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TMI Blog2016 (3) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... ephone Facilities to subscribers. The Department of Telecommunication, Govt. Of India has granted the License to the Assessee Company for operating it services in certain specified Circles. The facts leading to the assessment are brought out at para no. 4.2 to 4.7 of the Ld. CIT(A)'s order at pages 7 to 9. This is below extracted for ready reference:- "4.2 Earlier, in respect of domestic part of business of the assessee, DCIT, Circle 49, New Delhi, passed an order under section 201(1)/201(1A)of the Income-tax. Act, 1961 for the financial years 1995-96 to 2002-03 on 26-03-2004, holding that the payment made by the assessee to MTNL on account of interconnection charges, port/access charges was 'fees for technical services' and tax. was required to be deducted by the appellant u/s. 194J there from. Since MTNL had already filed return of income for the aforesaid financial year, declaring relevant amount received from the appellant on account of interconnection and port/access charges as income and had paid tax thereon, the DCIT, Circle 49, New Delhi did not raise any demand under section 201(1) on the appellant for the tax it had allegedly not deducted, but levied interest U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. Tanay Krishna was also re-examined on 04.10.2010 by the Department. The appellant also submitted evidence by way of opinion, dated 14.12.2010, of Mr. G.S. Grover, Ex-Member, Telecom Commission. Subsequently, the ACIT (TDS), Gurgaon, vide order dated, 03.01.2011, held that as there was human intervention in installing, monitoring of infrastructure etc., the services provided by BSNL/ MTNL to the appellant were covered within the meaning of "technical services" and tax ought to have been deducted therefrom U/S 194J of the Act. The said order of passed by ACIT (TDS), Gurgaon is challenged by the assessee in appeal. 4.7 Pursuant to the aforesaid order, the ACIT(TDS), Gurgaon, vide letter dated 8th February, 2011, sent information to the Income-tax Officer, TDS Ward 1(1), International Taxation, New Delhi so as to examine the similar issue involved in international part of business of the assessee. On receipt of the aforesaid letter, the ITO, TDS Ward 1(1), International Taxation, New Delhi, issued show cause notice, dated 31st March, 2011, requiring the appellant to show cause as to why the appellant should not be treated as an assessee in default under section 201 (1) for fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, configuration of system, testing, interconnect testing, pilot testing, operation and maintenance of hardware/software, supervision/monitoring the functioning of interconnect network, capacity augmentation and reconfiguration and capacity enhancement, monitoring including network monitoring, maintenance, fault identification, repair and ensuring quality of service as per interconnect agreement of interconnect network system to provide fault free services according to interconnect standards. (ii) The whole process for carriage and transfer of calls from the network of one operator to another is not limited to process of carriage of calls though being an automated process undertaken by a series of highly advanced telecom network equipment. The process of interconnection is a composite process involving several aspects which requires constant human intervention to make the process of carriage of calls satisfactory and as per performance standard agreed by the two parties. (iii) Regarding interconnection to Gateway, it is worth noting that Mobile Switching Centre (MSC) of two different operators is interconnected using any transport technology which involves wires as well as hu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumen in that particular area of relevant technology and is not possible by a general technician or semi skilled person. (vi) The assessee company/deductor has been considering the issue of call carriage in isolation under process of interconnection which involves many processes, like call connect, call routing and signaling taking place in a network. These processes taken together form interconnection but the assessee company/deductor has failed to counter the opinion of the experts who have categorically established that human, intervention, takes place during carriage of call as the call routing and signaling are predefined as an initial setup or in installation phase and based on this predefined data, which is part of configuration in interconnect system, such phases are selected automatically to call connect and not just in routing. The process of carriage of call is automatic only for successful and fault free calls (A successful, call is which reaches the desired destination and which carries quality voice). The configuration (predefined data is part of configuration of interconnecting of network) and reconfiguration of data in network system and capacity enhancement etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these areas cannot be merely a technician but are to be professionally and highly qualified experts having good knowledge of network management, knowledge of hardware & software, knowledge of network configuration, etc. as no service provider does take the risk of leaving the network systems unattended, when the networks are interconnected with each other during the process of carriage of calls, for the simple reason that even a small fault can cascade into large faults. which could finally lead to entire collapse of the systems and fail the process of carriage of calls . (xi) The technical experts have clearly stated that the entire process of call processing and capacity augmentation, i.e. additional capacity when capacity gets exhausted, is essentially/necessarily human intervention and cannot be done without the services of humans. The interconnect / access / port facility is regarded as technical services and all payments made on account of interconnect charges/access/port charges falls within the meaning of the technical services. In fact, the combined environment of both men and machinery is needed for providing technical services. Even sophisticated and automated mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as 201(IA) to the assessment years 2008-09 to 2011-12 for non-deduction of tax at source u/s. 195 of the Income Tax Act, 1961 (hereinafter referred as "The Act" of 'IUC' payment made to "FTO's". He levied tax on higher rate of 20% (plus Surcharge & Cess) on the gross amount of payment made to the FTO for all the years under consideration by applying the provisions of section 206AA of the Act. Aggrieved the assessee carried the matter in the Appeal before the Ld. First Appellate Authority. The First Appellate Authority upheld the order of the AO to the extent of the finding that the payment of IUC are in the nature of FTS under the Act. He has held as follows:- "9.7 The whole controversy is whether any human intervention exists at time of picking up of call from ILD gateway of the appellant by ILD gateway of foreign operators and it has to be understood and resolved by examining the statements of the experts, which have been reproduced supra. Scrutiny of the statements reveal following facts: * When a call gets connected from one operator to other, per se it is an automatic connection, but there can be instances when there is problem in call connect which requires human int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interconnection location, the process of establishing interconnection itself is elaborate one. It involves making the two network systems compatible, configuration & reconfiguration of system, allotment of capacity & capacity augmentation whenever required, re-routing of call in event of overflow, fault finding and repair and over & above, constant monitoring of the network system so as to ensure un-interrupted carriage of call. All these activities are performed by highly qualified professionals and not merely technicians or unskilled workers. All these human interventions are pre-requisite for successful connect of the call. Without such human intervention, the service of successful connection of call cannot be provided. Now, it is undisputed that with advent of latest technology, the call connect process has become software based and substantially automatic. Over a period of time, the automation has increased and correspondingly human intervention has decreased progressively. If the quantum of human intervention involved is the only criterion for determining whether a particular service is in nature of technical service, then what used to be a technical service a few years ago, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : The definition says that FTS consists of two parts: a) Consideration for the rendering of any managerial, technical or consultancy services. b) consideration for provision of services of technical or other personnel 9.12 The second part of definition talks about technical personnel whereas first part does not mention about technical personnel. It can reasonably be inferred that first part of definition is concerned with technical services provided in any manner, may be mainly through automated machine. In case under consideration, there is practically no human intervention at the time of connect of successful call and this is the position which has been accepted even by the AO. This situation is taken care of by the first part of definition of FTS. There is ample human intervention involved at different stages as discussed supra and this situation falls within purview of second part of definition of FTS. 9.13 Another argument taken by the appellant is that payments made by it are in nature of revenue shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant is rejected. 9.16 The appellant has taken another argument that it makes payment only for a successful call and other activities of foreign operator like maintenance of network system are not remunerated by it. Therefore, other incidental activities where some human intervention is involved, are not in nature of services from perspective of the appellant. This contention of the appellant is misleading. The payment on basis of successful call is only a mode of calculating the payment for provision of service of transmission of call. The service provided by non-resident operator cannot be restricted by adopting a particular mode of making the payment. 9.17 It is also pertinent to note that the appellant is deducting tax on IV C payments made to domestic telecom operators, which clearly indicates that the appellant is conscious of legal provisions applicable. Then, why such deduction is not being made in respect of IUC payments made to foreign telecom operators is not explainable. 9.18 In view of discussion supra, I hold that the IUC payments made by the appellant to the non-resident telecom operators are in nature of FTS both under IT Act, 1961 and under relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or skill; (iva) the use or right to use any industrial, commercial or scientific equipments but not including the amount 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, 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 (vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (iv), (iva) and (v). The definition of royalty as per Article 13(3) of Indo-UK treaty is as under: 3. For the purposes of this Article, the term "royalties" means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that non-resident telecom operator has provided technical services to the appellant. This is possible only when non-resident operator is using his network. Without using his network, nonresident cannot provide services to the appellant. Now, when non-resident is using his network, it cannot be said that the appellant is using the network of non-resident operator. Therefore, two situations are mutually exclusive. Only one of them, either non-resident operator or the appellant is using the network of non-resident while transmission of call through optic fiber. It has already been held that non-resident operator has provided technical services to the appellant as is the case made by the AO, consequently it cannot be said that payments made by the appellant are for 'use of process' and hence in nature of royalty. The appellant has further contended that reliance placed by the AO on decision in case of Verizon Communications Singapore Pvt. Ltd. v. ITO: [2011] 45 SOT 263(Chennai) is misplaced. I have carefully gone through facts of the case law. In that case, the Indian payer company had obtained 'leased lines' on hire basis under a contract from non-resident Verizon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yer which did not exist at time of crediting or actual payment of the sum. 11.7 In view of discussion supra, I have no hesitation to hold that payments made by the appellant are not in nature of royalty under domestic law and relevant DTAA. This disposes off ground of appeal no. 19 which is accordingly allowed." 3.1 On Section 206AA, the Ld. CIT(A) held that this Section is applicable only prospectively. 4. Aggrieved with the finding of the ld. CIT(A), that the payment for 'IUC' is 'FTS', the assessee filed these Appeals. The Revenue has filed the Cross Appeals against the finding of the Ld. CIT(A) that IUC cannot be treated as royalty and also the finding that section 206AA is applicable only prospectively. 5. Ld. Counsel of the Assessee Sh. S.K. Tulsiyan, filed an Application for admission of additional evidence under Rule 29 of the ITAT Rules, 1963 dated 06.11.2013.The additional evidence sought to be produced by the assessee, is an Opinion dated 03.9.2013 of Sh. SH Kapadia, Former Chief Justice of India, on the applicability of withholding tax provisions u/s. 194J read with Section 9(1)(vii) of the Income Tax Act, in the case of the assessee. The Ld. DR, Mr. Anuj Arora, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the FTOs u/s. 9(1) read with section 5(2) of the Act. f) As income in question is the business income, and as the FTOs do not have any Permanent Establishment in India, the income is not taxable in India even under Article 7 of the Double Taxation Avoidance Act. Hence, the assessee is not required to withhold the tax u/s. 195 of the Act for such payments and consequently, cannot be held liable u/s. 201 of the Act. g) Section 206AA cannot be applied retrospectively and that the beneficial provisions of the DTAA's have to be applied. h) The Ld. CIT(A) was right in admitting additional evidence. 8. Ld. Counsel for the Assessee Sh. Tulsiyan, made elaborate submissions, filed paper books as well as written submissions and relied upon various case laws in support of his contentions. We would be dealing with all these arguments as well as the case law during the course of our finding. 9. Ld. DR, Sh. Anuj Arora, on the other hand, vehemently controverted the submissions of the Ld. Counsel for the assessee. He relied on the order of the AO and submitted that payment in question is FTS. He submitted that the human intervention is one of the issue which was considered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also. 11. Ld. DR further argued that services has been provided by the FTOs to the assessee. He vehemently contended that the submissions of the Assessee that services are connected with successful calls only is fallacious. He argued that services are obtained from FTOs even in a case where a call has not materialized and that successful calls are taken into account only for the purpose of billing. He contended that method of billing cannot be equated with type of services obtained by the assessee. He submitted that the operations are described in the composite agreement and it includes host of service. He submitted that the call drop is also considered in these agreements and it is provided that in case of call drop, a penalty would be attracted. He pleaded that the pith and substance of these services should be considered and not the mode of billing and the agreement should be viewed in a holistic manner. He referred to the definition of FTS u/s. 9(1)(viii) and submitted that it does not exclude lumsum consideration. 12. On the argument that it is a case of revenue sharing the Ld. DR relied on Page No. 59 of the Ld. CIT(A)'s order vide para no. 9.13 to 9.18 and submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bai Bench in the case of Viacom 18 Media (P) Ltd. vs. ADIT (International Taxation), Mumbai Tribunal reported in (2014) 44 taxmann.com 1 wherein it was held that, the payment of Fees for use of Satellite Transponder Service by assessee to one US Company was taxable as royalty under Article 12 of the DTAA. 15. In reply thereto, Ld. Counsel of the assessee distinguished the case laws relied upon by the Ld. DR and distinguished each and every case law on facts as well as on law. He submitted that the proposition of law laid down by the Jurisdictional High Court on the very same issue are in favor of the Assesee and hence the orders even if they were in favour of the Revenue from other jurisdiction cannot bind the Tribunal. He further made detailed submissions to the effect that the ITAT should not follow the decision of the Bangalore Bench of the ITAT in the case of Vodafone South Ltd. vs. DDIT (Int. Taxation) (supra) and the decision of the Mumbai, ITAT in the case of Viacom 18 Media Pvt. Ltd. etc. We will deal with these arguments in detail in our findings. FINDING:- 16. Rival contention heard. On a careful consideration of the facts and circumstances of the case and on a perusa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting additional evidence by the assessee. 20.1 We now frame the following issues for our adjudication:- ISSUE NO. 1 WHETHER THE PAYMENT OF IUC BY ASSESSEE TO FTOS ARE TAXABLE AS FEE FOR TECHNICAL SERVICES U/S. 9(1)(VII) OF THE ACT. ISSUE NO. 2 WHETHER THE PAYMENT TO FTOS FOR 'IUC'S ARE IN THE NATURE OF ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. ISSUE NO. 3 WHETHER THE ASSESSEE IS LIABLE TO BE TREATED AS ASSESSEE IN DEFAULT U/S. 201 OF THE I.T. ACT. ISSUE NO. 4 WHETHER THE PAYMENT MADE BY THE ASSESSEE TO THE FTO CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA. ISSUE NO. 5 WHETHER BENEFICIAL RATE PROVIDED UNDER DTAA OVERRIDE THE PROVISIONS OF SECTION 206AA AND WHETHER SECTION 206AA OF THE ACT IS APPLICABLE RETROSPECTEVELY. ISSUE NO. 6 Whether the ld. CIT(A) acted in violation of the provisions of Rule 46A in admitting the additional evidence filed by the assessee. ISSUE NO. 7 Whether the payment is revenue sharing or not. 21. Before we adjudicate each of the issue, it would be relevant to discuss as to what is the Inter-connection, Inter-Connection Usage charges (IUC), International Long Standing Distance Services (ILD) etc. 22. The Ld. CIT(A)'s in this impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aurangabad mobility circle to the NLD gateway (say at Nagpur), travels on NLD network till ILD gateway (say Mumbai) from where it is transported to international operator(s) outside India. In order to provide seamless services to its subscribers, the appellant enters into agreement with overseas network operators, to connect the call over their network. Therefore, call traffic originating from India is carried first by the Access Provider, then by the NLD operator, then by the ILD operator and finally by the foreign telecom operator, and/or last mile service provider. The factual position, therefore, is that the entire chains of operator(s) pool their network/infrastructure to provide integrated and seamless connectivity service to the subscriber(s). The Access Provider, due to practical/legal considerations, enters into contract to provide seamless end to end connectivity to the subscriber, and earns revenue from the subscriber. The entire revenue paid by the subscriber to the Access Provider and collected by the Access Provider is shared with the NLD operators (where the NLD operator is different from the Access Provider) and with ILD operator, who in turn shares the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual agreement with originating service provider. (b) The LlCENCEE can also make mutually agreed arrangements with Basic Service Providers for picking up, carriage and delivery of the traffic from different legs between long Distance Charging Center (LDCe) and Short Distance Charging Centers (SDCCs). (c) In the case of Cellular Mobile Telephone Service traffic, the inter-circle traffic shall be handed/taken over at the Point of Presence (POP) situated in LDCA at the location of level I TAX in originating/terminating service area. For West Bengal, Himachal Pradesh and Jammu & Kashmir such locations shall be Asansol, Shimla & Jammu respectively. (d) NLD service licensee shall be required to make own suitable arrangements / agreements for leased lines with the Access Providers for last mile. Further, NLD Service Providers can access the subscribers directly only for provision of leased Circuits/Close User Groups (CUGs). leased circuit is defined as virtual private network (VPN) using circuit or packet switched (IP Protocol) technology apart from point to point non-switched physical connections/transmission bandwidth. Public network is not to be connected with leased circuits/C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rendered. The ILD Operator is in turn billed by the FTO in the form of Inter-connected Usage Charges (IUC). 24. The basic issue before us is whether such Interconnected Charges Billed by the FTOs and paid by the Assessee are in the nature of Fee of Technical Services (FTS) or in the nature of Royalty. We would first take up the adjudication of these two issues and then we would be reverting to other issues. 25. ISSUE NO. 1 WHETHER THE PAYMENT OF IUC BY ASSESSEE TO FTOS ARE TAXABLE AS FEE FOR TECHNICAL SERVICES U/S. 9(1)(VII) OF THE ACT. (As the Section 9(1)(vii) has already been extracted in the earlier paragraphs, we do not repeat the same.) 26. The Hon'ble Delhi High Court on this issue held as follows in the assessee's own case i.e. CIT vs. Bharti Cellular Ltd. (2009) 319 ITR 139 (Delhi):- "The expression 'fees for technical services' as appearing in s. 194J has the same meaning as given to the expression in Expln. 2 to s. 9(1)(vii). In the said Explanation. the expression 'fees for technical services' means any consideration. for rendering any (managerial, technical or consultancy services'. The word (technical' is preceded by the word (manageria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facility of interconnection and port access provided by MTNL/ other companies is 'technical' in the sense that it involves sophisticated technology. The facility may even be construed as a 'service' in the broader sense such as a 'communication service'. But, while interpreting the expression 'technical service', the individual meanings of the words 'technical' and 'service' have to be shed. And only the meaning of the whole expression 'technical services' has to be seen. Moreover, the expression 'technical service' would have reference to only technical service rendered by a human. It would not include any service provided by machines or robots. Thus, the interconnect charges/ port access charges cannot be regarded as fees for technical services." [emphasis supplied] 27. The judgment of the Hon'ble Delhi High Court in the aforesaid case may thus be summarized as under: * The rule of noscitur a sociis is clearly applicable and the word 'technical' would take colour from the words 'managerial' and 'consultancy', between which it is sandwiched. * Both managerial service and consultancy s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services" shall have the same meaning as contained in Explanation 2 to clause (vii) of Section 9(1) of the Act. Right from 1979 various judgments of the High Courts and Tribunals have taken the view that the words "technical services" have got to be read in the narrower sense by applying the rule of Noscitur a sociis, particularly, because the words "technical services" in Section 9(1)(vii) read with Explanation 2 comes in between the words "managerial and consultancy services". The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the Interconnect Agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on what basis is the "capacity" of each servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e its expert and to adduce any other evidence. Before concluding, we are directing CBDT to issue directions to all its officers, that in such cases, the Department need not proceed only by the contracts placed before the officers." (Emphasis ours) 29.1 Thus in our view the proposition of law laid down in the judgment of the Hon'ble Delhi High Court have attained finality. The Hon'ble Supreme Court held that the issue as to whether there is involvement / presence of human element or not was a factual and technical matter and required to be examined. The other proposition have been accepted by the Hon'ble Supreme Court. As the Hon'ble Supreme Court was of the opinion that this factual aspect of human intervention was not examined by the AO, the matter was remanded to the AO for factual examination only. The AO in pursuance of the directions of the Hon'ble Supreme Court examined witness on oath and also gave the assessee the opportunity to cross examine them. He also reexamined the expert witness. Our decision will be based on the evidence so collected by the AO on this aspect of human intervention in the services rendered. It held that the word "technical services" have got to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the jurisdiction of another circle, the call gets connected automatically without any human intervention and it is for this, the roaming charges is paid by the assessee to the Visiting Operator for providing this service. Hence we have no hesitation to hold that the provision of roaming services do not require any human intervention and accordingly we hold that the payment of roaming charges does not fall under the ambit of TDS provisions u/ s 194J of the Act." 30. The Jaipur Bench of the Tribunal in the case of Bharti Hexacom Ltd. vs. ITO (TDS) in ITA 656/JP/2010 dated 12.6.2015 held as follows : "11. We have heard the rival contentions of both the parties and perused the material available on the record. After going through the order of the Assessing Officer, ld CIT(A); submissions of the assessee as well as going through the process of providing roaming services; examination of technical experts by the ACIT TDS, New Delhi in the case of Bharti Cellular Ltd.; thereafter cross examination made by M/s Bharti Cellular Ltd.; also opinion of Hon'ble the then Chief Justice of India Mr. S.H. Kapadia dated 03/09/2013 and also various judgments given by the ITAT Ahmadabad Bench in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l)(vii) of the Act, found that whenever there was a human intervention, it has to be considered as technical service. In the light to the above judgment of the Apex Court, the Department obtained an expert opinion from Sub-Divisional Engineer of BSNL. The Sub- Divisional Engineer clarified that human intervention is required for establishing the physical connectivity between two operators for doing necessary system configurations. After necessary configuration for providing roaming services, human intervention is not required. Once human intervention is not required as found by the Apex Court, the service provided by the other service provider cannot be considered to be a technical Service. It is common knowledge that, when one' of the subscribers in the assessee's circle travels to the jurisdiction of another circle, the call gets connected automatically without any human intervention. It is due to configuration of software system in the respective service provider's place. In fact, the Sub-Divisional Engineer of BSNL has explained as follows in response to Question No. 23:- "Regarding roaming services as explained to question no. 21. Regarding interconnectivity, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r channel through another operator. Human intervention in setting up enhanced capacity has no connection or relation with the traffic of call. Thus it is clear that in the process of actual calls, no manual intervention is required. The finding of the revenue authorities that interconnection is a composite process, involving several processes which require human intervention is erroneous. The test laid down by the Hon'ble Supreme Court of India in its order when the case was remanded to the AO is to find out as to whether "during traffic of calls, is there was any manual intervention?". There is no reference to the issues of set up, installation or operation maintenance or repair of network as explained by the Ld. CIT(A). These decisions of the various Benches of the ITAT, when read with the judgment of the Hon'ble Delhi High Court as well as the Hon'ble Supreme Court, would settle this matter in favour of the assessee. But as a number of other decisions have been relied upon, we examine the same. 35. The Hon'ble Madras High Court in the case of Skycell Communications Ltd. vd. DCIT (2001) 251 ITR 53 (Mad.) has held that call charges received from telecom operators from firms and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and band width charges as 'fee for technical services" u/ s 9(1}(vii}-CIT(A} reversed findings of AO-Held, payments were made to MTNL & BSNL etc. for providing space for transmission of data for carriage of voice and for availing service of inter-communication, port access for which no human intervention was necessary- Payment cannot be characterized as "fee for technical services"-Thus, assessee cannot be held to be in default -for non- deduction of tax at source from payment of telecommunication. charges in terms of section 194JRevenue's ground dismissed. 38. The Bangalore ITAT in the case of Wipro Ltd. vs. ITO (2003) 80 TTJ (Bang) 191 held as follows:- "Income deemed to accrue or arise in India-Fees for technical services/ royalty-Payment for transmission of data and software through uplink and down link services- Assessee engaged, inter alia, in the business of development of software providing on line software services through customer based circuits with the help of VSNL and foreign telecom companies outside India-As per the agreements with such telecom companies assessee is to use the standard facility having standard pricing patterns-There is nothing to show tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come and it can be brought to tax in India, only if the FTO has the permanent establishment in India and if the earning of income is attributable to activities or functions performed by such permanent establishment. This view is supported by the decision of the Coordinate Bench. 42. The Delhi Bench of the Tribunal in the case of ACIT vs. Paradigm Geophysical Pty. Ltd. 122 ITD 155 (2010) held as follows:- "What art. 7(7) seems to convey is that where the business profits of the non-resident include items of income for which specific or separate provisions have been made in other articles of the treaty, then those provisions would apply to those items. Per contra, if it is" found that those provisions are not applicable to those items of income, then the logical result would be that those items of income will remain in art. 7 and will not go out of the same. Such items of income which do not fall under any other provision of the double tax treaty, would continue to be viewed as business profits covered by art. 7. The position canvassed by the counsel for the assessee seems to be more logical than the view canvassed on behalf of the Department. Fees for technical services are essen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, income other than of the nature provided in arts. V to XII, if relatable to industrial or commercial profits would fall under art. III, not chargeable to tax in the absence ofPE-This view is further fortified by the fact that art. III of the 1960 DTAA has been substituted by DTAA of 1995 and a new art. VIIIA has been inserted explaining the expression 'royalties '" 44. In view of the above reasons, we hold that wherever under the DTAA's. Make available clause is found, then as there is no imparting, the payment in question is not 'FTS' under the Treaty and when there is no 'FTS' clause in the treaties, the payment falls under Article 7 of the Treaty and is business income. 45. ISSUE NO. 2 WHETHER THE PAYMENT TO FTOS FOR 'IUC'S ARE IN THE NATURE OF ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. 46. The specific charge of the AO is that taking up a call by the FTO from the assessee is a use of 'process' and hence the payment for the same is "Royalty" in terms of Clause (iii) of Explanation 2 to Section 9(1)(iv) of the Act. 47. We analyse the finding of the Ld. CIT(A) on this issue. a) Section 9(1)(vi)(iii) employs the word "use of". The factum of "use of process" h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter of royalty after retrospective amendment in the Act, the assessee cannot be held to be an assessee in default in respect of those payments made prior to the amendment, as brought out in the Finance Act, 2012. g) The obligation imposed upon the assessee u/s. 195 to deduct tax specifies that it should be at the time of credited of such income to the account or at the time of payment thereof whichever is earlier and both these events had taken place much prior to the amendment brought in by the Finance Act. 48. We uphold the finding of the 1st Appellate Authority fo the following reasons. The AO has taken a contradictory stand that the payments in question may be treated as "royalty" for "use of process" in terms of Section 9(1)(vi) of the Act, if in case the Appellate Authorities hold that the payment to FTOs are in the nature of "Fee for Technical Services". As the AO has held that the payment in question is royalty, as it is for the "use of process", as per clause (iii) to Explanation 2 to Section 9(1)((iv) of the Act, we restrict our finding to this issue only. The term "Process" occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng into this agreement on a principal to principal basis. Each Party acts in its own name and operates for its own benefit and risk while performing its obligations under this Agreement. 1.3 Neither of the Parties hereto shall have any rights in the equipments or in the network of the other Party (eg. liens or pledges). Each Party is and remains responsible for its network and for the provision of services relating to it, unless specifically stated otherwise in this Agreement. " 3. Definition of Services The Parties shall connect, and keep connected, for the duration of this agreement, their systems at Points of Interconnection (POI) in order to convey calls to and from those systems and to provide voice Services to each other in accordance with this Agreement and as specified in the Schedules hereto. 5. Technical Standards and Interconnection 5.1 ....................... 5.2 Each Party shall at its own cost, unless otherwise agreed, be responsible for providing, installing, testing, making operational and maintaining all equipment on its side of each Point of Interconnection (POI) as defined in the TFD. 5.3.............. 7. Equipment 7.1 Each Party shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the RECIPROCAL TELECOMMUNIA TIONS SERVICES AGREEMENT entered into between AIRTEL TANZANIA LIMITED ('AIRTEL") and BHARTI AIRTEL LTD. ('Bharti") effective as of SERVICES Bharti will terminate international telecommunications traffic (IDD type), which AIRTEL has delivered to one of Bharti's interconnection locations to those Destinations as agreed from time to time." "ANNEX 3 [AIRTEL TANZANIA LIMITED, VOICE TERMINATION SERVICES, THIS ANNEX for domestic and International Telecommunication Services is subject-to the terms and conditions of the RECIPROCAL TELECOMMUNIATIONS SERVICES AGREEMENT entered into between AIRTEL TANZANIA LIMITED ('AIRTEL") and BHARTI AIRTEL LTD. ((Bharti") effective as of SERVICES AIRTEL will terminate international telecommunications traffic (IDD Type), which Bharti has delivered to one of AIRTEL'S interconnection locations to those international Destinations." 51. A perusal of these agreements demonstrate that, each party under the agreement remains responsible for its own network and for the provision of services related to it. The Telecom Operator provide connecting, transit and termination services to each other on a reciprocal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. It is one of the most readily tradable properties in the digital marketplace." [as per definition provided in BusinessDictionary.com] 53. The term "process" is therefore to be understood as an item of intellectual property resulting from the discovery, specialized knowledge, creative ideas, or expressions of human mind having a commercial value and not widely available in public domain. It is therefore an intangible asset, the exclusive right over which normally rests with its developer / creator or with the person to whom such asset has been exclusively transferred. In order to receive a 'royalty' in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. As far as intellectual properties (IPs) are concerned, these have significance for the purpose of 'royalty' only till the time the ownership (as differentiated from the right to use) of such property vests exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited user of such specialised knowledge to others in confidence against payment. There is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as royalty or in the nature of royalty.-Handley Page us. Butterioorth. 19 Tax Cases 322 relied on. " Thus, the term 'royalty' connotes exclusivity and the exclusive right in relation to the thing (be it physical or intellectual property) for which royalty is paid should be with the grantor of that right. In case an intellectual property, it is generally associated with some discovery, invention, creation, specialized knowledge etc. emanating from human mind and is payable to the inventor / creator for allowing the usage of his invention or creation and having an exclusive right over it. The Hon'ble Calcutta High Court in the case of NV Philips Gloeilampenfabrieken Eindhoven Vs. CIT (Supra) held that a person having some specialised knowledge can claim exclusive right to the same as long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;process' might grant the 'use' or 'right to sue' to different persons at the same time, but the exclusivity of the ownership should be with the grantor. The royalty is paid for the "use of" the 'process' as an item of IP by the manufacturing company in contradistinction to the equipments or resources deployed in the execution of such 'process'. The payer must therefore use the IP on its own and bear the risk of its exploitation. If the IP is used by the owner himself and he bears the risk of exploitation or liabilities for the use, then as the owner makes own entrepreneurial use of the IP the income would fall under the scope of "Business Income" and not "royalty". A 'process' which is widely known and deployed by everyone in the field and for which the owner does not have exclusive rights cannot be a "process" contemplated in this Section 991)(vi) Explanation (iii). 54.2 In the case of telecom industry, all the telecom operators have similar infrastructure and telecom networks in place, for rendition of telecommunication services. The process embedded in the networks of all telecom operators is the same. The equipments, resources etc. employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operators with the aid of their network and the process embedded therein. This is a standard facility which is used by the FTO itself. Thus the insertion of Explanation 6 to Section 9(1)(vi) does not alter the decision taken by us on this issue. 56. As far as the insertion of Explanation 5 to Section 9(1)(vi) is concerned, we hold that this Explanation comes into play only in case of Royalty falling within the ambit of Section 2 of Section 9(1)(vi). When a process is widely available in the public domain and is not exclusively owned by anyone the it cannot constitute an item of intellectual property for the purpose of charge of 'Royalty' under clauses (i), (ii) and (iii) of Explanation 2 to Section 9(1)(vi). Hence, the criteria of possession, control, location indirect use etc., as explained by Explanation 5 has no effect in the case in hand. 57. The arguments of the Ld. DR that Explanation 5 is attracted since the assessee company is indirectly using such equipment and process through the services provided by the FTO, in our view is devoid of merits. There is difference between the services rendering agreements and royalty agreements. If the arguments of the DR is accepted it wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds, Portuguese, Republic, Singapore, Spain, Sweden, United Kingdom, United States of America, Bangladesh, Indonesia, Mauritius, Nepal, Philippines, Saudi Arabia, Sri Lanka, Thailand, UAE etc. India has Double Taxation Avoidance Agreements with all the aforesaid countries. 59.3 The definition of 'royalties' (simply referred to as 'royalty' under the Income-tax Act, 1961) is mostly contained in Articles 12 & 13 of the DTAAs between India and the aforesaid countries. The definitions of 'royalties' contained in the Treaties with the aforesaid countries are almost pari materia insofar as the royalty is for 'use of process' is concerned. We quote from Article 13(3) of Indo-UK treaty defining the term 'royalties' hereunder: "3. For the purpose of this Article, the term (royalties' means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, all the treaties use the expression 'secret formula or process' is separated by a comma before and after the expression. This implies that" formula/ process is a part of the same group and the adjective 'secret' governs both. Thus, under the treaties, in order to constitute royalty for use of or the right to use of a process, the process has to be 'secret'. In the case of telecom industry, however, telecommunication services as already observed by us are rendered through standard facilities and no 'secret process' is involved. 60. A perusal of the wording of these Treaties show that only payments received as consideration for the "use of", or "the right to use" is necessary for the payment to be termed as Royalty. This is much narrower to the definition of royalty under the Act. As held by the Ld. CIT(A) there is no 'use of' or 'right to use' of any process in the facts and circumstances of the case on hand and hence, even under the DTAA's, the payment in question cannot be termed as royalty. 60.1 The Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd. vs. Director of Income Tax (2011) 332 340 considered this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched the programmes in India, even when they were uplinked and relayed outside, India, that would not mean that the assessee was carrying out its business 'Operations in India. The expressions "operations" and "carried out in India'' occurring in Explanation l(a) to section 9(1)(i) signify that it was necessary' to establish that any part of the aseeseee's operations were carried out in India. No machinery or computer was installed by the assessee in India through which the programmes reached India. The process of amplifying and relaying she programmes was performed' in the satellite which was not situated in Indian airspace. Even the tracking, telemetry and control operations to be performed outside India in Hong Kong. There was no contract or agreement between the assessee either with the cable operators or viewers for reception of signals in India. Thus, section 9(1)(i) was not attracted. (ii) 'That the process of transmission of television programmes started with television channels (customers of the assessee) uplinking the signals containing the television programmes ; thereafter the satellite received the signals and after amplifying 'and ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ident did not represent income by way of royalty as defined in Explanation section 9(1)(vi) of the Act. Article 12 of the model double taxation avoidance agreement framed by the Organisation of Economic Co-operation and Development contains a definition of "royalty" which is in all respects virtually the same as the definition of "royalty" contained in (iii) of Explanation 2 to section 9(1)(vi) of the Act. The commentary by the OECD can be relied upon. (iv) That the Tribunal rightly admitted the additional ground question of applicability of section 9(1)(vii) on the ground that it was legal and did not require consideration of any fresh facts, as all necessary for adjudication whether the amount received was chargeable to tax section 9(1)(vii) were available on record. However, no arguments been advanced by the Department on this ground, it had to be presumed that the case was not sought to be covered under this provision." 61. In the case of DCIT vs. PanAmSat International Systems Inc. (2006) 103 TTJ 861 (Del) the Tribunal has held as under:- "There is a ''process'' involved in the activity carried on by the assessee. There is a comma after the words "secret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onder/satellite was also transferred to the assessee by the manufacturer. If the patent did not ensure to the assessee, how the assessee could have, even in the wildest of imaginations, let the broadcasters use the same for consideration. The argument sought to be made is factually not borne out. There is not on iota of evidence to show that the assessee had any patent to the satellite or transponder which it allowed the broadcasters to use for a consideration." (Para 21) 62. In the case of Cable & Wireless Networks India (P) Ltd. in re (2009) 315 ITR 0072, the AAR held as under:- "Cable & Wireless Networks India (P) Ltd.; In Re (2009) 315 ITR 0072: Held that "Payment made by applicant to the UK company for providing international leg of the services in transmitting voice/data to places outside India using its international infrastructure and equipments is neither royalty nor fees for technical services; payment is in the nature of business profits and in the absence of PE of UK company in India, same is not taxable in India." Further, at paras 8.1 to 8.3, the Hon'ble AAR held as under: "No material has been placed to show that C&W UK uses any secret process in the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT 134 TTJ (Delhi) 257, CIT vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom.), DIT vs. Ericsson, 343 ITR 370, relied on." 64. Recently, the Hon'ble Delhi High Court in the case of DIT vs. New Skies Satellite BV & Ors. In ITA No. 473/2012 & Ors. Vide judgment dated 8.2.2016 has held as under:- "39. It is now essential to decide the second question i.e. whether the assessees in the present case will obtain any relief from the provisions of the DTAAs. Under Article 12 of the Double Tax Avoidance Agreements, the general rule states that whereas the State of Residence shall have the primary right to tax royalties, the Source State shall concurrently have the right to tax the income, to the extent of 15% of the total income. Before the amendment brought about by the Finance Act of 2012, the definition of royalty under the Act and the DTAAs were treated as pari materia. The definitions are reproduced below: Article 12(3), Indo Thai Double Tax Avoidance Agreement: "3. The term "royalties" as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible." 64.1 After considering the Vienna Convention on the Law of Treaties, 1969 (VCLT) and the judgments of the Hon'ble Supreme Court of Canada and other precedents, the Hon'ble High Court further has held as under :- "60. Consequently, since we have held that the Finance Act, 2012 will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the Assessee never used or had acquired the right to use the process of the FTOs. This decision of the ITAT, Bangalore Bench as already stated, is contrary to the proposition laid down in judgment of the Jurisdictional High Court in the case of the assessee itself where it is held that the payment was for service and this necessarily excludes the possibility of the payment being held as that which is made for Royalty, as both are contradictory position. This decision has been affirmed by the Hon'ble Supreme Court. Thus, we follow the binding decision of the Jurisdictional High Court in the matter and uphold the finding of the Ld. CIT(A). 67. Similarly, the reliance placed by the Ld. DR on the judgment of the Hon'ble Madras High court in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO (International Taxation) reported in (2014) 361 ITR 0575 is also misplaced for the following reasons:- (a) M/s Verizon Communications received International Private Leased Circuit charges from customers for providing point to point dedicated private line to communicate between offices that are geographically dispersed throughout the world, the said case the bandwidth capacity was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71. Under Section 195, any person, who is responsible for making a payment to a person who is a non-resident, of any sum, which is chargeable to Tax under the Act, is required to deduct the tax thereon at the rates in force. The Hon'ble Supreme Court of India in the case of GE Technology Central (P) Ltd. vs. CIT (2010) 327 ITR 456 (SC) held that the payer becomes an assessee in default, only when he fails in his statutory obligations under section 195(1) of the Act. If the payment does not contain an element of income, the payer cannot be made liable to deduct tax u/s. 195 of the Act and he cannot be declared to be an "assessee in default". 72. We have held that the payment in question for "IUC" to FTOs is neither FTS nor royalty either under the Act or under the Treaties. We have in subsequent paragraphs given reasons as to why the income in question arising from the payment cannot be deemed to accrue or arise in India. Thus the assessee cannot be declared as "assessee in default" as it has not failed in its statutory obligations to deduct tax at source u/s. 195 of the Act. Assessee cannot be held the Assessee in default under section 201 of the I.T. Act. Hence, this issue is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch part of the income as is. reasonably attributable to the operations carried out in India. From this Explanation, it is further amply clear that even if there is a business connection of the nonresident in India, then also only that part of the income shall be deemed to accrue or arise in India which is relatable to the operations carried out in India. So even if it is presumed for a moment, that there was any business connection of the assessee in India, still in the absence of any operations carried on by the assessee in India in this regard, there cannot be any question of bringing the case within the ambit of s. 9(1). It is pertinent to mention that the assessee categorically stated before the AO that the local activity with reference to installation was carried out by S Ltd. in their independent capacity. It has further been claimed that income from such services has been duly offered for taxation by the Indian company, which has not been disputed by the Departmental Representative. Therefore, no part of the income as relatable to the sale of equipment by the assessee can be said to have deemed to accrue or arise to the assessee in India within the meaning of s. 9." 77. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with provisions of this Act can be considered as an incorrect claim apparent from the statement. However, in the case in hand, it is not a simple case of deduction of tax at source by applying the rate only as per the provisions of Act, when the benefit of DTAA is available to the recipient of the amount in question. Therefore, the question of applying the rate of 20% as provided u/s 206AA of the IT Act is an issue which requires a long drawn reasoning and finding. Hence, we are of the considered opinion, that applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A is beyond the scope of the said provision. Thus, the AO has travelled beyond the jurisdiction of making the adjustment as per the provisions of Section 200A of the IT Act, 1961." 81. Respectfully, following the Coordinate Bench decision we hold that the beneficial rate provided in the DTAA override the provisions of Section 206AA of the Act. Thus this issue is resolved in favour of the Assessee. ISSUE NO. 6 Whether the ld. CIT(A) acted in violation of the provisions of Rule 46A in admitting the additional evidence filed by the assessee 82 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitting his report, the Assessing Officer had not object, to the admission of the additional evidence, but had merely reiterated contentions in the assessment orders. It is only after considering remand report, the Commissioner of Income-tax (Appeals) had admitted the additional evidence. It cannot be disputed that this additional evidence was crucial to the disposal of the appeal and had a direct bearing 0n the quantum of claim made by the assessee. The plea of the asses was taken before the Assessing Officer remains the same. The Assessing Officer had taken adverse note because of nonproduction of certain documents to support the plea and it was in these circumstances, the additional evidence was submitted before the Commissioner of Income- (Appeals). It cannot be said nor is it the case of the Revenue that additional evidence is not permissible at all before the first appellate authority. On contrary, rule, 46A of the Rules permits the Commissioner of Income-(Appeals) to admit additional evidence if he finds that the same is crucial for disposal of the appeal. In the facts of this case, therefore, we are of the opinion that on this aspect, no substantial question of law arise ..... X X X X Extracts X X X X X X X X Extracts X X X X
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