TaxTMI 
TaxTMI 
2016 (3) TMI 680
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....eral countries. It is engaged internationally in the business of providing Cellular Telephone Facilities to subscribers. The Department of Telecommunication, Govt. Of India has granted the License to the Assessee Company for operating it services in certain specified Circles. The facts leading to the assessment are brought out at para no. 4.2 to 4.7 of the Ld. CIT(A)'s order at pages 7 to 9. This is below extracted for ready reference:- "4.2 Earlier, in respect of domestic part of business of the assessee, DCIT, Circle 49, New Delhi, passed an order under section 201(1)/201(1A)of the Income-tax. Act, 1961 for the financial years 1995-96 to 2002-03 on 26-03-2004, holding that the payment made by the assessee to MTNL on account of interconnection charges, port/access charges was 'fees for technical services' and tax. was required to be deducted by the appellant u/s. 194J there from. Since MTNL had already filed return of income for the aforesaid financial year, declaring relevant amount received from the appellant on account of interconnection and port/access charges as income and had paid tax thereon, the DCIT, Circle 49, New Delhi did not raise any demand under ....
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....TDS), Gurgaon on 29.09.2010. Mr. Tanay Krishna was cross-examined by the representative of the appellant on 04.10.2010. Mr. Tanay Krishna was also re-examined on 04.10.2010 by the Department. The appellant also submitted evidence by way of opinion, dated 14.12.2010, of Mr. G.S. Grover, Ex-Member, Telecom Commission. Subsequently, the ACIT (TDS), Gurgaon, vide order dated, 03.01.2011, held that as there was human intervention in installing, monitoring of infrastructure etc., the services provided by BSNL/ MTNL to the appellant were covered within the meaning of "technical services" and tax ought to have been deducted therefrom U/S 194J of the Act. The said order of passed by ACIT (TDS), Gurgaon is challenged by the assessee in appeal. 4.7 Pursuant to the aforesaid order, the ACIT(TDS), Gurgaon, vide letter dated 8th February, 2011, sent information to the Income-tax Officer, TDS Ward 1(1), International Taxation, New Delhi so as to examine the similar issue involved in international part of business of the assessee. On receipt of the aforesaid letter, the ITO, TDS Ward 1(1), International Taxation, New Delhi, issued show cause notice, dated 31st March, 2011, requir....
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....issioning of interconnect circuit, Interconnect performance standards, interconnect capacity, network interface, interconnect link architecture, configuration of system, testing, interconnect testing, pilot testing, operation and maintenance of hardware/software, supervision/monitoring the functioning of interconnect network, capacity augmentation and reconfiguration and capacity enhancement, monitoring including network monitoring, maintenance, fault identification, repair and ensuring quality of service as per interconnect agreement of interconnect network system to provide fault free services according to interconnect standards. (ii) The whole process for carriage and transfer of calls from the network of one operator to another is not limited to process of carriage of calls though being an automated process undertaken by a series of highly advanced telecom network equipment. The process of interconnection is a composite process involving several aspects which requires constant human intervention to make the process of carriage of calls satisfactory and as per performance standard agreed by the two parties. (iii) Regarding interconnection to Gateway, it is wort....
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....ch patches/rectification of software is required. Such an intervention requires highly qualified and trained technical professional having expertise, experience and acumen in that particular area of relevant technology and is not possible by a general technician or semi skilled person. (vi) The assessee company/deductor has been considering the issue of call carriage in isolation under process of interconnection which involves many processes, like call connect, call routing and signaling taking place in a network. These processes taken together form interconnection but the assessee company/deductor has failed to counter the opinion of the experts who have categorically established that human, intervention, takes place during carriage of call as the call routing and signaling are predefined as an initial setup or in installation phase and based on this predefined data, which is part of configuration in interconnect system, such phases are selected automatically to call connect and not just in routing. The process of carriage of call is automatic only for successful and fault free calls (A successful, call is which reaches the desired destination and which carries quality vo....
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....red software, reconfiguring the systems, etc. On all the above areas of intervention, technical expert is persistently required to make the process of carriage of call victorious. Persons involved in these areas cannot be merely a technician but are to be professionally and highly qualified experts having good knowledge of network management, knowledge of hardware & software, knowledge of network configuration, etc. as no service provider does take the risk of leaving the network systems unattended, when the networks are interconnected with each other during the process of carriage of calls, for the simple reason that even a small fault can cascade into large faults. which could finally lead to entire collapse of the systems and fail the process of carriage of calls . (xi) The technical experts have clearly stated that the entire process of call processing and capacity augmentation, i.e. additional capacity when capacity gets exhausted, is essentially/necessarily human intervention and cannot be done without the services of humans. The interconnect / access / port facility is regarded as technical services and all payments made on account of interconnect charges/access/por....
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....ment is payment for FTS u/s. 9(1)(vii) of the Act had held that the payment was 'Royalty' in Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Act. 2.4.1 The AO vide order dated 12.1.2012 raised the demand u/s. 201 as well as 201(IA) to the assessment years 2008-09 to 2011-12 for non-deduction of tax at source u/s. 195 of the Income Tax Act, 1961 (hereinafter referred as "The Act" of 'IUC' payment made to "FTO's". He levied tax on higher rate of 20% (plus Surcharge & Cess) on the gross amount of payment made to the FTO for all the years under consideration by applying the provisions of section 206AA of the Act. Aggrieved the assessee carried the matter in the Appeal before the Ld. First Appellate Authority. The First Appellate Authority upheld the order of the AO to the extent of the finding that the payment of IUC are in the nature of FTS under the Act. He has held as follows:- "9.7 The whole controversy is whether any human intervention exists at time of picking up of call from ILD gateway of the appellant by ILD gateway of foreign operators and it has to be understood and resolved by examining the statements of the experts, which have been reproduced supra. Sc....
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.... part's network interconnection locations, and the parties shall be responsible to procure, at their own expense, the necessary facilities or equipment required to interconnect to such locations." 9.9 Though, the ultimate purpose of the agreement is to achieve successful carriage of call at the interconnection location, the process of establishing interconnection itself is elaborate one. It involves making the two network systems compatible, configuration & reconfiguration of system, allotment of capacity & capacity augmentation whenever required, re-routing of call in event of overflow, fault finding and repair and over & above, constant monitoring of the network system so as to ensure un-interrupted carriage of call. All these activities are performed by highly qualified professionals and not merely technicians or unskilled workers. All these human interventions are pre-requisite for successful connect of the call. Without such human intervention, the service of successful connection of call cannot be provided. Now, it is undisputed that with advent of latest technology, the call connect process has become software based and substantially automatic. Over a period of ....
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....f FTS as per DTAA is the same as in the Act. Just to take an example, FTS as Indo-UK treaty is given in Article 13(4), which is reproduced as below: 4. For the purposes of paragraph (2) of this Article, and subject to paragraph 5, of this Article, the term ''fees for technical services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which : The definition says that FTS consists of two parts: a) Consideration for the rendering of any managerial, technical or consultancy services. b) consideration for provision of services of technical or other personnel 9.12 The second part of definition talks about technical personnel whereas first part does not mention about technical personnel. It can reasonably be inferred that first part of definition is concerned with technical services provided in any manner, may be mainly through automated machine. In case under consideration, there is practically no human intervention at the time of connect of successful call and this is the position which has been accepted ev....
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....venue from NLD operator comes to a common pool and both appellant and the non-resident operator are entitled to share it according to some formula. The payments made by the appellant to non-resident telecom operators are in nature of expenditure in books of accounts of the appellant and such payments are in nature of FTS as discussed supra. Therefore, this contention of the appellant is rejected. 9.16 The appellant has taken another argument that it makes payment only for a successful call and other activities of foreign operator like maintenance of network system are not remunerated by it. Therefore, other incidental activities where some human intervention is involved, are not in nature of services from perspective of the appellant. This contention of the appellant is misleading. The payment on basis of successful call is only a mode of calculating the payment for provision of service of transmission of call. The service provided by non-resident operator cannot be restricted by adopting a particular mode of making the payment. 9.17 It is also pertinent to note that the appellant is deducting tax on IV C payments made to domestic telecom operators, which clearly ....
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....k 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 any industrial, commercial or scientific equipments but not including the amount referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (iv), (iva) and (v). The definition of royalty as per Article 13(3) of Indo-UK....
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.... that it constitutes a 'process'. According to Explanation 6, which is proposed to be incorporated in section 9(1)(vi) of the Act by Finance Act 2012, the process shall include transmission by optic fibre or similar technology. Thus, after this amendment, the transmission of call across gateway/interconnect shall be a 'process' under domestic law. However, even if there is a 'process' involved; there is no use of it by the appellant. In discussion supra under Issue no. 1, it has been held that non-resident telecom operator has provided technical services to the appellant. This is possible only when non-resident operator is using his network. Without using his network, nonresident cannot provide services to the appellant. Now, when non-resident is using his network, it cannot be said that the appellant is using the network of non-resident operator. Therefore, two situations are mutually exclusive. Only one of them, either non-resident operator or the appellant is using the network of non-resident while transmission of call through optic fiber. It has already been held that non-resident operator has provided technical services to the appellant as is the case m....
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....n view of various judicial decisions relied upon by the appellant. The obligation imposed upon the appellant u/s 195 to deduct tax is '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 '. Therefore time of credit or actual payment of sum is relevant to see the obligation of the payer. Thus, subsequent amendment though retrospective in effect, cannot create any obligation upon payer which did not exist at time of crediting or actual payment of the sum. 11.7 In view of discussion supra, I have no hesitation to hold that payments made by the appellant are not in nature of royalty under domestic law and relevant DTAA. This disposes off ground of appeal no. 19 which is accordingly allowed." 3.1 On Section 206AA, the Ld. CIT(A) held that this Section is applicable only prospectively. 4. Aggrieved with the finding of the ld. CIT(A), that the payment for 'IUC' is 'FTS', the assessee filed these Appeals. The Revenue has filed the Cross Appeals against the finding of the Ld. CIT(A) that IUC cannot be treated as royalty and also the fi....
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.... and both net works have a right to share the revenue generated from successful calls between the inter connected operators. c) IUC have been in the nature of sharing of revenue generated from successful calls. This is business incomes of such operators. d) The operations of the FTOs in the form of carriage and termination of calls over their respective network, are carried out entirely outside India and hence, are not taxable in India, in terms of Explanation 1(a) to Section 9(1)(i) of the Act. e) IUC cannot be deemed to accrue or arise in the hands of the FTOs u/s. 9(1) read with section 5(2) of the Act. f) As income in question is the business income, and as the FTOs do not have any Permanent Establishment in India, the income is not taxable in India even under Article 7 of the Double Taxation Avoidance Act. Hence, the assessee is not required to withhold the tax u/s. 195 of the Act for such payments and consequently, cannot be held liable u/s. 201 of the Act. g) Section 206AA cannot be applied retrospectively and that the beneficial provisions of the DTAA's have to be applied. h) The Ld. CIT(A) was right in admitting additio....
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....f the Ld. CIT(A) that there was human intervention. He referred to the cross examination done by the assessee as well as the reexamination done by the AO and the conclusions drawn by the AO and supported the conclusions of the AO as confirmed by the Ld. CIT(A). He further pointed out that the assessee company has itself deducted TDS on this "IUC" from domestic mobile service provider w.e.f. April, 2003 and argued that there is no difference in flow of calls or operations for a national call or an international call and under these circumstances tax should have been deducted on payment made to FTOs also. 11. Ld. DR further argued that services has been provided by the FTOs to the assessee. He vehemently contended that the submissions of the Assessee that services are connected with successful calls only is fallacious. He argued that services are obtained from FTOs even in a case where a call has not materialized and that successful calls are taken into account only for the purpose of billing. He contended that method of billing cannot be equated with type of services obtained by the assessee. He submitted that the operations are described in the composite agreement and it include....
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.... Court decision on this issue, he submitted that the Hon'ble High Court has not adjudicated the issues post amendment, as the same was not before it. He submitted that the payment is for use of a process and hence covered by Explanation 5 & 6 of Section 9(1)(vi)(b) of the Act. He specifically relied upon the orders of the ITAT, Bangalore Bench in the case of Vodafone South Ltd. vs. DDIT (Int. Taxation) reported (2015) 53 taxmann.com 441 (Bangalore-Trib.) and argued that the issue in question is squarely covered in favor of the Revenue by this decision. He further relied upon the decision of the ITAT, Mumbai Bench in the case of Viacom 18 Media (P) Ltd. vs. ADIT (International Taxation), Mumbai Tribunal reported in (2014) 44 taxmann.com 1 wherein it was held that, the payment of Fees for use of Satellite Transponder Service by assessee to one US Company was taxable as royalty under Article 12 of the DTAA. 15. In reply thereto, Ld. Counsel of the assessee distinguished the case laws relied upon by the Ld. DR and distinguished each and every case law on facts as well as on law. He submitted that the proposition of law laid down by the Jurisdictional High Court on the very same issu....
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....er beneficial rate provided under DTAA would override the provisions of section 206AA. 20. We summarize the grounds in the Revenue's Appeals as follows:- i) Whether the payment made by the Assessee to FTOs are taxable as royalty for the use of process under section 9(1)(vii) of the Act and relevant DTAA's. ii) Whether the assessee can be treated as "assessee in default" u/s. 201 of the Act in respect of the liability imposed by virtue of retrospective amendment to law. iii) Whether "make available" clause under relevant DTAA are satisfied. iv) Whether section 206AA of the Act is applicable retrospectively. v) Whether the Ld. CIT(A) acted in violation of the provision of Rule 46A in admitting additional evidence by the assessee. 20.1 We now frame the following issues for our adjudication:- ISSUE NO. 1 WHETHER THE PAYMENT OF IUC BY ASSESSEE TO FTOS ARE TAXABLE AS FEE FOR TECHNICAL SERVICES U/S. 9(1)(VII) OF THE ACT. ISSUE NO. 2 WHETHER THE PAYMENT TO FTOS FOR 'IUC'S ARE IN THE NATURE OF ROYALTY UNDER SECTION 9(1)(VI) OF THE ACT. ISSUE NO. 3 WHETHER THE ASSESSEE IS LIABLE TO BE TREATED AS ASSESSEE IN DEFAULT U/S. 201....
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.... 8.2 Thus, ILD business is nothing but provision of connectivity to the subscriber for international portion of a call, which may or may not originate domestically. The local connectivity [within India] is provided by Access Providers and National Long Distance (NLD) operators, and the international leg of the connectivity is provided by the ILD operator in conjunction with a foreign telecom operator(s), who provide the last mile connectivity. The following are three illustrations of carriage of calls provided by the ILD operator: a) Carriage of calls from India to outside India: To give an example, if a cellular subscriber is located in Delhi and seeks to make a call to New York, through his cell phone, the call will be routed as follows: In the above diagram, the call moves from Aurangabad mobility circle to the NLD gateway (say at Nagpur), travels on NLD network till ILD gateway (say Mumbai) from where it is transported to international operator(s) outside India. In order to provide seamless services to its subscribers, the appellant enters into agreement with overseas network operators, to connect the call over their network. Therefore, ca....
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.... network. The call will then be automatically carried on the network of the ILD operator to Singapore and then transported to the local operator in Singapore. The ILD operator will earn income from the US telecom service provider but will have to pay the IUC/access charges to the local Singaporean telecom service provider. 8.3 It may be noted that the appellant is not authorized, under the ILD license, to carry call traffic from one place to another within India which can be carried only by a NLD license holder. In this regard, the relevant clause of the NLD license is given below: "2.2(a) The NLD Service refers to the carriage of switched bearer telecommunications service over a long distance and NLD Service Licensee will have a right to carry inter circle traffic excluding intra-circle traffic except where such carriage is with mutual agreement with originating service provider. (b) The LlCENCEE can also make mutually agreed arrangements with Basic Service Providers for picking up, carriage and delivery of the traffic from different legs between long Distance Charging Center (LDCe) and Short Distance Charging Centers (SDCCs). (c) In the case of....
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....y by the ILD Operators interconnection with FTO, who provide the last mile connectivity. An international call has to be routed through NLD/ILD using the International Gate way. For termination of the international calls in India, ILD have commercial arrangements with foreign carriers who deliver the Traffic using the international connectivity and calls are delivered to the Indian ILD Operator. The assessee entered into an agreement with Overseas Network Corporate to connect the call over the network. This is done to provide seamless connectivity services to the subscribers. The Access Provider provide seamless end to end connectivity to the subscribers and the entire revenue arise out of such services is paid by the subscribers to the Access Provider. If the NLD Operator is difference from Access Provider, then the NLD Operator Bills the Access Provider for his part of service rendered. The ILD Operator is in turn billed by the FTO in the form of Inter-connected Usage Charges (IUC). 24. The basic issue before us is whether such Interconnected Charges Billed by the FTOs and paid by the Assessee are in the nature of Fee of Technical Services (FTS) or in the nature of Royalty. We....
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....rovide such facilities are rendering any technical services as contemplated in Expln. 2 to s. 9(l)(vii). This is so because the expression 'technical services' takes colour from the expressions 'managerial services' and 'consultancy services' which necessarily involve a human element or, what is nowadays fashionably called, human interface. In the facts of the present appeals, the services rendered qua interconnection port access do not involve any human interface and, therefore, the same cannot be regarded as 'technical services' as contemplated under s. 194J. The interconnect/ port access facility is only a facility to use the gateway and the network of MTNL/ other companies. MTNL or other companies do not provide any assistance or aid or help to the respondents/ assessees in managing, operating, setting up their infrastructure and networks. No doubt, the facility of interconnection and port access provided by MTNL/ other companies is 'technical' in the sense that it involves sophisticated technology. The facility may even be construed as a 'service' in the broader sense such as a 'communication service'. But, while interpre....
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....ich required for the provisions of such services. These are required to be rendered by humans. The services provided by machines and robust do not fall within the ambit of technical services as provided u/s. 9(1)(vii) of the Act. 29. On appeal by the Revenue, the Hon'ble Supreme Court in the case reported as CIT vs. Bharti Cellular Ltd. (2011) 330 ITR 239 upheld the proposition of law laid down by the Hon'ble Delhi High Court. The Hon'ble Supreme Court has held as under:- "The question basically involved in the lead case is: whether TDS was deductible by M/s. Bharti Cellular Limited when it paid interconnect charges/access/port charges to BSNL? For that purpose, we are required to examine the meaning of the words "fees for technical services" under Section 194J read with clause (b) of the Explanation to Section 194J of the Income Tax Act, 1961, [`Act', for short] which, inter alia, states that "fees for technical services" shall have the same meaning as contained in Explanation 2 to clause (vii) of Section 9(1) of the Act. Right from 1979 various judgments of the High Courts and Tribunals have taken the view that the words "technical services" have got to be read in....
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.... not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department before the CIT. It was not raised even before the Tribunal; it is not raised even in these civil appeals. However, keeping in mind the larger interest and the ramification of the issues, which is likely to recur, particularly, in matters of contracts between Indian Companies and Multinational Corporations, we are of the view that the cases herein are required to be remitted to the Assessing Officer (TDS). Accordingly, we are directing the Assessing Officer (TDS) in each of these cases to examine a technical expert from the side of the Department and to decide the matter within a period of four months. Such expert(s) will be examined (including cross-examined) within a period of four weeks from the date of receipt of the order of this Court. Liberty is also given to Respondent No.1 to examine its expert and to adduce any other evidence. Before concluding, we are directing CBDT to issue directions to all its officers, that in such cases, the Department need not proceed only by the contracts placed before the officers." (Emphasis ours) 29.1 Thus in ....
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....he various experts, as these were considered in detail by the Coordinate Benches and it was held as follows: 29.3 The Kolkata Bench of the Tribunal in the case of Vodafone East Ltd. vs. Addl. CIT in ITA No. 243/Kol/2014, vide order dated 15.9.2015 held as follows:- "From the aforesaid statement recorded from technical experts pursuant to the directions of the Supreme Court in CIT Vs. Bharti Cellular Ltd. (330 ITR 239) which has been heavily relied upon by the Learned CITA, we find that human intervention is required only for installation! setting up/ repairing/ servicing/ maintenance/ capacity augmentation of the network. But after completing this process, mere interconnection between the operators while roaming, is done automatically and does not require human intervention and accordingly cannot be construed as technical services. It is common knowledge that when one of the subscribers in the assessee's circle travels to the jurisdiction of another circle, the call gets connected automatically without any human intervention and it is for this, the roaming charges is paid by the assessee to the Visiting Operator for providing this service. Hence we have no hesitatio....
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....and methodology used by Telecom Companies in providing inter-connection of domestic calls or of international calls. So what decision is applicable for use of local calls also applies to "IUC" of international calls. Thus the view taken on the deductibility of TDS on IUC charges paid for local inter connectivity service would on all fours apply to charges paid for "IUC" for international inter connectivity. 32. The Chennai Bench of the ITAT in the case of M/s Dishnet Wireless Ltd. vs. DCIT in ITA No. 320 to 329/Mad/ 2014 vide order dated 20.7.2015 on the aspect of human intervention held as follows:- "25. Now coming to roaming charges, the contention of the assessee is that human intervention is not required for providing roaming facility, therefore, it cannot be considered to be a technical service. We have gone though the judgment of Apex Court in Bharti Cellular Limited (supra). The Apex Court after examining the provisions of Section 9(l)(vii) of the Act, found that whenever there was a human intervention, it has to be considered as technical service. In the light to the above judgment of the Apex Court, the Department obtained an expert opinion from Sub-Divisional ....
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.... taken in the above referred orders, we hold that the payment in question cannot be characterized as Fee for Technical Services u/s. 9(1)(vii) of the Act. There is no manual or human intervention during the process of transportation of calls between two networks. This is done automatically. Human intervention is required only for installation of the network and installation of other necessary equipments/ infrastructure. Human intervention is also necessary for maintaining, repairing and monitoring each operator or individual network, so that they remain in a robust condition to provide faultless services to the customers. Human intervention is also required in case where the network capacity has to be enhanced by the telecom operators. Such human intervention cannot be said to be for inter-connection of a call. 34. Where routing of every call has been decided, the exhaustive standard of capacity of the transporter network will automatically re-route through another channel through another operator. Human intervention in setting up enhanced capacity has no connection or relation with the traffic of call. Thus it is clear that in the process of actual calls, no manual intervention....
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....l services provided by T to the assessee and, therefore, the provisions of s. 9(l)(vii) did not apply. Tribunal has rightly dismissed the appeal after taking into consideration the agreement between the assessee and T and the nature of services provided by T to the assessee. It was a simple case of payment for the provision of a bandwidth. No technical services were rendered by T to the assessee. On a consideration of the material on record, no substantial question arises in the matter." 37. In the case of ACIT vs. Hughes Software Systems Ltd. (2013) 35 CCH 416 Del. Trib, the Tribunal has held as under:- "Deduction. of tax at source-Fees for technical services- Assessee was engaged in business of software development of products and providing software services in India and overseas-Assessee was treated as "assessee in default" u/s 201(1) on account of non-deduction of TDS u/ s 194J from payment made for use of tele-communication services i.e telephone charges, link charges and band width charges as 'fee for technical services" u/ s 9(1}(vii}-CIT(A} reversed findings of AO-Held, payments were made to MTNL & BSNL etc. for providing space for transmission of data for c....
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.... Act, it would be an academic exercise to examine whether the payment in question would be fee for technical services under DTAA's. Suffice to say wherever treaties contain "making available" clause, then in terms of the judgment of the Hon'ble Karnataka High Court in the case of CIT & Ors. vs. De Beers India Minerals Pvt. Ltd. (2012) 346 ITR 0467; the payment cannot be treated as FTS under the DTAA as there is no imparting as contemplated in the Treaties. Similar are the propositions on the issue of "make available" in the decisions in the case of Mahindra & Mahindra Ltd. vs. DCIT 313 ITR 263; Ramond Limited vs. DCIT 86 ITD 791; Cable and Wireless Networks India P. Ltd. (2009) 315 ITR 72. 41. The next aspect of this issue, which is raised as Ground No. 8 in the Department's Appeal is that, when the treaties do not contain FTS clause, what is the impact on taxability. Wherever FTS clause is not available in the treaty with a country, then the income in question would be assessable as business income and it can be brought to tax in India, only if the FTO has the permanent establishment in India and if the earning of income is attributable to activities or functions performed by s....
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....greement between India' and' Federal Republic of Germany-Royalty vis-a-vis industrial and commercial profits-Even though s. 9 would apply, provisions of DTAA, if more beneficial, would prevail- Assessee having no PE in India, amount of royalty, sought to be assessed as industrial or commercial profit, is not assessable to tax in India-If the consideration received by the assessee for grant of the patents and license is regarded as royalty as the grant admittedly took place outside India; the question of applying deeming provisions of Explanation to s. 9 inserted by the Finance Act, 2007 would not arise and further, assessee having no PE in India, such income would not be taxable in India as industrial and commercial profits in terms of art. III of Indo-German DTAA-Income from activities covered by arts. V to XII by virtue of art. 111(3) are specifically excluded from the expression 'industrial or commercial profits' in art. III as they are to be taxed in the manner provided under arts. V to XII-Therefore, income other than of the nature provided in arts. V to XII, if relatable to industrial or commercial profits would fall under art. III, not chargeable to tax in th....
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.... are mutually exclusive. As the assessee is not using the network of the FTO, the payment made is not for "use of process", hence, not in the nature of royalty. d) The AO's reliance on the judgment of the Chennai Bench of the Tribunal in the case of Verizon Communications Singapore Pte. Ltd. vs. ITO (2011) 45 SOT 263 (Chennai) is misplaced, as in that case the Indian Company obtained 'Leased Lines' on hire/lease basis under the contract. The facts are different. e) Explanation 5 & 6 incorporated in Section 9(1)(vi) by the Finance Act, 2012 do not affect the definition of royalty, as per DTAA. The Indo UK Tax Treaty, employs the word "use or right to use" in contra distinction to the word 'use' in domestic law. As per various judicial pronouncements, in order to satisfy the word "use or right to use", the control and possession of right, property or information should be with the payer. Thus under the DTAA royalty has a much restricted meaning. f) Without prejudice to the above findings, even if the payments partake the character of royalty after retrospective amendment in the Act, the assessee cannot be held to be an assessee in default in respect of those payments made pr....
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....n is in India. 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." 50. Before we deal the issue as to whether the payment is question for use of "process", we feel it relevant to extract certain clauses of the agreements (a) Agreement between Bharti Airtel Ltd. and Sunrise Communications AG, which reads as under:- "1. Object of the Agreement 1.1 Each Party agrees to provide the other Party with connecting, transit and termination services (hereinafter referred to as ''the Services") allowing the conveyance of international and/ or national calls on a non-exclusive basis as defined in the Service Description(s) associated with this Agreement. 1.2 This Agreement shall not be construed to constitute a partnership or agency relationship between the Parties. The parties are entering into this agreement on a principal to principal basis. Each Part....
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....r-to-carrier relationship with Bharti; and WHEREAS, the Parties have agreed to enter into this Agreement to set out the arrangement between the parties in respect of the exchange of international telecommunication services as also the settlement rates in respect of the Service(s) listed in relevant Annexures attached. 3. OPERATIONAL MATTERS 3.1 Each Party shall be responsible to connect to the other Party's network at one of the other Party's network interconnection locations, and the Parties shall be responsible to procure, at their own expense, the necessary facilities or equipment required to interconnect to such locations. 3.2................ 3.3.............. 3.4 The Parties shall coordinate the management of their respective system facilities, with each Party being responsible for providing and operating, at its own expense, its respective network facilities. The Parties also shall interface on a 24 hours/ 7 days a week basis to assist each other with the isolation and repair of any facility fault in their respective networks." "ANNEX 1 - [BHARTI VOICE TERMINATION SERVICES, THIS ANNEX to International Tele....
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....of intellectual property. Clause (iii) of the said Explanation reads as follows: "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" Clauses (i) & (ii) of the said explanation also use the same coinage of terms. The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi) refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. Thus the word "process" must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a sociis as held in the case of CIT Vs. Bharti Cellular Ltd. (2011) 330 ITR 239]. The expression 'similar property' used at the end of the list further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. 'Intellectual property' as understood in common parlance means: Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under c....
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.... The Hon'ble High Court of Calcutta in the case of N.V. Philips Gloeilampenfabrieken Eindhoven Vs. CIT (1988) 172 ITR 0521 held as under: "From the dictionary meaning of the term 'royalty', it appears that the said term connotes payments periodic or at a time for user by one person of certain exclusive rights belonging to another person. The examples of such exclusive rights are rights in the nature of a patent, mineral rights or right in respect of publications. It is possible that a person who invests may not take out a patent for his invention but unless some there inventor independently and by his own efforts come to duplicate the invention the original invention remains exclusive to the investor and it is conceivable that such an inventor might exploit his invention permitting some other person to have the user thereof against payment. Similarly, it is possible for a person carrying out operations of manufacture and production of a particular product to acquire specialised knowledge in respect of such manufacture and production which is not generally available. A person having such specialised knowledge can claim exclusive right to the same as long as he cho....
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....s reached." As Cambridge Dictionaries Online, defines "process" to mean a series of actions that you take in order to achieve a result. 54.1 Hence, the term 'process' implies a sequence of interdependent and linked procedures or actions consuming resources to convert inputs into outputs. Therefore, 'process' when viewed as an asset is an intangible asset and does not have physical existence. Various tangible equipments and resources may be employed in executing a process but 'process' per se, just like a formula or design, is intangible. The term 'process' as contemplated by the definition is thus referable to 'know-how' and intellectual property. There is a clear distinction between a 'process' and the physical equipments and resources deployed in the execution of a 'process'. While the former is an intangible asset, the latter is tangible and has a physical existence. The right to receive a royalty in respect of a process would only be with the person having exclusive right over such 'process' and 'process' being in the nature of intellectual property, the grantor of such right would normally be the inv....
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....the field cannot constitute an item of intellectual property for the purpose of charge of 'royalty'. Any compensation or consideration, if at all received for allowing the use of any such 'process' which is publically available and not exclusively owned by the grantor constitutes business income and not royalty. 55. We now consider the interpretation of the term "process" after insertion of Explanation 6 to Section 9(1)(vi) by the Finance Act, 2012 with retrospective effect from 1.6.1976. As per this Explanation, 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." However, the Explanation does not do away with the requirement of successful exclusivity of the right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party. None of the FTOs have any exclusive ownership or rights in respect of such process, and hence in our view the payment in question cannot be considered as royalty. The te....
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....ned u/s. 9(1)(vii) of the Act as there is no human intervention. This finding that it is a "service" has not been upheld by the Hon'ble Supreme Court of India only the factual issue as to whether there was human intervention was set aside to AO. Under such circumstances, the question of taking a contrary view that it is not a "technical services", but a case where the FTO had granted the assesse a right to use a process and the payment is for 'royalty' cannot be countenanced. Applying the binding decision of the Hon'ble Jurisdictional High Court we have to hold that the payment cannot be termed as covered by Explanation 2 read with Section 9(1)(vi) of the Act. On this ground alone the order of the First Appellate Authority has to be upheld. The charge that the payment in question is FTS u/s. 9(1)(vii) excludes the possibility of the payment being royalty under section 9(1)(vi) of the Act. Both these sections deal with different set of facts situation which cannot co-exist. 59.1 Even under the DTAA, as held by the Ld. First Appellate Authority we are of the view that the payment in question cannot be termed as royalty. 59.2 The assessee company has entered into interconnect ag....
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....m the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. " (Emphasis ours) The definition of 'royalties' under Indo-Canada treaty is the same as above. 59.5 Similarly, Article 13(3) of the Indo-France Treaty defines 'royalties' as under: "3. The term "royalties" as used in this article means payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, of for information concerning industrial, commercial or scientific experience." (Emphasis ours) The definition of royalties under Indo-Netherlands Treaty is the same as abov....
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....India. In particular, it was argued that there was no office or customers in India. The Delhi Tribunal in the said case held that despite the fact that the assessee could have business connection in India, none of its operations were carried out in India. In addition, the payment made by the customers was not for use of the equipments so that there was no equipment royalty angle in this case. However, the Hon'ble Tribunal also held that in the facts of the case, the customers were making payment to the non-resident for use of a process. It was observed that to constitute royalty, the process need not be a secret process. The income of the non-resident was ruled to be 'process royalty.' The Court held, (i) that under the agreement with television channels, the role attributed to the assessee was as follows: (i) programmes were uplinked by the television channels (admittedly not from India); (ii) after receipt of the programmes at the satellite (at locations not situated in Indian airspace), these were amplified through complicated process; and (iii) the programmes so amplified were relayed in the footprint area including India where the cable operators caught the waves a....
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....nents of the satellite. Consequently, it is entirely wrong to assume that a transponder is a self-contained operating unit, the control and constructive possession of which is or can be handed over by the satellite operator to its customers. The terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not be the determinative factors. There was no use of "process" by the television channels. Moreover, no such purported use had taken place in India. The telecast companies/customers were situated outside India and so was the assessee. The agreements under which the services were provided by the assessee to its customers were executed abroad. The transponder was in orbit. Merely because it had its footprint on various continents that would not that the process had taken place in India. ISRO SATELLITE CENTRE [ISAC], In re [2008] 307 ITR 59 (AAR), ISHIKAWAJIMA-HARIMA HEAVY INDUSTRIES LTD. v. DIT [2007] 288 ITR 408 (SC) and LAKSHMI AUDIO VISUAL INC. v. ASST. CCT [2001] 124 STC 426 (Karn) applied. iii) That the money received from the cable operators by the operators was treated as income by these telecast operators which had in ....
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....la or process" must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a sociis.-Asia Satellite Telecommunication Co. Ltd. vs. Dy. CITT(2003) 78 TTJ (Del) 489 : (2003) 85 ITD 478 (Del) distinguished. (Para 19) So far as the transponder technology is concerned there appears to be no "secret technology", known only to a few. There is evidence to show that the technology is even available in the form of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process- assuming it to be so-does not amount to royalty" (Para 20) The argument that the consideration has been received by the assessee for letting the broadcasters use the patent relating to the transponder/satellite goes farther than the assessment order and therefore cannot be accepted. Even on merits the arg....
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....uent to the retrospective amendments brought out by the Finance Act, 2002 w.e.f. 1.6.1976 by adding Explanation 5 & 6 to Section 9(1)(vi of the Act. The answer is no as changes in domestic law cannot be read into the Treaties as long as there is no change in the working of the Treaties. 63. The Hon'ble High court of Delhi in the case of DIT vs. Nokia Networks (2013) 358 ITR 259 has held as under:- "S. 9 has been amended vide Finance Act, :;2012 and Explanations have been inserted with retrospective effect from 1-6-1976. The revenue argued that the amendments are only clarificatory in nature and submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a "copyrighted article". It was categoric....
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....i) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" 40. In Asia Satellite Telecommunication the Court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as pari materia. This Court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations 4, 5, and 6 to the Section 9(1)(vi). The question is therefore, whether in an attempt to interpret the two definitions uniformly, i.e. the domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. In....
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.... where there exists no Double Tax Avoidance Agreement." 65. Thus, respectfully following the jurisdictional High Court decision as well as the judgments of the other Courts, we agree with the submission of the Ld. Counsel for the assessee that the amendments to the Finance Acts cannot be read into the DTAA's. 66. Ld. DR relied upon the decision of the Bangalore Bench of the ITAT in the case of Vodafone South vs. DCIT (Supra) wherein it was held that there is liability for deduction of tax at source on "IUC" payments as these payments were held to be payments, for use of process and hence payment for royalty. We have perused this decision of the ITAT. The proposition laid down therein are contrary to the propositions laid down by the Hon'ble Jurisdictional High Court in the case of DIT vs. New Skies Satellite BV & Ors. (Supra) as well as Asia Satellite Telecommunications Co. Ltd. vs. Director of Income Tax (Supra) and in the case of of the assessee itself as well as in the case of DIT vs. Nokia Networks (Supra) and other judgments referred in our decision. Even the Hon'ble Supreme Court has held that such payments are only for service rendered. Moreover, the agreements entered....
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....width hired by the customer. The bandwidth capacity is given to the customer on a dedicated basis for a entire contract period. The Assessee has no such interest. 68. Ld. DR further relied upon the decision of ITAT, Mumbai in the case of Viacom 18 Media (P) Ltd. vs. ADIT (International Taxation), (2014) 44 taxmann.com 1 (Mumbai Tribunal). This decision is also contrary to the proposition of law laid down by the Hon'ble Jurisdictional High Court in the assessee's own case. The ITAT has held that M/s Viacom 18 Media Pvt. Ltd. was engaged in the broadcasting of its various programmes on TV channels including marketing and advertising airtime. The Mumbai Bench also held that the judgment of the Hon'ble Jurisdictional High court in the case of Asia Satellite Communications Co. Ltd. vs. DIT (Supra) is not applicable to the facts of Viacom 18 (Supra) case. It is not so in the case on hand. In any event the interpretation given by the Mumbai ITAT is divergent from the law laid down by the Jurisdictional High court in the case of Asia Satellite Communication Co. Ltd. (Supra) and hence we canot follow the same. 69. Thus, we uphold the order of the Ld. First Appellate Authority that the....
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....ot applicable. Hence, we have to test the receipts, as per the deeming provisions contained in the I.T. Act i.e. whether the receipt in question can be deemed to accrue or arise in India, u/s. 9, read with section 5(2)(b) of the Act. 74. The payment in question does not accrue or arise to the 'FTOs', through or from any property of the 'FTOs' in India or from any asset or source of income of the 'FTOs' in India or through the transfer of any capital asset of the 'FTOs' in India. The entire business operations are carried out outside India by the FTOs. Under these circumstances, the proposition of law laid down in the judgment of the Hon'ble Jurisdictional High Court in the case of Asia Satellite Communication Company Ltd. (Supra) applies in this case. Hence, no income is deemed to accrue or arise to the FTO's in India. 75. Even if it is assumed that the payments accrued or arise to the FTOs either directly or indirectly through or from any business connection in India since the business operations of the FTOs are carried out entirely outside India, no part of such income can be said to be reasonably attributable to the business connection of the FTOs if in India.' 76. The ....
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.... Section 5(2) of the Act. Therefore this issue is decided in favour of the assessee. ISSUE NO. 5 WHETHER BENEFICIAL RATE PROVIDED UNDER DTAA OVERRIDE THE PROVISIONS OF SECTION 206AA AND WHETHER SECTION 206AA OF THE ACT IS APPLICABLE RETROSPECTIVELY. 79. This issue of retrospective applicability is covered in favour of the Assessee and against the Revenue by the decision of the ITAT, Pune Bench in the case of DDIT (IT-II), Pune vs. Serum Institute of India Ltd. (2015) 56 taxmann.com 1. Hence, respectfully following the order of the Coordinate Bench, we hold that Section 206AA cannot be applied retrospectively. 80. Recently the Bangalore 'B' Bench of the Tribunal in the case of M/s Wipro Ltd. vs. ITO (Int. Taxation) in ITA NO. 1544 to 1547/Bang./2013 (AY 2011-12) has held as under:- "Where the tax has been deducted on the strength of the beneficial provisions of section OT Ms, the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act. Section 206AA of the Act does not override the provisions of section 90(2) of the....
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....ting additional evidence under Rule 46A as these go into the root of the matter. The First Appellate Authority also recorded that these additional evidence are crucial for deciding the primary issues that were raised in the Appeal. 83. The Ld. DR in support of his contention that the Ld. CIT(A) should not have admitted additional evidence relied upon on the following decisions. - Order of the ITAT, 'D' Bench, Delhi in the case of ITO vs. Life Line Biotech Ltd. reported (2014) 52 taxmann.com 27 (Delhi - Trib.) - Order of the ITAT, 'H' Bench, Delhi in the case of JCIT vs. Venus Financial Services Ltd. reported in (2012) 21 taxmann.com 436 (Delhi) 84. The Assessee also relied upon the decision of the Jurisdictional High Court in the case of CIT vs. Virgin Securities & Credits (P) Ltd. 332 ITR 396. 85. We have perused these decisions. These are distinguished on facts. When the Ld. DR has not disputed the finding of the Ld. CIT(A) that sufficient time was not granted to the assessee to file the requisite details. He has also not disputed the finding that these documents are crucial for adjudicating this aspect. These were not the facts in these cases cited by ....