TaxTMI 
TaxTMI 
2008 (7) TMI 9
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....esident company formed and registered in USA under which BTA provides the applicant with two-way transmission of voice and data through telecom bandwidth. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e. USA and India. The applicant states that under the Agreement, a fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. Installation Charges as specified in the Order Form are also payable initially. The payment to BTA is net of any Indian taxes, including withholding taxes, as may be applicable. The applicant states that in consideration of the services rendered, BTA raises its invoices on Dell India (the applicant) and it is Dell India that directly makes payments to BTA and the amounts so paid are not being cross-charged to Dell U.S. The applicant states that it has been discharging the tax obligations arising out of payments made to BTA in accordance with sec. 19....
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....ssed to the applicant (Dell-India) also deserve reference while narrating the facts. It is stated therein that BT and its affiliates jointly with VSNL provides telecom services to Dell India to carry voice and data traffic from US and Ireland to India and back through dedicated private telecom lines. BT or its affiliates which are licensed telecom operators in Ireland and USA provide the US and Irish element of the service while VSNL (a licensed operator in India) provides the telecommunication service in India. It is further stated that these services are provided through sub-sea cables and telecom network owned or leased by BTA or VSNL. BTA states that it "has neither installed any equipment at DIS facilities nor placed any of these items at DIS's disposal or use elsewhere." (DIS is the applicant) 4. The applicant has stated at para 4.5 of Annexure IV that the same fiber link cables and other equipment are used for all customers including the applicant. In the applicant's letter dated 7th February, 2008 addressed to the ITO(International Taxation) Ward 1(1), Bangalore, the applicant further clarified that the telecom bandwidth is provided through a huge network of optical fibe....
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....inter-se arrangement between BTA and VSNL / Bharti Telecom. The applicant has also not furnished any details regarding the domestic access line provided by the Indian telecom service. Provider or the equipment placed at its site in Bangalore by the Indian service provider or the equipment deployed by the applicant at its site to establish connectivity etc. 6. The applicant sought advance ruling on six questions framed by it. At the time of admission of application, after hearing the arguments of both the counsel, Question no. 1 was recast and question no. 6 was substituted by question nos. 6 to 8. Thus, the following questions were formulated for consideration:- 1. Whether or not the amount payable by the applicant under the terms of "BT Private Line Connect Service Schedule" - the agreement between the Dell US and BT America (which has been confirmed by the applicant) read with the Master Service Agreement would be in the nature of "fees for included services" within the meaning of the term in Article 12 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital gains entered into between the Government of R....
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....ndia [vide sub-clause (b) of Sec. 9(1)(vi)]. There is an exception provided in sub-clause (b), which is relevant, to question no. 5 and it will be dealt with later. 8. The definition of 'royalty' as contained in Explanation 2 has six limbs. We are most concerned with clause (iv.a). Clause (iii) has also been referred to by DIT in his comments. Clause (iv.a) was inserted into the Explanation 2 to Sec. 9(1) by the Finance Act, 2001. According to the said clause, the consideration for the 'use' or 'right to use' any industrial, commercial or scientific equipment other than the amounts referred to section 44BB comes under 'royalty. Whether any consideration is payable for the use or right to use the scientific/commercial equipment is the question that looms large in the instant case. Whether the payments made by the applicant are in the nature of consideration for "the use of any patent, model, design, secret formula or process* within the meaning of clause (iii) to Explanation 2 is another question that arises. 9. The definition of 'royalty' in Sec. 9(1) of the Act, it may be noted, is not materially different from that in the Treaty. Article 12(3) of the Treaty defines "r....
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.... of royalty. The consideration stipulated is only for delivery of package of services, the applicant being recipient of service. The Agreement obligates BTA to utilize its 'leased circuit' for rendition of service to the applicant so as to give full country coverage in both countries of delivery i.e. Ireland and India. Leased circuit means a dedicated link provided between two-fixed locations for exclusive use of the subscriber. Both possession and control of the leased circuit and related equipment is only in the hands of BTA and not with the applicant. BTA has to maintain and monitor the network and infrastructure for the purpose of rendering service to the applicant. No equipment or machinery has been installed at the applicant's premises much less they were kept at the disposal of the applicant. The equipment if any placed at Dell's Premises cannot be changed or tampered with by the applicant. Such placement is only for rendering of service by BTA, but not to facilitate its use by the applicant. Transactions involving leasing or hiring of equipment cannot be compared to the present transaction which involves the receipt and consumption of service and payment of charges towards ....
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.... 9 of the Act and Article 12(4.a) of the India-USA DTAA. 15. A reference to various other clauses in the Agreement (Connect Service Schedule) on which reliance is placed by the Revenue, will be given later. 16. The alternative contention of the Revenue for bringing the payments in question within the definition of 'royalty' is that the applicant has paid for the use of or right to use a process or secret process. Analysis of agreements : 17. Dell-BT Private Line International Service Schedule and Dell-BT Private Connect Service Schedule were signed by the representatives of Dell-USA, LP and BT America Inc. in June, 2003. It is mentioned in the cover note of both the Service Schedules that the attached terms and conditions, annexures and orders constitute a schedule to the Master Agreement dated 1.1.2003 between British Telecom PIC and Dell-USA, LP and the terms and conditions of the Master Agreement have been incorporated in their entirety in these two schedules between BTA and Dell-USA and in the event of conflict between the terms of the Master Agreement and the Schedule, the latter shall take precedence. As already noted, the applicant has reaffirmed these two agreem....
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....tomer Site. Core Network means the core international telecommunications network owned by BTA. 'Network' is defined to mean the telecommunications network provided by BTA comprising hardware, software and private circuits for the purpose of providing the service. It is stated in section 2.4 that "for speeds 1920K and below, conversion is required and BT equipment provided will be chargeable". 2.7 says that "BT equipment remains the property of BT or its agents." 22. The 'service description' given in the second Agreement i.e. Connect Service Schedule is the following: 2.1 Overview BT Private Line Connect Service ("the Service") uses dedicated, digital international point-to-point circuits for the transmission of voice, data, IP and image or combination of any of these. They are permanently available, 24 hours a day, for a fixed rental charge. Connectivity is provided by a number of physical components - specifically domestic Access Lines in both countries of delivery and the core International Network (made up of under sea cables or satellite capacity). The Service is a bilateral service and is jointly provided with Distant End TAs giving full country coverage in bot....
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.... are the sources of electric energy for the circuit; they may be batteries, direct-current generators, or alternating-current generators. Circuit (electronics) is stated to be an electric circuit in which the equilibrium of electrons in some of the components is upset by a means other than an applied voltage. …….. . Electronic circuits find application in all branches of industry and in the home, both for entertainment equipment and increasingly for control. Because of their low power dissipation and fast response, they are excellent control circuits. Computers, communication systems, and navigation systems use many types of electronic circuits. 27. Bandwidth is another relevant term which needs to be adverted to. Bandwidth is the difference between the frequency limits of a band containing the useful frequency components of a signal (McGraw-Hill Dictionary of Scientific & Technical Terms). It is a capacity of transmission medium or amount of data, measured usually in bits per second that can be sent through a dedicated (leased) transmission circuit (Glossary of I.T. terms by Deeksha Agarwala) CSS - terms and stipulations: 28. As we are directly concerned with Conne....
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....ide "Customer Equipment at the Distant-End country", and "it is the customer's responsibility to ensure that the Customer Equipment at each site is capable of successful conversion of the signaling systems or protocols that the customer may use." Customer shall report faults in the service to the Service Centre using the fault reporting procedures. The faults diagnosed to be occurring in the Access Line not provided by BT shall be reported directly to the PTSP (vide 5.2). The customers are required to notify the BT service centre of any "Network affecting incidents" such as disconnection of BT equipment (vide 5.4.). Then, Section 5.5. says: 5.5. "The customer shall not, nor allow any person to: 5.5.1. attach anything directly to the Service; or 5.5.2. connect any electrical connection to the Service; or 5.5.3. place or use anything in such a way or position in relation to the Service that it is capable of transmitting or receiving any message or communication to or from the private circuit except in accordance with BT direction and conditions for the attachment of Customer's equipment to BT provided telecommunication systems. 34. The charges for the Service are as se....
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.... Schedule. Two items which are charged for in the case of International Service Schedule are: (1) Total monthly rental charge 21,200 USD, and (2) Installation charge for B-end access line - 12,000 USD. 37. The Service for each site which commences on the 'operational service date' will continue for a minimum period of 12 months or such other period specified in the Order (Annex 1) and even thereafter, the Agreement will continue in force until terminated by either party by giving 60 days' notice (vide Sec.3) Discussion: Reg. applicability of clause (iv.a) of Expl.2 to S.9(1)(vi): 38. After noting the important features and terms of the Agreements, we shall now proceed to address the crucial question whether the agreement (Connect Service Schedule) contemplates consideration^ to be paid for the use of or right to use the equipment within the meaning of clause (iv-a) of Explanation 2 to Section 9(1)(vi) as well Art. 12(3) of the Treaty. The respective contentions in this regard, we have already noted. The applicant's counsel highlighted the fact that everywhere in the Agreement, the emphasis is on service element and nowhere the user of equipment by the applicant or the gran....
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....ol the plain language of the said clause. 41. The language of cl.(iv.a) pertaining to royalty definition or for that matter, the language in the Treaty cannot be confined to pure and simple lease transactions. The phraseology "the use of or right to use the equipment" is wider in scope and can cover transactions which are not in stricto sensu 'leases'. Transactions falling short of lease and having substantial similarities with lease or hire can also be brought within the sweep of cl.(iv.a) and Art.12(3). 42. Has the consideration in the form of monthly recurring charges been paid by the applicant for the use of equipment or for getting a right to use the equipment owned by BTA ? How the expression "use" or right to use" should be understood vis-à-vis the equipment? These are the crucial questions we have to address. 43. It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in presenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in presenti but under a contract the right is ....
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....e negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. The word 'use' - what it means: 45. Let us now explore the meaning of the key word 'use'. The expression 'use' has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal & Co. vs. Secretary to Government of Punjab^, the Supreme Court noted that "in its ordinary m....
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....ty is assured on account of this. The electronic circuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network. 48. There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions....
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....es not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasizes the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that ....
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.... contra indication. Clause 5.1 (a) of Annexure 2 reinforces the prohibition contained in section 5.5 by penalizing the applicant with higher charges. That is the underlying object of this provision. The counsel for Revenue then drew our attention to clause 3.4 of Annexure 2, which according to him, is another pointer that the applicant is in custody of the circuit and equipment, and that it uses the same for the purpose of transmission of voice and data. Clause 3.4 states that BT will require "full access to the circuit during the course of fault investigation and fault repairs" including access to the customer's premises. It does not mean, as the Revenue's counsel wants to contend, that BTA or its agent has no access otherwise to the circuit/equipment as it is placed at the disposal of the applicant. We do not think that so much can be read into clause 3.4. By this clause, BTA is reiterating its authority which it has in any case to check the circuit and to restore a non-functional circuit, if necessary by entering the customer's premises. 52. It seems to us that the passage quoted by the applicant's counsel from Prof. Klaus Vogel's commentary on Double Taxation Convention brin....
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....ssue only from the angle whether the applicant can be said to have used the alleged equipment or obtained the right to use it. An equally relevant question would be whether any equipment has been placed in the possession and control of the applicant. Though the Revenue and its counsel asserts that electronic circuit is tangibly an equipment, no arguments were advanced to substantiate this point. Even the applicant, either in written or oral submissions has not dealt with this aspect, except by way of bald repudiation of the Revenue's contention. In this background, we do not propose to deal with this point. The conclusion that there was no use or right to use (the equipment) is sufficient to answer the issue as regards the applicability of clause (iv-a) of Explanation 2 in favour of the applicant. Whether the payment made by the applicant to BTA is in the nature of royalty falling under clause (iii) of Explanation 2 and/or Article 12(3) of the Treaty? 56. It is one of the contentions of the Revenue that the applicant makes use of or is conferred with the right to use a 'process' within the meaning of clause (iii) to Explanation (2) to Section 9(1) of the Act. That clause spea....
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....e case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect. Questions 1 and 3: 57. Whether the amounts payable by the applicant under the agreement would be in the nature of 'fee for included services" within the meaning of Article 12(4) of the Treaty OR 'fee for technical services' within the scope of clause (vii) of Explanation 2 to section 9(1) of the Income-tax Act, 1961. These questions need not be discussed at length because it has been fairly and correctly stated by the Revenue and its counsel that the requirement in article 12(4) of the Treaty that technical knowledge, experience, skill, etc. should be made available has not been satisfied in the instant case. In view of such language, the ambit of technical service has been considerably reduced in scope. The phrase "make available" occurring in 12(4) has been clarified in the MOU to the Treaty itself to the situations where the person receiving the service is enabled to apply the technology. As there is no transfer of any technology in the sense that the recipient of the service is enabled to apply technology by itself, the payment does not constitute a fee for included service, as clarifi....
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....India whereas a particular source of income is wholly outside India, but, that is not the situation here. The income which the applicant earns by data processing and other software export activities cannot be said to be from a source outside India. The 'source' of such income is very much within India and the entire business activities and operations triggering the exports take place within India. The source which generates income must necessarily be traced to India. Having regard to the fact that the entire operations are carried on by the applicant in India and the income is earned from such operations taking place in India, it would be futile to contend that the source of earning income is outside India i.e. in the country of the customer. Source is referable to the starting point or the origin or the spot where something springs into existence. The fact that the customer and the payer is a non-resident and the end product is made available to that foreign customer does not mean that the income is earned from a source outside India. As aptly said by Lord Atkin in Rhodesia Metals Ltd. vs. Commissioner of Taxes [1941] 9 ITR (Suppl) 45(PC) source means not a legal concept but somet....
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....is "principally comprises of export revenues" (emphasis supplied). No material has been placed before us to show that the network is not being availed of and not meant to be availed of for doing similar business within the country. It cannot therefore be said that the payments made to BTA for establishing and maintaining the requisite telecommunication network is for the purpose of earning income from a source outside India only. Another hurdle that comes in the way of the applicant is that it cannot be said with certainty that the transfer had taken place outside India. The property could have very well passed in India even though the terminating point of export is in a foreign country. We have no material in this regard to come to a definite conclusion. Question No.7: (Re: Permanent Establishment) 63. The Revenue pleaded that having regard to the nature of service and certain clauses in the Agreement (esp. Private Line International Service Schedule) there is every possibility of a fixed place of business of BTA at a particular geographical location in India, notwithstanding the self-serving statement of BTA to the contra. After the arguments were addressed before us, we fe....
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....ing tax at source. It implies that the income has to be grossed up for the purpose of deducting the tax. 66. Now, the questions framed give rise to twin aspects: (i) the future obligation of the applicant to deduct and pay the income-tax as per the requirements of section 195 and 195-A of I.T. Act and (ii) refund of the tax deducted and paid already. 67. These questions would have been answered straight away in favour of the applicant but for the fact that the issue regarding Permanent Establishment still lingers. Unless the concerned authority decides the same in an appropriate proceeding under the Income-tax Act, 1961, the applicant will not be in a position to deviate from the previous practice of deducting tax and to get the relief which could have otherwise flown from this ruling. However, it is open to the applicant to take resort to sub-sections (2) and (3) of section 195 or other relevant provision of I.T. Act and seek a determination by the authority concerned in the light of this ruling. Any such application has to be disposed of most expeditiously. Assuming that in regard to the P.E., an adverse finding is warranted against the applicant, still the applicant has le....