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Interroute Communications Limited Versus Deputy Director of Income Tax, International Taxation 3 (1) , Mumbai

Receipts from Indian entities on account of connectivity charges - Taxation of the receipts as royalty - Held that:- No services are made available in the sense that the recipient of service is enabled to apply the technology, and do the same work without recourse to the service provider. There is no transfer of technology here, and in that sense technical services are not made available. Undoubtedly, the services rendered by the assessee requires technical inputs, but that alone, as we have see .....

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: Kanchan Kaushal For The Respondent : Harshad Vengurlekar ORDER Per Pramod Kumar, AM: 1. By way of this appeal, the assessee appellant has called into question correctness of the order dated 31st October 2013 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10. 2. Grievances raised by the assessee appellant are as follows: 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in u .....

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law, the learned CIT(A) erred in upholding the action of the learned AO in alternatively treating the revenues of ₹ 6,15,32,756 received from the Indian customers during the year under consideration as fees for technical services as per the provisions of Section 9 of the Act, and the DTAA, without appreciating that the revenue is in the nature of business income not taxable in India since the appellant does not have a permanent establishment (PE) in India. 3. The assessee before us is a U .....

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s Ltd, towards the use of virtual voice network (VVN). This VVN, according to the assessee, is a standard facility provided by the assessee to various customers for providing the interconnect to third party carriers through assessee s port. The assessee s stand was that since no part of the work as carried out in India and since all the infrastructure and equipment is situated outside India, the income in question is not taxable in India. These submissions, however, did not impress the Assessing .....

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ure to Vodafone Essar South Limited and to a small extent from Tata Communication Ltd. 6. Interoute is not merely providing port connection. What it is providing is usage of its facilities/infrastructure enabling its customers to interconnect with each other. This includes proprietary software and hardware, technical expertise and other intellectual property held by Interoute. 7. Interoute s Virtual Voice Network (VVN} enables carriers to enter the voice services market without incurring high fi .....

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business of its customers. It includes infrastructure/facilities which enforces call admission control, provides an integrated firewall for real-time services and protects customer's traffic. Whether voice calls are incoming or outgoing, it ensures only authorized calls have access to the network. 9. Interoute has created the World's first commission free voice exchange; giving its customers the ability to exchange traffic securely and flexibly with other operators around the world. Bas .....

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eate their own private ones, giving them the ability to openly and honestly select who and when they wish to trade traffic with. 10. Arena uses Call Admission Control at the border of customer's network which means they can prioritize traffic streams coming into their network and reject unprofitable calls before they reach their Switching platform. Enabling them to prioritize important customers traffic streams, ensuring they receive their high quality supplier capacity. Arena acts as a meet .....

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osts of customer's network. Arena adds further value to customer's network as their interoperability, connection and management of multiple VoIP interconnect problems will be smoothed away by Interoute's expert VoIP teams, therefore saving them recruiting their own expensive VolP employees. Arena gives customer's immediate interconnection to over 250 Telehouses in sixteen countries, at no additional cost meaning significant savings in Local loop, international bandwidth and Teleh .....

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age and involves monthly/cyclic payments. It is also to be noted that availing of this facility has a direct link/bearing on the profitability of its customers i.e. (Vodafone India), who can substantially reduce their operating cost by availing the facility/services provided by the assessee. In view of the above, it is therefore held that the payments received by the assessee is in the nature of Royalty or alternatively as FTS and is to be taxed accordingly. 4. Aggrieved, assessee carried the ma .....

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tside India. Hence the same cannot be termed as 'Royalty' or 'Fee' for technical services. But having taken note of the AO's order, I am completely in agreement with the AO's finding that the entire payment which has been made by the Indian Customers to the appellant is in the nature of 'Royalty' or 'Fee: for technical services' as the appellant is creating a product which allows its customers in India to link its networks to that of other networks in Euro .....

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de. Having taken note of the Article of India-UK-DTAA on royalty and fee for technical services and also to Sec.9 of the income-tax Act, I am in complete agreement with the AO's finding that these payments are in the nature of royalty or fee for technical services. Accordingly, I consider it proper and appropriate to hold that the reasoning assigned by the AO for taxability of such receipt in the hands of the appellant in India is completely justified and correct as per the provisions of law .....

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s, can be pressed into service only when these are more beneficial to the assessee vis-à-vis the applicable treaty provisions. In a situation, therefore, in which the assessee is not exigible to tax under the provisions of the applicable tax treaty, there is no occasion to examine the taxability under the provisions of the Act. The assessee before us, being a tax resident of the United Kingdom, is eligible to avail benefits o the India UK Double Taxation Avoidance Agreement [(1994) 206 IT .....

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the relevant treaty provision, i.e. Article 13. This is as follows: ARTICLE 13 Royalties and fees for technical services 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees .....

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first-mentioned Contracting State or a political sub-division of that State, and (bb) 20 per cent of the gross amount of such royalties or fees for technical services in all other cases; and (ii) during subsequent years, 15 per cent of the gross amount of such royalties or fees for technical services; and (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties a .....

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ning 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. 4. For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any ki .....

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(c) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. 5. The definitions of fees for technical services in paragraph 4 of this article shall not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property, other than property described in paragraph 3(a) of this Article; (b) for services that are anci .....

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ention. 6. The provisions of paragraphs 1 and 2 of this Article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respec .....

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. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the obligation to make payments was incurred and the payments are borne by that permanent establishment or fixed base then the royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base .....

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tate, due regard being had to the other provisions of this Convention. 9. The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties or fees for technical services are paid to take advantage of this Article by means of that creation or assignment 8. So far as taxation of the receipts in question as royalty, under the above treaty provision, is concern .....

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ration for the use of, or the right to use, any industrial, commercial or scientific equipment . However, in order to understand whether the income in question will fit into any of the above descriptions, it is necessary to understand the nature of service provided by the assessee. By way of a diagram, this service can be described as follows: 9. Essentially, the role played by the interroute facility is connecting the call to the end operator, and, in that sense, it works like a clearing house. .....

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s any patent, trademark, design, plan or secret formula or process for which the payment is made. There can hardly be any dispute that the payment is made for a service, which is rendered with the help of certain scientific equipment and technology, rendered by the assessee. The service is connectivity to the telecom operators in the call end jurisdiction. The facility is a standard facility which is used by other telecom companies as well. As for the dedicated ports, these things only provide a .....

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acter of arrangement. The payment continues to be for service alone. The assessee may charge a fixed amount to cover its costs in employing enhanced capacity so as not to incur losses when this capacity is not used, but what the customer is paying for is a service and not the use of equipment involved in additional capacity, nor, as we have seen above, for any scientific work, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, comme .....

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