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TMI Blog2015 (1) TMI 1018X X X X Extracts X X X X X X X X Extracts X X X X ..... at for scrutinizing the return, notice u/s 143(2) was to be issued within six months from the end of financial year in which the return is furnished and for re-opening of an assessment u/s 147; time limit has been provided from 4 to 6 years from the end of the relevant assessment year as provided u/s 149. Thus the action of the Assessing Officer is within a reasonable time. Therefore, we do not see any reason to interfere in the findings of the CIT (A) on this issue. - Decided against assessee. Order of the Assessing Officer not held to be bad in law and void ab initio by CIT(A) - Held that:- Payments made (IUC and CTA) by the assessee to NTOs and Belgacom falls within the ambit of section 5 (2) of the Income Tax Act. Alternatively, he held that these are in the shape of royalties and it can also be construed as payment of fee for technical services. The learned CIT (A) has not decided the issue with regard to the nature of the payment being FTS because in the opinion of the CIT (A) once the payment contained the nature of the royalty payment, then there is no need to look into; whether the payments in the shape of FTS is involved in these payments or not. To our mind basically no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a receipt in DTAA, the applications of treaty comes to an end. Thereafter, one has to refer to the provisions of the Income-tax Act to assess the receipt.We are of the view that enquiry contemplated u/s.195(1) does not contemplate a wider scope equivalent to the one available in the regular assessment proceedings. In the present case, payee has no concern about the withholding of taxes that is the reason they have not opted for applying the DTAA to these payments at the time when payments were made by the assessee. Thus the assessee failed to demonstrate with sufficient material as to how it harboured a belief that taxes are not to be deducted at source while making the payments. In the enquiry thereafter the Assessing Officer has demonstrated with a reasonable degree that payments involved an element of income u/s.9(1)(vi) Explanations (2), (5) and (6). - Decided against assessee. The next contention raised by the assessee is that liability to deduct tax has been put upon it by virtue of retrospective amendment, thus it was impossible for the assessee to deduct TDS at the time of payments is not acceptable as observed that by insertion of Explanation (5) and (6) scope of expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business, the assessee is responsible for providing connectivity to calls originating or terminating outside India. In order to achieve its object, the assessee company avails the services of certain non resident telecom operators (hereinafter referred to NTOs), who provide to it carriage or connectivity services over the last leg of the communication channel, i.e. last leg of the communication channel where the assessee does not have its own license or capacity to provide connectivity. 4. In connection to this business, the assessee had entered into agreement with NTOs for provision of international carriage and connectivity services. As per these agreements, the assessee has to pay inter connectivity usage charges (hereinafter referred to IUC) to the NTOs as consideration for the alleged services provided by them. The assessee also entered into a capacity transfer agreement (hereinafter referred to CTA) with M/s Belgacom International Carrier Services, SA (Belgacom), a company incorporated under the laws of Belgium and the tax resident of that country for transfer of certain capacity over the Europe-India Gateway (EIG) cable system. EIG is a high capacity fibre optic submarine c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e noticed by the Assessing Officer in Paragraph No. 2.6 of the assessment order, which read as under: Financial year Total amount remitted to NTOs for provision of interconnect services (in crores) Total amount remitted to NTOs for provision of band width capacity in EIG cable system (in crores) 2007-08 21.22 2008-09 320.06 9.89 2009-10 321.21 7.09 2010-11 307.19 3.34 2011-12 349.08 3.37 Total 1318.76 23.69 6. After going through these details, Assessing Officer had issued a fresh show cause notice on 10.12.2012 seeking the assessee's explanation as to why it should not be treated as an "assessee in default" for non deduction of tax at source on IUC payments made to the NTOs and capacity transfer payments made to Belgacom. The assessee had filed written submissions before the Assessing Officer. Assessing Officer proceeded to examine the issue with six different angles as evident from Paragraph No.3 of the assessment order which read as under: "3. The submissions made by VSL regarding taxability of the payments for Interconnect services and payments for provision of bandwidth to NTOs are discussed in the following manner: I Taxability of payments to NTO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed beyond a reasonable period of time. It was contended before the learned CIT (A) that ITAT in the case of Raymond Woolen Mills Ltd vs. Income Tax Officer (57 ITD 536) (Bom.), while explaining the meaning of reasonable time period has held that an order u/s 201 of the Act could be passed within four years from the end of financial year. It was also contended that the intention of the Parliament in not putting a specific bar on limitation was not to give license to the Department to hold the assessee to ransom for all time to count; but to ensure that pre assessment taxes were collected promptly. The assessee had relied upon a large number of decisions including the decision of the Hon'ble Delhi High Court in the case of NHK Japan Broadcasting Corporation reported in 305 ITR 137. The learned first appellate authority has rejected the contentions of the assessee and put reliance upon the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. HMT reported in 304 ITR 219. 10. Before us the learned Counsel for the assessee, put reliance upon the stand of the assessee taken before the learned CIT (A) to buttress his plea on this issue i.e. as to how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Belgacom falls within the ambit of section 5 (2) of the Income Tax Act. Alternatively, he held that these are in the shape of royalties and it can also be construed as payment of fee for technical services. The learned CIT (A) has not decided the issue with regard to the nature of the payment being FTS because in the opinion of the CIT (A) once the payment contained the nature of the royalty payment, then there is no need to look into; whether the payments in the shape of FTS is involved in these payments or not. To our mind basically no specific finding is required on this issue at our end because, this is an argument, which indicates the alternative position of the law on a particular payment made by the assessee to the non resident. We will deal with the arguments of the learned representative while taking the issue; whether these payments can be termed as royalty payments or FTS. At this stage, no specific finding is required on this ground of appeal. Hence this ground is rejected. 13. In the third fold of grievance, the assessee has pleaded that the learned CIT (A) has erred in confirming the order of the Assessing Officer by holding that the impugned payments "accrued or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India". 15. A bare perusal of this section would reveal that total income of previous year, of a person, who is non-resident is chargeable to tax in India, if it is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India. The scope of total income includes all incomes from whatever source which are received or deemed to be received in India or which accrues or arises or deemed to accrue or arises, to such non resident in India. On the other hand section 9 deals (with regard to section, we will make discussion in the later part of this order), conditions under which different type of receipts can be deemed as income which accrue or arise in India. In other words, if the adjudicator face a situation where it cannot be stated unambiguously that income has been received or has arisen in India i.e. first portion of section 5(2)(b), then a need would arise to test the receipts as per section 9 of the Income Tax Act to determine whether it can be deemed to have arisen or accrual of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in accordance with other provisions of the Act. In fact, the expression "subject to the provisions of this Act" occurring in section 5(2) ought to be projected into section 9, so that deemed incomes are also computed in conformity with the other provisions of the Act. 85. In the light of the above, I do not see any conflict between sections 5(2) and 9(1)(i) as both the provisions need to be read harmoniously for an effective enforcement of either provision. The Assessing Officer is right in articulating that where income is actually received or accrues in India, resort to deeming provision is not warranted and in such a case, the provision contained in section 5(2) is sufficient to create a charge in respect of non-resident's income. I uphold his contention that payments made by the appellant to the NTOs for provision for EIG capacity and IUC resulted in income which accrues or arises in the hands of the nonresident recipients in India and are therefore, taxable u/s 5(2). These grounds of appeal are dismissed". 16. On an analysis of the learned CIT (A)'s findings, we are of the view that there is some ambiguity or confusion in appreciating the position of law. The learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of payment received by a non resident i.e. NTOs would be the place where the non resident carries on its business and perform the business activities pursuant to which it received income. Once the situs is outside India, then in order to determine whether the payments made by a resident of India to a non resident involves element of income is to be examined u/s 9 and in the present case, the Assessing Officer has examined the applicability of section 9(1)(vi) & 9(1)(vii)i.e. the payments involve royalty as well as fee for technical services. The two judgments relied upon by the assessee namely decision of the Hon'ble Delhi High Court in the case of EON Technologies and the order of the ITAT in the case of Adani Enterprises (supra) are fully applicable on the facts of the present case. The inference drawn by the learned Revenue authorities that income is deemed to be accrued or arisen in India or accrued or arisen or received in India merely on the basis that such payments was made from India is incorrect. However, to the extent that if income is deemed to accrue, arisen or receive in India u/s 9 is concerned, if (subject to our finding on these aspects), then it will become ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi telecom service area and at that point, hand over the call to the national long distance (NLD) service provider; • The NLD service would carry the call up to the ILD gateway of the appellant and hand over the call to the appellant; • The call would then be carried by the appellant on its ILD network up to its ILD gateway outside India (say US), where the call would be handed over to an NTO for carriage of the call beyond the ILD gateway of the appellant outside India and termination of the same at the destination location outside India (last leg of the communication channel). 92. A diagrammatic presentation of the international call flow would be as under: Subscriber Local telecom circle NLD gateway ILD gateway Foreign telecom Operator (NTO) 18. In lieu of the services rendered by the NTOs for providing connectivity to the customers of the assessee up to the last leg of the channel, the assessee paid to the NTOs in the shape of IUC charges. According to the assessee the alleged arrangement between it and the NTOs is a service contract under which the NTOs are responsible for provision of services resulting into carriage of calls and provision of connectivity over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include basic inter connect services, use of network element, ancillary service, enabling services and rental of physical component. IUC payment relatable to ancillary services qualify as royalty u/s vi of Explanation 9(1) of the Act. According to the Assessing Officer, Explanation 6 to 9(1)(vi) explains the meaning of term "process" such an explanation would be considered in order to determine whether a particular payment qualify as a royalty for use of a process under the DTAA as well. The explanation has provided that expression "secret" does not qualify the word "process" in the applicable DTAAs and hence the process need not be secret process to qualify as a royalty under applicable DTAAs. The assessee cannot rely upon the OECD commentaries as India is not a Member of the OECD group. On the strength of these conclusions, the Assessing Officer observed that the payments made by the assessee are chargeable to tax, therefore, it ought to have deducted the TDS thereof u/s 195 of the Act. Since the assessee failed to deduct the TDS, therefore, it be treated as an "assessee in default". 19. Dissatisfied with the order of the Assessing Officer, the assessee carried the matter in app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). 176. Explanation 5 to section 9(1)(vi) clarifies that royalty includes and has always included consideration in respect of any right, property, on information, whether or not a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6 to section 9(1)(vi) clarified that the expression process includes and shall be deemed to have always 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NTOs shows that each telecom operator gets a usage right upon the network capacities of other operators by virtue of such interconnection agreements and that such right is normally reciprocal. 180. The glossary of statistical terms available on the OECD website defines interconnection charge as a charge levied by network operators on other service providers to recover the costs of the interconnection facilities that include the hardware and the software used for routing, signaling and for other basic service functions provided by the network operators. Consultation Paper No.4/2011, dated 27.04.2011 issued by the TRAI defines interconnection usage charges as wholesale charges payable by one telecom operator to the other for use of the latter's network for originating, terminating, transiting, or carrying a call and state that these charges are usually based on costs and indicate a fair compensation for use of one service provider's network resources by another service provider. Interconnection charges often account for a very significant part of the costs of telecommunications operators. 181. The TRAI Consultation Paper states that globally, interconnection charges are general ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of these facts that the A.O has come to the conclusion that interconnection services are a bundle of services encompassing basic interconnection services, use of network elements, ancillary services, enabling services and rental for physical components and sharing of infrastructure. Thus the appellant's objections to the Assessing Officer's finding are baseless. 185. The next objection of the appellant is against the A.O's conclusion that provision of interconnect services by NTOs involves grant of access to and usage by the appellant of their network and equipment and therefore, the IUC payments qualify as royalty under clause (iva) of Explanation 2 to section 9(1)(vi) of the Act and also under the applicable DTAAs. I find that little substance in the appellant's contention that there is no scope under Explanation 5 and 6 to cover payments for service that involve "indirect" use of a process by the service recipient on the ground that such a step would "dilute" the legal and commercial difference between a royalty and a service arrangement. While there is no reference to the term "indirect use" in either Explanation, the appellant has hardly justified the distinction it has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation traffic. While it is true that no part of the telecom network of the NTOs was located in India, it is not correct to argue that the Act makes a distinction between transfer of a right to use or use of a property vis-à-vis mere rendering of services. According to the appellant, payments made for transfer of a right to use or of the use of a property, including rendering of any services in connection with such transfer, could be classified as royalty, while payments made for mere of provision of services could not be classified as such. I find no such distinction in the definition of royalty under Explanation 2 to section 9(1)(vi) and therefore, reject the appellant's contention. 190. The appellant is aggrieved by the A.O's finding that IUC paid by the appellant qualifies as royalty under the provisions clause (iv) of section 9(1)(vi) since provision of carriage and connectivity services involves exchange of information between the appellant and the NTOs. This argument has been effectively rebutted by the A.O by pointing out that an interconnect agreement is a complex procedure involving several activities, including sharing of information between the NTOs and the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as other sections in chapter XVII are concerned, they only talks of withholding of taxes from the payments. Section 195 in the whole scheme of chapter XVII is a unique. It contemplates two conditions namely chargeability of income to tax and its characterization i.e. the payment should be interest (not being interest on security) or any other sum not being dividend. These payments indicate the characterization or the nature of the payment. Apart from this nature of payment, such payment should be chargeable to tax in India. As far as other provisions in Chapter XVII are concerned, they only characterize the nature of payment i.e. salary (192), commission & brokerage (194H), interest on securities (193). On the strength of the Hon'ble Supreme Court's decision in the case of G.E. India Technologies vs. CIT reported in 327 ITR 456, he contended that first and foremost condition for treating the assessee in default is that the payment made by the assessee to a non resident should involve the sum chargeable to tax. Upon determination of this factor, the assessee can be treated in default. The Assessing Officer in order to determine that the payments made by the assessee has the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight should be vested in the hands of the payer. In that situation, payer would actually use or acquire the right to use in the future in the said property. The 2nd condition is that possession and control over such property for its user or right to user should be given to the payer. The payee should deliver the possession as well as control over such property for the use or the right to use to the payee. In other words, there should be demonstrative material on the record indicating the possession being taken over with respect to property namely use or right to use of such property from the payee and it should be given to the payer, the payer should have not only had the rights qua with property, but should also have control and possession of those tangible or intangible properties. The learned Counsel for the assessee has placed relevant paragraph of the commentary from Klaus Wogel commentary or the OECD commentaries. He further relied upon the decision of the Authority for Advance Ruling in the case of Dell International India (P) Ltd reported in 172 Taxmann.com 418, the copy has been placed on page No.633 of the case law paper book. He further relied upon the decision of the Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eographical boundary of India, could only be considered as used by the assessee or right to use if those processes and the assets have been transferred to the assessee, there is no evidence to this effect on the record. Therefore, the payments made by the assessee is at the most can be termed for the services and it could not be brought within the ambit of income by way of royalty. The transaction between the payee rendering services using its network and delivering the contracted services to the payer who is entitled to right of service cannot be equated with a transaction where the payee grants the use or right to use the network or the processes to the payer and the payer uses the network and or processes whether directly or indirectly or whether or not with possession or control. The learned Counsel for the assessee thereafter took us to Explanation 6 which has also been brought on the statute book with retrospective effect. According to this Explanation, a deeming fiction is being crated by the Parliament which has expanded the scope of the expression "process" by including presumption by satellites, cable, optic fibre or by any other similar technology, whether or not such pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss as deemed in Explanation 6 to section 9(1)(vi) has not been deemed under the DTAA. He pointed out that though there are exceptions in some of the DTAAs namely India Hungary and India Mexico wherein the definition of royalty inter alia included within the ambit of transmission by satellite or any other mode, but those DTAAs are not involved in the present appeal. The assessee had not interacted with any NTOs located in Hungary or Mexico. 24. In the next fold of submissions, he submitted that while construing the meaning of process available in Article 12(3) of India-UK DTAA, the ITAT Delhi in the case of Pan Amsat International Systems Inc (103 TTJ 861) and Dell International has held that the process should be secret process. By virtue of Explanation 6, explaining process, being need not be secret, has been incorporated with retrospective effect. But that would not be applicable and process should be read as a secret process. In his next fold of submissions, he contended that it is impossible to perform of withholding the taxes based on retrospective amendment and therefore, the assessee should not be held in default. He relied upon the decision of the ITAT Mumbai Bench in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. There is no correspondence between the payer and the payee exhibiting that it is not chargeable to tax in India. In this situation how the assessee can say that the sums remitted by the assessee do not involve element of income. 26. The learned Counsel for the Revenue further apprised us the historical background giving rise to the tax treaties and what is the scope of tax treaties. He pointed out that a treaty is not to be applied automatically. Under the domestic law, treaty is applicable as per section 90(2) of the I.T. Act which provide "in relation to the assessee" to whom such agreement applies. The treaty is applicable in the case of payee, if at all it is applicable. He drew our attention towards the model treaty and submitted that Article-1 in all the treaties specifies the types of persons to whom the treaty would be applicable. The treaty would be applicable to a person who is resident of State "R" or State(s) i.e. resident of a contracting state or source of income of the contracting state. It does not mean that it is applicable according to the domicile. Article-4 which is identical in most of the treaties explains the residence of the tax payer. He questioned, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conflict with the treaty provisions, then domestic law will give way to the treaty and that too only if the treaty provision is more beneficial to the tax payer. Thus, there is no conflict between the provisions contained in section 9(1)(vi) and those contained in the DTAA as far as the scope and meaning of the word "royalty" is concerned. The Explanations 5 & 6 seeks to clarify the doubt raised by certain Courts and Tribunals in India with regard to interpretation of the term "use" in the domestic law. He submitted that the amendment cannot be taken to suggest that there is or ever was any conflict between the provisions of the Act and the DTAA or the clarificatory amendment seeks to bring some new charge of tax which was not chargeable under the DTAA. 28. According to the learned Counsel for the Revenue, the primary functions of the DTAAs are to allocate taxing right between the contracting states. The Double Taxation of the income is avoided by either exempting the income from being taxed in one state or by allowing credit for the taxes paid in the other state by the tax authorities of the resident state. The DTAAs do provide both the contracting state, in certain cases the rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be read in their normal plain meaning. He made reference to the decision of the Hon'ble Supreme Court in the case of Ram Jetmalani vs. Union of India, reported in 339 ITR 107. Explaining his proposition as to how explanation 5 was incorporated with retrospective effect in section 9(1)(vi), he pointed out the following reasons: i) The need for the amendment in the domestic law arose for the reason that unintended interpretation was given to the word "process" as used in the definition of 'royalty' appearing in section 9(1)(vi) of the Act. ii) The DTAA neither provides any such restrictive meaning to the process royalty nor is any such view given in the explanation or comments in relation to treaty provisions. iii) The amendment is purely clarificatory in nature. It is not seeking to lay down a new charge of tax nor is the amendment substantive in nature. iv) It is settled rule of interpretation of statutes that the punctuation marks like comma cannot alter the express meaning of the words used. v) The word "secret" is used before the word "formula" and not before "process". vi) The process can not be secret. 30. The learned Counsel for the Revenue further contended that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the assessee has put reliance upon the decision of the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holdings (2013) (354 ITR 316) (A.P H.C) rendered in writ petition No.142 of 2012. According to the learned Counsel for the revenue, the issue in this case was, whether retrospective amendment to section 9(1) of the Act which provides that in a case where shares represent substantial interest in the assets allocated in India, the income can be deemed to arise in India by way of capital gain. This amendment, according to the Court come in direct conflict with the DTAA which does not grant right of taxation of capital gain to India. The facts of this case are quite distinguishable. The only test which is to be applied, whether or not the provisions contained in the DTAA are in conflict with the domestic law and if that be so, the beneficial provisions shall prevail. In the present case there is no conflict in the definition of royalty as given in the DTAA and that contain in section 9(1)(vi) of the I.T. Act, 1961. 32. The learned counsel for the revenue in support of his contentions relied upon the decision of the Hon'ble Madras High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the telecom operators. He had obtained information of international experts on this inter connection capacity and how it works including the aspect of human intervention. The cross examination and re-examination of the expert is also on record. The learned Counsel has pointed out the evidence collected by the Assessing Officer, namely, consultation paper issued by the TRAI, the telecommunication interconnection (charges and revenue sharing) regulations, 1999, mini case study conducted by Robert Bruce and Rory Macmillan for international telecommunication union. Thus no factual inquiry is pending. He also contended that the learned Counsel for the Revenue is incorrect in suggesting that the DTAA does nothing more than allocating of taxing right and as far as royalty is concerned, both the contracting parties have jurisdiction to tax and therefore, once the allocation of taxing right is ascertained, the respective states are entitled to apply the provisions in full force and tax the transactions, since the DTAA cannot be pressed into service beyond allocation of taxing right. According to the learned Sr. Counsel appearing for the assessee, the entire literatures, commentaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her sum as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.] [Explanation 2.-For the removal of doubts, it is hereby clarified that the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have always applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has- (i) a residence or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India.] (2) Where the person responsible for paying any such sum chargeable under this Act (other than salary) to a non-resident considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the [Assessing] Officer to determine, [by general or special order], the appropriate proportion of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es) or any other sum (not being salaries, dividend) chargeable to tax, to non residents only then, he would deduct tax at source. For example, if an assessee paid a sum of ₹ 100/- to a non resident, but only ₹ 20/- involves element of income under the expression "sum chargeable to tax" employed in this section, then TDS is to be deducted on this amount. It is also true that this section is not like other sections of Chapter XVII, which talks of payment, but it characterize the nature of payment as well as provide that it should be chargeable to tax under the Income Tax Act. The learned Counsel for the assessee has rightly pointed out that this section is at variance with the other sections of Chapter XVII, it characterize the payments i.e. determine the nature of the payment as well as the payment should be chargeable to tax in India. As far as the interpretation of the section is concerned, there is no dispute between the parties. The learned Counsel for the Revenue has also not disputed the proposition that as per the judgment of the Hon'ble Supreme Court in the case of G.E. India (327 ITR 456), TDS is expected from the payer, if the payments involve element of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollected whether by advance deduction etc. This is an area of the domestic law, the sum chargeable to tax is to be considered, with an angle of the domestic law, unless the payee is there to demonstrate that he is not chargeable under the DTAA either by himself or through a payer. The payee never comes u/s 195 (3) of the I.T. Act. It is not available on the record that payee had ever informed the payer about the holding of their tax residency certificate and also whether they want the benefit of DTAA. According to the learned Counsel for the Revenue the tax residency certificate given by the sovereign of the State or State(s) would satisfy that payee is a taxable entity in that state and it is entitled for the benefit of DTAA, if the provisions are more beneficial than the domestic law. Contrary to this contentions, it was pointed out by the learned Counsel for the assessee that the assessee has complied with the procedural requirement contemplated under Rule 37BB of the ITR 1962. It had submitted the details of the payee relevant clauses of the DTAA. According to him the entire literatures, commentaries and judicial decisions run counter to the arguments of the Revenue. The judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot lead to the application of foreign law. What treaty rules do is to limit the content of the tax law of both the contracting states to avoid double-taxation. In effect, double taxation avoidance treaty rules merely alter the legal consequences derived from the tax laws of the contracting states, either by excluding application of provisions of the domestic tax law where these apply or by obliging one or both of the concerned States to allow a credit against their domestic tax for taxes paid in the other State. Klaus Wogel (Supra) explains that rules or double taxation are thus not conflict rules, similar to that in private international law but are rules of limitation of law, comparable to those of international administrative law". 37. According to the learned Counsel for the Revenue, the treaty is not to be applied automatically. Section 90(2) of the Income Tax Act mandates application of treaty and it is applicable in relation to an assessee upon whom such agreements are applicable. In the present case it is applicable in the case of payee, if at all is applicable, he has highlighted that Article-1 in all the treaties specifies the type of person to whom treaty would be appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for some deductions, some exemption etc. The cumulative setting of all these peripheral factor and their bearing in ultimate decision making process will be considered by us in later part of the order. 38. Whether IUC payments qualify as a royalty under clause a(i) and (iii) of Explanation 2 appended to section 9(1)(vi) r.w. explanation 5 & 6. Before adverting to the respective contentions of the parties, let us have a look on section 9(1)(vi) along with its explanations 2, 5 and 6 it read as under: "Section 9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) x.x.x.x.x.x.x. (vi) income by way of royalty6 payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilms 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 (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to [(iv), (iva) and] (v). [Explanation 3.-For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.] [Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nos. 14 to 29 in this regard is worth to note, which is as under: "II Taxation of Payments to NTOS for Interconnect services as Royalty under the Act and the DTAAs Without prejudice to the view that income arises or accrues to NTOs under Section 5(2) of the Income Tax Act on payment of Interconnect charges, the department is also of the view that these payments are taxable under the deeming Section 9 of the Act as Royalty. Before examining whether the payments for Interconnect services to NTOs are taxable under the Act it is necessary to understand the concept of Interconnect services. 1. Definitions of Interconnect: There are various definitions of Interconnection and a few important ones are listed below: • International Telecommunications Union ("ITU") defines interconnection as "the set of legal rules, technical and operational arrangements between network operators that enable customers connected to one network to communicate with customers of other network" • The World Bank defines interconnection as "the physical and logical linking of public electronic communications networks used by the same or a different undertaking in order to allow the users of one und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 2011) which deals with Interconnection services is reproduced below: B- What is interconnection and why is it necessary? 1.3 Interconnection allows subscribers, services and networks of one service provider to be accessed by subscribers, services and networks of the other service providers. If networks are efficiently interconnected, subscribers of one network are able to seamlessly communicate with those of another network or access the services offered by other networks. Without interconnection the market would develop as discrete islands and economic benefits associated with market expansion and liberalization would be limited. It is essential for competition to develop to allow the subscribers of one network to communicate with those of another network. In a broader sense the term interconnection refers to the commercial and technical arrangement under which service providers connect their equipment, networks and services to enable their customers to have access to the customers, services and networks of other service providers. Interconnection is the lifeline of telecommunications. It is one of the foundations of viable competition which in turn is the main driver for grow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elays, inconvenience and additional costs for businesses, consumers and, ultimately, for national economies. C- What are interconnection usage charges? 1.5 IUC are wholesale charges payable by one telecom operator to the other for use of the latter's network for originating, terminating or transiting/carrying a call. These charges are usually based on cost and indicate a fair compensation for use of one service provider's network resources by another service provider. The IUC concept as evolved by Telecom Regulatory Authority of India (TRAI) has so far proved to be a suitable approach to interconnect pricing in a competitive, multi-operator environment. It has given service providers sufficient flexibility in fixing tariffs for its customers. 1.6 Interconnection charges often account for a very significant part of the costs of new telecommunications operators. This is particularly the case with new entrants that do not own end-to-end networks. The level and structure of interconnection charges are, therefore, major determinants of the viability of operators in a competitive telecommunications market. Over the years, a variety of approaches have been used to calculate interconnec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to enable their customers to have access to the customers, services and networks of other services providers. xi. "Interconnection Charge" means the charge for interconnection by an interconnection provider to an interconnection seeker. 1.6 The Annexure II of the Directive 97/33/EC of the European Parliament and of the Council of 30 June 1997 on interconnection in Telecommunications is reproduced below: ……. LIST OF EXAMPLES OF ELEMENTS FOR INTERCONNECTION CHARGES (referred to in Article 7 (3)) Interconnection charges refer to the actual charges payable by interconnected parties. The tariff structure refers to the broad categories into which interconnection charges are divided, e.g. • charges to cover initial implementation of the physical interconnection, based on the costs of providing the specific interconnection requested (e.g. specific equipment and resources; compatibility testing), • rental charges to cover the on-going use of equipment and resources (connection maintenance, etc.), • variable charges for ancillary and supplementary services (e.g. access to directory services; operator assistance; data collection; charging; billing; switch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice charges from such foreign telecom operators. 1.2 Section 5(2) of the Act inter-alia provides that any income accruing or arising to a non-resident in India shall be taxed in its hands in India. In this context, section 9(1)(vi) of the Act provides that income by way of 'royalty' payable by a resident shall be deemed to accrue or arise in India. 1.3 The term 'royalty' has been defined under Explanation 2 to mean "consideration (including lumpsum 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 license) 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt Mr. Prakash R from C-DOT recorded on Nov 30th 2012 and the relevant extracts are reproduced below: Question 3: Provide an overview of the technology behind International Voice Services? Answer : The telecom operators of various countries have agreements to ensure that subscribers from their respective countries are able to talk to networks in other countries and to allow for roaming. The diagram below depicts a high-level block diagram of a sample inter-connection network. Figure 1: Telecom Interconnection Network overview The countries A, B and C have telecom operators A1, B1 and C1 respectively. Telecom operator C1 has an agreement with both operators A1 and B1 for interconnection. The interconnection is typically done using the under-sea cable network for transmission of data over fibre. The under-sea cable network provider typically has a Point-of-Presence (PoP) in each of the country to which it connects. Operators A1 and B1 establish their Points-of- Presence (PoP) in country C. The Telecom provider C1 connects to these PoPs in country C. Similar Points of Presence are established in Countries A & B by operator C1. The telecom operators A1 and B1 connect to these PoP i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational Telecommunication Traffic Arrangement between Vodafone Essar South Limited and TELKOM South Africa Limited. b) International Carrier Services Agreement between Vodafone Essar South Limited and KPN Global Carrier Services B.V. c) Agreement for the supply of International Voice Services between France Telecom SA and Vodafone Essar South Limited. d) International Telecommunication Services Master Agreement between Telenor Global Services AS and Vodafone Essar South Limited. e) Telecommunication Services Agreement between VSNL Telecommunications (UK) Limited and Vodafone Essar South Limited. f) International Telecommunications Services Agreement between Saudi Telecom Company and Vodafone Essar South Limited. g) International Telecommunication Services Agreement between MCI International Inc., and Vodafone Essar South Limited. furnished by Vodafone Essar South Limited during the proceedings under Section 201 of the Income Tax Act, 1961. Please go through these agreements and comment on the nature of services rendered as per the agreement. Answer : I have perused the above agreements. These are basically International Voice Interconnect Agreements as described in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired for rendering of the interconnect services are given in response to Q8 of the statement provided on 30.Nov.2012. Most of the steps mentioned there are also required to be carried out both for a fresh network establishment and for enhancing the capacity of an existing network and provisioning for an interconnect. The carrying of calls cannot be seen in isolation from the other activities. 1.12 In the opinion of the technical expert the Interconnection agreement involves a series of interconnected activities undertaken to achieve the end result of carriage of calls. Relevant extracts are taken from the document "India Mini Case Study 2003 - Dealing with Interconnection and Access deficit contributions in a Multi Carrier Environment". This mini case study was conducted by Robert Bruce and Rory Macmillan of Debevoise & Plimpton, London U.K. for International Telecommunication Union ("ITU") and this is one of five mini case studies on interconnection dispute resolution undertaken by ITU. Para 2.3 of the mini case study which deals with contents of a typical Interconnect Agreement is reproduced for reference: The Authority(TRAI) is of the view that the following key items should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... network of the NTO so as to carry the telecom traffic from VSL over the network of the NTO". 39. The first fold of submissions of the learned Counsel for the assessee was that there should be a transfer of any right in process by the NTOs in favour of the assessee, only then it would be construed that consideration was paid for acquisition of any process contemplated in the definition of royalty. He pointed out that by insertion of Explanation 5, the possession and control of the payer in the process, though eliminated, it is not necessary that payer should have a possession or control over the process, but the process should have been transferred to the assessee. In other words, the payee should be stripped of with the rights in the process and it should be infused in the assessee. For buttressing his contention, he put reliance on the judgement of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunication. In that case, the assessee had not received payments from the customer towards charges for the use of any equipment or process. The case of the assessee was that it was not given any control over part of satellite/transponder. In this factual background, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale." The Hon'ble High Court in para no.55 of the order explained the expression "rights in respect of property and "right in the property". According to the Hon'ble Court, the two expressions are distinct and have different legal effects. In first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadeshi Ranjan Sinha v. Hardev Banerjee AIR 1992 SC 1590. When rights in respect of a property are transferred then there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collected by the learned Assessing Officer and used in orders. At the cost of repetition, we would like to take note of the diagram drawn by the expert in order to explain the process. It read as under : Figure 2: Telecom Interconnection Network overview The countries A, B and C have telecom operators A1, B1 and C1 respectively. Telecom operator C1 has an agreement with both operators A1 and B1 for interconnection. The interconnection is typically done using the under-sea cable network for transmission of data over fibre. The under-sea cable network provider typically has a Point-of-Presence (PoP) in each of the country to which it connects. Operators A1 and B1 establish their Points-of- Presence (PoP) in country C. The Telecom provider C1 connects to these PoPs in country C. Similar Points of Presence are established in Countries A & B by operator C1. The telecom operators A1 and B1 connect to these PoP in their respective countries. Typically, each operator is responsible for building, operating and maintaining the telecom network in their country and the PoP in the other countries. They then have agreements on the standards/ protocols/ mechanisms/ tariff /service-level-agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e activity. Thus after explanation 5 to section 9(1)(vi) it is not necessary that payer should have direct control or physical possession over the right, property or information. 40. The next defense put forth by the assessee is that the use or right to use of the process so acquired by the assessee should be a secret process and if it is not secret process, then consideration paid by the assessee would not fall within the ambit of royalty. The assessee had put into service the judgment of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co Ltd v. DIT [2011] 332 ITR 340 and the order of the ITAT Delhi in the case of Pan Amsat India International Systems reported in 9 SOT 100. The learned Counsel submitted that Explanation 6 has been appended with retrospective effect whereby it has been explained that process need not be a secret process. He contended that in the case of Pan Amsat India, ITAT Delhi Bench has explained that in the DTAA, definition of "process" would be associated with secret formula and the process so given to the assessee should be a secret process. Since the right to use or use of process was not a secret. Therefore, it would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 18 Media has taken note of the relevant paragraphs of the Hon'ble Madras High Court decision in the case of Verizone. The findings of the ITAT in this regard is worth to note it read as under: "10. So far as the term "Royalty" defined in the Explanation 2 of section 9(1)(vi), there is no change or amendment in the term royalty as such. Therefore, the definition of term royalty remained unchanged despite insertion of Explanation 6 by Finance Act 2012. Even otherwise the term "Royalty" is defined in the DTAA, therefore, any amendment in the definition of "Royalty" affecting adversely to an assessee covered by the DTAA would be inconsequential due to the protection of DTAA. The clause (b) of Article 12(3) of DTAA and clause (iva) of Explanation 2 of section 9(1)(vi) are pari materia of DTAA and clause (i) to (v) except clause (iva) are also pari material. It is pertinent to note that there is no change in the definition of term "Royalty" as provided in Explanation 2 of section 9(1)(vi) of the Act, by virtue of the retrospective amendment inserting of Explanation 6 to this clause of section 9(1)(vi). We are concerned with the definition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Prints v. Union of India [1989] 179 ITR 317 (SC); Dy. CST, Board of Revenue (Taxes) v. Pio Food Packers [1980] 46 STC 63 (SC), explaining the same in the context of processing of goods, which though would apply and hold. There is nothing in the language of the relevant provision/s of either the Act or of the DTAA constricting or restricting the scope of the term, which has thus to be examined and considered contextually. As such, even de hors Explanation 6 to section 9(1)(vi), which only abundantly clarifies matters, a process could only reasonably be regarded as including a process/es as specified in Explanation 6 (supra). The same must, therefore, be regarded as within the contemplation of the said term and, thus, the term 'royalty' as defined by Explanation 2 to section 9(1)(vi) and Article 12(3) of the Indo-US DTAA. The foregoing, however, does not detract from the fact that the term 'process' being not defined, the extant definition of the same, i.e. as per the domestic law, shall apply in terms of Article 3(2) of the said treaty. The Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd (supra) while considering an identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slots nor are they positioned over Indian airspace. The footprints of Asia Sat 1 and Asia Sat 2 extend over four continents, viz., Asia, Australia, Eastern Europe and Northern Africa. It enters into an agreement with TV channels, communication companies or other companies who desire to utilize the transponder capacity available on the appellant's satellite to relay their signals. The customers have their own relaying facilities, which are not situated in India. From these facilities, the signals are beamed in space where they are received by a transponder located in the appellant's satellite. The transponder 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 terrestri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own. The High Court held that the terms 'lease of transponder capacity', 'lessor', 'lessee' and 'rental' used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. The High Court went through the various clauses of the said agreement and held that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. Merely because the transponder has its footprint on various continents, it would not mean that the process has taken place in India. Thus the Delhi High Court followed 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)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the present case. On due consideration of this submission, we are of the view that the learned DR nowhere disputed the proposition that wherever there is a conflict between the scope in he provision of the DTAA vis-à-vis provisions of the Income Tax Act and if the provisions of DTAA are more beneficial to an assessee, then those provisions would be applied. The question is whether by insertion of Explanation 5 and 6, scope of the expression royalty under the I.T. Act has been enhanced or not. In the foregoing paragraphs we have observed that these explanations do not bring in new concept of chargeability. The considerations paid for use or right to use of process was already chargeable to tax as royalty. The Indian Courts over a period of time has interpreted the meaning of process in such a way which was contrary to the intention of the Indian Govt. when it entered into DTAA. These explanations are only clarificatory in nature explaining the position of one of the party to the DTAA about the construction of the meaning of expression "process". The Hon'ble Madras High Court in the foregoing paragraphs of its judgment has considered these aspects. Therefore, there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as IUC charges for alleged inter connect service falls within the ambit of process royalty and element of income was involved. Therefore, the assessee was bound to deduct the TDS on such payment. 43. The next issue is whether consideration paid for capacity transfer can be termed as a 'Royalty' within the meaning of Sec.9(1)(vi) r.w.Explanation (2), (5) and (6) of the IT Act. The facts regarding nature of payments, we have noticed in para 4 of the order. The learned Assessing Officer has made analysis of the term "Submarine Cable System" or Europe- India Gateway Cable System. The finding of the learned Assessing Officer in this connection is worth to note, which read as under : 7. Once it is found that the amount is not exempt under Art. III of the DTAA and there is no specific provision for assessment of such a receipt in DTAA, the applications of treaty comes to an end. Thereafter, one has to refer to the provisions of the Income-tax Act to assess the receipt. Art. XVI of DTAA also stated to in its clause (1), i.e. "The laws in either of the territories will continue to govern the assessment and taxation of income in the respective territory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which connect India to the world. A submarine cable used for providing international telecommunication links stretches across many countries. In each country, it lands in a land based facility called cable landing station (CLS). Thus, a typical submarine cable system consists of (i) a submarine cable in the sea-bed and (ii) cable landing stations on the land B- Cable Landing Station (CLS) 2.4. The Cable landing stations are the point at which International submarine cables come onshore and terminate. Generally, these are buildings, which contain the onshore end of the submarine fiber optic cable, house the necessary equipment to interconnect and pass traffic to and from the submarine cable, and are the point where the submarine cable capacity is connected to the domestic backhaul circuit. Therefore a cable landing station is a location at which: (a) The international submarine cable capacity is connectable to the backhaul circuit; (b) The international submarine cables are available on shore, for accessing international submarine cable capacity; and such location includes buildings containing the onshore end of the submarine cable and equipment for connecting to backhaul circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation Entity (ITE), at the premises of owner of cable landing station (OCLS) which provides the access to its cable landing station, and such charges include charges for providing space, power supply, accessing physical facilities, operation and maintenance of colocation site for the said purpose. (j) 'Operation and Maintenance Charges' means the annual charges: (i) payable to the owner of cable landing station (OCLS) by the eligible Indian International Telecommunication Entity (ITE) (ii) for operation and maintenance of facilities for accessing the capacity of the cable landing station of such owner. (k) 'International Long Distance Operator (ILDO)' means a service provider or operator who has been granted license to act as such to provide international long distance service. (l) 'Reference Capacity' means the international submarine cable capacity, (i) in the submarine cable system landing at the cable landing station in India; (ii) acquired whether on ownership basis or lease basis by the eligible Indian International Telecommunication Entity (ITE); (iii) activated by the owner of the submarine cable system or a member or members of consortium of submarine cable system ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rine cable capacity transaction involves two or more carriers, each prominent in its own national territory, exchanging traffic and making use of International system of accounting rates and settlements. 2 The relevant part of EXPOSURE DRAFT - TECHNICAL GUIDE ON REVENUE RECOGNITION FOR TELECOMMUNICATION OPERATORS brought out by ICAI is reproduced below: Indefeasible Rights of Use (IRU) 56. Telecommunications industry is capital intensive and demands significant investment for setting up of network and other related infrastructure. Setting up a network also leads to unwarranted gestation leading to significant costs and delay in roll out of services. In addition to facilitating accelerated roll out of services, IRU and/or capacity arrangements help minimise/optimise the capital expenditure required for setting up of the networks. 57. IRU's are potentially effective tools for cost management as small number of operators can mobilise enough funds to set up a global network and achieve the desired geographic presence. 58. IRU means an exclusive, unrestricted, and indefeasible right to use the relevant capacity (including equipment, fibres or capacity) for any legal purpose. The pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludes the right to connect to the terminal points on the EIG cable system. d) Belgacom has assured that at least 72,294 MIU.km shall be made available to VESL between London and Mumbai (Clause 2.2) e) VESL is allowed to re-sell, lease or grant the right to use the bandwidth capacity in the EIG cable system to other parties. (Clause 2.4) f) Belgacom agreement shall continue to be in effect for the duration of the EIG agreement (Clause 10.1) i.e. the capacity has been transferred for the lifetime of the EIG cable system. g) The ownership in the EIG cable system/equipment/machinery vest with EIG parties. h) VSL's Point of Presence (PoP) in Mumbai will link to the Cable Landing Station in Mumbai which is owned and maintained by Bharti Airtel Ltd one of the EIG consortium members. i) Belgacom also owns a share in the EIG cable system as it has invested in it through a joint venture with Omantel. 3 According to Black"s Law Dictionary the "process" has been defined as under: "a series of actions, motions, or occurrences; progressive act or transaction; continuous operation, method, mode or operation, whereby a result or effect is produced". In the New Oxf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acity. VSL will access this process by connecting its Point of Presence ("PoP") in Mumbai to the Cable Landing Station operated by Bharti Airtel Ltd in Mumbai. 3.4 Thus VSL does not get the title over the cable system/equipment/machinery but what it gets is a right in the 'process' which is controlled and managed by EIG Network administrator that will allow VSL to transmit signals from Mumbai to London. VSL is transferred the right to use the process by Belgacom for the lifetime of the cable system. It is for this reason that an upfront fee is paid as an investment by VSL and this is followed by payment of annual operation and maintenance charges to Belgacom. The payments made to Belgacom by VSL for provision of bandwidth capacity is precisely for the transfer of rights in the 'process'. The learned counsel for the assessee has raised his submissions as were raised with regard to the payments made for use of or right to use of interconnect charges. According to him, the definition of expression "process" employed in Sec.9(1)(vi) Explanation 2, sub-explanation (iii) has been expanded by insertion of Explanations (5) and (6) with retrospective effect. According to these E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Verizone Communication are closer to the facts of the present appeals. There is no decision of the Hon'ble jurisdictional High Court on this issue. Therefore, we prefer to follow the decision of Hon'ble Madras High Court. This decision has been followed by the Tribunal in the cases of Viacom and Cognizant Technology Solutions in ITA No.1535/Mad/2009. Copies of both these Tribunal orders are placed on the record. In view of the above, we do not find merit in the contentions of the learned counsel for the assessee. 44. Now we take the issue which we left with regard to the scope of enquiry u/s.195 r.w.s.201 of the Act. In the agreements, issue regarding taxation has been dealt with. It has been provided in Appendix-1, attached with the agreements. Copy of the sample agreement has been placed by the assessee at page no.1 to 131 of the paper book. The relevant part with regard to taxation is available at page 20 of the paper book, which read as under : Taxation. For the purpose of this contract, "Tax" or "Taxes" shall mean (i) any taxes applicable on turnover, such as value added tax, sales tax or service tax, (ii) withholding taxes applicable on payments made by the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary documents contemplating for application of the treaty on the date of payment. Whether assessee has collected these documents, what was the basis for the assessee to form a belief that consideration paid by it to the NTOs would be covered by the DTAA, no material has been placed on the record by the assessee. It has been pleaded that it has complied with the details under Rule 37BB, but those are the schedule proforma required by the IT Rules. Along with those proformas, the assessee has not annexed correspondence with the NTOs or any material indicating that payees are opting for applicability of the DTAA and the payments made to them are either exempt under DTAA or a reduced rate of tax would be applicable. These materials were to be seen on the date of payment when the accounts of the payee were credited. Had the assessee contacted with the supplier, it could have approached the Assessing Officer u/s.195(2) or the payee could approach u/s.195(3). In this factual background, we are of the view that enquiry contemplated u/s.195(1) does not contemplate a wider scope equivalent to the one available in the regular assessment proceedings. In the present case, payee has no conce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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