VERIZON COMMUNICATIONS SINGAPORE PTE LTD (FORMERLY MCI WORLDCOM ASIA PTE LTD) Vs THE INCOME TAX OFFICER
In view of retrospective amendments made to the definition of
"royalty" in section 9(1)(vi) by the Finance Act,2012 by
inserting Explanations 4 and 5 with effect
from 1-6-1976, bandwidth payments made by Indian party to non-resident for
International Private Leased Circuit (IPLC) for providing end–to-end internet
connectivity outside India (where connectivity for Indian leg provided by VSNL
due to Indian regulatory requirements) is taxable as 'royalty' under section
9(1)(vi) of the Act as well as under article 12(3) of Indo-Singapore DTAA
Related
cases:
1.
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M/s Poompuhar
Shipping Corpn. Ltd. v ITO [2013] 38 taxmann.com 150 (Mad.) wherein it was held
that the phrase "use or right to use" in the definition of
"royalty" in Explanation 2 is to be interpreted in
its ordinary meaning and applied in a broader sensed to mean employing for
any purpose. The retrospective amendments by FA 2012 by insertion ofExplanations
4 and 5 has removed all doubts as far as interpretation of "use
or right to use".
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2.
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Sanofi Pasteur
Holding SA v Department of Revenue, Ministry of Finance,
GOI [2013] 30 taxmann.com 222 (AP)- The Revenue's
contentions that retrospective amendments by Finance Act,2012 would over-ride
DTAA provisions deserves to be rejected for the following reasons:
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The Finance Act,2012 introduced GAAR provisions (sections 95 to
102) which override treaties in case of abuse of treaty provisions. Section
90(2A) inserted by Finance Act,2012 enables application of GAAR even if same is
not beneficial to assessee.
In contra-distinction, retrospective amendments relied upon by
Revenue-Explanation 2 to section 2(47) andExplanations 4 and 5 to section 9 are
not fortified by a non-obstante clause to override tax treaties.
There is a
presumption against repeal by implication. Therefore, burden to show that there
has been a repeal by implication of including override of tax treaties lies on
party asserting the same (the Revenue in this case).
Tax Case (Appeal) Nos.147 to 149 of 2011 and 230 of 2012
Income tax - Sections 5(2)(b), 9(1)(vi) & (vii), 208,
209(1)(d), 234B, 234D - India-Singapore DTAA - Articles 3, 5 & 12.
Whether when the agreement between the assessee and the customer
is for providing of seamless point to point private line so as to enable the
customer to communicate between its office that are geographically dispersed
and in entering this the assessee had provided the necessary equipment at
customer premises, configured and customised to ensure that the customer gets
the uninterrupted connectivity, there is user of equipment - Whether when the
service agreement assuring the service is possible and workable only when the
assessee and VSNL are considered as rendering the service jointly in their
respective leg, the assessee renders service in India and the consideration
received attracts the incidence of taxation in India - Whether where the end to
end provisioning in one single circuit is assured by the assessee and if by
reason of any regulatory laws of the Country the assessee is unable to extend
its service by itself but goes for such other licensed authority, it does so
only as a provisioning entity to make up for the gap caused by the statutory
limitation on the license - Whether it means that these facilities are
independent having no connection and relevance whatsoever to the connectivity
offered by the assessee - Whether when various contracts executed pursuant to
the service contract with the customer are closely linked to the single
transaction of providing end to end international private leased circuit
facility to the customer and in order to execute the same, if the assessee has
to enter into several sub- agreements, such agreements can be looked at in
isolation having no relevance to the service agreement - Whether when the
assessee provides the Indian customer an integrated communication system IPLC,
the part of which outside India is taken care of by the assessee and the part
inside India through VSNL, the same can be dissected as two independent
contract having no bearing at all on each other - Whether in a virtual world,
the physical presence of an entity has become an insignificant one - Whether
the traditional concepts relating to control, possession, location on economic
activities and geographic rules of source of income recede to the background
and are not of any relevance in considering the question under Section 9(1)(vi)
read with Explanation 2 - Whether when a non-resident service provider provides
international connectivity services to clients in India with the help of an
Indian telecom service provider, consideration received for rendering such
services is to be construed as royalty for use of commercial and scientific
equipment or for use of a process as per Sec 9(1)(vi)and also Article 12 of
India - Singapore DTAA.
CASE-
The assessee, Verizon Communication Singapore Pte Ltd,
originally called as MCI Worldcom Asia Pte Limited, and part of the global
telecommunication conglomerate of MCI, USA is a non-resident company engaged in
the business of providing international private leased circuit (IPLC). Being a
point to point private line used to communicate between offices that are
geographically dispersed throughout the world, the assessee provides a private
link that can transport voice data and video traffic between the offices in
different Countries. The international leg of the telecom services provided
outside India was provided by the assessee. Videsh Sanchar Nigam Limited (VSNL)
provided the Indian leg of the international service to the customers. Thus, a
customer interested in taking a lease connection between its office in India
and an overseas location entered into an arrangement with the assessee for the
provision of international connectivity in the overseas leg and with VSNL for
Indian half of the connectivity. VSNL transmitted the traffic of the customer
in India from the customer's office in India and transmitted the traffic to a
virtual point outside India and the assessee transmitted it upto the customer
location outside India. Assessee used its telecom service equipment situated
outside India in providing the international half circuit. The landing station
in India used in transmitting the traffic within India belonged to VSNL and was
used by VSNL for providing Indian end services pursuant to its contract with
the customer.
In assessment, the Assessing Officer came to the conclusion that
the payment received by the assessee in providing IPLC was taxable as 'royalty'
for use of or right to use of commercial and scientific equipment under Section
9(1)(vi) read with Explanation 2 of the Income Tax Act and Article 12(3) of the
Double Taxation Avoidance Agreement between India and Singapore. The Assessing
Officer also held that VSNL and MCI Wordcom Asia Pte Ltd were partners in
providing IPLC and related services to various customers; the assessee had
business connection in India on account of the source of income and location of
the business assets and software in India. Thus the Assessing Officer held that
the payments were in the nature of 'royalty', taxable under Section 9(1)(vi)
read with Explanation 2(iva) and (vi) as also under Article 12(3)(b) of DTAA
with Singapore.
The assessee contended that no part of the international network
was exclusive for any Indian customer or customers as a whole. The agreement
between the assessee and the customers being one for rendering of service by
the assessee, the payment could not be termed as 'royalty'. The collection of
fee for the usage of standard facility would not amount to payment made for
providing technical services. The Assessing Officer rejected these contentions
holding that the consideration for rendering of services to the end user was
workable only when the assessee and the VSNL were considered to be rendering
the service jointly to the end user in India. The payments made by the
customers for the offshore services rendered by the non-resident assessee were
part of one single agreement to provide IPLC and hence, the receipts were
taxable as 'royalty' under Section 9(1)(vi) read with Explanation 2 of the
Income Tax Act. He held that by reason of the amendment to Section 9(1) with
effect from 01.04.1976, under Finance Act 2010, the reliance on court decisions
was not of any relevance to the assessee. The transmission cables and hightech
instruments providing a seamless circuit were 'equipment' and the income earned
by permitting the use of or right to use of equipment fell within the meaning
of 'royalty', both under the Income Tax Act and under the DTAA.
On appeal, the CIT(A) while confirming the AO's order, held that
the circuit created/developed by MCI, comprising of transmission cables and
sophisticated instruments, amounted to 'equipment'. The payment made for the
lease of this circuit, which expressed the quantity of dedicated bandwidth,
would be taxable as 'royalty' under Section 9(1)(vi) Explanation 2 as well as
under DTAA. On further appeal, the ITAT held that the payments made were for
the use of tangible equipment and hence could be considered as payment for the
use of or right to use of industrial, commercial and scientific equipment. The
dedicated bandwidth was set aside by the service provider for the exclusive use
of the customer. The Tribunal confirmed the views of the Assessing Officer.
Aggrieved, the assessee filed an appeal before the High Court
and submitted that considering the fact that the contract between the assessee
and the customer being one for providing services, the consideration received
for rendering of services cannot be termed as 'royalty'. Referring to
Explanation 2 to Section 9(1)(vi) of the Income Tax Act, the AR submitted that
the enumeration in Explanation 2 clearly indicated that the royalty had to be
given a limited meaning , it being with reference to tangible and intangible
right, property or information. The Explanation says nothing about treating the
consideration on rendering of services as 'royalty'. Statutorily, rendition of
services was dealt with under sub-clause (vii) to Section 9(1) of the Income
Tax Act. Even as per this, the receipt cannot fall under sub-Clause (vii).
Thus, the assessee rendered the service of transmitting the customer's
information from one location to another and the customer did not make the
payment for acquiring a process, but only for a facility to communicate.
Further, the service rendered was on non-exclusive basis and half circuit in
India was operated by VSNL. In this, the customer did not get any right to use
any equipment or has any knowledge or interest in the process/technical
equipment deployed by the assessee in providing the service. Thus, access to service
was different from access to right to use the equipment. As regards the role of
MCI World Com India, the counsel submitted that it merely provided liaising and
co-ordinating services and this could not be treated as permanent
establishment. He submitted that IPLC services provided by the assessee could
be compared with the goods transporter. There was no conversion of data or
voice as in the case of the transponder services. In IPLC, there was only
transmission of data and voice in the same form through fibre cables. The
Revenue misconstrued the facts and the sophisticated technology merely concerns
transmission of the data without distortion and the VSNL provided independent
services within the Indian territory and was paid for separately and directly
by the customers.
Explaining the nature of services, the assessee submitted an
affidavit through the Manager giving the list of equipment owned by the
customer and the operating entity in the transmission activity in this part of
the World or elsewhere. The affidavit proceeded to explain how the system of
transmission worked. It stated that a dedicated bandwidth was nothing but
assuring an uninterrupted 24x7 provision of services at an agreed speed and
efficiency to meet the conditions of the service order. It was stated that
neither any capacity nor any network including the cables were earmarked or
dedicated to any customer for his exclusive or sole use. Commenting on the
customer equipment (CPE) and service equipment, the affidavit stated that a customer
equipment was nothing but equipment owned and operated by the customers such as
computers and customer routers. A customer premises equipment is the interface
equipment between the customer router and local loop in the nature of modem
provided by the local loop provider. Lastly, a service equipment is nothing but
a cabling facility and equipment installed by the local loop service provider
in the nature of a virtual local exchange.
The Revenue also filed an affidavit explaining what IPLC network
was about by enclosing a detailed discussion by Dr Nitin Chandrachoodan,
Associate Professor, Department of Electrical Engineering, IIT, Madras. It was
stated that the circuit developed by the assessee comprised transmission cables
and sophisticated equipment starting from the Data Circuit-Terminating
Equipment (DCE) at the customer premises to the other end of the network DTE
(Data Terminating Equipment), referred to as Customer Premises Equipment (CPE),
and the Data Circuit Terminating Equipment (DCE) were referred to as 'Service
Equipment' in the assessee's agreements. The assessee provided connectivity to
the customer at its premises at both ends of the network and the connectivity
was for a dedicated bandwidth capacity for the agreed time. The customer could
now monitor the extent and quality of signal transmission at various nodes
located all along the network pathway through 'Network Management Software'.
The customer thus paid for the use of and the right to use of the equipment. It
was pointed out that the assessee engaged the services of VSNL as a
provisioning entity for performing certain services in India for which the
assessee did not have the license. Thus the Revenue contended that the receipt
was nothing but royalty.
Referring to the Board's circular on the amendment 2012, the
counsel for the Revenue submitted that the declaratory amendment now cleared
whatever doubts that were there on the scope of the Explanation. Referring to
Article 12 of the DTAA, he submitted that there was no prohibition therein in
assessing royalty in India. As per Article 3.2 of the DTAA, the term not
defined in the agreement would be understood by the definition contained in the
law of the contracting state. Thus, going by the Explanation giving the
definition on 'royalty' and 'process', the receipts were rightly taxed .
Countering the stand of the Revenue, the counsel for the
assessee replied that even though wide meaning was given under Section 9(1)(vi)
read with Explanation 2 on 'royalty, yet, the transaction being one of pure
rendering of service, the consideration could not be taxed as 'royalty'.
Having heard the parties, held that,
Section 5 §ion 9
+ the Scheme of Section 5 of the Income Tax Act is that all
income received by a resident in India, irrespective of all income deemed to be
received in India, irrespective of whether it accrued or arise within India;
all income accruing or arising to him in India during the previous year and all
income accruing or arising to him outside India during the previous year are
assessable in India as per the provisions of the Income Tax Act. Section 9 of
the Income Tax Act specifically deals with the assessability of non-resident
tax payer in respect of income from whatever source derived, received or deemed
to be received in India or which accrues or arises or deemed to arise or accrue
in India. Under Finance Act, 1976, a source rule was provided in Section 9 for
taxing the income of a non-resident through insertion of Clauses (v), (vi) and
(vii) in sub-section (1) of Section 9 for income by way of interest, royalty or
fees for technical services respectively by creating a legal fiction in Section
9 that even in cases where services are provided outside India, it is the situs
of the payer, or the situs of utilisation of service by the payer which would
determine the taxability of such services in India;
Amendments:
+ after the decision in Ishikawajama-Harima Heavy Industries
Ltd. V. Director of Income Tax that there should be territorial nexus between
such income and territory of India and that the services had to be rendered in
India and utilised in India, an explanation was inserted below sub-section 2 of
Section 9, with effect from 01.06.1976 under Finance Act, 2007 clarifying that
when income is deemed to accrue or arise in India under Clauses (v), (vi) and
(vii) of sub-section 1 to Section 9, such income shall be included in the total
income of the non-resident regardless of whether the non-resident has a
residence or place of business or business connection in India. Thus, while in
the case of resident, irrespective of place of accrual or arising of income, it
is taxable in India, in the case of non-resident, unless the place of accrual
or arising is within India, he cannot be subjected to tax. Thus only to the
extent of any income accruing or arising within India, income is fictionally
deemed to arise or accrue in India, and the non-resident would be liable to be
taxed by reason of Section 5(2)(b) of the Income Tax Act. By Finance Act, 2010,
with effect from 01.06.1976, the Explanation inserted by Finance Act, 2007 was
substituted with retrospective effect from 01.06.1976 that income of a
non-resident shall be deemed to accrue or arise in India under Clauses (v),
(vi) and (vii), irrespective of the fact whether the non-resident has a
residence or a place of business or business connection in India or
non-resident has rendered service in India;
+ thus Section 9 of the Income Tax Act deals with taxation on
income of the non-resident on accrual basis. In contrast to the residence being
the focus in the case of the assessees falling for consideration under Section
5(1), Section 9 lists out income arising or accruing in India in cases of (i)
non-residents directly or indirectly through or from any property in India, or
through or from any asset or source of income in India or through the transfer
of a capital asset situate in India; (ii) income which falls under the head
"Salaries" earned in India; (iii) income chargeable under the head
"Salaries" payable by the Government to a citizen of India for
service outside India; (iv) a dividend paid by an Indian company outside India;
(v) income by way of interest payable by the Government or by a resident or
non-resident in the stated circumstances and (vi) income by way of royalty;
Treaties:
+ in the background of Section 9, considering the conflicting
claim that may arise among nations to exercise jurisdiction to tax the entity
by reason of choosing to emphasise on one or more connecting reasons such as
the location of the source residence of the taxable entity, maintenance of
permanent establishment and so on to exercise their fiscal jurisdiction to tax
that entity and that some income of the same entity might become liable to
taxation in different countries leading to harsh consequences, to avoid such
jarring results, incongruous and anomalous situation and to foster economic
development among nations, different Countries enter into bilateral treaties
convention, agreements for getting relief against double taxation called Double
Taxation Avoidance Treaties or Convention Agreements. The power to enter into a
treaty is held as an inherent part of the sovereign power of the State. By
Article 73 of the Constitution, subject to the provisions of the Constitution,
the executive power of the Union extends to matters with respect to which the
Parliament has power to make laws;
Royalty under section 9:
+ keeping in mind the settled principles, we are concerned about
the treatment of income under the head 'royalty'. As per Clause (b) of
sub-clause (vi) to Section 9(1) of the Income Tax Act, where, income by way of
royalty is payable by a person, who is a resident, to a non-resident, the same
shall be taxable as income under the provisions of the Act. Explanation 2 to
sub-clause (vi) gives the definition of 'royalty'. As is evident from the
reading of the provision, 'royalty' means the consideration for transfer of
intellectual property rights; for imparting of any information regarding the
working of, or the use of the intellectual property rights, use of any
intellectual property, imparting of any information concerning technical,
industrial, commercial, scientific knowledge, experience or skill; use or right
to use any industrial, commercial or scientific equipment but not including the
amounts referred to in Section 44BB; transfer of all or any rights including
the granting of a licence in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, but not
including consideration for the sale, distribution or exhibition of
cinematographic films or rendering of any services in connection with the
activities referred to in sub-clauses (i) to (iv), (iva) and (v);
+ the amendment relating to 'royalty', particularly with
reference to use or right to use any industrial, commercial or scientific
equipment, etc. was inserted with effect from 01.04.2002 under the Finance Act
2001. The said expression came up for consideration before the Authority for
Advance Ruling in the decision of Dell International Services (India) Pvt.
Ltd., a decision strongly relied on by the assessee in support of its
contention that the payment to the assessee herein is not 'royalty'. The
Authority for Advance Ruling held that the predominant object of the entire
agreement was concept of service. The Authority, however, observed that 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. Referring to Klaus
Vogel's commentary on Double Taxation Convention, the Authority held that the
nature of transaction was only a service and there was no use or right to use
the equipment to regard the consideration as 'royalty';
Use or right to use:
+ recently, in the case of M/s. Poompuhar Shipping Corporation
Ltd., V. The Income Tax Officer, Chennai concerning the case of time charter,
this Court considered the meaning of the expressions 'right to use' and
'equipment' and held that payment made for taking ship on time charter
constituted 'royalty' as defined under Section 9(1)(vi) of the Income Tax Act.
This Court considered the issue on use or right to use, particularly with
reference to the term 'royalty' as defined under Explanation 2 and held that
the expression 'use or right to use' is intended to take its ordinary meaning
and applied in the broader sense, to mean employing for any purpose. Referring
to the amendments made through insertion of Explanations 4 and 5, this Court
held that the retrospective amendment has thus removed all doubts in so far as
the expression 'use or right to use' to be understood in the context of
possession, control or location;
Dell and Cable and Wireless Networks distinguished:
+ Before going into the details of the agreement and the
arguments in this case, we may point out that the decisions in Dell International
Services (India) Pvt. Ltd., In re Cable and Wireless Networks India (P) Ltd.,
In re are not of any assistance to the assessee, considering the amendment that
had come in the wake of those decisions under Finance Act 2012 by the insertion
of Explanations 5 and 6 in particular having relevance to the issue on hand.
Asia Satellite distinguished
+ the decision relied on by the assessee, particularly with
reference to the Delhi High Court in Asia Satellite V. DIT is also
distinguishable. This relates to a case of an assessee/lessee of a satellite
called AsiaSat 1 which was launched in April 1990 and was the owner of a
satellite called AsiaSat 2 which was launched in November 1995. These
satellites were launched by the appellant and were placed in a geostationary
orbit in orbital slots, which initially were allotted by the International
Telecommunication Union to UK, and subsequently handed over to China. These
satellites neither use Indian orbital slots nor are they positioned over Indian
airspace. The footprints of AsiaSat 1 and AsiaSat 2 extend over four
continents, viz., Asia, Australia, Eastern Europe and Northern Africa. It
enters into an agreement with TV channels, communication companies or other
companies who desire to utilize the transponder capacity available on the
appellant's satellite to relay their signals. The customers have their own
relaying facilities, which are not situated in India. From these facilities,
the signals are beamed in space where they are received by a transponder
located in the appellant's satellite. The transponder receives the signals and
on account of the distance the signals have travelled, they are required to be
amplified. The amplification is a simple electrical operation. Thereafter, the
frequency on which the signals are to be downlinked is changed only in order to
facilitate the transmission of signals so that, there is no distortion between
the signals that are being received and the signals that are being relayed from
the transponder. The transponder operations are commonly known, which are
carried out not only in satellite transmission but also in the case of
terrestrial transmission. There is no change in the content of the signals
whatsoever that is carried out by the appellant in the transponder. Thereafter,
the signals leave the transponder and are relayed over the entire footprint
area where they can be received by the facilities of the appellant's customers
or their customers. Its role is confined in space where the transponder which
it makes available to its customers performs a function which it is designed to
perform. It is claimed by the appellant that no part of the income generated by
it from the customers to whom the aforesaid services are provided was
chargeable to tax in India and for this reason no return income was filed in
India. The Tribunal found that the transponder was not equipment and hence the
payment made by the TV channels to the appellant could not be regarded as one
for use of equipment. The Tribunal held that the appellant had not leased out
any equipment but had only made available the process that was carried out in
the transponder to its customers. Insofar as income earned by the appellant
from its customers in India is concerned, the Tribunal held that this would
qualify as 'royalty' as defined in Explanation 2 to Section 9(1)(vi) of the
Act;
+ therefore, issues which arose for consideration in the appeal
before the Delhi High Court related to Clauses (i), (vi) and (vii) of
sub-Section (1) of the Section 9 of the Act. The High Court held that even when
the appellant had business connection in India, no part of the appellant's
income was chargeable to tax in India in terms of Section 9 (1)(i), as no
operations to earn the income were carried on in India. The Delhi High Court
held that carrying out the operations in India, wholly or at least partly, is
sine qua non for the application of Clause (i) of sub-section (1) of Section 9
of the Act. Merely because the footprint area included India and ultimate
consumers/viewers are watching the programmes in India, even when they are
uplinked and relayed outside India, would not mean that the appellant is
carrying out its business operations in India. No machinery or computer, etc.
is installed by the appellant in India through which the programmes are
reaching India. The process of amplifying and relaying the programmes is
performed in the satellite which is not situated in the Indian airspace. The
transponder functioned on its own. The High Court held that the terms 'lease of
transponder capacity', 'lessor', 'lessee' and 'rental' used in the agreement
would not be the determinative factors. It is the substance of the agreement
which is to be seen. The High Court went through the various clauses of the
said agreement and held that the control always remained with the appellant and
the appellant had merely given access to a broadband available with the
transponder, to particular customers. Merely because the transponder has its
footprint on various continents, it would not mean that the process has taken
place in India. Thus the Delhi High Court followed the decision of the Apex
Court in Ishikawajama-Harima Heavy Industries Ltd. V. Director of Income Tax
and held that services rendered outside India would have nothing to do with the
permanent establishment in India and hence there was no process carried out in
India or was there any business in India which could be attributed to the
Indian territory. Thus the High Court held that the income earned by the
assessee would not qualify as 'royalty', as defined in Explanation 2 to Section
9(1)(vi) of the Income Tax Act. As seen from the facts, the said judgment was
rendered in the year 2011, much before the amendment under Finance Act, 2012.
Further after the decision in Ishikawajama-Harima Heavy Industries Ltd. V.
Director of Income Tax an explanation was inserted below sub-section 2 of
Section 9, with effect from 01.06.1976 under Finance Act, 2007 to get over the
decision of the Supreme Court. Hence this decision of the Delhi High Court is
distinguishable and has no relevance to the case on hand which has to be
considered on the strength of the law prevailing now.
Bandwidth:
+ technological advancement in the field of communication has
brought in sea change in public ability to connect and communicate seamlessly
with people in different parts of the World. Computer and related services are
considered as the basis of the modern information and communication sector.
From a manual economy to automated economy, development of technology today has
ushered in electronic commerce where business or trade is conducted over a
network that uses computer and telecommunication. Internet, in the most
simplest of the term, is a group of millions of computers connected by
networks. It is the size of each network connection that determines how much
bandwidth is available. Bandwidth therefore is a measure in bits (0 to 1). Bits
are grouped in bytes which form words, texts and other information that is
transferred between the computer and the internet. Thus, an user having a particular
server connection to the internet has a dedicated bandwidth between the
computer and the internet service provider. But the internet service provider
may have thousands of service connections to their location. The service
provider has enough bandwidth to serve a person's computing needs as well as
that of the other customers;
+ bandwidth is the number of lanes as in the highway through
which data at a speed designed is transmitted. Bandwidth is the capacity of
transmission medium or amount of data, measured usually in bits per second that
can be sent through a dedicated (leased) transmission circuit. Thus the
equipment at the customer's premises must have the capacity to send and receive
data at a required speed. Circuit is the complete path of an electric current,
a communication link between two or more point. A leased line is a service
contract between a provider and a customer, whereby the provider agrees to
deliver a symmetric telecommunication live connecting two or more location in
exchange for a monthly rent, hence, the term 'lease'. Unlike a PSTN line, it
does not have a telephone number, each of the line being permanently connected
to the other. The lease line is always active. Typically, these lines are used
in business to connect geographically distant offices. The connection does not
carry anybody or everybody else's connection, and the carrier assure the
customer a given level of quality and speed for carrying the data or voice.
Thus, leased line is a private, high performance circuit leased by a common
carrier between a customer and a service providers' network. It carries usually
data, voice or both. It delivers dedicated guaranteed bandwidth straight to the
internet backbone, for which, the customers pay a premium for the leased line and
it is supported by a comprehensive service level agreement;
+ leased lines are normally made up of the following equipments,
viz., a router - usually managed by the service provider and is installed into
a customer room; the circuit is connected with a connector; Local loop circuit
is usually provided by the carrier linking the router to the service provider's
local point of presence (POP); Network Termination Equipment (NTE) is attached
to the wall in the customer's room and is connected to either a fibre optic or
copper local loop circuit. Depending upon location, a back haul circuit may be
used to link a customer to the service provider POP and then on to the internet
gateway. This takes place behind the scenes and may run over a third party'
national network. CPE - the Customer Premises Equipment is the
telecommunication equipment owned by an organisation and located on its
premises. It refers to all types of routers, switches, PBXs (Private Branch
Exchanges), telephones, key system facsimile products, modems, voice processing
equipment and video communication equipment;
Assessee's expert evidence:
+ thus IPLC is a point-to-point private line used by an
organisation, providing bandwidth for global communication networks between
offices that are geographically dispersed internationally. IPLCs are the basic
building blocks for international communication. These point-to-point private
line services are supported by an exclusive range of bandwidth option dedicated
to the customers' exclusive use, providing quality reliable digital
transmission seamlessly integrating data, voice and imaging services. To
simplify, IPLC ordering and billing, a concept called, One Stop Shopping (OSS)
was developed. It allows an organisation to place a single order with a single
carrier for two private leased circuits for two offices in two different
Countries. OSS consolidates the billing for both circuits into a single
invoice, handles all currency issue and allows the organisation to report all
problems from either circuit to one carrier. Giving the diagram on the circuit
layout for IPLC under sea cable, the affidavit filed by the assessee explains
technical explanation to the IPLC services, that it is a point to point service
with two half circuits starting from one end of the customer and terminating to
the other end. One half of the circuit is a mirror image of the other from the
midpoint outside the Indian territorial waters;
+ in the affidavit filed by the assessee, it is stated that
neither any capacity nor any network including the cables earmarked or
dedicated to any customer for his exclusive or sole use. It is also stated that
it is a technological impossibility to dedicate or allocate any infrastructure
or capacity to any customer. It is further stated that every operator and
service provider need not own the entire infrastructure. Likewise, the owner of
the infrastructure need not be a service provider and service provider need not
necessarily own the infrastructure. They can as well hire or lease;
Expert evidence of Revenue
+ the Revenue has also filed an affidavit supported by the
expert view by Associate Professor, Department of Electrical Engineering, IIT,
Madras and stated that the connectivity is provided by the service provider, in
this case by the assessee company to the customer at the customer premises at
both ends of the network. This connectivity is for a Dedicated Bandwidth
capacity for the agreed time period. Thereafter, it is the customer who feeds
the data/voice inputs into the IPLC network at the interface located at his
place and also receives the data/voice inputs coming from the opposite
direction. It is upto the customer whether he uses the hired Dedicated
Bandwidth capacity fully, in part or not. In any case, the agreed charges are
payable by the customer to the assessee company. The DCE is installed at the
customer premises and is owned by the assessee company, MCI, since it is the
point of connection between the customer and the carrier. It provides clock and
switching services to the data from the customer to the carrier. The assessee
owns the Data Circuit Termination Equipment (DCE) installed at the customer
premises. The customer is given a choice only in respect of the Data
Terminating Equipment (DTE). The DTE can be either supplied by the assessee or
can be acquired and installed by the customer himself in accordance with the
terms and conditions of the 'MCI Asia Pacific Master Services Agreement'. The
reply affidavit disputes certain statement in the affidavit filed by the Revenue
on technical aspects that the Data Terminal Equipment equal to terminals,
personal computers, routers and bridges are all owned by the customers and are
not Customer Premises Equipment of the service provider. The transmission
network involves various legs of operations involving multiple players. Like a
passenger booking the ticket, a customer has to book for his service which can
be 2mbps. Like an airline, a service provider after using the network and
transmission equipment of multiple operators would provide or deliver the end
service, namely, transmission of voice or data and the customer does not gain
control in any manner either physically or economically either over the network
or processes involved;
Various agreements:
+ the case of the assessee, hence, has to be seen in the context
of the agreement between the assessee and the customer, assessee and VSNL, VSNL
and customer and Master agreement. The agreement between the assessee and the
customer, called Service Order Form, gives the nature of service contracted to
by the customer and the terms subject to which services are given. The Data
Service Order Form states that it shall be read in conjunction with the terms
of Asia Pacific Master Terms and Conditions, which the customer is stated to have
agreed prior to executing the service order. The Asia Pacific Master Terms and
Conditions, the parent document, which govern the provision of services to the
customers by MCI in Asia pacific region, requires immediate attention. The Asia
Pacific Master terms and conditions gives the scope of the agreement as
concerning of a) Master Terms and Conditions (Master Terms), b) specific terms
which apply to particular categories of service as attached in the schedule to
the Master terms and c) the service order. it is stated that to the extent that
there is any inconsistency between the terms set out in (a), (b) and (c), the
service order will prevail over the schedule and Master Terms. It is stated
that each service order issued and accepted pursuant to the terms of the
agreement would create an individual contract relationship between the parties
to such service Order. The relationship would be governed by the Master Terms
and schedules together with relevant service order in addition to the
provisions set forth in the agreement; the service would also be subject to all
mandatory local law requirements, including but not limited to the regulatory
and data protection requirements in the respective countries;
Definition of terms used:
+ the Master Terms gives the definitions of various terms used.
"Customer Equipment" is defined to mean equipment, systems, cabling
and facilities provided by Customer and used in conjunction with the service
equipment in order to obtain the service and includes CPE. "CPE"
means equipment installed by MCI whether owned by the customer or not, which is
located at the customer site for the purpose of receiving a service.
"Service" is defined as specific service supplied by MCI or a
Provisioning Entity to customer identified in a relevant service order and any
related service equipment support or consulting provided. "Service
Equipment" means the equipment, systems, cabling and facilities provided
by or on behalf of MCI at Customer Site in order to make the Service available
to customer. Ownership of the Service Equipment does not pass to customer from
MCI and does not include the network. The Master Terms also contains MCI
termination and consequences of termination. It also refers confidentiality
information, data protection and privacy. It also states that if MCI consider
it necessary, it shall conduct one initial survey at the customer site
identified on the Service Order prior to receipt of the CPE to evaluate the
accommodation for the CPE, the necessary wiring required, the compatibility of
the CPE configuration, interfaces with the connecting equipment and to identify
any potential deficiencies within the customer site. The customer site survey
will also confirm the CPE configuration and all CPE interfaces will be
compatible with the local PBX/telephone and data equipment to which it will be
connected. Customer Site surveys shall be conducted between 9 am to 5.30 p.m.
on a working day in the location in which the Customer Site is located .
Equipment vendors other than MCI may be consulted, in MCI's sole and reasonable
discretion, to determine the compatibility of their equipment. All charges for
such consultancy visits by third party vendors shall be borne solely by
Customer;
Customers' responsibilities:
+ as regards the customers' responsibilities, it is stated that
the customer has to have the site prepared and ready for installation of the
CPE by MCI or its designee on the delivery date specified by MCI. The clause
further states that the customer is solely responsible for ensuring that the
Customer Equipment is compatible with MCI's requirements and that it continues
to be compatible with subsequent revision levels of MCI provided equipment and
services. The customer has to maintain each analogue line and to ensure
installation of the CPE proceeds as planned. The customer should provide
details of the analogue line a minimum of 14 days prior to the installation of
the CPE. Upon expiry of the service term or upon termination of service for any
reason whatsoever including due to the default of MCI, the customer would
return the CPE, freight pre-paid, to such location as MCI may designate in
writing in good repair, condition and working order, ordinary wear and tear
resulting from proper use thereof only excepted. It is stated that CPE must be
returned to MCI from the termination of service and if the same is not returned
within 15 days of the termination of service, the customer would be billed for
the price of the CPE, such invoice will be payable in accordance with terms;
Equipment sale:
+ as regards Equipment Sales in Schedule C, it is stated that
MCI is only acting as a reseller with respect to the hardware and software
offered for sale to Customer under the agreement, which was manufactured by a
third party. It is stated that MCI would ship the current MCI-tested version of
the equipment to customer. Customer's use of the equipment is subject to the
terms and conditions of the manufacturer's end user agreement for the
equipment. 40% of the price of the equipment purchased by the customer would be
paid by the customer upon execution of the service order and the remaining 60%
of the price would be invoiced upon shipment of the equipment and title to the
equipment would remain with MCI until the customer has paid for the equipment in
full. It is stated that title in any software and associated documentation with
the CPE (software) remain at all times with the licensor and use of such
software must be in accordance with the accompanying licence agreement;
Service order form:
+ in the background of this Master Agreement, when we look at
the Service Order Form, we find that from the additional terms and conditions
of service attached to the order form that the customer has ordered for IPLC
services and has appointed MCI as its agent with regard to the provision of
direct supply services. The order form defines provisioning entities as the
local licensed telecommunication supplier for any portion of the service not
provided by MCI or its affiliates; MCI, if requested by the customer in the
service agreement has to arrange the provisioning of direct supply services on
the terms specified therein, namely, (i) the customer appoints MCI for the
duration of the term; should be the customer's sole agent for the provisioning
and continuing supply of the direct supply services described therein; (ii) MCI
shall have authority to select the provider of the Direct Supply Services;
(iii) the Customer shall contract as principal with the provider of the Direct
Supply Services on the terms and conditions of supply notified by MCI to
customer and (iv) MCI will act as the customer's agent to receive and pay
invoices for the Direct Supply Services. The invoice issued by the MCI to the
customer for IPLC clearly mentions that it is for Circuit billing from the
originating A End - Chennai in India to terminating B end - SanJose, USA.
Direct Supply Services is defined as a circuit or service, including a local
circuit or service directly connecting the customer's premises in a country or
an international capacity connecting to circuits or services supplied by MCI,
which by reason of regulatory requirements in the relevant country, MCI cannot
supply direct to the customer. The order form says that MCI may appoint Direct
Supply Services, Provisioning Entities as its debt collection agent for charges
for Direct Supply Services. Service form gives a single ID appointing MCI as
its agent with regard to provision of Direct Supply Services. The initial
service period is for one year. The monthly services, recurring charges are
also given thereon. Attachment B(2) defines International Private Line (IPL),
which is a bilateral Service - MCI is only responsible for its half circuit in
terms or ordering, provisioning, billing and fault reporting. Customer has to
liaise directly with the correspondent carriers for the distant half end
circuit. One Stop Shopping (OSS) is an IPL service that provides a single
point-of-contact for the planning, ordering, billing, management and
maintenance of a customer's IPL. OSS is an optional arrangement whereby, a
single carrier handles the coordination between the customer and the other
carrier(s) involved in the provision of the customer's IPL.
+ there is also an agreement between MCI Worldcom Asia Pte
Limited and Videsh Sanchar Nigam Limited on International Private Leased
Circuit. One stop shopping service agreement specifically gives the details of
the service description as OSS Service by which customers can order both of the
half circuits comprising an IPLC Service through a single point of contact at
either of the Administrations, with the option of requesting SEO(Single end
ordering), SEB (single end billing) and SPFR (single point fault repairing).
The agreement further states One Administration, selected in each case by the
customer, shall be the single point of contact for the customer in respect of
the IPLC Service and shall liaise in relation thereto with the customer and
with the other Administration. The provision of OSS Service is without
prejudice to the contractual relationship that each Administration has or may
have with its respective customers. Each Administration shall separately
contract with customers to provide IPLC half circuits whether originating or
terminating in its operating territory and each such customer will be liable to
that Administration for all charges, fees and taxes billed under that contract;
+ where an Administration introduces the IPLC services of the
other Administration to any customer, it shall notify the customer that such
services will be provided under the relevant terms and conditions of the other
Administration. The Administrations will exchange instructions on the method of
completion of their respective Order Forms. Once the customer has signed
Administration B's original Order Form, it must be returned to Administration B
for approval. Administration B will notify Administration A immediately if
Administration B's order documents are in any way incomplete or inaccurate. If
Administration B does not provide Administration A with such notification, it
will constitute that Administration B has accepted the order along with
Administration B's order documents as complete. The overall provisioning
interval for the IPLC Service will be the longer of the two lead times of each
of the Administrations;
+ schedule I gives the obligation when VSNL is the
Administration A and Schedule II when VSNL is Administration B. VSNL shall get
the relevant documents, including the MCI Warranty of Agency, filled by the
customer at Indian end as per the customer order form made available to VSNL by
MCI. This document has to be handed over to MCI at the earliest time possible,
by courier and also communicated by facsimile/email to contacts of MCI as
provided, for expediting the order. The charges or fees raised by MCI through
its invoices will be the total charges to be paid by VSNL under the Agreement.
When VSNL is Administration B, under SEO, MCI shall get the relevant documents
filled by the customer at their end as per the customer order form made
available to them by VSNL. This document shall be handed over to VSNL at the
earliest time possible, by courier and also communicated by facsimile/email to
contacts of VSNL as provided, for expediting the order. The charges or fees
raised by VSNL through its invoices will be the total charges to be paid by MCI
under this Agreement;
Agreement with Indian subsidiary
+ there is also an agreement between the assessee and MCI
WorldCom India Private Limited. MCI WorldCom India is a service provider. The
agreement states that the assessee and the service provider are both members of
the WorldCom group of companies and the assessee wish to avail of certain
support services from the service provider on terms and conditions mentioned
therein in the agreement. The nature of services to be provided are given in
appendix (1) to the agreement, namely, Market Development, Providing
information on potential customers, liaising with potential customers for
dispersing information about the company' products and services, liaising with
customers for obtaining feedback on behalf of the company and exploring new
service lines/ventures for the company in India. The obligations of the service
provider are given in clause 2 of the agreement. The service fee and payments
are given in clause 5 of the agreement and the duration of the agreement at the
initial term is for a period of two years. The agreement states that at all
times, the service provider shall only provide marketing assistance, advice and
other information to the company;
+ MCI Global Access Corporation and VSNL have also entered into
agreement, called VSNL/WCom Global Network Services, on 8th February, 2001. The
scope of services are given in Clause 3; the functions, practices and
procedures required to enable WCom and VSNL are described in Appendix A. The
intention of entering into the agreement is given in Clause 3.03. It states
that the intention of the parties is to provide WorldCom Global Network
Services by utilising the respective strength and capabilities of VSNL and
Wcom. Clause 3.05 states that WCOM Global Network Services will be offered for
VSNL customers to communicate internationally. Clause 3.06 states that the
agreement is non-exclusive and shall not restrict either party from offering
similar services independently or in combination with other organizations.
Neither shall it create a partnership between VSNL and WCOM.
Composite contract:
+ in the background of the service agreement with the customer,
Service agreement with VSNL and the one between customer and VSNL, it is clear
that these are part and parcel of one composite agreement split into four for
the purposes of convenience and the nature of services to be offered through
the different agencies having a bearing on each other. The ultimate aim however
being to give the customer a point-to-point private line to communicate between
offices that are geographically dispersed throughout the world for the purposes
of accessing business data exchange, video conferencing or any other form of
telecommunication. As is evident from the reading of the terms of all these
agreements, parties have agreed to go for One Stop Shopping, which allows an
organisation, namely, customer to place a single order with a single carrier
for two private leased circuits for two offices in two different Countries,
here the Indian half by VSNL and the other half by MCI. Nevertheless, this
consolidation in a single invoice at the agreed currency enables the customer
to report its problem from either circuit to one carrier. It fixes the
responsibility on the parties herein for ensuring undisturbed enjoyment of the
private leased line. There is a symmetric telecommunication facility
permanently connecting one end to the other. Thus, the contract ensures that
the customer has an active internet dedicated to that particular customer at a
particular speed agreed upon, namely, 2 Mbps. VSNL is a provisioning entity
whose services the assessee has to direct the customer to avail of, since as
per the Indian law, the assessee is not the licensed operator in the Indian
half circuit. Thus, when the customer requires a seamless dedicated point to
point IPLC service for transmission of voice and data, it requests the
assessee' affiliate in India who arranges for the assessee MCI singapore to
enter into an agreement with the customer on the terms and conditions of the
service provided by it;
+ the counsel appearing for the assessee submitted that even
though the assessee provides end to end service, as far as the half of the leg
upto the Indian sub-continent is concerned, it has nothing to do with the
maintenance or providing service by VSNL. Whatever bandwidth is assured is
again a shared one. There are no equipment strictly speaking of the assessee to
process the data of the customer;
Agreement to be looked at in a holistic manner:
+ the case of the assessee is that the agreement between the
assessee and customer contemplated rendering of service only and hence the
consideration paid would not partake the character of royalty and the agreement
with VSNL could not be read into the agreement or the service order form that
the assessee has with the customer. We do not agree with the assessee
principally for the reason that the decision of the Delhi High Court reported
in Asia Satellite V. DIT and the Rulings of the Authority for Advance Ruling
reported in Dell International Services (India) Pvt. Ltd. and Cable and
Wireless Networks India (P) Ltd., on which heavy reliance was made were all
rendered prior to the insertion of Explanation 5 and that the decision of the
Delhi High Court rested on the facts therein. The amendments by insertion of
Explanation 5 gives a very expansive meaning to the term 'royalty' and this has
a bearing on the issue, so too the various clauses in the agreements which are
to be looked at in a holistic manner. The agreement entered into between the
assessee and the customer herein is for providing of seamless point to point
private line so as to enable the customer to communicate between its office
that are geographically dispersed. The service order reveals that the parties
had agreed for a particular bandwidth and in entering this the assessee had
provided the necessary equipment at customer premises, configured and
customised to ensure that the customer gets the uninterrupted connectivity from
one end to the other end in different geographical point;
+ a reading of the agreement with VSNL also shows that the
configuration at the customer's end and at the VSNL end and in the other half
managed by the assessee match with each other and compatible for ensuring the
integrated service to the customer. The arrangement between the assessee and
the VSNL has to be necessarily integrated and technically and financially
viable having regard to the close functional relationship between the two. For
this, the Indian customer pays through the single billing system called OSS for
the integrated services. Thus the service agreement assuring the service is
possible and workable only when the assessee and VSNL are considered as
rendering the service jointly in their respective leg. Thus the two half being
the mirror image of each other and going by the terms of the agreements, the
assessee renders service in India and the consideration received attracts the
incidence of taxation in India.
Master agreement:
+ bandwidth is defined as the amount of traffic that is allowed
to occur between the customer website and the rest of the internet. Bandwidth
is measured in bits a single 0 to 1 and are grouped in bytes which form words
texts and other information transferred between the computer and the internet.
It is stated that an user having a particular IPLC service connection has a
dedicated bandwidth between the computer and the internet provider though the
provider itself may have 1000 such service connection to other location.
Evidently, service provider has to have enough bandwidth to serve a person's
computing needs as well as all of its other customers. Thus, being high speed
internet connection, to achieve this, the equipment at the customer's end must
have the capacity to send and receive data at the required speed. In order that
the contracted bandwidth is provided, the Master agreement read with the
service order clearly gives the selected bandwidth for each customer which is
assumed end to end and to this end, the equipment at the customer's end are
delivered by the assessee itself.
+ in the Master agreement, Clause 4 deals with Managed Services
Complete, Clause 4.1 stipulates Service Description, Clause 4.2 stipulates
Customer Site Surveys, Clause 4.3 stipulates CPE Installation, Clause 4.4
stipulates CPE Rental, Clause 4.5 stipulates CPE Maintenance Services, Clause
4.6 stipulates Customer Responsibilities and Clause 4.7 Termination of Service
stipulates the return of the CPE to the location specified by MCI. The Master
Agreement specifically refers to the use of the equipment by the assessee and
throughout the contract period, the assessee has the right to supervise its
maintenance. The customer's responsibility as stated in the agreement thus
points out that during the currency of the agreement, the customer cannot in
any manner tinker with it or its rights in any manner alienated;
+ it is a matter of record that the terminal equipment with the
VSNL has to have the compatibility to match to the mirror like operation in the
other half of the leg to see that the end to end connectivity is really assured
to the customer. Being an end to end dedicated telecommunication transmission
for customers' exclusive use, leased line are available only to those who seek
private circuits. The customers' premises equipment thus refers to routers,
switches, private board exchange, installed in a customers' premises. Thus, in
the bandwidth services for transmission of data/voice through IPLC network, the
data/voice are converted into signals at the customer' end which are then
picked up by the local loop service provider and carried into the Indian
carrier, namely, VSNL's half circuit. VSNL carries this to the international
terminal which interconnects the domestic network to the international network.
An international terminal is present in the appellant's side of half circuit
performing identical function as in the Indian half circuit, where the steps in
respect of Indian half circuit is replicated and the recipient receives the
voice/data. The agreement is silent on what is involved in the ITOC in the
current layout that interconnects the domestic network to the international
network. Yet, looking at the various clauses in the agreement and the service
order form, it is clear that the customer is assured of a particular bandwidth;
to provide the assured bandwidth, the agreement ensures that the necessary
equipment are placed at the customer's end in the Indian half that is
compatible with the equipment in the other half outside India, so that the
switching facility converts and receives the signal in the network and transmit
through the transmission network cable to the ultimate destination;
Service cum order agreement
+ the service order-cum-agreement for Inter nation Private
Leased Line Service between the customer and VSNL and between VSNL and the MCI
WorldCom Asia Pte Ltd. on One Stop Shopping Service Agreement thus clearly
point out that the payment to the assessee is for the online service from one
point to the other as a whole and it is difficult to accept the case of the
appellant seeking dissection of the same as two independent contract;
+ it is no doubt true that the agreement between the assessee
and the VSNL states that one is not the agent or the representative of the
other. This, however, does not mean that VSNL has provided its server
independently without any connection whatsoever with the service order that the
customer places with the assessee. A reading of the service agreement shows
that parties agreed that the provisioning entities in the Indian half circuit
shall be VSNL and in getting the seamless end to end connectivity, the customer
enters into a further agreement with VSNL. If the agreement with VSNL has to
have no relevance or reference to the customer agreement with the assessee,
then, there is no need at all in the service agreement to refer to VSNL as the
provisioning entity or for that matter to go for OSS. The Telecom Regulatory
Laws thus can have no reference to the agreement that the assessee may have
with the Indian customer except to the extent of providing of the connectivity
in the Indian half circuit through VSNL. Thus, the end to end provisioning in
one single circuit is assured by the assessee and if by reason of any
regulatory laws of the Country the assessee is unable to extend its service by
itself but goes for such other licensed authority, it does so only as a
provisioning entity to make up for the gap caused by the statutory limitation
on the license and thus it does not mean that these facilities are independent
having no connection and relevance whatsoever to the connectivity offered by
the assessee. The various contracts executed pursuant to the service contract
with the customer are closely linked to the single transaction of providing end
to end international private leased circuit facility to the customer and in
order to execute the same, if the assessee has to enter into several sub-
agreements/agreement, such agreements cannot be looked at in isolation having
no relevance to the service agreement;
Effect of insertion of Explanation 5:
+ in the background of this, we reject the plea of the assessee
that the payment made is not in consideration of the use of the equipment by
the customer. We also reject the argument of the assessee that what is provided
is in the nature of service. We hold that providing of service is not possible
without the use of the equipment ensuring the assured bandwidth for
transmission of data/voice which provides the internet access to the customer
to and fro. After the insertion of Explanation 5, possession, control of such
right, property or information usage directly by the payer, location of the
right are not matters of concern in deciding the character of payment as
'royalty' and but for the use of the connectivity by the payer, the service
agreement itself has no meaning. Thus the amendment introduced as a result of
the decision of the Authority for Advance Ruling in Dell International Services
India (P) Ltd. clearly answer the question raised in this regard against the
assessee;
Integrated contract
+ it is rightly pointed out by the Solicitor General, the
customer has a significant economic interest in the assessee's equipment to the
extent of the bandwidth hired by the customer. The service order form shows the
customer contracting for IPLC service and MCI is appointed as its agent as
regards the provision of direct supply service. The OSS is a facility which the
customer is provided with for availing of the economic interest in the services
provided. The bandwidth capacity made available on a dedicated basis for the
entire contract period, even if it does not involve a possessory interest, the
amount received by the assessee in a way is also for the use of process. The
service order form clearly points out that the assessee is at liberty to change
the equipment, modify the configuration or change the routing of the network in
providing the service and the assessee could provide the service either
directly or through a provisioning entity. Thus the assessee provides the
Indian customer an integrated communication system called IPLC, the part of
which outside India is taken care of by the assessee and the part inside India
through VSNL, which cannot be dissected as two independent contract having no
bearing at all on each other. In the light of the above, we reject the
contention of the assessee;
Royalty under the DTAA:
+ the definition of 'royalty' under DTAA and the Indian Income
Tax Act are in pari materia. As rightly pointed out by the Revenue, Explanation
6 defines 'process' to mean and include transmission by satellite (including
uplinking, amplification, conversion for downlinking of any signal) cable,
optic fibre, or by any other similar technology, whether or not such process is
secret. Thus, apart from the relevance and applicability of Clause (iva) that
the payment is for the use or right to use of the equipment, the Tribunal held
that payment for the bandwidth amounts to royalty for the use of the process.
The Tribunal also pointed out that out by reason of the long distance, to
maintain the required speed, boosters are kept at periodical intervals. Going
by this too, in any event, the payment received by the assessee was rightly
assessed as 'royalty' and would constitute so for the purposes of DTAA;
PE in the virtual world:
+ we may also note that except for making the submission on the
question that the transaction is only a service and hence the consideration is
not royalty, no arguments are made on permanent establishment or on the effect
of the amendments. The assessee had submitted a detailed written submission on
the clauses in the agreement and on the legal submissions. After considering
the same, with reference to the arguments made by the counsel on the issue of
royalty, vis-a-vis the agreement terms, we hold that the order of the Tribunal
does not call for any interference. Although in his reply, the counsel
appearing for the assessee pointed out to Article 5 on permanent establishment
to contend that VSNL is not an agent and hence cannot be construed as a
permanent establishment of the assessee, no arguments are advanced on this
account. In any event, in a virtual world, the physical presence of an entity
has today become an insignificant one; the presence of the equipment of the
assessee, its rights and the responsibilities of the assessee, vis-a-vis the
customer and the customers' responsibilities clearly show the extent of the
virtual presence of the assessee which operates through its equipment placed in
the customer's premises through which the customer has access to data on the
speed and delivery of the data and voice sent from one end to the other. The
Explanations inserted thus clearly point out that the traditional concepts
relating to control, possession, location on economic activities and geographic
rules of source of income recede to the background and are not of any relevance
in considering the question under Section 9(1)(vi) read with Explanation 2.
Thus, more so when it comes to the question of dealing with issues arising on
account of more complex situations brought in by technological development by
the use of and role of digital information, goods etc., the foreign enterprise
does not need physical presence at all in a country for carrying on business.
Hence, we do not think that we need to go in depth in this regard for the
reason that we have already given;
+ in the circumstances, we reject the case of the assessee
holding that the receipts are liable to be treated as 'royalty' for the use of
IPLC under Section 9(1)(vi) read with Explanation 2(iva) and correspondingly
Article 12(3) of DTAA between India and Singapore. We also agree with the
Tribunal that even if the payment is not treated as one for the use of the
equipment, the use of the process was provided by the assessee, whereby through
the assured bandwidth the customer is guaranteed the transmission of the data
and voice. The fact that the bandwidth is shared with others, however, has to
be seen in the light of the technology governing the operation of the process
and this by itself does not take the assessee out of the scope of royalty. Thus
the consideration being for the use and the right to use of the process, it is
'royalty' within the meaning of Clause (iii) of Explanation 2 to Section
9(1)(vi) of the Income Tax Act;
+ in the circumstances, we affirm the order of the Tribunal
holding that the consideration paid by the customer to the assessee is
'royalty' within the meaning of Explanation 2(iva) or in the alternative under
Explanation 2(iii) of Section 9(1)(vi) of the Income Tax Act and Article 12(3)
of the DTAA between India and Singapore. With regard to levy of interest under
Section 234 A, 234B and 234 D of the Income Tax Act, as the case may be, we
remand this issue alone to the Income Tax Appellate Tribunal for its
consideration on merits and in accordance with law.
Source: Taxmann & TIOL
