TaxTMI 
TaxTMI 
2012 (8) TMI 741
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.... will link the Terminal Stations in India, UAE, Oman, Djibouti, Saudi Arabia, Egypt, Libya, France, Monoco, Gibraltar, Portugal and U.K. As per the C&MA, STC is required to make an initial investment of $ 50 million in order to acquire 7.1265% stake in the EIG cable system. 3. As per the agreement among the consortium members, the terrestrial and submarine portions of the EIG cable system have been divided into segments connected through various Terminal Stations. The segments have been further divided into sub- segments which is to provide connectivity between different Terminal Stations across the system. The segment that terminates at the Terminal Station (T13) located at Mumbai is referred to as S4j, being part of Segment 4. There is a capacity allocation to each of the consortium members in respect of portions of the EIG cable system based on the proximity to the country to which the consortium member belongs. The concerned member of the consortium is entitled to transfer capacity in the EIG cable system capacity, to other telecommunication entities from its allotted capacity on a private basis with the condition that the transferring EIG party should cause the recipient to....
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.... That part of the cable system falling within the territory of India had been allocated to an Indian member of the consortium and the grantor SAT was not its owner. The concerned segment of EIG system was not wholly lying within the territory of India. But, the capacity under segment S4j upto Terminal Station 13 allocated to SAT may be within the territory of India, but since STC is merely recouping its costs from the applicant to take part ownership in the system, no income arises to SAT in India that could be taxed as capital gains in India. STC and the applicant are not associated enterprises in terms of section 92A of the Act so as to attract sections 92 to 92F of the Act. Paragraph 6 of Article 13 of the DTAC ensure that the gains cannot be taxed in India since STC is a tax resident of Saudi Arabia. 7. The stand adopted by the Revenue was that the EIG Cable System in which SAT holds 7.1265% stake is not an independent asset which can be transferred by the stake holding company. The capacity acquired by SAT under the C&MA Agreement is not capable of being transferred or sold independent of the C&MA agreement. The applicant was paying a lump sum consideration for the right to....
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....'. The allocated party continued liable to the others notwithstanding the transfer, for claims arising out of violations by the transferee and any injury, loss or damage. Notwithstanding the transfer of its Capacity, the transferor was to remain ultimately liable for any amounts due under the agreement attributable to the transferred Capacity Assignment of rights, and obligations could only be in terms of clause 12. With the prior written consent of the Management Committee constituted under the agreement, a party could assign, sell or transfer the whole of its rights and obligations under the Agreement and the transfer will be subject to the transferee acceding to the EIG agreement. 9. On the strength of this, STC entered into the Capacity Transfer Agreement with the applicant dated 5.3.2009. It does not purport to be a transfer of the whole of the rights and obligations of STC. It is recited in the preamble, among other things, that under the EIG C&MA, an EIG party may transfer part or all of its 'Terminal Point Right of use' to a telecommunication entity to whom it can transfer its Allocated Capacity in accordance with the agreement. Since the applicant was desirous of acquir....
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....th a right in it to share the user with another. The agreement between STC and the applicant also suggests that it is only the right to participate in the use of the EIG System that is given to the applicant. It is discernible from the agreements that a transferee like the applicant is only permitted to operate and use the capacity and permitted to activate it at the relevant terminal point. The restraint placed on the applicant from transferring the capacity to any third party and the reverting back of the rights of the applicant to STC on the termination of its agreement with STC negates the theory of a part of the ownership having passed to the applicant. 11. A transfer of a capital asset is different from the transfer of a right to use exclusively a part or segment of the system. I am therefore, not in a position to accept the argument on behalf of the applicant that what is involved is the transfer of a Capital Asset that generates capital gains. Hence the argument that what is generated is Capital gains cannot be accepted. 12. It is then argued that what is paid as consideration for the exclusive right to exploitation of the segment, is only reimbursement and it is not ....
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....tion. The concept of reimbursement does not arise. Even if the applicant does not pay STC, the obligation of STC to pay the consortium will remain. The applicant also does not have an obligation to pay the consortium. It has entered into no agreement with the consortium. What is to be seen is the character of the payment based on the payer and what he pays for. So viewed, what the applicant has paid STC is for the right to use the system with a right to access it and exploit it. 15. What is the right to use in this case? That is the right to access the particular segment of a larger system to use the capacity of the system powered by the equipments of the whole system. The consideration paid for this right to access and the right to use and exploit the system, is royalty according to the Revenue. It is pointed out that Explanations 5 and 6 to Section 9(1)(vi) of the Act introduced by the Finance Act, 2012 with retrospective effect, makes it clear that the consideration being paid by the applicant to STC is royalty under the Act. Even otherwise, it was a right to use a process and a right to use equipment coming within Explanation 2 to section 9(1)(vi) of the Act. 16. Under pa....