TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 708
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....ed are interconnected, the appeals were heard together and disposed of by this consolidated order for sake of convenience and brevity. 2. The grounds of the Revenue's appeal in I.T.A. No. 2088/Del/2008 for the assessment year 2002-03 are as under : "1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 95,33,520 on account of deferred revenue expenditure, ignoring that the expenditure which were incurred before the commencement of business can be allocated to cost of fixed assets, if it was directly required for the purpose of bringing the asset to put to use situation. 2. On the facts and circumstances of the case and in law the Commissioner of Income-tax (Appeals) erred in deleting the addition of Rs. 76,43,892 on account of capitalisation of professional charges, ignoring the facts that the Assessing Officer had not restricted himself to disallowing the expenditure claimed under the head 'professional charges' but had taken all such expenditure which were in the nature of professional charges and which were incurred in lieu of professional services. 3. The appellant crave....
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....llowance Amount in 1. Deferred revenue expenditure 95,33,520 2. Non-deduction of TDS on international private leased circuit payment to M/s. Kick Communications 15,98,596 3. Non-deduction of TDS on connectivity agreement with IGTL Solutions 40,29,614 4. Certain items expenditure treated as capital expenditure 76,43,892 Total 2,28,05,622 5.1 Aggrieved with the above additions/disallowances made, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals), who allowed relief to the assessee in respect of additions at Sr. Nos. 1 and 4 of the above table and sustained the additions at serial Nos. 2 and 3 of the above table. Aggrieved with the order of the learned Commissioner of Income-tax (Appeals), both the Revenue and the assessee are in appeal before the Tribunal, raising the grounds as reproduced above. 6. In ground No. 1 of the appeal, the addition of Rs. 95,33,520 on account of deferred revenue expenditure deleted by the learned Commissioner of Income-tax (Appeals), has been challenged. The facts in respect of issue in dispute are that in the computation of income, the Assessing Officer observed the claim of the deferred revenue ex....
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....books of account. The entries made in the books of account was not relevant for the purpose of allowability under the Income-tax Act as laid down in Amar Raja Batteries Ltd. v. Asst. CIT [2004] 85 TTJ (Hyd) 20; (iii) that in the case of Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC) it was held that though the asses see has written off the expenditure in its books of account over a period of five years, it must be allowed in entirety in the year in which it is incurred, if it is a revenue expenditure and if it is wholly and exclusively incurred for the purpose of business; (iv) that once the business is set up and ready for commencement of business operations, whatever expenditure is incurred after setting up but before commencement of business operations and commercial sale, is an allowable expenditure; (v) that the international call centre commenced business operation on December 20, 2001 and yielded loss for the period under consideration relevant to the assessment year 2002-03 but it does not mean that deferred revenue expenditure not directly allocable to fixed assets would be treated as dead expenditure and expenditure incurred for the pur....
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....hi). The learned counsel also referred to the decision of the Delhi High Court in the case of Omniglobe Information Tech India P. Ltd. v. CIT [2014] 369 ITR 1 (Delhi); (I.T.A. No. 257 of 2012), wherein it is held that in case of BPO business, the moment employees recruited and enrolled and infrastructure to use their services was in place, set up was complete. In view of the submissions, the learned counsel requested to uphold the finding of the learned Commissioner of Income-tax (Appeals) on the issue in dispute. 6.7 We have heard the rival submissions and perused the relevant material on record including the order of the lower authorities on the issue in dispute. We find that the expenses in dispute are in the nature of salaries, staff and welfare expenses, miscellaneous expenses etc. In the books of account, the assessee has amortised the expenses and spread the claim over a period of three years, whereas for the purpose of Income-tax, the assessee claimed the entire expenses in the year under consideration. The Assessing Officer has not disputed the nature of the expenses as revenue. The objection of the Assessing Officer is that the business of the assessee was commenced on D....
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....a P. Ltd. v. CIT [2014] 369 ITR 1 (Delhi), the Hon'ble High Court held that in the case of BPO business, the moment the employees recruited and enrolled and infrastructure to use their service was in place, the setup of business was complete. The relevant finding of the decision of the Hon'ble High Court is reproduced as under (page 8) : "This brings us to the moot question : whether the business of the BPO (business process outsourcing) had been set up by the respondent-assessee on April 1, 2004 or was it set up only on June 1, 2004 ? We have already quoted factual position elucidated in the assessment order to the effect that the appellant had employed several employees and salary and wages were paid to them. However, these employees were given training in the months of April and May, 2004 and expenditure was incurred on various heads, during the months of April and May, 2004, the actual BPO services to the parent company were not rendered. When the said services actually were rendered or the assessee did start rendering of services to a third party, the business commenced. This, according to us, does not mean that business had not been set up by the appellant-assessee. In orde....
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.... seen, whether the infrastructure to utilise their services was in place or not. One may postpone actual rendering of services to be a zero error company. In CIT v. E-Funds International India [2007] 162 Taxman 1 (Delhi) the assessee was engaged in the business of information technology like software development/consultancy, business process management and electronic banking schemes. The claim of the assessee therein was that business of software development was set up the moment they had employed 30 40 employees in the relevant previous year. This claim was accepted by the High Court after noticing that the assessee had certain infrastructure facilities at the relevant time." 6.7.3 Further, in paragraph 20 of the decision, the Hon'ble High Court held that training of the employees was part and parcel of the business activity. The relevant paragraph is reproduced as under (page 13 of 369 ITR) : "Upon recruitment of employees, the factum that expenditure under the different heads, as noticed above, was incurred is indicative that business was set up. Training to the employees was given to ensure that when the work was undertaken and performed, there were no glitches, trouble or p....
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....ly preceding year expended in foreign currency Rs. 83.13 lakhs for import of capital goods and an amount of Rs. 6.24 lakhs for training and development of its employees." 6.7.5 We find from page 58 of the assessee's paper book that in the immediately preceding year the assessee has incurred expenses on "training of employees" amounting to Rs. 6,24,669. We have also seen that the assessee entered into agreement with Videsh Sanchar Nigam Limited (for short "VSNL") for international private leased line service on December 20, 2000, which also falls in the immediately preceding year. 6.7.6 In view of the above facts, respectfully following the decision of the Hon'ble High Court in the case of Omniglobe Information Tech India P. Ltd. (supra), we are of the opinion that the business of the assessee was set up in the immediately preceding year. Further, in view of the decision of the Hon'ble High Court in the case of CIT v. Samsung India Electronics Ltd. the expenses incurred after set up of the business and before the actual commencement of the business are allowable. Accordingly, we hold that the expenses claimed by the assessee are revenue in nature and incurred after setting of ....
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....der of the Assessing Officer submitted that the learned Commissioner of Income-tax (Appeals) has given no finding in respect of the expenses of Rs. 15.27 lakhs claimed by the assessee as professional charges. 7.3 The learned counsel, on the other hand, referred to page 56 of the paper book and submitted that in schedule 10 of the profit and loss account, under the head "administrative expenses", the assessee only claimed the professional charges of Rs. 15,27,790 and, therefore, disallowance of Rs. 76,43,892 holding the same as capital expenditure was totally incorrect on the part of the Assessing Officer. He further submitted that the learned Commissioner of Income-tax (Appeals), after taking into account the fact that other than the expenses of Rs. 15,27,790, all the expenses included under Rs. 76,43,892 were already treated by the assessee as capital expenditure and the expenses of Rs. 15,27,790 being revenue in nature, he deleted the addition made by the Assessing Officer in respect of the professional charges. He, accordingly, submitted that the action of the learned Commissioner of Income-tax (Appeals) was justified and required to be upheld. 7.4 We have heard the rival subm....
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....mount of Rs. 71,678 would be claimed as expenditure in future years. The remaining amount of Rs. 15,27,790 under professional charges has been considered as expenditure in the profit and loss account. The Assessing Officer's action in treating an amount of Rs. 76,43,892 as capital expenditure from out of a claim of Rs. 15,27,790 under that head in the profit and loss account is actuated by the fact that many of the accounts under professional charges have either been not mentioned in the order reported or the amount against an individual party being represented differently by the Assessing Officer. Thus whereas the Assessing Officer has not considered payments to Unicon Consulting, S. R. Wadhwa, Leading Edge Consultants, Jerath Electronic and Allied Industries, Charan Gupta Enterprises, the counsellor, S. K. Sharma and Co. Ravi Parkash Jerath, Sushil Jeetpuria and Co., although those names appear in the accounts under professional charges, the Assessing Officer has in turn referred to payments by the appellant to Fonet Consultancy Pvt. Ltd. Nest 4 India Ltd., North Star Call Centre College, Main Stream and Shardha India. Those latter parties do not figure under professional c....
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....charges incurred for the running and operation of the appellant's business has alone been claimed in the accounts. I hold therefore that the disallowance and treatment of a sum of Rs. 76,43,892 as capital expenditure, whereas the appellant's professional charges amounted to Rs. 15,27,790 is not in order. Since incurred for the purposes of business, I hold that the expenditure is interalia allowable under section 37(1) of the Act. The ground is allowed." 7.4.1 In our opinion, the order of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is comprehensive and well reasoned and thus no interference on our part is required on the finding of the learned Commissioner of Income-tax (Appeals), accordingly, we uphold the same. Ground No. 2 of the appeal of the Revenue is rejected. 8. In the result, the appeal of the Revenue is dismissed. I. T. A. No. 1927/Del/2008 for the assessment year 2002-03 9. In the ground No. 1 raised in its appeal, the assessee has challenged the finding of the learned Commissioner of Income-tax (Appeals) in upholding the action of the Assessing Officer in treating the payment of International Private Leased Circuit (IPLC) to M/s. ....
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....eller of AT and T USA. The assessee paid the International Private Leased Circuit (IPLC) charges to M/s. VSNL and to M/s. Kick Communication for the use of dedicated private bandwidth in underwater sea cable. 9.3 The assessee deducted TDS on payments made to VSNL, however, no tax was deducted on payments amounting to Rs. 15,98,526 made to M/s. Kick Communication. 9.4 It was explained by the assessee that M/s. Kick Communication is a non-resident party, which has not rendered any services in India as the cable on which bandwidth was made available was lying outside India. 9.5 According to the Assessing Officer, the authorised representative of the assessee took the physical existence of the cable for establishing its case of services rendered outside India by a non-resident entity. However, the Assessing Officer was of the view that service was not in the physical sense but it was a service provided on a physical cable. M/s. Kick Communication was also given the responsibility of rectifying the connectivity problems. The Assessing Officer referred to paragraphs 2 and 3 of service level agreement between the assessee and M/s. Kick Communication and observed that M/s. Kick Communic....
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....nts were made for using the facilities of M/s. Kick Communication by the assessee from India. The Assessing Officer further stated that Explanation 2 to section 9(1)(vi) of the Act was applicable in the case of the assessee, according to which royalty include consideration for imparting of any information concerning technical, industrial, commercial or scientific knowledge or experience or a skill. The Assessing Officer was of the view that the right to use the bandwidth and technical services in the nature of maintenance fall within the definition of royalty and thus the tax was required to be deducted. Further the Assessing Officer stated that article 12 of the Double Tax Avoidance Agreement (DTAA) between India and the USA deals with royalties and fees for included services and the term "royalty" has been defined in clause 3(b) as payment of any kind received as consideration for use of, or the right to use, any industrial, commercial or scientific equipment and therefore the term royalty has been defined on similar lines as per section 9 of the Act. The Assessing Officer held that income deemed to accrue or arise in India within the meaning of section 9 and the DTAA and tax was....
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....submissions made a gist of agreements with both the parties, which is reproduced as under : "2.3.1 I have considered the submissions of the appellant, findings of the Assessing Officer and the facts on record. The gist of agreements in question runs as under : (a) The agreement with Kick Communication Inc. is dated August 9, 2001. The agreement is towards rendering of services by way of bandwidth capacity lease. The appellant as per the agreement is responsible for establishing each service interconnection and shall bear the cost of the service interconnection, has the responsibility of installation, testing, operation of and cost associated with the facility, services and equipment at the Miami co-location other than those specifically to be provided by Kick Communication and shall include any co-ordination with VSNL at Mumbai, and T-1 at the US end. In the event that the appellant believes that a condition has occurred effecting service, the appellant would immediately contact Kick Communication's designated network operating centre to open a report and thereafter Kick Communication which takes steps to determine the indicated on the report. In terms of clause 14 of the a....
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....connectivity in accordance with service, level agreement and in case of discontinuation of connectivity facility due to non-on working or faults in CRM software, it shall immediately inform the appellant about such fault and make the equipment available to the appellant or its software vendor. As regards the appellant's obligations, it shall endeavour that all the equipment, circuit and CRN software loaded on the equipment in IGTL node necessary for using IGTL connectivity are in working condition. In accordance with clause 10 of the agreement, the recitals and the information contained in the agreement have been treated as confidential." 9.9.1 In the light of the facts of the case, the learned Commissioner of Income-tax (Appeals) held that the decisions relied upon by the assessee were either not applicable over the facts of the case or distinguishable. 9.9.2 The learned Commissioner of Income-tax (Appeals) relied on the decision of the Tribunal in the case of Asia Satellite Telecommunications Company Ltd. v. Deputy CIT [2003] 85 ITD 478 (Delhi), wherein it was held that lease rent payments by TV channels for using transponder capacity so as to enable the cable operators to ....
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...., it was held in Hutchison Telecom East Ltd. v. Asst. CIT [2007] 16 SOT 404 (Kol), that since the services provided by BSNL were based on technology and the assessee without technical services by BSNL would not be able to continue its business to transmit call/voice and signal to recipients, payments made by the assessee to BSNL with regard to port charges (interconnectivity charges) and access charges was in the nature of technical services subject to TDS under section 194J. Fees for technical services for the purposes of TDS under section 194J is as per the definition given in Explanation 2 to section 9(1)(vii). Going by the citation above and aligning to the facts under appeal, the appellant has paid for connectivity charges to non-residents. The appellant is a resident. The charges were not payable with respect of services utilised in the business by the appellant outside India. The amount was also not paid for the purpose of making or earning any income from any source outside India. Article 12 of the DTAA between India and the USA provides that fees for included services arising in any Contracting State and paid to a residents of other Contracting State may also be taxed in t....
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....e of 'process' by the television channels. (ii) In the case of the present assessee also the dedicated band width have been utilised by the assessee in the undersea water cables and the network in the USA and call transfer/connectivity charges have only been paid to the non-resident parties and therefore the same does not fall under the category of royalty either under Explanation 2 to section 9(1)(vi) of the Act or article 12 of the DTAA between the USA and India. (iii) The payments made for bandwidth charges for completion of the international leg of the call to non-resident companies was neither royalty nor fee for technical services as held by the Authority for Advance Rulings in the case of Cable and Wireless Networks India Private Ltd., In re [2009] 315 ITR 72 (AAR) (AAR No. 786 of 2008). The special leave petition filed by the Revenue against the decision of the Authority for Advance Rulings was dismissed in SLP No. 6392 of 2010. In support of the contention, the assessee also relied on the decision of the Authority for Advance Rulings in the case of Dell International Services (India) P. Ltd., In re reported in [2008] 305 ITR 37 (AAR). (iv) In the case of Cabl....
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....either in terms of section 9(1)(vii) read with Explanation 2 of the Act or under the articles of the respective DTAA. The Tribunal also held that such payment of interconnectivity charges was not in the nature of royalty as the foreign telecom operators had no exclusive ownership rights in respect of the process embedded in their network which is usually a standard facility to render telecommunication services to the subscriber as well as the interconnecting telecom operators and therefore the payment of interconnectivity charges made to the foreign telecom operators do not fall within the ambit of royalty under section 9(1)(vi) of the Act as well as the term 'royalty' under the DTAA. Further it is held that the change in domestic law cannot be read into the treaties as long as there is no change in the wording of the treaties. In the case of the assessee also the payment has been made for connecting the domestic leg of the call with the international leg of the call. (vii) That retrospective amendment in law cannot have retrospective effect to the TDS provisions or lead to disallowance under section 40(a)(i) of the Act. In support of the contention, he relied on the deci....
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....all data was transmitted from the last point in the Indian territory at Mumbai to the entry point in the USA at Miami through the undersea cable by M/s. Kick Communication. The data from the entry point at Miami in the USA to the person connected to the call was trans mitted by M/s. IGTL Solutions. We may call these both the part of the call transmission as the international leg of the call transmission. From the analysis of the agreements with both the non-resident parties by the learned Commissioner of Income-tax (Appeals), we find that M/s. Kick Communication was not only responsible for providing smooth transmission of call data, it was also responsible for managing the faults arising in the transmission of calls and providing all information to the assessee in respect of the transmission of call data. Similarly, M/s. IGTL Solutions was responsible for smooth transmission and management of call data from the entry point in the USA to the person to whom the call was made. The lower authorities have not raised any issue of rendering service by the non- resident parties through any permanent establishments in India. The Assessing Officer held that there was certainly a business co....
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.... 2 below sub-section 9(1)(i) as under : "Explanation 2.-For the removal of doubts, it is hereby declared that 'business connection' shall include any business activity carried out through a person who, acting on behalf of the non-resident,- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non- resident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or (c) habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident : Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : Provided ....
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.... him where the transactions of sale between the two parties are on a principal to principal basis. In all cases, the real relationship between the parties has to be looked into on the basis of an agreement existing between them but where : (a) the purchases made by the resident are outright on his own account, (b) the transactions between the resident and the non-resident are made at arm's length and at prices which would be normally chargeable to other customers, (c) the non-resident exercises no control over the business of the resident and sales are made by the latter on his own account, or (d) the payment to the non-resident is made on delivery of documents and is not dependent in any way of the sales to be effected by the resident. It can be inferred that the transactions are on the basis of principal to principal. (ii) A question may arise in the above type of cases whether there is any liability of the non-resident under section 5(1) of the Income-tax Act, 1961, on the basis of receipt of sale proceeds including the profits in India. If the non-resident makes over the shipping documents to a bank in his own country which discounts the documents and sends them....
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....t from India). (ii) After receipt of the programmes at the satellite (at the locations not situated in India airspace), these are amplified through complicated process. (iii) The programmes so amplified are relayed in the footprint area including India where the cable operators catch the waves and pass them over to the Indian population. The accepted position is that the first two steps are not carried out in India and the entire thrust of the Revenue is limited to the third step and the argument is that the relaying of the programmes in India amounted to the operations carried out in India. Whether this argument is sustainable ? Answer is emphatic no ! Merely because the footprint area includes India and the programmers by ultimate consumers/viewers are watching the programmes in India, even when they are uplinked and relayed outside India, would not mean that the appellant is carrying out its business operations in India. The Tribunal has rightly emphasised the expressions 'operations' and 'carried out in India' occurring in Explanation (a) to hold that these expression signify that it was necessary to establish that any part of the appellant's operation....
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....f the recipient chargeable under the head 'Capital gains') for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use, any industrial, commercial or scientific equipment but not including the amounts 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;....
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....assessee and thus the said clause of Explanation 2 was not applicable over the facts of the instant case. 10.7 Further, the learned Commissioner of Income-tax (Appeals) has invoked clause (iii) and clause (iv) of Explanation 2 for holding that the consideration to non-resident was in the nature of royalty. 10.7.1 The learned Commissioner of Income-tax (Appeals) has referred to consideration for use of the process of transmission of data as royalty. In our opinion, in Explanation 2, the process referred, is the patentable process and the consideration received for allowing use of such patentable process for manufacturing or any other use has been termed as royalty. For earning royalty, the person should have exclusive rights in respect of the process embedded. But in the case of the assessee, we do not find any mention in the agreement for the use of any process, which is of a patentable nature or under exclusive rights of the non-resident party. Further, we also find from the agreements with the Kick Communication that no information concerning technical, industrial, commercial or scientific knowledge, experience or a skill has been imparted to the assessee by the non-resident pa....
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.... 102, 115) : "3. The term 'royalties' as used in this article means : (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from 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." 10.11 The learned Assessing Officer has held consideration received for use of or right to use any industrial, commercial or scientific equipment as royalty. The learned Commissioner of Income-tax (Appea....
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....t of a patent, etc. Thus, what this clause envisages is the transfer of 'rights in respect of property' and not transfer of 'right in the property'. The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable the use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadesh Ranjan Sinha v. Haradeb Banerjee, AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights which are indeterminate in duration and residuary in character. Lump sum consideration is not decisive of th....
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..... Before that, we may take note of a few judgments relevant to the context. In the case of CIT v. Datacons (P.) Ltd. [1985] 155 ITR 66 (Karn); [1985] 47 CTR (Karn) 162, the company was engaged in processing the data supplied by its customers by using IBM unit record machine computer. The assessee received vouchers and statements of accounts from its customers and converted them into balance-sheets, stock accounts, sales analyses etc. They were printed as per the requirement of the customers. The Karnataka High Court held that in all these activities, the assessee had to play an active role by co-ordinating the activities and collecting the information. Such activities amounted to processing of goods. In the case of N. V. Philips v. CIT (No. 1) [1988] 172 ITR 521 (Cal), the assessee received the amount for providing specialised knowledge of manufacturing particular commodity which included working methods, manufacturing process including indications, instructions, specifications, standards and formulae, method of analysis and quality control. It was held that the payment for the user of such specialised knowledge, though not protected by a patent, was assessable as royalty. In the c....
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....s a foreign company incorporated in Hong Kong and carries business of providing satellite communications and broadcasting facilities. (b) The clients with whom the appellant has entered into agreement are not the residents of India. (c) The appellant has launched its satellites in the orbit footprint on which it is extended over four continents including Asia and, thus, covers India. (d) The agreement signed with the customers which are television channels, the appellant provides facility of transponder capacity available on its satellite to enable these television channels to relay their signals. These customers have their own relaying facilities, which are situated outside India. From this facility, the signals are beamed in space where they are received by a transponder located in the appellant's satellite. The transponder receives the signal and on account of the distance these signals have to travel, they are required to be amplified. After amplification frequency of signals are downlinked to facilitate the transmission of signals. This is how the signals are received over various parts of the earth spanning numerous countries including India. (e) The outcome, thus....
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....and Uplink Station) which is set up and operated by the applicant. The capacity is meant to be used for the purpose of providing an augmentation to global satellite navigation system. The capacity will be utilised through data commands issued from the ground station (INLUS). Undeniably, the applicant will not be able to operate the transponder in space but it will be transmitting/uplinking the augmented data to the navigation transponder. Access to the transponder's space capacity is established through the applicant's operations at the ground station (INLUS) pursuant to which the transponder transmits signals/data received from INLUS from the geostationary orbits. The Inmarsat satellite carries many transponders out of which the transponder for navigation purposes will provide the satellite based augmentation system signals in space at two frequencies i.e. 1575.42 MHz (L1) and 1176.45 MHz (L5) which are accessed for the GAGAN project undertaken by the applicant. It is also seen that the navigation transponder which uplinks and downlinks the data is a passive transponder unlike the communication transponder. It will be relevant to know the connotation of the term "trans p....
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....ally happens is that the augmented data sent by INLUS reaches the trans ponder and it is transmitted back to the earth and the same is accessed by SBAS user receivers in the coverage area. In response to a query, the applicant specifically clarified that the transponder does not perform any operation with reference to the data uplinked and downlinked and "there is no on-board data storage".' It is worthwhile to note that the contention of the Department that there was use of transponder by the applicant was specifically rejected in the following terms (page 68) : 'It is contended by the Revenue that in substance, there is use of equipment i.e. transponder by the applicant. The exclusive capacity of specific transponder is kept entirely at the disposal of the applicant. The use of the transponder is ensured when it responds to the directions sent through the ground station. Such directions, it is stated, are akin to the operation of television by remote control apparatus. We find it difficult to accept this contention. The fact that the transponder automatically responds to the data commands sent from the ground station network and retransmits the same data over a wider ....
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.... the contract as revealed from the terms of the contract document, the technical report and other facts furnished by the applicant.' On the aforesaid poser, the Authority for Advance Rulings discussed the issue and held that the transponder and the process therein are actually utilised for the satellite user for rendering the services to the customer and further that it cannot be said that the transponder or process employed therein are used by the customer. It needs to be emphasised that a satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. It was explained that the transponder is in fact an inseverable part of the satellite and cannot function without the continuous support of various systems and components of the satellite, including in particular : (a) Electrical power generation by solar arrays and storage battery of the satellite, which is common to and supports multiple trans ponders on board the satellite. (b) Common input antenna for receiving signals from the customers' ground stations, which are shared by multiple transponders. (c) Common output antenna for retransmitting signals ....
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....d speed as the earth. If it had been fixed at a particular place or the speed or direction had been different from that of earth, it could not have produced the desired results. The transponder is part of the satellite, which is fixed in the satellite and is neither moving in itself nor assisting the satellite to and the transponder, namely, a part of it, playing howsoever important role, cannot be termed as equipment.' Even after stating so, the Tribunal did not take the aforesaid view to its logical conclusion, viz., the process carried on in the trans ponder in receiving signals and retransmitting the same, is an inseparable part of the process of the satellite and that process is utilised only by the appellant who is in control thereof. Whether it is done with or without amplification of the signal would not make any difference, in such a scenario. We are inclined to agree with the argument of the learned senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms 'lease of transponder capacity', 'lessor', 'lessee' and &#....
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.... the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the "use of the lorry" for the following reasons : (i) The lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (iii) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry; or the carrier may unload the consignment en-route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8 a.m. to 8 p.m. at the customer's factory for its use, at a fixed hire p....
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....d responsibility of each member of the consortium and the consideration to be paid separately for the respective work of each member. The appellant was to develop, design, engineer, procure equipment, materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities, etc. The contract involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services, and (v) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outside India was received by the appellant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on the high seas outside India. Though the appellant unloaded the goods, cleared them from customs and transported them to the site, it was for and on behalf of Petronet and the expenditure including the customs duty was reimbursed t....
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....ph 6 of the protocol supply of equipment or machinery (sale of which was completed around, the order having been placed directly by the overseas office of the enterprise) would be within the meaning of the phrase 'directly or indirectly attributable to that permanent establishment' and, therefore, so much of the amount received or receivable by the appellant as was directly or indirectly attributable to the permanent establishment as postulated in paragraph 6 of the protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise under section9(1)(vii) of the Income-tax Act, 1961. And inasmuch as fees for technical services were specifically provided in article 12 of the Convention, they would not fall under article 7. Therefore, the price of the offshore services was taxable in India under the Act as well as the Convention. (iii) That, however, in view of section 115A(1)(b)(B) of the Act and article 12(2) of the Convention, tax was payable at the fixed rate of 20 per cent. of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the gross amount. In that case, the appella....
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....the basis of resident. So far as accrual of income in India was concerned, taxability must be read in terms of section 4(2) read with section 9, whereupon the question of seeking assessment of such income in India on the basis of the Double Taxation Treaty would arise. Paragraph 6 of the protocol to the Convention was not applicable, because, for the profits to be 'attributable directly or indirectly', the permanent establishment must be involved in the activity giving rise to the profits. . . . (vi) That where different severable parts of a composite contract were performed in different places, as in this case, the principle of apportionment could be applied to determine which fiscal jurisdiction could tax that particular part of the transaction. This principle helped to determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax on event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the taxability of various operations. Therefore, the concepts of profits of business connection and permanent establishment should not be mixed up. Whereas bu....
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....nt was with the non-resident parties and they have not leased the equipment, i.e. the undersea cable etc. to the assessee. The equipment were owned and used by the non-resident parties only and therefore it cannot be said that the consideration paid was for use of equipment by the assessee. Similarly the non-resident parties have not provided use of any process to the asses see, which are of patentable nature having exclusive ownership rights. The assessee was not concerned with any of the process involved in transmission or connectivity of call data. The only concern of the assessee was transmission of call data beyond the boundaries of India to the person in the USA to whom call was made. 10.15 Identical issue came up before the Delhi Bench of the Tribunal in the case of Bharti Airtel Ltd. v. ITO (TDS) [2016] 47 ITR (Trib) 418 (Delhi), wherein also the issue whether payment towards call interconnectivity charges for call transmission on foreign network was amounted to royalty or not. The findings of the Tribunal are reproduced as under (page 441) : "11.4 Thus, the essence of the agreement is that each party to the contract shall connect to network of other party at port locati....
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....e carefully gone through the facts of the case law. In that case, the Indian payer company had obtained 'leased lines' on hire basis under a contract from non-resident Verizon Communications. This is a vital fact which makes all the difference. When an Indian company takes leased line on hire, then it can be said that it had 'used' it. In the present appeal under consideration, the appellant has neither been leased nor been given on hire network of foreign operator, then it cannot be said that the appellant has 'used' the network belonging to foreign operator. Therefore, reliance of the Assessing Officer on the said case law is misplaced. 11.5 It is seen from proposed Explanations 5 and 6 and Mem randum of explanation that the meaning of the word 'process' has been widened, the 'process' need not be secret and situs of control and possession of right, property or information has been rendered irrelevant. However, all these changes do not affect the definition of royalty as per the Double Taxation Avoidance Agreement. In article 13(3)(a) of the Indo-UK Tax Treaty, the word employed is 'use or right to use' in contradistinction to the....
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....the Explanations 5 and 6 and Memorandum of explanation cannot be brought into action as there has not been any corresponding change in the definition of the term "royalty" in the DTAA between India and the USA. Accordingly, we are of the opinion that under the DTAA, the restricted meaning of the term royalty shall continue to operate despite the amendment in law. 10.17 As far as the assessee is concerned, in case of difference between provisions of the Act and an agreement under section 90 i.e. (DTAA), the provisions of the agreement shall prevail over the provisions of the Act. 10.18 In view of our discussion above, we hold that the payments made by the assessee are not in the nature of royalty either under the domestic law or relevant DTAA. 11. Further, in the case of the instant assessee, it has been argued by the learned counsel that even if it is assumed that the payment was in the nature of royalty after the retrospective amendment in the Act, the assessee cannot be held in default for not deducting tax on those payments. In support of the contention, the learned counsel has relied on the decision of the Delhi Bench of the Tribunal in the case of Business India Televisions....
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....alaries'." 16. In the instant case, the Commissioner of Income-tax (Appeals) has alleged that the non-resident parties have rendered services of transmission of call beyond the Indian territory, which are technical services. We find that the Hon'ble Delhi High Court in the case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 (Delhi); [2008] 175 Taxman 573 (Delhi) as held that technical services must be rendered by human element and it does not include any service provided by machine or robots. The call connectivity and transmission services have been held as not involving human element by the Tribunal in the case of Bharti Airtel Ltd. v. ITO (TDS) (supra). In the instant case, the Revenue has not brought forwarded any evidences that human element was involved in call transmission services through dedicated bandwidth. The identical issue was before the Authority for Advance Rulings in the case of Cable and Wireless Networks India (P) Ltd., In re [2009] 315 ITR 72 (AAR) The facts of the case has been submitted by the learned counsel in his submission. The assessee-company proposed to enter into an agreement with M/s. Cable and Wireless, UK with a view to provide end-to-end int....
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....(TDS) [2016] 47 ITR (Trib) 418 (Delhi) the Tribunal, Delhi Bench has decided the identical issue of payment made for carrying calls from outside India and terminating such calls in India. The relevant part of the decision is reproduced as under (page 454) : "A perusal of the above extracted paragraphs leads to the following conclusions : 'The assessee, as part of its ILD telecom services business, is responsible for providing services to its subscribers in respect of calls originated/terminated outside India. Thus, for the provisions of ILD services, the assessee is required to obtain the services of FTOs for provision of carriage connectivity services over the last leg by the communication channel i.e. the lack of communication channel where the assessee does not have a licence/capacity to provide connectivity services. Thus, the ILD business is the provisions of connectivity to the subscribers for international portion of the call, which may or may not originate domestically. The local connectivity within India is provided by the access providers and the national long distance operators (NLD operators) and the International connectivity by the ILD operators interconnectio....
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....ich pertains to or has the characteristic of a manager. It is obvious that the expression "manager" and consequently "managerial service" has a definite human element attached to it. To put it bluntly, a machine cannot be a manager. The service of consultancy also necessarily entails human intervention. The consultant, who provides consultancy service, has to be a human being. A machine cannot be regarded as a consultant. From the above discussion, it is apparent that both the words "managerial" and "consultancy" involve a human element. And, both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word "technical" as appearing in Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. But, the facility provided by MTNL/other companies for interconnect/port access is one which is provided automatically by machines. It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which provide such facilities are rendering any technical services as contemplated in Explanation 2 to section 9(1....
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.... * No doubt, such a facility is 'technical' in the sense that it involves sophisticated technology and may even be construed as 'communication service' but while interpreting the entire expression 'technical service', the individual meanings of the words 'technical' and 'service' have to be shed and only the meaning of the whole expression 'technical services' has to be seen. * 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 section 194J.' The phraseology of fees for technical services covers only such technical services provided for fees. There should be a direct co-relation between the services which are on technical nature and the consideration received in lieu of rendering the services. The services can be said to be of technical nature is the special skills and knowledge relating to technical field which required for the provisions of such services. These are required to be rendered by humans. The services provided by machines and robots do not fall within the ambit of technical servic....
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....is required to be examined, which again needs a technical data. We are only highlighting these facts to emphasise that these types of matters cannot be decided without any technical assistance available on record. There is one more aspect that requires to be gone into. It is the contention of respondent No. 1 herein that interconnect agreement between, let us say, M/s. Bharti Cellular Limited and BSNL in these cases is based on obligations and counter obligations, which is called a "revenue sharing contract". According to respondent No. 1, section194J of the Act is not attracted in the case of "revenue sharing contract". According to respondent No. 1, in such contracts there is only sharing of revenue and, therefore, payments by revenue sharing cannot constitute 'fees' under section 194J of the Act. This submission is not accepted by the Department. We leave it there because this submission has not been examined by the Tribunal. In short, the above aspects need reconsideration by the Assessing Officer. We make it clear that the assessee(s) is not at fault in these cases for the simple reason that the question of human intervention was never raised by the Department befo....
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....human element for coming to a conclusion that 'technical services' can be said to have been rendered in terms of Explanation 2 to section 9(1)(vii) of the Act. In our view the Hon'ble Supreme Court of India has approved the proposition laid down by the Hon'ble High Court, that this is a service and that it would be FTS as defined under section 9(1)(vii) if there is human interference in such communication service. Hence the issue to be considered is narrow and based on evidence collected by the Revenue post the Hon'ble Supreme Court judgment. All other issues are no more res integra. This aspect as to whether a human element is involved in such interconnect services or not, has been examined by different Benches of the Tribunal based on the evidence collected by the Assessing Officer in the above stated set aside proceedings. The facts that are on record are the same as the facts and evidence which have been examined by various co-ordinate Benches of the Tribunal. These include the statement of experts recorded by the Assessing Officer and the cross-examination done by the representative of the company. For the sake of brevity, we do not extract the statement and cross-ex....
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....Appellate Tribunal, Ahmedabad Bench, in the case of Canara Bank v. ITO [2008] 305 ITR (AT) 189 (Ahd) on MICR and the Pune Bench decision in iGate Computer Systems Ltd. v. Deputy CIT (TDS) [2015] 5 ITR (Trib)-OL 50 (Pune) on data link services. We find that for installation/setting up/repairing/servicing/maintenance capacity augmentation requires human intervention but after completing this process mere interconnection between the operators is automatic and does not require any human intervention. The term interconnecting user charges (IUC) also signifies charges for connecting two entities. The co-ordinate Bench also considered the Hon'ble Supreme Court decision in the case of CIT v. Bharti Cellular Ltd. [2011] 330 ITR 239 (SC) and in the case of iGate Computer Systems Ltd. and held that data link transfer does not require any human intervention and charges received or paid on account of this is not fees for technical services as envisaged in section 194J read with section 9(1)(vii) read with Explanation 2 of the Act. In case before us, the assessee has paid roaming charges, i.e., IUC charges to various operators at Rs. 10,18,92,350. Respectfully following above judicial precedents....
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....sdiction of another circle, the call gets connected automatically without any human intervention. It is due to configuration of software system in the respective service provider's place. In fact, the sub-divisional engineer of BSNL has explained as follows in response to question No. 23 : "Regarding roaming services as explained to question No. 21. Regarding interconnectivity, initial human intervention is required for establishing the physical connectivity and also for doing the required configuration. Once it is working fine, no intervention is required. In case of any faults human intervention is required for taking necessary corrective actions." In view of the above, once configuration was made, no human intervention is required for connecting roaming calls. The subscriber can make and receive calls, access and receive data and other services without any human intervention. Like any other machinery, whenever the system breakdown, to set right the same, human intervention is required. However, for connecting roaming call, no human intervention is required except initial configuration in system. This Tribunal is of the considered opinion that human intervention is necess....
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....ions of the various Benches of the Income-tax Appellate Tribunal, when read with the judgment of the Hon'ble Delhi High Court as well as the Hon'ble Supreme Court, would settle this matter in favour of the assessee. But as a number of other decisions have been relied upon, we examine the same. The Hon'ble Madras High Court in the case of Skycell Communications Ltd. v. Deputy CIT [2001] 251 ITR 53 (Mad) has held that call charges received from the telecom operators from firms and companies subscribing to cellular mobile services provided by them do not come within the definition of technical services under section 194J read with section 9(1)(vii) Explanation 2, as it is a mere collection of fee for use of standard facility provided to all those willing to pay for it. Applying the proposition laid down in this case law to the facts of this case, we have to hold that interconnection facility and the service of the FTO in picking up, carrying and successful termination the call over their respective network is a standard facility and the FTO in question does not render any technical services to the assessee under interconnect agreement. The Hon'ble High Court of Delhi in the case o....
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....alore Income-tax Appellate Tribunal in the case of Wipro Ltd. v. ITO [2003] 80 TTJ (Bang) 191 held as follows : 'Income deemed to accrue or arise in India-Fees for technical services/royalty-Payment for transmission of data and software through uplink and downlink services-Assessee engaged, interalia, in the business of development of software providing online software services through customer based circuits with the help of VSNL and foreign telecom companies outside India-As per the agreements with such telecom companies assessee is to use the standard facility having standard pricing patterns-There is nothing to show that assessee was provided with any technology or technical services- Therefore, the amounts paid by the assessee-company to non-resident telecom companies for downlinking and transmitting of data to the assessee's customers located outside India cannot be considered as "fees for technical services" under section 9(1)(vii), more so when similar services offered by VSNL is not regarded as technical services-Further, no process has been made available to the assessee- Hence, there is no question of applicability of section 9(1)(vi) too-So long as the amount ....
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....hindra and Mahindra Ltd. v. Deputy CIT [2009] 313 ITR (AT) 263 (Mum) [SB]; Raymond Ltd. v. Deputy CIT [2003] 86 ITD 791 (Mumbai); Cable and Wireless Networks India P. Ltd., In re [2009] 315 ITR 72 (AAR)." 20. We find that in the DTAA between India and the USA the make available clause is in existence. Article 12(4) of the treaty is reproduced as under ([1991] 187 ITR (St.) 102, 116) : "For purposes of this article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design." 21. Since in the call connectivity and transmission from end of the Indian territory at Mumbai to the termination of call in the USA, no technical knowledge has been made available to the a....