TaxTMI 
TaxTMI 
TaxTMI 
2015 (6) TMI 806
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....e been raised: Ground No.1: "On the facts and circumstances of the case, the learned Commissioner of Income-Tax (Appeals) -XXXI [CIT(A)] erred in holding that income from standby maintenance revenues earned by the Appellant under the Construction and Maintenance Agreement (C&MA) from VSNL are taxable in India". Ground No. 2: "On the facts and circumstances of the case, the learned CIT(A) further erred in treating that the standby maintenance revenues earned by the Appellant are in the nature of fees for technical services under section 9(1)(vii) of the Act". Ground No.3: "On the facts and circumstances of the case, without prejudice to Ground no.1, the learned CIT(A) erred in not accepting the Appellant's contention that the revenues chargeable to tax in India, be computed as per Explanation to Section 9(1)(i) of the Act, by applying the proportion of the cable length situated in India vis-à-vis the total cable length world-wide". Ground No.4: "On the facts and circumstances of the case, the learned CIT(A) erred in holding the restoration revenues earned by the appellant under Restoration Agreement are taxable in India". Ground No.5: "On the facts and circums....
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....e are that the assessee, 'FLAG Limited' is a company incorporated in Bermuda, which was set-up to build high capacity submarine Fiber Optic Telecommunication Link Cable System. It has build under-sea cable for providing telecommunication link between United Kingdom & Japan. In India, Videsh Sanchar Nigam Limited (VSNL) was one of the original landing party in the FLAG cable system. For the purpose of selling the capacity in the cable system to various landing parties, including VSNL, Capacity Sales Agreement (CSA) was entered into amongst Landing Parties and FLAG on 31.03.1995, which was further amended on 29th April, 1998, by which, VSNL has bought the capacity in the said cable system. The entire procedure for the ownership of capacity in the cable system and also for providing standby maintenance activities contains in the Construction and Maintenance Agreement (C&MA) separately entered between the parties. The CSA & C&MA was for the period of 25 years, which coincides with the life of the cable. Under the terms of C&MA, the FLAG cable system is to be jointly operated and maintained in efficient working condition along with FLAG and landing parties signatories. 5. In the year u....
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....ared to previous assessment years. The appellant company is maintaining fiber optic cable in good condition for use by viz. VSNL & other parties. VSNL having purchased capacity has further agreed to pay minimum amount of charges to be paid to the appellant so that the appellant maintains cable system for error free use by VSNL. The fiber optic cable as 'modern technological' system cable is submerged in the seas. The maintenance of the same is highly technical expertise work. The cable having been sold to the VSNL & Other parties for the period of 25 years. The appellant is charging standby maintenance charges from VSNL for technical services rendered by it towards maintenance of such cable maintenance. Accordingly, I find no force in the arguments of the appellant and hold that the standby maintenance as "fees for Technical Services" within the meaning of Explanation (2) to Sec. 9(1)(vii) and agree with my predecessor in this regard. Accordingly, the appeal on this point is dismissed and finding of the AO is upheld". 7. Before us, Ld. Sr. Counsel, Shri J D Mistri submitted that exactly similar issue was involved in the assessment years 1998-99 to 2000-01 wherein, the matter has r....
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....l as of the subsequent years and accordingly, this has to be decided in light of the findings given in the earlier years. This issue had come up for consideration before the Tribunal, wherein, it was held that standby maintenance charges do not fall within the realm of "Technical Services". After considering the entire facts of the cases, the relevant finding of the Tribunal on this issue are as under: "68. The second issue relates to taxability of 'standby maintenance charges' as fees for technical services u/s 9(1)(vii), as raised by the assessee in ground no. 4. As stated earlier, the assessee along with consortium of other parties has built the submarine fiber optic cable providing telecommunication link between UK and Japan. Under the terms of C&MA the FLAG cable system is to be jointly operated and maintained in efficient working condition or along with the founding signatory i.e. Flag and the landing party signatories. The operation and maintenance duties and rights has been elaborated in para 10 along with various sub clauses. The entire cable system is to be operated and maintained by founding signatory in coordination with relevant landing party signatory. Flag Network O....
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....tting up conditions for efficient rendering of services in relation to maintenance and repairs of cable system. There is a separate charge for repair and maintenance under the C&MA whereby, the assessee is actually required to undertake repair and maintenance and for which the assessee separately charges. Such a repair and maintenance is separate from standby maintenance cost, which is in the nature of reimbursement of fixed cost. The standby maintenance is a fixed annual charge which is payable not for providing or rendering services but for arranging standby maintenance arrangement which is required for a situation whenever some repair work in the undersea cable or terrestrial cable is actually to be performed or rendered. It is a facility or infrastructure maintained for ready to use or render the technical services or repair services, if required. On these facts we have to examine whether assessee is providing any service to VSNL in respect of standby maintenance. 70. Explanation 2 to section 9(1)(vii) defines "fees for technical services" in the following manner:- "Explanation (2)- For the purpose of this clause, "fees for technical services" means any consideration (includin....
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....nnual charge which is to be recovered as proportionate cost of maintaining the standby facility ready for carrying out any maintenance or repair services. This charge is different from an annual maintenance contract, whereby repairs and maintenance is covered for a certain period or services. In the present case as evident from the clause 11.1, that so far as standby maintenance charges is concerned, it is in the form of fixed annual charge which is in the nature of reimbursement. It has been also brought on record that only actual cost incurred has been recovered from VSNL in providing the standby maintenance services. There is no profit element or mark up involved. The assessee has also provided the details of receipt and cost involved in providing standby maintenance services to VSNL for A.Ys. 1998-99, 1999-2000 and 2000-01 which are as under:- Particulars Amount in US $ A.Y. 1998-99 A.Y. 1999-00 A.Y. 2000-01 Revenues from standby maintenance activities 512,955 1,226,860 2,072,453 Total costs incurred (as per auditor's certificate) (857,093) (2,0,77,219) (2,800,495) Profit/(Loss) from standby maintenance activities (344,138) (850,359) (728,042) It has been contended that there ....
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....nations. The unsold capacity rests with the assessee as its stock. This entire issue of sales of capacity and its taxability in India has been dealt in detail by the Tribunal in the appeal of the earlier years. The assessee in this year had entered into an arrangement with certain telecom cable operators to provide restoration of traffic to their customers in the event of disruption in the traffic on their cable system. Under these arrangements, if there is disruption in the traffic on a particular segment of the other cable operator, the assessee provides the alternative telecommunication link route through its own capacity in the cable. In India, VSNL had an arrangement with SEA-ME-WE3, herein referred to as (SMW3), for carrying its telecommunications traffic on segments to and from India and between the segments not connected to India. In case of a disruption in the traffic on a particular segment on SMW-3 Cable, the operator SMW3 approaches the assessee for restoration of the traffic on a particular segment through its cable. For this purpose, the assessee, had entered into a "Restoration Agreement" with SMW3 Cable Network vide agreement dated 23rd March, 2000. The assessee agr....
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....utilized excess capacity. (v) It is VSNL, who is making the payment to FLAG, and not SEA-ME-WE3, as it is VSNL, which is benefiting from the end-to-end connectivity on spare capacity of FLAG, which it is using to impart facilities to its users. 4.2.5 In effect, what has been termed as 'restoration activity' is basically rendering of technical service by allowing the utilization of spare capacity on its submarine fiber-optic cable system by FLAG. The assessee has claimed that if at all it has to be taxed, then the revenue attributable to India should be derived by using the ratio Length of cable in India , and applying this Total Length of cable Worldwide Method, it has submitted that the revenues attributable to India would be USD 943.7 out of USD 441854, as paid by VSNL. The above method begs for the question as to why, at all, VSNL has to FLAG the amount of USD 441854, if only USD 943.7 could be attributed to it. The fact remains that, as per the terms of the agreement, this arrangement is temporary. Ownership is not transferred FLAG is simply allowing VSNL to utilize the technical facility as available with it, in the form of the sophisticated cable system. The same is taxable....
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....ation activities. Regarding technical services, he submitted that the assessee is merely providing a standard facility of carrying telecommunications traffic to other capacity provider, such as SMW3 on temporary basis in the event of disruption in its traffic. When a restoration calling party i.e. VSNL decides to avail of the connectivity from the assessee, there is neither transfer of technology nor rendering of any technical services. Customers like VSNL only receive end-toend connectivity to enable it to carry on its normal transmission business activity. Simply using highly sophisticated technical equipment or cable for providing capacity to the customer does not make it a provision for a technical service to the customer. In support of his contention, he strongly relied upon a decision of Madras High Court in the case of Sky-Cell Communications Ltd vs DCIT, reported in 254 ITR 53 and ITAT Bangalore Bench decision in the case of Vipro Ltd. 80 TTJ 191. Thus, there is no technical service provided by the assessee while providing a standard facility of carrying telecommunication traffic through its capacity in the cable. 17. He further submitted that the activity of providing a r....
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....attributable to the operations carried out in India shall be taxable in India. Here, in this case the only activity carried out by the assessee in India if at all can be attributed, is that, it has small portion of cable system laid in the territorial waters of India. In such a situation, the most appropriate basis for identifying the income, which can be reasonably attributed to India, would be on the basis of a fraction of a length of the entire cable system, which falls within territorial waters of India, which is only 12 nautical miles. Hence, only 12 nautical miles cable system ought to be considered in India. He submitted that, during the relevant years under consideration, there were three segments in which restoration activities were undertaken, that were connected to the cable landing station in the territorial water in India i.e. Fujairah to Mumbai, Miura to Mumbai and Mumbai to Singapore. He also filed a chart showing a details of restoration charges received over the years (which are subject matter of appeals before us) and the segments on which restoration services were provided; length of the cable segment; length of the cable in the territorial waters in India and th....
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....and SMW3 to allow the VSNL to use the system of FLAG in the case of disruption in SMW3 cable, so as to ensure un-interrupted transmission of telecommunication data. He submitted that, if VSNL bought the capacity in the submarine cable system of the FLAG and is also a co-owner, how can then VSNL make payment to the assessee towards use of the capacity on the cable system owned by it. After referring to the various clauses of the restoration agreement, he submitted that services provided by the assessee to the VSNL are purely technical services. He further reiterated that the assessee retains the coownership of the system till Mumbai and is also the owner of the equipment in the cable landing station for monitoring the submarine cable system. This cable landing station provides point of power to the submarine cable system and receiving and processing of signals for communication to the domestic network system of VSNL. Thereafter, VSNL connects the cable through an interface point at a landing station into its backhaul system. Thus, entire equipment is owned by the assessee in India and hence it cannot be held that there is no asset or source of income in India. He referred to the sta....
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.... Explanation (2) provides that the payment made in consideration for the rendering of managerial, technical or consultancy services falls within the category of 'fees for technical services' which is taxable in India u/s 9(1)(vii). In this case, such a restoration activity does not fall within the nature of 'managerial' or 'consultancy services', because there was no rendering or managing by direction, regulation, administration or supervision of activities by the FLAG to the VSNL. Neither it is providing any advisory services for arranging of restoration activities to the VSNL. The assessee already has a cable system network in which it has spare capacity, which is being provided to the VSNL on behalf of SMW3 in case of disruption in SMW3 cable network. It is a kind of providing a standard facility for carrying telecommunication traffic to other telecommunication/capacity provider. When a restoration calling party like VSNL avails the network link in the cable of the assessee, no transfer of technology is involved nor have any technical services been rendered. The VSNL only receives end to end connectivity for a temporary period till the cable of SMW3 is restored for the traffic. ....
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....t is not fee for technical services is upheld. The other arguments of Shri Dave that landing station belongs to the assessee is not acceptable as this aspect of the matter has already been dealt in detail in our earlier years order. 22. Further, from the perusal of the restoration agreement and various clauses, it cannot be inferred that there is any actual rendering of technical services by the assessee. Nothing is suggestive of the fact that under the restoration agreement some kind of technical skill, technical services are being provided, except for the kinds of restorations which can be undertaken and terms thereof for the connectivity and payment. Thus on these facts, we hold that revenue received from restoration activities is not taxable as FTS u/s 9(1)(vii). 23. Now coming to the issue, whether providing of such restoration services is in the nature of 'business income' or not. The assessee's case had been that no business operations were carried out in India in respect of the restoration activities as the revenue from such services have been received outside India and there is no business connection or any asset or source of income in India, because majority of the FLAG....
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....rt of the income, which can be reasonably attributable to the operations carried out in India. In other words, attribution of such income has to be made in accordance with Explanation 1A. The Ld. CIT(A) though held that it is a business income of the assessee to which we fully endorse, however has allocated the income in India by estimating 10% of the global income from restoration activities. Such an apportionment by the CIT(A) cannot be held to be tenable at all, firstly, the Ld. CIT(A) himself has stated that the working of the loss given by the assessee to show that it has incurred huge loss at global level, cannot be corroborated because there is no availability of certified global statement; and secondly, the global income cannot be the basis for attributing the income in India, when only small portion of cable passes through territorial waters of India and the majority length of the cable is situated outside India. Under the present fact, the most appropriate basis for identifying the income, which can be reasonably attributable to India would be on the basis of the fraction of the length of the entire cable system in the cases where restoration services have been provided i....