TaxTMI 
TaxTMI 
2023 (12) TMI 1122
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....de by the deductor by collecting it from the ultimate payer i.e., the end consumer in India for services rendered ? 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka , wherein the Hon'ble High court has held that the non-resident telecom operators (NTOS) have no presence in India without considering the fact that the income accrued and arose in India at the time of the call being made and no receipt would be available for the Indian entity also in the event the call did not go through? 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of Hon'ble High Court of Karnataka, wherein the Hon'ble High court has held that the process royalty is not applicable without as much as considering the agreements between the assessee and payees, opinion of experts in the field of telecommunication and provisions governing royalty in the act and DTAA? 4. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has erred in relying on the decision of H....
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....ernational Taxation), Circle-2(1), Bangalore. The notice was returned unserved. Due to the change of the assessee name from "France Telecoms" to "Orange" and address change, the notice issued under section 148 was not served. After ascertaining the correct address and name of the assessee company, a copy of the notice u/s 148 was again issued to the assessee on 22.10.2019. 2.1. Since the assessee had not filed any return of income for the A.Y. 2011-12, notices were issued by the Ld.AO to the assessee on various dates calling for the return of income and other details. The assessee, vide its letter dated 25.11.2019, objected to the jurisdiction assumed by the Ld.AO. In paras 2.6 to 2.8 of the impugned order, the Ld.AO addressed these issues. Later, vide its letter dated 24/12/2019, the assessee informed the Ld.AO that it could not file its return electronically and hence had filed a manual return, The Ld.AO did not accept this return as a valid return. 2.2. The Ld.AO proceeded to pass the assessment order, in which the following observations regarding the interconnect charges received by the assessee from VSL were made: Interconnect arrangement is a complex procedure ....
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....d below: 12. We have carefully considered the rival contentions and perused the records. 13. Undisputed fact of the case are, Assessee is an ILO license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee 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. Toprovide 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....
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....e law, the alleged disobedience of law is excused arid it it held In Engineering Analysis as follows: "85. It is thus clear that the "person" mentioned In section 195 of the income Tax Act cannot be expected to do the Impossible, namely, to apply the 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 assessees own case, the ITAT has held that tax is not deductable when payment is made to non-resident telecom ....
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....by VSL to the appellant towards interconnect charges is deleted. 10. In the result, the assessee's appeal is allowed." Aggrieved by the order of the Ld.CIT(A), the revenue is in appeal before this Tribunal. We have perused the records and submissions of the Ld.DR. 2.5. It has been submitted by the assessee that the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty / FTS in India stands squarely covered in favour of assessee. 2.6. We note that this issue is now been considered by various decisions of this Tribunal by following the decision of Hon'ble Jurisdictional High Court in case of Vodafone Idea Ltd. vs. DCIT (supra). In the paperbook placed before us filed by the assessee, reliance is placed on following decisions. * Telefonica De Espana S.A, vs. ACIT(IT)/DIT reported in (2023) 154 taxmann.com 436 * Al Telekom Austria Aktiengesellschaft vs. DCIT in reported in (2023) 156 taxmann.com 155 2.7. We note that the assessee has submitted before the authorities below that the services rendered the assessee are standard telecom services which are automat....
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....mparting 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;' 5.2.1 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. 5.2.2 The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression 'similar property' used at ....
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....at 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". 5.2.7 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. 5.2.8 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 such right, property or information is in India. Explanation 6: For the removal of....
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....n re (supra), a 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 Bharat Sanchar Nigam Ltd. v. Union of India [2006] 3 STT 245 * Decision of AAR in case of Dell International Services India (P.) Ltd. In re (supra) ....
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.... element of control. We may clarify here 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. ....
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....enefit". (Esfeld Trucking Inc. v. Metropolitan 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 equipment 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, th....
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.... according to the revenue) and does not 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 c....
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....on or are capable of being protected. That is why Article 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 Pan AmSat International Systems Inc., (supra) Hon'ble Delhi High Court distinguished the decision of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT [2003] 85 ITR 478 (Delhi - Trib.) 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 Tele-communication Co. Ltd. (supra....
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.... there is anything in article 12.3(a) of the DTAA between India and USA which militates against 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 Tele-communication Co. Ltd.'s case (supra) the Tribunal pointed out, while repelling the argument that the....
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....dem generis or noscitur a socii. 20. That takes us to a consideration of the question whether the process 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 lan....
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....d the records. 13. Undisputed fact of the case are, Assessee is an ILD license holder and responsible for providing connectivity to calls originating/terminating outside India. Assessee has entered into an agreement with NTOs for international carriage and connectivity services. According to the assessee, payment made to NTOs is towards inter-connectivity 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.....
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....t is held in Engineering Analysis as follows: 85. It is thus clear that the "person" mentioned in section 195 of the income Tax Act cannot be expected to do the impossible, namely, to apply the 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 Incometax 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 nonresident telecom operator. This factual aspect is not refuted. ....