TaxTMI 
TaxTMI 
2013 (11) TMI 1058
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....andwidth/Telecom Services outside India is royalty for the 'use of, or the right to use equipment' under Section 9(1)(vi) of the Act? 2. Whether the Tribunal was right on facts and in law in holding that the payments received by the appellant from the Indian customers for provision of Bandwidth/Telecom Services outside India is royalty for the 'use of, or the right to use equipment' under Article 12(3)(b) of the Tax Treaty?" The assessee seeks admission of T.C.(A)No.230 of 2012 on the following substantial questions of law: "1. Whether the Honourable Tribunal was right in fact and in law in holding that the payments received by the appellant from its Indian customers for provision of Bandwidth Services outside India is a royalty for the use of or the right to use equipment under Section 9(1)(vi) of the Act? 2. Whether the Honourable Tribunal was right in fact and in law in holding that the payments received by the appellant from its Indian customers for provision of Bandwidth Services outside India is a royalty for the use of or the right to use equipment under Article 12(3)(b) of the Tax Treaty? 3. Whether the Honourable Tribu....
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....ld that no interest is levied where tax was deductible at source on the income chargeable to tax?" 2. The assessee company, Verizon Communication Singapore Pte Limited originally called as MCI Worldcom Asia Pte Limited, and part of the global telecommunication conglomerate of MCI, USA is a non-resident company engaged in the business of providing international connectivity services (bandwidth services or telecom services in the Asia Pacific region including customers in India for transmission of data and voice. Being a point to point private line used by an Organisation to communicate between offices that are geographically dispersed through out the world, the assessee provides a private link that can transport voice data and video traffic between the offices in different Countries. Thus, IPLC is an end to end managed dedicated bandwidth service that provides internet service to customers for various applications. The international leg of the telecom services provided outside India is provided by the assessee. Since in India, under the Indian Telecom Regulations, only the licensed service provider could provide international long distance communication services on the Indian leg....
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....network used for rendering the service. The assessee contended that no part of the international network is exclusive for any Indian customer or customers as a whole. The agreement between the assessee and the customers being one for rendering of service by the assessee, the payment could not be termed as 'royalty'. The collection of fee for the usage of standard facility would not amount to payment made for providing technical services. Thus the assessee contended that the question of any liability to pay advance tax or interest under Section 234B of the Income Tax Act did not arise. 4. The Assessing Officer rejected these contentions holding that the receipt of consideration for rendering of services to the end user is workable only when the assessee and the VSNL are considered to be rendering the service jointly to the end user in India. The agreements between the assessee and the end user and the VSNL are part of one transaction, but executed through several agreements/arrangements. The payments made by the customers for the offshore services rendered by the non-resident assessee are part of one single agreement to provide IPLC and hence, the receipts are taxable as ....
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....SNL for providing Indian end services pursuant to the contract it has with the customers. According to the assessee, its associates MCI Worldcom India Pte Limited (MCI India) has no authority to negotiate or bind the assessee in any manner vis-a-vis a potential customer. Hence, the assessee has no permanent establishment in India. MCI India provided marketing support to the assessee for which it is remunerated at an arms length basis. Considering the nature of services rendered, the consideration received could not be termed as 'royalty'. The Tribunal found that as per the agreement, the customer acquired significant, economic or possessory interest in the equipment of the assessee to the extent of the bandwidth hired by the customer. This was made available to the assessee on a dedicated basis. The agreement with VSNL for split billing is only to overcome the telecom regulatory regime prevailing in India. VSNL was a sub-contractor and a provisioning entity on behalf of the assessee and the IPLC is a hightech circuit comprising transmission cables and sophisticated equipment. The Tribunal held that even if the payments are not treated as not relating to the use of the '....
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....the equipment. Thus the assessee places reliance on the decisions reported in (2001) 251 ITR 53 (Skycell Communications Limited and another V. Deputy Commissioner of Income Tax and others), 80 TTJ 191 (Wipro Ltd., V. ITO) and 2005 3 SOT 529 (Software Technology Parks of India V. ITO) and submitted that the payment could not be brought under the head of 'royalty'. The arrangement between the assessee and VSNL is a bona fide one based on domestic law. The assessee is not a party to the agreement between MCI Global Access Corporation (Wcom) and VSNL and MCI Global Access Corporation (Wcom) had sold the nodal equipment to VSNL. The provision for transfer back to WCom does not, in any manner, change the VSNL's ownership rights. As regards the role of MCI World Com India, it merely provides liaising and co-ordinating services and this could not be treated as permanent establishment. He submitted that IPLC services provided by the assessee could be compared with the goods transporter. There is no conversion of data or voice as in the case of the transponder services, as discussed in the case of New Skies Satellites N.V. Vs. ADIT (Int. Tax) reported in 319 ITR 269. In IPLC, the....
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....ent' in the assessee's agreements. The assessee provided connectivity to the customer at its premises at both ends of the network and the connectivity is for a dedicated bandwidth capacity for the agreed time. The customer could now monitor the extent and quality of signal transmission at various nodes located all along the network pathway through 'Network Management Software'. The customer thus paid for the use of and the right to use of the equipment. It pointed out that the assessee engaged the services of VSNL as a provisioning entity for performing certain services in India for which the assessee did not have the license. Thus the Revenue contended that the receipt is nothing but royalty. 10. Learned Solicitor General appearing for the Revenue reiterated the above by taking us through the various clauses in the agreements and submitted that the character of the receipt clearly fits in with Section 9(1)(vi) read with Explanation 2 (iva) of the Income Tax Act for equipment royalty; alternatively, it can also be taxed as process, falling under Explanation 2(iii) to Section 9(1)(vi) of the Income Tax Act that receipt would nevertheless be held as 'royalty....
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....ence 'royalty'. Even otherwise, it is a right to use a process and a right to use equipment coming within Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 13. Referring to the Board's circular on the amendment 2012, he submitted that the declaratory amendment now clears whatever doubts that were there on the scope of the Explanation. Referring to Article 12 of the DTAA, he submitted that there is no prohibition therein in assessing royalty in India. As per Article 3.2 of the DTAA, the term not defined in the agreement would be understood by the definition contained in the law of the contracting state. Thus, going by the Explanation giving the definition on 'royalty' and 'process', the receipts are rightly taxed herein. 14. As regards the levy of penalty under Section 234B of the Income Tax Act, he pointed out that unless there is actual deduction of tax as TDS, there can be no escapement from the provision of Section 234B levying penalty. In this connection, he relied on the decision reported in (2011) 2 SCC 408 (CIT V. Rolta India Ltd.), as well as the unreported decision of this Court in T.C.(A)No.202 of 2007 dated 23.7.2013 (Commissioner....
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....a source rule was provided in Section 9 for taxing the income of a non-resident through insertion of Clauses (v), (vi) and (vii) in sub-section (1) of Section 9 for income by way of interest, royalty or fees for technical services respectively by creating a legal fiction in Section 9 that even in cases where services are provided outside India, it is the situs of the payer, or the situs of utilisation of service by the payer which would determine the taxability of such services in India. 19. After the decision reported in (2007) 288 ITR 408 (Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax) that there should be territorial nexus between such income and territory of India and that the services had to be rendered in India and utilised in India, an explanation was inserted below sub-section 2 of Section 9, with effect from 01.06.1976 under Finance Act, 2007 clarifying that when income is deemed to accrue or arise in India under Clauses (v), (vi) and (vii) of sub-section 1 to Section 9, such income shall be included in the total income of the non-resident regardless of whether the non-resident has a residence or place of business or business connection in India. T....
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....velopment among nations, different Countries enter into bilateral treaties convention, agreements for getting relief against double taxation called Double Taxation Avoidance Treaties or Convention Agreements. The power to enter into a treaty is held as an inherent part of the sovereign power of the State. By Article 73 of the Constitution, subject to the provisions of the Constitution, the executive power of the Union extends to matters with respect to which the Parliament has power to make laws. In the decision reported in (2003) 263 ITR 706 (SC) (Union of India v. Azadi Bachao Andolan), the Apex Court pointed out "the power to legislate in respect of treaties lies with parliament under Entry 10 and 14 of List I of 7th Schedule." As regards fiscal treaties, since the same would have to be translated into an Act of Parliament, a special procedure is evolved by enacting Section 90 of the Income Tax Act enabling the Central Government to enter into agreements with the Government of any country outside India for granting relief in respect of income on which both income tax under the Act and income tax in that country under the corresponding Act in that country had been paid. 22. To....
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....finition of 'royalty'. As is evident from the reading of the provision, 'royalty' means the consideration for transfer of intellectual property rights; for imparting of any information regarding the working of, or the use of the intellectual property rights, use of any intellectual property, imparting of any information concerning technical, industrial, commercial, scientific knowledge, experience or skill; use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44BB; transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films or rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 25. The said amendment relating to 'royalty', particularly with reference to use or right to use any industrial, commercial or scientific equipment, etc. was ....
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....ly whether the U.S. Company had a permanent establishment in India as defined in Article 5 of the Indo-US Treaty? 27. In considering the said issue, the Authority for Advance Ruling considered the meaning of 'circuit' as given in the various dictionaries on science and technology as well as given in the agreement and considered the meaning of the expression 'use or right to use', vis-a-vis the equipment used and the service agreement between the assessee and the U.S company. It pointed out that the service was an unbroken thread running through the entire fabric of agreement between the parties. The Authority further pointed out that the provision of telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the BTA or its agent does not, in the absence of specific and clear indication, amount to a lease of equipment and that the expression rental used here and there in the Agreement was not used in its legal sense nor can it be treated as a decisive factor. 28. Referring to the decision reported in (1990) 77 STC 182 (Rashtriya Ispat Nigam Ltd. V. Commercial Tax Officer, Company Circle, Visakhapatnam) affirmed in 12....
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....l's commentary on Double Taxation Convention, the Authority held that the nature of transaction was only a service and there was no use or right to use the equipment to regard the consideration as 'royalty'. 30. Learned Senior Counsel appearing for the assessee placed reliance on yet another decision reported in (2009) 315 ITR 72 Cable & Wireless Networks India Private Limited V. Director of Income-tax International Taxation, Bangalore). once again, the Authority for Advance Ruling considered the scope of Explanation 2 to Section 9(1)(vi) and (vii) of the Income Tax Act. The facts were that the Indian Company which was part of cable and wireless group of companies was engaged in the business of providing long distance and domestic long distance telecommunication services in India. It entered into an agreement with M/s Cable and Wireless UK (C &W UK) with a view to providing end to end international long distance telecommunication services to its Indian customers of the applicant Cable and Wireless Networks India Private Limited. As per the agreement, the said company was to provide the Indian leg of service by using its own network and equipment and the international....
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....ould nevertheless be treated as 'royalty'. The decisions cited, hence, cannot be pressed into service to understand the scope of the expression 'royalty'. 33. In the decision reported in (2007) 289 ITR 355 (In Re Cargo Community Network Pte Ltd.), relied on by the Revenue, the Authority for Advance Ruling considered the scope of right to use equipment and the consideration paid thereon in the case of the applicant company incorporated in Singapore engaged in the business of providing access to an Internet based Air Cargo Portal known as Ezycargo at Singapore. An agent who books cargo through various airlines could subscribe for the portal - Ezycargo which enables him to access the data bank of the airlines like flight schedules, availability of cargo space etc. It also gave further details like the status of booking to the agent, creating database for various bookings by furnishing the status of the shipment etc. It is stated that the portal transmits data from the agent to the airlines by transmitting from simple English language to Cargo IMP data and on receiving the reply of the airlines converts the Cargo IMP into simple English language and transmits the sam....
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....e Company for providing the password to access and use the portal hosted from Singapore were taxable in India and subject to deduction of tax at source. 34. Again in the decision reported in (2013) 353 ITR 646 (In Re: Dishnet Wireless Limited, Chennai), relied on by the Revenue, the Authority for Advance Ruling had an occasion to consider the issue on 'royalty' and in particular the effect of the newly inserted Explanations 5 and 6 under the Finance Act, 2012. There, the facts were the applicant company was a subsidiary of another Indian company and engaged in the business of providing telecommunication services in a number of telecom circles in India. A company registered in Saudi Arabia, STC for identification, indirectly holds 10.5% shareholding in the applicant company. The foreign company owned and/or controlled and/or operated telecommunication paths, facilities and network infrastructure in the Kingdom of Saudi Arabia and elsewhere. A consortium of STC entered into a construction and maintenance agreement to plan and lay cable system, Europe India Gateway submarine cable, known as EIG, linking the Indian subcontinent and the United Kingdom with Terminal Station....
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....d 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." 36. Referring to the clarificatory amendment to Section 9(1)(vi) by the introduction of Explanations 5 and 6, the Authority held that in view of the amendment, there could not be much doubt that what was paid by the applicant was for a right to use in the process and/or right to use a commercial or scientific equipment. Consequently, the payment was held to be royalty. 37. Recently, in the case of M/s. Poompuhar Shipping Corporation Ltd., V. The Income Tax Officer, Chennai in T.C.(A)Nos.2206 to 2008 of 2006 concerning the case of time charter, this Court, by order dated 09.10.2013, considered the meaning of the expressions 'right to use' and 'equipment' and held that payment made for taking ship on time charter constituted 'royalty' as defined under Section 9(1)(vi) of the Income Tax Act. This Cou....
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.... have always meant and included "by means of", "in consequence of" or "by reason of". Explanation 5. (ii) (iii) iv) (v) income by way of interest payable by (a) (b) (c) (vi) income by way of royalty payable by (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided Provided . Explanation 1 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 ....
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....e fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided Explanation 1. Explanation2. (2). Explanation. 39. The assessee herein has not disputed or made any argument on the aspect as to whether cable is an equipment or not nor on the width of the expression 'royalty', meaning of the term 'royalty'. Except to say that there was no use of any equipment and that there was rendering of service only, the assessee has not made any submission on the expression 'use or right to use'. The assessee has also not made any submission on the aspect of permanent establishment, even though the question as such has been raised in the substantial questions of law by the assessee and the written submission had touched on the issue on....
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....changed only in order to facilitate the transmission of signals so that, there is no distortion between the signals that are being received and the signals that are being relayed from the transponder. The transponder operations are commonly known, which are carried out not only in satellite transmission but also in the case of terrestrial transmission. There is no change in the content of the signals whatsoever that is carried out by the appellant in the transponder. Thereafter, the signals leave the transponder and are relayed over the entire footprint area where they can be received by the facilities of the appellant's customers or their customers. Its role is confined in space where the transponder which it makes available to its customers performs a function which it is designed to perform. It is claimed by the appellant that no part of the income generated by it from the customers to whom the aforesaid services are provided was chargeable to tax in India and for this reason no return income was filed in India. The Tribunal found that the transponder was not equipment and hence the payment made by the TV channels to the appellant could not be regarded as one for use of equi....
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....othing to do with the permanent establishment in India and hence there was no process carried out in India or was there any business in India which could be attributed to the Indian territory. Thus the High Court held that the income earned by the assessee would not qualify as 'royalty', as defined in Explanation 2 to Section 9(1)(vi) of the Income Tax Act. As seen from the facts, the said judgment was rendered in the year 2011, much before the amendment under Finance Act, 2012. Further after the decision reported in (2007) 288 ITR 408 (Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax) an explanation was inserted below sub-section 2 of Section 9, with effect from 01.06.1976 under Finance Act, 2007 to get over the decision of the Supreme Court. Hence this decision of the Delhi High Court is distinguishable and has no relevance to the case on hand which has to be considered on the strength of the law prevailing now. 43. Technological advancement in the field of communication has brought in sea change in public ability to connect and communicate seamlessly with people in different parts of the World. Computer and related services are considered as the bas....
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.... straight to the internet backbone, for which, the customers pay a premium for the leased line and it is supported by a comprehensive service level agreement. 47. Leased lines are normally made up of the following equipments, viz., a router usually managed by the service provider and is installed into a customer room; the circuit is connected with a connector; Local loop circuit is usually provided by the carrier linking the router to the service provider's local point of presence (POP); Network Termination Equipment (NTE) is attached to the wall in the customer's room and is connected to either a fibre optic or copper local loop circuit. Depending upon location, a back haul circuit may be used to link a customer to the service provider POP and then on to the internet gateway. This takes place behind the scenes and may run over a third party' national network. CPE - the Customer Premises Equipment is the telecommunication equipment owned by an organisation and located on its premises. It refers to all types of routers, switches, PBXs (Private Branch Exchanges), telephones, key system facsimile products, modems, voice processing equipment and video communication equip....
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.... the customer who feeds the data/voice inputs into the IPLC network at the interface located at his place and also receives the data/voice inputs coming from the opposite direction. It is upto the customer whether he uses the hired Dedicated Bandwidth capacity fully, in part or not. In any case, the agreed charges are payable by the customer to the assessee company. The DCE is installed at the customer premises and is owned by the assessee company, MCI, since it is the point of connection between the customer and the carrier. It provides clock and switching services to the data from the customer to the carrier. The assessee owns the Data Circuit Termination Equipment (DCE) installed at the customer premises. The customer is given a choice only in respect of the Data Terminating Equipment (DTE). The DTE can be either supplied by the assessee or can be acquired and installed by the customer himself in accordance with the terms and conditions of the 'MCI Asia Pacific Master Services Agreement'. 51. The reply affidavit disputes certain statement in the affidavit filed by the Revenue on technical aspects that the Data Terminal Equipment equal to terminals, personal computers,....
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....54. The Master Terms gives the definitions of various terms used. "Customer Equipment" is defined to mean equipment, systems, cabling and facilities provided by Customer and used in conjunction with the service equipment in order to obtain the service and includes CPE. "CPE" means equipment installed by MCI whether owned by the customer or not, which is located at the customer site for the purpose of receiving a service. "Service" is defined as specific service supplied by MCI or a Provisioning Entity to customer identified in a relevant service order and any related service equipment support or consulting provided. "Service Equipment" means the equipment, systems, cabling and facilities provided by or on behalf of MCI at Customer Site in order to make the Service available to customer. Ownership of the Service Equipment does not pass to customer from MCI and does not include the network. "Provisioning Entity" means the entity providing a Service to Customer and may include any MCI affiliate or sub-contractor, including licensed carriers or service providers in countries where MCI is not licensed. "Delivery of Service" is defined that MCI will determine the most appropriate means o....
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....s determined by MCI and as applicable from time to time." 57. Clause 4.4 refers to CPE rental and Clause 4.5 refers to maintenance Services. The Clause further points out that MCI shall be released from its maintenance service obligations if customer or any other person (whether authorised or not) (i) alters, modifies or moves the CPE; (ii) uses the CPE for the purposes other than the intended purpose; (iii) attaches devices to the CPE not supplied by the original manufacturer without MCI's approval or not supplied by MCI; or (iv) performs or attempts to perform maintenance services on the CPE or any portion thereof. 58. As regards the customers' responsibilities, it is stated that the customer has to have the site prepared and ready for installation of the CPE by MCI or its designee on the delivery date specified by MCI. The clause further states that the customer is solely responsible for ensuring that the Customer Equipment is compatible with MCI's requirements and that it continues to be compatible with subsequent revision levels of MCI provided equipment and services. The customer has to maintain each analogue line and to ensure installation of the CPE procee....
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....f such software must be in accordance with the accompanying licence agreement. 61. In the background of this Master Agreement, when we look at the Service Order Form, we find that from the additional terms and conditions of service attached to the order form that the customer has ordered for IPLC services and has appointed MCI as its agent with regard to the provision of direct supply services. The order form defines provisioning entities as the local licensed telecommunication supplier for any portion of the service not provided by MCI or its affiliates; MCI, if requested by the customer in the service agreement has to arrange the provisioning of direct supply services on the terms specified therein, namely, (i) the customer appoints MCI for the duration of the term; should be the customer's sole agent for the provisioning and continuing supply of the direct supply services described therein; (ii) MCI shall have authority to select the provider of the Direct Supply Services; (iii) the Customer shall contract as principal with the provider of the Direct Supply Services on the terms and conditions of supply notified by MCI to customer and (iv) MCI will act as the customer'....
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....es or shall be fully responsible for effecting payment for his portion of the International Private Leased Line including local lead charges to VSNL in the event of non-receipt of payment from distant end by VSNL. 65. There is also an agreement between MCI Worldcom Asia Pte Limited and Videsh Sanchar Nigam Limited on International Private Leased Circuit. One stop shopping service agreement specifically gives the details of the service description as OSS Service by which customers can order both of the half circuits comprising an IPLC Service through a single point of contact at either of the Administrations, with the option of requesting SEO(Single end ordering), SEB (single end billing) and SPFR (single point fault repairing). The agreement further states One Administration, selected in each case by the customer, shall be the single point of contact for the customer in respect of the IPLC Service and shall liaise in relation thereto with the customer and with the other Administration. 66. The provision of OSS Service is without prejudice to the contractual relationship that each Administration has or may have with its respective customers. Each Administration shall separatel....
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..... If the customer requests SEB, Administration A will communicate this to Administration B. On receipt of Administration B's invoice, Administration A will convert Administration B's charges into the local currency of Administration A at the appropriate prevailing exchange rate as at the date of Administration A's invoice and present these together with the charges of Administration A to the customer for payment. The invoice to the customer shall show clearly that it represents charges on behalf of both Administrations and shall set out each Administration's charges separately. 71. The Provisioning Phase is given in Clause 5.3 of the agreement. According to this, Administration A will schedule end-to-end testing with Administration B. End-to-end testing will be inclusive of local loops to both customer locations. Upon satisfactory completion of the end-to-end testing, Administration A will advise the customer that the service has been satisfactorily established. Billing will commence after the satisfactory completion of the end-to-end testing. As regards the relationship of the Administrations, it is stated that the Administrations are independent business entiti....
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.... from the service provider on terms and conditions mentioned therein in the agreement. The nature of services to be provided are given in appendix (1) to the agreement, namely, Market Development, Providing information on potential customers, liaising with potential customers for dispersing information about the company' products and services, liaising with customers for obtaining feedback on behalf of the company and exploring new service lines/ventures for the company in India. The obligations of the service provider are given in clause 2 of the agreement. The service fee and payments are given in clause 5 of the agreement and the duration of the agreement at the initial term is for a period of two years. The agreement states that at all times, the service provider shall only provide marketing assistance, advice and other information to the company. 75. MCI Global Access Corporation and VSNL have also entered into agreement, called VSNL/WCom Global Network Services, on 8th February, 2001. The scope of services are given in Clause 3; the functions, practices and procedures required to enable WCom and VSNL are described in Appendix A. The intention of entering into the agree....
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....ffiliate in India who arranges for the assessee MCI singapore to enter into an agreement with the customer on the terms and conditions of the service provided by it. 77. Learned senior counsel appearing for the assessee submitted that even though the assessee provides end to end service, as far as the half of the leg upto the Indian sub-continent is concerned, it has nothing to do with the maintenance or providing service by VSNL. Whatever bandwidth is assured is again a shared one. There are no equipment strictly speaking of the assessee to process the data of the customer. 78. Learned senior counsel appearing for the assessee submitted that the aforementioned agreements showed that the consideration received is only for rendition of services and not for individual use or right to use any equipment/ process. As the assessee required to provide the bandwidth services to customers in India not having the necessary license under the regulatory laws of India, it entered into an agreement with VSNL for providing and ensuring the seamless performance/delivery of bandwidth services. Thus, the respective service provisioning entities, namely, the appellant outside India and VSNL wit....
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.... contained in the Master agreement indicating that the assessee had provided the infrastructure and equipment to the customer; that the customers are promised certain bandwidth for their use at all times, the services provided to various customers of the assessee in India by affiliates of MCI, such as MCI India Private Limited, MCI Global Access Corporation USA, payments for these services are made on the account of MCI Singapore outside India. In a statement made by Mr.Mohan Ramaswamy, employee of MCI WorldCom India Private Limited, it is stated that he along with a team of Engineers are to attend to fault resolution service for various customers in India and for this purpose they co-ordinate with VSNL and MCI, USA. He reported directly to MCI USA and he is not reporting to any of the authorities of MCI India. 81. The Revenue further pointed out that the equipment is transferred to VSNL by MCI for a token payment of Rs.10,000/-, and the ownership remained only with MCI because VSNL does not have the right to sell the equipment and the equipment is to be handed over at any time to MCI on demand for payment of Rs.10,000/-. Payment by VSNL was only a token payment and hence not th....
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....arned Solicitor General submitted that the two administration exchange information between Indian half and outside India of the assessee showed that the customers have to pay for both part; in addition to the above, service is defined as specific telecommunication service rendered by WorldCom outside India to the customer and as identified in the relevant service order. The service order is a request made by the customer, the service equipment at the configuration of the assessee is installed in the premises of the customer, the title to which is not passed on to the customer and the form prescribe the service charges payable. VSNL's role is only that of a provisioning entity and it cannot in any way control the use of the equipment by the customers outside India or determine the configuration at which the equipment is installed even within VSNL's premises and the services are mirror image of the other. Thus it is clear that the appellant would be responsible for setting up the network and connecting to the Indian half of the network. Clause 3.08 of the service agreement with the VSNL shows its role to carry on international traffic in and out of India. Thus, equipment and ....
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....#39; so too the various clauses in the agreements which are to be looked at in a holistic manner. The agreement entered into between the assessee and the customer herein is for providing of seamless point to point private line so as to enable the customer to communicate between its office that are geograhically dispersed. The service order reveals that the parties had agreed for a particular bandwidth and in entering this the assessee had provided the necessary equipment at customer premises, configured and customised to ensure that the customer gets the uninterrupted connectivity from one end to the other end in different geographical point. 87. A reading of the agreement with VSNL also shows that the configuration at the customer's end and at the VSNL end and in the other half managed by the assessee match with each other and compatible for ensuring the integrated service to the customer. The arrangement between the assessee and the VSNL has to be necessarily integrated and technically and financially viable having regard to the close functional relationship between the two. For this, the Indian customer pays through the single billing system called OSS for the integrated ....
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....ment with the VSNL has to have the compatibility to match to the mirror like operation in the other half of the leg to see that the end to end connectivity is really assured to the customer. Being an end to end dedicated telecommunication transmission for customers' exclusive use, leased line are available only to those who seek private circuits. The customers' premises equipment thus refers to routers, switches, private board exchange, installed in a customers' premises. Thus, in the bandwidth services for transmission of data/voice through IPLC network, the data/voice are converted into signals at the customer' end which are then picked up by the local loop service provider and carried into the Indian carrier, namely, VSNL's half circuit. VSNL carries this to the international terminal which interconnects the domestic network to the international network. An international terminal is present in the appellant's side of half circuit performing identical function as in the Indian half circuit, where the steps in respect of Indian half circuit is replicated and the recipient receives the voice/data. The agreement is silent on what is involved in the ITOC in th....
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.... as a whole and it is difficult to accept the case of the appellant seeking dissection of the same as two independent contract. 93. Learned senior counsel appearing for the assessee submitted that the Master Agreement is a template format used across all contracts globally and the service performance consideration would vary from Country to Country. Because of the Indian Regulatory restriction, the assessee is disabled in providing bandwidth services within India. He submitted that the agreement between the assessee and VSNL showed that they are independent parties and one cannot assist/represent on behalf of the other. 94. It is no doubt true that the agreement between the assessee and the VSNL states that one is not the agent or the representative of the other. This, however, does not mean that VSNL has provided its server independently without any connection whatsoever with the service order that the customer places with the assessee. A reading of the service agreement shows that parties agreed that the provisioning entities in the Indian half circuit shall be VSNL and in getting the seamless end to end connectivity, the customer enters into a further agreement with VSNL. ....
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....ot contract to receive a technical service, What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes to, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable in fixed telephone service. Neither service can be regarded as "technical service" for the purpose of Section 194J of the Act."..... "At the time the Income-tax Act was enacted in the year 1961, as also at the time when Explanation 2 to Section 9(1)(vii) was introduced by the Finance (No. 2) Act, with effect from April 1, 1977, the products of technology had not been in such wide use as they are today. Any construction of the provisions of the Act must b....
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....e order form clearly points out that the assessee is at liberty to change the equipment, modify the configuration or change the routing of the network in providing the service. (Clauses 2.2, 2.3 and 2.7 of the Service agreement) and the assessee could provide the service either directly or through a provisioning entity (clause 2.1). Thus the assessee provides the Indian customer an integrated communication system called IPLC, the part of which outside India is taken care of by the assessee and the part inside India through VSNL, which cannot be dissected as two independent contract having no bearing at all on each other. In the light of the above, we reject the contention of the assessee. 98. Article 12 of the DTAA between India and Singapore is the relevant article on royalty which reads as under: ROYALTIES AND FEES FOR TECHNICAL SERVICES 1.Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2.However, such royalties and fees for technical sevices may also be taxed in the Contracting State in which they arise and according to the laws of that S....
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....agent, nominee, or transferee of such person. 5. Notwithstanding paragraph 4, "fees for technical services" does not include payments: a. for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); b. for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; c. for teaching in or by educational institutions; d. for services for the personal use of the individual or individuals making the payment; e. to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14; f. for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5; g. for services referred to in paragraphs 4 and 5 of Article 5. 6. The provisions of paragraphs 1 and 2 shall not apply if t....
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....hus, apart from the relevance and applicability of Clause (iva) that the payment is for the use or right to use of the equipment, the Tribunal held that payment for the bandwidth amounts to royalty for the use of the process. The Tribunal also pointed out that out by reason of the long distance, to maintain the required speed, boosters are kept at periodical intervals. Going by this too, in any event, the payment received by the assessee was rightly assessed as 'royalty' and would constitute so for the purposes of DTAA. 100. Although the assessee has submitted a voluminous paper book on case law, except for those that are discussed above, others were not touched by the assessee and hence we have not considered it necessary to discuss these decisions. We may also note that except for making the submission on the question that the transaction is only a service and hence the consideration is not royalty, no arguments are made on permanent establishment or on the effect of the amendments. The assessee had submitted a detailed written submission on the clauses in the agreement and on the legal submissions. After considering the same, with reference to the arguments made by th....
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....of the process and this by itself does not take the assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is 'royalty' within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Income Tax Act. 102. This leaves us with the last of the question, namely, the relevance of Section 234A,234B and 234D of the Income Tax Act. As far as levy of interest under Section 234 B of the Income Tax Act is concerned, the assessee submitted that the said provision would be applicable only in cases where the tax payer is liable to pay advance tax but defaults in payment of advance tax. Thus, unless there is a liability to pay advance tax under Section 208 of the Income Tax Act, the question of invoking section 234B(1) will not arise. Learned Senior Counsel further pointed out that as per Section 209(1)(d), the advance tax liability has to be computed after reducing the tax deductible at source from the estimated total tax liability. When the tax deducted at source takes care of the entire liability, there would be no advance tax payable; consequently interest under Section 234B could not be levied. Apart fr....