TMI Blog2018 (4) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... ot liable to withhold tax on the lease line charges paid by it. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended. We have already decided this issue in the paras hereinabove that under the provisions of DTAA, the term ‘royalty’ is defined and it does not cover any such services availed and payment made and hence, there is no merit in the stand of Revenue in this regard and the same is dismissed. In any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The assessee as recipient of services had reimbursed the same and in the absence of profit / income element, there is no liability to deduct tax at source. Hence, the assessee cannot be held to be in default. Acceptance of international transactions to be at arm's length price by the TPO in its order passed under section 92CA(3) - Once the nature of expenses has been so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was made without deduction of tax. 2. The learned CIT(A) erred in law and on facts in not accepting the payments of lease line charges were reimbursement of expenses and further failed to appreciate that there was no contract between the appellant and the service provider Quest Communication Inc. 3. The learned CIT(A) erred in law and on facts in confirming the action of learned AO in treating the payments as royalties or fees for included services ignoring the provisions of DTAA with USA. The said payments cannot be held to be Royalties or fees for included services in view of the DTAA with USA. 4. Without prejudice to ground no.1 to 3, the amendments relied upon by AO to Section 9(1)(vi) though retrospective, Section 40(a)(i) would not apply for non-deduction as the deductor could not anticipate such amendments and therefore there could be no default as per the law existing on the date of deduction. 3. The issue raised in the present appeal is in relation to payment of lease line charges by the assessee to its associated enterprises. The Assessing Officer has disallowed the claim of deduction of ₹ 31,22,300/- on the ground that the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was placed on various other decisions for the same proposition that the payments towards reimbursement of expenses was not in the nature of income and there was no obligation to deduct tax at source under section 195 of the Act. The assessee also pointed out that lease line / bandwidth charges were not royalty for the use of process and it should not be considered so. The submissions of assessee are reproduced by the Assessing Officer under para 7.2 at pages 2 to 6 of the assessment order. The Assessing Officer vide para 7.3 observed that contention of assessee was not correct since it was not reimbursement of expenses to the associated enterprises for any services provided by them to the assessee, actually it was payment made to third party Qwest Communication Inc, through associated enterprise of assessee. The said payment was for providing lease lines for communication purposes. The Assessing Officer further observed that in the absence of associated enterprise, if the assessee intended to take services of Qwest Communications, Inc, services would be provided to him at the same rates as charged by associated enterprise. Thus, the amount remitted to third party was income in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in view of this amendment. Thus, the definition of royalty as per DTAA has includes and shall be deemed to have always included the clarificatory meaning only. The DTAA is in consonance with the I.T Act only and so there is no question of them being inconsonance. 5) The various court decisions which are quoted by the assessee for non payment of TDS on lease line charges have no significance now. The transmission of every kind whether by satellite cable or optic fibre and used for uplinking / downlinking of signal / data comes under royalty on which TDS was always deductible. And it covers the case where the service provider provides the service through the equipment (be it cable, optic fibre, satellite) and service recipient uses it for the price. It is the business of the service provider to provide the technical service of this kind. It cannot be said that as the service is provided by the provider to many customers it has changed its nature from being technical in nature. In view of the above facts the plea taken by the assessee regarding the DTAA, reimbursement of expenses, no direct payment to Qwest Communications Inc and case laws in their favour stands negated. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed to circumvent the law on the ground of reimbursement. 7. Reliance of assessee on the decision of Mumbai Bench of Tribunal in WNS North America Inc. Vs. ADIT in ITA No.821/Mum/2010 for assessment year 2006-07, dated 14.12.2012 (2013) DTR (Mumbai)(Trib) 402 for the proposition that on similar issue of reimbursement of lease line charges paid to associated enterprise, it was held that the same could not be income of associated enterprise as payment was made without mark up, was held to be not correct since the decision in C.U. Inspections (I) (P) Ltd. Vs. DCIT (supra) was dated 06.03.2013 while the decision in WNS North America Inc. Vs. ADIT (supra) was dated 14.12.2012. The CIT(A) held that the later decision of Mumbai Bench of Tribunal needs to be followed. As regards the claim of assessee that decision of Mumbai Bench of Tribunal has been upheld by the Hon ble High Court, the CIT(A) observed that the Hon ble High Court had simply refused to entertain question Nos.4 and 5 pertaining to this issue on admission stage itself being question of fact. Therefore, he upheld the order of Assessing Officer and confirmed the disallowance of ₹ 31,22,300/-. 8. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... best, the disallowance could be made at ₹ 20,47,432/-. The learned Authorized Representative for the assessee also pointed out that sum of ₹ 10,74,870/- has been allowed as deduction in the preceding year. 10. He further referred to the second aspect of the order of Assessing Officer, wherein he stated that payment was in the nature of royalty and also in the nature of Fees for Technical Services (FTS), because of amendment to section 9(1)(v) of the Act. The learned Authorized Representative for the assessee referred to the TP study report at page 55 onwards and pointed out that the said transaction of reimbursement of expenses was part of the said report and the TPO had also in its order referred to the reimbursement of lease line charges as an international transaction. The learned Authorized Representative for the assessee further referred to the Invoice raised by Qwest Communications Inc on T-3 Energy Services for entire T-3 group, of which India was one part. Reference was made to page 23 of Paper Book in this regard. He further pointed out that T-3, USA in the first instance makes the payment and then the amount is collected from the assessee. The assessee ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the ratio laid down by the Hon'ble Supreme Court in GE India Technology Cen (P.) Ltd. Vs. CIT (supra) and DIT Vs. A.P. Moller Maersk A S (supra) for the proposition that if there was no profit element in the payments, then there is no need for any withholding tax. He stressed that it cannot be said that for each payment, there has to be withholding of tax. He stressed that where the TPO had accepted reimbursement of expenses to be within arm's length and where the books of account of assessee have not been rejected, so the transaction contained in, needs to be accepted. The learned Authorized Representative for the assessee also stressed that between Qwest Communications Inc and T-3, USA, there was a privity of contract for global utilization of facilities; if individually agreements were entered with each of the entity of T-3, USA, then cost would be affected. He further stressed that T-3, USA had no Permanent Establishment (PE) in India and had entered into an agreement with Qwest Communications Inc outside India to provide lease lines worldwide to its entities. The learned Authorized Representative for the assessee strongly relied on the decision of the Hon ble Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o payment was made to Qwest Communications Inc and the payment was made to associated enterprise, who was not the holder of intellectual property, for which the payment was being made to him. The Invoice was raised by Qwest Communications Inc on T-3 USA on usage basis and it was not case of tax planning where constant amount was being paid. He then, referred to the decision of Delhi Bench of Tribunal in M/s. Geo Connect Ltd. Vs. DCIT in ITA Nos.1927/Del/2008 127/Del/2011 relating to assessment years 2002-03 2003-04 and in DCIT Vs. M/s. Geo Connect Ltd. in ITA Nos.2088/Del/2008 5851/Del/2011, relating to assessment year 2002-03, vide order dated 17.01.2017 and stressed that where standard facilities were being provided for transmission, it was neither royalty nor FTS . There is no secret process for such transmission, whereas the definition of royalty talks of secret process. In respect of reliance of learned Departmental Representative for the Revenue on the ratio laid down by Mumbai Bench of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ADIT (IT) (supra) and Hon ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO, the learned Authorized Representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be disallowed under section 40(a)(i) of the Act. The assessee is in appeal against cumulative disallowance of ₹ 31,22,300/- made under section 40(a)(i) of the Act. 15. The first aspect which needs to be seen is the factual aspect, wherein in pursuance to the contract between Qwest Communications Inc and T-3, USA, Invoices were raised by Qwest Communications on T-3, USA, copies of which are placed at page 13 onwards of Paper Book. The said Invoices talked about lease line usage by different entities of T-3 group at Oklahoma City, Canada, India, Azura, etc. Consequent thereto, T-3 Energy Services India Ltd. received Invoice from T-3 USA and the amount was remitted through banking channel to T-3, USA. The first set of communications in this regard are placed at pages 13 to 18 of the Paper Book. Thereafter, the documents are placed at pages 19 to 54 of the Paper Book. The learned Authorized Representative for the assessee during the course of hearing has also filed tabulated chart at Annexure-1, wherein the amounts payable on account of lease line charges monthwise are provided. Invoices are raised by Qwest Communications Inc, USA on 7th of each month, copies of which are p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiations of price to be charged for providing lease lines to different entities. The understanding was between T-3, USA and Qwest Communications Inc and the assessee was not part of said understanding though it benefited from the understanding, wherein lease lines were provided for use by the assessee on bandwidth which was made available to entities of T-3, USA worldwide and the assessee was one such entity using the said services and hence, benefiting from reduced rates of charges. Thus, the claim of assessee of reimbursement of expenses to T-3, USA since it was under contract with Qwest Communications Inc, which was the service provider. It is nobody s case that T-3, USA was the person providing services. However, both the authorities and even learned Departmental Representative for the Revenue before us has urged that the assessee had made payments to Qwest Communications Inc through its associated enterprise, since the amount was reimbursed on cost to cost basis. On the other hand, the assessee pleads that since it had reimbursed the expenses on cost to cost basis and there was no profit element of payments being made to associated enterprise, there was no question of withhold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then took note of the amendment by the Finance Act, 2012, which inserted Explanations 4, 5 and 6 under section 9(1)(vi) of the Act. The Revenue before the Hon ble High Court claimed that the said Explanations were clarificatory and it had settled the matter i.e. reasoning in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) could not stand because the basis of that ruling had been undone. The second proposition which was raised was whether DTAA applied and resulted rendering activity non taxable was also argued by the Revenue would not arise, since the DTAA predated the amendment. The Counsel for the assessee therein however, contended that the matter was no longer res integra. It was argued that the Revenue could not contend that any change in the substantive law would automatically result any like change in respect of taxability of transaction or service which was otherwise taxed in terms of DTAA, or which was subject to lower rate of tax mandated by a treaty. Reliance in this regard was placed on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (2009) 310 ITR 320 (Bom) and the Hon ble High Court of Andhra Pradesh in Sanofi Past ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible. 18. Referring to the decision of Apex Court in Union of India Vs. Azadi Bachao Andolan Arn. (2003) 263 ITR 706 (SC) and The Vienna Convention on the Law of Treaties, 1969, the Hon ble High Court held the amendments to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore, categorically prohibited. The Hon ble High Court held that the words in the treaty would be controlled by definition of those words in the treaty, if they are so provided. In case they are not provided, then the domestic law shall mandatorily supply the import to be given to the word in question. The H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of Tribunal in Shin Satellite Public Co. Ltd. Vs. DDIT (IT) (2011) 12 taxmann.com 6 (Del), we are not going into the aspect of the amendment to section 9(1)(vi) of the Act, under which Explanations 4, 5 and 6 have been added, which interalia, amends the definition of royalty with retrospective effect. We hold that the same need not to be gone into since the issue otherwise stands decided in favour of assessee. The Hon ble High Court of Delhi in DIT Vs. New Skies Satellite BV Ors. (supra) have held that even though the term royalty as used in section 9(1)(vi) of the Act has been amended by introducing Explanation retrospectively, but in view of no change in the definition of royalty in DTAA, the beneficial provisions of DTAA would apply. The amendment made under the Act does not affect the terms of DTAA unless and until the same is amended by two Contracting States. 21. In the present case also, though definition of Royalty under the Act had been amended, but the term Royalty under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of royalty under DTAA, the assessee is not liable to withhold tax on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra) and held that the amendments could not be read into the treaty. Unilateral amendment by the Indian Government to the term royalty by way of amendment to section 9(1)(vi) of the Act cannot be extended to the meaning of the term under DTAA. Hence, we hold reliance of learned Departmental Representative for the Revenue on Mumbai Bench of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ACIT (supra) and Bangalore Bench of Tribunal in Vodafone South Ltd. Vs. DDIT (IT) and also Mumbai Bench of Tribunal in C.U. Inspections (I) (P) Ltd. Vs. DCIT (supra) are not to be applied in view of the issue being settled by the Hon ble High Court of Delhi. 23. The assessee on the other hand, has relied on the decision in WNS North America Inc. Vs. ADIT (supra) i.e. decision of Mumbai Bench of Tribunal, which has been approved by the Hon ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman 317 (Bom). The issue before the Hon ble High Court of Delhi was in the hands of recipient of lease line charges. The assessee therein had recovered internal telecommunication charges from WNS charges and the Tribunal held the amount in question was received by the said assessee as reimbursement of lease line cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit in the stand of Revenue in this regard and the same is dismissed. In any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The assessee as recipient of services had reimbursed the same and in the absence of profit / income element, there is no liability to deduct tax at source. Hence, the assessee cannot be held to be in default. 26. The Assessing Officer had also raised the issue of payment being in the nature of fees for technical services. However, in the final analysis disallowance has been made in the hands of assessee for non deduction of tax at source on the payments being made in the nature of royalty i.e. amended provisions of the Income-tax Act. We have already decided the said issue in the paras hereinabove and accordingly, we hold that there is no merit in invoking the provisions of section 40(a)(i) of the Act for non withholding of tax on the amount of charges paid for reimbursing associated enterprise for lease line charges. 27. Another related aspect of the issue is the acceptance of internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
