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TMI Blog2023 (9) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... a secret process , as is required by the definition of royalty mentioned in clause 3 of Article 13 of India-Spain DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 13 in India of India-Spain DTAA. As relying in case of Vodafone Idea Ltd. [ 2023 (7) TMI 1164 - KARNATAKA HIGH COURT] and Vodafone South Ltd. [ 2015 (1) TMI 1018 - ITAT BANGALORE] and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and also as per DTAA. The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Even Hon ble High Court has held that the non-resident service providers do not have any presence in India. Decided in favour of assessee. - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fone Essar South Limited ('VESL), to provide seamless services of carrying/delivering outbound and inbound calls for the years under consideration, the details of which are as under: S.No. Parties AY 2010-11 Page 2 of draft order AY 2011-12 Page 72-73 of PB AY 2012-13 Page 3 and 4 of draft order 1 Bharti Infotel Limited ('BIL') 288,287 835,030 6,87,993 2 Tata Communications Limited 135,046 5,59,047 3 Vodafone Essar South Limited ('VESL ) 59,924 154,447 63,785 Total 483,356 989,477 1,310,825 2.3 It is submitted that the assessee was of the opinion that, the receipts towards IUC charges are not taxable in India since these do not amount to Royalty / FTS, but would constitute assessee s business income. And, as the assessee do not have a permanent establishment in India, the same need not be attributed towards any income earned in India. Based on such opinion, assessee did not file return of income in India for the concerned AYs under consideration. 2.4 The Ld.AO issued a notice u/s. 147 of the act was issued for A.Y. 2010-11 based on the proceedings u/s. 201 of the Act initiated on M/s. Vodafone South Ltd. (who was one of the service recipient). The Ld.AO was of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... munications has been dissented by the Delhi HC in the case of New Skies and Bombay HC in the case of Neo Sports. It is also submitted that when there exists two conflicting judgments - the one favouring the assessee should prevail - J P Coats. Nonetheless, the recent jurisdictional High Court decision of Vodafone South would have binding effect on the Bangalore Tribunal. 3.5 Reliance is also placed on the following decisions: 1. Bharat Sanchar Nigam Ltd. [2017] 87 taxmann.com 152 (Delhi - Trib.) 2. Pan AmSat International Systems Inc. [2006] 9 SOT 100 (DELHI ITAT) 3. Asia Satellite Telecommunications Co Ltd [2011] 197 Taxman 263 (Delhi) 4. New Skies Satellite BV [2016] 68 Taxmann.com 8 (Delhi) 5. Neo Sport Broadcast (P.) Ltd. [2019] 107 Taxmann.com 17 (Bombay) 6. Viacom18 Media (P.) Ltd. [2022] 134 taxmann.com 243 (Mumbai -Trib.) - Para 9 page 656 of PB which has followed Bom HC decision in Neo Sports as opposed to earlier ITAT adverse view in own case 7. J P Coats Ltd. No.11/Bang/2014, ITA 382 1493/Bang/2015, 2135/Bang/2016 and 1365-1367/Bang/2019 8. Engineering Analysis Centre of Excellence (P.) Ltd . [2021] 125 taxmann.com 42 (SC) 3.6 It is submitted by the Ld.AR that the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;' 5.2.1 The term process used under Explanation 2 to section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' which is publicly available. The term process occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a process which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows: (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property Clauses (i) (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty . 5.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked. 5.2.8 Further we note that by Finance Act, 2012, Explanation 5 6 were added with retrospective effect from 1.6.1976 which reads as under: 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 right, property or information is with the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n re(supra), a similar issue was considered wherein Cable Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable Wireless Group of companies. Cable Wireless Networks India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable Wireless Networks India(P.)Ltd., to the UK Group company, whether the payment is taxable as royalty or FTS under section 9(1)(vi)/(vii). The AAR relied on following decisions: Decision of Hon ble Supreme Court in case of BSNL vs. UOI reported in (2006) 3 STT 245 Decision of AAR in case of Dell International Services India Ltd. In.re reported in (supra) Decision of Hon ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant that, it has neither possession nor control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words transfer of right to use the goods in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words equipment suggests that there must be some positive act of utilization, application or employment of equip-ment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. 13. It is the contention of the revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on account of this. The electronic circuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment. There is no scope to invoke clause (iva) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the socalled equipment, solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to use already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret. We note that, in case of DCIT v. PanAmSat International Systems Inc., reported in (2006) 9 SOT 100 , Hon ble Delhi High Court distinguished the decision of Asia Satellite Telecommunication Co. Ltd. v. Dy. CITT reported in (2003) 85 ITD 478 and held as under: 19. The question that first comes up for consideration is whether section 9(1)(vi) of the Income-tax Act, read with the Explanation 2 below thereto, is applicable. This also involves the subsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) which is also a case of a non-resident company based in Hongkong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held in the context of the provisions of clause (iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s worded as below : The term royalties as used in this article means : (a)payments of any kind received as 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 film, 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 concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and In Asia Satellite Telecommunication Co. Ltd. s case (supra) the Tribunal pointed out, while repelling the argument that the word secret also qualifies the word process appearing in clause (iii) of Explanation 2, that there is no comma after the word secret till the end of the clause and had the intention been to qualify the word process also with the word secret there would have been a comma after the word process (by mistake mentioned in the order as formula ). The Tribunal was thus prepared, with respect, to accept the argument tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. This aspect of the matter was not required to be considered by the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) because the view taken by the Tribunal was that there was no requirement in clause (iii) of Explanation 2 below section 9(1)(vi) of the Act that the process involved, for which the payment is being made, should be a secret process. But in the view we have taken on the language employed by article 12.3(a) of the treaty coupled with the punctuation and the setting and surrounding words, the payment would be considered as royalty only if it is made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process assuming it to be so does not amount to royalty. 5.2.14 Similar issue came up before Hon ble Delhi Tribunal in case of Bharti Airtel vs.ITO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident? 2. Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi) by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the 'Act') will also result in amendment of the DTAAS? 3. Whether ITAT was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms right process in the clarificatory Explanation 2, 5 and 6 of Section 9(1)(vi) of the Act, and consequently, appellant was bound to deduct tax at source thereon under Section 195 of the Act? 4. Whether the income tax authorities in India have jurisdiction to bring to tax income arising from extraterritorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any permanent establishment in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue s reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. It is also the further case of the Revenue that the agreement between assessee and the payee did not specify that income was not taxable. 17. The first question is whether the ITAT was correct in holding that DTAA cannot be considered under Section 201 of the Act. It was argued by Shri. Percy Pardiwala that this issue is covered by the decision in GE Technolgy. We may record that a DTAA is a sovereign document between two countries. In GE Technology, the Apex Court has held as follows: 7. ...While deciding the scope of Section 195(2) it is important to note that the tax which is required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee s own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income Tax Authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. Assessee s contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the Tax authorities in India shall have no jurisdiction to bri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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