TaxTMI 
TaxTMI 
2026 (4) TMI 1619
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.... 153 of the Act which expired on 30 September 2022. Ground No. 2-On the facts and circumstances of the case and in law, the Ld. DCIT erred in holding that the receipts for voice termination services received by the Appellant from Reliance Jio Infocomm Limited ('RJIL') would constitute 'Royalty under section 9(1)(vii) of the Act and DTAA between India and USA ('DTAA'). Article 12 of DTAA Ground No. 3-On the facts and circumstances of the case and in law, the Ld. DCIT erred in holding that retrospective amendments to the Act can be read as an amendment to the DTAA by virtue of Article 3(2) of the DTAA Ground No. 4 On the facts and circumstances of the case in law, the Ld. DCIT erred in disregarding the Appellant's submission that the receipts for voice termination services are in the nature of "Business Profits" and not chargeable to tax in India in the absence of the Appellant's PE in India as per provisions of Article 5 read with Article 7 of the DTAA Each of the above grounds of appeal are independent and without prejudice to each other." 2. Brief facts of the case are as under: The assessee is a 100% subsidiary....
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....vices. It is important to understand the services provided by assessee on account of voice termination services, it is important to understand the exact nature and process how these services are provided. Voice Termination Services means provision of standard telecommunication services by one party to another party for termination of voice traffic which one party has delivered to the other party's interconnection locations, gateways or network domains for termination to agreed destinations. Provision of voice termination services by the Company to RJIL enables R.JIL to transmit voice call of its subscribers to overseas location. RJIL, the holding company of the assessee company is in the business of providing digital services and has built a next generation all-IP data network with latest 4G LTE technology. R.JIL, holds Unified License which enables it to offer various telecom services including voice and data services. The assessee is engaged in supporting the development and execution of the international long-distance voice and data services of RJIL. USA is one of the main business hubs in the world where most of the incumbent telecom players have their pre....
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....s, telecom switches etc." 2.6 It was submitted that the assessee entered into reciprocal carrier services agreement with Reliance Jio Infocomm Ltd. India. As per the reciprocal agreement, each party shall arrange and monitor its own expenses, telecommunication network facilities, other than customer premises equipment necessary for the provision of the IPST Services. Each party shall advise other as soon as practicably possible of any facility failure in its area of operation that is expected to cause protracted interruption of IPST services. 2.7. It was submitted that, in the event of interruption of any IPST services, parties shall use their reasonable efforts to resume normal operation as soon as practicable and the parties shall connect their respective systems in the manner agreed between them from time to time. The point of inter connection shall be at such location as mutually agreed in writing by both parties. 2.8. The Ld.AR submitted that, the assessee undertakes Infrastructure and technology related risk. He submitted that, this risk refers to glitches in the infrastructure or technology getting obsolete. This risk belongs to assessee since it owns the infrastruc....
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....lf on third party clients. 4. 4 As regards the meaning of "royalty" as per DTAA the AD has observed that-"The sound "process" is not defined in the India USA DTAA Therefore, as per Article 323 of the Indie USA DTAA, the meaning of word "process" as defined under the domestic tax law of the contracting state which applies the treaty is to be applied while interpreting the provisions of the said DTAA. For the sake of brevity, the Article 312) of India USA DTAA is reproduced as under 2. As regards the application of the Convention by a Contracting State any term not defined therein shall, unless the context otherwise requires of the competent authorities agree to a common meaning pursuant to the provisions of Article 27 (Mutual Agreement Procedure), have the meanings which it has under the laws of that State concerning the taxes to which the Convention applies "Explanation 4 to section 90 of the Act was also inserted wide Finance Act 2018 to clarity that any meaning of the "word" that is not defined under the DTAA would have the meaning as per the domestic law in Income tax Act. The said explanation is as under: "Explanation 4.-For the removal of do....
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....ompany then hands over the call to RJIL RJIL. arranges for the call to be carried upto India and terminates it at the end recipient. The assessee has set up necessary PoP infrastructure and telecommunication equipments like hub, switches, routers and other equipments, alongwith necessary software and technology in USA through which inbound and outbound services are facilitated to RJIL.. As per 9(1)(vi) of the Income Tax Act (Explanation -2) royalty includes consideration for ..... (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. 4.8 Thus consideration for the use of a process is covered within the ambit of the definition of royalty as per section 9(1)(vi) of the Income Tax Act. Explanation 6 to section 9(1)(vi) further clarifies the meaning of process as under: "Explanation-6 For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always ....
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....he word process itself has not been defined in the DTAA and hence, the meaning of the same needs to be derived from the definition of the word "process" as per Income Tax Act. As stated above "process" includes transmission by satellite (including up-linking. amplification, conversion for down-hinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Thus the facilitation by the assessee in transmission of inbound and outbound calls for RJIL. through its own infrastructure, software technology and Pol' maintained at its own risk clearly falls within the definition of process, and hence, consideration received for the same is in the nature of royalty taxable in India. As regards the assessee's reliance on the judgment of Hon'ble Delhi High Court in the DIT vs New Skies Satellite BV and Others, the same has been dealt at length in para 6 of the DAO and the panel is in agreement with the observations and analysis of the AO. In view of the above, the panel finds no ground to interfere with AO's conclusion of taxing the receipts in the hands of the assessee on account of provision of voice termination services t....
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..... 785/Bang 2022 (Bangalore 228-248 6.2. He submitted that in the hands of the service recipient, this Tribunal has held that there was no obligation to deduct TDS on the payments made by Reliance Jio Infocomm Ltd., in ITA No.2866/Mum/2022 vide order dated 26/04/2023 for assessment year 2019-20. The Ld.AR also referred to the decion of coordinate bench Reliance Jio Infocomm Ltd., in ITA No.6331 to 6334/Mum/2018 vide order dated 15/09/2019 for assessment year 2018-19. We refer to the relevant observation of this Tribunal in case of ITA No.6331 to 6334/Mum/2018 vide order dated 15/09/2019 for assessment year 2018-19 as under:- "6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. A coordinate bench of this Tribunal, while dealing with the same issue in assessee's own case for the assessment year 2016-17 and in the judgment reported as DCIT Vs Reliance Jio Infocomm Ltd [(2019) 73 ITR (T) 194 (Mum)], has, speaking through one of us (i.e. the Judicial Member), observed, inter alia, as follows: .......We find that our indulgence in the present appeal h....
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....iding the bandwidth services. Apart there from, the assessee also did not have any access to any process which helped in providing of such bandwidth services by RJIPL. As a matter of fact, all infrastructure and process required for provision of bandwidth services was always used and under the control of RJIPL, and the same was never given either to the assessee or to any other person availing the said services. We are persuaded to subscribe to the observations of the CIT(A) that as the process involved to provide the bandwidth services was not a "secret" i.e IPR in the process was not owned/registered in the name of RJIPL, but was a standard commercial process that was followed by the industry players, therefore, the same could not be classified as a "secret process" which would have been required for charactering the aforesaid payment made by the assessee to RJIPL as "royalty" under the India-Singapore DTAA. We are further in agreement with the view taken by the CIT(A) that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) Industrial, commercial or scientific equipment, nor towards use of (or for obtaining right to use) any sec....
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....foresaid "business profits" is concerned, we find that as RJIPL did not have any business connection or a PE in India, therefore, the same as per Article 7 of the India-Singapore DTAA could not have been brought to tax in India services was not a "secret" i.e IPR in the process was not owned/registered in the name of RJIPL, but was a standard commercial process that was followed by the industry players, therefore, the same could not be classified as a "secret process" which would have been required for charactering the aforesaid payment made by the assessee to RJIPL as "royalty" under the India-Singapore DTAA. We are further in agreement with the view taken by the CIT(A) that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) Industrial, commercial or scientific equipment, nor towards use of (or for obtaining right to use) any secret formula or process, therefore, the same could not be classified as payment of "royalty" by the assessee. Insofar the ld. D.R had tried to press into service Explanation 6 to Sec. 9(1)(vi), in order to drive home his contention that the payment made by the assessee to RJIPL for availing the bandwidth s....
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....ry is, however, not exhausted. 9. Learned Departmental Representatives basic stand is that the specific issues raised in the grounds of appeal, which go to the root of matter and conclusively uphold the stand of the Assessing Officer, are not dealt with in the judicial precedents relied upon. As we have noted earlier as well, and as evident from the specific grounds of appeal, the specific plea taken in this appeal is that the Explanation 5 and 6 to Section 9(1)(vi) must hold the field, in the context of interpretation of Article 12 of the Indo Singapore tax treaty so far connotations of undefined expressions therein are concerned, in view of the specific provisions of article 3(2) of Indo Singapore tax treaty itself and in the light of, as the grounds of appeal point out, Hon'ble Supreme Court's judgment in the case of Vatika Township Pvt Ltd (supra). 10. It is only in exceptional cases that there is an occasion to deviate from the decisions of the coordinate benches, but that does not mean that in the covered cases all doors are shut on the parties. When a coordinate bench judgment does not appeal to another coordinate bench, or when the coordinate bench discove....
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....defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies", the domestic law meaning of the expression "process", which is set out in Explanation 6 to Section 9(1)(vii), must hold the filed. Explanation 6 to Section 9(1)(vii), which was inserted vide the Finance Act 2012 with retrospective effect from 1st June 1976, provides that "(f)or 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 secret". In plain words, going by the complex web of this line of argument, thus, in the absence of any specific definition of "process" in the Indo Singapore tax treaty, the domestic law meaning of this expression must law prevail under article 3(2), and, going by the domestic law meaning under Explanation 6 to Section 9(1)(vii), any transmission by satellite (including (including up-linking, amplification, conversion ....
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....t it will not be necessary to establish, before adopting a meaning other than the domestic law meaning, that it's the compulsion of context requiring that the domestic law meaning is to be discarded. 12. It's important to note that the provisions of Article 3(2) come into play for domestic law meaning of "any term not defined (emphasis, by underlining, supplied by us)" in the tax treaty. To invoke the provisions of Article 3(2), the first thing to be seen is whether the undefined expression can be said to be a treaty term. The expression "term" is defined as "a word or phrase used to describe a thing or to express a concept, especially in a particular kind of language or branch of study". A "term" is thus a word that has meaning and refers to objects, ideas, events or a state of affair. A term is thus, in addition to being a word, some kind of a point of reference, whereas a word is only a constituent of language. As a corollary to these discussions, Article 3(2) will come into play only in respect of the undefined treaty terms, which are in the nature of reference points and which have some peculiar significance as a term employed in the treaty, and not all the undefined ....
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....rticular sub section dealing with the "income by way of royalty". The definition of expression 'process' is thus not a standalone definition which can be imported in treaty under article 3(2). 13. The domestic law meaning under article 3(2) is relevant only when the treaty term itself is undefined, as noted by Hon'ble Delhi High Court in the case of DIT Vs New Skies Satellite BV [(2016) 328 ITR 114 (Del)]. When the expression 'royalty' is a defined expression under the applicable tax treaty, there cannot be any occasion to invoke article 3(2) for further dissecting the issue and explore the domestic law meaning of each expression used in this definition for coming at the conclusions about connotations of royalty. It cannot, therefore, be open to invoke article 3(2) to import domestic law meaning, even partly, when the treaty term has received a definition under the treaty. It is for this reason that Explanation 6 to Section 9(1)(vi), in our humble understanding, has no role, under article 3(2) of the treaty, in explaining the expression "process", in the context of defining royalty under the Indo Singaporean tax treaty. This statutory provision, under the domestic law, is ....
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....'ble jurisdictional High Court had, in the case of CIT Vs Siemens Aktiongesellschaft [(2009) 310 ITR 320 (Bom)] had an occasion to consider the question whether the domestic law meaning to be supplied to a treaty provision should be the meaning as prevailing at the point of time when agreement was entered into or as prevailing at the point of time when taxes are levied, i.e. whether such an interpretation should be static interpretation or ambulatory interpretation. Rejecting the plea of the assessee seeking static interpretation, Hon'ble High Court, having noted the argument against the assessee that "considering article II(2), the expression "laws in force" [emphasis, by underlining, supplied by us now] as contained in DTAA, the ambulatory interpretation will have to be accepted" has held that "Considering the express language of article II(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as was applicable or as defined when the DTAA was entered into". Interestingly, the words employed in Article II(2) of the old Indo German tax treaty, which is what Their Lordships were dealing with, were to the effect that "In t....
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.... has under the laws of that State from time to time in force (Emphasis, by underlining, supplied by us) relating to the taxes to which this Agreement applies". We are not really concerned with this tax treaty at present and we must not, therefore, get into the academic delights of taking a call on what the legal position will be in such a case, in case one is to proceed on the basis that the expression "process" is a treaty term and the article 3(2) can be invoked in respect of the same. 17. So far as our purposes are concerned, it is sufficient to take note of the fact that the provisions of Article 3(2) of Indo Singaporean tax treaty are differently worded vis-à-vis the old Indo German tax treaty that Hon'ble jurisdictional High Court were dealing with in Siemens Aktiongesellschaft's case (supra) and the crucial words "laws in force" on which so much emphasis was placed in judicial analysis by Hon'ble jurisdictional High Court do not find place in this treaty. Strictly speaking, therefore, the judicial sanction for the theory of ambulatory interpretation, for the purpose of article 3(2), does not, therefore, necessarily extend to Indo Singaporean tax treaty that w....
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....) to clarify that the term "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret". 21. Let us appreciate the nature of development, from the treaty perspective, in case one is to hold that the retrospective amendments defining the expression 'process' would be equally applicable for definition of 'royalties' under the tax treaty. Thus viewed, situation could be like this. There are judicial rulings which decide something in favour of the residence jurisdiction, and the source jurisdiction is not happy with that outcome, and it's a coincidence, coincidence if it is, that the source jurisdiction changes the domestic law in a way that, once that amended domestic law is applied in the context of article 3(2), a different outcome to the same treaty provision, which favours the source jurisdiction, is possible. In effect, thus, what was not taxable in the source jurisdiction in pre domestic law amendment situation becomes taxable in source jurisdiction post domestic law ame....
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....s universally accepted as authoritatively laying down the principles governing the law of treaties". Even though India is not a signatory to the Vienna Convention, Hon'ble Supreme Court has referred to the same time and again and, in the case of Ram Jethmalani Vs Union of India [(2011) 339 ITR 107 (SC)], observed that "it contains many principles of customary international law" and the rules set out therein provides "a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also". In our humble understanding, therefore, the additional test that is required to be put, while adopting the ambulatory interpretation in such a situation, is whether the amendment is domestic law ends up unsettling a conclusion arrived at under the pre domestic law amendment position i.e. reversing the judicial rulings in favour of the residence jurisdiction, and, if the answer is in the positive, the ambulatory interpretation is to be discarded because that approach would patronise, and legitimise, a unilateral treaty override, and the outcome of ambulatory interpretation in such a case will be incompatible with the fundamental principles of treaty interpre....
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.... 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 players. Hence, same cannot be classified as "secret process" as per clause 3 o Article 13 of India-Spain DTAA Page 21 Para 5.2.17 We hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty / FTS to be brought to tax in India under section 9(1)(vi)/(vii) of the Act and also as per DTAA Pag....
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....ii) 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 'Intellectual property' as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowled....
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.... 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 secret." 5.2.9 By insertion of Explanation 5 & 6, meaning of word 'Process' has been widened. As per these explanations, the word 'Process' need not be 'secret', and situs of control & possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition o....
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....s 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 expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in praesenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in prasenti but under a contract the right is derived to use the equipment in future. In both the si....
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....s. 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 of the parties and the essence of the transaction. The word 'use' - what it means: 12.7 Let us now explore the meaning of the key word 'use'. The expression 'use' has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal & Co. v. Secretary to Govern....
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....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 equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components....
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....ss 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 network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of an....
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....ITT 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 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 transponder get converted into different frequencies and fit for being down-linked via earth stations over the footprint area. It was therefore held that the payment was for the use of a "process" and hence royalty within the meaning of the aforesaid clause. The clause reads as follows : "(iii) the use of any patent, invention, model, design, secret formula or process....
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....r 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" can be said to be qualified by the word "secret" had the clause been drafted as under : "the use of any patent, invention, model, design, secret formula or process, or trademark or similar property" What the Tribunal has pointed out stands fulfilled in article 12.3(a) of the treaty with USA. From the article quoted above, it may be seen that there is ....