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TMI Blog2023 (12) TMI 206X X X X Extracts X X X X X X X X Extracts X X X X ..... ns services, providing delivery of traffic to destinations outside India on behalf of its Indian customers. The assessee enters into agreement with Indian telecom operators for provision of telecom services comprising of interconnectivity services ("IC services") and international private leased circuit services ("IPLC services"). One such agreement was entered into by the assessee with M/s. Vodafone South Limited ("VSL"). The assessee was in receipt of certain amounts from VSL for the Assessment Years 2009-10 to 2015-16. Proceedings under sections 201 of the Act, was initiated in the case of VSL in respect of non-deduction of tax at source on payments made to the non-resident telecom operators for provision of bandwidth capacity and for provision of IC services. The said charges were considered as royalty/Fees for Technical Services ("FTS") both as per the Act and the respective Double Taxation Avoidance Agreements ("DTAA"). Since VSL was made an assessee in default and consequently made liable under section 201 and 201(1A) of the Act, proceedings against the assessee were initiated under section 147 of the Act for Assessment Years 2009-10 to 2015-16. Initially the AO passed Draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telecom services are licensed / regulated services and therefore, if any telecom service provider (operating in any country) has to terminate call(s) originating in its country to a subscriber in other country, the telecom service provider in the country has to have an agreement for terminating calls to subscriber in other country. * A simplified model depicting the mechanism of a call from India terminated on the domestic network of a Foreign Telecom Operator ('FTO') in the UK is diagrammatically represented as under: *NLD - National Long Distance Operator for carriage of calls within boundaries of India **ILD - International Long Distance Operator for carriage of calls from a point in India to a point outside of India * The IPLC services rendered also are similar in nature and pertain to automatic transmission of data. * It is submitted that the intention of entering into the agreements is for provision of voice/data transmission and not allowing use of any particular equipment or network or process or part thereof. The customers in India (including VSL) do not have any control whatsoever on the assets deployed by the Assessee in provision of the service, nor is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' with reference to use of a process, the payer must obtain some control or rights in the 'process' that may lead to the transaction being classified as Royalty under Explanation 2 to Section 9(1)(vi). It is submitted that, the Assessee's receipts from customers in India including VSL are for provision of telecom services and not for the use of the Assessee's process. * It is submitted that in order to constitute 'use' or right to use' equipment, the agreement between the parties must identify the relevant equipment and the equipment must be under some control and possession of the payer. Further, the payer must bear the risks and rewards associated with the use of such equipment. In the present case, the customers in India (including VSL) do not have any control whatsoever on the assets deployed by the Assessee in provision of the service, nor is any equipment of the Assessee located at the premises of customers in India (including VSL). Further, neither is the equipment identified or known nor does the payer bear the risk in relation to the use of any equipment. The agreements entered between the Assessee and customers in India are one for provision of services, and customers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty" is defined to mean (i) 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 of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (ii) 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. * It is submitted that the definition of "royalty" in the DTAA, to the above extent is pari materia to the definition thereof under the Act. Therefore, it submitted that under the DTAA as well, the receipts are not taxable in India since the payment is not for the "use of" or "right to use" the process/equipment. * Without prejudice to the submission that Explanations 5 and 6 of the Act have no application to the present case, it is submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set aside in its entirety. * It is submitted that the Hon'ble Tribunal, has consistently held that consideration received towards rendering interconnect / WAN / Bandwidth/ data link services, services are not in the nature of "royalty". Reliance in this regard is placed on the following decisions: - Wipro Ltd. v. ITO (reported in [2004] 1 SOT 758 (Bang.)); - J&P Coats Ltd v. CIT (supra); - Madura Coats Pvt Ltd v. DCIT (reported in [2022] 142 taxmann.com 356 (Bangalore - Trib.)); - Telefonica Depreciation Espana SA v. ACIT (Order dated 10.08.2023 passed by this Hon'ble Tribunal in IT(IT)A No. 2657/Bang/2019); - Telefonica De Espana S. A v. DCIT (Order dated 17.08.2023 passed by this Hon'ble Tribunal in IT(IT)A Nos. 215 and 216/Bang/2023); - Honeywell Technology Solutions Pvt. Ltd. v. JCIT (Order dated 30.05.2022 passed by this Hon'ble Tribunal in ITA No. 2890/Bang/2018) - Netcracker Technology Solutions LLC (reported in [2020] 116 Taxmann.com 243 (Mumbai - Trib.). SUBMISSIONS RE. TAXABILITY OF THE RECEIPTS AS FTS: Taxability under the Act: * It is submitted that the FTS is defined under Explanation 2 to section 9(1)(vii) of the Act to mean any consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 2011-12 to 2015-16. Taxability under the DTAA * Under Article 13(4) of the DTAA, the term FTS has been defined to mean, inter alia, payment of any kind in consideration for rendering of any technical or consultancy services, if such services inter alia make available technical knowledge, experience, skill, knowhow, or processes. * Without prejudice to the submission that the services are not technical in nature, it is submitted that the service do not satisfy the "make available" clause, and therefore, the consideration received is not in the nature of FTS under the Act. * In the present case, the Assessee has provided telecom services to customers in India (including VSL). Customers in India (including VSL) merely obtains a service for carrying telecom traffic for serving their customers and do not receive any technical or consultancy services. The Assessee does not make available to customers in India (including VSL) any technical knowledge, experience, skill, knowhow, or processes. * It is submitted that technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overt the submissions of the assessee. 7. We have heard the rival submission and perused the material on record. The Bangalore Bench of the Tribunal in the case of Telefonica De Espana S. A, (supra) had decided all the issues raised on merits in favour of the assessee i.e., with regard to taxability as royalty/FTS and alternatively under section 5(2) of the Act. The Bangalore Bench of the Tribunal had followed its earlier order in the case of Telefonica De Espana S. A, as well as the judgment of the Hon'ble jurisdictional High Court in the case of VSL. The relevant finding of the Bangalore Bench of the Tribunal reads as follows: "10. We have heard the rival submission and perused the material on record. At the outset, we notice that Assessment Year 2010-11 has been considered by the AO as the base year and has been followed in the subsequent Assessment Years. The Tribunal in ITA Nos. 2657/Bang/2019, 180/Bang/2021 and 817/Bang/2022 for Assessment Years 2010-11 to 2012-13 has decided the issue in favour of the assessee vide order dated 10 August 2023. The Tribunal has passed a detailed order after considering several judicial precedents including the Hon'ble Karnataka High Court j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... due to the following reasons: i. The accrual of the income happens where the rendition of service takes place. In the instant case, the actual rendition of service of interconnect facility is provided by the taxpayer outside India i.e., in Spain. The taxpayer does not have any presence in India. Hence, the income does not accrue in India as argued by the learned DR. ii. Reliance is placed on the judgment of the Hon'ble Delhi High Court in the case of Havells India Ltd. [2012] 21 taxmann.com 476 (Delhi) wherein the hon'ble Court has clearly demarcated the source of income and source of receipt under section 9(1)(vii) of the Act. The High Court categorically held that the place/situs of the payer cannot be said to be the source of income. iii. Reliance is also placed on the order of the Bangalore Tribunal in the case of Vodafone South Ltd (2015) 53 taxmann.com 441 (para 13-16) which reads as under: 16. On an analysis of the learned CIT (A)'s findings, we are of the view that there is some ambiguity or confusion in appreciating the position of law. The learned CIT (A) is right in observing to the extent that the Assessing Officer is right in articulating that where in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of income is to be examined u/s 9 and in the present case, the Assessing Officer has examined the applicability of section 9(1) (vi) & 9(1)(vii) i.e. the payments involve royalty as well as fee for technical services. The two judgments relied upon by the assessee namely decision of the Hon'ble Delhi High Court in the case of EON Technology (P.) Ltd. (supra) and the order of the ITAT in the case of Adani Enterprises Ltd. (supra) are fully applicable on the facts of the present case. The inference drawn by the learned Revenue authorities that income is deemed to be accrued or arisen in India or accrued or arisen or received in India merely on the basis that such payments was made from India is incorrect."' 12. The Department / Revenue has not appealed against the above finding / observation of the Tribunal. Hence, the contention of learned DR placing reliance on the section 5 of the Act is rejected. In light of the aforesaid reasoning and judicial pronouncements cited supra, we hold that the IUC charges do not qualify as royalty or FTS and hence is not taxable in India." 8. In light of the above judicial pronouncements relied on by the Tribunal in the case of Telefonica De ..... X X X X Extracts X X X X X X X X Extracts X X X X
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