing the business of .....

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nical field or by the person who has skill, knowledge expertise in the area of technical or science. Here-in-this case if the assessee is providing some kind of repair services in the cable system, then it can be termed as technical services, however, if there is no actual rendering of services, but mere collection of annual charge to recover the cost of standby facility, agreed by all the members of the consortium on proportionate cost basis, then it cannot be held that it is providing any kind .....

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, 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 deta .....

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s account. 71. Thus, on the facts and circumstances of the case as well as looking to the nature of standby maintenance cost, we hold that the receipts from standby maintenance charges from VSNL cannot be taxed as FTS, within the definition and meaning of section 9(1)(vii) as there is no rendering of services. However, whenever payment is received on account of actual repair or maintenance carried out, then same would definitely fall within the ambit of FTS chargeable to tax u/s 9(1)(vii). Accor .....

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dering the technical services or for repairing services, if required. There is no actual rendering of the services qua the standby maintenance charges. Here, it is not the case of AO or CIT(A) that standby maintenance charges is on account of actual repair or maintenance carried out by the assessee. Hence, following the earlier years precedence, we hold that the receipt on account of standby maintenance charges is not chargeable as fees for technical services within the scope of section 9(1)(vii .....

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s qua the issue involved are that, the assessee has built a submarine Fiber Optic Telecommunication Cable to Link Telecom traffic 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 taxabili .....

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n 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 approaches the assessee for restoration of the traffic on a particular segment through its cable. For this purpose, the assessee, had entered into a Restoration Agreement wit .....

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able system. In other words, if SMW3 is providing telecommunication link through its cable between X place to Y place to VSNL and if there is any disruption on this segment, then SMW3 approaches the assessee, who is also having spare capacity in the cable between place X and place Y, to allow VSNL to link its telecommunication traffic with the cable of assessee for the temporary period of restoration. During the year, the assessee has received a sum of US $ 4,41,854 from the provision of Restora .....

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y allowing the utilization of spare capacity of its submarine cable Optic fiber system by the assessee. The relevant facts, noted by the AO and his conclusion for taxing the said receipt u/s 9(1)(vii) is as under: Thus, the following facts can be ascertained in this regard: (i) FLAG has entered into a Capacity Sales Agreement with VSNL, the nodal telecommunications service provider in India. The capacity is borne by its sophisticated optical fiber cable system. (ii) Similarly, SEA-ME-WE3, anothe .....

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, 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 .....

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rred FLAG is simply allowing VSNL to utilize the technical facility as available with it, in the form of the sophisticated cable system. The same is taxable u/s 9(1)(vii) of the I.T. Act, 1961. 4.2.6 Accordingly, it is held that the receipts of the assessee on account of restoration services of US $ 441,854 are held to be in the nature of fees for technical, and are taxed @ 20%. It is seen from clause D.6 of the agreement, that FLAG is receiving the payments free of all taxes. Thus, the amount o .....

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its cable does also does not mean rendering of any technical services to the customer. Accordingly, he held that such payment is to be assessed as business income and is taxable in India u/s 9(1)(i). 15. Thereafter, the Ld. CIT(A) held that the computation of income in respect of receipts from restoration facility should be computed on the basis of global profit & loss account of the assessee would wide. After detail discussion, he estimated the Indian income from restoration activity at 10% .....

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services. Here, in this case, the provision for restoration activity is certainly not in the nature of managerial or consultancy services. Because the managerial services are services in the nature of managing by direction, regulation, administration or supervision of activities verified 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 .....

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ers 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 in the case of .....

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arge business income to tax in India, it should be squarely covered under the relevant provisions of section 9(1)(i). He submitted that under this clause, the income is deemed to accrue or arise in India, if it is accrues or arise, directly or indirectly through or from any business connection from India; or through or from any property in India; or through or from any asset as source of income in India; or through the transfer of a capital asset situated in India. Here, in this case, since no b .....

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es. The majority of the segments of the bulk cable system on which restoration have been provided, is located outside India and there is only small part of the entire cable that passes through territorial waters of India, which can be 12 nautical miles from Indian shore. In such a situation it cannot be held that the entire cable is one asset and is deemed to be situated in India. Thus, assessee does not have any asset or source in India through which the revenues from restoration activities hav .....

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o 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, whic .....

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e. Fujairah to Mumbai, Miura to Mumbai and Mumbai to Singapore. He also filed a chart showing a details of restoration charges received over the years (which are subject matter of appeals before us) and the segments on which restoration services were provided; length of the cable segment; length of the cable in the territorial waters in India and the apportionment of the revenue to India. He submitted that at the most, business income can be taxed on such a apportionment of revenue in India. The .....

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nd accordingly, such an allocation on estimate basis is very unreasonable. 19. On the other hand, before us, the Ld. Special Counsel, Shri Girish Dave submitted that VSNL is a landing party of the FLAG Cable system, which has used the capacity of the cable owned by the FLAG for the purpose of restoration services. The restoration has been provided to the VSNL for which FLAG has raised bill directly to VSNL for availing the cable services to the VSNL in India. The asset and equipments of the FLAG .....

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s and equipments. He also referred to the equipments required in the entire cable system, through which such cable system is operated. He also handed over a handbook on Laws and Policy of submarine cable system and referred to Chapter -VI of the said Hand-book and explained the provisions with respect to repair and maintenance of submarine cable system. After explaining the entire process, he referred to the Restoration Agreement and relevant clauses for restoration of SMW3 cable network and cab .....

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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 syste .....

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the CIT(A), from there he pointed out that it has been stated that the assessee retains the co-ownership of submarine cable system in India. The finding of the CIT(A) is not correct that the receipts from the restoration activity are in the nature of business income. There is an utilization of services of the cable network system by the VSNL by the assessee and hence the assessee s case clearly falls within the ambit of fee for technical services, as defined in Explanation to section 9(1)(vii). .....

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is not an ordinary activity, but requires highly technical expertise for restoring the cable transmission through its own cables and hence it clearly falls in the nature of FTS. 20. We have heard the rival submissions and perused the relevant findings given in the impugned order. The assessee has built a high capacity submarine optic fiber telecommunications link cable system and has sold the capacity in the said cable system to various landing parties including VSNL. The VSNL has bought the ca .....

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on in the traffic on SMW3 cable. For this purpose the FLAG provides alternative 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 c .....

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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 party like VSNL avails the network link in the cable of the assessee, no transfer of technology is involved nor have any technical services been rendered. The VSNL only receives end to end connectivity for a temporary period till th .....

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nsmission in the cable. As per the requirement it is providing its network to the VSNL as an alternate route to the SMW3 cable for the temporary period. We are unable to appreciate the argument of Shri Girish Dave that, since the submarine cable system is highly technical in nature and involves sophisticated process and technical equipments, therefore, the transmission of data through such a cable amounts to rendering of technical services. The cable system though may be highly sophisticated pro .....

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within the ambit of FTS u/s 9(1)(vii). For rendering of technical services there has to be delivery of technical skills through human element or there is a constant human endeavor in providing technical service or advice or make available such a technical skills or services. But if any technical equipment developed by human has been put to operation automatically, then usage of such a technology per se cannot be held as rendering of technical services. Transmission of a data or telecommunicatio .....

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r 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 .....

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have been received outside India and there is no business connection or any asset or source of income in India, because majority of the FLAG cable system on which restoration has been provided is located outside India. Section 9(1)(i) is a deeming provision which provides that income is deemed to accrue as arise in India, if it accrues, directly or indirectly through or from any business correction in India; or through or from any property in India; or through or from any asset or source of inc .....

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anding parties, which fact too has been noted by the AO as well by the CIT(A) in the impugned order and also held by us, in the earlier years. After selling the capacities, the FLAG is left with spare capacity, which here in this case has been used for providing restoration activity services to SMW3 which in turn has been provided to VSNL. A portion of the cable length falls within the territorial waters of India from where it connects to Mumbai and from there it again goes to other countries. I .....

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well held that income has accrued to the assessee from an asset in India and hence it is deemed to be business income arising in India. However, here all the business operations of the assessee are not carried out in India, therefore reasonable attribution 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 t .....

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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 situated outside India. Under the present fact, t .....

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ssee 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 details of segments on which the restoration has been provided; length of the segment, length of the cable in territorial waters of .....

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