TMI Blog2016 (3) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of sec.9(1)(vi) are applicable. Accordingly, we are of the opinion that the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. - Decided against assessee Nonpayment of TDS on bandwidth charges - Held that:- As decided in Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxation) [2013 (11) TMI 1058 - MADRAS HIGH COURT] the receipts are liable to be treated as 'royalty' for the use of IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly Article 12(3) of DTAA between India and Singapore. We also agree that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer is guaranteed the transmission of the data and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealed that remittance Is for the software maintenance fees and not software purchases and concluded that what has been purchased is not the software but. the right to use it. The Assessing Officer on examination of the Agreements with the software providers concluded that the assessee has got a license to use the software for a particular tenure subject to certain terms and conditions. He distinguished the case laws relied upon by the assessee in the following cases : In the case of Tata Consultancy Services. (271 ITR 401) As seen from the contract with DNATA, Dubai, assessee has not purchased any software ready to use as contended nor is DNATA a supplier of off the shelf software. DNATA is the owner of a software called RAPID which is used in passenger revenue accounting system. As per the contract entered into with SGS India DNATA. Dubai allows the later to use the software subject to certain terms and conditions. The client M/s SGS India Ltd is bound to pay the Licence and usage fees on quarterly basis. Here, the payment made is mainly for Licence charges for the usage of software and it is distinct from purchase of software. The amount paid for the usage of software is taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are suppliers on a non-exclusive/non-transferable basis for enabling the call recording for certain time as per the contract, for processing the airline coupons and other such services. The assessee was given only a copyrighted article and the ownership of such software rest with the suppliers of the software all the time. All these software are taken on license from owners of software and used for business on a non-exclusive basis. According to him, the payment for purchase of software cannot be considered as payment of royalty as per the Act as well as applicable under DTAA and thereby it cannot be treated as the assessee is in default for not withholding u/s.195 of the Act before making the payment. 5.1 According to the ld. AR, the assessee has not purchased the IP rights in the software. The assessee is not in the business of software development and resale. The assessee has made payment towards software maintenance fee and licence to use it. As per Explanation under Article 12, royalty defined as under : Typically, Article 12 defines royalties as payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e impugned payment. This ground of appeal of the assessee is dismissed. 6. The next ground in these appeals is with regard to nonpayment of TDS on bandwidth charges. 7. The facts of the case are that the AO has stated that there is dedicated undersea cable. Bandwidth charges are charges for getting a dedicated lease line for making international voice based calls. It is stated by the assessee that the services were rendered outside India by the service providers i.e within India the connectivity is provided by BSNL/MTNL etc. and beyond the territory of India these services are provided by the foreign Telecom operators. The assessee has admitted that there is a dedicated under the sea cable provided for the uninterrupted use of SGS Pvt Ltd. It is stated that based on the capacity utilization the payment Is charged and that they are taxable as royalty u/s.9(1)(vi) of the Act. The services rendered by the non-resident towards bandwidth charges are taxable as royalty as per section 9(I)(vi) of the Act. Since the payment is made for use of any patent, invention model or design secret formula or process or trade mark or similar property, these services are taxable as royalty . F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment and why no TDS has been made on the said transaction. Answer No. 45: Connectivity and bandwidth charges refer to the payment for lease line circuits provided by the telecom companies abroad. Those are used for transporting voice and data FOR our BPO operations. These are in the nature of utility services and do not come. under royalty or technical services and hence no TDS has been made. From the details you had shown to me it is seen that there are payments for non-telecom companies. We will look into that and revert back with details by 31 JAN 2013. 7.3 It Is further stated that these are in the nature of utility services and there is no technology made available to the assessee and there are several decisions to support this view and hence no tax has been deducted. The AO has also held that as per Article 12(3) of Indo US DTAA, the payments are taxable in India. As per Article 12 (3) Indo USA DTAA, the payment made for bandwidth charges are taxable in India. The relevant para defining the meaning of the term royalties in the said DTAA reads as under: The term royalties as used in this Article means: payments of any kind received as a consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e non-resident provider towards bandwidth charges. There is also no denial by the assessee that it enjoyed the uninterrupted right to use the bandwidth. The appellant has always been at ease to have fact to face operational contact with the equipment. The assessee paid the bandwidth charges as consideration for using the bandwidth. The point-to-point communication could be possibly established as per the requirements of the assessee only by the commissioning of the bandwidth communication line. 8.2 The CIT(Appeals) observed that it is immaterial that the right to use the dedicated bandwidth was under the control of the provider or not. But indisputably noticeable fact in this case is that the assessee has been enjoying a significant economic and commercial interest in the bandwidth hired by it. The bandwidth capacity made available on a dedicated basis to the assessee, even if it does not involve a possessory interest, the amount paid is also for the use of process. The definition of 'Royalty' under DTAA and I.T. Act are in pari materia. As per Explanation 6 u/s 9(1)(vi) of the Act, possession, control, etc. of such right on the dedicated bandwidth line are not matters o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of the intellectual property rights, use of any intellectual property, imparting any information concerning technical, industrial, commercial, scientific knowledge, experience or skill ; use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB, transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films or rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). The amendment relating to royalty , particularly the reference to use or right to use any industrial, commercial or scientific equipment, etc., was inserted with effect from April 1, 2002, by the Finance Act, 2001. Explanations 4 and 5 were inserted by the Finance Act, 2012, with effect from June 1, 1976. Under Explanation 5, the Legislature sought to clarify the definition of royalty to include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts, including but not limited to the regulatory and data protection requirements in the respective countries. The international leg of the telecom services provided outside India was provided by the assessee. Since in India, under the Indian Telecommunications Regulations, only licensed service providers could provide international long distance communication services on the Indian leg, and the assessee was not a licensed service provider under the Indian laws, Videsh Sanchar Nigam Limited (VSNL) a public sector undertaking provided the Indian leg of the international service to the customers. Thus, a customer interested in taking a lease connection between its office in India and an overseas location entered into an arrangement with the assessee for the provision of international connectivity in the overseas leg and with VSNL for the Indian half of the connectivity. VSNL transmitted the traffic of the customer in India from the customer's office in India to a virtual point outside India and the assessee transmitted it up to the customer location outside India. The assessee used its telecom service equipment situated outside India in providing the international half circuit. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement with the customer, service agreement with VSNL and the one between the customer and VSNL, were part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim, however, was to give the customer a point-to-point private line to communicate between offices that were geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. The parties had agreed to one stop shopping , which allowed an organisation, namely, the customer to place a single order with a single carrier for two private leased circuits for two offices in two different countries, here the Indian half by VSNL and the other half by MCI. The contract ensured that the customer had an active internet dedicated to that particular customer at a particular speed agreed upon. VSNL was a provisioning entity whose services the assessee had to direct the customer to avail of, since as per the Indian law, the assessee was not the licensed operator in the Indian half circuit. The arrang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, the assessee could not be considered merely to be providing the service to the customer. (iii) Although the agreement between the assessee and VSNL stated that one was not the agent or the representative of the other, this did not mean that VSNL had provided its server independently without any connection whatsoever with the service order that the customer placed with the assessee. A reading of the service agreement showed that the parties agreed that the provisioning entities in the Indian half circuit shall be VSNL and in getting the seamless end-to-end connectivity, the customer entered into a further agreement with VSNL. If the agreement with VSNL had to have no relevance or reference to the customer agreement with the assessee, there was no need at all in the service agreement to refer to VSNL as the provisioning entity or for that matter to go for one-stop shopping. Thus, the end-to-end provisioning in one single circuit was assured by the assessee and if by reason of any regulatory laws of the country the assessee was unable to extend its service by itself but went for such other licensed authority, it did so only as a provisioning entity to make up for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracts having no bearing at all on each other. (v) The definition of royalty under article 12 of the DTAA between India and Singapore and the Act are in pari materia. Explanation 6 defines process to mean and include transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal) cable, optic fibre, or by any other similar technology, whether or not such process is secret. Thus, apart from the relevance and applicability of clause (iva) that the payment was for the use or right to use of the equipment, the payment for the bandwidth amounted to royalty for the use of the process and by reason of the long distance, to maintain the required speed, boosters were kept at periodical intervals. Going by this too, in any event, the payment received by the assessee was rightly assessed as royalty and would constitute so for the purposes of the DTAA. Obiter dicta : In a virtual world, the physical presence of an entity has today become an insignificant one ; the presence of the equipment of the assessee, its rights and the responsibilities of the assessee, vis-a-vis the customer and the customers' responsibilities clearly show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bandwidth charges (3) commission payments, etc. Therefore it has become apparent that the reimbursements constitute a mixture of so many kinds of payments which should have been genuinely accounted for under the appropriate heads and account. Further, the CIT(Appeals) observed that whereas the assessee has not done so far the reasons best known to it. Had the payments (called reimbursements) been properly accounted for under the respective head of account, the AO would have assessed without any difficulty. A confounding situation has been created by the assessee, itself by Indulging In unfair and unapproved accounting procedures. According to the CIT(Appeals), when adequate opportunities were provided to the assessee, during the course of assessment and appeal proceedings, it could not furnish a segregated statement of expenses together with the relevant invoices and vouchers pertaining to such reimbursements. Under these circumstances, it is quite natural for the AO to resort to a permissible assumption that the assessee could have chosen to make the payments through the present company instead of making direct payments to the overseas service providers with the intention to avoi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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