AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2024 (6) TMI 804
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Avoidance Agreement between India - Japan ("DTAA" or "tax treaty") and it is entitled to beneficial provisions of the India - Japan DTAA. It is also submitted that the assessee does not have any presence in India either in form of an office, a branch or any other fixed place of business in India. 2.3 The Ld.AR submitted that for the years under consideration, the assessee provided telecom interconnect facility to various Indian telecom operators including Vodafone South Ltd. and has received payment on account of interconnect usage charges as under: S.No. Assessment Year Amount 1. 2013-14 35,18,79,980/- 2. 2014-15 36,53,06,495/- 3. 2015-16 39,58,29,947/- 2.4 It is submitted that a proceeding u/s. 201 of the act was initiated against Vodafone South Ltd. in respect of alleged non- deduction of tax at source on payments made to its non-resident telecom operators for provision of bandwidth capacity and interconnect services. It is submitted that the said charges were considered as taxable by the revenue in case of VSNL both under the provisions of the act and the respective DTAAs. 2.5 On the basis of the proceedings initiated against VSNL,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015-16 vide order dated 14.07.2023 had decided the similar issue in favour of assessee. 5.2 The Ld.AR submitted that DTAA will prevail over the Income- Tax Act, as held by Hon'ble Karnataka High Court in case of Vodafone Mobile (supra), and it is further submitted that Explanation 5 and 6 do not override the DTAA between India and Japan. Hence, the subject payment received from Vodafone and other telecom operators in India is not taxable as 'royalty' as per DTAA. It is submitted that Hon'ble Karnataka High Court in the case of Vodafone (supra) reversed the ITAT judgment on this point. The substantial questions of law 2,3 and 4 in the decision of Vodafone (supra) by Hon'ble Karnataka High Court has answered the question regarding the IUC charges not amounting to 'royalty'. 5.3 Without prejudice to the above, the Ld.AR submitted that there is no "use of process" or any "use of equipment". Hence, the entire assumption of "process royalty" / "equipment royalty" does not arise in the case of the assessee. 5.4 The Ld.AR submitted that the provision apparently reads "secret formula or process", and hence the process has t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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". 7.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term "Process" 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 patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right." 7.2.5 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. 7.2.6 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 transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty". ....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."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 * 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. 7.2.11 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 payer. 7.2.12 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 Networ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l. 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 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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 co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y 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 under the category of 'royalty' in clause (iva) of Explanation 2. 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 tim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gic 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' also, then a comma would have been used after the word 'formula'" and further that the word "secret" cannot also be applied to the word "trademark" because once registered there is nothing secret about the trademark and the impossibility of reading the word "secret" before the word "trademark" further strengthens the view that the word "secret" cannot be read before the word "process" also. This naturally takes us to the question whether 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 : ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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 such as patent, invention, model, formula and process etc. are intellectual properties. Similarly, the words which surround the words "secret formula or process," in article 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trademark, design or model, plan, etc. Thus the words "secret formula or process" must also refer to a specie of intellectual property applying the rule of ejusdem 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 for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 12 of India-Japan DTAA. 7.2.17 We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not "secret" but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a "secret process", as is required by the definition of "royalty" mentioned in clause 3 of Article 12 of India-Japan DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 12 in India of India- Japan DTAA. 7.2.18 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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. Thereafter Hon'ble High Court after verifying the facts of the case having regards to the decision of Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 observed and held as under: "12. We have carefully considered the rival contentions and perused 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 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 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct 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 considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia i.e. the law does not demand the impossible, and impotentia excusat legem i.e. when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....012. In addition, we have also held that assessee is entitled for the benefits under DTAA." 7.2.20 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 from Indian customers / end users cannot be considered as Royalty to be brought to tax in India under section 9(1)(vi) of the Act and also as per DTAA. 7.2.21 The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India. Accordingly, the grounds on merit referred to in para 5 stands allowed in favour of assessee. In the result, all the three appeals filed by assessee stands partly allowed. 8. As we have considered the issues raised by the assessee on merits, in its favour, the stay petitions filed by the assessee becomes infructuous and accordingly the same are dismissed. In the result, all the appeals filed by the assessee stands p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r residuary Article 22 of Japan DTAA India- On the facts and in the circumstances of the case & in law, the AO grossly erred in not verifying the credit of tax deducted at source amounting to INR 8,84,834 claimed by the Appellant in the return of income, as directed by the Ld. DRP and grossly erred in not granting the credit of tax deducted at source. judgement of VSL (supra) Appellant General Ground Pressed Legal Ground Not Pressed Grounds on Merit Pressed Grounds of Appeal taken by the Appellant for AY 2014-15 Whether Legal Ground or Ground on Ground of Appeal Description of the Ground Merits Whether being Pressed by covered by the judgement of VSL (supra) the Appellant Ground -1 Ground-2 Ground- 3 On the facts and circumstances of the case & in law, the final assessment order passed by the Deputy Commissioner of Income-tax (International Taxation), Circle 2(1), Bangalore ("AO"), under section 143(3) read with section 147 read with section 144C(3) of the Income-tax Act, 1961 ("the Act"), in pursuance to the directions of the Learned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essment order passed by the Deputy Commissioner of income-tax (International Taxation), Circle-2(1), Bangalore ("AO"), under section 143(3) read with section 147 read with section 144C(3) of the Income tax Act, 1961 ("the Act"), in pursuance to the directions of the Learned Dispute Resolution Panel - 2, Bengaluru ("Ld. DRP"), assessing the income of the Appellant at INR 39,96,89,857 instead of returned income of INR 38,59.910 is bad in law. by the judgement of VSL (supra) General Ground Pressed On the facts and in the circumstances of the case & in law, the Ld. DRP grossly erred in confirming the validity of initiation of the proceedings under Ground- section 147 of the Act in the case of the Appellant 2 merely on the basis of proceedings initiated against Vodafone South Limited under section 201 of the Act without analyzing the facts of present case and jurisprudence in this regard On the facts and in the circumstances of the case & in law, the Ld. DRP/AO erred in holding that the interconnect usage charges amounting to INR 39.58,39,947 received Ground-3 by the Appellant from various Indian Telecom Operator....