2007 (8) TMI 371 - AT - Income Tax

Special Bench - Deduction u/s 80IA - Establishing earth stations is Undertaking or Not - Activity carried on by the assessee through the earth stations set up by it - whether basic or cellular as per the provisions of s. 80-IA applicable to the year under consideration - whether the new unit can function without depending on the existing activity - method of computation of revenue attributable - HELD THAT - The earth station commissioned by the assessee company is not a functionally independent unit. The earth station cannot commercially function without the other systems embedded in the chain of activity carried on by the assessee company in providing telecommunication services. The earth station commissioned by the assessee company is not an independent service provider in the true commercial sense. It is not an independent profit centre. The earth station does not provide services to other providers of telecommunication services. The earth station commissioned by the assessee company is in the nature of an internal pathway of its transmission system. We are of the considered view that the earth stations commissioned by the assessee company in the previous year relevant to the assessment year under appeal are not undertakings for the purpose of s. 80-IA. Sec. 80-IA provides that the deduction shall be available to an assessee in providing telecommunication services only if it has set up an undertaking which starts providing telecommunication services whether basic or cellular at any time on or after the 1st day of April, 1995 but before the 31st day of March, 2000. In the present case, it is not possible to hold that the assessee company has set up an undertaking to provide telecommunication services for the fact that it has commissioned two earth stations in the previous year relevant to the assessment year under appeal. We hold that earth stations are not undertakings for the purpose of s. 80-IA. We find that the requirement that the undertaking should provide basic telecommunication or cellular telecommunication must be understood in their plain meaning. Then the question to be answered would be whether there is anything like basic telecommunication services or cellular telecommunication services. Regarding cellular telecommunication services, both parties have no quarrel and it is admitted that the assessee company is not engaged in cellular telecommunication services. Dispute is with reference to basic telecommunication services. The expression basic is used in a lucid style as understood by a customer of telecommunication services. Telecommunication services are a consumer-oriented industry. The expression basic is used in a consumer-friendly manner and it is used as such in telecommunication sector. The assessee company is providing the telecommunication services not directly to the end customer. It is providing the services of international communication to other providers of basic telecommunication services. The assessee is connecting the basic service providers. It is true that the assessee company is also serving the end customer in an indirect manner. The basic service providers cannot extend their services to the end customer, in the matter of international telecommunications without the help and support of the assessee company. The learned senior counsel has also rightly explained that it is impossible for any service provider to extend an end-to-end service in international telecommunication. We do agree. If not impossible, it is highly improbable that a single telecom provider can extend international telecommunication services on an end-to-end basis. But, the expression basic does not mean end-to-end service. It is sufficient, if the service provider has direct linkage with the ultimate customer at one end. The assessee company can have one end connectivity with the ultimate telecommunication customer in India. That would satisfy the requirement of basic telecommunication service. There needs to be a first level inter-connectivity with the service user (ultimate customer) so as to say that the services provided by the assessee company are basic telecommunication services. The scheme of deduction is provided by the Government on consideration of various economic and industrial priorities leading to infrastructural development. Deduction is provided in the Act to basic service providers for the reason that there is a need for enlarging basic telecommunication services in India with more and more providers coming into the field. Such deduction meant for basic service providers may not be found necessary by the Government to persons like the assessee who are providing direct services to other basic service providers in the area of international telecommunication; may be for the reason that the tariff rate enjoyed by such secondary service providers itself would take care of the need of incentives. Therefore, we find that the assessee company is not providing basic telecommunication services as stated in s. 80-IA(4C). The assessee is providing international connectivity to other providers of basic services in India. The services rendered by the assessee company is one step above the basic telecommunication services. Therefore, it is to be seen that the assessee company does not satisfy the condition provided in sub-s. (4C) regarding the nature of telecommunication services so as to become eligible for the deduction provided u/s 80-IA. We hold the answer in the negative that the assessee is not entitled to be treated as eligible undertaking for the purposes of s. 80-IA of the IT Act, 1961. The only ground raised by the assessee in the impugned appeal is the disallowance of claim made u/s 80-IA. As we have found that the assessee is not entitled, the ground raised by the assessee in this appeal fails. In result, this appeal filed by the assessee is dismissed. K.C. SINGHAL, J.M - I am in agreement with the final conclusion reached by him but for different reasons given hereafter. Therefore, I think it appropriate to pass a separate order. In the present case, the new units are identifiable units separate and distinct from the existing one as these were located at places different from the existing one. Even the system of connectivity of phone calls was entirely different from the existing one since the existing activity was through sea cables while the new activity was through the satellite. The investment in plant and machinery, land and building was entirely new one. Therefore, it cannot be said that the new activity was dependent on the existing activity. Consequently, it has to be held that both the earth stations were functionally independent and, therefore, the activity carried on was integrated one. Thus, it is held that activity carried on by the assessee through the two earth stations amounts to new undertaking eligible for deduction u/s 80-IA subject to the fulfilment of other conditions. It has to be held that voice communication through satellite, based on latest technology, was outside the scope of the expression telecommunication services whether basic or cellular used in s. 80-IA. The earth station is part of the system of voice communication through satellite. Earth station and satellite are supplementary to each other. This system is entirely distinct and different from the cable or cellular system. According to DR, the assessee is operating as backbone industry and connects the calls received through other service providers and, therefore, does not provide any service to the actual user of the phone. In my opinion, this contention cannot be accepted for the reason that legislature itself has allowed the deduction to telecommunication services through satellite or trunking network. Both these services are provided by backbone industry which does not have any direct link with actual consumer of such services. The customers of satellite network are the service providers who have access to actual consumers like all mobile service providers and Mahanagar Telephone Nigam Ltd., Bharat Sanchar Nigam Ltd., Department of Telecommunication, etc. If the contention of the learned Departmental Representative is accepted, then inclusion of words like satellite service or trunking network would become ineffective. Such construction would be absurd and, therefore, cannot be accepted. Thus, it is held that the telecommunication services through earth stations set up by the assessee cannot be characterized either basic or cellular and, therefore, the assessee would not be entitled to deduction u/s 80-IA for the year under consideration. In the result, appeals of the assessee stand dismissed. PRAMOD KUMAR, A.M - I may also add that though the assessee company was a public sector undertaking in the relevant previous year, according to the learned counsel, it has since been privatized and, therefore, clearance has not been obtained from the Committee on Disputes (Cabinet Secretariat). Learned counsel contends that the ownership of the assessee company now vests in private sector, and, for this reason, the requirements of Hon'ble Supreme Court's judgment in the case of Oil Natural Gas Commission Anr. vs. CCE 1991 (10) TMI 58 - SUPREME COURT do not apply in this case. As learned CIT (DR) has conceded this position, we have not addressed ourselves to the broader question whether or not a clearance of the Committee on Disputes is required in a case where the assessee company was a public sector undertaking in the relevant previous year but ceases to be owned by the Government of India at the point of time when litigation comes up for adjudication before a Court or Tribunal. I respectfully disassociate myself from the proposed separate order, though I agree that the appeal of the assessee is to be dismissed.

Summary

Issues Involved:
1. Whether the earth stations commissioned by the assessee company are new undertakings for the purposes of Section 80-IA(4C) of the IT Act, 1961.
2. Whether the undertakings have commenced providing services after 1st April 1995.
3. Whether the undertakings are providing basic or cellular telecom services.
4. Whether the profit computed by the assessee company, which is attributable to the earth stations, is acceptable for quantifying the deduction under Section 80-IA.

Detailed Analysis:

1. Whether the earth stations commissioned by the assessee company are new undertakings for the purposes of Section 80-IA(4C) of the IT Act, 1961:

The assessee argued that the earth stations should be considered as undertakings eligible for deduction under Section 80-IA. They emphasized that the earth stations are independent units with substantial investments and technological advancements. The assessee relied on several judicial pronouncements to support their claim that the earth stations are undertakings.

The Revenue contended that the earth stations are not independent undertakings but are part of the existing telecommunication system. They argued that the earth stations are merely links in the chain of telecommunication services and do not qualify as independent undertakings.

The Tribunal held that the earth stations are not independent undertakings. They reasoned that an undertaking must have an independent functional identity and be capable of surviving independently of the existing business. The earth stations, being integral parts of the telecommunication system, do not meet this criterion. Therefore, the earth stations are not eligible for deduction under Section 80-IA.

2. Whether the undertakings have commenced providing services after 1st April 1995:

Since the Tribunal concluded that the earth stations are not undertakings, this question became infructuous. The Tribunal noted that the assessee company commenced its telecommunication services in 1986, and the commissioning of the earth stations does not constitute the commencement of a new undertaking after 1st April 1995.

3. Whether the undertakings are providing basic or cellular telecom services:

The assessee argued that their services should be considered basic telecommunication services. They presented various documents and government notifications to support their claim. The Revenue argued that the assessee is not providing basic telecommunication services but is providing international connectivity to other basic service providers.

The Tribunal held that the services provided by the assessee do not qualify as basic telecommunication services. They reasoned that basic telecommunication services are those provided directly to end customers. The assessee's services, being a step above basic services and providing connectivity to other service providers, do not meet this criterion. Therefore, the assessee is not eligible for deduction under Section 80-IA.

4. Whether the profit computed by the assessee company, which is attributable to the earth stations, is acceptable for quantifying the deduction under Section 80-IA:

Since the Tribunal concluded that the assessee is not eligible for deduction under Section 80-IA, the question of the method of computation of revenue attributable to the earth stations became irrelevant.

Conclusion:

The Tribunal dismissed the appeal filed by the assessee, holding that the earth stations commissioned by the assessee are not eligible undertakings for the purposes of Section 80-IA of the IT Act, 1961. The Tribunal concluded that the assessee is not providing basic telecommunication services and, therefore, is not entitled to the deduction claimed under Section 80-IA.