TaxTMI 
TaxTMI 
2022 (2) TMI 313
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.... passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2010-11. (iii) IT(TP) A.No.1493/Bang/2015, is an appeal against the final order of assessment dated 16.10.2015 of DCIT, International taxation., Circle 1 (1), Bangalore, passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2011-12. (iv) IT (TP) A.No.2135/Bang/2016 is an appeal by the Assessee against the final order of assessment dated 5.10.2016 passed by the DCIT(International Taxation), Circle-1(1), Bangalore, u/s.143(3) read with Sec.144C(13) of the Income Tax Act, 1961, in relation to AY 2012-13. (v to vii): IT (TP) A.No. 1365 to 1367/Bang/2019 are appeals is an appeal against the common order dated 28.3.2019 of CIT(A)-12, Bangalore, in relation to AY 2013-14 to 2015-16. 2. These appeals involve one common issue, except for one additional issue in one of the appeals i.e., appeal for AY 2010-11. All these appeals were heard together and we deem it convenient to pass a common order. We will deal with the appeal for AY 2012-13 as a lead case and the decision taken therein will be equally applicable to other AYs also, as the facts and c....
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....lity to provide application support for users of the said software. The Assessee agreed to provide application support to MCPL. (ii) Wide Area Network Services: The Assessee has ageeement with British Telecom Plc., UK (BT) whereby BT provides wide area network services to subsidiary companies and associated enterprises of the Assessee. The Assessee with a view to formalise the arrangement with provision of wide area network services has entered into the agreement. The support services covered under the ambit of Wide Area Network Support services are described in Schedule-II to the Agreement. 6. Clause-5 of the agreement provides as follows: 5. Wide Area Network Support Services 5.1 During the Term 1.11(1 as from the Effective Date the Service Provider shall make Wide Area Network Support Services available to the User in accordance with the User's reasonable requirements. These requirements shall include, inter alias, 5.1.1 setting up a global wide area network capable of supporting transaction processing; 5.1..2 providing global wide area network access to sites of India business- operations that meet required service levels for ....
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....vide the Services, from the Effective Date in accordance with this Agreement and the Local Agreements. 11. "Local Agreement" has been defined under the MGFA to mean: "Local Agreement" means an agreement entered into between the relevant member of BT Group and the relevant member of Coats Group in relation to one or more countries based on this Agreement substantially in accordance with the example set out within Schedule 8 (Pro-Forma Local Agreement)" 12. Therefore the Agreement by which the Assessee agreed to provide WAN services to the Assessee referred to in the earlier part of this order would be covered under the definition of "Local Agreeement" under the MGFA. 13. Schedule I to the MGFA details the services and the relevant clauses in so far as the issue to be decided in this appeal is concerned reads as follows: "SCHEDULE 1 SERVICES 1. Purpose of Schedule This Schedule describes the scope of the Services to be provided to the Sites by BT to Coats under this Agreement. 2. Scope of Services The scope of Services are defined as a BT Global WAN with BT's end to end Managed Services including all network elements as ....
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....ne to Bangalore HQ site, India Sri Lanka (Horana) Local connection to Colombo site, Sri Lanka, then long line to Bangalore (as above) Sri Lanka (Kelaniya) Local connection to Colombo site, Sri Lanka, then long line to Bangalore (as above)+ Morocco (Casabianca) Long line to Stockley Park site, UK Tunisia (Tunis) Long line to Stockley Park site, UK 5.2 Network Equipment The routers provided will be Cisco, as defined in Schedule 18 (Coats Site List), with standard Interface Operating System (IOS) software. Besides the above, Schedule - I also refers to management services (i.e., help desk for user), service desk, fault management, etc. These are incidental to use of WAN by the user." 14. The user MCPL has made payments to the Assessee under different heads of expense in relation to services provided, expenses recharged etc. and TDS has been made wherever the payer felt that TDS is applicable. Details of the total received/ receivables related to or connected to India in the hands of JPCL for FY 2011-12 are as under: Sl. No. Name and address of the party Nature of transactions Accruals during the year - Rs. Whether receipts....
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....The Assessee is a tax resident of United Kingdom (UK) and therefore taxability of income of a non-resident in India on the income from whatever source which: • is received or is deemed to be received in India; or • accrues or arises or is deemed to accrue or arise to it in India It is only when the receipt in question can be characterized as "Royalty" under the provisions of the applicable Indo-UK Double Taxation Avoidance Agreements (`DTAA') will there be liability to tax in India. The term "Royalty" has been defined in Explanation 2 to section 9(l)(vi) of the Act as follows: "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 license) 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 formu....
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....ed the following principles in this regard - • The provision of telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the service provider does not amount to a lease of equipment. • The service provider utilises its own network and provides a facility that enables the service recipient to transmit voice and data through the media of telecom bandwidth and accordingly there is no use or right to use equipment within the meaning of clause (via) of Explanation 2 to section 9(1)(vi) of the Act. Provision of bandwidth facility does not tantamount to use of or right to use any secret process. The AAR mentioned that similar bandwidth services through private circuits are being provided by many other telecom operators and hence the royalty definition relating to secret process is not attracted while providing telecom bandwidth facility. Reliance was placed on the following judicial precedents in support of Assessee's contention that provision of telecom bandwidth facility would not be characterised as royalty under the Act and the DTAA- A In this regard, the Hon'ble High Court of Delhi in th....
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....s submitted that data connectivity is primarily provided by BT. The Assessee merely recoups a portion of the costs from MCPL based on usage by MCPL. Accordingly, the payments made by MCPL to Assessee would not fall within the ambit of the term `fees for technical services' under the Act in the absence of any services being rendered by Assessee to MCPL. The Assessee placed reliance on the decision of the Madras High Court in Skycell Communications Ltd v DCIT [2001] 251 ITR 53 (Mad) and Delhi High Court in CIT And Others v Bharti Cellular And Others [2008] 175 Taxman 573 (Del) in which it was held that provision of cellular services cannot be treated as technical services. Without prejudice to the aforesaid submission, it was submitted that under Article 13 of Indo UK DTAA deals with Royalty and fees for technical services. Paragraph 4 of Article 13 defines the term 'fees for technical services' to mean: "For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including t....
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.... • The Karnataka High Court in A.E.G Telefunken v. CIT -233 ITR 129 (Kar) compared the DTAA entered with German Democratic Republic with the DTAA entered with Finland for achieving a better understanding of the term fees foi technical services. • The Mumbai Tribunal Bench in Raymond Ltd v DCIT - 86 ITD 791 (T Born) reliec upon the Memorandum of Understanding, examples and explanation appended tc the DTAA between India and United States of America in order to arrive at a better understanding of the treaty law between India and United Kingdom. The Assessee submitted that the MOU under the Indo-US DTAA can be used to explain the concept of 'make available' under the Indo- UK DTAA. Under Para 4(b) of Article 12 of the Indo-US DTAA, technical and consultancy services are considered as included services only if they make available technical knowledge, expertise, skill, knowhow or processes or consists of the development and transfer of a technical plant or technical design to such person. The MOU explains that the category of services included in para 4(b) of article 12 is narrower because it excludes any service that does not make technology available to th....
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....submitted that the receipts pertaining to the recoveries of data connectivity charges would not be taxable as business profits in India. 17. The AO rejected the theory of cost to cost reimbursement on the ground that what is to be seen is whether the payment is for services rendered then whether the charge for the services is equivalent to the cost or not becomes immaterial. Once the income falls under the category mentioned in Sec.9(1)(vi) of the Act i.e., royalty, then it is taxable, irrespective of whether it is equivalent to the cost of the service provider. 18. The AO thereafter examined the nature of payment in the light of the definition of "Royalty" under the Act and as per the DTAA. He referred to clause (via) of explanation-2 to Sec.9(1)(vi) of the Act which provides that consideration for "the use or right to use any industrial, commercial or scientific equipment" is regarded as Royalty. He also referred to the definition of Royalty as given in Article 13(3)clause (b) of DTAA which also has a similar clause "payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment". According to the AO, t....
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....tituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are : Does the availment of service involve user of equipment belonging to BT or its agent by the applicant ? Is the applicant required to do some positive act in relation to the equipment such as operation and control of the same in order to utilize the service or facility ? Does the applicant deal with any BT equipment for adapting it to its use? Unless the answer is 'yes', the payment made by the applicant to BTA cannot be brought within the royalty cl. (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the applicant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevan....
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....o in the MGFA) and concluded that the entire system of MPLS is based on the routers. He also referred to clause 6.1 of the MGFA which provides that initial trouble shooting will be done by the Assessee wherever any problem occurs in use of Wide Area Network connectivity. According to the AO it is only if the Assessee is aware of the equipment installed in its premises can it trouble shoot. The Assessee does constant checking of the equipment installed in the premises of MCPL and therefore there was a right to use the equipment. 22. The AO thereafter made reference to the decision of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd v. ITO (International Taxation) [2013] 39 taxmann.com 70 wherein it was held that the consideration received by the non-resident taxpayer from the Indian customers for provision of bandwidth/telecommunications services outside India was for the 'use of, or the right to use equipment' and, therefore, royalty under section 9(1)(vi) of the Act. It was also held that alternatively, the payments can also be considered for the use of process provided by the taxpayer and therefore, royalty under the Act. The H....
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.... telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing "use of the process" and consequently assessable as "royalty" under the Act and the DTAA. This decision has been reversed by the Hon'ble Delhi High Court in the decision of New Skies Satellites N.V. 68 taxmann.com 8. The AO also took recourse to the provisions of Expln. 5 & 6 to Sec.9(1)(vi) of the Act in support of his conclusions as above, though these provisions are not found in the definition of Royalty under the DTAA. 23. For all the above reasons the AO brought to tax, the BT charges received by the Assessee from MCPL in his draft assessment order. The Assessee filed objections before the Dispute Resolution Panel (DRP) against the conclusions of the AO in the draft assessment order. The DRP upheld the order of the AO. The AO passed the final order of assessment in which he brought to tax BT charges as royalty. Aggrieved by the aforesaid addition, the Assessee is in appeal before the Tribunal. 24. The arguments advanced by the parties are almost iden....
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....ssessee and MCPL have no interest in the equipment whatsoever and did not have control over the equipment or the process and the payment was for providing standard services from BT. It was submitted that mere fact that some equipments are installed and maintained by the service provider at the sites will not amount to lease of equipment. The service provider BT utilizes its own network and provides a facility that enables Coats group to transmit voice and data through the media of telecom bandwidth and accordingly there is no use or right to use equipment. The use of the router is for the limited purpose of obtaining the services from BT. It was submitted that use of router is akin to a set top box kept at homes of the subscribers of television channels or direct to home (DTH) operators. The equipment (i.e., set top box) at the house of the subscriber belongs to the service provider. It cannot be said that the subscriber is paying for "use of equipment". The subscriber is paying for services and the equipment is required for such a purpose. Reference was made to decision of Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt.Ltd. Vs. CIT Civil Appeal ....
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....into a master service agreement (MSA) with BT America (BTA) a non-resident company formed and registered in USA under which BTA provided the applicant with two-way transmission of voice and data through telecom bandwidth. The purpose of entering into such arrangement was to enable Dell entities in the respective countries to utilize the services of BTA. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e. USA and India. Under the agreement, a fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. Installation charges as specified in the order form are also payable initially. The payment to BTA is net of any Indian taxes, including withholding taxes, as may be applicable. There was no equipment of BTA at the Dell India's premises and Dell India has no rights over any equipment held by BTA for providing the bandwidth. Dell India sought ruling that the payments made to BTA....
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....ces provided outside India is provided by the Assessee. The gateway/the landing station in India used in transmitting the traffic within India belonged to VSNL and is used by VSNL for providing Indian end services pursuant to its contract with the customer. On the above facts, the question before the Hon'ble Court was as to Whether the Tribunal was right on facts and in law in holding that the payments received by Verizon Communications Singapore Pvt.Ltd., the appellant from the Indian customers for provision of Bandwidth/Telecom Services outside India is royalty for the 'use of, the right to use equipment' u/s 9(1)(vi) of the Act? And Whether these payments received constitute royalty for the 'use of, or the right to use equipment' u/s 12(3)(b) of the Tax Treaty(DTAA between India and Singapore)? The Hon'ble Madras High Court held that the payments made to the non-resident company were for the 'use of equipment'. In addition, the Court also held that such payments may also be held to be in relation to the 'use of process' since the provision of assured bandwidth and guaranteeing the transmission of data and voice would qualify for the same, irrespective of the fact that the bandwi....
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....position that but the above explanation 5 and 6 are not found in the definition of Royalty under the India-UK DTAA. The Hon'ble Supreme Court in the case of "Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT" [2021] 125 taxmann.com 42, has in the context of taxability or otherwise of consideration paid for use of computer software as royalty, by holding that the payments made by resident Indian endusers/ distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale of the computer software through End User License Agreements (EULAs)/distribution agreements, can't be considered as payment of royalty for the use of copyright in the computer software as per provisions of Article 12(3) of the applicable DTAAs and further that the provisions contained in section 9(1)(vi) of the Income Tax Act along with explanations 2 and 4 thereof, not being more beneficial to the Assessees, will not have any application. We find that the Hon'ble Delhi High Court in New Skies Satellite (supra) has also taken the same view and has observed in the said decision that Hon'ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. (supra)....
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....d facility with a view to earn income by allowing the users to avail the benefits of such equipments or standard facility does not tantamount to granting the use or the right to use that equipment or process so as to be considered as royalty within the above definition of 'royalty' contained in clause 3(b) of Article 13 of the India-UK DTAA. At no point of time, the customer gain any possession or physical custody, control or management over any equipment. Payment of bandwidth charges can't be considered as 'Royalty'. Also, the process involved to provide the bandwidth service is not "secret", but a standard commercial process followed by the industry players. Therefore, the said process can't be classified as a "secret process", as is required by the above- mentioned clause 3(b) of Article 13 of the DTAA. 31. The law is well settled, that in so far as provisions which impose a tax liability on the subject, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject. In State of West Bengal vs. Kesoram Industries Limited, (2004)10 SCC 201 has summed up the following principles applicable to ....
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....le' technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. We do not wish to go into these arguments as the revenue has not taxed the sum in question as FTS. It is also not the case of the revenue that the Assessee has permanent establishment in India and therefore the receipts even if considered as business income, cannot be taxed in India. Even on this aspect, there is no discussion and it is admitted case of the revenue that the sum in question cannot be taxed as business income. 34. In so far as AY 2010-11 is concerned, there is one additional issue and that issue is with regard to taxing a sum of Rs. 4,49,395 received by the Assessee from MCPL towards cost of shrink-wrapped software, which the Assessee purchased from software vendors and sold to the Assessee. The taxed the aforesaid receipt treating it as royalty by following the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 345 ITR 494 (Karn.). It was the plea of the Assessee before DRP that there was no transfer of right in respect of the copyright by the software vendors to the....
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....t Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/ equipment." Hon'ble Supreme Court, considered various arguments advanced by the Revenue as well as the assessee's and came to the conclusion as under: CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the income Ta Act (section 9(1)(vi, along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the a....