TMI Blog2023 (11) TMI 281X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of Royalty as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to, transfer of all or any rights or 'use of', in the domestic law. As per Explanation 5 6 , the word 'process' includes and shall be deemed to 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. Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of Royalty u/s 9(1)(vi) Explanation 5 6. We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of Royalty under India Netherlands DTAA. The definition of Royalty under the DTAA is much more narrower in its scope and coverage, than the definition of Royalty contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. On perusal of the agreement between the assessee and the end users placed at pages 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to our notice the additional grounds raised by assessee vide application dated 16.06.2023 for all the years under consideration. He submitted that as the issues on merits are covered in favour of assessee by virtue of the decision of Hon ble jurisdictional High Court in case of Vodafone Idea Ltd. vs. DDIT reported in (2023) 152 taxmann.com 575, assessee is not inclined to press upon the issues raised in the application for admission of additional grounds. The same has been endorsed by the Ld.AR which is placed on record. Based on the above submission, the additional grounds raised by the assessee for all the years under consideration vide application dated 16.06.2023 stands dismissed as not pressed. 2. It is submitted that, the issues raised by the assessee in grounds of appeal for all four A.Ys. are common and on identical facts. It is submitted that the observations of the Ld.AO/DRP are identical and similar for all the years under consideration. Accordingly, all the appeals are being disposed of by way of common order. 3. For the sake of convenience, the issues raised by the assessee in the grounds of appeal for A.Y. 2013-14 are reproduced as under: 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resident of the Netherlands is eligible for the beneficial provisions of DTAA. 4.3. That on the facts and circumstances of the case and in law, the receipts towards interconnect charges under consideration are in the nature of business income of the Assessee and in the absence of a Permanent Establishment in-India, the same cannot be brought to tax in India. 4.4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not following various judicial precedent including the order of the Hon'ble Delhi ITAT in the case of Bharti Airtel Limited (TDS) ITA No 4079/De1/2012 and B.T. Global Communications India Private Limited [TS-209-ITAT 2022 (DEL)] wherein it has been held that the interconnect charges paid to the Foreign Telecom Operator for carriage of calls is not 'Royalty' both under the Act as well as the DTAA. 5. Without prejudice, on the facts and the circumstances of the case and in law, the Ld. AO has erred in initiating proceeding against the Assessee under section 147 of the Act having already initiated proceeding and raised demand against VSL under section 201 of the Act. 6. Levy of interest under section 234A and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections raised by the assessee and the details filed during the assessment proceedings, passed the draft assessment order by holding that interconnect utility charges received by the assessee from Vodafone South Ltd. for all the years under consideration are in the nature of Royalty as per the provisions of the act as well as India-Netherlands DTAA. 4.5 On receipt of the draft assessment order, the Ld.AO in all the four years under consideration upon reopening of the assessment and after considering the submissions filed by assessee held that the payments received by assessee from the Indian telecom operators one of the party being Vodafone South Ltd. towards the interconnect utility charges was in the nature of royalty and is deemed to accrue or arise in India. The Ld.AO was of the opinion that as the assessee has not offered these payments to tax under the Income Tax Act, the 148 proceedings were initiated against assessee. 4.6 On merits of the case, the Ld.AO based on the decision of Coordinate Bench of this Tribunal in case of Vodafone South Ltd. vs. DIT reported in (2015) 53 taxmann.com 441 held that the payment was liable for TDS u/s. 195. 4.7 On receipt of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount received by the assessee towards the interconnect utility charges was brought to tax in the hands of the assessee in India as royalty under the Income Tax Act as well as the DTAA between India and Netherlands. 4.9 Aggrieved by the order of the Ld.AO, assessee filed appeals before this Tribunal. 5. The Ld.AR at the outset submitted that Ground no. 1 in all the appeals are general in nature and therefore does not require adjudication. 6. Ground nos. 2, 2.1, 3 and 5 in all the appeals under consideration are not pressed by assessee as the issue on merits are squarely covered by the order of the jurisdictional High Court. Accordingly, the only effective grounds argued by the assessee are Ground nos. 4, 6 and 7. Ground no. 4 :- 7. The Ld.AR submitted that DTAA will prevail over the Income- Tax Act as held by Hon ble Karnataka High Court and it is further submitted that Explanation 5 and 6 do not override the DTAA between India and Netherlands. Hence, the subject payment received from Vodafone and Bharti Airtel is not taxable as 'royalty' as per DTAA. It is submitted that Hon ble Karnataka High Court in the case of Vodafone reversed the ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;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 or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;' 9.2.1 The term process used under Explanation 2 to section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' which is publicly available. The term process occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a process which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows: (iii) the use of any patent, invention, model, design, secr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt observed as under: 10. The term (royalty' normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual 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 . 9.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked. 9.2.8 Further we note that by Finance Act, 2012, Explanation 5 6 were 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, in order to satisfy 'use or right to use', the control and possession of right, property or information should be with payer. 9.2.12 In the decision of Authority For Advance Ruling , in case of Cable Wireless Networks India(P.)Ltd., In re(supra) , a similar issue was considered wherein Cable Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable Wireless Group of companies. Cable Wireless Networks India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable Wireless Networks India(P.)Ltd., to the UK Group company, whether the payment is taxable as royalty or FTS under section 9(1)(vi)/(vii). The AAR relied on following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of applicant that, it has neither possession nor control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words transfer of right to use the goods in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's service or to put to one's use or benefit . (Esfeld Trucking Inc. v. Metropolitan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words equipment suggests that there must be some positive act of utilization, application or employment of equip-ment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. 13. 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 electro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iva) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms 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 applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they enjoy at least relative protection or are capable of being protected. That is why Article 12(2) very properly use, in connection with such formulae, etc., the criterion right to use , which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the right to use already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret. We note that, in case of DCIT v. PanAmSat International Systems Inc., reported in (2006) 9 SOT 100 , Hon ble Delhi High Court distinguished the decision of Asia Satellite Telecommunication Co. Ltd. v. Dy. CITT reported in (2003) 85 ITD 478 and held as under: 19. The question that first comes up for consideration is whether section 9(1)(vi) of the Income-tax Act, read with the Explanation 2 below thereto, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk further strengthens the view that the word secret cannot be read before the word process also. This naturally takes us to the question whether there is anything in article 12.3(a) of the DTAA between India and USA which militates against such a view. It must be remembered that India had no DTAA with Hongkong and hence the view taken by the Tribunal (supra) with regard to the clause (iii) of Explanation 2 below section 9(1)(vi) would apply if we were to also interpret the same provision. But article 12.3(a) is worded as below : The term royalties as used in this article means : (a)payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in 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, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords secret formula or process must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a socii. 20. That takes us to a consideration of the question whether the process carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to be no secret technology , known only to a few. There is evidence adduced before us to show that the technology is even available in the form of published 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. This aspect of the matter was not required to be considered by the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) because the view taken by the Tribunal was that there was no requirement in clause (iii) of Explanation 2 below section 9(1)(vi) of the Act that the process invo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a secret process , as is required by the definition of royalty mentioned in clause 4 of Article 12 of India-Netherlands DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 12(4) in India of India- Netherlands DTAA. 9.2.18 The above observations are supported by the view expressed by Hon ble Karnataka High Court in case of Vodafone Idea Ltd. (supra). Hon ble High Court in the group of cases had considered following questions of law which are as under: 1. Whether the Income-Tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under Section 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident? 2. Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi) by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the 'Act') will also result in amendment of the DTAAS? 3. Whether ITAT was correct in holding that payments made to non-resident telec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rival contentions and perused the records. 13. Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards interconnectivity charges. 14. Assessee has also entered into a CTA with a Belgium entity Belgacom. Belgacom had certain arrangement with the Omantel for utilisation of bandwidth. Omantel transferred certain portion of its capacity to Belgacom and Belgacom had in turn transferred a portion of its capacity to the assessee. 15. Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any permanent establishment in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering Analysis as follows: 85. It is thus clear that the person mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute. 100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA . 21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee s own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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