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TMI Blog2023 (11) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... e ambit of Royalty under section 9(1)(vi), Explanation 2,5 and 6. As per the decision of case of Vodafone Idea Ltd.[ 2023 (7) TMI 1164 - KARNATAKA HIGH COURT] we hold that the receipts in the hands of the assessee could be taxed as business profits as per the applicable laws of Hong Kong and cannot be brought to tax either as FTS or Royalty under the Income Tax Act in India. Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961. Hon'ble Court has observed that a non-resident telecom operator cannot be held to be taxable as "right" and "process" appearing in the clarificatory Explanation 2,5 and 6 of section 9(1)(vi) of the act. He also referred to the decision of Coordinate Bench of this Tribunal in case of M/s. Telefonica Depreciation Espana S.A, vs. DCIT in IT(IT)A Nos. 215 & 216/Bang/2023 by order dated 17.08.2023 wherein this Tribunal observed and held as under: "10. We have heard the rival submission and perused the material on record. At the outset, we notice that Assessment Year 2010-11 has been considered by the AO as the base year and has been followed in the subsequent Assessment Years. The Tribunal in ITA Nos. 2657/Bang/2019, 180/Bang/2021 and 817/Bang/2022 for Assessment Years 2010-11 to 2012-13 has decided the issue in favour of the assessee vide order dated 10 August 2023. The Tribunal has passed a detailed order after considering several judicial precedents including the Hon'ble Karnataka High Court judgments in the case of Vodafone in ITA No. 161/2015 and Vodafone South Ltd. (2016) 72 taxmann.com 347 which have held that interconnectivity charges are not taxable as royalty and FT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 the decision of Authority For Advance Ruling, in case of Cable & Wireless Networks India(P.)Ltd., In 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 domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trol 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 possession, it cannot be said that such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of applicant 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 contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 service or to put to one's use or benefit". (Esfeld Trucking Inc. v. Metropolitan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood in the broad sense 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss 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 enjoy at least relative protection or are capable of being protected. That is why Article 12(2) very properly use, in connection with such formulae, etc., the criterion 'right to use', which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the '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 bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quot; 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 there is anything in article 12.3(a) of the DTAA between India and USA which militates against such a view. It must be remembered that India had no DTAA with Hongkong and hence the view taken by the Tribunal (supra) with regard to the clause (iii) of Explanation 2 below section 9(1)(vi) would apply if we were to also interpret the same provision. But article 12.3(a) is worded as below : "The term 'royalties' as used in this article means : (a)paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 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. That takes us to a consideration of the question whether the process carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Income Tax Act, having regards to section 9(1)(vi); Explanation 2, 5 and 6 also. And this Tribunal has held that payments made by an Indian telecom company for identical services, as rendered by the present assessee will not fall within the ambit of Royalty under section 9(1)(vi), Explanation 2,5 and 6. There has been nothing contrary to the above observations brought on record by the revenue. a) Telefonica De Espana SA vs. ACIT/DCIT reported in [2023] 154 taxmann.com 436 (Bangalore - Trib.) b) Telefonica De Espana SA vs. DCIT in IT(IT)A Nos. 215 & 216/Bang/2023 by order dated 17.08.2023 c) Al Telekom Austria Aktiengesellschaft vs. DCIT in IT(IT)A Nos. 336, 338 & 339/Bang/2023 by order dated 25.08.2023 d) Telecom Italia Sparkle Singapore Ptd. Ltd. vs. DCIT in IT(IT)A Nos. 579 & 580/Bang/2020 & IT(IT)A No. 1138/Bang/2022 by order dated 31.08.2023 7. Respectfully following the aforesaid views and the decision of Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. (supra), we hold that the receipts in the hands of the assessee could be taxed as business profits as per the applicable laws of Hong Kong and cannot be brought to tax either as FTS or Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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