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TMI Blog2023 (9) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... es provides by the assessee cannot fall within the ambit of Royalty under section 9(1)(vi) Explanation 5 6. We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of Royalty under India- Austria DTAA. The definition of Royalty under the DTAA is much more narrower in its scope and coverage, than the definition of Royalty contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. On perusal of the agreement between the assessee and the end users it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of royalty as contained in clause 3 of Article 13 of India-Austria DTAA. We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'learned CIT(A)') under Section 250 of the Income-tax Act, 1961(`the Act') and in respect of assessment order dated 26 December 2017 (received on 5 January 2018) passed by the Deputy Commissioner of Income Tax (International Taxation) - Circle 2(1), Bangalore [hereinafter referred to as the 'learned AO'] under section 147 read with section 144 of the Act, on the grounds as set out herein. The following grounds are independent of, and without prejudice to, one another: 1. General 1.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in determining the total income of the Appellant at Rs. 4,49,80,244 by making adjustment in respect of which specific ground has been raised. 1.2. On the facts, and in the circumstances of the case, and in law, the learned AO has erred in raising a demand of Rs. 1,70,47,510 (Rs. 89,51,069 as per order under section 154 of the Act) on the Appellant. 1.3. On the facts, and in the circumstances of the case, and in law, the learned C1T(A) has erred in erroneously recording the date of order as 28.02.2022 instead of the correct date i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest under section 234A of the Act 5.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of the learned AO in levying interest under section 234A of the Act. 5.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234A for a period beyond two years where it is not possible for the appellant to file a valid return beyond the due date prescribed under section 139 of the Act. 6. Levy of Interest under section 234B and 234C of the Act 6.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234B and 234C of the Act, without considering the fact that the Appellant being a non-resident is not required to pay advance tax as its entire income is subject to tax withholding under the Act. 6.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in not considering the rectification order wherein the interest under section 234B and 23 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .s 142(1). Subsequently, a show-cause letter was issued by the Ld.AO, whereby the assessee was asked to show cause as to why the sum received by it from VSL during relevant assessment years under consideration towards 'interconnect charges' should not be taxed in its hands, as per the provisions of the Act and the relevant DTAA. 2.3 The assessee did not respond to the show-cause letter for A.Y. 2009-10. Since the assessee had not responded to any of the notices/ letters issued to it, the AO concluded the assessment ex-parte by bringing to tax the amount received by assessee as Inter-connect utility charges as FTS/Royalty. In respect of A.Ys. 2011-12 and 2012-13, the assessee had responded to the statutory notices and necessary communications as required u/s. 144C of the Ld.AO to pass the final assessment order. Aggrieved by the impugned assessment orders, the assessee filed appeals before the Ld.CIT(A), for the relevant assessment years under consideration. Before the Ld.CIT(A), assessee filed written submissions, reiterating the submissions made in the rejoinder (supra). I have given careful consideration to the assessee's submissions. The case laws relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under section 9(1)(vi) of the Act. 4.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under India-Austria Tax Treaty. 4.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO have erred in treating the Voice Interconnect Services as taxable in India. Ground nos. 3-4 (A.Ys. 2011-12 2012-13) 3.1 The Ld.AR submitted that DTAA will prevail over the Income- Tax Act as held by Hon ble Karnataka High Court and it is further submitted that Explanation 5 and 6 do not override the DTAA between India and Austria. Hence, the subject payment received from Vodafone and Bharti Airtel is not taxable as 'royalty' as per DTAA. It is submitted that Hon ble Karnataka High Court in the case of Vodafone reversed the ITAT judgment on this point. The substantial questions of law 2,3 and 4 in the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty in India stands squarely covered in favour of assessee. 4. On the contrary, the Ld.DR relying on the orders passed by the authorities below vehemently argued the observations as recorded by the revenue in their orders. 5. We have perused the submissions advanced by both sides in the light of records placed before us. 5.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to use the process or an equipment . 5.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term Process occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under: 'Explanation 2.: For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalties . These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right. 5.2.5 Thus the word process thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon ble Supreme Court in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239. 5.2.6 We refer to the decision of Hon ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon ble High Court observed as under: 10. The term (royalty' normally connotes the payment made to a person who has exclusive right over a thing for allowing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party. 5.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase use or right to use has been explained. The meaning attached to phrase use or right to use has been explained in following decisions: Decision of Authority For Advance Ruling(hereinafter referred to as AAR), in case of Cable Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76 Decision of AAR in case of ISRO Satellite Centre reported in 2008) 307 ITR 59 Decision of AAR in case of Dell International Services (India) P. Ltd.In.re. reported in (2008) 172 Taxman 418. 5.2.11 The above decisions, lay down that, in order to satisfy 'use or right to use', the control and possession of right, property or information should be with payer. 5.2.12 In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression transfer of right to use any goods occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase 'right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the action of using something; the fact or state of being used; application or conversion to some purpose . Another meaning given is Make use of (a thing), especially for a particular end or purpose; utilize, turn to account... cause (an implement, instrument etc.) to work especially for a particular purpose; manipulate, operate . The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below : The word 'use' means to make use of; convert to one's service; to avail oneself of; to employ . (Miller v. Franklin County) The word 'use' means the purpose served, a purpose, object or end for useful or advantageous nature . (Brown v. Kennedy) 'Use' means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one's service or to put to one's use or benefit. (Beach v. Liningston) 'Use', as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the equipment such as operation and control of the same in order to utilize the service or facility ? Does the applicant deal with any BT equipment for adapting it to its use ? Unless the answer is 'yes', the payment made by the applicant to BTA cannot be brought within the royalty clause (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the applicant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity like telephone connection offered by the service provider, it does not admit of any doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iva) of Explanation 2. We also refer to the commentary relied by the Ld.Counsel form Prof. Klaus Vogel's Commentary on Double Taxation Convention , wherein Secrete formulae or process is defined as under: Secret formulae or processes: This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried on by the assessee before us. In Asia Satellite Telecommunication Co. Ltd. s case (supra) it was further held that the word secret appearing in clause (iii) above qualifies only the word formula but not the word process and therefore even if the process involved in the operation of the transponder is in the public domain and no longer a secret known only to a few, the payment for the process would still be taxable as royalty. The reason or logic given in paragraph 6.18 of the order by the Tribunal to hold that the word secret does not qualify the word process is that there is no comma after the use of the word secret till the end of clause (iii) and if the intention has been to apply the word secret before the word process also, then a comma would have been used after the word formula and further that the word secret cannot also be applied to the word trademark because once registered there is nothing secret about the trademark and the impossibility of reading the word secret before the word trademark further strengthens the view that the word secret cannot be read before the word process also. This naturally takes us to the question whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of the Special Counsel for the Department, on the strength of the several authorities cited by him, that normally punctuation by itself cannot control the interpretation of a statutory provision and in fact the learned counsel for the assessee did not seriously dispute the proposition. However, the punctuation the use of the comma coupled with the setting and words surrounding the words under consideration, do persuade us to hold that under the treaty even the process should be a secret process so that the payment therefore, if any, may be assessed in India as royalty. The Tribunal in Asia Satellite Telecommunication Co. Ltd. s case (supra) have recognized that all the items referred to in clause (iii) of Explanation 2 such as patent, invention, model, formula and process etc. are intellectual properties. Similarly, the words which surround the words secret formula or process, in article 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trademark, design or model, plan, etc. Thus the words secret formula or process must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a socii. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. 5.2.16 On perusal of the agreement between the assessee and the end users placed at pages 35 to 80 of paper book Vol. 1, it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of royalty as contained in clause 3 of Article 13 of India-Austria DTAA. 5.2.17 We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not secret but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a secret process , as is required by the definition of royalty mentioned in clause 3 of Article 13 of India-Austria DTAA. We are therefore of the op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced? Hon ble High Court for considering the above questions had looked into the agreement between Vodafone Idea Ltd. and the various service providers from whom Vodafone Idea Ltd. had received the IUC services. Hon ble High Court also considered the various decisions by other High Courts referred to hereinabove vis-a-vis the arguments advanced by the Ld.Counsel. 5.2.19 In case of Vodafone Idea Ltd. (supra), Hon ble Court also observed that the equipments and submarine cables are situated overseas and that Vodafone Idea Ltd. had availed certain services from the non-resident telecom operators and that such agreements would not create a permanent establishment of such non-resident telecom operators in India. Thereafter Hon ble High Court after verifying the facts of the case having regards to the decision of Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 observed and held as under: 12. We have carefully considered the rival contentions and perused the records. 13. Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings under Section 201 of the Act is tenable. 19. The second question for consideration is whether the ITAT was correct in holding that the amendment to provisions of Section 9(1)(vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows: 85. It is thus clear that the person mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... source for payments made for the A.Ys. on the basis of amendment to Section 9(1)(vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the impossible. Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA. 5.2.20 Respectfully following the above view, in case of Vodafone Idea Ltd. (supra), 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 to be brought to tax in India under section 9(1)(vi) of the Act and also as per DTAA. 5.2.21 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 in para 25, held that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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