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TMI Blog2023 (12) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... te payer i.e., the end consumer in India for services rendered ? 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka , wherein the Hon'ble High court has held that the non-resident telecom operators (NTOS) have no presence in India without considering the fact that the income accrued and arose in India at the time of the call being made and no receipt would be available for the Indian entity also in the event the call did not go through? 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka, wherein the Hon'ble High court has held that the process royalty is not applicable without as much as considering the agreements between the assessee and payees, opinion of experts in the field of telecommunication and provisions governing royalty in the act and DTAA? 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka, wherein the Hon'ble High relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change of the assessee name from "France Telecoms" to "Orange" and address change, the notice issued under section 148 was not served. After ascertaining the correct address and name of the assessee company, a copy of the notice u/s 148 was again issued to the assessee on 22.10.2019. 2.1. Since the assessee had not filed any return of income for the A.Y. 2011-12, notices were issued by the Ld.AO to the assessee on various dates calling for the return of income and other details. The assessee, vide its letter dated 25.11.2019, objected to the jurisdiction assumed by the Ld.AO. In paras 2.6 to 2.8 of the impugned order, the Ld.AO addressed these issues. Later, vide its letter dated 24/12/2019, the assessee informed the Ld.AO that it could not file its return electronically and hence had filed a manual return, The Ld.AO did not accept this return as a valid return. 2.2. The Ld.AO proceeded to pass the assessment order, in which the following observations regarding the interconnect charges received by the assessee from VSL were made: Interconnect arrangement is a complex procedure involving a bundle of services including basic interconnection services, use or network elements, anc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is an ILO 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. Toprovide 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 India. Revenue's reply to his contention Is that, the Income belongs to the payee. If, in the opini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessees 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 earlier stand for the subsequent assessment years placing reliance on Viacom etc 35, rendered by the ITAT. In that view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e records and submissions of the Ld.DR. 2.5. It has been submitted by the assessee that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty / FTS in India stands squarely covered in favour of assessee. 2.6. We note that this issue is now been considered by various decisions of this Tribunal by following the decision of Hon'ble Jurisdictional High Court in case of Vodafone Idea Ltd. vs. DCIT (supra). In the paperbook placed before us filed by the assessee, reliance is placed on following decisions. * Telefonica De Espana S.A, vs. ACIT(IT)/DIT reported in (2023) 154 taxmann.com 436 * Al Telekom Austria Aktiengesellschaft vs. DCIT in reported in (2023) 156 taxmann.com 155 2.7. We note that the assessee has submitted before the authorities below that the services rendered the assessee are standard telecom services which are automated requiring no human intervention. It has been submitted that the issue of taxability of interconnectivity charges as FTS has been decided by Hon'ble Karnataka High Court in case of Vodafone South Ltd. reported in (2016) 72 taxmann.com 347 and that, the revenue h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess" 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, secret formula or process or trade mark or similar property" Clauses (i) & (ii) of the said explanation also use identical terms. 5.2.2 The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression 'similar property' used at the end of the list, further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. 5.2.3 We also note that 'Intellectual property' as understood in common parlance means, Knowl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 5.2.8 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 respect of any right, property or information, whether or not - (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of such right, property or information is in India. Explanation 6: For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always 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." 5.2.9 By insertion of Explanation 5 & 6, meaning of word 'Process' has been widened. As per these exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twork 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 decisions: * Decision of Hon'ble Supreme Court in case of Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 * Decision of AAR in case of Dell International Services India (P.) Ltd. In re (supra) * Decision of Hon'ble Madras High Court in case of Neyveli Lignite Corpn. Ltd. (supra) * Decision of coordinate bench of this Tribunal in case of WIPRO Ltd. v. ITO [2003] 86 ITD 407 (Bang.-Trib.) 5.2.13 The AAR relying on its view in case of Dell International Services India (P.) Ltd. In re (supra) held as under: 12.5 It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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: 12.7 Let us now explore the meaning of the ke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. 13.1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 emphasize 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n AmSat International Systems Inc., (supra) Hon'ble Delhi High Court distinguished the decision of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT [2003] 85 ITR 478 (Delhi - Trib.) 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 applicable. This also involves the subsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Satellite Tele-communication Co. Ltd. (supra) which is also a case of a non-resident company based in Hongkong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held in the context of the provisions of clause (iii) of Explanation 2 below section 9(1)(vi), that a "process" is involved when the signals that are uplinked through the earth stations to the transponder get converted into different frequencies and fit for being down-linked via earth stations over the footprint area. It was therefore held that the payment was for the use of a "process" and hence royalty within the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pe 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" In Asia Satellite Tele-communication Co. Ltd.'s case (supra) the Tribunal pointed out, while repelling the argument that the word "secret" also qualifies the word "process" appearing in clause (iii) of Explanation 2, that there is no comma after the word "secret" till the end of the clause and had the intention been to qualify the word "process" also with the word "secret" there would have been a comma after the word "process" (by mistake mentioned in the order as "formula"). The Tribunal was thus prepared, with respect, to accept the argument that both the words "formula" and "process" can be said to be qualified by the word "secret" had the clause been drafted as under : "the use of any patent, invention, model, design, secret formula or process, or trademark or similar property" W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nown 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 involved, for which the payment is being made, should be a secret process. But in the view we have taken on the language employed by article 12.3(a) of the treaty coupled with the punctuation and the setting and surrounding words, the payment would be considered as royalty only if it is made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process assuming it to be so does not amount to royalty. 5.2.14 Similar issue came up before Hon'ble Delhi Tribunal in case of Bharti Airtel Ltd. (supra). The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein, on applying ratios pronounced in the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bles 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 India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable. 17. The first question is whether the ITAT was correct in holding that DTAA cannot be considered under section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows: "7. ...While deciding the scope of section 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 nonresident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income-tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. Assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the assessee that has been made out by the revenue in India. Even Hon'ble High Court has in para 25, held that the non-resident service providers do not have any presence in India. 2.15. The Ld.CIT(A) has considered the merits of the issue by placing reliance on the aforesaid decision by Hon'ble Karnataka High Court. We therefore do not find any infirmity in the view taken by the Ld.CIT(A) and the same is upheld. Accordingly, the grounds raised by the revenue stands dismissed. In the result, the appeal filed by the revenue stands dismissed. We may place it on record that the representative who appeared on the date of hearing was not holding a valid POA, due to which it was taken as non appeared on behalf of the assessee. The issue was considered based on the PB filed by the assessee. Subsequently on 11/12/23, the POA has been filed with the Registry, wherein the Ld.AR( Ali Asgar CA) who had appeared on the date of hearing has been given the authority to represent the assessee before this Tribunal. The POA filed on 11.12.2023 which is kept on record though, it is not possible to rectify the appearance in the order sheet. Order pronounced in the open court on 22nd Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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