2014 (4) TMI 81 - HC - Income Tax

Stay of recovery of demand - Tribunal has granted partial relief staying 50% of tax liabilaity as determined by AO - Total demand is Rs. 2,57,57,53,136/ - Taxability of payments made - DTAAs with the NTOs for interconnectivity capacity transfer agreements - Failure to deduct income u/s 5(2) of the Act Held that - The source of payment is in India - for services rendered by the NTOs abroad, and towards such services utilized, petitioner has made payments - Section 5(2) of the Act referred to deals with the source from which income is derived - The word Source means the place from which something is obtained The decision in Sheth Shiv Prasad .v. C.I.T. 1971 (3) TMI 16 - ALLAHABAD High Court followed - in section 2(11) the definition of previous year envisages a different previous year in respect of each separate source of income - Sec.4, which concerned with the application of the Act, declares that the total income of the person includes all profits and gains, from whatever source derived, which falls within the categories set out there. The source of income will be from the payer - Payer is the person from whom income is received and earned - income originates from the payer and such payer becomes the source of income - the payer is in India and payment undoubtedly is made to NTOs who have received payments abroad for and towards provision of EIG capacity and IUC from the payer in India - payments become income of the NTO arising in India which reaches the hands of the NTO - the term Accrue or arise have to be understood in the context in which it is used - payments made to NTOs is payment Accruing or Arising in India assessee has made payments towards services availed by it even though there may be no territorial nexus between the facilities and infrastructure available in the hands of India - Assessee has not been able to make out prima facie case to opine that assessment of tax liability as determined by the assessing officer vide Annexure-A is wholly untenable or illegal - payments made by the assessee qualify as having been paid by the payer and the payment made to NTOs/Belgacom is the amount received and fall within the definition of income under Section 5(2) of the Act. It must be observed that granting interim orders which practically give the principal relief sought in the petition for no better reason than that a prima facie case has been made out, without being concerned about the balance of convenience, the public interest and a host of other relevant considerations is unwarranted. Even if we give a margin to the petitioner s contention to hold that petitioner may have a prima facie case against the impugned orders Annexures A and B , yet, there is no circumstances or material placed before me to show that petitioner will suffer irreparable hardship and injuries to his favour nor any other circumstances made out to show balance of convenience is in his favour. - Assessee to make pre-deposit as per tribunal order - Decided against Assessee.

Issues Involved:
1. Taxability of payments made by the petitioner to Non-resident Telecom Operators (NTOs) and Belgacom.
2. Whether such payments qualify as 'Income' or 'Royalty' under the Income Tax Act, 1961 and Double Taxation Avoidance Agreements (DTAAs).
3. Jurisdiction of the tax assessing officer to invoke Section 201(1) and 201(1A) of the Income Tax Act.
4. Legality of retrospective amendments to Section 9(1)(vi) of the Income Tax Act by Finance Act, 2012.
5. Validity of the interim order by the Income Tax Appellate Tribunal (ITAT) granting partial stay of the assessment order.

Detailed Analysis:

1. Taxability of Payments to NTOs and Belgacom:
The petitioner, a telecom service provider, entered into agreements with NTOs and Belgacom for bandwidth and interconnect capacity services outside India. The tax assessing officer opined that payments made to these foreign entities were liable to tax in India under Section 9(1)(vi) and (vii) of the Income Tax Act, treating such payments as 'Royalty' and 'Fees for Technical Services.' Consequently, the petitioner was deemed an 'assessee in default' under Section 201(1) and was liable for penalty and interest under Section 201(1A).

2. Definition of 'Income' or 'Royalty':
The petitioner argued that payments made to NTOs and Belgacom did not qualify as 'Income' under Section 5(2) of the Act, nor as 'Royalty' under Section 9(1)(vi) or DTAAs. The petitioner claimed that the services were rendered and utilized outside India, lacking territorial nexus with India. However, the court noted that India follows a source-based taxation system, and payments made by the petitioner to NTOs were considered income accruing or arising in India. The court referred to judicial pronouncements to affirm that the source of income is from the payer, located in India.

3. Jurisdiction of the Tax Assessing Officer:
The petitioner contested the jurisdiction of the tax assessing officer to apply Section 201(1) and 201(1A) of the Act. The court, however, found that the tax assessing officer had validly invoked these sections, as the payments made by the petitioner fell within the definition of 'Income' and 'Royalty' under the Act.

4. Retrospective Amendments by Finance Act, 2012:
The petitioner challenged the validity of the retrospective amendments to Section 9(1)(vi) by the Finance Act, 2012, which included Explanations 5 and 6. The court noted that these amendments clarified that 'Royalty' includes consideration for the use of any right, property, or information, regardless of the location or direct use by the payer. The court emphasized that unless these provisions are declared ultra vires, they must be applied by the assessing officer.

5. Interim Order by ITAT:
The ITAT granted a partial stay, directing the petitioner to deposit 50% of the tax liability. The petitioner sought a complete stay, arguing that the payments did not qualify as 'Income' or 'Royalty.' The court, however, found no grounds to interfere with the ITAT's order, noting that the petitioner had not demonstrated irreparable hardship or imbalance of convenience. The court upheld the ITAT's decision, emphasizing that the Tribunal had considered the request for stay appropriately.

Conclusion:
The court confirmed the ITAT's order granting partial stay and directed the petitioner to comply with the deposit requirement. The writ petitions filed by the petitioner and the Income Tax Department were disposed of accordingly.

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