TaxTMI 
TaxTMI 
2015 (1) TMI 1018
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....ese aspects, this appeal is dismissed on becoming redundant. 2. The grounds of appeal taken by the assessee are running into four pages which contain arguments also. Therefore, they are not in consonance with Rule 8 of the ITAT Rules. The issue involved in all these ten appeals is common and the issue is, whether the assessee has to be treated in default for non deduction of tax at source on IUC payments made to non resident telecom operators and capacity transfer payments made to Belgacom. All other issues pleaded in the grounds of appeals are the arguments in respect of this main issue. Therefore, we will take each proposition raised by the learned representative on the strength of their grounds of appeal in seriatim. 3. The brief facts of the case are that the assessee company was incorporated in India on 7.12.1995 under the Companies Act, 1956. It is engaged inter alia in providing international long distance (hereinafter referred to ILD) services to its subscribers, as well as subscribers of its customers, pursuant to the ILD license granted by the Department of Telecommunication (hereinafter referred to DoT) by the Govt. of India. As part of its ILD services business, t....
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....deduction at source (TDS) to Belgacom and NTOs. He also noticed that NTOs had also not filed any application before the Department for lower or nil rate of deduction of tax at source. According to the Assessing Officer, as per section 195 of the Income Tax Act, 1961, any person responsible for paying to a non resident, not being a company, or to a foreign company, any interests or any other sum chargeable under the provisions of the Act (not being the income chargeable under the head salary) shall at the time of credit of such income to the account of the payee or at the time of payment thereof in cash, or by the issue of a cheque or draft or by any other mode, whichever is earlier deduct income tax thereon at the rate in force. In this way the Assessing Officer had issued a show cause notice to the assessee on 6th June, 2011 u/s 201, seeking its explanation for not making tax deduction at source u/s 195 on the capacity transfer payment made to Belgacom. On 15th May, 2012, Assessing Officer had issued another notice seeking details of all payments made by the assessee to NTOs and Belgacom during the financial years 2007-08 to 2010-11. The details have been furnished which are notic....
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....the learned representative on each proposition in the later part of this order. 8. Dissatisfied with the order of the Assessing Officer, the assessee carried the matter in appeal before the learned first appellate authority. The CIT (A) made a lucid analysis of the law and facts. Assessing Officer in order to determine that element of income is involved in the payments made to NTOs for inter connectivity as well as payments to Belgacom for capacity transfer payments examined the issue with 5 different angles as extracted (Supra). The learned first appellate authority has upheld the taxability of payments u/s 5(2) and also upheld that processes royalty was involved. The CIT (A) did not adjudicate the issue, whether in the payments, "fee for technical services" is involved or not? The CIT (A) further held that income under the head "other income" is not involved in these payments. When we take each proposition, we will make the discussion about the findings of the learned CIT (A). 9. The first fold of the grievance of the assessee is that order passed by the learned Assessing Officer is bad in law and void ab initio. According to the assessee the order is barred by limitation, ....
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....(2) was to be issued within six months from the end of financial year in which the return is furnished and for re-opening of an assessment u/s 147; time limit has been provided from 4 to 6 years from the end of the relevant assessment year as provided u/s 149. Thus the action of the Assessing Officer is within a reasonable time. Therefore, we do not see any reason to interfere in the findings of the CIT (A) on this issue. This ground of appeal is rejected. 11. In the second fold of grievance, the assessee has pleaded that the learned CIT (A) has erred in not holding the order of the Assessing Officer to be bad in law and void ab initio. In the absence of any conclusive findings of the Assessing Officer with respect to the nature and characterization of the impugned payments, which have been held to be in the nature of royalty, fee for technical services and other income by the Assessing Officer, which position is untenable in law, because a particular payment cannot be taxed under three different provisons. 12. With the assistance of the learned representatives, we have gone through the record carefully. As observed earlier, the Assessing Officer has examined the issue under ....
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....On the other hand the learned Counsel for the Revenue submitted that there is no conflict in the position of law. The ITAT Ahmedabad Bench in the case of Adani Exports has explained the position of section 5(2)(b) of the Income Tax Act, vis-à-vis section 9(1) of the Income Tax Act, 1961. 14. We have duly considered the rival contentions and gone through the record carefully. Section 5(2) has a direct bearing on the controversy. Therefore, it is pertinent to take note of this section, which read as under: "Section 5(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. Explanation 2.-For the removal of doubts, it is hereby declared ....
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....in respect of a non resident by section 42(1). It could not be accepted that the charge of a nonresident to income-tax on profits and gains actually received or accruing or arising in India was, by virtue of the words "subject to the provisions of this Act", in any way modified by section 42(3). The relief afforded by section 42(3) applied only to a case in which the profits and gains were deemed u/s 42 to accrue or arise in India and not to a case in which they actually so accrued or arose or were received in India. 84. The analogy between sections 4(1) and 42(1) of the 1922 Act and sections 5(2) and 9(1)(iii) cannot be lost sight of. The observations in the Hira Mills decision (supra) therefore, fully support the Revenue's stand that if an income primarily falls u/s 5(2), resort to section 9 is not necessary. The non-obstante clause embodies in the expression "subject to the provisions of this Act" occurring in section 5(2) does not lead one to the conclusion that the charging provision in section 5(2) is controlled by another charging provision in section 9(1). All that the expression conveys is that the total income of a non resident from whatever source derived on account o....
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.... resident constitute a business connection in India. In that situation only so much income shall be taxable in India as is relatable to operations carried on in India. As discussed earlier section 5(2) of the Act provides that the total income of a non resident would include income accrues or arise, received. In order to fulfill the requirements contemplated under this provision, that same income to be taxed in the hands of a non resident under the aforesaid provisions, then such income should accrue or arose to such non resident in India. Both the learned Revenue authorities have construed that since the payments have been made from India, therefore, income has arisen or accrued in the hands of non resident. They lost sight to the fact that non resident has no business connection in India. The connectivity services are provided by the payee outside India and also utilized by the assessee outside India. Therefore, to our mind, the learned Revenue authorities have erred in construing that the income has accrued or arisen in India. Similarly capacity transfer payments are for transfer of capacity by Belgacom outside India. The payees have not performed any part of its activities for ....
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....tion traffic of the assessee's subscribers and sub-subscribers of the assessee's customers at locations outside India. As a part of its ILD telecommunication service business, the assessee is responsible for and provides connectivity services to its subscribers in respect of the calls originating/terminating outside India. Thus for the provisions of ILD services the assessee is required to obtain services of NTOs for provision of carriage/connectivity services over the last leg of the communication channel i.e. the leg of communication channel where the assessee does not have a license/capacity to provide connectivity services. The learned CIT (A) has taken note of these activities in a flow chart reproduced in Paragraph 91 of the impugned order. In order to understand the very nature of the activity more scientifically, it is pertinent to take note of the details noticed by the CIT (A) in paragraph 91, it read as under: "91. The sequence of carriage of an international call originating from India and terminating at a location outside India was as follows: * When a mobile subscriber in Delhi made a call to a person in the US, the call would originate on the network of the loc....
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....ank and as per the ECD website etc., On an analysis of the various agreements and other literatures available on the record, the Assessing Officer prima facie formed an opinion that provision of inter connect services by the NTOs to the assessee results in "use of or transfer of right to use of ", the process running on the network of the NTOs to the assessee and hence IUC payment qualify as a royalty under clause a(i) and (iii) of explanation to section 9(1)(vi) r.w. newly inserted explanation with retrospective effect i.e. Explanation 5 & 6 of section 9(1)(vi) of the Act and also under the applicable DTAA. He further observed that provision of inter connect services by the NTOs involves grant of assets to and use of network of the NTOs and equipment forming part thereof by the assessee, hence IUC payment qualify as a royalty under clause (iv-a) of Explanation 2 of section 9(1)(vi) of the Act and also under the DTAA. The Assessing Officer was of the opinion that in the provision of carriage and connectivity services, exchange of information is involved between the assessee and the NTOs, therefore, the IUC payment is to be considered as royalty u/s 9(1)(vi) also. The Assessing Offi....
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....this ground is whether the IUC payments made by the appellant to the NTOs qualify as royalty as defined in Explanation 2 to section 9(1)(vi) and whether the appellant was under an obligation to deduct tax at source thereon u/s 185. While the Assessing Officer has argued that provision of interconnect services by the NTOs to the appellant involved 'use of' or 'transfer of right to use' of the process belonging to them and hence the IUC payments qualified as royalty as defined under clauses (i), (iii), (iva) and (vi) of Explanation 2 to section 9(1)(vi) under the amended provisions of section 9(1)(vi), the appellants contention is that the amendments, brought in by insertion of Explanation 5 and 6 to section 9(1)(vi) with retrospective effect, were unconstitutional and hence cannot be applied to characterize the impugned payments, which were made prior to the amendment. 175. Section 9(1)(vi) provides that income by way of royalty payable by a resident shall be deemed to accrue or arise in India. The term royalty has been defined under explanation 2 to mean consideration (including lump sum consideration but excluding any consideration which would be the income of the recipient cha....
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....is clarified in the impugned order that the Legislature had, through the amendments brought in by Finance Act, 2012, only clarified the meaning of the term 'process' used in explanation 2 to section 9(1)(vi) and had not inserted any provisions which were contrary to the definitions of the term royalty as per the DTAA and that Article 3 containing the definition of terms in the DTAAs itself makes a reference to the domestic law for the meaning of terms not defined in the DTAA. 179. I find that the Assessing Officer is justified in arriving at a finding that provision of interconnect services by the NTOs to the appellant resulted in 'use of' or 'transfer of 'right to use of' the process running on the networks of the NTOs to the appellant and hence IUC payments qualified as royalty under clause (i) and (iii) of Explanation (2) to section 9(1)(vi) read with Explanations 5 and 6 to section 9(1)(vi) and also under the applicable DTAAS. The finding is based on the fact that as interconnection requires not only technical harmonization, but also bilateral or multilateral contractual arrangements among network operators, it is usual for contract operators to define the conditions of acce....
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....plementation of the physical interconnection, based on the costs of providing the specific interconnection requested, e.g. specific equipment and resources and compatibility testing; * Rental charges to cover ongoing use of equipment and resources such as connection, maintenance etc; * Variable charges for ancillary and supplementary services, e.g. access to directory services, operator assistance, data collection, charging, billing, switchbased and advances services etc; * Traffic related charges for conveyance of traffic to and from the interconnected network e.g. costs of switching and transmission, which may be on a per minute basis and/or on the basis of additional network capacity required. 183. Tariff elements refer to individual prices set for each network component or facility provided to the interconnected party. Tariffs and charges for interconnection must follow the principles of cost orientation and transparency, in accordance with Article 7(2) and may include a fair share, according to the principle of proportionality, of joint and common costs and the costs incurred in providing equal access and number portability and the costs of ensuring essential requi....
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....se the ICS equipment of the other telecom network for connectivity and carriage of calls. He has made a specific reference to the appellant's agreements with M/s France Telecom to point out that it involves access to ICS equipment and supply of services and facilities by means of telecommunications facilities. 188. The appellant has made specific references to the appellant's agreement with M/s Telenor Global Services AS, where Article 3 refers to provision of interconnection link, equipment, technical standards and operating methods. Further, the appellant's agreement with M/s Belgacom International Carrier Services SA, which provides for sharing of switches and products and mapping between circuits (CICs) and Circuit Sub Groups (CSG). The agreement with M/s KPN Global Carrier Services B.V. states that the parties acknowledge that it is in their mutual interest to adequately plan the necessary capacity needed at their respective facilities, in order to allow for efficient provisioning of services. These agreements belie the appellant's claim that access to the NTOs' networks and equipment was either absent or was indirect. 189. I am unable to accept the appellant's contentio....
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.... has rightly held that Explanation 6 to section 9(1)(vi) clarifies the meaning of the term 'process' which ought to be considered in order to determine whether a particular payment qualified as royalty for use of a process under the DTAAs as well. I am in agreement with him that the word 'secret' does not qualify the word 'process' in the applicable DTAAs and hence the process does not need to be a secret process to qualify as royalty under the applicable DTAAs. In the present case, the NTOs have transferred some rights in the process to the appellant for the purpose of transmission of telecommunication traffic, which allow it to access and use the process running over the NTOs' telecom networks". 20. The learned Counsel for the assessee while impugning the orders of the Revenue authorities below has made multi fold submission. In his first fold of submission, he submitted that in order to treat the assessee in default, it is to be determined that the payments made by an assessee to a non resident involves element of income. Taking us through section 195 of the Income Tax Act, he submitted that this section impose statutory obligations on any person responsible for paying to a n....
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....use or right to use of property. According to the learned Counsel for the assessee before construing any payment as a royalty income u/s 9(1)(vi) with the help of Explanation 2, it is mandatory that the payer should be infused with use or right to use or impartment or transfer of right in property or information. In other words, payer should receive some valuable right of use or actual user or transfer f right property or information. He pointed out that the Assessing Officer has invoked the process royalty vide sub clause (i) and (iii) of Explanation 2 appended with section 9(1)(vi) and equipment royalty provided in Explanation (iva) of the Act. All these clauses contain the same conditions. On the strength of OECD commentary and the opinion of learned Author Klaus Wogel and decision of the Hon'ble High Court as well as ITAT, he submitted that expression "use" or "right to use" had fallen for consideration on a number of occasions before the Hon'ble Courts in India. The uniform opinion expressed in the OECD commentary, other learned author as well as in the decisions of the Indian Courts, contains two conditions before invoking the Explanation 2 to section 9(1)(vi) of the ....
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....t which is outside India, then also the payments made for such a user would fall within the ambit of income by way of royalty. He pointed out that though this explanation has been inserted, but it has dispensed with the 2nd condition only namely possession and control. It has not diluted the first condition which is principle condition namely use or right to use contemplates a transfer of a right to use in the process or equipment by the payee to the payer, meaning thereby the expression "use or right to use" could be given full effect when the process or the equipments are being transferred by the payee to the payer. Only, then, income for payment of such transfer of these assets would be termed as an income by way of royalty. According to the learned Counsel for the assessee before introduction of Explanation 5 to section 9(1)(vi), the twin conditions need to be satisfied namely transfer of use or right to use followed by delivery or control or possession. After this Explanation, the 2nd condition namely delivery of control or possession has been eliminated. The Assessing Officer has failed to establish that the rights in the shape of use or right to use have been transferred to ....
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.... of the assessee is that it was a provision of service and not grant of use or right to use any process. 23. In his next fold of submissions, he contended that provisions of the DTAA are beneficial to the assessee, therefore, it has opted the DTAA provision to be applied on it, the retrospective amendment by introduction of Explanation 5 to 6 to section 9(1)(vi) of the Act cannot override the DTAA. For buttressing his contentions that the assessee should be governed by the provisions of treaty or Income Tax Act, which is more beneficial to the assessee relied upon the following decisions: i) Azadi Bachao Andolan (2003) 132 Taxman 373 (S.C) ii) Visakhapatnam Port Trust (1983), 144 ITR 146 A.P. H.C iii) Circular No.333 dated 2nd April issued by CBDT iv) P.V.A.L. Kulandagan Chettiar (2004) 137 Taxman 460 (S.C) He submitted that the definition of royalty expanded by virtue of Explanations 5 and 6 is not available in the definition of royalty provided in the DTAA (Article 12(3). Under Article 12(3), the requirement of possession or control to be delivered as a part of the principle condition for grant of use or right to use process or equipment has not been dispensed w....
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....t payable represents "sum chargeable to tax". In order to form an opinion by the payer that the payments do not include sum chargeable to tax, he has to reach a prima facie satisfaction. This satisfaction ought to be based on the relevant material available with him at the time of payment. How the assessee can say that the payments made by it do not include the "sum chargeable to tax". The learned Counsel for the assessee had raised multi-fold submission pointing out that no human intervention is there, therefore, the payment cannot be termed as fee for technical services. The material to indicate that no human intervention was there, was not possessed by the assessee when it made the payments. The scope of inquiry u/s 195 is limited, it cannot be equated with a regular assessment proceedings. The opinion cannot be formed simply on the assertion of the payer that payments do not include the sum chargeable to tax, because payer might have not complete knowledge of the business of the payee. The payee may not be charged to tax for many reasons, but is that relevant factor for not deducting the TDS by the payer. He drew our attention towards page No.20 of the paper book-I, where copy ....
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.... it is not clear whether the payees are only beneficial owner. Application of DTAA may not be determined at this stage of section 195 because the DTAA is not a parallel code, not a complete code, it only allocates taxing rights. The treaties are not more than the allocation of taxes, they do not provide any other mode, how the taxes are to be collected whether by advance deduction etc. This is the area of the domestic law, the sum chargeable to tax is to be considered within an angle of domestic law, unless the payee is there to demonstrate that he is not chargeable to tax under the DTAA either by himself or through the payer. Payee never comes forward u/s 195(3) of the Act. 27. In the next fold of his submissions, the learned Counsel for the Revenue contended that on perusal of section 9(1)(vi) would indicate that consideration paid by the assessee would constitute royalty within the meaning of this section. The assessee has been harping upon the provisions contained in the DTAAs with different countries to urge that the processes to be regarded as a royalty, if it is a secret. It was further amendment made in the domestic law could not override the DTAA. Contended by the asses....
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....re defined both under the domestic law and DTAA; definitions are not in conflict with each other. The definitions are identical. The DTAAS have not at all restricted the scope of either the term royalty or fee for technical services. 29. The learned Counsel for the Revenue further contended that the assessee had made a fatuous attempt to say that expression "process" used in the DTAA gives a restrictive meaning than that of the said term appearing in the domestic law. According to the assessee, the expression "secret" ought to be read with process. In other words it should be a secret process. According to the learned Counsel for the Revenue, this was not the situation when DTAAS were entered by India. The expression "secret" has been associated with the process by the Indian Courts, while interpreting the DTAA. The Indian Parliament has appended an explanation and pointed out its intention of using expression "process" in the DTAA. It was never intended that secret should be associated with the process. Therefore, a clarification has been incorporated by way of explanation-5 which clarifies that secret ought not to be associated with the process. It gives the plain meaning of t....
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....ned Counsel for the assessee that possession or control over the processes should vest with the assessee is concerned; the learned Counsel for the Revenue contended that there is no such stipulation either under the domestic law or under the DTAA. 31. The learned Counsel for the Revenue further contended that one of the decisions relied upon by the assessee is in the case of Siemens Aktiongesellschaft reported in 177 taxman.com 81. In this case the dispute pertains with regard to the treaty entered by India with Germany on 13.09.1960. The income from royalty was not taxable in India at the relevant time and it being taxable after the amendment to the Income Tax Act, 1961 by the taxation law amendment act, 1967. There was no royalty clause in the DTAA with Germany. Only Royalty in respect of cinematographic film was included in the definition of industrial and commercial profits. Therefore, this decision is not applicable on the facts of the present case. In that case the DTAA provide that such industrial and commercial profits can be taxed only, if there was a PE in other State. With regard to the decision of the Nokia Networks OY rendered in ITA No.512/07 (Delhi High Court), th....
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.... Rules 1962 requires a payer to furnish information in relation to remittance made to a non resident in the prescribed form 15CA. Form 15CA contained the following details required to be furnished by the assessee namely; a) Details of payee b) Details of taxes withheld, if any and the basis for such deduction and c) the relevant clause of the DTAA under which taxes have been withheld, in case taxes were withheld under the provisions of the DTAA. Form 15CA has to be filed with the banker before making the remittance. In addition, Rule 37BB further requires that the payer to obtain form 15CB (i.e. a certificate from an accountant) containing details such as details of the payee, country of residence of the payee, beneficial owner of the remittance, basis for deduction of tax at source etc. These forms were duly maintained and furnished by the assessee in relation to IUC payment made to the NTOs. The Assessing Officer was able to initiate withholding tax proceedings u/s 201 of the Act after collecting information from these forms. Thus, the assessee had necessary details which were duly examined by it. These details were never disputed by the Assessing Officer. These are t....
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....s 201, we would like to address the peripheral issues raised by the learned representatives. The first peripheral issue is that the ambit and scope of inquiry u/s 201 for violation of section 195. Could it be equated with regular assessment proceedings?. It is necessary to take note the relevant part of Section 195 reads as under: "195. (1) Any person responsible for paying to a nonresident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC)] [or section 194LD] or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : [Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the ....
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....cancelled by the [Assessing] Officer before the expiry of such period, till such cancellation. (5) The Board may, having regard to the convenience of assessees and the interests of revenue, by notification in the Official Gazette, make rules specifying the cases in which, and the circumstances under which, an application may be made for the grant of a certificate under sub-section (3) and the conditions subject to which such certificate may be granted and providing for all other matters connected therewith.] (6) The person referred to in sub-section (1) shall furnish the information relating to payment of any sum in such form and manner as may be prescribed by the Board.] [(7) Notwithstanding anything contained in sub-section (1) and sub-section (2), the Board may, by notification in the Official Gazette, specify a class of persons or cases, where the person responsible for paying to a nonresident, not being a company, or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall make an application to the Assessing Officer to determine, by general or special order, the appropriate proportion of sum chargeable, and upon such determinat....
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....ive force of the arguments of the learned representative with regard to construction and meaning of this section is, whether while determining the obligations of the payer to deduct the TDS on the payment, a full fledged inquiry, the procedural aspects available to the payee for assessment of his income is to be applied for determining the "sum chargeable to tax" in the payments. In other words, whether the assessee payer can claim all the defense as available to the payee in its assessment proceedings. No doubt the Hon'ble Supreme Court in the case of G.E. India (327 ITR 456) has explained its earlier judgment in the case of Transmission Corporation of A.P Ltd vs. CIT (239 ITR 587) and emphasized that an inquiry for determining the "sum chargeable to tax" has been embedded in the section. It is also observed by the Hon'ble Supreme Court that this section has to be read in conformity with the charging provision i.e. 4, 5 and 9. Thus the inquiry for determining the element of income chargeable to tax has to be conducted. We will take the issue regarding scope of inquiry at the relevant juncture which would be linked with the facts on record. 36. The next peripheral issue ....
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.... are several steps in the negotiations phase eventually leading to conclusion of the treaty. Treaties or conventions are thus instruments signaling sovereign political choices negotiated between States. The efficacy of a treaty over domestic law turns upon either State - specific conventions operating to govern the sovereign practices, or where there is a written constitution provisions of that charter. Double taxation treaty rules do not "authorize" or "allocate" jurisdiction to tax to the contracting State nor attribute the "right to tax". As is recognized by public international law and constitutional law, States have the original jurisdiction to tax, as an attribute of sovereignty. What double taxation treaties do is to establish an independent mechanism to avoid double taxation through restriction of tax claims in areas where overlapping tax claims are expected, or at least theoretically possible. Essentially therefore, through the mechanism of a treaty the contracting states mutually bind themselves not to levy taxes, or to tax only to a limited extent, in cases where the treaty reserves taxation for the other contracting states, either wholly or in part. Contracting st....
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..... The learned Counsel for the Revenue has not raked up any new controversy in his submissions. He has just highlighted the procedural limitations of the inquiry required to be conducted u/s 195 r.w.s 201. To our mind onus is upon the assessee to determine that payments made by it do not involve the element of income. The role of the Assessing Officer while conducting the inquiry u/s 201 would be to demolish the formation of this opinion at the end of the assessee. The Assessing Officer has to indicate that the payments made by the assessee are the sums chargeable to tax and belief harboured by the assessee that it is not chargeable to tax and therefore it did not deduct the tax was an erroneous belief. We will consider the evidence available on record in support of the assessee's conclusions in the later part of this order, but analysis of the scheme of income tax act, namely recovery of taxes in advance by withholding under Chapter XVII, procedure u/s 195(2) and 195(3) and procedure for assessment persuade us to say that certainly the rights as available to the payee to defend itself in an income tax assessment proceedings are not available to the assessee as payer in equal force.....
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....ce) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.] Explanation 1.X.X.X.X.X.X.X. 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 process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; [(iva) the use or right to use ....
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....ses of this Article, the term "royalties" means (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience; and (b) ......... The issue is, that consideration paid by the assessee for inter connection charges is a consideration for the use of or right to use of a process which would fall within the ambit of royalty as provided in section 9(1)(vi). Therefore, first it is to be construed what is inter connect charges, whether it is a process and if it is a process then we will consider its meaning as per the definition of royalty given in the Income Tax Act vis-à-vis DTAA. Assessing Officer in order to explain the meaning of expression "inter connect" has made reference various literatures including the term defined by International Telecommunication Union, World Bank, WTO, the Institute o....
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.... Revenue Recognition for Telecommunication Operators, issued by the Research Committee of the Institute of Chartered Accountants of India states that: Interconnect agreements are agreements that allow operators to transit the traffic on another operator's network. Telecom operators, on whose network the call finally ends (known as termination of call) do not recover any amount directly from the subscriber. The operator on whose network the call originates pays terminating charge to the terminating network. 1.1 Two adjacent, non-competing telephone networks interconnect so that subscribers on one network can call those on the other (see Figure below). 1.2 Traditional wireline telephone and new wireless mobile carriers interconnect so that subscribers of the traditional phone service can call wireless subscribers, and vice versa (see figure below) 1.3 Interconnection is needed because: * No single telecom operator can own or lease all the telecom network required to switch calls to and from all possible locations * No telecom operator has ever owned or leased all the network components for international calls * The requirement for a telecom operator to connect ca....
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....hey can access. With increasing competition comes plurality of operators and services and the importance of interconnection further increases. If a subscriber of network A requires to call subscriber of Network B then A has to have interconnection with B as B has monopoly over termination of calls on his subscribers' equipment. If Network B is in another circle then an National Long Distance (NLD) operator might be involved in carrying the call and both A and B should be connected to NLD for this call to mature. If a service provider is offering innovative service like Intelligent Network (IN) based Services, content and application services then subscribers of another service provider can make use of these if this service provider allows interconnection to the service provider who not have these services. This is beneficial to both the service providers and usually would happen through mutual negotiations. In certain situations, it may not happen and it is here that regulations can play an enabling role. With technological developments, the range of services that depend on interconnection has increased. Efficient interconnection has become an essential input to all types of voice ....
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....sive and informed guidance by regulators is required to pave the way for effective interconnection arrangements. 1.9 Globally interconnection charges are generally designed following either the paradigm of (1) revenue sharing or (2) interconnection usage charges. Revenue sharing means that the telecommunications operators involved in exchange of traffic have agreed to share the revenues, on a percentage basis or some other agreed basis. They thus share the risk of billing disputes and bad debts. On the other hand, interconnection usage charges imply setting charges to compensate explicitly one operator for the costs imposed on him by the other operator's use of his network to originate or terminate a call. The operator paying the interconnection usage charge "owns" the call and takes the risk of disputed and unpaid charges. 1.5 TRAI had issued the Telecommunications Interconnection Charges and Revenue Sharing Regulation'99 (Annexure C) specifying Interconnection Charge i.e. for 'Port' & 'Leased Lines' required to terminate Interconnection links between the Network of the Interconnection seekers and that of the Interconnection givers. The relevant parts of THE TELECOMMUNICATIO....
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.... 1.7 It is now clear that Interconnection Services are a bundle of services and they encompass: * Basic interconnection services * Use of network elements * Ancillary services * Enabling services * Rental of physical components/Infrastructure sharing II A Taxation of payment to NTOs for Interconnect Services as Royalty under the Act. 1 VSL on obtaining the International Long Distance ("ILD") license, has entered into agreements with various non-resident telecom operators ("NTOs) for provision of international carriage and connectivity services to facilitate seamless connectivity and carriage of telecommunication traffic of VSL's subscribers and the subscribers of VSL's customers at locations outside India. In consideration of the services so rendered by NTOs, VSL pays the aforesaid interconnect charges to such NTOs. 1.1 As part of its ILD telecommunication services business, VSL is responsible for and provides connectivity services to its subscribers in respect of the calls originating/ terminating outside India. For provision of the ILD services, VSL is required to obtain services of NTOs for provision of carriage/ connectivity services over the last leg of....
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....ic fibre or by any other similar technology, whether or not such process is secret or not." 1.4 Whether payments for interconnect is covered by clause (i)and clause(iii) of the Explanation 2 to Section 9(1)(vi) It can be understood from the various definitions of Interconnection that it is: a) the set of legal rules, technical and operational arrangements between network operators (ITU) b) the physical and logical linking of public electronic communications networks used by the same or a different undertaking (World Bank) c) A charge levied by network operators on other service providers to recover the costs of the interconnection facilities (including the hardware and software for routing, signalling, and other basic service functions) provided by the network operators.(OECD) d) agreements that allow operators to transit the traffic on another operator's network. (ICAI) 1.5 The key points to be noted from the definitions of Interconnect agreements are: a) It is a reciprocal agreement between telecom network operators b) incorporating a set of technical and operational arrangements c) for the physical and logical linking of the telecom networks d) t....
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....y a complex process running continuously (except under rare circumstances when hardware or software malfunctions) managed and supervised by trained staff. The complex process which is a control system manned by trained staff executes a series of interconnected steps for transmission of telecom traffic through the network. This complex process will ensure that a subscriber of service provider A1 can talk to another subscriber of A1. 1.8 Now the issue of interconnection arises when a subscriber of A1 in Country A wants to talk to a subscriber of B1 in country B since the two networks which are independent have to be interlinked. Question 5: Explain the interconnection services with reference to a call originating in Country A and terminating in Country B? Answer: The mobile subscriber MSA1 in country A will be using the services of a local telecom service provider designated as A1. When this subscriber calls another subscriber MSB1 in Country B using telecom service provider B1, the hand set of MSA1 will interact with the service provider A1 and inform about the details of the call request. The network equipment of A1 will process the call and identify the destination countr....
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....ation, method, mode or operation, whereby a result or effect is produced". In the New Oxford Dictionary the meaning assigned to the word "process" is "series of action or steps taken in order to achieve a particular end. The Interconnect Agreement is the method or arrangement by which one telecom operator allows its process to be accessed by another telecom operator for carriage/transit of telecommunication traffic. 1.11 This is further clarified by the response of Mr Prakash, technical expert from C-DOT during the re-examination recorded on 9th Jan 2013 Q5. Refer to the above response and agreements and clarify whether the process of carriage of calls is the end result of several inter related activities/steps or is it just one of the steps of the whole process undertaken by the foreign telecom operator. Ans. The carriage of calls is definitely the end result of the several interrelated activities/steps carried out by the foreign telecom operators. The purpose of all the activities is to create and maintain the infrastructure and logistics to enable the calls. Viewing them as independent steps from the carrying of calls is not logical. Q 4. Refer to a few interconnect ....
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....ms, billing and settlement procedures; o) Transmission of calling line identification (CLI) information; p) Operator assisted services, directory information and assistance; q) Commercial terms and conditions; r) Provision for contribution to the cost of local access; s) Fundamental Technical Plans; t) Confidentiality of information; u) Liability and indemnities; v) Provision for an Interconnection Agreement liaison and coordination Committee; and w) Review periods and terms for review x) Quality of Service 1.13 It is evident from the above that an Interconnect Agreement is a complex procedure involving several activities. It involves the NTOs sharing information with the VSL concerning the working of, or the use of the process employed the telecom network of NTO to allow the transit of telecom traffic generated by VSL. All the agreements of VSL with the NTOs has a confidentiality clause wherein the receiving party has to use confidential Information (includes information, know-how, ideas, concepts, technology, discussions, documents, papers, drawings etc) of the Disclosing Party only for the purpose of Interconnection Agreement. There are other spe....
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....se of the lorry" for the following reasons : (i) The lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry ; (iii) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry ; or the carrier may unload the consignment en route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m to 8.00 p.m at the customer's factory for its use, at a fixed hire per day or hire per km. subject to an assured minimum, for a period of one month or one week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction in....
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....sfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. A perusal of the finding of the Assessing Officer (extracted supra) it would indicate that inter connect agreement is a complex procedure involving several activities. It exhibits the role of NTOs, sharing information with the assessee, concerning the working of or the use of the process employed in the Telecom Network of NTOs to allow the transit of telecom traffic generated by the assessee. The agreements have confidentiality clause wherein the receiving party has as to use confidential information including the knowhow, ideas, concept, technology drawings, discussions, papers etc. According to the Assessing Officer there are specific clauses in the intercom agreement entered into by the assessee with the NTOs for transfer of technical details related so that the "process" running on telecom network, and the assessee can connect and interact with the processes running on network of the NTOs. Thus one aspect is not in doubt that this interconnect is an activity which can be termed as a "process", because the Black's Law Dictionary explain the processes;- a source....
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....ocess would take place. The assessee as bulk user of connectivity which it will provide to its end user customer had acquired dedicated networking space. The consideration was paid for acquisition of dedicated networking process on the NTOs. It is not the case that contents meant for display on T. V were handed over to satellite operator. It is all together different complex system. It cannot be made and operated in such simple way as suggested by the assessee. However, on a plain reading of section 9(1)(vi) Explanation 2, sub clause (iii), along with Explanation 5 and 6, it nowhere reveals that there should be a transfer. If we read this argument of the assessee, then we would be ignoring the intention of the legislation incorporated by way of Explanation 5. The transfer inherently would also embarrass the possession or control, otherwise it will be half way transfer. No such concept is being suggested either in the definition of royalty under the DTAA or under Explanation 2 to section 9(1)(vi) of the Act. It would indicate that in the era of technological advancement, how activity could happen in such a manner where even without having physical possession or control by an assesse....
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.... is the Courts who have interpreted the expression "secret formula" or "process" employed in the Act as well as in the DTAA. According to the ITAT in the case of Pan Amsat international there is no coma between the expression, "secret formula or process". Therefore, the process should also be associated with the word "secret". The Indian Govt. when entered into DTAA never agreed that it should be a secret process. The intention was that secret formula is a different connotation than "process" which is an independent activity in itself. It is the interpretation provided by the Court who have made it as a secret process. In order to explain the stand of one of the party to the agreement that its intention was always not to construe the "process" as secret "process", Explanation 6 has appended with retrospective effect. This explanation only clarifies the position. After incorporation of Explanation 5 and 6, there are series of decisions which have distinguished the position of law prior to incorporation of these explanations. In order to buttress our conclusion, we would like to refer the order of the ITAT in the case of Viacom 18 Media vs. ADIT Mumbai. It is placed on page No.472 of....
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.... Act as under:- "Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always 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;] 12. The introduction of Explanation 6 with retrospective effect w.e.f 1.6.1976 is an expression as intended by the legislature of the meaning of term process in the context of transmission by satellite is clarificatory in nature and, therefore, it does not amend the definition of royalty per se .There is no quarrel on the point that any payment for use or right to use of process is in the nature of royalty as per the provisions of Article 12(3) of DTAA as well as the Explanation 2 of section 9(1)(vi) of the Act. Since the term process is not defined under the DTAA, therefore, by virtue of Article 3(2) of the Indo-US DTAA, the meaning of term process as defined in the Act would apply for this purpose. We say so as a word 'process' is a term of wide import and, accordingly, has to be construed in a generic s....
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.... by the payer or the location in India, the consideration would nevertheless be treated as 'royalty'. The decisions cited, hence, cannot be pressed into service to understand the scope of the expression 'royalty'." 13. The expression process has been understood by the Hon'ble High Court in the light of Explanation 6 inserted by the Finance Act 2012 w.e.f 1.6.1976 and it was observed that the decision relied upon by the assessee cannot be pressed into service to understand the scope of expression royalty while distinguishing the decision of Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd (supra), the Hon'ble Madras High Court in para 42 and 43 has held as under:- "42. The decision relied on by the assessee, particularly with reference to the Delhi High Court reported in 332 ITR 340 (Asia Satellite v. DIT) is also distinguishable. This relates to a case of an assessee/lessee of a satellite called AsiaSat 1 which was launched in April 1990 and was the owner of a satellite called AsiaSat 2 which was launched in November 1995. These satellites were launched by the appellant and were placed in a geostationary orbit in orbital....
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....ustomers. Insofar as income earned by the appellant from its customers in India is concerned, the Tribunal held that this would qualify as 'royalty' as defined in Explanation 2 to Section 9(1)(vi) of the Act. 43. Therefore, issues which arose for consideration in the appeal before the Delhi High Court related to Clauses (i), (vi) and (vii) of sub-Section (1) of the Section 9 of the Act. The High Court held that even when the appellant had business connection in India, no part of the appellant's income was chargeable to tax in India in terms of Section 9 (1)(i), as no operations to earn the income were carried on in India. The Delhi High Court held that carrying out the operations in India, wholly or at least partly, is sine qua non for the application of Clause (i) of sub-section (1) of Section 9 of the Act. Merely because the footprint area included India and ultimate consumers/viewers are watching the programmes in India, even when they are uplinked and relayed outside India, would not mean that the appellant is carrying out its business operations in India. No machinery or computer, etc. is installed by the appellant in India through which the programmes are reach....
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....efines 'process' to mean and include transmission by satellite (including uplinking, amplification, conversion for downlinking of any signal) cable, optic fibre, or by any other similar technology, whether or not such process is secret. Thus, 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. " One of the contention of the learned Counsel for the assessee was that retrospective amendment in the Income Tax Act cannot override the provisions of the DTAA and if an assessee is being governed under the DTAA, then such retrospective amendment cannot affect the rights of the assessee. According to him insertion of Explanations 5 & 6 to section 9(1)(vi) of the Income Tax Act enhance the scope of expression roy....
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....considered almost all the decisions referred by the learned Counsel for the assessee. 41. The learned Counsel for the assessee also contended that the Hon'ble Madras High Court has failed to consider the decision of the Authority for Advanced Ruling in the case of Dell International & Cable and Wireless Network India. It also failed to consider the decision of the Delhi High Court in the case of Asia Satellite Communication in the right perspective and therefore, the decision of the Hon'ble Madras High Court should not be followed because it is not by the jurisdictional High Court. We do not find any force in the submissions of the learned Counsel for the assessee because the orders of AAR are not binding either upon the ITAT or upon the Hon'ble Madras High Court. The ITAT being a subordinate authority is not supposed to comment on any decision of any High Court, rather bound to follow the decision which is direct on the point. The Hon'ble Delhi High Court has considered the decision in the case of Asia Satellite Telecommunication on 31.01.2011 and Explanation 6 to section 9(1)(vi) was not on the statute at that point of time. 42. In view of the above discussi....
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....ct on payment to Belgacom for provision of bandwidth capacity, it is also the view of the department these payments are taxable under deeming Section 9 of Act as Royalty and under the DTAA. 1 Before the examining whether the payments made to Belgacom for provision of bandwidth capacity on the EIG cable system constitute Royalty it is necessary to know a few facts about submarine cable systems. Reference is made to the Consultation paper of Telecom Regulatory Authority of India ("TRAI") on Access Facilitation Charges and Co-Location Charges at Cable Landing Stations dated 22.03.2012. Note on submarine cable systems A- Submarine Cable Systems 2.2. Submarine cables are laid on the sea bed between land-based stations to carry telecommunication signals. They offer highly secure, greatly reliable and very high capacity telecommunication links between countries across the world. The transmission quality of a sub-marine cable is significantly better than a typical satellite media. Submarine cables are only a few inches thick and they carry only a few optical fibers. Yet they have transmission capacities of the order of terra bits per second (Tbps). However, a typical multi-tera....
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....ble capacity in submarine cable system landing at the cable landing stations in India. (c) 'Access Facilitation' means access or interconnection, as the case may be, to the essential facilities (including landing facilities for submarine cable) at cable landing station. (d) 'Co-location Facilities' means the facilities at a submarine cable landing station (including building space, power, environment services, security and site maintenance) which may be offered by the owner of cable landing station (OCLS) to the eligible Indian International Telecommunication Entity to facilitate access to the cable landing station of such owner (including installation of co-location equipment). ......... (h) 'Access Facilitation Charges' means charges payable by the eligible Indian International Telecommunication Entity (ITE) to the owner of the cable landing station (OCLS) to interconnect or access the capacity acquired on Indefeasible Right of Use basis or on short-term lease basis from an owner of the submarine cable capacity or a member of consortium owning submarine cable capacity. (i) 'Co-location charges' means the charges payable by the eligible Indian International Telecomm....
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....sortium members. Construction, operation and maintenance (O&M) and other terms of a submarine cable system are governed by a Construction and Maintenance Agreement (C&MA), entered among the consortium members. A typical consortium has the following operating mechanism: (a) The members of consortium raise the funds for constructing the submarine cable system, which includes the laying of cable in the sea-bed and construction of cable landing stations on the shore ends. (b) The members of the consortium build cable landing stations in their home countries and lay cable in the oceans/seas as per the terms of C&MA. (c) In the consortium-owned cable systems, capacity of the submarine cables system is divided into Minimum Investment Units (MIU), which reflect each individual operator's cumulative stake in financing and operating the system. (d) The consortium may offer international capacity on the submarine cable to other willing telecom operators (i) through an Indefeasible Right of Use (IRU), which gives the telecom operator an exclusive right to use a dedicated amount of capacity on the cable but with no rights to control or manage the cable and (ii) by leasing out the ca....
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....t need the pipe to get services to customers. As stated earlier, these leaseholders are known as grantees or lessees. In exchange for ownership of a portion of the network, the grantee/lessee pays the grantor a large up-front fee and also annual charges for maintenance and upkeep. If the grantee buys dark fibre, it may or may not be responsible for paying for the hardware and other network inventory necessary to light it. The grantee/lessee owns the right to pump the data, voice and video traffic it wants through the pipe and can set up its own IRUs with sub-carriers. In return, the grantor/lessor is responsible for maintenance and upkeep of the pipe. The contracts take many forms with the common arrangement being: * Purchase or sale of specified network infrastructure, * Purchase or sale of lit fibre capacity, and * Exchange of network infrastructure or lit fibre capacity XXXXXXXX 2.8 The following points emerge from the Belgacom agreement and the submissions made by VSL: a) VESL has acquired bandwidth capacity in the EIG cable system for transmission of telecom signals from one terminal point on the EIG cable system to another. b) This capacity has been acqui....
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....of voice/data over the EIG cable system between two points is therefore the end result of a process running continuously over the EIG cable system. 3.2 Each of the EIG parties are allotted a certain capacity on the EIG cable system on an ownership basis. Such capacity entitles the respective members to transfer their telecommunication traffic on the EIG system upto the derived capacity. It means the each of EIG parties have the rights to use the process running over the EIG cable system to transmit data as per their allotted capacity. Omantel transferred a certain portion of the capacity owned by it in the EIG cable system to Belgacom. This transfer of a portion of the bandwidth capacity implicitly involves the right to use the process without which Belgacom cannot use the EIG cable system for transmission of voice/data. Belgacom had been given a unrestricted and exclusive right to use this process for transmission upto certain bandwidth capacity by Omantel. 3.3 Belgacom in turn transferred a certain portion of the EIG capacity acquired from Omantel to VESL, by way of grant of an IRU, under the Belgacom agreement. Belgacom has therefore also transferred to VSL the rights to u....
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....High Court in the case of M/s. Sanofi Pasteur Holdings SA reported in 213 Taxmann 504. He pointed out that in the case of Sanofi Pasteur Holdings SA, Hon'ble Court has observed that Explanation (5) appended with Sec.9(1) cannot be given preference over and above the DTAA provisions under Explanations (4) and (5) to Sec.9(1), the scope of Sec.9(1) was enhanced. On the other hand, learned DR relied upon his submissions as were made with regard to the payments made as consideration for use or right to use of interconnect facility. We have duly considered the rival contentions and gone through the record carefully. In the case before the Hon'ble Andhra Pradesh High Court, the issue of taxability of capital gains on the transfer of shares of a foreign company by one non-resident to another non-resident was involved. In that context, Hon'ble court has decided the controversy and implication of insertion of Explanations (4) and (5) u/s.9(1) of the Act. On the other hand, Hon'ble Madras High Court has dealt with a situation where payments were made towards interconnect charges/dedicated connectivity. The facts before the Hon'ble Madras High Court as well as before....
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....m or an invoice to The Customer. In case a double tax treaty would provide for a reduced tax rate or a tax exemption. The Supplier will, upon request from The Customer, provide all documentation contemplated for the application of the treaty If any withholding tax must be paid in relation to this contract, evidence of such payment signed by the competent Tax Authority must be sent to The Supplier as soon as possible. A perusal of the agreement exhibit the stands of the parties. The payee was interested for its consideration, net of taxes. The payee has nothing to do with regard to the tax liability on the process given to the assessee for its use or right to use. In case the suppliers i.e., NTOs was to be made to pay for any of the taxes, then the customer, namely, assessee would pay back USD equivalent to such taxes to the supplier within 30 days after. The supplier would sent a reimbursement claim or an invoice to the customer. It has also been provided that in case of Double Tax Treaty which would provide for a reduced tax rate or tax exemption, the supplier will, upon request from the customer provide all documentation provided for application of the treaty. This claus....
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....s do not create a different charging position upon the consideration paid by an assessee for use or right to use of any process. These are clarificatory in nature. The position to deduct TDS at the time when assessee made the payments was categorical and it was not persuaded to perform which is impossible to perform. Therefore, we do not find any merit in this contention also. The learned counsel for the assessee further contended that where there is conflict in the views of non-jurisdictional High Courts, then the view which is favourable to the assessee ought to be adopted by the Tribunal. We do not have any hesitation in accepting this proposition, but there is no direct conflict between the judgement of Hon'ble Madras High Court vis-à-vis that of Hon'ble Andhra Pradesh High Court. Decision of Hon'ble Madras High Court is direct on the point dealing with similar factual situation. Therefore, keeping in mind the decision of Hon'ble Supreme Court in the case of Sun Engineering Works (198 ITR 297). We are preferring the decision of Hon'ble Madras High Court. 45. The next issue in all these appeals is whether the IUC charges or ECG charges are to be ....