TaxTMI 
TaxTMI 
2023 (11) TMI 1239
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....e provisions of section 191 of the act would fasten to the assessee. Accordingly, the notice u/s. 148 was issued based on the proceedings of Vodafone South Ltd. The Ld.AO after verifying all the details filed by the assessee was of the opinion that the inter connect utility charges paid by Vodafone South to assessee would be taxable as royalty for the usage of process that was provided by the assessee and that there was an element of income involved for which TDS was liable to be deducted at the time of making of payment by Vodafone South to the assessee. The Ld.AO also held that as the payment was made for the use of process or for services rendered from a source in India. The same is deemed to be agreed or arising in India by virtue of the provisions of section 9(1)(vi) of the act. On receipt of the draft assessment order dated 08.09.2021, the assessee filed the objections before the DRP. The DRP placing reliance on the decision of Coordinate Bench of this Tribunal in case of Vodafone South Ltd. held that consideration paid by Vodafone South Ltd. to assessee towards the inter connection usage charges for inter connect services fall within the ambit of process royalty. 2.2 On r....
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....ore ready reference: Tribunal Findings / Observations Page no. / Para 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. Page 10 Para 5.2.7 All these changes in Act (insertion of Explanation 5 & 6) do not affect the definition of Royalty as per DTAA Page 10 Para 5.2.9 On perusal of agreement, it is noted that installation and operation of sophisticated equipment are with the view to earn income by allowing the users to avail the benefits of such equipment or facility and does not tantamount to granting the "use or right to use" the equipment or process so as to be considered as royalty Page 21 Para 5.2.16 At no point of time, any possession or physical custody, control or management over any equipment is received by the end users/customers. Page 21 Para 5.2.17 Process involved in providing the services to the end users/customers is not "secret" but a standard commercial process followed by the industry p....
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....a 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 the end of the list, further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property. 5.2.3 We also note that ....
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....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 doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always 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 secr....
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....(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 in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 • Decision of coordinate bench of this Tribunal in case of WIPRO Ltd. Vs. ITO reported in (2003) 86 ITD 407. 5.2.13 The AAR relying on its view in case of Dell International Services India Ltd. In., held as under: 12.5 It seems to us that the two expressio....
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....urned 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 service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention ....
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....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 for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network. 13.1 There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equ....
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....l 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 and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's netwo....
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....ime 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 nonresident company based in Hongkong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held in the context of the provisions of clause (iii) of Explanation 2 below section 9(1)(vi), that a "process" is involved when the signals that are uplinked through the earth stations to the trans....
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.... (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 no comma after the word "secret" till the end of the clause and had the intention been to qualify the word "process" also with the word "secret" there would have been a comma after the word "process" (by mistake mentioned in the order as "formula"). The Tribunal was thus prepared, with respect, to accept the argument that both the words "formula" and "process....
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....he 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 words, the payment would be considered as royalty only if it is made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process assuming it to be so does not amount to royalty. 5.2.14 Similar issue came up before Hon'ble Delhi Tribunal in case of Bha....
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..... 8. Ground no. 4.1 becomes infructuous. 9. Ground no. 1 is general in nature. In the result, the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 08th November, 2023. ============= Document 1 General That on the facts and circumstances of the case and in law, the Learned (Ld.) Assessing Officer (AO) Dispute Resolution Panel (DRP) erred in assessing/confirming the total income of the Appellant at Rs 3,24,63,493 as against nil income submitted to the Ld. AO during the assessment. Lack of Jurisdiction 2.1 That on the facts and circumstances of the case and in law, the Ld. DRP after having adjudicated that the jurisdiction of the Ld. AO is decided on the basis of the registered office address, failed to note that the registered office of payer of receipts to the Appellant L.e. erstwhile Vodafone South Limited (VSL) was situated in New Delhi and not in Bengaluru and thereby grossly erred in confirming the jurisdiction of the Ld. AO over the Appellant in terms of section 124(1) of the Income Act 1981 (the Act). Without prejudice to the above and in the alternativa, on the facts and cir....
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....ument 3 interconnection usage charges was acquired by the assessee due to call originating or emanating from India or transiting India. 4.1 In doing so, the Ld. AO/DRP failed to appreciate that alternative contentions cannot be based on a contradictory factual approach when on one hand, receipts are alleged to be income accrued or arisen in India under section 5(2) of the Act and on the other hand, same receipts are alleged to be income "deemed to accrue or arise in India under section 9(1)(vi) of the Act. Receipts as income deemed to accrue or arise in India i.e. Royalty under section 9(1)(vi) of the Act 5. Without prejudice to the above and in the alternative, on the facts and in circumstances of the case and in law, the Ld. AO/DRP grossly erred in treating/confirming receipts from erstwhile VSL amounting to Rs 3,24,63,493 as royalty for use of process under section 9(1)(vi) of the Act, in complete disregard to the applicable regulatory regime in Hong Kong permitting only a licensee to establish, maintain or otherwise use telecom network including any processes therein.. Erroneous surcharge rate Document 4 Without prejudice to....