TaxTMI 
TaxTMI 
2023 (11) TMI 281
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....nn.com 575, assessee is not inclined to press upon the issues raised in the application for admission of additional grounds. The same has been endorsed by the Ld.AR which is placed on record. Based on the above submission, the additional grounds raised by the assessee for all the years under consideration vide application dated 16.06.2023 stands dismissed as not pressed. 2. It is submitted that, the issues raised by the assessee in grounds of appeal for all four A.Ys. are common and on identical facts. It is submitted that the observations of the Ld.AO/DRP are identical and similar for all the years under consideration. Accordingly, all the appeals are being disposed of by way of common order. 3. For the sake of convenience, the issues raised by the assessee in the grounds of appeal for A.Y. 2013-14 are reproduced as under: "1. That on the facts and circumstances of the case and in law, the order dated January 24, 2023 passed by the Learned Deputy Commissioner of Income tax (International Taxation), Circle -2(2), Bangalore ("Ld. AO") under section 147 read with section 143(3)/144C of the Income-tax Act, 1961 (`the Act') assessing income of INR 6,12,36,790 is b....
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....ndia, the same cannot be brought to tax in India. 4.4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not following various judicial precedent including the order of the Hon'ble Delhi ITAT in the case of Bharti Airtel Limited (TDS) ITA No 4079/De1/2012 and B.T. Global Communications India Private Limited [TS-209-ITAT 2022 (DEL)] wherein it has been held that the interconnect charges paid to the Foreign Telecom Operator for carriage of calls is not 'Royalty' both under the Act as well as the DTAA. 5. Without prejudice, on the facts and the circumstances of the case and in law, the Ld. AO has erred in initiating proceeding against the Assessee under section 147 of the Act having already initiated proceeding and raised demand against VSL under section 201 of the Act. 6. Levy of interest under section 234A and section 234B of the Act On the facts and the circumstances of the case and in law, the Ld. AO erred in charging interest under section 234A and section 234B of the Act. 7. Initiation of penalty proceedings On the facts and the circumstances of the case and in law, the Ld. AO err....
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....per the provisions of the act as well as India-Netherlands DTAA. 4.5 On receipt of the draft assessment order, the Ld.AO in all the four years under consideration upon reopening of the assessment and after considering the submissions filed by assessee held that the payments received by assessee from the Indian telecom operators one of the party being Vodafone South Ltd. towards the interconnect utility charges was in the nature of royalty and is deemed to accrue or arise in India. The Ld.AO was of the opinion that as the assessee has not offered these payments to tax under the Income Tax Act, the 148 proceedings were initiated against assessee. 4.6 On merits of the case, the Ld.AO based on the decision of Coordinate Bench of this Tribunal in case of Vodafone South Ltd. vs. DIT reported in (2015) 53 taxmann.com 441 held that the payment was liable for TDS u/s. 195. 4.7 On receipt of the draft assessment order, assessee filed objections before the DRP. The DRP upheld the view of the Ld.AO by observing as under: "2.6.12 In this regard as discussed in detail in preceding paras the payments in the nature of Interconnect charges made by VSL are not in the nature of busi....
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....iled appeals before this Tribunal. 5. The Ld.AR at the outset submitted that Ground no. 1 in all the appeals are general in nature and therefore does not require adjudication. 6. Ground nos. 2, 2.1, 3 and 5 in all the appeals under consideration are not pressed by assessee as the issue on merits are squarely covered by the order of the jurisdictional High Court. Accordingly, the only effective grounds argued by the assessee are Ground nos. 4, 6 and 7. Ground no. 4 :- 7. 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 submitted that Explanation 5 and 6 do not override the DTAA between India and Netherlands. Hence, the subject payment received from Vodafone and Bharti Airtel is not taxable as 'royalty' as per DTAA. It is submitted that Hon'ble Karnataka High Court in the case of Vodafone reversed the ITAT judgment on this point. The substantial questions of law 2,3 and 4 in the judgment of Vodafone by Hon'ble Karnataka High Court has answered the question regarding the IUC charges not amounting to 'royalty'. 7.1 Without prejudice to the above, the Ld.AR also submitted that the....
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.... rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;' 9.2.1 The term "process" used under Explanation 2 to section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' which is publicly available. The term "process" occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a "process" which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows: "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" Clauses (i) & (ii) of the said explanation also use identical terms. 9.2.2 The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to va....
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....e right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty". 9.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked. 9.2.8 Further we note that by Finance Act, 2012, Explanation 5 & 6 were added with retrospective effect from 1.6.1976 which reads as under:- "Explanation 5: For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not - (a) The possession or control of such right, property or information is with the payer; (b) Such right, property or information is used directly by the payer; (c) The location of suc....
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.... similar issue was considered wherein Cable & Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable & Wireless Group of companies. Cable & Wireless Networks India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable & Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable & Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable & Wireless Networks India(P.)Ltd., to the UK Group company, whether the payment is taxable as 'royalty' or 'FTS' under section 9(1)(vi)/(vii). The AAR relied on following decisions: * Decision of Hon'ble Supreme Court in case of BSNL vs. UOI reported in (2006) 3 STT 245 * Decision of AAR in case of Dell International Services India Ltd. In.re reported in (supra) * Decision of Hon'ble Madras High Court ....
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....e that notwithstanding the above submission, it is the case of applicant that, it has neither possession nor control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words "transfer of right to use the goods" in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone servi....
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....politan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words "equipment" suggests that there must be some positive act of utilization, application or employment of equip-ment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. 13. It is the contention of the revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on account of this. The electronic circuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent f....
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....ot exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iva) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the so-called equipment, solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network ....
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....ticle 12(2) very properly use, in connection with such formulae, etc., the criterion 'right to use', which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the 'right to use' already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret. We note that, in case of DCIT v. PanAmSat International Systems Inc., reported in (2006) 9 SOT 100 , Hon'ble Delhi High Court distinguished the decision of Asia Satellite Telecommunication Co. Ltd. v. Dy. CITT reported in (2003) 85 ITD 478 and held as under:- 19. The question that first comes up for consideration is whether section 9(1)(vi) of the Income-tax Act, read with the Explanation 2 below thereto, is applicable. This also involves the subsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) which is also a case of a non-resident company based....
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....nst such a view. It must be remembered that India had no DTAA with Hongkong and hence the view taken by the Tribunal (supra) with regard to the clause (iii) of Explanation 2 below section 9(1)(vi) would apply if we were to also interpret the same provision. But article 12.3(a) is worded as below : "The term 'royalties' as used in this article means : (a)payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and" In Asia Satellite Telecommunication Co. Ltd.'s case (supra) the Tribunal pointed out, while repelling the argument that the word "secret" also qualifies the word "process" appearing in clause (iii) of Explanation 2, that there is....
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....ess carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to be no "secret technology", known only to a few. There is evidence adduced before us to show that the technology is even available in the form of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. This aspect of the matter was not required to be considered by the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) because the view taken by the Tribunal was that there was no requirement in clause (iii) of Explanation 2 below section 9(1)(vi) of the Act that the process involved, for which the payment is being made, should be a secret process. But in the view we have taken on the language employed by article 12.3(a) of the treaty coupled with the punctuation and the setting and surrounding wo....
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....cle 12(4) in India of India- Netherlands DTAA. 9.2.18 The above observations are supported by the view expressed by Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. (supra). Hon'ble High Court in the group of cases had considered following questions of law which are as under: "1. Whether the Income-Tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under Section 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident? 2. Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi) by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the 'Act') will also result in amendment of the DTAAS? 3. Whether ITAT was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms "right" & "process" in the clarificatory Explanation 2, 5 and....
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....has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards interconnectivity charges. 14. Assessee has also entered into a CTA with a Belgium entity Belgacom. Belgacom had certain arrangement with the Omantel for utilisation of bandwidth. Omantel transferred certain portion of its capacity to Belgacom and Belgacom had in turn transferred a portion of its capacity to the assessee. 15. Admittedly the equipments and the submarine cables are situated overseas. To provide ILD calls, assessee had availed certain services from NTOs. It is also not in dispute that Belgacom, a Belgium entity with whom assessee has entered into an agreement does not have any 'permanent establishment' in India. 16. Shri. Pardiwala contended that the payments made by assessee cannot be treated as either Royalty or FTS34 or business profits as no part of the activity was carried out in India. Revenue's reply to his contention is that, the income belongs to the payee. If, in the opinion of assessee, tax was not deductible, he ought to have approached the AO for the nil deduction certificate. I....
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....e expanded definition of "royalty" inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute." "100. Also, any ruling on the more expansive language contained in the explanations to section 9(1)(vi) of the Income Tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the DTAA, as per section 90(2) of the Income Tax Act read with explanation 4 thereof, and Article 3(2) of the DTAA.........." 21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri. Pardiwala, that for subsequent years in assessee's own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom etc35, rendered by the ITAT. In that view of the matter this question also needs to be answe....