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2016 (3) TMI 680 - ITAT DELHI

2016 (3) TMI 680 - ITAT DELHI - [2016] 47 ITR (Trib) 418 - Fee for Technical Services - Payment of IUC by assessee to FTOS - Held that:- No hesitation in upholding the submissions of the Ld. Counsel of the Assessee that, the payment in question cannot be considered as “Fee for Technical Services” in terms of section 9(1)(vii) read with Expln. 2 of the Act as inter connection facility and the service of the FTO in picking up, carrying and successful termination the call over their respective netw .....

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available clause is found, then as there is no imparting, the payment in question is not ‘FTS’ under the Treaty and when there is no ‘FTS’ clause in the treaties, the payment falls under Article 7 of the Treaty and is business income.

Payment in question is not ‘Royalty’ as contemplated under the DTAAs.

We agree with the submission of the Ld. Counsel for the assessee that the amendments to the Finance Acts cannot be read into the DTAA’s

We uphold the order of t .....

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ing from the payment cannot be deemed to accrue or arise in India. Thus the assessee cannot be declared as “assessee in default” as it has not failed in its statutory obligations to deduct tax at source u/s. 195 of the Act. Assessee cannot be held the Assessee in default under section 201 of the I.T. Act. Hence, this issue is decided in favour of the Assessee.

Income deemed to accrue or arise in India - Payment made by assessee to "FTO" - Held that:- Even under the DTAA, the payments .....

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assessee.

Section 206AA application- prospectively or retrospectively - Held that:- This issue of retrospective applicability is covered in favour of the Assessee and against the Revenue by the decision of the ITAT, Pune Bench in the case of DDIT (IT-II), Pune vs. Serum Institute of India Ltd. [2015 (6) TMI 26 - ITAT PUNE] to hold that Section 206AA cannot be applied retrospectively. The beneficial rate provided in the DTAA override the provisions of Section 206AA of the Act. Thus th .....

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Delhi dated 21.5.2012 in Appeal No. 83 to 86/11-12 for assessment years 2008-09, 2009-10, 2010-11 & 2011-12. As issues arising in these appeals are common, for the sake convenience they were heard together and are being disposed of by this common order. 2. The brief facts of the case are: 2.1 The Assessee M/s Bharti Airtel Ltd. is a Company and is a leading Telecom Service Provider in India. It is also a Global Telecommunication Company having operations in several countries. It is engaged i .....

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Delhi, passed an order under section 201(1)/201(1A)of the Income-tax. Act, 1961 for the financial years 1995-96 to 2002-03 on 26-03-2004, holding that the payment made by the assessee to MTNL on account of interconnection charges, port/access charges was 'fees for technical services' and tax. was required to be deducted by the appellant u/s. 194J there from. Since MTNL had already filed return of income for the aforesaid financial year, declaring relevant amount received from the appell .....

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n of Hon'ble Madras High Court in the case of M/s Skycell Communication Ltd: 251 ITR 253, deleted the interest levied U/S 201(1A) on the ground that the interconnection/port access charges paid by the appellant to MTNL were not in the nature of "fee for technical services" under section 194J read with Explanation 2 to section 9(1)(vii) of the Act. The Revenue preferred appeal against the order of the CIT (A) before the ITAT, which was dismissed. 4.4 Thereupon, the Revenue filed app .....

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t, therefore, be regarded as "technical services" as contemplated under Section 194J of the said Act. Accordingly, the Revenue's appeal was dismissed. The decision has been reported in 319 ITR 139. The Revenue assailed the order passed by the Delhi High Court by way of Special Leave Petition (SLP) before the Supreme Court. 4.5 The Supreme Court, vide order dated 12/08/2010, in SLP No. 16452 of2009 while agreeing in principle with the aforesaid observation of the Delhi High Court re .....

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Mr. Ashok Mittal and Mr. Tanay Krishna, from C-DOT, were recorded by the ACIT (TDS), Gurgaon on 29.09.2010. Mr. Tanay Krishna was cross-examined by the representative of the appellant on 04.10.2010. Mr. Tanay Krishna was also re-examined on 04.10.2010 by the Department. The appellant also submitted evidence by way of opinion, dated 14.12.2010, of Mr. G.S. Grover, Ex-Member, Telecom Commission. Subsequently, the ACIT (TDS), Gurgaon, vide order dated, 03.01.2011, held that as there was human inte .....

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ional Taxation, New Delhi so as to examine the similar issue involved in international part of business of the assessee. On receipt of the aforesaid letter, the ITO, TDS Ward 1(1), International Taxation, New Delhi, issued show cause notice, dated 31st March, 2011, requiring the appellant to show cause as to why the appellant should not be treated as an assessee in default under section 201 (1) for failure to deduct tax at source U/S 195 of the Act in respect of inter connection charges paid by .....

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erefore the appellant was to be treated as an assessee in default under section 201(1) for failure to withhold tax under section 195 of the Act from the impugned payments. 2.2 The AO held that Inter-connect Usage Charges (hereinafter referred IUC ) paid by the Assessee to the Foreign Telecom Operator (hereinafter referred as FTO ), in the course of carrying out its business as an International Long Distance (hereinafter referred as ILD ) Service Provider are in the nature of Fee for Technical Se .....

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AO for holding the amount of IUC charges, paid by the Assessee to FTO are in the nature of FTS/ royalty are mentioned in paras 6(h) of the assessment order. This para is extracted below for ready reference:- (i) The assessee company repeatedly submitted that the facility provided by other overseas service providers for international interconnection services are being provided through automatic machinery or equipments automatically but failed to counter the opinion of the experts who have categor .....

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d reconfiguration and capacity enhancement, monitoring including network monitoring, maintenance, fault identification, repair and ensuring quality of service as per interconnect agreement of interconnect network system to provide fault free services according to interconnect standards. (ii) The whole process for carriage and transfer of calls from the network of one operator to another is not limited to process of carriage of calls though being an automated process undertaken by a series of hig .....

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r setting up. Further, it involves different phases like planning, selection of vendor, supply of hardware and software, installation as per vendor guidelines, call configuration/provisioning of system, exhaustive testing on various modes on network portion, interconnect testing and also requires support/consent of other interconnect operator. All these phases require human interventions which are mostly technical in nature. (iv) The explanation of the assessee company/deductor that no intervent .....

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could be due to many reasons like failure in physical hardware, problem due to software bug, problem due to snapping of optic fiber cables etc. which requires resolution through intervention of teams of technical experts to remedy the situation and hence there is no fully automatic operation of this network. Though the carriage of calls from one network to the other network flows automatically, to make the carriage of calls successful, constant network monitoring is required to attain quality o .....

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red by the service provider at OMCs. Technical help is required to detect certain complicated faults at OMCs like hardware faults which may require change of components, cards, etc. and/or software faults for which patches/rectification of software is required. Such an intervention requires highly qualified and trained technical professional having expertise, experience and acumen in that particular area of relevant technology and is not possible by a general technician or semi skilled person. ( .....

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e predefined as an initial setup or in installation phase and based on this predefined data, which is part of configuration in interconnect system, such phases are selected automatically to call connect and not just in routing. The process of carriage of call is automatic only for successful and fault free calls (A successful, call is which reaches the desired destination and which carries quality voice). The configuration (predefined data is part of configuration of interconnecting of network) .....

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pair their own infrastructure. However, for ensuring a seamless service by employing specific set of people to carry out operability and functioning of network, it makes it clear that human intervention is a necessity to provide seamless service . (viii) Regarding the situation on exhaustion of allotted capacity and allotment of additional capacity, the capacity enhancement is a time consuming exercise by a group of technically skilled professionals with close coordination of both the parties si .....

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led to appreciate the fact that handling of equipment and infrastructure by operators in their own network, is to ensure fault free service and as an obligation for success of interconnect as seen from the clauses of interconnect agreement of interconnect performance standards. This not only takes place on one side but takes place on both the ends in close co-ordination and that is what the experts opined. (x) During the process of carriage of calls, the network system of each cellular provider .....

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chnician but are to be professionally and highly qualified experts having good knowledge of network management, knowledge of hardware & software, knowledge of network configuration, etc. as no service provider does take the risk of leaving the network systems unattended, when the networks are interconnected with each other during the process of carriage of calls, for the simple reason that even a small fault can cascade into large faults. which could finally lead to entire collapse of the sy .....

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the technical services. In fact, the combined environment of both men and machinery is needed for providing technical services. Even sophisticated and automated machinery/equipment cannot work without a human interface, as these are regularly required to monitoring of performance and maintenance. A machine or instrument even if automatic cannot become or replace human mind. In fact, there are a number of articles in the interconnect agreement. which itself provide various specifications for qual .....

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ion and maintenance is taken away, the interconnected network will not function indefinitely and further the purpose of interconnection along with the quality of service will not be achieved (Ans. 11 & 12). Lastly, it is also important to mention here that;-. - The assessee company/deductor itself is deducting TDS on these interconnect payments to domestic mobile service providers with effect from April 2003. - There is no difference in flow of calls for an international call or a national c .....

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ational IUC, except that in domestic IUQ, the network and the equipment of the other telecom operators are located in India, whereas, in international IUC, the network and the equipment of the other telecom - operators are located outside India. 2.4 The AO alternatively and without prejudice to his finding that, the said payment is payment for FTS u/s. 9(1)(vii) of the Act had held that the payment was Royalty in Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Act. 2.4.1 The AO vide ord .....

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peal before the Ld. First Appellate Authority. The First Appellate Authority upheld the order of the AO to the extent of the finding that the payment of IUC are in the nature of FTS under the Act. He has held as follows:- 9.7 The whole controversy is whether any human intervention exists at time of picking up of call from ILD gateway of the appellant by ILD gateway of foreign operators and it has to be understood and resolved by examining the statements of the experts, which have been reproduced .....

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rocessing of a successful call has many aspects like call connect, call routing and signaling. Call connect component cannot be dissected. • Beside these faults, constant network monitoring is required to be done by technical experts to ensure fault free connection. The network system cannot be left un-attended . • Human intervention is required for capacity augmentation. • There is no network system which can work continuously without any kind of human intervention. Machines cann .....

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ere is any human intervention at the time of interconnect, then the answer is quite obvious that for a successful call, the interconnect is automatic. This has been accepted by the AO also. As already discussed supra, this cannot be the intention/essence of direction of Hon'ble Supreme Court as the interconnect of call takes place in fraction of a second and during that period, no effective human intervention is possible. Therefore, we have to see the process of interconnect of call in a hol .....

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ies or equipment required to interconnect to such locations." 9.9 Though, the ultimate purpose of the agreement is to achieve successful carriage of call at the interconnection location, the process of establishing interconnection itself is elaborate one. It involves making the two network systems compatible, configuration & reconfiguration of system, allotment of capacity & capacity augmentation whenever required, re-routing of call in event of overflow, fault finding and repair an .....

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become software based and substantially automatic. Over a period of time, the automation has increased and correspondingly human intervention has decreased progressively. If the quantum of human intervention involved is the only criterion for determining whether a particular service is in nature of technical service, then what used to be a technical service a few years ago, has ceased to be so now with progressive automation; This however does not mean that the machine has replaced the man. In .....

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entation and reconfiguration and capacity enhancement, constant monitoring & maintenance, fault identification, repair etc. All this is required to ensure quality of service as per interconnect agreement to provide fault free services. Call is not something which can be carried in person by a technical person. It has to pass through a configured network and technical personnel are required to see that net work functions properly. The direction contained in Hon'ble Supreme Court's ord .....

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cal services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". 9.11 The definition of FTS as per DTAA is the same as i .....

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of two parts: a) Consideration for the rendering of any managerial, technical or consultancy services. b) consideration for provision of services of technical or other personnel 9.12 The second part of definition talks about technical personnel whereas first part does not mention about technical personnel. It can reasonably be inferred that first part of definition is concerned with technical services provided in any manner, may be mainly through automated machine. In case under consideration, t .....

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FTS. It has been argued that the appellant has entered into agreement with various international telecom operators for the purpose of two way carriage of call internationally. Whatever revenue is charged from the subscribers is shared between network operators depending upon flow of successful calls and therefore no network operator is providing services to other network operator. Therefore, the amount paid to the foreign telecom operator is not qua the service provided by the foreign telecom op .....

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he parties shall not be that of partners, and nothing herein contained shall be deemed to constitute a partnership between them, a joint venture, or a merger of their assets or their fiscal or other liabilities or undertakings. Neither party shall have right to bind the other party, except as expressly provided for herein." 9.15 Therefore, agreement does not create a new 'Person' as defined in section 2(31) of the Act. The obligations of the appellant have to be seen in its separate .....

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where revenue from NLD operator comes to a common pool and both appellant and the non-resident operator are entitled to share it according to some formula. The payments made by the appellant to non-resident telecom operators are in nature of expenditure in books of accounts of the appellant and such payments are in nature of FTS as discussed supra. Therefore, this contention of the appellant is rejected. 9.16 The appellant has taken another argument that it makes payment only for a successful c .....

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by adopting a particular mode of making the payment. 9.17 It is also pertinent to note that the appellant is deducting tax on IV C payments made to domestic telecom operators, which clearly indicates that the appellant is conscious of legal provisions applicable. Then, why such deduction is not being made in respect of IUC payments made to foreign telecom operators is not explainable. 9.18 In view of discussion supra, I hold that the IUC payments made by the appellant to the non-resident teleco .....

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made by the appellant have been carefully considered. The AO has held that the payments made by the appellant amount to royalty U/S 9(1 )(vi)(iii) as these are for use of process. The contentions of the appellant are summarized as under: - The payments are in nature of revenue sharing. - The appellant has not been given 'use or right to use' of process by foreign operators. - Proposed amendments in the Act do not override the treaty definition of royalty. - In any case, the appellant can .....

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; is provided in Explanation 2 to section 9(1)(vi) of the Act, which is being reproduced as below:- 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 .....

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ny industrial, commercial or scientific equipments but not including the amount referred to in section 44BB; (v) the 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 (vi) the rendering of .....

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connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. 11.3 According to AO, .....

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ons, and the parties shall be responsible to procure, at their own expense, the necessary facilities or equipment required to interconnect to such locations. " 11.4 Thus, the essence of the agreement is that each party to the contract shall connect to network of other party at port locations. It is not a case of lease or licence of network of foreign operator in favour of the appellant. Once two networks are interconnected, the flow of call is completed. A foreign operator connects his netw .....

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as not given a finding to the effect that it constitutes a 'process'. According to Explanation 6, which is proposed to be incorporated in section 9(1)(vi) of the Act by Finance Act 2012, the process shall include transmission by optic fibre or similar technology. Thus, after this amendment, the transmission of call across gateway/interconnect shall be a 'process' under domestic law. However, even if there is a 'process' involved; there is no use of it by the appellant. In .....

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esident operator or the appellant is using the network of non-resident while transmission of call through optic fiber. It has already been held that non-resident operator has provided technical services to the appellant as is the case made by the AO, consequently it cannot be said that payments made by the appellant are for 'use of process' and hence in nature of royalty. The appellant has further contended that reliance placed by the AO on decision in case of Verizon Communications Sing .....

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given on hire network of foreign operator, then it cannot be said that the appellant has 'used' the network belonging to foreign operator. Therefore, reliance of AO on the said case law is misplaced. 11.5 It is seen from proposed Explanation 5 & 6 and Memorandum of explanation that meaning of word 'process' has been widened, the 'process' need not be secret and situs of control & possession of right, property or information has been rendered irrelevant. However, .....

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ternational Services (India) P. Ltd. [2008305 ITR 37 AAR]. All these judicial pronouncements say that in order to satisfy 'use or right to use'; the control and possession of right, property or information should be with payer. Therefore, under DT AA, the restricted meaning of royalty shall continue to operate despite amendments in domestic law. 11.6 The appellant has further argued that even if it is assumed that payments partake the character of royalty after retrospective amendment in .....

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t of sum is relevant to see the obligation of the payer. Thus, subsequent amendment though retrospective in effect, cannot create any obligation upon payer which did not exist at time of crediting or actual payment of the sum. 11.7 In view of discussion supra, I have no hesitation to hold that payments made by the appellant are not in nature of royalty under domestic law and relevant DTAA. This disposes off ground of appeal no. 19 which is accordingly allowed. 3.1 On Section 206AA, the Ld. CIT(A .....

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Rules, 1963 dated 06.11.2013.The additional evidence sought to be produced by the assessee, is an Opinion dated 03.9.2013 of Sh. SH Kapadia, Former Chief Justice of India, on the applicability of withholding tax provisions u/s. 194J read with Section 9(1)(vii) of the Income Tax Act, in the case of the assessee. The Ld. DR, Mr. Anuj Arora, CIT(DR) strongly objected to the admission of this opinion as an evidence on the ground that Shri Kapadia delivered the judgment in the assessee s own case whe .....

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wn by the Hon ble Supreme Court for Judges. 6. As what is sought to be produced is an opinion of Former Chief Justice of India, we hold that this is not additional evidence which could be admitted for the purpose of adjudication of these Appeals. We do not wish to express any opinion as the conduct of the Former Hon ble Chief Justice of India who delivered the judgment in the case of the assesee company, and had given an opinion on the very same issue after retirement. Hence, this Application is .....

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e Telecom operators for pooling in their services. The object of these agreement are to provide seamless facility to the subscribers and income accrues to both the networks and both net works have a right to share the revenue generated from successful calls between the inter connected operators. c) IUC have been in the nature of sharing of revenue generated from successful calls. This is business incomes of such operators. d) The operations of the FTOs in the form of carriage and termination of .....

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, the assessee is not required to withhold the tax u/s. 195 of the Act for such payments and consequently, cannot be held liable u/s. 201 of the Act. g) Section 206AA cannot be applied retrospectively and that the beneficial provisions of the DTAA s have to be applied. h) The Ld. CIT(A) was right in admitting additional evidence. 8. Ld. Counsel for the Assessee Sh. Tulsiyan, made elaborate submissions, filed paper books as well as written submissions and relied upon various case laws in support .....

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is issue, without due restrictions or conditions. He argued that the Assessee s contention that the AO should have restricted himself only to this aspect is not correct and does not flow from the judgment of the Hon ble Supreme Court and submitted that the AO could examine many other issues. He further submitted that the judgment of the Hon ble Supreme Court of India in question, wherein the matter was remanded to the AO, pertaining to a particular assessment year is not yet finalized and that t .....

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facts of the case. 10. Ld. DR further argued that all the agreements the assessee entered with the FTOs were not with the AO. Referring to Page No. 22 of the Ld. CIT(A) s order as well as Page no. 35, he drew the attention of the Bench to the questions and answers recorded from Sh. Ashok Mittal as well as Sh. Tanai Krishnan on oath. Specifically he drew the attention of the Bench to Question No. 4, 5 and 6 which are at pages 35 & 36 of the CIT(A) s order and to the answers to question no. 7 .....

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that the assessee company has itself deducted TDS on this IUC from domestic mobile service provider w.e.f. April, 2003 and argued that there is no difference in flow of calls or operations for a national call or an international call and under these circumstances tax should have been deducted on payment made to FTOs also. 11. Ld. DR further argued that services has been provided by the FTOs to the assessee. He vehemently contended that the submissions of the Assessee that services are connected .....

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and it is provided that in case of call drop, a penalty would be attracted. He pleaded that the pith and substance of these services should be considered and not the mode of billing and the agreement should be viewed in a holistic manner. He referred to the definition of FTS u/s. 9(1)(viii) and submitted that it does not exclude lumsum consideration. 12. On the argument that it is a case of revenue sharing the Ld. DR relied on Page No. 59 of the Ld. CIT(A) s order vide para no. 9.13 to 9.18 and .....

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d. 13. On the Revenue s Appeals, the Ld. DR submitted that the Ground No. 1 is against the admission of additional evidence by the Ld. CIT(A). He pleaded that there was violation of Rule 46A and submitted that the Ld. CIT(A) should not be admitted the evidence in the form of (i) copy of the agreements with various Overseas Telecom Operator, (ii) Resident Certificate, (iii) no PE Certificate of those non-residents operators and (iv) copies of vouchers regarding the payment made to them. He relied .....

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in the alternative be classified as royalty . Ld. DR further contended that the amendments brought to Section 9(1)(vii) are retrospective and are clarificatory in nature and were only brought in to clarify the unintended interpretation of the Courts of Law. Referring to the Hon ble Delhi High Court decision on this issue, he submitted that the Hon ble High Court has not adjudicated the issues post amendment, as the same was not before it. He submitted that the payment is for use of a process an .....

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Tribunal reported in (2014) 44 taxmann.com 1 wherein it was held that, the payment of Fees for use of Satellite Transponder Service by assessee to one US Company was taxable as royalty under Article 12 of the DTAA. 15. In reply thereto, Ld. Counsel of the assessee distinguished the case laws relied upon by the Ld. DR and distinguished each and every case law on facts as well as on law. He submitted that the proposition of law laid down by the Jurisdictional High Court on the very same issue are .....

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l contention heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record and the orders of the authorities below as well as the case law cited, we hold as follows:- 17. The Ld. CIT(A) has classified the issues as follows:- I. Whether the assessee is liable to be treated as assessee in default u/s. 201(1). II. Whether payments made by the assessee are taxable as Fee for Technical Services (hereinafter referred as FTS). III. Whether the pay .....

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peal on the issues which were adjudicated against it by the Ld. CIT(A) and the Revenue has filed the Appeals on the issue which were adjudicated in favour of the Assessee by the Ld. CIT(A). ASSESSEE S APPEALS 19. The grounds in the assessees appeal are summarized as follows:- i). Whether the assessee is liable to be treated as the assessee in default u/s. 201(1). ii) Whether inter-connected agreements between the assessee and the FTOs are in the nature of revenue sharing arrangements. iii) Wheth .....

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or the use of process under section 9(1)(vii) of the Act and relevant DTAA s. ii) Whether the assessee can be treated as assessee in default u/s. 201 of the Act in respect of the liability imposed by virtue of retrospective amendment to law. iii) Whether make available clause under relevant DTAA are satisfied. iv) Whether section 206AA of the Act is applicable retrospectively. v) Whether the Ld. CIT(A) acted in violation of the provision of Rule 46A in admitting additional evidence by the assess .....

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E OR ARISE IN INDIA. ISSUE NO. 5 WHETHER BENEFICIAL RATE PROVIDED UNDER DTAA OVERRIDE THE PROVISIONS OF SECTION 206AA AND WHETHER SECTION 206AA OF THE ACT IS APPLICABLE RETROSPECTEVELY. ISSUE NO. 6 Whether the ld. CIT(A) acted in violation of the provisions of Rule 46A in admitting the additional evidence filed by the assessee. ISSUE NO. 7 Whether the payment is revenue sharing or not. 21. Before we adjudicate each of the issue, it would be relevant to discuss as to what is the Inter-connection, .....

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n granted license to provide International Long Distance services (ILD) [License Agreement No.10- Q7/2002-BS-I(ILD-02) dated 14th March 2002]. Clause 2.2 (a) of the said License is reproduced below [refer page 36 of letter dated 28.03.2012]: "2.2(a) The ILD Service is basically a network carriage service (also called Bearer), providing International connectivity to the Network operated by foreign carriers. The ILD service provider is permitted full flexibility to offer all types of bearer s .....

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1 of the "DEFINITIONS AND INTERPRETATIONS' of the said license defines Access Providers as follows: "ACCESS PROVIDERS" means Basic, Cellular, and cable service providers who have a direct access with the subscribers. 8.2 Thus, ILD business is nothing but provision of connectivity to the subscriber for international portion of a call, which may or may not originate domestically. The local connectivity [within India] is provided by Access Providers and National Long Distance (N .....

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iagram, the call moves from Aurangabad mobility circle to the NLD gateway (say at Nagpur), travels on NLD network till ILD gateway (say Mumbai) from where it is transported to international operator(s) outside India. In order to provide seamless services to its subscribers, the appellant enters into agreement with overseas network operators, to connect the call over their network. Therefore, call traffic originating from India is carried first by the Access Provider, then by the NLD operator, th .....

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he subscriber to the Access Provider and collected by the Access Provider is shared with the NLD operators (where the NLD operator is different from the Access Provider) and with ILD operator, who in turn shares the revenue with the foreign telecom operator(s). b) Carrying calls from outside and terminating such calls in India: The call in this case originates from outside India. The call may originate from, say, a subscriber of AT & T, USA. The call will travel automatically on the network .....

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transport it to the customer. As can be observed from the above, the role of ILD operator is to transport the call from outside India till the first landing station in India. As submitted earlier, the ILD operator is not allowed to transport calls within India. c) Carrying calls from a telecom service provider in one country outside India to another telecom service provider and its subscriber in a third country (Hubbing'): To illustrate, the subscriber of a US telecom service provider, in N .....

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ut will have to pay the IUC/access charges to the local Singaporean telecom service provider. 8.3 It may be noted that the appellant is not authorized, under the ILD license, to carry call traffic from one place to another within India which can be carried only by a NLD license holder. In this regard, the relevant clause of the NLD license is given below: "2.2(a) The NLD Service refers to the carriage of switched bearer telecommunications service over a long distance and NLD Service License .....

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raffic shall be handed/taken over at the Point of Presence (POP) situated in LDCA at the location of level I TAX in originating/terminating service area. For West Bengal, Himachal Pradesh and Jammu & Kashmir such locations shall be Asansol, Shimla & Jammu respectively. (d) NLD service licensee shall be required to make own suitable arrangements / agreements for leased lines with the Access Providers for last mile. Further, NLD Service Providers can access the subscribers directly only fo .....

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ed by the appellant as an ILD operator, outside India. From the ILD gateway of the appellant in India, the call is carried to the gateway of the appellant outside India and if the appellant has no gateway outside India, the call is carried on the telecom network of the foreign operator(s}. The call from the gateway outside India is transported to the customer destination by the local foreign telecom operator(s). (Emphasis ours) 23. A perusal of the above extracted paras leads to the following co .....

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es. Thus, the ILD business is the provisions of connectivity to the subscribers for international portion of the call, which may or may not originate domestically. The local connectivity within India is provided by the Access Providers and the National Long Distance Operators (NLD operators) and the International connectivity by the ILD Operators interconnection with FTO, who provide the last mile connectivity. An international call has to be routed through NLD/ILD using the International Gate w .....

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ire revenue arise out of such services is paid by the subscribers to the Access Provider. If the NLD Operator is difference from Access Provider, then the NLD Operator Bills the Access Provider for his part of service rendered. The ILD Operator is in turn billed by the FTO in the form of Inter-connected Usage Charges (IUC). 24. The basic issue before us is whether such Interconnected Charges Billed by the FTOs and paid by the Assessee are in the nature of Fee of Technical Services (FTS) or in th .....

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319 ITR 139 (Delhi):- The expression 'fees for technical services' as appearing in s. 194J has the same meaning as given to the expression in Expln. 2 to s. 9(1)(vii). In the said Explanation. the expression 'fees for technical services' means any consideration. for rendering any (managerial, technical or consultancy services'. The word (technical' is preceded by the word (managerial' and succeeded by the word 'consultancy'. Since the expression (technical ser .....

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ntly, a machine cannot be a manager. The service of consultancy also necessarily entails human intervention. The consultant, who provides consultancy service, has to be a human being. A machine cannot be regarded as a consultant. From the above discussion, it is apparent that both the words 'manaqerial" and 'consultancy' involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a soccis, th .....

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2 to s. 9(l)(vii). This is so because the expression 'technical services' takes colour from the expressions 'managerial services' and 'consultancy services' which necessarily involve a human element or, what is nowadays fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection port access do not involve any human interface and, therefore, the same cannot be regarded as 'technical services' as contemplated .....

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onstrued as a 'service' in the broader sense such as a 'communication service'. But, while interpreting the expression 'technical service', the individual meanings of the words 'technical' and 'service' have to be shed. And only the meaning of the whole expression 'technical services' has to be seen. Moreover, the expression 'technical service' would have reference to only technical service rendered by a human. It would not include any serv .....

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service and consultancy service are provided by humans. Consequently, applying the rule of noscitur a soccis, the word 'technical' as appearing in Expln. 2 to s. 9(1)(vii) would also have to be construed as involving a human element • The expression 'technical service' would have reference to only technical service rendered by a human. • MTNL or other companies do not provide any assistance to the assessee in managing, operating, setting up their infrastructure and net .....

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ccess do not involve any human interface and, therefore, the same cannot be regarded as 'technical services' as contemplated under s. 194J. 28. The phraseology of Fees for Technical Services covers only such technical services provided for Fees. There should be a direct co-relation between the Services which are on technical nature and the consideration received in lieu of rendering the services. The services can be said to be of technical nature is the special skills and knowledge relat .....

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- The question basically involved in the lead case is: whether TDS was deductible by M/s. Bharti Cellular Limited when it paid interconnect charges/access/port charges to BSNL? For that purpose, we are required to examine the meaning of the words fees for technical services under Section 194J read with clause (b) of the Explanation to Section 194J of the Income Tax Act, 1961, [ Act', for short] which, inter alia, states that fees for technical services shall have the same meaning as containe .....

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dence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual .....

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uman intervention is involved is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasise that these types of matters cannot be decided without any technical assistance available on record. There is one more aspect that requires to be gone into. It is the contention of Respondent No.1 herein that Interconnect Agreement between, let us say, M/s. Bharti Cellular Limited and BSNL in these cases is based on obligations and counter obligations, wh .....

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reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinationa .....

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to examine its expert and to adduce any other evidence. Before concluding, we are directing CBDT to issue directions to all its officers, that in such cases, the Department need not proceed only by the contracts placed before the officers. (Emphasis ours) 29.1 Thus in our view the proposition of law laid down in the judgment of the Hon ble Delhi High Court have attained finality. The Hon ble Supreme Court held that the issue as to whether there is involvement / presence of human element or not w .....

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e expert witness. Our decision will be based on the evidence so collected by the AO on this aspect of human intervention in the services rendered. It held that the word technical services have got to be read in the narrower sense by applying the rule of noscitur a sociis, particularly, because the words technical services in Section 9(1)(vii) r/w Expln. 2 comes in between the words managerial and consultancy services . Hence, there should be involvement/ presence of human element for coming to a .....

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judgment. All other issues are no more res-integra. 29.2 This aspect as to whether a human element is involved in such interconnect services or not, has been examined by different Benches of the Tribunal based on the evidence collected by the AO in the above stated set-aside proceedings. The facts that are on record are the same as the facts and evidence which have been examined by various Coordinate Benches of the Tribunal. These include the statement of experts recorded by the Assessing Office .....

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to the directions of the Supreme Court in CIT Vs. Bharti Cellular Ltd. (330 ITR 239) which has been heavily relied upon by the Learned CITA, we find that human intervention is required only for installation! setting up/ repairing/ servicing/ maintenance/ capacity augmentation of the network. But after completing this process, mere interconnection between the operators while roaming, is done automatically and does not require human intervention and accordingly cannot be construed as technical se .....

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oes not fall under the ambit of TDS provisions u/ s 194J of the Act." 30. The Jaipur Bench of the Tribunal in the case of Bharti Hexacom Ltd. vs. ITO (TDS) in ITA 656/JP/2010 dated 12.6.2015 held as follows : 11. We have heard the rival contentions of both the parties and perused the material available on the record. After going through the order of the Assessing Officer, ld CIT(A); submissions of the assessee as well as going through the process of providing roaming services; examination o .....

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ervention but after completing this process mere interconnection between the operators is automatic and does not require any human intervention. The term Inter Connecting User Charges (IUC) also signifies charges for connecting two entities. The Coordinate Bench also considered the Hon'ble Supreme Court decision in the case of Bharti Cellular Ltd. in the case of i-GATE Computer System Ltd. and held that Data Link transfer does not require any human intervention and charges received or paid o .....

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appeal is allowed on this ground also. 31. The AO as well as the Ld. CIT(A) has recorded that there is no human intervention when the call is successfully completed. It is also not disputed that there is no difference in the technology, system and methodology used by Telecom Companies in providing inter-connection of domestic calls or of international calls. So what decision is applicable for use of local calls also applies to IUC of international calls. Thus the view taken on the deductibility .....

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fore, it cannot be considered to be a technical service. We have gone though the judgment of Apex Court in Bharti Cellular Limited (supra). The Apex Court after examining the provisions of Section 9(l)(vii) of the Act, found that whenever there was a human intervention, it has to be considered as technical service. In the light to the above judgment of the Apex Court, the Department obtained an expert opinion from Sub-Divisional Engineer of BSNL. The Sub- Divisional Engineer clarified that human .....

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the jurisdiction of another circle, the call gets connected automatically without any human intervention. It is due to configuration of software system in the respective service provider's place. In fact, the Sub-Divisional Engineer of BSNL has explained as follows in response to Question No. 23:- Regarding roaming services as explained to question no. 21. Regarding interconnectivity, initial human intervention is required for establishing the physical connectivity and also for doing the re .....

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required. However, for connecting roaming call, no human intervention is required except initial configuration in system. This Tribunal is of the considered opinion that human intervention is necessary for routine maintenance of the system and machinery. However, no human intervention is required for connecting the roaming calls. Therefore, as held by the Apex Court in Bharti Cellular Limited (supra), the roaming connections are provided without any human intervention and therefore, no technica .....

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tervention during the process of transportation of calls between two networks. This is done automatically. Human intervention is required only for installation of the network and installation of other necessary equipments/ infrastructure. Human intervention is also necessary for maintaining, repairing and monitoring each operator or individual network, so that they remain in a robust condition to provide faultless services to the customers. Human intervention is also required in case where the n .....

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intervention is required. The finding of the revenue authorities that interconnection is a composite process, involving several processes which require human intervention is erroneous. The test laid down by the Hon ble Supreme Court of India in its order when the case was remanded to the AO is to find out as to whether during traffic of calls, is there was any manual intervention? . There is no reference to the issues of set up, installation or operation maintenance or repair of network as expla .....

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subscribing to cellular mobile services provided by them do not come within the definition of technical services u/s. 194J read with section 9(1)(vii) Expln. 2, as it a mere collection of Fee for use of standard facility provided to all those willing to pay for it. Applying the proposition laid down in this case law to the facts of this case, we have to hold that inter connection facility and the service of the FTO in picking up, carrying and successful termination the call over their respective .....

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ely paying for an internet bandwidth to T and then selling it to its customers. The use of internet facility may require sophisticated equipment but that does not mean that technical services were rendered by T to the assessee. It was a simple case of purchase of internet bandwidth by the assessee from T. Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by T to the assessee and, therefore, the provisions of s. 9(l)(vii) did not apply. Tr .....

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der:- "Deduction. of tax at source-Fees for technical services- Assessee was engaged in business of software development of products and providing software services in India and overseas-Assessee was treated as "assessee in default" u/s 201(1) on account of non-deduction of TDS u/ s 194J from payment made for use of tele-communication services i.e telephone charges, link charges and band width charges as 'fee for technical services" u/ s 9(1}(vii}-CIT(A} reversed findings .....

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alore ITAT in the case of Wipro Ltd. vs. ITO (2003) 80 TTJ (Bang) 191 held as follows:- "Income deemed to accrue or arise in India-Fees for technical services/ royalty-Payment for transmission of data and software through uplink and down link services- Assessee engaged, inter alia, in the business of development of software providing on line software services through customer based circuits with the help of VSNL and foreign telecom companies outside India-As per the agreements with such tel .....

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ded as technical services-Further, no process has been made available to the assessee-Hence, there is no question of applicability of s. 9(l)(vi) too-So long as the amount paid is not taxable under the Act, the clause in the DTAA cannot bring the charge-Hence, there was no liability to deduct tax under s. 195" 39. In view of the above discussions, respectfully following the binding judgment of the Hon ble Supreme Court of India, we have no hesitation in upholding the submissions of the Ld. .....

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he Act, it would be an academic exercise to examine whether the payment in question would be fee for technical services under DTAA s. Suffice to say wherever treaties contain making available clause, then in terms of the judgment of the Hon ble Karnataka High Court in the case of CIT & Ors. vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 0467; the payment cannot be treated as FTS under the DTAA as there is no imparting as contemplated in the Treaties. Similar are the propositions on the .....

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e as business income and it can be brought to tax in India, only if the FTO has the permanent establishment in India and if the earning of income is attributable to activities or functions performed by such permanent establishment. This view is supported by the decision of the Coordinate Bench. 42. The Delhi Bench of the Tribunal in the case of ACIT vs. Paradigm Geophysical Pty. Ltd. 122 ITD 155 (2010) held as follows:- What art. 7(7) seems to convey is that where the business profits of the non .....

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viewed as business profits covered by art. 7. The position canvassed by the counsel for the assessee seems to be more logical than the view canvassed on behalf of the Department. Fees for technical services are essentially business profits since the rendering of such services is the business of the non-resident. In order to take out an item of income from the business profits, it is necessary under art. 7(7) that there should be some other provision in the treaty dealing specifically with the i .....

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on for any technical services rendered to RIL which made available technical knowledge, experience, skill, etc. or consisted of the development and transfer of any technical plan or design within the meaning of art. 12(3)(g) of the Indo Australian Treaty. The consideration will continue to be viewed as business profits under art. 7 of the treaty and since the assessee had no PE in India the business profits cannot be taxed in India." 43. Similarly, the Hon ble Bombay High Court in the case .....

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patents and license is regarded as royalty as the grant admittedly took place outside India; the question of applying deeming provisions of Explanation to s. 9 inserted by the Finance Act, 2007 would not arise and further, assessee having no PE in India, such income would not be taxable in India as industrial and commercial profits in terms of art. III of Indo-German DTAA-Income from activities covered by arts. V to XII by virtue of art. 111(3) are specifically excluded from the expression ' .....

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#39;" 44. In view of the above reasons, we hold that wherever under the DTAA s. Make available clause is found, then as there is no imparting, the payment in question is not FTS under the Treaty and when there is no FTS clause in the treaties, the payment falls under Article 7 of the Treaty and is business income. 45. ISSUE NO. 2 WHETHER THE PAYMENT TO FTOS FOR IUC S ARE IN THE NATURE OF ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. 46. The specific charge of the AO is that taking up a call by .....

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eign operator in favour of the assessee. The foreign operator connects his network to that of the assessee for further transmission. Hence, in this model, only the foreign operator is using his network and the assessee is not using or is not allowed to use network of foreign operator. Therefore, the definition of royalty is not attracted. b) The AO has not given a finding as to whether taking up a call by the FTO from the Assessee is a process . The definition of the term process rather the mean .....

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s network. When the FTO is using its network, it cannot be said that assessee is using the network of the Non-Resident Operator. Hence, both the situations are mutually exclusive. As the assessee is not using the network of the FTO, the payment made is not for use of process , hence, not in the nature of royalty. d) The AO s reliance on the judgment of the Chennai Bench of the Tribunal in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO (2011) 45 SOT 263 (Chennai) is misplaced, as .....

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property or information should be with the payer. Thus under the DTAA royalty has a much restricted meaning. f) Without prejudice to the above findings, even if the payments partake the character of royalty after retrospective amendment in the Act, the assessee cannot be held to be an assessee in default in respect of those payments made prior to the amendment, as brought out in the Finance Act, 2012. g) The obligation imposed upon the assessee u/s. 195 to deduct tax specifies that it should be .....

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nt to FTOs are in the nature of Fee for Technical Services . As the AO has held that the payment in question is royalty, as it is for the use of process , as per clause (iii) to Explanation 2 to Section 9(1)((iv) of the Act, we restrict our finding to this issue only. The term Process occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:- Explanation 2. -For the purposes of this clause, "royalty" means consideration (including any lump sum consid .....

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rty; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis ours) 49. By the Finance Act, 2012, Explanation 5 & 6 are added with retrospective effect from 1.6.1976 which reads as under:- Explanation 5 - For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not - (a) The possession or control of such rig .....

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ther or not such process is secret. 50. Before we deal the issue as to whether the payment is question for use of process , we feel it relevant to extract certain clauses of the agreements (a) Agreement between Bharti Airtel Ltd. and Sunrise Communications AG, which reads as under:- "1. Object of the Agreement 1.1 Each Party agrees to provide the other Party with connecting, transit and termination services (hereinafter referred to as ''the Services") allowing the conveyance of .....

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ave any rights in the equipments or in the network of the other Party (eg. liens or pledges). Each Party is and remains responsible for its network and for the provision of services relating to it, unless specifically stated otherwise in this Agreement. " 3. Definition of Services The Parties shall connect, and keep connected, for the duration of this agreement, their systems at Points of Interconnection (POI) in order to convey calls to and from those systems and to provide voice Services .....

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hall at its own cost, unless otherwise agreed by both Parties, be responsible for providing, installing, testing, making operational and maintaining all equipment on its side of each Point of Interconnection. 7.2 9. Charges 9.1 Each Party shall notify the other in writing of its 'per minute' rates for the Service(s]on a regular basis, as defined in the Service. Description(s) (see Schedule 1). All rates shall be stated in DOLLAR ($). Each Party shall invoice the other Party for the Servi .....

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ommunications services provided by Bharti; and WHEREAS, Parties, which are already providing carrier-to-carrier traffic, is now interested in creating a non-exclusive carrier-to-carrier relationship with Bharti; and WHEREAS, the Parties have agreed to enter into this Agreement to set out the arrangement between the parties in respect of the exchange of international telecommunication services as also the settlement rates in respect of the Service(s) listed in relevant Annexures attached. 3. OPER .....

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y being responsible for providing and operating, at its own expense, its respective network facilities. The Parties also shall interface on a 24 hours/ 7 days a week basis to assist each other with the isolation and repair of any facility fault in their respective networks." "ANNEX 1 - [BHARTI VOICE TERMINATION SERVICES, THIS ANNEX to International Telecommunication Services is subject to the terms and conditions of the RECIPROCAL TELECOMMUNIA TIONS SERVICES AGREEMENT entered into betw .....

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of the RECIPROCAL TELECOMMUNIATIONS SERVICES AGREEMENT entered into between AIRTEL TANZANIA LIMITED ('AIRTEL") and BHARTI AIRTEL LTD. ((Bharti") effective as of SERVICES AIRTEL will terminate international telecommunications traffic (IDD Type), which Bharti has delivered to one of AIRTEL S interconnection locations to those international Destinations. 51. A perusal of these agreements demonstrate that, each party under the agreement remains responsible for its own network and for t .....

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leasing out of any of the network elements or resources to the other parties or for rendering telecommunication services on a reciprocal basis. The assessee merely delivers the call that originates on its network to one of the inter connection locations of the FTO and FTO carries and terminates the call on its network. The Assessee is nowhere concerned with the route, equipment, process or network elements used by the FTO in the course of rendering such services. 52. The term process" used .....

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) & (ii) of the said explanation also use the same coinage of terms. The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi) refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. Thus the word "process" must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a sociis as held in the case of CIT Vs. Bharti Cellular Lt .....

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right, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. It is one of the most readily tradable properties in the digital marketplace." [as per definition provided in BusinessDictionary.com] 53. The term "process" is therefore to be understood as an item of intelle .....

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ty, the owner thereof must have an exclusive right over such property. As far as intellectual properties (IPs) are concerned, these have significance for the purpose of 'royalty' only till the time the ownership (as differentiated from the right to use) of such property vests exclusively with a single person and such person by virtue of its exclusive ownership allows the usage or right to use such IP to another person/ persons for a consideration in the form of 'royalty'. Payment .....

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ellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty . The Hon'ble High Court of Calcutta in the case of N.V. Philips Gloeilampenfabrieken Eind .....

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ependently and by his own efforts come to duplicate the invention the original invention remains exclusive to the investor and it is conceivable that such an inventor might exploit his invention permitting some other person to have the user thereof against payment. Similarly, it is possible for a person carrying out operations of manufacture and production of a particular product to acquire specialised knowledge in respect of such manufacture and production which is not generally available. A pe .....

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ecialised knowledge, though not protected by a patent, should not be treated as royalty or in the nature of royalty.-Handley Page us. Butterioorth. 19 Tax Cases 322 relied on. " Thus, the term 'royalty' connotes exclusivity and the exclusive right in relation to the thing (be it physical or intellectual property) for which royalty is paid should be with the grantor of that right. In case an intellectual property, it is generally associated with some discovery, invention, creation, s .....

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ialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited use of such specialised knowledge to others in confidence against payment in which case it is termed as royalty. However, once such specialized knowledge becomes public; such person loses the exclusivity in respect of such special knowledge and hence, loses the right to receive any royalty in respect of the same. Thus, for a payment to be classified .....

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Cambridge Dictionaries Online, defines process to mean a series of actions that you take in order to achieve a result. 54.1 Hence, the term 'process' implies a sequence of interdependent and linked procedures or actions consuming resources to convert inputs into outputs. Therefore, 'process' when viewed as an asset is an intangible asset and does not have physical existence. Various tangible equipments and resources may be employed in executing a process but 'process' pe .....

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person having exclusive right over such 'process' and 'process' being in the nature of intellectual property, the grantor of such right would normally be the inventor or creator of such process or person enjoying exclusive ownership of such process. The owner of the 'process' might grant the 'use' or right to sue to different persons at the same time, but the exclusivity of the ownership should be with the grantor. The royalty is paid for the use of the 'proc .....

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39; which is widely known and deployed by everyone in the field and for which the owner does not have exclusive rights cannot be a process contemplated in this Section 991)(vi) Explanation (iii). 54.2 In the case of telecom industry, all the telecom operators have similar infrastructure and telecom networks in place, for rendition of telecommunication services. The process embedded in the networks of all telecom operators is the same. The equipments, resources etc. employed in the execution of t .....

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rantee must 'use' the 'process' on its own and bear the risk of exploitation. The 'process' of running the networks in the case of all the telecom operators is essentially the same and they do not have any exclusive right over such 'process' so as to be in a position to charge a 'royalty'. For allowing the use of such process, the term 'use' in context of royalty connotes use by the grantee and not by the grantor. A 'process' which has been .....

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(1)(vi) by the Finance Act, 2012 with retrospective effect from 1.6.1976. As per this Explanation, the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of the right in respect of such pr .....

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. Thus the insertion of Explanation 6 to Section 9(1)(vi) does not alter the decision taken by us on this issue. 56. As far as the insertion of Explanation 5 to Section 9(1)(vi) is concerned, we hold that this Explanation comes into play only in case of Royalty falling within the ambit of Section 2 of Section 9(1)(vi). When a process is widely available in the public domain and is not exclusively owned by anyone the it cannot constitute an item of intellectual property for the purpose of charge .....

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oyalty agreements. If the arguments of the DR is accepted it would result in absurdity. For example:- i) A person hiring a taxi will be paying a royalty for indirectly using the process of running of the engines of the taxi. ii) A person using a cable connection will be termed to be paying royalty in the form of cable charges for indirectly using the process of running of the systems of the cable operators. iii) A telephone subscriber using or making a call would be held as indirectly using the .....

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s is that technical services is being provided by the FTO s to the assessee but that such Technical Service is not FTS as defined u/s. 9(1)(vii) of the Act as there is no human intervention. This finding that it is a service has not been upheld by the Hon ble Supreme Court of India only the factual issue as to whether there was human intervention was set aside to AO. Under such circumstances, the question of taking a contrary view that it is not a technical services , but a case where the FTO ha .....

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n 9(1)(vi) of the Act. Both these sections deal with different set of facts situation which cannot co-exist. 59.1 Even under the DTAA, as held by the Ld. First Appellate Authority we are of the view that the payment in question cannot be termed as royalty. 59.2 The assessee company has entered into interconnect agreements with various foreign telecom operators who are residents of countries like Australia, Canada, France, Israeal, Netherlands, Portuguese, Republic, Singapore, Spain, Sweden, Unit .....

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th the aforesaid countries are almost pari materia insofar as the royalty is for 'use of process' is concerned. We quote from Article 13(3) of Indo-UK treaty defining the term 'royalties' hereunder: 3. For the purpose of this Article, the term (royalties' means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means .....

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fic. (Emphasis ours) 59.4 Further, as per Article 12(3) of the Indo-US treaty, the term 'royalties' has been defined as under: 3. The term royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of - a literary, artistic, or scientific work, including.- cinematography films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any pate .....

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graph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. " (Emphasis ours) The definition of 'royalties' under Indo-Canada treaty is the same as above. 59.5 Similarly, Article 13(3) of the Indo-France Treaty defines 'royalties' as under: 3. The term royalties" as used in this article means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scie .....

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ovided in various treaties, it is clear that, all the treaties use the expression 'secret formula or process' is separated by a comma before and after the expression. This implies that" formula/ process is a part of the same group and the adjective 'secret' governs both. Thus, under the treaties, in order to constitute royalty for use of or the right to use of a process, the process has to be 'secret'. In the case of telecom industry, however, telecommunication servi .....

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hence, even under the DTAA s, the payment in question cannot be termed as royalty. 60.1 The Hon ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd. vs. Director of Income Tax (2011) 332 340 considered this issue and held as follows :- The taxpayer, a Hong Kong based company, was engaged in the business of satellite communications and broadcasting facilities. This business: was carried out through the medium of satellites, owned and leased, which are placed in geost .....

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and sends it to the target area. The area so covered, called the footprint area, included the territory of India. The assessee held that its income was not chargeable to tax in India because it does not have any permanent establishment in India. In particular, it was argued that there was no office or customers in India. The Delhi Tribunal in the said case held that despite the fact that the assessee could have business connection in India, none of its operations were carried out in India. In ad .....

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vision channels, the role attributed to the assessee was as follows: (i) programmes were uplinked by the television channels (admittedly not from India); (ii) after receipt of the programmes at the satellite (at locations not situated in Indian airspace), these were amplified through complicated process; and (iii) the programmes so amplified were relayed in the footprint area including India where the cable operators caught the waves and passed them over to the Indian population. The first two s .....

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any part of the aseeseee's operations were carried out in India. No machinery or computer was installed by the assessee in India through which the programmes reached India. The process of amplifying and relaying she programmes was performed' in the satellite which was not situated in Indian airspace. Even the tracking, telemetry and control operations to be performed outside India in Hong Kong. There was no contract or agreement between the assessee either with the cable operators or vi .....

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ny person who had a dish antenna, could also catch the signals relayed from these satellites: 'The role of the assessee was that of receiving the signals, amplifying them and after changing the frequency relaying them on the earth. For this service, the television channels made payment to the assessee. The assessee was the operator of the satellites and was in control of the satellite. It had not leased out the equipment to the customers. The assessee had merely given access to a broadband w .....

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ssession of which is or can be handed over by the satellite operator to its customers. The terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not be the determinative factors. There was no use of "process" by the television channels. Moreover, no such purported use had taken place in India. The telecast companies/customers were situated outside India and so was the assessee. The agreements under whi .....

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the operators was treated as income by these telecast operators which had in India and they had offered and paid tax. Thus, the income generated in India had been duly subjected to tax in India. The payment made by the tele cast operators situated abroad to the assessee which was also a nonresident did not represent income by way of royalty as defined in Explanation section 9(1)(vi) of the Act. Article 12 of the model double taxation avoidance agreement framed by the Organisation of Economic Co- .....

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whether the amount received was chargeable to tax section 9(1)(vii) were available on record. However, no arguments been advanced by the Department on this ground, it had to be presumed that the case was not sought to be covered under this provision. 61. In the case of DCIT vs. PanAmSat International Systems Inc. (2006) 103 TTJ 861 (Del) the Tribunal has held as under:- There is a ''process'' involved in the activity carried on by the assessee. There is a comma after the words &q .....

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vision. However, the punctuation-the use of the comma-coupled with the setting and words surrounding the words under consideration, indicates that under the treaty even the process should be a secret process so that the payment therefore, if any, may be assessed in India as royalty. The words which surround the words "secret formula or process", in art. 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trade mark, design or model, plan, etc. Thus .....

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hed literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process- assuming it to be so-does not amount to royalty" (Para 20) The arg .....

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o transferred to the assessee by the manufacturer. If the patent did not ensure to the assessee, how the assessee could have, even in the wildest of imaginations, let the broadcasters use the same for consideration. The argument sought to be made is factually not borne out. There is not on iota of evidence to show that the assessee had any patent to the satellite or transponder which it allowed the broadcasters to use for a consideration. (Para 21) 62. In the case of Cable & Wireless Network .....

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same is not taxable in India." Further, at paras 8.1 to 8.3, the Hon'ble AAR held as under: "No material has been placed to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well settled that telecom services are standard services. The arrangement between the applicant and C& W UK is for rendition of service and the applicant pays for the .....

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in question is not Royalty as contemplated under the DTAAs. 62.2 Now the question is whether there would be any change in this position subsequent to the retrospective amendments brought out by the Finance Act, 2002 w.e.f. 1.6.1976 by adding Explanation 5 & 6 to Section 9(1)(vi of the Act. The answer is no as changes in domestic law cannot be read into the Treaties as long as there is no change in the working of the Treaties. 63. The Hon ble High court of Delhi in the case of DIT vs. Nokia .....

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yright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article". It was categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty and on 'the wording of t .....

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sees in the present case will obtain any relief from the provisions of the DTAAs. Under Article 12 of the Double Tax Avoidance Agreements, the general rule states that whereas the State of Residence shall have the primary right to tax royalties, the Source State shall concurrently have the right to tax the income, to the extent of 15% of the total income. Before the amendment brought about by the Finance Act of 2012, the definition of royalty under the Act and the DTAAs were treated as pari mate .....

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rocess, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Article 12(4), Indo Netherlands Double Tax Avoidance Agreement ITA 473/2012, 474/2012, 500/2012 & 244/2014 Page 31 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work in .....

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he OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as pari materia. This Court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid i .....

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cessive Finance Act amendments, whether retrospective or prospective? The Revenue argues that it must, while the Assessees argue to the contrary. This Court is inclined to uphold the contention of the latter. 41. This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome a .....

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nt of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible. 64.1 After considering the Vienna Convention on the Law of Treaties, 1969 (VCLT) and the judgments of the Hon ble Supreme Court of Canada and other precedents, the Hon ble High Court further has held as under :- 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative i .....

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a manner so 59 supra note 1 ITA 473/2012, 474/2012, 500/2012 & 244/2014 Page 50 that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 65. Thus, respectfully following the jurisdictional High Court decision as well as the judgments of the other Courts, we agree with the submission .....

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y to the propositions laid down by the Hon ble Jurisdictional High Court in the case of DIT vs. New Skies Satellite BV & Ors. (Supra) as well as Asia Satellite Telecommunications Co. Ltd. vs. Director of Income Tax (Supra) and in the case of of the assessee itself as well as in the case of DIT vs. Nokia Networks (Supra) and other judgments referred in our decision. Even the Hon ble Supreme Court has held that such payments are only for service rendered. Moreover, the agreements entered into .....

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in judgment of the Jurisdictional High Court in the case of the assessee itself where it is held that the payment was for service and this necessarily excludes the possibility of the payment being held as that which is made for Royalty, as both are contradictory position. This decision has been affirmed by the Hon ble Supreme Court. Thus, we follow the binding decision of the Jurisdictional High Court in the matter and uphold the finding of the Ld. CIT(A). 67. Similarly, the reliance placed by .....

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city was dedicated for the use of the Indian customer irrespective of actual usage. In the case of the present assessee, no such point to point dedicated private line was made available by the FTOs. (b) In the case of Verizon Communications the customer has dedicated active internet connection at a particular speed, so that the contracted bandwidth is provided and the equipment at the customer end is also delivered by VCPL. In the case of the assessee no equipment is given by the FTO to the asse .....

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has no such interest. 68. Ld. DR further relied upon the decision of ITAT, Mumbai in the case of Viacom 18 Media (P) Ltd. vs. ADIT (International Taxation), (2014) 44 taxmann.com 1 (Mumbai Tribunal). This decision is also contrary to the proposition of law laid down by the Hon ble Jurisdictional High Court in the assessee s own case. The ITAT has held that M/s Viacom 18 Media Pvt. Ltd. was engaged in the broadcasting of its various programmes on TV channels including marketing and advertising a .....

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he order of the Ld. First Appellate Authority that the payment made for FTO for interconnection charges does not fall within the ambit of the definition of Royalty under section 9(1)(vi) of the Act or under the definition of Royalty under the Treaties. 70. Now we take up the other issues. ISSUE NO. 3 WHETHER THE ASSESSEE IS LIABLE TO BE TREATED AS ASSESSEE IN DEFAULT U/S. 201 OF THE I.T. ACT. 71. Under Section 195, any person, who is responsible for making a payment to a person who is a non-resi .....

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be declared to be an assessee in default . 72. We have held that the payment in question for IUC to FTOs is neither FTS nor royalty either under the Act or under the Treaties. We have in subsequent paragraphs given reasons as to why the income in question arising from the payment cannot be deemed to accrue or arise in India. Thus the assessee cannot be declared as assessee in default as it has not failed in its statutory obligations to deduct tax at source u/s. 195 of the Act. Assessee cannot b .....

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on the ground that, the income is received or is deemed to have been received in India or on the ground that, the income accrues or arises in India or is deemed to accrue or arise in India, during the relevant year. On facts, it is clear that Section 5(2)(a) is not applicable, as the payments were neither received nor deemed to have been received by the FTOs in India. The first part of Section 5(1)(2)(b) is also not applicable. Hence, we have to test the receipts, as per the deeming provisions c .....

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roposition of law laid down in the judgment of the Hon ble Jurisdictional High Court in the case of Asia Satellite Communication Company Ltd. (Supra) applies in this case. Hence, no income is deemed to accrue or arise to the FTO s in India. 75. Even if it is assumed that the payments accrued or arise to the FTOs either directly or indirectly through or from any business connection in India since the business operations of the FTOs are carried out entirely outside India, no part of such income ca .....

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. reasonably attributable to the operations carried out in India. From this Explanation, it is further amply clear that even if there is a business connection of the nonresident in India, then also only that part of the income shall be deemed to accrue or arise in India which is relatable to the operations carried out in India. So even if it is presumed for a moment, that there was any business connection of the assessee in India, still in the absence of any operations carried on by the assessee .....

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the income as relatable to the sale of equipment by the assessee can be said to have deemed to accrue or arise to the assessee in India within the meaning of s. 9." 77. The Hon ble High Court in the case of CIT vs. Goodyear Tyre & Rubber Co. (1989) 184 ITR 369 (Del.) held that even though the non-resident had a business connection in India, if no operations were carried out in India, the income cannot be subject to tax in India. Hence, the payment cannot be brought within the ambit of S .....

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ion 5(2) of the Act. Therefore this issue is decided in favour of the assessee. ISSUE NO. 5 WHETHER BENEFICIAL RATE PROVIDED UNDER DTAA OVERRIDE THE PROVISIONS OF SECTION 206AA AND WHETHER SECTION 206AA OF THE ACT IS APPLICABLE RETROSPECTIVELY. 79. This issue of retrospective applicability is covered in favour of the Assessee and against the Revenue by the decision of the ITAT, Pune Bench in the case of DDIT (IT-II), Pune vs. Serum Institute of India Ltd. (2015) 56 taxmann.com 1. Hence, respectf .....

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0%, having regard to the overriding nature of the provisions of section 90(2) of the Act. Section 206AA of the Act does not override the provisions of section 90(2) of the Act and in the payments made to non-residents, the assessee correctly applied the rate of tax prescribed under the OT Ms and not as per section 206AA of the Act because the provisions of the DTAAs was more beneficial. (ii) The explanation below sub-section-1 of Section 200A of the IT Act, which clarifies that in respect of ded .....

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g drawn reasoning and finding. Hence, we are of the considered opinion, that applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A is beyond the scope of the said provision. Thus, the AO has travelled beyond the jurisdiction of making the adjustment as per the provisions of Section 200A of the IT Act, 1961. 81. Respectfully, following the Coordinate Bench decision we hold that the beneficial rate provided in the DTAA o .....

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CIT(A) that the time given by the AO to furnish all the information and details pertaining to many past years, and that the assessee required time to collect the same from third parties who were located overseas and that such an exercise was time consuming. The Assessee has requested the AO specifically on 5.1.2012 to allow more time to compile the details. The AO without giving any further opportunity, within 7 days of such a request passed the impugned order. Under the circumstances, we find .....

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iotech Ltd. reported (2014) 52 taxmann.com 27 (Delhi - Trib.) - Order of the ITAT, H Bench, Delhi in the case of JCIT vs. Venus Financial Services Ltd. reported in (2012) 21 taxmann.com 436 (Delhi) 84. The Assessee also relied upon the decision of the Jurisdictional High Court in the case of CIT vs. Virgin Securities & Credits (P) Ltd. 332 ITR 396. 85. We have perused these decisions. These are distinguished on facts. When the Ld. DR has not disputed the finding of the Ld. CIT(A) that suffic .....

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t before admitting the additional evidence; the Commission of Income-tax (Appeals) had obtained a remand report from the Assessing Officer. While submitting his report, the Assessing Officer had not object, to the admission of the additional evidence, but had merely reiterated contentions in the assessment orders. It is only after considering remand report, the Commissioner of Income-tax (Appeals) had admitted the additional evidence. It cannot be disputed that this additional evidence was cruci .....

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missible at all before the first appellate authority. On contrary, rule, 46A of the Rules permits the Commissioner of Income-(Appeals) to admit additional evidence if he finds that the same is crucial for disposal of the appeal. In the facts of this case, therefore, we are of the opinion that on this aspect, no substantial question of law arises. 87. The Jurisdictional High Court in the case of CIT vs. Text Hundred India (P) Ltd. at Para 13 held as follows: 13. The aforesaid case law clearly lay .....

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