TaxTMI 
TaxTMI 
2023 (9) TMI 318
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....r A.Y. 2009-10 are reproduced as under: "Al Telekom Austria Aktiengesellschaft (`the Appellant' or Al- Telekom") craves leave to prefer appeal against order dated 28 February 2023 passed by the Commissioner of Income-tax (Appeals) -- 12, Bangalore (hereinafter referred to as the 'learned CIT(A)') under Section 250 of the Income-tax Act, 1961(`the Act') and in respect of assessment order dated 26 December 2017 (received on 5 January 2018) passed by the Deputy Commissioner of Income Tax (International Taxation) - Circle 2(1), Bangalore [hereinafter referred to as the 'learned AO'] under section 147 read with section 144 of the Act, on the grounds as set out herein. The following grounds are independent of, and without prejudice to, one another: 1. General 1.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in determining the total income of the Appellant at Rs. 4,49,80,244 by making adjustment in respect of which specific ground has been raised. 1.2. On the facts, and in the circumstances of the case, and in law, the learned AO has e....
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....ned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under India-Austria Tax Treaty. 4.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO have erred in treating the Voice Interconnect Services as taxable in India. 5. Levy of interest under section 234A of the Act 5.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of the learned AO in levying interest under section 234A of the Act. 5.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234A for a period beyond two years where it is not possible for the appellant to file a valid return beyond the due date prescribed under section 139 of the Act. 6. Levy of Interest under section 234B and 234C of the Act 6.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in levying interest under section 234B and 234C o....
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....DS. No return of income was filed by the assessee for A.Ys. 2009-10, 2011-12 & 2012-13. The Ld.AO formed the belief that the sum received by the assessee for years under consideration was chargeable to tax, and escaped assessment. He therefore issued a notice u/s 148 of the Act to the assessee. 2.2 The assessee did not respond to the aforesaid notice u/s 148 nor to the notices u/s 129 r.w.s 142(1). Subsequently, a show-cause letter was issued by the Ld.AO, whereby the assessee was asked to show cause as to why the sum received by it from VSL during relevant assessment years under consideration towards 'interconnect charges' should not be taxed in its hands, as per the provisions of the Act and the relevant DTAA. 2.3 The assessee did not respond to the show-cause letter for A.Y. 2009-10. Since the assessee had not responded to any of the notices/ letters issued to it, the AO concluded the assessment ex-parte by bringing to tax the amount received by assessee as Inter-connect utility charges as FTS/Royalty. In respect of A.Ys. 2011-12 and 2012-13, the assessee had responded to the statutory notices and necessary communications as required u/s. 144C of the Ld.AO to pa....
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....t in case of M/s. Vodafone South Ltd. The Ld.AR thus effectively argued Ground no. 4 for A.Y. 2009-10 and Ground nos. 3-4 for A.Ys. 2011-12 and 2012-13 that reads as under: A.Y. 2009-10: "4. Taxability of Voice Interconnect Services as Royalty 4.1. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under section 9(1)(vi) of the Act. 4.2. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) has erred in upholding the action of learned AO in treating the payments received by the Appellant for provision of Voice Interconnect Services as royalty under India-Austria Tax Treaty. 4.3. On the facts, and in the circumstances of the case, and in law, the learned CIT(A) and the learned AO have erred in treating the Voice Interconnect Services as taxable in India." Ground nos. 3-4 (A.Ys. 2011-12 & 2012-13) 3.1 The Ld.AR submitted that DTAA will prevail over the Income- Tax Act as held by Hon'ble Karnataka High Court and it is further su....
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....interconnectivity utility charges as 'Royalty', has been considered in a recent decision by Hon'ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) & Ors. in ITA Nos. 160-164/2015 & ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015- 16 vide order dated 14.07.2023. 3.7 He thus submitted that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty in India stands squarely covered in favour of assessee. 4. On the contrary, the Ld.DR relying on the orders passed by the authorities below vehemently argued the observations as recorded by the revenue in their orders. 5. We have perused the submissions advanced by both sides in the light of records placed before us. 5.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty since the payment is made to "use the process" or "an equipment". 5.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity ....
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....ingement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. 5.2.4 We refer to the commentary in Prof.Klaus Vogel's Commentary on Double Taxation Convention, wherein, the term 'Royalty' is defined as under: "Paragraph 2 contains definition of the term 'royalties'. These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right." 5.2.5 Thus the word "process" thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon'ble Supreme Court ....
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.... our opinion, all these changes in the Act, do not affect the definition of 'Royalty' as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to, "transfer of all or any rights" or 'use of', in the domestic law. As per Explanation 5 & 6, the word 'process' includes and shall be deemed to included, transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. However, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party. 5.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase "use" or "right to use" has been explained. The meaning attached to phrase "use" or "right to use" has been explained in following decisions: • Decision of Authority For Advance Ruling(hereinafter referred to as AAR), in case of Cable & Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76 ....
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....er a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression "transfer of right to use any goods" occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physica....
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....ate to the context should be chosen. In S.M. Ram Lal & Co. v. Secretary to Government of Punjab [1998] 5 SCC 574, the Supreme Court noted that 'in its ordinary meaning', "the word 'use' as a noun, is the act of employing a thing; putting into action or service, employing for or applying to a given purpose". In the New Shorter Oxford Dictionary, more or less the same meaning is given. The very first meaning noted there is: "the action of using something; the fact or state of being used; application or conversion to some purpose". Another meaning given is "Make use of (a thing), especially for a particular end or purpose; utilize, turn to account... cause (an implement, instrument etc.) to work especially for a particular purpose; manipulate, operate". The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below : "The word 'use' means to make use of; convert to one's service; to avail oneself of; to employ". (Miller v. Franklin County) "The word 'use' means the purpose served, a purpose, object or end for useful or advantageous....
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....applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions 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 clause (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 h....
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....hat the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that the bulk of consideration paid is for the use of that item of equipment. 13.3 In cases where the customers make use of standard facility like telephone connection offered by the service provider, it does not admit of any doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall unde....
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.... use of any patent, invention, model, design, secret formula or process or trademark or similar property;" It was not disputed before us on behalf of the assessee that the nature of the activity carried on by it is the same as in the case of Asia Satellite Telecommunication Co. Ltd. (supra). If that is so, we have to hold, respectfully following the order of the co-ordinate Bench, that there is a "process" involved in the activity carried on by the assessee before us. In Asia Satellite Telecommunication Co. Ltd.'s case (supra) it was further held that the word "secret" appearing in clause (iii) above qualifies only the word "formula" but not the word "process" and therefore even if the process involved in the operation of the transponder is in the public domain and no longer a secret known only to a few, the payment for the process would still be taxable as royalty. The reason or logic given in paragraph 6.18 of the order by the Tribunal to hold that the word "secret" does not qualify the word "process" is that "there is no comma after the use of the word 'secret' till the end of clause (iii) and if the intention has been to apply the word 'secret' before the word 'process....
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....with USA. From the article quoted above, it may be seen that there is a comma after the words "secret formula or process" which indicates that both the words "formula" and "process" are qualified by the word "secret". The requirement thus under the treaty is that both the formula and the process, for which the payment is made, should be a secret formula or a secret process in order that the consideration may be characterised as royalty. We do agree with the argument of the Special Counsel for the Department, on the strength of the several authorities cited by him, that normally punctuation by itself cannot control the interpretation of a statutory provision and in fact the learned counsel for the assessee did not seriously dispute the proposition. However, the punctuation the use of the comma coupled with the setting and words surrounding the words under consideration, do persuade us to hold that under the treaty even the process should be a secret process so that the payment therefore, if any, may be assessed in India as royalty. The Tribunal in Asia Satellite Telecommunication Co. Ltd.'s case (supra) have recognized that all the items referred to in clause (iii) of Explanation 2 ....
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.... Therefore in our opinion, the Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of 'Royalty' under section 9(1)(vi) Explanation 5 &6. 5.2.15 We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of "Royalty" under India- Austria DTAA. The definition of "Royalty" under the DTAA is much more narrower in its scope and coverage, than the definition of "Royalty" contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act. 5.2.16 On perusal of the agreement between the assessee and the end users placed at pages 35 to 80 of paper book Vol. 1, it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right to use the equipment or process so as to be considered as royalty within the definition of "royalty" as contained in clause 3 of Article 13 of India-Austria DTAA. 5.2.17 We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management....
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....ing tax liability should be levied at a higher rate at 20% in accordance with section 206AA of the Act? 6. Whether the Hon'ble Tribunal was right in repelling the contention of the Appellant to the effect that, as a deductor, it cannot be held liable for non-reduction of tax at source for payments made for the Assessment Year 2008-09 to Assessment Year 2012-13 on the basis of a subsequent amendment to Section 9(1)(vi) whereby Explanation 5 and 6 were introduced?" Hon'ble High Court for considering the above questions had looked into the agreement between Vodafone Idea Ltd. and the various service providers from whom Vodafone Idea Ltd. had received the IUC services. Hon'ble High Court also considered the various decisions by other High Courts referred to hereinabove vis-a-vis the arguments advanced by the Ld.Counsel. 5.2.19 In case of Vodafone Idea Ltd. (supra), Hon'ble Court also observed that the equipments and submarine cables are situated overseas and that Vodafone Idea Ltd. had availed certain services from the non-resident telecom operators and that such agreements would not create a permanent establishment of such non-resident telecom operators in India. Th....
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.... sum. This is the underlying principle of Section 195. Hence, apart from Section 9(1), Sections 4, 5, 9, 90, 91 as well as the provisions of DTAA are also relevant, while applying tax deduction at source provisions." (Emphasis supplied) 18. The above passage has been noted and extracted in Engineering Analysis. Thus it is clear that an assessee is entitled to take the benefit under a DTAA between two countries. Hence, the ITAT's view that DTAA cannot be considered in proceedings under Section 201 of the Act is tenable. 19. The second question for consideration is whether the ITAT was correct in holding that the amendment to provisions of Section 9(1)(vi) inserting the Explanations will result in amendment of DTAA. The answer to this question must be in the negative because in Engineering Analysis, the Apex Court has held that Explanation 4 to Section 9(1)(vi) of the Act is not clarificatory of the position as on 01.06.1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. The Explanation 5 and 6 to Section 9(1)(vi) of the Act has been inserted with effect from 01.06.1976. This aspect has also been considere....
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....o jurisdiction to bring to tax the income arising from extra-territorial source. 23. The fifth question is whether the Revenue is right in holding that withholding tax liability should be levied at a higher rate. It was contended by Shri. Pardiwala that this issue is covered in assessee's favour in CIT Vs. M/s. Wipro36 and the same is not disputed. Hence, this question also needs to be answered against the Revenue. 24. The sixth question is whether assessee can be held liable for non-reduction of tax at source for payments made for the A.Ys. on the basis of amendment to Section 9(1)(vi) of the Act. This aspect has been considered by us while answering question No.2. It is held in Engineering Analysis that an assessee is not obliged to do the impossible. Admittedly, the A.Y.s under consideration are 2008-09 to 2012-13 and the Explanation has been inserted by Finance Act, 2012. In addition, we have also held that assessee is entitled for the benefits under DTAA." 5.2.20 Respectfully following the above view, in case of Vodafone Idea Ltd. (supra), and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges ....
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....vi) has also clarified that the definition of royalty would also cover payments for the use of any right, property or information, whether or not such right, property or information is located in India. 6.5.6 In addition to being taxable under the Act, the payment received by the appellant from VSL would also fall within the definition of 'royalty' as given in Article 12 of the India-Austria DTAA, reproduced below: ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties and fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties and fees for technical services. 3. The term "royalties" as used in this Article, means payments of any kind received as a consideration for th....
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....s for technical services paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. The process of interconnection has been described in detail by the AO in the remand report (supra). A reading of the above Article favours the interpretation that the interconnect services provided by the appellant to VSL falls within the definition of 'process' as given in paragraph 3 of Article 12 of the treaty. 5.6.7 The issue of whether interconnect charges constitute royalty in the hands of the foreign telecom operator has been extensively discussed in the order of the Bangalore ITAT in the case of Vodafone South Limited for the assessment years 2008-09 to 2012-13, which period includes the assessment year involved in the present appeal. In the aforesaid decision, Vodafone South Limited vs DDIT (International Taxation) C....
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....ula is a different connotation than "process" which is an independent activity in itself. It is the interpretation provided by the Courts who have made it as a secret process, in order to explain the stand of one of the party to the agreement that its intention was always not to construe the 'process' as secret 'process', Explanation 6 has been appended with retrospective effect. This Explanation only clarifies the position. After incorporation of Explanation 5 and 6, there are series of decisions which have distinguished the position of law prior to incorporation of these Explanations. One of the contention of the assessee was that retrospective amendment in the Income- tax Act cannot override the provisions of the DTAA and if an assessee is being governed under the DTAA, then such retrospective amendment cannot affect the rights of the assessee. According to it insertion of Explanation 5 & 6 to section 9(1)(vi) enhance the scope of expression 'royalty" vis-Ã -vis one provided under the DTAA and, thus, the restricted meaning given to the royalty in the DTAA ought to be applied on the payments made by the assessee in the instant case. So ....