TMI Blog2008 (7) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in the business of providing call centre, data processing and Information technology support services to its group companies. The applicant submits that it has entered into an agreement with BT America (hereinafter referred to as 'BTA' or BT) - a non-resident company formed and registered in USA under which BTA provides the applicant with two-way transmission of voice and data through telecom bandwidth. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e. USA and India. The applicant states that under the Agreement, a fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. Installation Charges as specified in the Order Form are also payable initially. The payment to BTA is net of any Indian taxes, including withholding taxes, as may be applicable. The applicant states that in consideration of the services rendered, BTA raises its invoices on Dell India (the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the privity of contract is established between the applicant and the BTA. The applicant is as much governed by the terms of the two agreements (Service Schedules) as its parent company - Dell US. 3. The facts stated in BTA's letter dated 18th May, 2007 addressed to the applicant (Dell-India) also deserve reference while narrating the facts. It is stated therein that BT and its affiliates jointly with VSNL provides telecom services to Dell India to carry voice and data traffic from US and Ireland to India and back through dedicated private telecom lines. BT or its affiliates which are licensed telecom operators in Ireland and USA provide the US and Irish element of the service while VSNL (a licensed operator in India) provides the telecommunication service in India. It is further stated that these services are provided through sub-sea cables and telecom network owned or leased by BTA or VSNL. BTA states that it "has neither installed any equipment at DIS facilities nor placed any of these items at DIS's disposal or use elsewhere." (DIS is the applicant) 4. The applicant has stated at para 4.5 of Annexure IV that the same fiber link cables and other equipment are used for all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngalore, after inquiry and the applicant was put on notice thereof. The applicant's version that VSNL provides and manages the Indian half circuit is, therefore, not fully correct. We may also mention that the applicant did not file any documentary evidencing the inter-se arrangement between BTA and VSNL / Bharti Telecom. The applicant has also not furnished any details regarding the domestic access line provided by the Indian telecom service. Provider or the equipment placed at its site in Bangalore by the Indian service provider or the equipment deployed by the applicant at its site to establish connectivity etc. 6. The applicant sought advance ruling on six questions framed by it. At the time of admission of application, after hearing the arguments of both the counsel, Question no. 1 was recast and question no. 6 was substituted by question nos. 6 to 8. Thus, the following questions were formulated for consideration:- 1. Whether or not the amount payable by the applicant under the terms of "BT Private Line Connect Service Schedule" - the agreement between the Dell US and BT America (which has been confirmed by the applicant) read with the Master Service Agreement would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly (iv)(a) of the said Explanation? In short, these are the questions. Section 9 in so far as it is relevant for our purposes enjoins that income by way of 'royalty' payable by a person who is a resident shall be deemed to be the income accruing or arising in India [vide sub-clause (b) of Sec. 9(1)(vi)]. There is an exception provided in sub-clause (b), which is relevant, to question no. 5 and it will be dealt with later. 8. The definition of 'royalty' as contained in Explanation 2 has six limbs. We are most concerned with clause (iv.a). Clause (iii) has also been referred to by DIT in his comments. Clause (iv.a) was inserted into the Explanation 2 to Sec. 9(1) by the Finance Act, 2001. According to the said clause, the consideration for the 'use' or 'right to use' any industrial, commercial or scientific equipment other than the amounts referred to section 44BB comes under 'royalty. Whether any consideration is payable for the use or right to use the scientific/commercial equipment is the question that looms large in the instant case. Whether the payments made by the applicant are in the nature of consideration for "the use of any patent, model, design, secret formula or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oice and data. The consideration is paid for rendition of such service by BTA by means of a point-to-point dedicated circuit owned by the service provider, namely, BTA. Rendition of service by service provider using its own equipment does not attract the definition of royalty. The consideration stipulated is only for delivery of package of services, the applicant being recipient of service. The Agreement obligates BTA to utilize its 'leased circuit' for rendition of service to the applicant so as to give full country coverage in both countries of delivery i.e. Ireland and India. Leased circuit means a dedicated link provided between two-fixed locations for exclusive use of the subscriber. Both possession and control of the leased circuit and related equipment is only in the hands of BTA and not with the applicant. BTA has to maintain and monitor the network and infrastructure for the purpose of rendering service to the applicant. No equipment or machinery has been installed at the applicant's premises much less they were kept at the disposal of the applicant. The equipment if any placed at Dell's Premises cannot be changed or tampered with by the applicant. Such placement is only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but it carries an artificial meaning. The services are merely incidental to BT granting right to use or permitting the 'use' of its point to point circuit by the applicant and therefore the consideration charged partakes the character of 'royalty' as defined in Section 9 of the Act and Article 12(4.a) of the India-USA DTAA. 15. A reference to various other clauses in the Agreement (Connect Service Schedule) on which reliance is placed by the Revenue, will be given later. 16. The alternative contention of the Revenue for bringing the payments in question within the definition of 'royalty' is that the applicant has paid for the use of or right to use a process or secret process. Analysis of agreements : 17. Dell-BT Private Line International Service Schedule and Dell-BT Private Connect Service Schedule were signed by the representatives of Dell-USA, LP and BT America Inc. in June, 2003. It is mentioned in the cover note of both the Service Schedules that the attached terms and conditions, annexures and orders constitute a schedule to the Master Agreement dated 1.1.2003 between British Telecom PIC and Dell-USA, LP and the terms and conditions of the Master Agreement ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om section 2.3. that the service comprises of two components: (i) International Component comprising of the Core Network between the two countries of the Service. (ii) Domestic Component comprising of the Access Lines from Core Network in each country of the service to the Customer Site. Core Network means the core international telecommunications network owned by BTA. 'Network' is defined to mean the telecommunications network provided by BTA comprising hardware, software and private circuits for the purpose of providing the service. It is stated in section 2.4 that "for speeds 1920K and below, conversion is required and BT equipment provided will be chargeable". 2.7 says that "BT equipment remains the property of BT or its agents." 22. The 'service description' given in the second Agreement i.e. Connect Service Schedule is the following: 2.1 Overview BT Private Line Connect Service ("the Service") uses dedicated, digital international point-to-point circuits for the transmission of voice, data, IP and image or combination of any of these. They are permanently available, 24 hours a day, for a fixed rental charge. Connectivity is provided by a number of physical compon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (electricity) is described as a general term referring to a system of conducting parts and their inter-connections through which an electric current is intended to flow. A circuit is made up of active and passive elements or parts and their interconnecting conducting paths. The active elements are the sources of electric energy for the circuit; they may be batteries, direct-current generators, or alternating-current generators. Circuit (electronics) is stated to be an electric circuit in which the equilibrium of electrons in some of the components is upset by a means other than an applied voltage. …….. . Electronic circuits find application in all branches of industry and in the home, both for entertainment equipment and increasingly for control. Because of their low power dissipation and fast response, they are excellent control circuits. Computers, communication systems, and navigation systems use many types of electronic circuits. 27. Bandwidth is another relevant term which needs to be adverted to. Bandwidth is the difference between the frequency limits of a band containing the useful frequency components of a signal ( McGraw-Hill Dictionary of Scientific Technical Ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he changes or alterations to the Service or BT equipment made other than by BT or authorized agent is mentioned as one such. 33. Section 5 of Connect Service Schedule deals with Customer's responsibilities. Section 5.1. says that the customer must provide a CSU/DSU in the US and may have to provide "Customer Equipment at the Distant-End country", and "it is the customer's responsibility to ensure that the Customer Equipment at each site is capable of successful conversion of the signaling systems or protocols that the customer may use." Customer shall report faults in the service to the Service Centre using the fault reporting procedures. The faults diagnosed to be occurring in the Access Line not provided by BT shall be reported directly to the PTSP (vide 5.2). The customers are required to notify the BT service centre of any "Network affecting incidents" such as disconnection of BT equipment (vide 5.4.). Then, Section 5.5. says: 5.5. "The customer shall not, nor allow any person to: 5.5.1. attach anything directly to the Service; or 5.5.2. connect any electrical connection to the Service; or 5.5.3. place or use anything in such a way or position in relation to the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween US and Ireland and Rs.83,100 for the circuit between Ireland and India. However, nothing much turns on this apparent discrepancy. In the Order Form, BT network installation charges is shown as waived. Access Line Installation Charge is specified as 12,000 USD. The same is the position in International Service Schedule. Two items which are charged for in the case of International Service Schedule are: (1) Total monthly rental charge 21,200 USD, and (2) Installation charge for B-end access line - 12,000 USD. 37. The Service for each site which commences on the 'operational service date' will continue for a minimum period of 12 months or such other period specified in the Order (Annex 1) and even thereafter, the Agreement will continue in force until terminated by either party by giving 60 days' notice (vide Sec.3) Discussion: Reg. applicability of clause (iv.a) of Expl.2 to S.9(1)(vi): 38. After noting the important features and terms of the Agreements, we shall now proceed to address the crucial question whether the agreement (Connect Service Schedule) contemplates consideration^ to be paid for the use of or right to use the equipment within the meaning of clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar No.14/2001, it is contended by the applicant that cl.(iv.a) was added to Expl.2 by the Finance Act of 2001 only with a view to bring the leasing transactions within the net of taxation. However, the Circular cannot be construed to have exhaustively defined the scope of cl.(iv.a) In any case, the Circular cannot control the plain language of the said clause. 41. The language of cl.(iv.a) pertaining to royalty definition or for that matter, the language in the Treaty cannot be confined to pure and simple lease transactions. The phraseology "the use of or right to use the equipment" is wider in scope and can cover transactions which are not in stricto sensu 'leases'. Transactions falling short of lease and having substantial similarities with lease or hire can also be brought within the sweep of cl.(iv.a) and Art.12(3). 42. Has the consideration in the form of monthly recurring charges been paid by the applicant for the use of equipment or for getting a right to use the equipment owned by BTA ? How the expression "use" or right to use" should be understood vis-à-vis the equipment? These are the crucial questions we have to address. 43. It seems to us that the two expre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context of sales-tax Acts and the expanded definition of sale contained in clause (29-A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. The word 'use' - what it means: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. 47. It is the contention of the Revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on account of this. The electronic circuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network. 48. There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the so-called equipment, solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasizes the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause 5.1. From this, it is sought to be inferred that the customer (applicant) is in a position to modify the equipment and that the agreement recognizes this fact. We cannot construe this provision as a sort of licence given to the applicant to modify or meddle with the access line or the equipment. In fact, section 5.5 referred to supra, gives a contra indication. Clause 5.1 (a) of Annexure 2 reinforces the prohibition contained in section 5.5 by penalizing the applicant with higher charges. That is the underlying object of this provision. The counsel for Revenue then drew our attention to clause 3.4 of Annexure 2, which according to him, is another pointer that the applicant is in custody of the circuit and equipment, and that it uses the same for the purpose of transmission of voice and data. Clause 3.4 states that BT will require "full access to the circuit during the course of fault investigation and fault repairs" including access to the customer's premises. It does not mean, as the Revenue's counsel wants to contend, that BTA or its agent has no access otherwise to the circuit/equipment as it is placed at the disposal of the applicant. We do not think that so much can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the service tax Law, the provision of bandwidth connectivity is considered as a 'leased circuit' service liable for service tax. It is not necessary to delve into the larger question whether service tax provisions can be pressed into service for understanding the real nature of transaction in the instant case. 55. We have approached the entire issue only from the angle whether the applicant can be said to have used the alleged equipment or obtained the right to use it. An equally relevant question would be whether any equipment has been placed in the possession and control of the applicant. Though the Revenue and its counsel asserts that electronic circuit is tangibly an equipment, no arguments were advanced to substantiate this point. Even the applicant, either in written or oral submissions has not dealt with this aspect, except by way of bald repudiation of the Revenue's contention. In this background, we do not propose to deal with this point. The conclusion that there was no use or right to use (the equipment) is sufficient to answer the issue as regards the applicability of clause (iv-a) of Explanation 2 in favour of the applicant. Whether the payment made by the appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Incidentally, we may mention that it was brought to our notice that similar bandwidth services through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the Treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect. Questions 1 and 3: 57. Whether the amounts payable by the applicant under the agreement would be in the nature of 'fee for included services" within the meaning of Article 12(4) of the Treaty OR 'fee for technical services' within the scope of clause (vii) of Explanation 2 to section 9(1) of the Income-tax Act, 1961. These questions need not be discussed at length because it has been fairly and correctly stated by the Revenue and its counsel that the requirement in article 12(4) of the Treaty that technical knowledge, experience, skill, etc. should be made available has not been satisfied in the instant case. In view of such language, the ambit of technical service has been considerably reduced in scope. The phrase "make available" occurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imb, i.e., for the purpose of earning income from a source outside India. We find it difficult to accept the applicant's contention. No doubt, the factum of the applicant carrying on business in India does not come in the way of getting the benefit of the exception. It is possible to visualize the situations in which the business is carried on principally in India whereas a particular source of income is wholly outside India, but, that is not the situation here. The income which the applicant earns by data processing and other software export activities cannot be said to be from a source outside India. The 'source' of such income is very much within India and the entire business activities and operations triggering the exports take place within India. The source which generates income must necessarily be traced to India. Having regard to the fact that the entire operations are carried on by the applicant in India and the income is earned from such operations taking place in India, it would be futile to contend that the source of earning income is outside India i.e. in the country of the customer. Source is referable to the starting point or the origin or the spot where something sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludes the applicant from making use of the facility it secured for the purpose of its business in India. That is why the applicant has guardedly used the words that the applicant "is inter alia, engaged in the business of providing call centres and data processing and information technology support services to its group companies" and at another place, the expression used is "principally comprises of export revenues" (emphasis supplied). No material has been placed before us to show that the network is not being availed of and not meant to be availed of for doing similar business within the country. It cannot therefore be said that the payments made to BTA for establishing and maintaining the requisite telecommunication network is for the purpose of earning income from a source outside India only. Another hurdle that comes in the way of the applicant is that it cannot be said with certainty that the transfer had taken place outside India. The property could have very well passed in India even though the terminating point of export is in a foreign country. We have no material in this regard to come to a definite conclusion. Question No.7: (Re: Permanent Establishment) 63. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o BTA is net of any Indian taxes including withholding taxes and it appears to be so under the terms of the agreement. Under section 195A if under an agreement or other arrangement the tax chargeable on any income is to be borne by the buyer, for the purpose of deducting tax at source, such income needs to be increased to an amount equivalent to the net amount payable after deducting tax at source. It implies that the income has to be grossed up for the purpose of deducting the tax. 66. Now, the questions framed give rise to twin aspects: (i) the future obligation of the applicant to deduct and pay the income-tax as per the requirements of section 195 and 195-A of I.T. Act and (ii) refund of the tax deducted and paid already. 67. These questions would have been answered straight away in favour of the applicant but for the fact that the issue regarding Permanent Establishment still lingers. Unless the concerned authority decides the same in an appropriate proceeding under the Income-tax Act, 1961, the applicant will not be in a position to deviate from the previous practice of deducting tax and to get the relief which could have otherwise flown from this ruling. However, it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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