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TMI Blog2024 (3) TMI 1062X X X X Extracts X X X X X X X X Extracts X X X X ..... ation traffic in Sri Lanka. The assessee's case was reopened by the ld. A.O. u/s. 147 of the Act for the reason that the assessee has received payment of Rs. 4,16,80,240/- during the year under consideration from M/s. Vodafone South Limited (VSL)which is an Indian entity. The ld. A.O. observed that the said income was chargeable to tax in India as 'royalty' and that the deductor had not deducted tax at source as per the provision of section 191 of the Act. The ld. A.O. passed the draft assessment order u/s. 144C of the Act dated 29.09.2021 and determined the total income at Rs. 4,16,80,240/- by holding that the receipts in the form of Interconnect Usage Charges ('IUC' for short) are to be taxed in India as per the provisions of Income Tax Act as well as the DTAA entered into between India and Sri Lanka and held that as per the provision of section 5 of the Act, the said receipts are to be taxed as 'royalty'. 4. The assessee filed its objection before the learned Dispute Resolution Panel ('ld. DRP' for short) challenging the draft assessment order passed by the ld. A.O. The ld. DRP disposed off the objections raised by the assessee vide order dated 31.05.2022 by upholding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accrues in India. The ld. A.O. further reiterated that as income has accrued in India, there was no necessity to invoke the deeming provision of section 9 of the Act, thereby adding the said receipt to the total income of the assessee which is liable to be taxed in India as per section 5(2) of the Act. In an objection filed by the assessee before the Hon'ble DRP, the said addition was confirmed by holding that the IUC is liable to be taxed in India as per IT Act and the DTAA entered into between India and Sri Lanka by holding the same to be 'royalty'. 6. The assessee is in appeal before us, challenging the final assessment order passed by the ld. A.O. making an addition on the impugned receipt in pursuance to the direction of the Hon'ble DRP. 7. The learned Authorised Representative ('ld. AR' for short) proceeded to argue on the merits of the case raised in ground no. 6 of the appeal. The ld. AR for the assessee further contended that the network and the related equipments are used solely by the assessee for the purpose of providing carriage services to VSL and that no access or control pertaining to the said network or equipment is provided by the assessee to VSL. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The ld. DR further contended that the income which has accrued to the assessee is sourced from India which is from the subscriber who is located within India using the Indian network. The ld. DR further contended that the assessee's case would not fall under the exception to section 9(1)(vi)(b) of the Act. The ld. DR further argued that the assessee has relied on the decision of the Hon'ble Apex Court in the case of Engineering Analysis Centre of Excellence (P (supra) in which the Revenue has filed review petition against the said decision and as the same has not attend finality reliance cannot be placed on the said decision of the assessee. The ld. DR relied on the decision of Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO [2014] 361 ITR 575 (Mad) and the orders of the lower authorities. 9. We have heard the rival submissions and perused the materials available on record. It is observed that the assessee being a non resident company is a licensed telecommunication service provider within and outside Sri Lanka and providing international carriage and connectivity services to telecom operators of other countries for facilitating seam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes from a caller in India and, therefore, accrues in India till the said call is terminated on the network of the assessee, thereby holding that the IUC charges is sourced out of India and, hence, the income accrues in India. The ld. A.O. further held that as per the provision of section 9(1)(vi) of the Act, Vodafone being a telecom operator in India has made payment to a non resident telecom operator (NTO), i.e., the assessee which has earned income out of subscriber in India by way of interconnectivity which the ld. A.O. terms it to be a "process". The ld. A.O. further held that post insertion of Explanation 5 to section 9(1)(vi) of the Act the payer need not have direct control or physical possession over the right, property or information and that the said process need not be a secret process. Further the explanation 6 to section 9(1)(vi) of the Act was with retrospective effect from 01.06.1976. The ld. A.O. relied on the decision of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. (supra) where the payment made towards interconnect charges are held to be consideration in respect of a "process" both under I T Act as well as under DTAA. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance Act, 2012 to section 9(1)(vi) of the Act along with Article 12 of DTAA are extracted hereunder for ease of reference: Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed68 to accrue or arise in India :- (vi) income by way of royalty82 payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : 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 inf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. 4. The provisions of paragraph 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated there in, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. (a) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... territories. 90(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under subsection (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 14. The issue here is whether Explanation 5 & 6 are to be read into the DTAA entered into between India and Sri-Lanka. The ld. A.O. relied on the order of the Bangalore Tribunal in the case of Vodafone South Ltd. (supra) which has held that the consideration paid by VSL to the assessee as IUC/bandwidth charges for the interconnected service would fall within the ambit of 'Royalty' for which VSL was bound to deduct TDS on such payment. The ld. A.O. also relied on the decision of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. (supra) which has held the same to be as 'Royalty' within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. The lower authorities have also held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 aorrect 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(2) it is important to note that the tax which is required to be deducted at source is deductible only out of the This is the underlying principle chargeable of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also Source relevant, while applying tax deduction at provisions." (Emphasis supplied) 18. The above passage has been extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bring to tax the income arising from extra-territorial source. 23. The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was contended Shri. Pardiwala that this issue is covered in assessee's favour in CIT Vs. M/s. Wipro and the same is not disputed. Hence, this question also needs to be answered against the Revenue. 24. The sixth question is whether assessee can be held liable for non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact parimateria (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment year preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement unless as DTAAs are amended jointly by both parties to incorporate income from data transmission Services as partaking of the nature of royalty. or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 17. Apart from the grounds of applicability of amendment to section 9(1)(via) and the DTAA between India-Sri Lanka It is observed that the Delhi Tribunal in the case of Bharti Airtel Ltd. (supra) and Bharat Sanchar Nigam Ltd. (supra) has held that the payment made towards interconnect usage charges to foreign telecom operators does not accrue or arise i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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