9911796707
TMI Blog2024 (6) TMI 804X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression 'similar property' used at the end of the list, further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. We also note that 'Intellectual property' as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. 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 [ 2010 (8) TMI 332 - SUPREME COURT] It is an admitted fact that there is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the receipt of IUC charges cannot be taxed as Royalty under Article 12 in India of India- Japan DTAA. Respectfully following the above view, in case of Vodafone Idea Ltd . ( 2019 (12) TMI 206 - 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 to be brought to tax in India under section 9(1)(vi) 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. Decided in favour of assessee. - Smt. Beena Pillai, Judicial Member And Shri Laxmi Prasad Sahu, Accountant Member For the Assessee : Shri Arjit Prasad, Sr. Advocate For the Revenue : Dr. Subash K R, CIT-DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against the separate orders passed by the Ld.CIT(International Taxation), Circle 2(1), Bangalore for A.Ys. 2013-14 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld.AO. Further the Ld.DRP, in its directions dated 28.11.2023 ought to tax IUC as other income under Article 22 of India-Japan DTAA considering IUC is not specifically covered in the definition of royalty under Article 12 of tax treaty. 2.8 On receipt of the DRP directions, the Ld.AO passed the final assessment orders considering the receipt for interconnect utility charges as royalty in the hands of the assessee. 2.9 Aggrieved by the final assessment order, the assessee preferred appeal before this Tribunal. 3. At the outset, the Ld.AR vide submission dated 04.04.2024 restricted the arguments only relating to the issues on merits. In connection to the same, the Ld.AR has filed the following details in the synopsis as under: 4. Based on the above submission by the Ld.AR on behalf of the assessee, the issues raised in the grounds referred to hereinabove in the present appeals challenging the validity of reopening are not pressed. Accordingly, Ground no. 2 for A.Y. 2013-14, Ground no. 3 for A.Y. 2014-15 and Ground no. 2 for A.Y. 2015-16 stands dismissed. 4.1 Ground no. 1 in all the three appeals are general in nature and therefore do not require adjudication. 5. Ground no. 2 for A.Y. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew 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) 5.7 It is thus submitted that, in respect of the treatment of the interconnectivity utility charges as Royalty , has been considered in a recent decision by Hon ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) Ors. in ITA Nos. 160-164/2015 ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015- 16 vide order dated 14.07.2023. 5.8 He thus submitted 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. 6. On the contrary, the Ld.DR relying on the orders pass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. 7.2.3 We also note that 'Intellectual property' as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. 7.2.4 We refer to the commentary in Prof.Klaus Vogel's Commentary on Double Taxation Convention, wherein, the term Royalty is defined as under: Paragraph 2 contains definition of the term 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... optic fibre or by any other similar technology, whether or not such process is secret. 7.2.9 By insertion of Explanation 5 6, meaning of word 'Process' has been widened. As per these explanations, the word 'Process' need not be secret , and situs of control possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of Royalty as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to, transfer of all or any rights or 'use of', in the domestic law. As per Explanation 5 6 , the word 'process' includes and shall be deemed to included, transmission by satellite (including up- linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not 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. 7.2.10 We may also refer to the following decisions of AAR wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid not merely for the usage of equipment in praesenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in prasenti but under a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in 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 conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the key word 'use'. The expression 'use' has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal Co. v. Secretary to Government of Punjab [1998] 5 SCC 574, the Supreme Court noted that 'in its ordinary meaning', the word 'use' as a noun, is the act of employing a thing; putting into action or service, employing for or applying to a given purpose . In the New Shorter Oxford Dictionary, more or less the same meaning is given. The very first meaning noted there is: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are: Does the availment of service involve user of equipment belonging to BT or its agent by the applicant ? Is the applicant required to do some positive act 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 usin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that the bulk of consideration paid is for the use of that item of equipment. 13.3 In cases where the customers make use of standard facility 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use reads as follows : (iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property; It was not disputed before us on behalf of the assessee that the nature of the activity carried on by it is the same as in the case of Asia Satellite Telecommunication Co. Ltd. (supra). If that is so, we have to hold, respectfully following the order of the co-ordinate Bench, that there is a process involved in the activity carried 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the words secret formula or process which indicates that both the words formula and process are qualified by the word secret . The requirement thus under the treaty is that both the formula and the process, for which the payment is made, should be a secret formula or a secret process in order that the consideration may be characterised as royalty. We do agree with the argument 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot fall within the ambit of Royalty under section 9(1)(vi) Explanation 5 6. 7.2.15 We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of Royalty under India- Japan 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. 7.2.16 On perusal of the agreement between the assessee and the end users placed at pages 46 to 64 of paper book for A.Y. 2010-11, 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 12 of India-Japan DTAA. 7.2.17 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant to the effect that, as a deductor, it cannot be held liable for non-reduction of tax at source for payments made for the Assessment Year 2008-09 to Assessment Year 2012-13 on the basis of a subsequent amendment to Section 9(1)(vi) whereby Explanation 5 and 6 were introduced? 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. 7.2.19 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT s view that DTAA cannot be considered in proceedings 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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this question also needs to be answered against the Revenue. 24. The sixth question is whether assessee can be held liable for non-reduction of tax at 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. 7.2.20 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. 7.2.21 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
