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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 ..... ment' under Section 9(1)(vi) of the Act? 2. Whether the Tribunal was right on facts and in law in holding that the payments received by the appellant from the Indian customers for provision of Bandwidth/Telecom Services outside India is royalty for the 'use of, or the right to use equipment' under Article 12(3)(b) of the Tax Treaty?" 2. The assessee seeks admission of T.C.(A)No.230 of 2012 on the following substantial questions of law: "1. Whether the Honourable Tribunal was right in fact and in law in holding that the payments received by the appellant from its Indian customers for provision of Bandwidth Services outside India is a royalty for the use of or the right to use equipment under Section 9(1)(vi) of the Act? 2. Whether the Honourable Tribunal was right in fact and in law in holding that the payments received by the appellant from its Indian customers for provision of Bandwidth Services outside India is a royalty for the use of or the right to use equipment under Article 12(3)(b) of the Tax Treaty? 3. Whether the Honourable Tribunal was right in fact and in law in holding that in the alternative, the payments received by the appellant from its Indian customers for pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called as MCI Worldcom Asia Pte Limited, and part of the global telecommunication conglomerate of MCI, USA is a non-resident company engaged in the business of providing international connectivity services (bandwidth services or telecom services in the Asia Pacific region including customers in India for transmission of data and voice. Being a point to point private line used by an Organisation to communicate between offices that are geographically dispersed through out the world, the assessee provides a private link that can transport voice data and video traffic between the offices in different Countries. Thus, IPLC is an end to end managed dedicated bandwidth service that provides internet service to customers for various applications. The international leg of the telecom services provided outside India is provided by the assessee. Since in India, under the Indian Telecom Regulations, only the licensed service provider could provide international long distance communication services on the Indian leg, and the assessee is not a licensed service provider under the Indian laws, Videsh Sanchar Nigam Limited (VSNL) a public sector undertaking provides the Indian leg of the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being one for rendering of service by the assessee, the payment could not be termed as 'royalty'. The collection of fee for the usage of standard facility would not amount to payment made for providing technical services. Thus the assessee contended that the question of any liability to pay advance tax or interest under Section 234B of the Income Tax Act did not arise. 5. The Assessing Officer rejected these contentions holding that the receipt of consideration for rendering of services to the end user is workable only when the assessee and the VSNL are considered to be rendering the service jointly to the end user in India. The agreements between the assessee and the end user and the VSNL are part of one transaction, but executed through several agreements/arrangements. The payments made by the customers for the offshore services rendered by the non-resident assessee are part of one single agreement to provide IPLC and hence, the receipts are taxable as 'royalty' under Section 9(1)(vi) read with Explanation 2 of the Income Tax Act. He held that by reason of the amendment to Section 9(1) with effect from 01.04.1976, under Finance Act 2010, the reliance on the decisions reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has no permanent establishment in India. MCI India provided marketing support to the assessee for which it is remunerated at an arms length basis. Considering the nature of services rendered, the consideration received could not be termed as 'royalty'. The Tribunal found that as per the agreement, the customer acquired significant, economic or possessory interest in the equipment of the assessee to the extent of the bandwidth hired by the customer. This was made available to the assessee on a dedicated basis. The agreement with VSNL for split billing is only to overcome the telecom regulatory regime prevailing in India. VSNL was a sub-contractor and a provisioning entity on behalf of the assessee and the IPLC is a hightech circuit comprising transmission cables and sophisticated equipment. The Tribunal held that even if the payments are not treated as not relating to the use of the 'equipment', they should be considered as payment for the use of the 'process'. Thus, referring to the ITAT Special Bench order in the case of New Skies Satellites N.V. Vs. ADIT (Int. Tax) reported in 319 ITR 269; in the case of ACIT Vs. Grandpix Fab (P) Ltd. reported in 34 DTR 248, and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought under the head of 'royalty'. The arrangement between the assessee and VSNL is a bona fide one based on domestic law. The assessee is not a party to the agreement between MCI Global Access Corporation (Wcom) and VSNL and MCI Global Access Corporation (Wcom) had sold the nodal equipment to VSNL. The provision for transfer back to WCom does not, in any manner, change the VSNL's ownership rights. As regards the role of MCI World Com India, it merely provides liaising and co-ordinating services and this could not be treated as permanent establishment. He submitted that IPLC services provided by the assessee could be compared with the goods transporter. There is no conversion of data or voice as in the case of the transponder services, as discussed in the case of New Skies Satellites N.V. Vs. ADIT (Int. Tax) reported in 319 ITR 269. In IPLC, there is only transmission of data and voice in the same form through fibre cables. The Revenue has misconstrued the facts and the sophisticated technology merely concerns transmission of the data without distortion and the VSNL provided independent services within the Indian territory and is paid for separately and directly by the customers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work Management Software'. The customer thus paid for the use of and the right to use of the equipment. It pointed out that the assessee engaged the services of VSNL as a provisioning entity for performing certain services in India for which the assessee did not have the license. Thus the Revenue contended that the receipt is nothing but royalty. 11. Learned Solicitor General appearing for the Revenue reiterated the above by taking us through the various clauses in the agreements and submitted that the character of the receipt clearly fits in with Section 9(1)(vi) read with Explanation 2 (iva) of the Income Tax Act for equipment royalty; alternatively, it can also be taxed as process, falling under Explanation 2(iii) to Section 9(1)(vi) of the Income Tax Act that receipt would nevertheless be held as 'royalty'. Contending that for tax purpose qua royalty there need not be a physical or right to use to the user, he submitted that so long as there is nexus between the user, the situs of the usage (in India) and the purpose of the use (for offering seamless internet facility), economic exploitation of the equipment gives rise to the income to be taxed as 'royalty'. Referring to the 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion therein in assessing royalty in India. As per Article 3.2 of the DTAA, the term not defined in the agreement would be understood by the definition contained in the law of the contracting state. Thus, going by the Explanation giving the definition on 'royalty' and 'process', the receipts are rightly taxed herein. 15. As regards the levy of penalty under Section 234B of the Income Tax Act, he pointed out that unless there is actual deduction of tax as TDS, there can be no escapement from the provision of Section 234B levying penalty. In this connection, he relied on the decision reported in (2011) 2 SCC 408 (CIT V. Rolta India Ltd.), as well as the unreported decision of this Court in T.C.(A)No.202 of 2007 dated 23.7.2013 (Commissioner of Income Tax V. M/s.Fisher Sanmar Ltd.), the assessment itself herein made after the amendment. 16. Countering the stand of the Revenue, learned senior counsel appearing for the assessee replied that even though wide meaning is given under Section 9(1)(vi) read with Explanation 2 on 'royalty, yet, the transaction being one of pure rendering of service, the consideration could not be taxed as 'royalty'. In this connection, he placed reliance on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in India. 20. After the decision reported in (2007) 288 ITR 408 (Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax) that there should be territorial nexus between such income and territory of India and that the services had to be rendered in India and utilised in India, an explanation was inserted below sub-section 2 of Section 9, with effect from 01.06.1976 under Finance Act, 2007 clarifying that when income is deemed to accrue or arise in India under Clauses (v), (vi) and (vii) of sub-section 1 to Section 9, such income shall be included in the total income of the non-resident regardless of whether the non-resident has a residence or place of business or business connection in India. Thus, while in the case of resident, irrespective of place of accrual or arising of income, it is taxable in India, in the case of non-resident, unless the place of accrual or arising is within India, he cannot be subjected to tax. Thus only to the extent of any income accruing or arising within India, income is fictionally deemed to arise or accrue in India, and the non-resident would be liable to be taxed by reason of Section 5(2)(b) of the Income Tax Act. By Finance Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as power to make laws. In the decision reported in (2003) 263 ITR 706 (SC) (Union of India v. Azadi Bachao Andolan), the Apex Court pointed out "the power to legislate in respect of treaties lies with parliament under Entry 10 and 14 of List I of 7th Schedule." As regards fiscal treaties, since the same would have to be translated into an Act of Parliament, a special procedure is evolved by enacting Section 90 of the Income Tax Act enabling the Central Government to enter into agreements with the Government of any country outside India for granting relief in respect of income on which both income tax under the Act and income tax in that country under the corresponding Act in that country had been paid. 23. Touching on the scope of tax treaty, in the case of Union of India v. Azadi Bachao Andolan reported in (2003) 263 ITR 706 (SC), the Apex Court pointed out that no provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act. If a tax liability is imposed by the Act, the Agreement may be resorted to for negativing or reducing it; and, in case of difference between the provisions of the Act and the Agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the amounts referred to in Section 44BB; transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films or rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 26. The said amendment relating to 'royalty', particularly with reference to use or right to use any industrial, commercial or scientific equipment, etc. was inserted with effect from 01.04.2002 under the Finance Act 2001. The said expression came up for consideration before the Authority for Advance Ruling in the decision reported in (2005) 305 ITR 37 (Dell International Services (India) Pvt. Ltd., In re), a decision strongly relied on by the appellant in support of its contention that the payment to the assessee herein is not 'royalty'. The applicant company before the Authority for Advance ruling was Dell International Services (India) Private Limited engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thread running through the entire fabric of agreement between the parties. The Authority further pointed out that the provision of telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the BTA or its agent does not, in the absence of specific and clear indication, amount to a lease of equipment and that the expression rental used here and there in the Agreement was not used in its legal sense nor can it be treated as a decisive factor. 29. Referring to the decision reported in (1990) 77 STC 182 (Rashtriya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam) affirmed in 126 ITR 114; (1999) 113 ITR 317 (Aggarwal Brothers V. State of Haryana and another), the Authority for Advance Ruling viewed that the ratio of these decisions therein would not be pressed into service to conclude that the right to use of equipment did not carry with it the right of control and direction, whereas the phrase right to use implies the existence of such control. As to the meaning of the word 'use', the Authority viewed that the said expression in relation to equipment occurring in Clause (iva) was not to be understood in the broad se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Act. The facts were that the Indian Company which was part of cable and wireless group of companies was engaged in the business of providing long distance and domestic long distance telecommunication services in India. It entered into an agreement with M/s Cable and Wireless UK (C &W UK) with a view to providing end to end international long distance telecommunication services to its Indian customers of the applicant Cable and Wireless Networks India Private Limited. As per the agreement, the said company was to provide the Indian leg of service by using its own network and equipment and the international leg would be provided by the UK Company using its infrastructure and equipment. In respect of the services rendered by the UK company, the Indian company would pay the fee to the UK company. On the question as to whether the said payment would be 'royalty' within the meaning of Explanation 2 to Section 9(1)(vi) of the Income Tax Act and whether the amount would be fee for technical services under Article 13 of the agreement for avoidance of double taxation between India and UK, where there was a permanent establishment, the applicant sought for a decision before the Authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could subscribe for the portal - Ezycargo which enables him to access the data bank of the airlines like flight schedules, availability of cargo space etc. It also gave further details like the status of booking to the agent, creating database for various bookings by furnishing the status of the shipment etc. It is stated that the portal transmits data from the agent to the airlines by transmitting from simple English language to Cargo IMP data and on receiving the reply of the airlines converts the Cargo IMP into simple English language and transmits the same to the agent. For this service, the applicant charged subscription fee, system connects fee and help desk support fee etc. On the question as to whether the payment made by the Indian subscriber to the Cargo Community Network Private Limited at Singapore for providing a password to access and use the portal hosted from Singapore was taxable in India and subjected to deduction of tax at source, the Authority for Advance Ruling held that the use of the commercial equipment was made in India and the payments also arose in India. The portal on the C.C.N. Server Platform is scientific equipment, authorized to be used for commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circles in India. A company registered in Saudi Arabia, STC for identification, indirectly holds 10.5% shareholding in the applicant company. The foreign company owned and/or controlled and/or operated telecommunication paths, facilities and network infrastructure in the Kingdom of Saudi Arabia and elsewhere. A consortium of STC entered into a construction and maintenance agreement to plan and lay cable system, Europe India Gateway submarine cable, known as EIG, linking the Indian subcontinent and the United Kingdom with Terminal Stations at various Terminal points. The system was a high capacity fibre-optic submarine consortium cable system. The system would link the Terminal Stations in India, UAE, Oman, Djibouti, Saudi Arabia, Egypt, Libya, France, Monoco, Gibraltar, Portugal and U.K. As per the agreement, the terrestrial and submarine portions of the EIG cable system were divided into segments, connected through various Terminal Stations; the segment that terminates at the Terminal Station (T13) located at Mumbai was referred to as S4j and the allocation to each of the consortium members in respect of the portions of the EIG cable system was based on proximity to the country t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or scientific equipment. Consequently, the payment was held to be royalty. 38. Recently, in the case of M/s.Poompuhar Shipping Corporation Ltd., V. The Income Tax Officer, Chennai in T.C.(A)Nos.2206 to 2008 of 2006 concerning the case of time charter, this Court, by order dated 09.10.2013, considered the meaning of the expressions 'right to use' and 'equipment' and held that payment made for taking ship on time charter constituted 'royalty' as defined under Section 9(1)(vi) of the Income Tax Act. This Court considered the issue on use or right to use, particularly with reference to the term 'royalty' as defined under Explanation 2 and held that the expression 'use or right to use' is intended to take its ordinary meaning and applied in the broader sense, to mean employing for any purpose. Referring to the amendments made through insertion of Explanations 4 and 5, this Court held that the retrospective amendment has thus removed all doubts in so far as the expression 'use or right to use' to be understood in the context of possession, control or location. 39. Section 9 as it stands today relevant to our purpose reads as under: Income deemed to accrue or arise in India. "9.(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earning any income from any source in India : Provided Provided . Explanation 1 Explanation 2. For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for (i)the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii)the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii)the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv)the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artisti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ten submission had touched on the issue on permanent establishment. Thus, the one and only question that arises for consideration as projected in the arguments of the learned Senior Counsel appearing for the assessee is as to whether the consideration paid for providing IPLC is towards service and not towards equipment; consequently, the consideration would not fall within the meaning of the expression 'royalty'. 41. Before going into the details of the agreement and the arguments in this case, we may point out that the decisions reported in (2005) 305 ITR 37 (Dell International Services (India) Pvt. Ltd., In re). (2009) 315 ITR 72 (AAR) (Cable and Wireless Networks India (P) Ltd., In re) are not of any assistance to the assessee, considering the amendment that had come in the wake of those decisions under Finance Act 2012 by the insertion of Explanations 5 and 6 in particular having relevance to the issue on hand. 42. The decision relied on by the assessee, particularly with reference to the Delhi High Court reported in 332 ITR 340 (Asia Satellite V. DIT) is also distinguishable. This relates to a case of an assessee/lessee of a satellite called AsiaSat 1 which was launched in A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for use of equipment. The Tribunal held that the appellant had not leased out any equipment but had only made available the process that was carried out in the transponder to its customers. Insofar as income earned by the appellant from its customers in India is concerned, the Tribunal held that this would qualify as 'royalty' as defined in Explanation 2 to Section 9(1)(vi) of the Act. 43. Therefore, issues which arose for consideration in the appeal before the Delhi High Court related to Clauses (i), (vi) and (vii) of sub-Section (1) of the Section 9 of the Act. The High Court held that even when the appellant had business connection in India, no part of the appellant's income was chargeable to tax in India in terms of Section 9 (1)(i), as no operations to earn the income were carried on in India. The Delhi High Court held that carrying out the operations in India, wholly or at least partly, is sine qua non for the application of Clause (i) of sub-section (1) of Section 9 of the Act. Merely because the footprint area included India and ultimate consumers/viewers are watching the programmes in India, even when they are uplinked and relayed outside India, would not mean that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation sector. From a manual economy to automated economy, development of technology today has ushered in electronic commerce where business or trade is conducted over a network that uses computer and telecommunication. 45. Internet, in the most simplest of the term, is a group of millions of computers connected by networks. It is the size of each network connection that determines how much bandwidth is available. Bandwidth therefore is a measure in bits (0 to 1). Bits are grouped in bytes which form words, texts and other information that is transferred between the computer and the internet. Thus, an user having a particular server connection to the internet has a dedicated bandwidth between the computer and the internet service provider. But the internet service provider may have thousands of service connections to their location. The service provider has enough bandwidth to serve a person's computing needs as well as that of the other customers. 46. Bandwidth is the number of lanes as in the highway through which data at a speed designed is transmitted. Bandwidth is the capacity of transmission medium or amount of data, measured usually in bits per second that can be sent thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding bandwidth for global communication networks between offices that are geographically dispersed internationally. IPLCs are the basic building blocks for international communication. These point-to-point private line services are supported by an exclusive range of bandwidth option dedicated to the customers' exclusive use, providing quality reliable digital transmission seamlessly integrating data, voice and imaging services. To simplify, IPLC ordering and billing, a concept called, One Stop Shopping (OSS) was developed. It allows an organisation to place a single order with a single carrier for two private leased circuits for two offices in two different Countries. OSS consolidates the billing for both circuits into a single invoice, handles all currency issue and allows the organisation to report all problems from either circuit to one carrier. 50. Giving the diagram on the circuit layout for IPLC under sea cable, the affidavit filed by the assessee explains technical explantion to the IPLC services, that it is a point to point service with two half circuits starting from one end of the customer and terminating to the other end. One half of the circuit is a mirror image of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provider. The transmission network involves various legs of operations involving multiple players. Like a passenger booking the ticket, a customer has to book for his service which can be 2mbps. Like an airline, a service provider after using the network and transmission equipment of multiple operators would provide or deliver the end service, namely, transmission of voice or data and the customer does not gain control in any manner either physically or economically either over the network or processes involved. 53. The case of the assessee, hence, has to be seen in the context of the agreement between the assessee and the customer, assessee and VSNL, VSNL and customer and Master agreement. 54. The agreement between the assessee and the customer, called Service Order Form, gives the nature of service contracted to by the customer and the terms subject to which services are given. The Data Service Order Form states that it shall be read in conjunction with the terms of Asia Pacific Master Terms and Conditions, which the customer is stated to have agreed prior to executing the service order. The Asia Pacific Master Terms and Conditions, the parent document, which govern the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod, technology and route of delivery of the Service to Customer, MCI may vary the method, technology and route of delivery at any time without notice. MCI may utilise the services of one or more provisioning entities in connecting with the performance of its obligation under the agreement. 56. The Mater Terms also contains MCI termination and consequences of termination. It also refers confidentiality information, data protection and privacy. Schedule A relating to Additional Terms for Internet Services. It gives the lists of service description under the head of Managed Services Complete. It also states that if MCI consider it necessary, it shall conduct one initial survey at the customer site identified on the Service Order prior to receipt of the CPE to evaluate the accommodation for the CPE, the necessary wiring required, the compatibility of the CPE configuration, interfaces with the connecting equipment and to identify any potential deficiencies within the customer site. The customer site survey will also confirm the CPE configuration and all CPE interfaces will be compatible with the local PBX/telephone and data equipment to which it will be connected. Customer Site survey ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iry of the service term or upon termination of service for any reason whatsoever including due to the default of MCI, the customer would return the CPE, freight pre-paid, to such location as MCI may designate in writing in good repair, condition and working order, ordinary wear and tear resulting from proper use thereof only excepted. It is stated that CPE must be returned to MCI from the termination of service and if the same is not returned within 15 days of the termination of service, the customer would be billed for the price of the CPE, such invoice will be payable in accordance with terms. 60. Schedule B is Additional Terms for Co-Location Service. Clause 2 speaks about the installation, delivery of equipment, removal of customer equipment on expiration or termination and re-location. Under the head 'delivery of equipment', it is stated that on customer's request, MCI may, in its sole discretion, accept delivery of customer equipment at the facility if MCI has the means to do so. Upon the expiration or termination of the relevant service order, the customer has to remove the customer equipment from the space and return the space to MCI in the same condition as it was origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... originating A End - Chennai in India to termnating B end SanJose, USA. Direct Supply Services is defined as a circuit or service, including a local circuit or service directly connecting the customer's premises in a country or an international capacity connecting to circuits or services supplied by MCI, which by reason of regulatory requirements in the relevant country, MCI cannot supply direct to the customer. The order form says that MCI may appoint Direct Supply Services, Provisioning Entities as its debt collection agent for charges for Direct Supply Services. 63. Service form gives a single ID appointing MCI as its agent with regard to provision of Direct Supply Services. The initial service period is for one year. The monthly services, recurring charges are also given thereon. Attachment B(2) defines International Private Line (IPL), which is a bilateral Service - MCI is only responsible for its half circuit in terms or ordering, provisioning, billing and fault reporting. Customer has to liaise directly with the correspondent carriers for the distant half end circuit. 64. One Stop Shopping (OSS) is an IPL service that provides a single point-of-contact for the planning, ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taxes billed under that contract. 68. Clause 4 of the agreement details the principles involved in One Stop Shopping. According to this, the Administrations shall use their respective Order Forms to enter into agreements with customers for provision of that Administration's half circuit of the IPLC Service to the customer. The Administrations will exchange information and any promotional literature relating to their respective IPLC services and keep each other informed of the terms and conditions for such services and any amendments thereto. 69. Where an Administration introduces the IPLC services of the other Administration to any customer, it shall notify the customer that such services will be provided under the relevant terms and conditions of the other Administration. The Administrations will exchange instructions on the method of completion of their respective Order Forms. Once the customer has signed Administration B's original Order Form, it must be returned to Administration B for approval. Administration B will notify Administration A immediately if Administration B's order documents are in any way incomplete or inaccurate. If Administration B does not provide Adminis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its representative in the other Administration's country, to market and co-ordinate the provision of the IPLC Service. The activities of each Administration in the course of such representation shall be by way of introduction only to a prospective customer. Neither Administration shall be obliged or required to provide the Service to a customer in its country until it has accepted a customer's Order Form in accordance with the other Administration's IPLC Terms and countersigned its Order Form for the service. Neither Administration shall assign, transfer, convey, license or otherwise disposed of, wholly or partially the rights and obligation under this Agreement, except with the prior written consent of the other Administration. 74. Schedule I gives the obligation when VSNL is the Administration A and Schedule II when VSNL is Administration B. VSNL shall get the relevant documents, including the MCI Warranty of Agency, filled by the customer at Indian end as per the customer order form made available to VSNL by MCI. This document has to be handed over to MCI at the earliest time possible, by courier and also communicated by facsimile/email to contacts of MCI as provided, for expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomers to communicate internationally. Clause 3.06 states that the agreement is non-exclusive and shall not restrict either party from offering similar services independently or in combination with other organizations. Neither shall it create a partnership between VSNL and WCOM. 77. In the background of the service agreement with the customer, Service agreement with VSNL and the one between customer and VSNL, it is clear that these are part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim however being to give the customer a point-to-point private line to communicate between offices that are geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. As is evident from the reading of the terms of all these agreements, parties have agreed to go for One Stop Shopping, which allows an organisation, namely, customer to place a single order with a single carrier for two private leased circuits for two offices in two different Countr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over at any point of time to the customers. Being in the nature of provision of services, the consideration for the service did not come within the scope of clause (iv)(b) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. He further pointed out that failure to render or any deficiency in service resulted in non-payment of the consideration. The assessee secures the information and the data and maintains confidentiality and provides mirror image of what is given by VSNL outside India. In the background of this process to provide high-quality service to the customers, the receipt could never be attributed with the character of 'royalty'. 80. Referring to the general principles on international taxation, he submitted that when a non-resident physically receives income in India either direct or on its behalf by somebody else, the transaction would fall within the ambit of income received in India. Referring to Section 9(1)(vi) of the Income Tax Act read with the Explanation on 'royalty' which included equipment royalty and process royalty, unless and until the Department showed that there is consideration for use of equipment or right to use the equipment/or a process, the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take the services of VSNL as the provisioning entity for providing that part of the services in India having regard to the Regulations of the Telecom Regulatory Authority of India. As the assessee did not possess the appropriate license for doing so in India, it had taken the services of VSNL as provisioning entity; that the assessee provided dedicated bandwidth for the use of its Indian customers from India to other countries through its sub-contractor or named provisioning entity VSNL who provided the connection in the Indian half. Thus the consideration made by the Indian customers is for obtaining an economic interest over the bandwidth under the terms of the agreement. In this, the assessee did not provide any service to its customers but only leased out equipment for use of its Indian customers. 83. Referring to the various documents filed by the assessee in the form of service agreements and Master agreement, learned Solicitor General appearing for the Revenue contended that the service order, the master agreement on IPLC service revealed the true nature of the transaction which is an end to end transmission facility partly serviced through the provisioning entity, that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any point of time. When the Indian customer economically exploited the network to transmit data between locations for the purposes of its business and for the use of the equipment paid the consideration for the end to end service, what data goes over the bandwidth reserved for the customer is exclusively in the control of the Indian customer and not the assessee and the assessee cannot see the data that is passing through the network dedicated for the use of the Indian customer. Thus, the Indian customer does obtain an economic interest in the equipment which need not result in the ownership. 85. Learned Solicitor General further submitted that examined from all perspective, the consideration is only equipment royalty, as IPLC and bandwidth are used by the customer or the right to use the same has been given to the Indian customer by the assessee. In the background of this, learned Additional Solicitor General submitted that the order of the Income Tax Appellate Tribunal is unexceptionable. 86. The case of the assessee projected herein is that the agreement between the assessee and customer contemplated rendering of service only and hence the consideration paid would not partake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xation in India. 89. Bandwidth is defined as the amount of traffic that is allowed to occur between the customer website and the rest of the internet. Bandwidth is measured in bits a single 0 to 1 and are grouped in bytes which form words texts and other information transferred between the computer and the internet. It is stated that an user having a particular IPLC service connection has a dedicated bandwidth between the computer and the internet provider though the provider itself may have 1000 such service connection to other location. Evidently, service provider has to have enough bandwidth to serve a person's computing needs as well as all of its other customers. Thus, being high speed internet connection, to achieve this, the equipment at the customer's end must have the capacity to send and receive data at the required speed. In order that the contracted bandwidth is provided, the Master agreement read with the service order clearly gives the selected bandwidth for each customer which is assumed end to end and to this end, the equipment at the customer's end are delivered by the assessee itself. 90. In the Master agreement, Clause 4 deals with Managed Services Complete, Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India, so that the switching facility converts and receives the signal in the network and transmit through the transmission network cable to the ultimate destination. 92. In the background of the clauses in the agreement, the Customer Premises Equipment at the customer's location and Schedule- B on Additional terms for Co-Location Services also assume significance, particularly Clause 2 on Installation, Clause 2.2 on Delivery of Equipment, Clause 2.3 on Removal of Unauthorised Equipment, Clause 2.4 on Removal of Customer Equipment on Expiration or Termination, Clause 2.6 on Relocation of the Customer Equipment, Clause 3.3 on On-Site Technical Support at customer's request, Clause 4.5 on Technical Obligations of the customer, it is difficult to hold that there is no use of any equipment scientific/commercial. There is use of equipment and cable in the transmission of the data/voice from one end to the other and it is difficult to accept the case of the assessee that the nature of transaction is only that of service. The agreement provides an indefeasible right to the customer to use the facility of communicating the data/voice and has an internet in the matching half circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through VSNL. Thus, the end to end provisioning in one single circuit is assured by the assessee and if by reason of any regulatory laws of the Country the assessee is unable to extend its service by itself but goes for such other licensed authority, it does so only as a provisioning entity to make up for the gap caused by the statutory limitation on the license and thus it does not mean that these facilities are independent having no connection and relevance whatsoever to the connectivity offered by the assessee. The various contracts executed pursuant to the service contract with the customer are closely linked to the single transaction of providing end to end international private leased circuit facility to the customer and in order to execute the same, if the assessee has to enter into several sub- agreements/agreement, such agreements cannot be looked at in isolation having no relevance to the service agreement. 96. In the background of this, we reject the plea of the assessee that the payment made is not in consideration of the use of the equipment by the customer. We also reject the argument of the asssessee that what is provided is in the nature of service. In the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roplane, consumption of electrical energy, etc. Such facilities which when used by individuals are not capable of being regarded as technical service cannot become so when used by firms and companies. The facility remains the same whoever the subscriber may be-individual, firm or company." 97. Thus, even going by the above decision, we hold that providing of service is not possible without the use of the equipment ensuring the assured bandwidth for transmission of data/voice which provides the internet access to the customer to and fro. After the insertion of Explanation 5, possession, control of such right, property or information usage directly by the payer, location of the right are not matters of concern in deciding the character of payment as 'royalty' and but for the use of the connectivity by the payer, the service agreement itself has no meaning. Thus the amendment introduced as a result of the decision of the Authority for Advance Ruling reported in (2008) 172 Taxmann 418 (AAR) (Dell International Services India (P) Ltd., In re) and (2009) 315 ITR 72 (AAR) (Cable and Wireless Networks India (P) Ltd., In re) clearly answer the question raised in this regard against the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llary and subsidiary to the enjoyment of property for which royalties under paragraph 3(b) are received, 10 per cent. of the gross amount of the royalties and fees. 3.The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: a.any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, 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, property or information; b.any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described it! paragraph 4(b) or 4(c) of Article 8. 4.The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: a.are ancillary and subsidiary to the application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 8.Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtual presence of the assessee which operates through its equipment placed in the customer's premises through which the customer has access to data on the speed and delivery of the data and voice sent from one end to the other. The Explanations inserted thus clearly point out that the traditional concepts relating to control, possession, location on economic activities and geographic rules of source of income recede to the background and are not of any relevance in considering the question under Section 9(1)(vi) read with Explanation 2. Thus, more so when it comes to the question of dealing with issues arising on account of more complex situations brought in by technological development by the use of and role of digital information, goods etc., the foreign enterprise does not need physical presence at all in a country for carrying on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given herein before. 102. In the circumstances, we reject the case of the assessee holding that the receipts are liable to be treated as 'royalty' for the use of IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t considered the issue at all, even though it was raised in the grounds. 105. It is seen that in T.C.(A)Nos.147 to 149 of 2006, the assessee has raised a ground as regards the levy of interest under Section 234A, 234B and 234D of the Income Tax Act, as the case may be, even though the same has not been included in the substantial questions of law at the time of admission. The Tribunal has not considered the grounds on the levy of interest under Section 234A 234B and 234D inspite of grounds raised therein. We had perused the order of the Tribunal and we find nowhere the Tribunal had touched on this issue. In the circumstances, We feel the proper course herein would be to remand the matter back to the Tribunal to consider levy of interest alone under the above said Section. 106. In the circumstances, we affirm the order of the Tribunal holding that the consideration paid by the customer to the assessee is 'royalty' within the meaning of Explanation 2(iva) or in the alternative under Explanation 2(iii) of Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India and Singapore. With regard to levy of interest under Section 234 A, 234B and 234 D of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X
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