TaxTMI 
TaxTMI 
2015 (2) TMI 454
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....Appeals) XXXI ['CIT(A)'] erred in holding that income from capacity sales earned under the Capacity Sales Agreement dated March 31, 1995 entered into between the Appellant and Videsh Sanchar Nigam Limited ('VSNL') is taxable in India under section 9(1)(i) of the Income-tax ct, 1961 ('Act'). 2. Without prejudice to Ground No. 1, the Learned CIT(A) erred in not accepting the Appellant's contention that the revenue chargeable to tax in India, as per Explanation to Section 9(1)(i) of the Act, be compute d by applying the proportion of the cable length situated in India vis-à-vis the total cable length worldwide. 3. Without prejudice to Ground No. 1 and 2, the Learned CIT(A) erred in computing the revenues chargeable to tax in India, as per Explanation to Section 9(1)(i) of the Act, by applying the proportion of capacity sales earned from VSNL to the worldwide capacity sales earned by the Appellant. 4. The Learned CIT(A) erred in holding that standby maintenance revenues earned by the Appellant from VSNL under the Construction and Maintenance Agreement ('C&MA') between the Appellant and the licensed international telecommunications carriers (including VSNL), are taxable ....
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....assessee company had entered into Memorandum of understanding (MOU) on 19th July 1993, by and among 13 parties which were mostly National Telecommunication Companies belonging to different nations, for the purpose of planning and implementation of the said Submarine Fabric Optic Telecommunication Link Cable System linking Western Europe (starting from UK), Middle East, South Asia, South East Asia and Far East (ending in Japan). The assessee has been termed as 'founding party', whereas the 13 parties to the MOU have been termed as 'landing parties', Later on these landing parties kept on increasing. Most part of the cable has been laid down in the sea bed and for the purpose of connection in the terrestrial land, the cable comes ashore in certain countries, connecting with the domestic telecommunication system, which has been termed as 'landing stations'. The whole of the submarine cable system between Flag interface points has been divided into sea segments i.e. S1, S2, .........; and terrestrial segments T1, T2.. & X1, X2. The layout of the cable can be illustrated from the following diagram: In India, Videsh Sanchar Nigam Limited (VSNL) was one of the original landing party to....
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....ct or machine. In this case, without goodwill of Flag, VSNL cannot use the assignable capacity, since it requires activation. Therefore, it is not a routine sales agreement and what is being sold even in the terms of CSA is not a physical object but "right to use the assignable capacity in the cable". (ii) Purchase of the capacity does not result into real sense of ownership, as the word "owner" used in C&MA does not mean anything more than a right to use the cable system for the next 25 years. (iii) Flag takes the responsibility for the supply contract for the provision and installation of submarine cable system and segments and in addition to this, recurring cost is shared by the Flag as well as by the VSNL. The VSNL has Indefeasible Right to Use (IRU) in lieu of 1/3rd payment of such cost. Flag has developed the technical design of the Flag cable system and insures the technical compliance of the entire cable system. It is the responsibility of the Flag to make available to VSNL technical information relating to the construction and operation of the Flag cable system and VSNL has to treat such information as confidential. Thus, what Flag is providing to VSNL is basically t....
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....d CSA have been executed outside India on principal to principal basis. The VSNL has all the ownership, rights and obligations in the capacity like transfer or assignment of the capacity, standby maintenance payment obligation and all other decisions in respect of the capacity purchased by it in the cable system. The VSNL can use the capacity for itself or resale it to others or grant interest to any person in the capacity for the life time of the cable system. The VSNL is not only the member of the management committee but also has a right to vote. All these terms in the agreement goes to show that, VSNL has become the owner of the capacity and hence in the cable system. Dictionary meaning of 'owner' and 'ownership' was also relied upon by the assessee along with following decisions:- "Mahabir Commercial Co. Ltd. Vs Commissioner of Income-tax (86 ITR 417) (SC) Commissioner of Income-tax Vs. Mewar Textile Mills Lltd. (91 ITR 542) (SC) Commissioner of Income-tax Vs. Kirloskar Oil Engines Ltd. (135 ITR 762) (Bom) Income-tax Officer Vs. Sriram Bearings Ltd. (224 ITR 724) (SC)" Besides this, various clauses of CSA and C&MA were referred to in support of its contention, as t....
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....ccount of any use of technical information. The relevant observation of the Ld. CIT(A) in this regard is as under:- "Though it is true that certain technical information (not being in the nature of any specialized know-how or technical services) would be shared with VSNL as an integral part of the above arrangement to enable VSNL to serve as a lending party on the cable system. However, no separate consideration is attributable in respect of the technical information provided to VSNL in this regard and the entire consideration of US$ 28,940,000 is towards purchase of capacity by VSNL. Furthermore, the same technical information is provided to each landing party regardless of the amount of the capacity it buys. The payment for sale of capacity, in isolation, does not envisage provision of any services of a technical nature or royalties. The Authorized Representative even took plans to explain how the amendment brought in the definition of "royalty" as given in Explanation 2 to section 9(1)(vi) to include consideration for use or right to use any industrial, commercial or scientific equipment by the Finance Act, 2001 cannot be applied in the present case as the same has come into ....
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....but sale of capacity in the cable system, Mr. Mistry submitted that, all the documents in the agreements have to be considered in a literal manner and the true intent of the parties. He submitted that the MOU was the first document executed between the Flag and various other international telecommunications carriers for the purpose of planning and designing a submarine fibre optic telecommunication cable system linking Western Europe, Middle East, South Asia, South East Asia and Far East Asia which runs up to 27,000 kms. MOU was entered for the co-operation of the concerned parties who were required to plan, design and construct the entire cable system and to determine the rights and obligations of the various parties involved. 15. To demonstrate the intent and purpose of joint co-ownership of the capacity in the entire cable system, he pointed out to following clauses of the MOU:- "2. The intentions of the Parties are: 2.1 To plan jointly for the implementation of the Flag Cable System in order to meet the projected traffic requirements of the Parties and their correspondents through at least the year 2010, and to interconnect the Flag Cable System with other cable system....
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....pective cable landing station in order to satisfy the objectives and purpose of this MOU; 9.8 preparing and providing terms and conditions for the use of cable landing stations in the Flag Cable System; 9.9 making available appropriate, ordinary and necessary information, including contract terms and conditions, relating to terminal country inland extension system charges and domestic network transit charges; 9.10 requesting and receiving reports relating to the Flag Cable System procurement activities; 9.11 reviewing the progress of all activities undertaken to ensure the performance of this MOU; and 9.12 providing full cooperation with each other on matters concerning the Flag Cable System. 10. The following rules and procedures shall apply to the Interim Management Committee: 10.1 The Founding Party shall provide the Chairperson of the Interim Management Committee. The Interim Management Committee will meet on the call of the Chairperson or whenever requested by two or more Landing Parties...... 10.2 Except as otherwise provided in Paragraph 4, all decisions made by the Interim Management Committee shall be subject kin the first instance to full participa....
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....f capacity was for entre life of the cable. The terms and various clauses of C&MA clearly demonstrate that the ownership of the assignable capacity vests with the purchasing party, that is, VSNL. So far as technical information shared with VSNL is concerned as alleged by the AO, they were not in the nature of any specialized know-how for technical services. It was an integral part of arrangement to enable the VSNL to serve as landing parties on the cable system. There is no separate consideration in respect of the technical information as it was part and parcel of sale consideration of US$ 28.94 million. The C&MA categorically provides that VSNL has all the ownership rights and obligation in respect of the capacity, i.e., transfer, assignment, to take decision etc. in respect of the capacity in the cable system. As per the CSA, title to the cable system and the capacity stands transferred to the VSNL with all rights and obligation and the VSNL becomes the complete owner. This has been further provided in clause (3) of C&MA. Learned Counsel further drew our attention to clause 1 and 2 of CSA, which deals with the sale of capacity in the cable system and the terms of payment. These c....
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.... 17. From these clauses, Mr. Mistry submitted that it is quite evident that VSNL has all the ownership rights and obligations in respect of capacity purchased in the cable system. It is only when a ownership right is given that such obligations are associated with and would not have been there, if Flag had granted only the 'right to use' the capacity in the cable system to the VSNL. He also emphasized clause 4.1 of C&MA which provides that the management committee shall make all the decisions on behalf of the signatories to implement the purpose of the agreement and how the signatories designate their representative to attend the meetings. Even the VSNL had the representation and the voting rights. Such a right is only possible where there is ownership and not merely a simple right to use the capacity. Clause 11 provides that VSNL has obligation to pay standby maintenance charges for up gradation and maintenance cost of the capacity that they own on the cable system. Clause 13.1 provides for assignable capacity which would be in the form of MIU's which is owned by each signatories. He submitted that, the very fact that purchasers of the capacity can sell or grant a right to use th....
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....to be understood as sheath or clothing of the optic fibre through which data is transferred. The meaning and the term of capacity as intended by the parties has to be seen in a holistic concept. The cable as such has no meaning, except for its capacity to transfer datas. It is the capacity in the cable system which is being sold by the Flag. The intention of the parties is further corroborated by the entries in the books of account. Here Flag has treated the capacity as stock-in-trade in the accounts. In support, Mr. Mistry drew our attention to audited accounts of Flag as on 31.12.1997. From the said accounts, he pointed out that the Flag has accounted the capacity sold as "sale of goods" and cost of construction and laying the cable has been accounted as "cost of goods sold" in the books of account and the same is reflected in statement of operations. The difference between the sale consideration received and cost of good sold have been treated as profit in the books. Relevant extract of the statement of operation as appearing in the accounts has been as under:- 1997 REVENUES $ Capacity sales, net of discounts 335,982 Standby Maintenance Revenues ....
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....ncial statement which are as under:- 1997 $ Office furniture 500 Leasehold improvements 167 Computer equipment 802 Autos 78 1,547 Less-Accumulated depreciation (400) Net book value 1,147 19. After referring to the accounts of Flag, Mr. J.D. Mistry referred to the accounts of the VSNL and also filed copy of financial account and annual report of VSNL, to point out that in the said report it has been stated that VSNL has bought the link and capacity in the submarine fibre optic cable system, which goes to prove the contention of the assessee that there was a sale by the assessee and purchase by the VSNL. The VSNL has treated the said purchase of capacity in the cable as "fixed asset" and depreciation has been claimed on the basis of expected life of the cable system. This has been specifically given in the accounting policies and notes to the account relating to fixed assets. Thus, in no manner it can be held that the payment received is towards use of cables, within the ambit and scope of "royalty" as defined in section 9(1)(vi). 20. He further submitted that the contention of the department that the....
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....int at cable station at Mumbai and Flag interface point at the cable station at Penang (Malaysia). Simply because small portion of the cable passes through India, it cannot be construed that capacity sold lies in the cable situated in India. Thus, income from sale of capacity in the cable system does not arise through or from any business connection in India. Further capacity cannot be also termed as 'property' or any 'asset' or 'source' or 'capital asset' in India as the capacity sold is an amorphous thing, it cannot have any territorial link. C&MA and CSA have been executed by the assessee outside India on principal to principal basis and ownership interest in the capacity has been sold and transfer to VSNL outside India. No part of the receipt can be taxed in India under 9(1) (i). In support of his contention, he strongly placed reliance upon CBDT Circular No. 23 dated 23.07.1969, wherein it has been clarified that the income of a non-resident is not taxable provided the contract to sell is made outside India and the sale is on a principal-to-principal basis. The Circular further states that no liability will arise on accrual basis to a non-resident on the profits made by him wh....
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....none of the clauses in the CSA or C&MA provides for use or right to use of any equipment. As regard taxability of income from capacity sales as FTS u/s 9(1)(vii), he submitted that the Assessing Officer though has discussed the same in the assessment order but finally held it to be taxable as royalty u/s 9(1)(vi). 22. Coming to the apportionment of the profits to India, Mr. Mistry submitted that, assessee's alternate contention before authorities below was that, reasonable proportion of income from the capacity sales which at best can be taxed in India would be the portion of cable laid in the territorial waters of India. Regarding attribution of income to the extent of the operation carried out in India, reliance upon following decisions was placed; Carborandum Co. Vs. CIT (108 ITR 335) and CIT Vs. Toshoku (125 ITR 525) and by the Bombay High Court in the case of the CIT Vs. Tata Chemical Ltd. (94 ITR 85). Based on the same principle, it was contended that the only activity carried out in India by the assessee would confined to the portion of the cable laid in the territorial water of India, which is 12 Nautical Miles and put in the land which will come to 57.6 kms. Thus, the r....
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....t of vessels for repair and maintenance operations in accordance with the procedure defined in the Flag Operation and Maintenance Plan (FOMP). Clause 11.1 of C&MA provides that, Cost of standby charges, procurement of cable ship services, ship depreciation, insurance, in-port expenses etc. is to be recovered by the assessee through fixed charges payable by the signatories. Further it gives details of activities, expenses and costs incurred by the assessee with regard to standby maintenance activities. Under this clause, the fixed payments are made for the maintenance of segments S, X1 and X2, the FNOC, the procurement of cable ship services covering, inter alia, ship depreciation, ship retrofit, crew insurance (except insurance at sea), in-port expenses, the storage of submersible plant, remotely operated vehicles and other devices when included in the wet maintenance zone agreement standby charges. 24. Mr. Mistry pointed out that, as is clearly evident, from these clauses, these standby maintenance charges are not made in respect of any actual services, leave alone any technical services to be rendered to the signatories, but are part of the assessee's normal business operation....
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....L for standby charges cannot be treated as service fees, leave alone technical service fees under section 9(1)(vii) of the Act. He further submitted that there cannot be rendering of any managerial or consultancy services by the assessee for standby maintenance charges. In support of this contention, learned senior counsel strongly relied upon the decision of the Madras High Court in the case of Skycell Communications Limited and another Vs. DCIT and others (251 ITR 53) and other decisions. Objections raised on behalf of the Revenue 25. On behalf of the department, Ld. Special counsel, Shri Girish Dave, first of all raised a preliminary objection that some of the annexure/schedules to C&MA agreement have not been filed by the assessee. There have been multiple C&MA agreements which should be read together. He requested the bench to direct the assessee to submit various supply agreements, Schedule J to C&MA and other relevant documents which have been referred in the agreements. He also filed a petition under Rule 29 praying for direction to the assessee for submission of additional evidence like "maintenance zone agreements", "wet maintenance agreements", standby charges, sch....
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.... been provided. To illustrate that the additional documents which had been filed has no bearing, he referred to some of such documents. In support of this contention that the department now cannot make out a different case other than what has been adjudicated and decided by the AO and Ld. CIT(A) on the basis of material on record, he strongly relied upon the decision of Special Bench in the case of Mahindra & Mahindra Ltd. (2009) 313 ITR [AT 263] (Mum) (SB). Decision on the Objections Raised by the Department 27. After considering the rival submissions on the preliminary objections and the petition filed under Rule 29 by the Departmental Representative, we are of the opinion that the documents and the evidences which are required for adjudication of the issues involved are already there on the record and the documents which have neither been considered by the AO nor by the Ld. CIT(A), now at this stage cannot be admitted, unless it is shown by the parties that such an additional documents have very vital bearing on the issues and changes the entire colour of the controversy involved, the assessee cannot be directed to furnish further records when specific relevance has not be....
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....nts by FLAG, can be said to be a "sale" of cable capacity or mere "right to use" of the cable capacity subject to fulfillment of certain obligations under the agreement. Further, whether capacity to transmit the data through cable system can be said to be an 'asset' being capable of independent existence and capable of being delivered to third parties de-hors the ownership in the cable system, which carries such data as canvassed by the assessee. The answer would be negative. He also filed a diagram of a typical submarine cable system to show that the optical fibre is covered by layers of various materials and it is the optic fibre which is used for the transmission of data. 30. He submitted that, one has to understand the entire concept as to how the cable system works. The transmission of electronic or electromagnetic signal takes place at atomic or subatomic level and the transmission capacity of cable will depend upon the atomic structure of the matter of which the cable is made of. Hence, the capacity of cable to transmit the data is not an independently existing asset. The capacity to transmit is the intrinsic quality of the material used in the cable through which data/si....
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....ts capacity to transmit. This he submitted can be better appreciated by following examples; the best example can be the sale of electricity which is again only an electromagnetic waves/signal capable of running through the wires/cables where by allowing the consumers to use the cable network for withdrawing electricity, but in no case the cable becomes devoid of its capacity to transmit to other consumers nor does it mean that electricity board has sold the transmission capacity of cables to its consumers. Similarly, when a consumer agrees to download or upload a particular volume of data through internet network provided by ISPs user the transmission capacity upto a specified quantity of data as per the plan opted, but in no way it amounts to purchase of transmission capacity of internet network. The customer pays for the time of use or quantity of data sent or received through the network. In the present case also what the parties are paying to FLAG is for the volume of data (MIUs) transmitted through the specified segment. Similar is case when a landline telephone connection is obtained wherein the customer can use the transmission capacity of telephone line for transmitting the....
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....it the cable data in that segment equivalent to the percentage of the rights to use the capacity acquired by it. But that does not mean that the data of other parties does not pass through that particular segment. Thus, the transmission capacity in a particular segment acquired by any party is not absolute or exclusive. It is only sharing of the capacity in a particular segment with others which proves that there is no absolute sale of the capacity in a particular segment to the exclusion of others. Even the right to assign the acquired capacity segment by a party to other parties is with consent of FLAG Ltd as per the terms of C&MA and it does not mean that the acquiring party has an absolute and excusive right as owner of the capacity in a segment. These are only non exclusive rights to use the capacity of the cable in a segment unlike in case of a sale where the right to use becomes exclusive to the acquiring party. Interdependence of ownership of capacities between various parties further shows that there could not be absolute sale of a particular capacity segment to anyone party and that it was merely in nature of right to use, though in recitals of agreement the word 'own....
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....ent outside India, the cable passing through India does not house that segment capacity in India. Ld. Sr. Counsel He had further stated that after the date of activation, the capacity does not belong to it and hence no income can accrue to Flag from/through such capacity sales. This argument of Ld. Counsel is based on assumption that capacity is distinct asset than the cable system and that capacity of cable is restricted to the segments only which have been allocated to a particular party. Both these assumptions are misplaced as already explained. The Ld. Counsel is erroneously identifying the situs of capacity of cable based on location of the segment acquired by VSNL. On one hand, he argues that capacity and the cable are two distinct and independent assets and capacity can be sold without transferring the cable whose capacity it is and on other hand he identifies the situs of capacity of the cable based to be linked to the segment location for which segment capacity has been acquired. As submitted earlier the capacity is inseparable ability of cable and if the capacity has to be inextricably linked and be intrinsic part of cable, then the capacity has to be identified only as a....
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....s. The landing points are inextricably linked to the cable system for the use of its capacity. Just as one cannot say the wheels of a car are not part of car because they are needed to use the car, similarly the cable system cannot be used without landing points which are inextricately linked and part of a working cable network. The landing points are owned by FLAG and not the landing party. Hence, it cannot be said that landing points do not have any connection to cable which is also owned by FLAG or to the segments which are assigned to different parties by FLAG. Therefore, the location of landing point in India and the Indian Co being the landing party in India comprises of an asset which is part of cable network located in India and also the source of income in India as required u/s 9(1)(i). It is the cable system passing through India and the landing points in India which is used by VSNL to transmit the data into the cable system to earn its income though for a segment located outside India. The source of income to VSNL may be from transmitting the data in a segment outside India but the asset including the landing cables and landing points in India and when VSNL is also the l....
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.... were to be arranged by Flag. Hence the landing party and payment under CSA are also inextricably linked. The fact that out of all the parties acquiring the capacity segment, some of them are also the landing parties who have made investments in landing equipments suggests that there is no sale of capacity, but only transfer of right to use, because it is illogical for a landing party to invest in landing equipment to purchase the capacity segment whereas the other parties who are also the purchaser of capacity segment without being a landing party or making investments as that of a landing party. This proves that it is only right to use which is being acquired and the party which chooses to be a landing party gets a discount due to investment made by it on landing equipment. 36. Mr. Dave on the issue of treatment given in accounts by the Flag, submitted that in accounts of Flag Ltd, the fact that cost of cable has been claimed as expenditure and sales of capacity is shown as income, proves that the cable and capacity are one and the same thing, but measured in different units for purpose of ascertaining the profits in accounts wherein the cost of cable is recovered by sale in t....
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.... assessee has given to the VSNL is the user rights of the capacity in the cable network. 38. Further on the issue of taxability of receipt as royalty, he submitted that the cable network, the landing equipment and the segment capacity are part of one commercial asset owned by Flag and qualify as 'equipment' owned by Flag Ltd. The investment in laying cables is of Flag and the equipments are also procured by Flag. It is only the different segments on notional basis which have been given user rights to different parties and there is no sale/delivery of capacity to the so called buyers. Further the transmission of data is by way of use of a complicated process supported by various software and other sophisticated equipments, the use of it allows the use of 'process' also. It is only the right to use the commercial 'equipment' or 'process' which has been given by Flag to different parties on the basis of segments of cable network. To qualify as 'Royalty', it is not necessary that such equipment or process be under physical possession or control of user. The control or 'user' of the equipment, or process has to be seen from practical angle. Onc....
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....nternational Taxation of Telecom for the treatment of tax in such a cable system which we shall refer to in our later part of the order and International Telecommunication Transmission System Network Mode Interface explaining the entire submarine cable system. Rejoinder By Shri J.D. Mistry 40. First of all, learned senior counsel, Shri J.D. Mistry strongly objected to filing of additional papers which had no correlation with the issues involved and neither they have been considered by the AO nor by the Ld. CIT(A) and therefore, same should not be accepted or considered at this stage. However, without prejudice he submitted that in the SEC filing, reference to the parties as 'customers' cannot be adversely viewed because the parties to whom the capacity have been sold were in fact customers of the assessee as the assessee was in the business of selling the capacity in the cable system. In fact page 22 of SEC filing reflects that revenue is on account of sale of capacity which were recognized on the date on which the risks and rewards of the ownership is transferred to the purchaser, that is, on such date when the capacity is made available for activation. This in fact strongly....
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.... two independent parties enter into commercial agreement and understood the agreement in a particular manner confirming the ownership rights, then the department cannot decide the commerciality of the agreement but only its taxability or non-taxability. Here there is no allegation either by the AO or by the CIT(A), that agreement is a colourable device to camouflage the real transaction. He submitted that during the course of the hearing, Shri Girish Dave has referred to various schedules that VSNL has purchased various MIU capacity and it also provides details of capacity with segment of purchaser with ownership and IRU leases. However, in this case the VSNL has bought the capacity in terms of MIU's and not by way of IRU or lease. The capacity has been sold by transferring the ownership with all rights and obligation. Regarding his main contention that capacity is not an independent asset and cannot be sold de-hors the cable system, because capacity to transmit is intrinsic quality of the material used in the cable through which data/signal passes and it is not even an incorporeal asset but ability of the cable itself, therefore, transfer/delivery/sale of transmission capacity of ....
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....h other party does not mean that VSNL is not an owner of the purchased capacity. For instance, in case of Flag the same can be owned by one person or several persons in proportions as may be agreed between them. 42. Regarding department's contention on the issue of business connection in India, the main argument of the Mr. Dave has been that the capacity of the cable in any segment can be used or accessed through landing points which are inextricably link to the cable system for the use of its capacity and that the equipments at landing point in India are owned by Flag and not by VSNL, therefore, the location of landing point is in India comprises an asset which is part of cable network located in India and also source of income in India as contemplated u/s 9(1)(i); further the landing points is used by VSNL to transmit data into cable system to earn its income, therefore, the cable system which has a territorial nexus in India through landing points should be considered for determining the territorial nexus; further the word "through" used in Explanation 4 to 9(1)(i) is vide enough to include the cable system with its inherent and inseparable capacity passing through India and ....
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....tatute w.e.f. 01.04.2002 and Secondly, if the sale has been made on ownership basis there cannot be case of royalty. The tests of ownership have been clearly elaborated in C&MA, like in order to determine whether there is a sale or not, the following tests need to be considered from the terms of C&MA. Like disposition clause who would be entitled to the sale proceeds on disposition of the asset: In this case, as per clause 23.2 of the C&MA, the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights. Right to Assign: The fact that the purchaser of capacity can sell or grant a right to use the capacity in the cable system to some other party clearly indicates that the signatory is the owner of the capacity in the cable system purchased by it i.e. VSNL in the instant case. In view of the above, it is evident that VSNL is the owner of the capacity purchased by it forms the assessee. 45. Further the decisions relied upon by the learned Special Counsel are also not applicable, because of the peculiar facts of the assessee' case and also that these decisions are based on concept of use of equipments. The strong....
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....sing ground No.5 of the revenue. " We have heard the rival submissions, perused the Orders of the lower authorities and also the order of the Tribunal in assessee's own case in ITA No. 3062/MUM/2003. The facts of the present case are identical with the facts before the tribunal in assessment year 1997-98 and as no new facts have been brought on record which may persuade us to take a different view, Respectfully following the findings of the Tribunal in assessee's own case in ITA 3062/MUM/2003 (supra), we have no hesitation in confirming the findings of the CIT(A). Ground No. 2 is accordingly dismissed. 47. Regarding taxability of standby maintenance charges, he reiterated his submission that there is no rendering of services and no actual services has been provided to the VSNL and therefore, there same cannot be held to be in the nature of FTS. DECISION 48. We have carefully considered the entire gamut of arguments made by the rival parties before us, findings given in the impugned orders and the material referred to by the parties. The first issue for our adjudication arising out of grounds raised by both the parties in their respective appeals is, whether the ....
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....k. In that case, the transferee will hook to the network of the operator in order to send calls or transfer data or information from one network to another. Under such an agreement a transferee generally acquires right to send certain amount of data or information over fibre optic network for a certain period of time under certain terms and conditions. Such an agreement does not hand over the ownership control. For the determination as to whether the telecom capacity agreement is for the provision of 'right to use' or 'sale' of a capacity in the cable network, it is required to examine, if the property owner (here cable network owners) has firstly, retained the ownership control and possession of the property; secondly, has retained the risk of loss of the property; and lastly, reserved the right to remove the property from the premise of a purchaser. If the owner of the property has transferred the ownership and control over the property to a purchaser, then such a contractual agreement will be characterize as "sale" and not a contract for 'right to use' the capacity or service contract. Thus, the relevant facts and circumstances of the case as well as the terms of agreement are c....
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....ble system which was in the following manner:- Sr. No. DESTINATION COUNTRY FLAG LANDING POINT No. OF MIU's COST/MIU's UPTO LANDING POINT IN US $ THOUSANDS TOTL COST UPTO LANDING POINT IN US$ THOUSNADS 1 ISRAEL EGYPT 1 450 450 2 HONGKONG HONGKONG 3 900 2700 3 KOREA KOREA 1 1020 1020 4 USA(MCI) JAPAN 1 1020 1020 UK 2 1050 2100 5 UK MCL UK 3 1050 3150 6 POLAND ITALY 1 705 705 7 QATAR UAE 3 324 972 8 USA (US SPRINT) JAPAN 1 1020 1020 UK 1 1050 1050 9 SPAIN SPAIN 1 840 840 10 UKRAINE ITALY 1 705 705 11 BAHRAIN UAE 1 324 324 12 THAILAND THAILAND 2 840 1680 13 GERMANY ITALY 2 705 1410 14 UAE UAE 14 324 4536 15 OMAN UAE 2 324 648 16 HUNGARY ITALY 1 705 705 17 JAPAN (IDC) JAPAN 1 1020 1020 18 PHILIPPINES THAILAND 1 840 840 19 RISSOA (RPSSTE;CP,) ITALY 2 705 1010 20 IRAN UAE 1 324 324 2....
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....dens of the ownership has shifted from seller to the buyer. Here the buyer, VSNL has all the risks and rewards of ownership which is unfettered by the Flag, inasmuch as the VSNL has not only the exclusive domain on the rights to use but also right to resale or transfer its interest in the capacity in the cable system to the exclusion of the Flag. The assessee has no right on the capacity once sold. It does not retain any ownership, control and possession of the capacity sold to the VSNL. Under the terms of the C&MA, the VSNL also has right to vote on important matters relating to the management of cable system. The VSNL in all terms becomes absolute owner after the purchase of the capacity to the exclusion of the Flag and others. Thus, under the C&MA the VSNL satisfies the characteristic of a "owner" and "ownership" in respect of the capacity in the cable system. 52. The intention of the parties and their conduct can also be gauged by the accounting treatment given by the parties. As already referred to earlier at several places, the Flag has recognized its revenue from sale of capacity on the date of the risks and rewards of ownership have been transferred to the purchaser. The....
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....tc. are transmitted. The capacity of cable to transmit the data cannot exist independently, because capacity to transmit is the intrinsic quality of the material used in the cable. It is not even an incorporeal asset. Here in this case the capacity cannot be said to be an 'asset' having independent existence de-hors the cable. How can a cable be remained the property of the assessee and at the same time capacity which is the intrinsic quality of transmission of data can be sold, independently. Thus, there cannot be any sale of intrinsic capacity of a cable without the transfer of ownership of the cable itself. It cannot be classified as "goods" under the Sales of Goods Act. Thus, the transfer/delivery/sale of transmission capacity of a cable cannot be completed without the sale/delivery/transfer of the cable which transmits it. He had further clarified that, if the argument of the assessee is accepted that transmission capacity has been sold and delivered to the purchaser, then it would lead to absurd conclusion that once the data is transmitted through cable even once, the cable network which housed the capacity would become like an empty shell. 54. Technically speaking, what S....
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....arties and how they commercially enter into an agreement and agree to the terms and clauses as they mutually understand and accept. The revenue or courts cannot interpret the terms of agreement as entered commercially and understood by the parties, unless it is found that agreement has been made purposely to camouflage the real transaction. Once, we say that capacity and the cable are inextricably linked and inseparable, then capacity itself becomes a property which can be a subject matter of transfer or sale. Herein the present case, the agreements entered by the assessee as well as by the landing parties (including VSNL), the capacity has been understood as a saleable commodity. Even the Flag has accounted the capacity sold as sale of goods and the cost of constructing and laying the cable has been accounted as cost of goods sold. It has not been treated as two entirely different items, one which will remain with the assessee and other which would be sold. It is not the case of the assessee that they are exclusive of each other. Mr. Dave's entire premise of his arguments rests upon a foundation that cable remains with the assessee and it only intends to sell the capacity alone. T....
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.... argument of Mr. Dave which has been emphatically contended before us is that, it is not the case that the use of capacity in a particular segment was exclusive to one party only. The acquisition of capacity in a particular segment by any party is not absolute or exclusive, because every party has a right in all the segments. Everybody sharing a capacity in a particular segment with other goes to prove that there is no absolute sale of capacity in a particular segment to the exclusion of others. Thus, there is only non exclusive rights to use the capacity of the cable in a segment unlike in the case of sale where the right to use becomes exclusive to the acquiring party. As stated in the earlier part of our finding that the subject matter of sale is the capacity which has been sold in terms of MIU. The capacity in a particular segment has an exclusive right qua the owner which can be used in the manner in which the owner proposes. There can be several owner of capacity in a particular length of the cable. For example, if between two destinations various parties have bought the capacities, they will have all the rights of ownership in their respective capacity. Interdependence of ow....
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....d that the parties have acted or conducted their affairs contrary to the terms of the agreement. It is also not the case that the Flag has agreed to allow the VSNL to use its network and at the same time retained the ownership control and possession of the cable. Further it is not the case that Flag has vested itself with the right to remove the capacity in the cable assigned to VSNL after the period of contract. Rather there is a clause of disposition, where the benefits are distributed amongst all the signatories, including VSNL. In case had there been only right to use to be given, then the ownership right to the exclusion of the Flag could not have been given to the VSNL. In other words, if right to use is given then ownership is not transferred. Thus, in our conclusion which is based on the apparent terms and conditions of the agreement between the parties, there is no assignment of 'right to use' but 'sale of capacity' in the cable system. Whether It is a case of Royalty 58. Now we will come to the question, whether the receipts can be taxed as a "royalty". Since we have already held that, there is no right to use, then there is no question of treating the payment as ro....
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....assets, clause 23.2 clearly envisages that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights. Not only that, there is right to assign the capacity, which is borne out from the fact that purchaser of the capacity can sell or grant right to use the capacity in the cable system to some other party. All this clearly indicate that the signatory becomes the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case. This fact further establishes that there is no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party. The concept of transfer of ownership to the exclusion of the other perty is denuded in the case of "royalty". What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments etc. The relevant, Explanation 2 of section 9(1)(vi) reads as under:- "Explanation 2- Fo....
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.... was engaged in the business of providing telecommunication services in number of telecom circles in India. A Saudi Arabia based company, STC held 18.5% share holding in the assessee company. The STC owns controls and operates telecommunication network infrastructure in Saudi Arabia and elsewhere STC was a part of consortium who had entered into C&MA agreement to plan and lay a cable system called as 'Europe India Gateway Submarine Cable' known EIG. The members of the consortium were entitled to transfer capacity in the EIG cable system to other telecommunication entities from its allotted capacity. In pursuance thereof, SAT entered into capacity transfer agreement with the assessee which is an Indian Co. for transfer of part of the capacity out of its total allocated capacity of the EIG cable system. In terms of the said agreement, SAT has transferred right to use 40% of its allotted capacity in the EIG system to the assessee for consideration of $ 20 million. The assessee had approached the AAR, to render the rulings mainly on the following questions:- "Whether payments by the Assessee to Saudi Telecom Limited (STC) under the terms of the EIG Capacity Transfer Agreement toward....
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....id to be relevant, in case when VSNL grants right to use capacity to some other entity. It does not apply in case of assessee. The other important thing, the Authority held that the annual operation and maintenance charges cannot be taxed as FTS. (ii) Viacom "18" Media Pvt. Ltd. Vs. ADIT reported in (2014) 162 TTJ (Mum) 336. In this case the issue involved was, whether the transponder fees payable by the assessee to 'X' corporation was in the nature of royalty as per the provisions of Indo-US DTAA. The assessee company was incorporated in the India, primarily engaged in telecasting/broad casting television channels in India; it is also engaged in marketing of advertising air time of these channels, distribution of the channels marketing and distribution of films etc. The assessee has been provided 24 hour satellite signal reception and retransmission services i.e. transponder services by Intel SAT Corporation. In consideration for the transponder services, the assessee has to pay transponder service fee to Intel SAT. Pm these facts it was held by the authorities below and also confirmed by the Tribunal that, the payment in question payable to Intel SAT was for user for transp....
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....fect deals on spot foreign exchange with other foreign exchange dealers. The main server of the assessee was located in Geneva and it has executed a deal for services marketing agreement with Indian company which marketed the services of the assessee to the subscribers in India. Herein this case the issue involved is completely on account of service agreement and for rendering of services. Thus, this case is also not applicable at all. 61. However form the aforesaid decisions/ rulings, one thing is amply clear that terms and conditions agreed upon in the agreement between the parties is the crucial point for deciding the nature of controversy, characterization of receipts and issue of taxability. The economic substance of the transaction flowing from the written agreements between the parties is the key factor for determination of nature and taxability of receipt. 62. In our conclusion based on the discussions in the forgoing paragraph, the payment of US $ 28.94 million received by the assessee from VSNL is on account of sales and hence constitutes business income of the assessee. The finding and the conclusion of the Ld.CIT(A) based on the terms of the agreement and facts of....
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....e in India'. The assessee has sold capacity in various segments of the cable system lying from UK to Japan. In India the cable comes ashore in Mumbai which is connected to a landing station. This landing station has various equipments which is connected to the landing party's domestic system. Segment S-6 runs between Flag interface point landing station at the Fujera (UAE) to landing station Mumbai (India). Segment S-7 runs between Flag interface point at landing station at Mumbai and Flag interface point landing station at Penang (Malaysia). The assessee's case is that, firstly, once the capacity is sold by the Flag, the income thereof cannot be said to be by means of any asset or source situated in India. It does not receive income from use of capacity albeit by sale of capacity. The cable is only the sheath or housing for the capacity; Secondly, the sale of capacity in the cable system does not arise through and from business connection in India, because sale has been made to VSNL which is unconnected to the assessee; and Lastly, the landing station is owned by the landing parties of the respective countries. Thus, there is neither any business connection in India, nor any asset....
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....planation 2 to section 9(1)(i), which provides that business activity carried out through a person who is acting on behalf of nonresident and further illustrates the kind of activity such person carries out in India This explanation though has been inserted w.e.f. 01.04.2004 and may not be applicable in this year, however for understanding the concept some guidance can definitely be drawn. The term business connection connotes some type of establishment, agency or subsidiary or dependent agent or like. The connection in India must be in the form of any concern in the nature of trade, commerce or manufacture by which non-resident earns income. There should be a continuity of business relationship with the concern or person in India with the non-resident. Here is no such concern or person in India with whom the assessee has any business connection. The VSNL cannot be held to be a person or concern having a business correction in India as it is an independent entity, who has agreed to be a landing party in the agreement. Flag is not earning income through any aid or assistance of VSNL as VSNL is not carrying out any business for Flag in India. Thus, here in this case there is no incom....
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....eferred to by Ld. Senior Counsel would be squarely applicable in the case of the assessee in this year, as it has now been quite settled by various decision (as referred by the assessee before us) that later circular withdrawing this circular will not have retrospective effect. 67. Now coming to Explanation 1(a) to section 9(1)(i), which clarifies that the income from operation of business deemed under clause (i) of sub section (1), is to be reasonably be attributed to the operation carried out in India. The said explanation will not be applicable, as there is no deemed income accruing or arising to assessee in India within the ambit of section 9(1)(i). The question of attribution will only arise, once it is established that income has accrued or arisen to assessee within the deeming fiction of section 9(1)(i). Therefore, the attribution made by the CIT(A) on proportionate basis of worldwide revenue and gross profit is not correct and uncalled for The Ld. CIT(A) has not culled out how there is a business connection, asset or source of income in India. Unless the deeming income falls within the parameters of section 9(1)(i), no attribution can be made. Thus, so far as payment of ....
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....es covering, inter alia, ship depreciation, ship retrofit, crew, insurance (except insurance at sea), in-port expenses, the storage of submersible plant, remotely operated vehicles and other devices when included in the wet maintenance zone agreement standby charges, shall be recovered by the Founding Signatory through fixed charges payable by the Signatories and other holders of Assignable Capacity, in accordance with Schedules H-1 through H-55 and J. adjusted to reflect inflation. 11.2 The cost of running charges, which shall be limited to recovery the direct incremental costs incurred in connection with a repair operation involving Segment S or Segment X-1 or Segment X-2, including, but not limited to, the cost of fuel, at sea insurance, additional crew at sea, crew overtime, victual ling, telecommunications, mobilization and de-mobilization expenses, consumables, replenished equipment, and remotely operated vehicles, the extent not included in the wet maintenance agreement standby charges, shall be apportioned among Signatories (excluding the Founding Signatory) and other holders of Assignable Capacity on the affected Segment S or Segment X- 1 or Segment X-2 in accordance wi....
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....ltancy services is, "rendering". The word 'rendering' qualifies the other terms used for the FTS. The word "rendering" connotes to "provide" or "deliver" or "to do something". Thus, rendering services mean some kind of actual services is being provided or delivered which are in the nature of managerial technical or consultancy. The word 'managerial' has to be understood in the context of running and managing the business of the client or one who is in charge for management and control of its business. Here the payment made by VSNL is not in the nature of managerial. Again the term 'consultancy' has to be understood as advisory services wherein necessary advice and consultation is given to the client for the purpose of client's business. It is act of consulting or giving advice or guidance. Again here-in-this case there is no consultancy services. The word "technical" services connote services which are provided in technical field or by the person who has skill, knowledge expertise in the area of technical or science. Here-in-this case if the assessee is providing some kind of repair services in the cable system, then it can be termed as technical services, however, if there is no a....
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....wed. 72. The last issue relates to charging of interest u/s 234B as raised by the department in ground no. 2. As admitted by both the parties, this issue is covered by the decision of Hon'ble jurisdictional High Court in the case of DIT (International Taxation Vs. NGC Network Asia LLC reported in 313 ITR 187 (Bom). Thus, respectively following the binding precedence, we hold that assessee has not committed any default in payment of advance tax and hence there is no liability to pay interest u/s 234B. 73. Accordingly the grounds raised by the Revenue is dismissed, whereas, the grounds raised by the assessee is treated as allowed in part. Appeals for the A.Ys. 1999-2000 & 2000-01 74. In the cross appeals for the A.Y. 1999-2000, and A.Y. 2000-01 the revenue as well as the assessee have raised similar grounds, which are identical to ground raised by either parties in A.Y. 1998-99. For sake of ready reference, grounds raised by the either parties are reproduced here-in-below:- ITA NO. 1168/Mum/2004 (Grounds raised by the Assessee) 1. The Learned Commissioner of Income-tax Appeals- XXXI [CIT(A)] erred in holding that income from capacity sales earned under the Capacity ....
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....anation to section 9(1)(i) of the Act, be computed by applying the proportion of the cable length situated in India vis-à-vis the total cable length worldwide. 3. Without prejudice to Ground Nos. 1 and 2, the Ld. CIT(A) erred in computing the revenues chargeable to tax in India, as per Explanation to section 9(1)(i) of the Act, by applying the proportion of capacity sales earned from VSNL to the worldwide capacity sales earned by the Appellant. 4. The Ld. CIT(A) erred in holding that standby maintenance revenues earned by the Appellant from VSNL under the Construction and Maintenance Agreement (C&MA) between the Appellant and the licenses international telecommunications carriers (including VSNL), are taxable in India as fees for technical services under section 9(1) (vii) of the ACT. ITA NO. 7193/Mum/2004 (Grounds raised by the Department) 1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in holding that payment received by the assessee towards capacity sales agreement is not covered u/s 9(1)(vi) and 9(1)(vii) of the I.T. Act, 1961, but is taxable as business income? 2. Without prejudice to Q. No. 1 above, whether on t....