TaxTMI 
TaxTMI 
2024 (5) TMI 909
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....s the legal issue raised in these grounds. In support of the same, assessee has filed a letter which is scanned and reproduced as under: Accordingly, ground nos. 1-2 for A.Y. 2014-15 and ground no. 1 for A.Y. 2017-18 stands dismissed as not pressed. 3. The Ld.AR submitted that Ground nos. 3-4 for A.Y. 2014-15 and Ground nos. 2-3 for A.Y. 2017-18 are on single issue of payment received towards IUC held as royalty in the hands of the assessee u/s. 9(1)(vi) of the act. 4. Brief facts of the case are as under: 4.1 Assessee is a non-resident company registered in Hongkong. It had received payment of Rs. 20,19,231/- for A.Y. 2014-15 and Rs. 36,97,710/- for A.Y. 2017-18 from M/s. Vodafone South Ltd., an Indian entity during the relevant assessment years. On examination of records, the Ld.AO was of the opinion that the assessee's income was chargeable to tax in India as the deductor did not deduct TDS under the provisions of section 191 of the act that would fasten to assessee. The Ld.AO further observed that provisions of section 201 were invoked in the deductor's case on a cumulative default by the deductor for not deducting tax and remitting the money to the non-resident com....
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....m 'royalty' in the relevant Article of the DTAA21 and the payments made by assessee cannot be characterised as "royalty" as defined in the relevant Article of DTAA; * in Viacom 18 Media Limited Vs. ADIT22 rendered by ITAT Mumbai and relied upon by the ITAT for the A.Ys. 2009-10 to 2011-12' the ITAT has held that TDS was deductable at source. However, for subsequent years in assessee's own cases23, the ITAT has taken a different view and held that the definition in the DTAA could not be enlarged by relying upon the provisions of Explanations 5 and 6; * that, for a payment to be characterised as one for use of, or for the right to use certain intellectual property, firstly, the grantor of that right should be denuded from that property and it should vest completely with the recipient and secondly, the possession, dominion and control over such property should be fully granted to the user. The amendment brought by the Finance Act, 2012 by insertion of Explanation 5 seeks to do away with the second condition but the first condition remains unchanged; * the NTOs have not denuded themselves of utilising the process. The payment made by assessee to t....
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....the submissions advanced by both sides in the light of records placed before us. 8.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty under the Act, since the payment is made to "use the process" or "an equipment". 8.2 It is an admitted fact that, service provider in India entered into agreement with assessee for international carriage and connectivity services, against which, an interconnectivity charges were received by the assessee. We refer to the term "Process" that occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:- '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 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 paten....
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.... 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." 8.2.5 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 in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239. 8.2.6 We refer to the decision of Hon'ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon'ble High Court observed as under: "10. The term (royalty' normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the 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 t....
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....f Cable & Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76 * Decision of AAR in case of ISRO Satellite Centre reported in 2008) 307 ITR 59 * Decision of AAR in case of Dell International Services (India) P. Ltd.In.re. reported in (2008) 172 Taxman 418. 8.2.11 The above decisions, lay down that, in order to satisfy 'use or right to use', the control and possession of right, property or information should be with service recipient. 8.2.12 In the decision of Authority For Advance Ruling, in case of Cable & Wireless Networks India(P.)Ltd., In 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 u....
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....th RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase 'right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that such right is bereft of the 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 tra....
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....e purpose served, a purpose, object or end for useful or advantageous nature". (Brown v. Kennedy) "'Use' means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one's service or to put to one's use or benefit. (Beach v. Liningston) "'Use', as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's service or to put to one's use or benefit". (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 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 ....
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....ephone 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 relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, 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....
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.... use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iva) of Explanation 2. 8.2.14 We also refer to the commentary relied by the Ld.Counsel form Prof. Klaus Vogel's Commentary on Double Taxation Convention, wherein 'Secrete formulae or process' is defined as under: Secret formulae or processes: This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they enjoy at least relative protection 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. 9. Also Hon'ble Karnataka High Court in case of Vodafon....
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....lly following the decision of Hon'ble Karnataka High Court in case of Vodafone Idea Ltd. (supra), we hold that the payments received by the assessee cannot be held to be royalty under section 9(1)(vi) of the Act. Further the revenue has not made out a case that there is a permanent establishment of assessee in India in order to tax the receipt by assessee in India as it is arising from extra territorial sources. Accordingly, in our opinion, the payments received by assessee amounts to be business profits of the assessee which is taxable in the recipient country. Accordingly, ground nos. 3-4 for A.Y. 2014-15 and ground nos. 2-3 for A.Y. 2017-18 stands allowed. In the result, both the appeals filed by the assessee for both the years under consideration stands partly allowed. Order pronounced in the open court on 25th April, 2024. ============= Document 1 BEFORE THE HON'BLE ITAT, BANGALORE BENCH-C, BANGALORE IN THE MATTER OF GLOBE TELESERVICES LIMITED ITA NO. 348/BANG/2024 AND 349/BANG/2024 ASSESSMENT YEAR 2014-15 AND 2017-18 Hon'ble Madam/Sir. For the captioned appeals, before the Hon'ble Bench, the entity, M/s Globe Teleservices Limited ("GTL") ha....