TaxTMI 
TaxTMI 
2017 (5) TMI 708
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....pect of the same assessee and issues involved 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....
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....section 143(3) of the Act on March 30, 2005, the Assessing Officer made following additions : S. No. Addition/disallowance 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 chal....
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....a revenue expenditure admissible under section 37(1) of the Act; (ii) that the entire expenditure was allowable in the relevant assessment year though the assessee had spread it over a period of three years in the 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 los....
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....ear, which also established that the business was setup in the immediately preceding year. In this connection, he relied on the decision of the Hon'ble Delhi High Court in the case of CIT v. Samsung India Electronics Ltd. reported in [2013] 356 ITR 354 (Delhi). 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....
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....re may be an interval between the business which is setup and a business which is commenced and before the commencement of the business all the expenses during the interregnum would be permissible deduction. 6.7.2 In the case of Omniglobe Information Tech India 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 paren....
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....ry, the process starts with the recruitment of employees, who are to work in the said industry. Training or introduction after recruitment would be akin to the trial production or the first step in production undertaken by a manufacturer of goods. Of course it has to be 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 recr....
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....as the expenditure during the construction period in the immediately preceding year. For operationalising the call centre, during the immediately preceding year an amount of Rs. 3.79 crores was also obtained by way of current liabilities and provisions. The appellant during the immediately 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....
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.... have been made again in respect of those expenses. The learned Commissioner of Income-tax (Appeals) agreed with the contention of the assessee and allowed the ground of the appeal raised by the assessee before him. 7.2 Before us, the learned Senior Departmental representative relying on the order 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....
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....nses incurred during the year amounting to Rs. 40,97,720, Rs. 24,98,252 has been taken to expenditure during construction period and an amount of Rs. 71,678 has been taken to deferred revenue expenditure. Meaning thereby that an amount of Rs. 24,98,252 would be capitalised to the cost of the assets, and an amount 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 C....
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....under professional charges have been incurred before the commencement of commercial operations, those have been treated as capital expenditure by the appellant. In that manner Rs. 24,98,250 out of the professional charges have been booked under expenditure during construction period. The remaining expenditure under professional 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 dis....
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....For running the call centre, the assessee acquired dedicated private bandwidth in the underwater sea cable from M/s. VSNL and M/s. AT and T USA. The dedicated "private bandwidth" means certain portion of total data carrying capacity of the cable would be available to the assessee. M/s. Kick Communication Inc. USA (in short "Kick Communications") is a reseller 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 v....
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....ompany situated at Vaishali, Ghaziabad. The Assessing Officer referred to section 9(1)(i) which provides that all income accruing or arising whether directly or indirectly through or from any business connection shall be deemed to accrue or arise in India. According to the Assessing Officer, there was certainly a business connection between the two parties and the payments 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 ....
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....ogies Hindustan Ltd. v. ITO [2004] 270 ITR (AT) 62 (Bang); [2005] 92 ITD 366 (Bang); (v) Wipro Ltd. v. ITO [2005] 278 ITR (AT) 57 (Bang); [2005] 92 TTJ (Bang) 796; (vi) Dun and Bradstreet Espana S. A., In re [2005] 272 ITR 99 (AAR); and (vii) Deputy CIT v. Pan AmSat International Systems Inc. [2006] 103 TTJ (Delhi) 861. 9.9 The learned Commissioner of Income-tax (Appeals) after considering the 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 pr....
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....he appellant to generate and cater to the outbound PSTN calls within the USA. This shall comprise of co-located equipment set up at USA and IGTL arrangement with local PSPN carrier using T-1 circuit from such carrier for PSTN connectivity within USA. In terms of the agreement IGTL shall provide connectivity to the appellant for the number of ports and shifts as set out in the exhibit to the agreement. The obligations of the IGTL are to provide 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....
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....d that amounts of remittance were chargeable as fee for technical service (FTS) under section 9(1)(vii) read with article 12(2) and 12(4) of the DTAA between the USA and India with following observations : "2.3.5 In the case similar to the case of the appellant, where payments were made on account of lease line rental charges, port charges (interconnectivity charges) and access charges to BSNL without deduction of tax at source under section 194J of the Act, 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 ....
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....tellite and thereafter downlinking over the footprint area on various continents, where the cable operator received the signals. The Hon'ble court held that the assessee was the operator of the satellite and was in control of the satellite and it has not leased out the equipment to the customers. The assessee had merely given access to a broad bandwidth available in the transponder which can be utilised for the purpose of transmitting signals to the customer. There was no use 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 th....
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....Act, 2012 has no bearing on the provisions of the DTAA as held by the Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114 (Delhi) (I.T.A. No. 473 of 2012). (vi) That in the case of Bharti Airtel Limited v. ITO (TDS) [2016] 47 ITR (Trib) 418 (Delhi) (I.T.A. Nos. 3593 to 3596/Del/2012) the Tribunal held that the payment of interconnectivity charges to the foreign telecom operators was not income deemed to accrue or arise in India as fee for technical services (FTS) 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' ....
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....rised that the executive of the call centre of the assessee located at Ghaziabad used to make call to the persons in the USA for marketing of the products of the clients of the assessee. The voice call data was converted into electronic data and transmitted from the call centre in India to the person in the USA to whom the call was made. The call from the call centre at Ghaziabad to the last point of the Indian territory at Mumbai was transmitted by the VSNL. We may call it as domestic leg of the call trans mission. Further, the call 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 responsibl....
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.... asset or source of income in India, or through the transfer of a capital asset situate in India." 9.12.4 Thus, for the Revenue to succeed on this issue, it has to prove that income has accrued or arisen, whether directly or indirectly in India : (a) through or from any business connection in India; (b) through or from any property in India; (c) through or from any assets or source of income in India; (d) through or from transfer of capital asset situated in India. 9.12.5 Further the "business connection" has been defined in Explanation 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....
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....ess purposes. (c) Erecting a factory in India where the raw produce purchased locally is worked into a firm suitable for export abroad. (d) Forming a local subsidiary company to sell the products of the non-resident parent company. (e) Having financial association between a resident and non- resident company. 3. The following clarifications would be found useful in deciding questions regarding the applicability of the provisions of section 9 in certain specific situations : 1. Non-resident exporter selling goods from abroad to Indian importer. (i) No liability will arise on accrual basis to the non-resident on the profits made by 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 n....
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....der this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. It, thus, clearly follows that carrying out the operations in India, wholly or at least partly, is sine qua non for the application of clause (i) of sub-section (1) of section 9 of the Act. Can it be said that the appellant, under the given circumstances, is doing some business in India, i.e., is there any business act of the appellant which could be attributed to the Indian territory ? Under the agreement with television channels, the role attributed to the appellant can be paraphrased in the following steps : (i) The programmes are uplinked by the television channels (admittedly not 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....
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.... accrue or arise in India.-(1) The following incomes shall be deemed to accrue or arise in India-. . . (vi) income by way of royalty payable by- (a) . . . (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) . . . " Further, Explanation 2 below the sub-section, which is invoked by the lower authorities, is reproduced as under : "Explanation 2.-For the purposes of this clause, 'royalty' means consideration (including any lump sum consideration but excluding any consideration which would be the income of 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, invent....
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....ation as requires; (iii) Alarm handling and management; (iv) Fault co-ordination management; (v) Network and service interruption co-ordination and management; (vi) Network and service reporting; (vii) Preventive monitoring and maintenance; and (viii) Preventive field maintenance.' (c) On page 25 of the paper book, in clause 1.1 of the service level agreement 99.50 per cent. service availability has been granted and the service unavailability has been referred to a period during which there is a break in transmission reported to and confirmed by the Kick Communications customer service." 10.3 The above terms and conditions of the agreement makes it evident that M/s. Kick Communication agreed for rendering services of transmission of call data and its effective management and there was no agreement for use or right to use any industrial, commercial or scientific equipment between the non-resident and the 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) ....
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....y comprise to co- located equipment, set up at the USA and IGTL's arrangement with local PSTN carrier, using TI circuits from such carriers for PSTN connectivity with the USA." 10.10 We find that the service in substance is for providing connectivity facility to the assessee to generate and cater to outbound public switch telephone network (PSTN) calls within the USA. Thus, clause (iii), (iv) or (iva) are not applicable for consideration paid to M/s. IGTL Solutions by the assessee. 10.10.1 In view of above, we are of the opinion that the consideration paid to the non-resident parties does not fall under the term "royalty" in terms of section 9(1)(vi) of the Act. 10.10.2 Further, we now examine whether the consideration paid by the assessee falls in the definition of the "royalty" in the hands of the recipient as per the DTAA between the USA and India. The term "royalty" has been defined under the DTAA between India and the USA in article 12(3) of the treaty as under ([1991] 187 ITR (St.) 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,....
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....ided, same held within the meaning of royalty as defined in Explanation 2. 10.13 The above decision of the Tribunal was reversed by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Company Ltd. v. DIT [2011] 332 ITR 340 (Delhi). The Hon'ble High Court held that the consideration paid for bandwidth used for up-linking and down-linking of the television signals cannot be termed as royalty either under section 9(1)(vi) of the Act or under the terms defined in the DTAA. The Hon'ble High Court has discussed in detail the use or right to use the process, information or equipment. The relevant paragraphs of the decision of the Hon'ble High Court are reproduced as under (page 377) : "Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of the term 'royalty' appearing in Explanation 2 to clause (vi) of section 9(1) of the Act. Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect 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 p....
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....ion of the satellite in the transmission chain is to receive the modulator carrier that earth stations emitted as uplinking, amplifying them and retransmitting them and downlink for reception at the destination earth stations. The meaning of the word 'process' being a series of action or steps taken in order to achieve a particular end, considering the role of the appellant in the light of meaning of the term 'process', it is evident that the particular end, viz., viewership by the public at large was achieved only through the series of steps taken by receiving the uplinked signals, amplifying them and relaying them after changing the frequency in the footprint area including India. This is held that the television channels in entire cycle of relaying the programmes in India were using the process provided by the assessee and, therefore, it is liable to be taxed as royalty income. We have to test the rationality of the aforesaid reasoning and consider the attack thereupon by the appellants in their arguments recorded above. 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 (K....
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....t has to be the nature of services provided by the appellant to its customers as per the agreement arrived at between them. Keeping in view the aforesaid operation of the satellites, we revert back to the agreement entered into between the appellant and its customers. It is clear from various clauses of the agreement (and noticed above), the appellant is the operator of the satellites. It also remains in the control of the satellite. It had not leased out the equipment to the customers. On this basis, it is argued by the appellant that the equipment is used by the appellant and it is only providing and rendering services to its customers and not allowing the customers to use the process. In the case of ISRO Satellite Centre [ISAC], Inre [2008] 307 ITR 59 (AAR), the Authority for Advance Rulings has narrated in detail the process of the operation of a satellite and the role played by the transponder therein. The following features of the agreement entered into by the appellant with its clients need to be highlighted at this stage : (a) The appellant is a foreign company incorporated in Hong Kong and carries business of providing satellite communications and broadca....
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....7) : 'As IGL does not carry on any business in India through permanent establishment, as discussed towards the end, the main contention of the Revenue is that the "charges" paid by the applicant ISRO under the terms of the agreement is in the nature of consideration paid for the "use of" or "right to use" the scientific equipment within the meaning of clause (b) of article 13(3) of the Treaty. The crucial question that needs to be addressed, therefore, is whether the payment made to IGL under the aforementioned contract constitutes consideration for the use of or right to use equipment of IGL. To answer this question, we have to discern the substance and essence of the contract as revealed from the terms of the contract document, the technical report and other facts furnished by the applicant. The first article in the contract makes it clear that the payment is for the 'lease of navigation transponder segment capacity'. From the designated transponder (L1 and L5) of Inmarsat satellite, this capacity at a particular frequency is made available to the applicant through INLUS (Navigation Land Uplink Station) which is set up and operated by the applicant. ....
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....s not use or operate any equipment of IGL. The lease of space segment capacity related to L1 and L5 transponder only means that a segment of the navigational transponder though which the data passes is allocated to the applicant so that it could be utilised for the specific purpose of making available the augmented data sent by the applicant through its ground station to the users extensively. The substance of the contract is the facility given to the applicant for the utilisation of space segment capacity of the transponder for transmit ting the augmented data as to the position of an object on land, air or water so that the end-user can have access to it through SABS receiver. The use of capacity, as clarified by the applicant involves the use of bandwidth, that is to say, a particular bandwidth in the trans ponder meant exclusively for navigational purposes is linked to the earth station (INLUS). The expression "use of space segment capacity" of transponder has no reference to any operations performed by means of the transponder. The use or operation of transponder as such is not at all contemplated under the contract. What really happens is that the augmented data sent by INLUS....
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....part of the satellite, remains under the control of the satellite/transponder owner (like the appellant in this case) and it does not vest with the telecast operator/television channels. The position is substantially the same in the present case as well. The Tribunal has distinguished this judgment and has opined that it is not applicable because of the reason that in ISRO (supra), there was any (sic-no) amplification of the signal whereas in the present case, signals are amplified. That, to our mind, would not make any difference insofar as ultimate conclusion is concerned, inasmuch as the ruling of the Authority for Advance Rulings is not founded on the aforesaid consideration. It becomes manifest when we take note of the question posed by the Authority for Advance Rulings before answering the same. The Authority for Advance Rulings expressed this as under (page 67) : 'The crucial question that needs to be addressed, therefore, is whether the payment made to IGL under the aforementioned contract constitutes consideration for the use of or right to use equipment of IGL. To answer this question, we have to discern the substance and essence of the contract as r....
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....tructive possession of which is or can be handed over by the satellite operator to its customers. On the contrary, the transponder is incapable of functioning on its own. In fact, the Tribunal has itself demonstrated so in the order as is clear from the following : 'A bare perusal of this meaning reveals that equipment is an instrument or tool which is capable of doing some job independently or with the help of other tools. A part of an equipment incapable of performing any activity in itself cannot be termed as an equipment. We take an example of scissors which has two blades. This scissors is an equipment but when one blade is separated from the other blade, it ceases to be an equipment. In other words, the blade in isolation cannot be termed as an equipment. Reverting to the facts of the present case, we find that the transponder is not an equipment in itself. In other words, it is not capable of performing any activity when divorced from the satellite. It was fairly conceded by the learned authorised representative that the transponder in itself without other parts of satellite is not capable of performing any function. Rightly so because satellite is not plotted a....
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....mer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the framework of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of "sale". On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of "sale". Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 (AP). Illustration : (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry ....
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....of intellectual property. On this it was argued that the process employed in the transponder of a satellite, i.e., changing of frequency and amplifying the signal, is not at all an item of intellectual property. Though there appears to be some force in this argument, it is not necessary to answer it conclusively. The fact remains that there is no use of 'process' by the television channels. Moreover, no such purported use has taken place in India. It is stated at the cost of repetition that the telecast companies/customers are situated outside India and so is the appellant. Even the agreements are executed abroad under which the services are provided by the appellant to its customers. The transponder is in the orbit. Merely because it has its footprint on various continents would not mean that the process has taken place in India. This aspect now stands concluded by the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408. In that case, the appellant, a non- resident company incorporated in Japan, along with five other enterprises formed a consortium. The consortium was awarded by Petronet a turnkey project for setting up a liquef....
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....e on the high seas, and in so far as the activities of the appellant for taking delivery of the goods from the ship, payment of customs duty and transportation of the goods to the site were concerned, these facts did not militate against the property in the goods passing to the appellant. In connection with the offshore supply, certain operations were inextricably interlinked in India, such as, signing of the contract in India which imposed liability on the appellant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance. The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the appellant. Therefore, income accrued to the appellant from the offshore supply through business connection in India and some operations of the business were carried out in India. Profits were deemed to accrue/arise in India would be only such part of the profits as was reasonably attributable to the operation carried out in India. (ii) That having regard to article 7(1) of the Conventio....
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....ax all income derived by the enterprise from sources in the State irrespective of whether or not such income was economically connected with the permanent establishment. The State of the permanent establishment was allowed to tax only those profits which were economically attributable to the permanent establishment, i.e., those which resulted from the permanent establishment's activities, which were economically from the business carried on by the permanent establishment. In this case, the permanent establishment's non-involvement in the transaction of offshore supply, excluded it from being a part of the cause of the income itself and thus there was no business connection. (iv) That for attracting the tax there had to be some activities through the permanent establishment. If income arose without any activity of the permanent establishment, even under the Convention the taxation liability in respect of overseas services would not arise in India. Section 9 spelled out the extent to which the income of a non- resident would be liable to tax in India. Section 9 had a direct territorial nexus. Relief under a Double Taxation Avoidance Treaty, having regard to the provi....
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....tax. (x) That even in relation to such income, viz., income from off shore services, the provisions of article 7 of the Convention would be applicable, as services rendered outside India would have nothing to do with the permanent establishment in India. Thus, if any services had been rendered by the head office of the appellant outside India, only because they were connected with the permanent establishment, even in relation thereto the principle of apportionment would apply.' The Tribunal has made an attempt to trace the fund flow and observed that since the end consumers, i.e., persons watching tele vision in India are paying the amounts to the cable operators who in turn are paying the same to the television channels, the flow of fund is traced to India. That is a farfetched ground to rope in the appellant in the taxation net. The Tribunal has glossed over an important fact that the money which is received from the cable operators by the telecast operators is treated as income by these telecast operators which has accrued in India and they have offered and paid tax. Thus, the income which is generated in India has been duly subjected to tax in India. It is....
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.... 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 the 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, non-resident 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 made by the Assessing Officer, consequently it cannot be said that payments made by the appellant are for 'use of process' and hence in nature of 'royalty'....
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....ective amendment in the Act, the appellant cannot be held to be asses see-in-default in respect of those payments. I find force in this argument in view of various judicial decisions relied upon by the appellant. The obligation imposed upon the appellant under section 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, the subsequent amendment though retrospective in effect, cannot create any obligation upon the payer which did not exist at time of crediting or actual payment of the sum. 11.7 In view of the discussion supra, I have no hesitation to hold that the payments made by the appellant are not in the nature of royalty under the domestic law and relevant Double Taxation Avoidance Agreement. This disposes of ground of Appeal No. 19 which is accordingly allowed." 10.16 Further the assessee in support of the proposition that the amendment under section 9(1)(vi) of the Act by the Finance Act, 2012, ha....
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....ingly, ground No. 1 of the appeal is allowed. 13. The learned Commissioner of Income-tax (Appeals) has alternatively held that the payments to the above two non-resident parties was chargeable in their hands as "fee for technical services" (FTS). In ground No. 1.1, the assessee has challenged this alternative finding of the learned Commissioner of Income-tax (Appeals). 14. In section 9(1)(vii) of the Act, fee for technical services, which has been deemed as income accrue or arise in India, as under : "9. (1)(vii) income by way of fees for technical services payable by-. . . (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or . . . " 15. Further, the "fee for technical services" has been defined in Explanation 2 below section 9(1)(vii), which is reproduced as under : "Explanation 2.-For the purposes of this clause, 'fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, ....
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....d for rendering any managerial, technical or consultancy services, including the provision of services of technical or other personnel. In the present case, in carrying telecom signals from Marseilles to other countries, C&W (UK) is not providing any managerial, technical or consultancy services, nor is it providing the services of its technical or other personnel to the applicant. C&W (UK) performs this part of service itself without the involvement of the applicant. The applicant has thus rightly urged that the fees paid by it to C&W (UK) is not in the nature of fees for technical services under the Act. So far as article 13(4) of the DTAA is concerned, the first part of it defines 'technical services' in a manner similar to Explanation 2 to section 9(1)(vii), but it further qualifies this expression in clauses (a), (b) and (c). Clause (c) is relevant for the present consideration. This clause requires that the technical service in question should make available technical knowledge, experience, skill, know-how or process, or consist of the development and transfer of a technical plan or technical design (emphasis supplied). From the description of service presented before....
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....e ILD operator is in turn billed by the FTO in the form of inter-connected usage charges (IUC).' 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 for technical services (FTS) or in the nature of royalty. We would first take up the adjudication of these two issues and then we would be reverting to other issues. Issue No. 1 Whether the payments of IUC by the assessee to FTOs are taxable as fees for technical services under section 9(1)(vii) of the Act. (As section 9(1)(vii) has already been extracted in the earlier paragraphs, we do not repeat the same ?) The Hon'ble Delhi High Court on this issue held as follows in the assessee's own case i.e. CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139 (Delhi) : 'The expression "fees for technical services" as appearing in section 194J has the same meaning as given to the expression in Explanation 2 to section 9(1)(vii). In the said Explanation, the expression "fees for technical services" means any consideration for rendering any "managerial, technical or consultancy services". The word "technical" is pre....
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.... 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 interpreting the 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. Moreover, the expression "technical service" would have reference to only technical service rendered by a human. It would not include any service provided by machines or robots. Thus, the interconnect charges/port access charges cannot be regarded as fees for technical services.' (emphasis supplied) The judgment of the Hon'ble Delhi High Court in the aforesaid case may thus be summarised as under : * The rule of noscitur a sociis is clearly applicable and the word 'technical' would take colour from the words 'managerial' and 'consultancy', between which it is sandwiched. * Both managerial service and consultancy service are provided by humans. Consequently, applying the rule of noscitur a socii....
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....nteralia, 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 the narrower sense by applying the rule of noscitur a sociis, particularly, because the words "technical services" in section9(1)(vii) read with Explanation 2 comes in between the words "managerial and consultancy services". The problem which arises in these cases is that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place, let us say, from Delhi to Nainital and vice versa. If, let us say, BSNL has no network in Nainital whereas it has a network in Delhi, the interconnect agreement enables M/s. Bharti Cellular Limited to access the network of BSNL in Nainital and the same situation can arise vice versa in a given case. During the traffic of such calls whether there is any manual intervention, is one of the points which requires expert evidence. Similarly, on....
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.... 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 the Central Board of Direct Taxes to issue directions to all its officers, that in such cases, the Department need not proceed only by the contracts placed before the officers.' Thus in our view the proposition of law laid down in the judgment of the Hon'ble Delhi High Court have attained finality. The Hon'ble Supreme Court held that the issue as to whether there is involvement/presence of human element or not was a factual and technical matter and required to be examined. The other proposition have been accepted by the Hon'ble Supreme Court. As the Hon'ble Supreme Court was of the opinion that this factual aspect of human intervention was not examined by the Assessing Officer, the matter was remanded to the Assessing Officer for factual examination only. The Assessing Officer in pursuance of the directions of the Hon'ble Supreme Court examined witness on oath and also gave the assessee the opportunity to cross-examine them. He also re-examined the expert witness. Our decisio....
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....ng/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 any 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 hesitation to hold that the provision of roaming services do not require any human intervention and accordingly we hold that the payment of roaming charges does not fall under the ambit of TDS provisions under section 194J of the Act.' The Jaipur Bench of the Tribunal in the case of Bharti Hexacom Ltd. v. ITO (TDS)-II [2015] 42 ITR (Trib) 686 (Jaipur) (I.T.A. No. 656/JP/2010 dated June 12, 2015) held as follows (page 707) : 'We have heard the rival contentions of both the parties and perused the material available on the record. After going through the....
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....plicable 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 interconnectivity service would on all fours apply to charges paid for 'IUC' for international interconnectivity. The Chennai Bench of the Income-tax Appellate Tribunal in the case of Dishnet Wireless Ltd. v. Deputy CIT [2016] 45 ITR (Trib) 430 (Chennai) (I.T.A. Nos. 320 to 329/Mds/2014 vide order dated July 20, 2015) on the aspect of human intervention held as follows (page 446): '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 the apex court in CIT v. Bharti Cellular Ltd. [2011] 330 ITR 239 (SC). The apex court after examining the provisions of section 9(1)(vii) of the Act, found that whenever there was a human intervention, it has to be considered as technical service. In the light of the above judgment of the apex court, the Department obtained an expert opinion from the sub-divisional engineer of BSNL. ....
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....he above referred orders, we hold that the payment in question cannot be characterised as fee for technical services under section 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 equipment/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. 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 i....
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....se of internet bandwidth by the assessee from T. Under the circumstances, the Tribunal came to the conclusion that there were no technical services provided by T to the assessee and, therefore, the provisions of section 9(1)(vii) did not apply. The 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.' In the case of Asst. CIT v. 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-Asses see was engaged in business of software development of products and providing software services in India and overseas-Assessee was treated as "assessee in default" under section 201(1) on account of non-deduction of TDS under section 194J from payment made for use of telecommunication services i.e. telephone charges, link charges and bandwidth charges....
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....entical service of transmission of call data from end of the Indian territory to the person in the USA to whom call is made, is involved, and accordingly in view of above discussion and following the judgments cited above, the payment in question cannot be considered as fee for technical services (FTS) in terms of section 9(1)(vii) read with Explanation 2 of the Act. 19. Further in paragraph 40 of the decision in the case of Bharti Airtel Limited v. ITO (TDS) [2016] 47 ITR (Trib) 418 (Delhi), the Tribunal has held that where make available clause is found in the treaty and there is no imparting as contemplated in the treaties, the payment cannot be treated as fee for technical services (FTS) under the DTAA. The relevant paragraph of the decision is reproduced as under (page 465) : "The second aspect of the issue are before us, is without prejudice to the finding under the domestic law, whether the payment to FTOs for 'IUC' is fee for technical services under the Double Taxation Avoidance Agreement, wherever 'make available clause' is found in these agreements. In view of our finding that the payment is not fee for technical services under the Act, it wou....
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....by us. 24. In the result, the appeal of the assessee is allowed. I. T. A. No. 5851/Del/2011 for the assessment year 2002-03 25. In I.T.A. No. 5851/Del/2011, the Revenue challenged the cancellation of penalty under section 271(1)(c) of the Act for the assessment year 2002- 03 by the learned Commissioner of Income-tax (Appeals). Since the quantum of addition in respect of the assessment year 2002-03 has already been deleted by us in I.T.A. No. 2088/Del/2008 and I.T.A. No. 1927/Del/2008, the issue of cancellation of penalty by the Commissioner of Income-tax (Appeals) is rendered infructuous. Accordingly, we dismiss the grounds raised in the appeal of the Revenue. 26. In the result, the appeal of the Revenue is dismissed. I. T. A. No. 127/Del/2011 assessment year 2003-04 27. Grounds of appeal raised in I.T.A. No. 127/Del/2011 for the assessment year 2003-04 are reproduced as under : "1. That on the law, facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance made by the learned Assessing Officer in respect of telecommunication expenses paid to M/s. GNG Solutions Inc. USA, Internatio....