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TMI Blog2013 (11) TMI 1058X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to Section 9(1)(vi) of the Income Tax Act. – Decided against assessee. Levy of interest u/s 234A, 234B, 234C where no TDS was deducted u/s 195 - Held that:- The Tribunal has not considered the grounds on the levy of interest under Section 234A 234B and 234D inspite of grounds raised therein. - matter remanded back on the issue of charging of interest. - Tax Case (Appeal) Nos.147 to 149 of 2011 and 230 of 2012 - - - Dated:- 7-11-2013 - Chitra Venkataraman And T. S. Sivagnanam,JJ. For the Appellant : Mr. N. Venkataraman, SC, M/s. Mohammed Shaffiq For the Respondent : Mr.Mohan Parasaran, Solicitor General of India, assisted by Mr. T. Ravikumar, Senior Standing Counsel for Income Tax, Mr. Arun Kurien Joseph Standing Counsel for Income Tax JUDGMENT Chitra Venkataraman,J. The above Tax Case (Appeals) arise out of the order of the Income Tax Appellate Tribunal relating to the assessment years 2002-03, 2003-04, 2007-08 and 2008-09. T.C.(A)Nos.147 to 149 of 2011 were admitted by this Court on the following substantial questions of law: "1. Whether the Tribunal was right on facts and in law in holding that the payments received by the appellant from the Indian cu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nology Parks of India V. ITO (2005) 3 SOT 529 and the binding decision of the Honourable Supreme Court in the case of BSNL V. Union of India (2006) 282 ITR 273(W)? 6. Whether the Honourable Tribunal was right in fact and in law, in the alternative, that the payments received by the appellant from the Indian customers for provision of Bandwidth Services outside India are in the nature of FTS under Article 12(4) of the Tax Treaty and under Section 9(1)(vii) of the Act? 7. Whether the Honourable Tribunal was right in fact and in law in not considering and deciding on the grounds related to levy of interest under Section 234D of the Act? 8. Whether the Honourable Tribunal was right in fact and in law in not considering and deciding on the grounds related to levy of interest under Section 234B of the Act despite the fact that the matter has already been decided in favour of taxpayers by various Honourable Courts in India, including the recent decision of Honourable Delhi High Court in the case of DIT V. Ericsson A.B. (2012) 204 Taxman 192 (Del) and this Honourable Court in the case of Madras Fertilizers Ltd. (149 ITR 703) which held that no interest is levied where tax was deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mercial and scientific equipment under Section 9(1)(vi) read with Explanation 2 of the Income Tax Act and Article 12(3) of the Double Taxation Avoidance Agreement (hereinafter referred to as 'DTAA') between India and Singapore. The Assessing Officer also held that VSNL and MCI Wordcom Asia Pte Ltd are partners in providing IPLC and related services to various customers; the assessee has business connection in India on account of the source of income and location of the business assets and software in India. Thus the Assessing Officer held that the payments were in the nature of 'royalty', taxable under Section 9(1)(vi) read with Explanation 2(iva) and (vi) as also under Article 12(3)(b) of DTAA with Singapore. 4. The assessee objected to this and pointed out that the revenue earned by the assessee could not be considered as 'royalty' paid for the use of the equipment under the Income Tax Act, as the customers have no knowledge of the equipment/network used by the assessee for the provision of the service; that the customers do not have the control with reference to the usage of the equipment/network used for rendering the service. The assessee contended that no part of the intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Service Agreement, technology agreement between the assessee and VSNL and MCI Global Access Corporation (WCom), the support services agreement with the assessee affiliates and held that the circuit created/developed by MCI, comprising of transmission cables and sophisticated instruments, amounted to 'equipment'. The payment made for the lease of this circuit, which expressed the quantity of dedicated bandwidth, would be taxable as 'royalty' under Section 9(1)(vi) Explanation 2 as well as under DTAA. Thus, the first Appellate Authority rejected the appeals. 7. On further appeal before the Income Tax Appellate Tribunal, the assessee reiterated the stand taken before the Authorities. The assessee contended that it used telecom service equipment which is situated outside the territory of India to provide international connectivity service and that they do not utilise any landing station in India for providing international half circuits. The gateway in India used in transmitting the traffic within India belonged to VSNL. This is used by VSNL for providing Indian end services pursuant to the contract it has with the customers. According to the assessee, its associates MCI Worldcom Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly indicates that the royalty has to be given a limited meaning only, it being with reference to tangible and intangible right, property or information. The Explanation says nothing about treating the consideration on rendering of services as 'royalty'. Statutorily, rendition of services is dealt with under sub-clause (vii) to Section 9(1) of the Income Tax Act. Even as per this, the receipt cannot fall under sub-Clause (vii). Thus, the assessee renders the service of transmitting the customer's information from one location to another and the customer does not make the payment for acquiring a process, but only for a facility to communicate. Further, the service rendered is on non-exclusive basis and half circuit in India is operated by VSNL. In this, the customer does not get any right to use any equipment or has any knowledge or interest in the process/technical equipment deployed by the assessee in providing the service. Thus, access to service is different from access to right to use the equipment. Thus the assessee places reliance on the decisions reported in (2001) 251 ITR 53 (Skycell Communications Limited and another V. Deputy Commissioner of Income Tax and others), 80 TTJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, a service equipment is nothing but a cabling facility and equipment installed by the local loop service provider in the nature of a virtual local exchange". 10. The Revenue has also filed an affidavit explaining what IPLC network is about by enclosing a detailed discussion by Dr.Nitin Chandrachoodan, Associate Professor, Department of Electrical Engineering, IIT, Madras. In the affidavit filed by the Revenue, it is stated that the IPLC diagram given by the assessee was presented to and the technical description of the same was obtained from Dr.Nitin Chandrachoodan, annexed as Annexure I. The circuit developed by the assessee comprises of transmission cables and sophisticated equipment starting from the Data Circuit-Terminating Equipment (DCE) at the customer premises to the other end of the network DTE (Data Terminating Equipment), referred to as Customer Premises Equipment (CPE), and the Data Circuit Terminating Equipment (DCE) are referred to as 'Service Equipment' in the assessee's agreements. The assessee provided connectivity to the customer at its premises at both ends of the network and the connectivity is for a dedicated bandwidth capacity for the agreed time. The cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Referring to Explanation 6 with reference to the Revenue's contention that payment is also with reference to the use of the process as falling under Explanation 2(iii), he submitted that cable is also treated as a commercial equipment. Thus for the equipment usage and the services utilised, the payment falls within the meaning of 'royalty' and Clause (iva) thus includes licence and lease. 13. Referring to the decisions reported in (2007) 289 ITR 355 (In Re Cargo Community Network Pte Ltd.); 12 DTR 131 (Frontline soft Limited and Call World Technologies Ltd. V. Deputy Commissioner of Income Tax) and (2013) 353 ITR 646 (In Re: Dishnet Wireless Ltd., Chennai), he submitted that a right to access and exploit a part of segment of a larger system to use the capacity of the system and the consideration paid therefor clearly falls under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act and hence 'royalty'. Even otherwise, it is a right to use a process and a right to use equipment coming within Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 14. Referring to the Board's circular on the amendment 2012, he submitted that the declaratory amendment now clears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r counsel appearing for the assessee and learned Solicitor General appearing for the Revenue and perused the materials placed before this Court. 19. The Scheme of Section 5 of the Income Tax Act is that all income received by a resident in India, irrespective of all income deemed to be received in India, irrespective of whether it accrued or arise within India; all income accruing or arising to him in India during the previous year and all income accruing or arising to him outside India during the previous year are assessable in India as per the provisions of the Income Tax Act. Section 9 of the Income Tax Act specifically deals with the assessability of non-resident tax payer in respect of income from whatever source derived, received or deemed to be received in India or which accrues or arises or deemed to arise or accrue in India. Under Finance Act, 1976, a source rule was provided in Section 9 for taxing the income of a non-resident through insertion of Clauses (v), (vi) and (vii) in sub-section (1) of Section 9 for income by way of interest, royalty or fees for technical services respectively by creating a legal fiction in Section 9 that even in cases where services are prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment to a citizen of India for service outside India; (iv) a dividend paid by an Indian company outside India; (v) income by way of interest payable by the Government or by a resident or non-resident in the stated circumstances and (vi) income by way of royalty. 22. In the background of Section 9, considering the conflicting claim that may arise among nations to exercise jurisdiction to tax the entity by reason of choosing to emphasise on one or more connecting reasons such as the location of the source residence of the taxable entity, maintenance of permanent establishment and so on to exercise their fiscal jurisdiction to tax that entity and that some income of the same entity might become liable to taxation in different countries leading to harsh consequences, to avoid such jarring results, incongruous and anomalous situation and to foster economic development among nations, different Countries enter into bilateral treaties convention, agreements for getting relief against double taxation called Double Taxation Avoidance Treaties or Convention Agreements. The power to enter into a treaty is held as an inherent part of the sovereign power of the State. By Article 73 of the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the principles adopted for interpretation of treaties, the Apex Court pointed out "the interpretation of provisions of an international treaty, including one for double taxation relief, is that treaties are entered into in a political level and have several considerations as their bases". "The court cannot judge the legality of "treaty shopping" merely because one section of thought considers it improper." 25. Keeping these principles in the background as far as the present case is concerned, we are concerned about the treatment of income under the head 'royalty'. As per Clause (b) of sub-clause (vi) to Section 9(1) of the Income Tax Act, where, income by way of royalty is payable by a person, who is a resident, to a non-resident, the same shall be taxable as income under the provisions of the Act. Explanation 2 to sub-clause (vi) gives the definition of 'royalty'. As is evident from the reading of the provision, 'royalty' means the consideration for transfer of intellectual property rights; for imparting of any information regarding the working of, or the use of the intellectual property rights, use of any intellectual property, imparting of any information concerning technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, or not?; whether the amounts payable by the applicant under the terms of the Agreement would be in the nature of royalty within the meaning of the term in Article 12 of the Treaty, or not?; whether the amounts payable by the applicant under the terms of the agreement would be in the nature of Fees for technical services within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Act, or not?; whether the amounts paid by the applicant are for the purposes of making or earning any income from any source outside India and hence covered within the exception carved out in Section 9(1)(vii)(b) or 9(i)(vi)(b) of the Act?; whether the applicant is required to withhold taxes under Section 195 of the Income-tax Act on payments made to BT Americas as per the Agreement or not? and finally whether the U.S. Company had a permanent establishment in India as defined in Article 5 of the Indo-US Treaty? 28. In considering the said issue, the Authority for Advance Ruling considered the meaning of 'circuit' as given in the various dictionaries on science and technology as well as given in the agreement and considered the meaning of the expression 'use or right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircuit, according to the Revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates. " 30. The Authority further held that the predominant object of the entire agreement was concept of service. The Authority, however, observed that even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of royalty in Clause (iva) of Explanation 2. Referring to Klaus Vogel's commentary on Double Taxation Convention, the Authority held that the nature of transaction was only a service and there was no use or right to use the equipment to regard the consideration as 'royalty'. 31. Learned Senior Counsel appearing for the assessee placed reliance on yet another decision reported in (2009) 315 ITR 72 Cable Wireless Networks India Private Limited V. Director of Income-tax In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of any right, property or information whether or not possession or control of such right, property or information is with the payer; such right, property or information is used directly by the payer; the location of such right, property or information is in India. Explanation 6 further clarifies that the expression 'process' 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. Thus, after the amendment introduced in the year 2012, with effect from 01.06.1976, irrespective of possession, control with the payer or use by the payer or the location in India, the consideration would nevertheless be treated as 'royalty'. The decisions cited, hence, cannot be pressed into service to understand the scope of the expression 'royalty'. 34. In the decision reported in (2007) 289 ITR 355 (In Re Cargo Community Network Pte Ltd.), relied on by the Revenue, the Authority for Advance Ruling considered the scope of right to use equipment and the consideration paid thereon in the case of the applicant company incorporated in Singapore eng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted services offered by the portal, would be covered by the expression royalties as used in Article 12 of the DTAA. The Authority held that the decision of this Court reported in (2001) 251 ITR 53 (Skycell Communications Ltd. and another V. Deputy Commissioner of Income tax and Others) and that of the decision of the Income Tax Appellate Tribunal reported in 80 TTJ 191 (Wipro Ltd., V. ITO) were distinguishable on facts. As in the case on hand, the training and the help desk support was being given by the applicant in India for the use of a complex portal- a commercial- cum scientific equipment for access to different airlines for booking of cargo. Thus the payment made by the Indian subscriber to the Singapore Company for providing the password to access and use the portal hosted from Singapore were taxable in India and subject to deduction of tax at source. 35. Again in the decision reported in (2013) 353 ITR 646 (In Re: Dishnet Wireless Limited, Chennai), relied on by the Revenue, the Authority for Advance Ruling had an occasion to consider the issue on 'royalty' and in particular the effect of the newly inserted Explanations 5 and 6 under the Finance Act, 2012. There, the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use exclusively a part or segment of a system, the Authority rejected the plea of the assessee that what was involved was transfer of a capital asset that generated capital gains. On the true consideration of the agreement, the Authority held that it was only a right to use that was granted to the assessee. On the question as to what is right to use, the Authority observed "What is right to use in this case? That is the right to access the particular segment of a larger system to use the capacity of the system powered by the equipments of the whole system. The consideration paid for this right to access and the right to use and exploit the system, is royalty according to the Revenue. It is pointed out that Explanations 5 and 6 to Section 9(1)(vi) of the Act introduced by the Finance Act 2012 with retrospective effect, makes it clear that the consideration being paid by the applicant to STC is royalty under the Act. Even otherwise, it was a right to use a process and a right to use equipment coming within Explanation 2 to Section 9(1)(vi) of the Act." 37. Referring to the clarificatory amendment to Section 9(1)(vi) by the introduction of Explanations 5 and 6, the Authority held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... limited to the purchase of goods or merchandise for the non-resident; or (b) (c) Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Explanation 3. Explanation 4. For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". Explanation 5. (ii) (iii) iv) (v) income by way of interest payable by (a) (b) (c) (vi)income by way of royalty 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 paya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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; (vii) income by way of fees for technical services payable by (a)the Government ; or (b)a person who is a resident, except where the fees are payable in respect of services utilised in 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 fees are payable in respect of services utilised in 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 : Provided Explanation 1. Explanation2. (2). Explanation. 40. The assessee herein has not disputed or made any argument on the aspect as to whether cable is an equipment or not nor on the width of the expression 'royalty', meaning of the term 'royalty'. Except to say that there was no use of any equipment and that there was rendering of service only, the assessee has not made any submission on the expression 'use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der receives the signals and on account of the distance the signals have travelled, they are required to be amplified. The amplification is a simple electrical operation. Thereafter, the frequency on which the signals are to be downlinked is changed only in order to facilitate the transmission of signals so that, there is no distortion between the signals that are being received and the signals that are being relayed from the transponder. The transponder operations are commonly known, which are carried out not only in satellite transmission but also in the case of terrestrial transmission. There is no change in the content of the signals whatsoever that is carried out by the appellant in the transponder. Thereafter, the signals leave the transponder and are relayed over the entire footprint area where they can be received by the facilities of the appellant's customers or their customers. Its role is confined in space where the transponder which it makes available to its customers performs a function which it is designed to perform. It is claimed by the appellant that no part of the income generated by it from the customers to whom the aforesaid services are provided was chargeable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the decision of the Apex Court reported in (2007) 288 ITR 408 (Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax) and held that services rendered outside India would have nothing to do with the permanent establishment in India and hence there was no process carried out in India or was there any business in India which could be attributed to the Indian territory. Thus the High Court held that the income earned by the assesee would not qualify as 'royalty', as defined in Explanation 2 to Section 9(1)(vi) of the Income Tax Act. As seen from the facts, the said judgment was rendered in the year 2011, much before the amendment under Finance Act, 2012. Further after the decision reported in (2007) 288 ITR 408 (Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax) an explanation was inserted below sub-section 2 of Section 9, with effect from 01.06.1976 under Finance Act, 2007 to get over the decision of the Supreme Court. Hence this decision of the Delhi High Court is distinguishable and has no relevance to the case on hand which has to be considered on the strength of the law prevailing now. 44. Technological advancement in the field of communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a common carrier between a customer and a service providers' network. It carries usually data, voice or both. It delivers dedicated guaranteed bandwidth straight to the internet backbone, for which, the customers pay a premium for the leased line and it is supported by a comprehensive service level agreement. 48. Leased lines are normally made up of the following equipments, viz., a router usually managed by the service provider and is installed into a customer room; the circuit is connected with a connector; Local loop circuit is usually provided by the carrier linking the router to the service provider's local point of presence (POP); Network Termination Equipment (NTE) is attached to the wall in the customer's room and is connected to either a fibre optic or copper local loop circuit. Depending upon location, a back haul circuit may be used to link a customer to the service provider POP and then on to the internet gateway. This takes place behind the scenes and may run over a third party' national network. CPE - the Customer Premises Equipment is the telecommunication equipment owned by an organisation and located on its premises. It refers to all types of routers, switche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises at both ends of the network. This connectivity is for a Dedicated Bandwidth capacity for the agreed time period. Thereafter, it is the customer who feeds the data/voice inputs into the IPLC network at the interface located at his place and also receives the data/voice inputs coming from the opposite direction. It is upto the customer whether he uses the hired Dedicated Bandwidth capacity fully, in part or not. In any case, the agreed charges are payable by the customer to the assessee company. The DCE is installed at the customer premises and is owned by the assessee company, MCI, since it is the point of connection between the customer and the carrier. It provides clock and switching services to the data from the customer to the carrier. The assessee owns the Data Circuit Termination Equipment (DCE) installed at the customer premises. The customer is given a choice only in respect of the Data Terminating Equipment (DTE). The DTE can be either supplied by the assessee or can be acquired and installed by the customer himself in accordance with the terms and conditions of the 'MCI Asia Pacific Master Services Agreement'. 52. The reply affidavit disputes certain statement in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirements, including but not limited to the regulatory and data protection requirements in the respective countries. 55. The Master Terms gives the definitions of various terms used. "Customer Equipment" is defined to mean equipment, systems, cabling and facilities provided by Customer and used in conjunction with the service equipment in order to obtain the service and includes CPE. "CPE" means equipment installed by MCI whether owned by the customer or not, which is located at the customer site for the purpose of receiving a service. "Service" is defined as specific service supplied by MCI or a Provisioning Entity to customer identified in a relevant service order and any related service equipment support or consulting provided. "Service Equipment" means the equipment, systems, cabling and facilities provided by or on behalf of MCI at Customer Site in order to make the Service available to customer. Ownership of the Service Equipment does not pass to customer from MCI and does not include the network. "Provisioning Entity" means the entity providing a Service to Customer and may include any MCI affiliate or sub-contractor, including licensed carriers or service providers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside MCI's Normal Business Hours, Customer shall pay an additional expedited/non-business hours install fee, as determined by MCI and as applicable from time to time." 58. Clause 4.4 refers to CPE rental and Clause 4.5 refers to maintenance Services. The Clause further points out that MCI shall be released from its maintenance service obligations if customer or any other person (whether authorised or not) (i) alters, modifies or moves the CPE; (ii) uses the CPE for the purposes other than the intended purpose; (iii) attaches devices to the CPE not supplied by the original manufacturer without MCI's approval or not supplied by MCI; or (iv) performs or attempts to perform maintenance services on the CPE or any portion thereof. 59. As regards the customers' responsibilities, it is stated that the customer has to have the site prepared and ready for installation of the CPE by MCI or its designee on the delivery date specified by MCI. The clause further states that the customer is solely responsible for ensuring that the Customer Equipment is compatible with MCI's requirements and that it continues to be compatible with subsequent revision levels of MCI provided equipment and ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the CPE (software) remain at all times with the licensor and use of such software must be in accordance with the accompanying licence agreement. 62. In the background of this Master Agreement, when we look at the Service Order Form, we find that from the additional terms and conditions of service attached to the order form that the customer has ordered for IPLC services and has appointed MCI as its agent with regard to the provision of direct supply services. The order form defines provisioning entities as the local licensed telecommunication supplier for any portion of the service not provided by MCI or its affiliates; MCI, if requested by the customer in the service agreement has to arrange the provisioning of direct supply services on the terms specified therein, namely, (i) the customer appoints MCI for the duration of the term; should be the customer's sole agent for the provisioning and continuing supply of the direct supply services described therein; (ii) MCI shall have authority to select the provider of the Direct Supply Services; (iii) the Customer shall contract as principal with the provider of the Direct Supply Services on the terms and conditions of supply notif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payments at the distant end, the Customer owes or shall be fully responsible for effecting payment for his portion of the International Private Leased Line including local lead charges to VSNL in the event of non-receipt of payment from distant end by VSNL. 66. There is also an agreement between MCI Worldcom Asia Pte Limited and Videsh Sanchar Nigam Limited on International Private Leased Circuit. One stop shopping service agreement specifically gives the details of the service description as OSS Service by which customers can order both of the half circuits comprising an IPLC Service through a single point of contact at either of the Administrations, with the option of requesting SEO(Single end ordering), SEB (single end billing) and SPFR (single point fault repairing). The agreement further states One Administration, selected in each case by the customer, shall be the single point of contact for the customer in respect of the IPLC Service and shall liaise in relation thereto with the customer and with the other Administration. 67. The provision of OSS Service is without prejudice to the contractual relationship that each Administration has or may have with its respective cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est SEB at any time. If the customer requests SEB, Administration A will communicate this to Administration B. On receipt of Administration B's invoice, Administration A will convert Administration B's charges into the local currency of Administration A at the appropriate prevailing exchange rate as at the date of Administration A's invoice and present these together with the charges of Administration A to the customer for payment. The invoice to the customer shall show clearly that it represents charges on behalf of both Administrations and shall set out each Administration's charges separately. 72. The Provisioning Phase is given in Clause 5.3 of the agreement. According to this, Administration A will schedule end-to-end testing with Administration B. End-to-end testing will be inclusive of local loops to both customer locations. Upon satisfactory completion of the end-to-end testing, Administration A will advise the customer that the service has been satisfactorily established. Billing will commence after the satisfactory completion of the end-to-end testing. As regards the relationship of the Administrations, it is stated that the Administrations are independent business enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice provider on terms and conditions mentioned therein in the agreement. The nature of services to be provided are given in appendix (1) to the agreement, namely, Market Development, Providing information on potential customers, liaising with potential customers for dispersing information about the company' products and services, liaising with customers for obtaining feedback on behalf of the company and exploring new service lines/ventures for the company in India. The obligations of the service provider are given in clause 2 of the agreement. The service fee and payments are given in clause 5 of the agreement and the duration of the agreement at the initial term is for a period of two years. The agreement states that at all times, the service provider shall only provide marketing assistance, advice and other information to the company. 76. MCI Global Access Corporation and VSNL have also entered into agreement, called VSNL/WCom Global Network Services, on 8th February, 2001. The scope of services are given in Clause 3; the functions, practices and procedures required to enable WCom and VSNL are described in Appendix A. The intention of entering into the agreement is given in C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rranges for the assessee MCI singapore to enter into an agreement with the customer on the terms and conditions of the service provided by it. 78. Learned senior counsel appearing for the assessee submitted that even though the assessee provides end to end service, as far as the half of the leg upto the Indian sub-continent is concerned, it has nothing to do with the maintenance or providing service by VSNL. Whatever bandwidth is assured is again a shared one. There are no equipment strictly speaking of the assessee to process the data of the customer. 79. Learned senior counsel appearing for the assessee submitted that the aforementioned agreements showed that the consideration received is only for rendition of services and not for individual use or right to use any equipment/ process. As the assessee required to provide the bandwidth services to customers in India not having the necessary license under the regulatory laws of India, it entered into an agreement with VSNL for providing and ensuring the seamless performance/delivery of bandwidth services. Thus, the respective service provisioning entities, namely, the appellant outside India and VSNL within India provide the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the infrastructure and equipment to the customer; that the customers are promised certain bandwidth for their use at all times, the services provided to various customers of the assessee in India by affiliates of MCI, such as MCI India Private Limited, MCI Global Access Corporation USA, payments for these services are made on the account of MCI Singapore outside India. In a statement made by Mr.Mohan Ramaswamy, employee of MCI WorldCom India Private Limited, it is stated that he along with a team of Engineers are to attend to fault resolution service for various customers in India and for this purpose they co-ordinate with VSNL and MCI, USA. He reported directly to MCI USA and he is not reporting to any of the authorities of MCI India. 82. The Revenue further pointed out that the equipment is transferred to VSNL by MCI for a token payment of Rs.10,000/-, and the ownership remained only with MCI because VSNL does not have the right to sell the equipment and the equipment is to be handed over at any time to MCI on demand for payment of Rs.10,000/-. Payment by VSNL was only a token payment and hence not the actual consideration for the equipment. Pointing out the Commissioner's fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een Indian half and outside India of the assessee showed that the customers have to pay for both part; in addition to the above, service is defined as specific telecommunication service rendered by WorldCom outside India to the customer and as identified in the relevant service order. The service order is a request made by the customer, the service equipment at the configuration of the assessee is installed in the premises of the customer, the title to which is not passed on to the customer and the form prescribe the service charges payable. VSNL's role is only that of a provisioning entity and it cannot in any way control the use of the equipment by the customers outside India or determine the configuration at which the equipment is installed even within VSNL's premises and the services are mirror image of the other. Thus it is clear that the appellant would be responsible for setting up the network and connecting to the Indian half of the network. Clause 3.08 of the service agreement with the VSNL shows its role to carry on international traffic in and out of India. Thus, equipment and configuration provided by the assessee thus read in the context of various provisions of the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t entered into between the assessee and the customer herein is for providing of seamless point to point private line so as to enable the customer to communicate between its office that are geograhically dispersed. The service order reveals that the parties had agreed for a particular bandwidth and in entering this the assessee had provided the necessary equipment at customer premises, configured and customised to ensure that the customer gets the uninterrupted connectivity from one end to the other end in different geographical point. 88. A reading of the agreement with VSNL also shows that the configuration at the customer's end and at the VSNL end and in the other half managed by the assessee match with each other and compatible for ensuring the integrated service to the customer. The arrangement between the assessee and the VSNL has to be necessarily integrated and technically and financially viable having regard to the close functional relationship between the two. For this, the Indian customer pays through the single billing system called OSS for the integrated services. Thus the service agreement assuring the service is possible and workable only when the assessee and VSNL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to end connectivity is really assured to the customer. Being an end to end dedicated telecommunication transmission for customers' exclusive use, leased line are available only to those who seek private circuits. The customers' premises equipment thus refers to routers, switches, private board exchange, installed in a customers' premises. Thus, in the bandwidth services for transmission of data/voice through IPLC network, the data/voice are converted into signals at the customer' end which are then picked up by the local loop service provider and carried into the Indian carrier, namely, VSNL's half circuit. VSNL carries this to the international terminal which interconnects the domestic network to the international network. An international terminal is present in the appellant's side of half circuit performing identical function as in the Indian half circuit, where the steps in respect of Indian half circuit is replicated and the recipient receives the voice/data. The agreement is silent on what is involved in the ITOC in the current layout that interconnects the domestic network to the international network. Yet, looking at the various clauses in the agreement and the service or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee submitted that the Master Agreement is a template format used across all contracts globally and the service performance consideration would vary from Country to Country. Because of the Indian Regulatory restriction, the assessee is disabled in providing bandwidth services within India. He submitted that the agreement between the assessee and VSNL showed that they are independent parties and one cannot assist/represent on behalf of the other. 95. It is no doubt true that the agreement between the assessee and the VSNL states that one is not the agent or the representative of the other. This, however, does not mean that VSNL has provided its server independently without any connection whatsoever with the service order that the customer places with the assessee. A reading of the service agreement shows that parties agreed that the provisioning entities in the Indian half circuit shall be VSNL and in getting the seamless end to end connectivity, the customer enters into a further agreement with VSNL. If the agreement with VSNL has to have no relevance or reference to the customer agreement with the assessee, then, there is no need at all in the service agreement to refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical service" for the purpose of Section 194J of the Act."..... "At the time the Income-tax Act was enacted in the year 1961, as also at the time when Explanation 2 to Section 9(1)(vii) was introduced by the Finance (No. 2) Act, with effect from April 1, 1977, the products of technology had not been in such wide use as they are today. Any construction of the provisions of the Act must be in the background of the realities of day-to-day life in which the products of technology play an important role in making life smoother and more convenient. Section 194J, as also Explanation 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Service agreement) and the assessee could provide the service either directly or through a provisioning entity (clause 2.1). Thus the assessee provides the Indian customer an integrated communication system called IPLC, the part of which outside India is taken care of by the assessee and the part inside India through VSNL, which cannot be dissected as two independent contract having no bearing at all on each other. In the light of the above, we reject the contention of the assessee. 99. Article 12 of the DTAA between India and Singapore is the relevant article on royalty which reads as under: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1.Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2.However, such royalties and fees for technical sevices may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed: a.in the case of royalties referred to in paragraph 3(a) and fees for technical services as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; c.for teaching in or by educational institutions; d.for services for the personal use of the individual or individuals making the payment; e.to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14; f.for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5; g.for services referred to in paragraphs 4 and 5 of Article 5. 6.The provisions of paragraphs 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 therein, and the ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received by the assessee was rightly assessed as 'royalty' and would constitute so for the purposes of DTAA. 101. Although the assessee has submitted a voluminous paper book on case law, except for those that are discussed above, others were not touched by the assessee and hence we have not considered it necessary to discuss these decisions. We may also note that except for making the submission on the question that the transaction is only a service and hence the consideration is not royalty, no arguments are made on permanent establishment or on the effect of the amendments. The assessee had submitted a detailed written submission on the clauses in the agreement and on the legal submissions. After considering the same, with reference to the arguments made by the learned senior counsel on the issue of royalty, vis-a-vis the agreement terms, we hold that the order of the Tribunal does not call for any interference. Although in his reply, learned senior counsel appearing for the assessee pointed out to Article 5 on permanent establishment to contend that VSNL is not an agent and hence cannot be construed as a permanent establishment of the assessee, no arguments are advanced on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 234 B of the Income Tax Act is concerned, the assessee submitted that the said provision would be applicable only in cases where the tax payer is liable to pay advance tax but defaults in payment of advance tax. Thus, unless there is a liability to pay advance tax under Section 208 of the Income Tax Act, the question of invoking section 234B(1) will not arise. Learned Senior Counsel further pointed out that as per Section 209(1)(d), the advance tax liability has to be computed after reducing the tax deductible at source from the estimated total tax liability. When the tax deducted at source takes care of the entire liability, there would be no advance tax payable; consequently interest under Section 234B could not be levied. Apart from contending that the payment received would not partake the character royalty, he submitted that tax would be deductible at source, if at all there is a liability under Section 195 of the Income Tax Act on all payments made to the appellant. Consequently, there is no liability to pay any advance tax and hence, the assessee could not be subjected to interest under Section 234B of the Income Tax Act. 104. Learned Senior Counsel appearing for the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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