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Facts
The assessee, an UAE-based entity, provided communication network services to an Indian company (BTGC). The revenue authorities treated the payments received by the assessee as royalty under Section 9(1)(vi) of the Income Tax Act and the India-UAE DTAA. The assessee argued that the services provided did not involve the use or right to use equipment or process, and therefore, did not constitute royalty.
Held
The Tribunal held that the payments received by the assessee were for providing services through a facility acquired, owned, and used by the assessee, not by the Indian customer. The control, maintenance, and risk remained with the assessee. Therefore, the payment did not constitute royalty under the Act or the DTAA.
Key Issues
Whether the payments received by the assessee for providing network connectivity and related services qualify as 'royalty' under the Income Tax Act and the India-UAE DTAA.
Sections Cited
143(3), 144C(13), 144C(5), 201, 201(1A), 195, 9(1)(vi), 148A(b), 148A(d), 148, 234A, 234B, 234C, 270A, 234F
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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: MS. PADMAVATHY S & SHRI RAJ KUMAR CHAUHANiSAT Africa Limited FZC
O R D E R PER RAJ KUMAR CHAUHAN (J.M.): 1. This appeal is filed by the appellant/assessee against thefinal assessment order dated 16.01.2024 passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 („the Act‟), in pursuant to the direction of Ld. Dispute Resolution Panel-1, Mumbai-2 (Ld. DRP) u/s 144C(5) of the Act for AY. 2018-19.
Africa Limited FZC 2. The brief facts as culled out from the order of authorities below are that theassesseei.e.ISAT Africa Ltd FZC is a Non-Resident entity, tax resident in UAE. As per the official website, it is involved in the business of providing integrated communications services to its customers. The entity doesn't have PAN in India, but during the course of assessment proceedings, the assessee had obtained PAN and the same is AAGCI8661Q. As per the information available insight portal of Income-tax Department, it is noticed that M/s. BT Global Communication (BTGC) India Pvt. Ltd. had made various remittances to non-resident entities, including ISAT Africa Ltd FZC, on which it had not deducted any TDS. It was found that the transactions for which remittances were made are in the nature of Royalty within the meaning of Section 9(1)(vi) of the Act and as such withholding tax required to be deducted u/s 195 of the Act on these transactions. An order u/s 201/201(1A) of the Act was also passed on 25.03.2022 in the case of M/s. BT Global Communications India Pvt Ltd, wherein M/s. BT Global was held to be in default for non-deduction of tax to these recipients. M/s. BTGC had entered into an agreement with the assessee on 01.04.2016 wherein the assessee was to provide services related to communication technology, which included provisioning of network on VSAT medium, providing separate router at the customer premises, Page | 2 Africa Limited FZC provisioning of network bandwidth etc. It was noticed that the payment under consideration is for the use or right to use of the equipment for bandwidth, and hence it qualified as royalty for the use of the process. M/s. BTGC has paid the total amount of Rs. 1,55,55,344/- whichwas liable to be taxed in the hands of the assessee as its Royalty income. However, the assessee has not filed any return of income for the relevant assessment year. Accordingly, a show-cause notice u/s.148A(b) of the Act was issued on 31.03.2022 and the order u/s.148A(d) of the Act was passed on 06.05.2022. Subsequently, a notice u/s.148 of the Act was issued on 06.05.2022. In reply to the show cause notice, the assessee submitted thatISAT Africa Ltd FZCis a tax resident of UAE and is duly entitled to be governed in accordance with the provisions of the IndiaUAE Double Taxation Avoidance Agreement ('DTAA') in the present context in respect of its income earned from BTGC. ISAT does not have any Permanent Establishment ('PE') in India. It was also submitted that the assessee was duly entitled to be governed by the provisions of the Article 12 of the India- UAE DTAA on 'Royalties'. It was further submitted that the services rendered to BTGC are utilized by BTGC for its business activities outside India and accordingly, the income earned by ISAT from the same does not fall within the scope of total income taxable in India. It was further Page | 3
This submission of the assessee has been duly considered by the revenue authorities, but the same were not accepted. Ld. AO was of the view that the amount paid to the assessee was not covered u/s 9(1)(6) of the Act and the same was royalty payments taxable in India. Ld. AO was of the view that as per Article 12 of DTAA between the India and UAE, the term "royalties" as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. As per the definition, only a payment for the use of or right to use a process can be characterized as royalty. The Ld. AO was of the view that M/s. BT Global Communications India Pvt Ltd acquired significant economic or possessory interest in the equipment of the assessee to the extent of bandwidth hired by the customers. The bandwidth capacity is made available on a dedicated Africa Limited FZC basis to the customer; therefore the amount paid is also for the use of process. The Indian entity enjoyed the right to use the transmission by cable or optic fibre or satellite, the usage by the BTGC of the communication facility enabled by satellite links and cable through bandwidth line is nothing but using the process. The amount paid by the Indian entity for the use of process would ultimately amount to payment of royalty. Hence, it was concluded that the payment under consideration is for the use or right to use of the equipment for bandwidth and hence, it shall qualify to be royalty for the use of process. In the draft assessment order, the amount paid by the Indian entity was considered to be taxed as royality and the income was assessed at Rs. 1,55,55,344/-.
The assessee has filed objections before the Hon‟ble DRP stating therein that the view taken by the AO in the draft assessment order was contrary to the actual facts pattern of the assessee because the income earned is not towards allowing any use or right to use of equipment and /or process and therefore, the same does not qualify as royality. It was further submitted that during the course of providing network entity services, the assessee does not allow any access for use or right to use of equipment and /or process, therefore the income earned from rendering of the services Africa Limited FZC does not qualify as „royalty‟ under article 12 of the Indo-UAE DTAA. After considering the objections, Ld. DRP observed that the payments or relevant parts thereof received by the applicant from Indian clients are in nature of Royalty, which have been received on account of charging for optical fibre and V-SAT satellite transponder and connectivity process and/or ceding of right to use and use of commercial / scientific equipment being digital infrastructure, transponder facilities, computer systems, optical fibre network etc. to Indian customers. Accordingly, all the objections were rejected and AO was directed to give effect to the aforesaid findings. Accordingly, the final assessment order dated 16.01.2024 was passed u/s 143(3) r.w.s. 144C(13) of the Act wherein income was assessed at Rs. 1,55,55,344/- and penalty proceeding u/s 270A was also initiated separately.
Aggrieved by the impugned order, the assessee is in appeal before us and has raised the following grounds of appeal:-
1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating/ concluding proceedings under section 148 of the Act and passing the assessment order dated 16 January 2024 under section 143(3) read with Section 144C(13) of the Act, wherein it has been erroneously concluded that assessee has earned an income of INR 1,55,55,344 taxable in the nature of royalty. Page | 6 Africa Limited FZC 1.1 That on the facts and circumstances of the case and in law, Ld. AO, has grossly erred in determining the taxable income of the Appellant for the subject assessment year at INR 1,55,55,340/- as against nil income and, accordingly, the assessment order passed by the Ld. AO is bad in law and void abinitio.
2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that the payment amounting to INR 1,55,55,344 towards the network connectivity and related services rendered outside India is taxable as royalty under the Act as well as the India-UAE tax treaty.
2.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in holding that the amount received for providing network connectivity and related services involves significant economic or possessory interest in the equipment and represent consideration for right to use of equipment and is chargeable to tax as royalty in India both, under the Act as well as the India-UAE tax treaty.
2.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in facts and in law in holding that amount received for network connectivity and related services through assured bandwidth represents consideration for use or right to use of process and is chargeable to tax as royalty in India both, under the Act as well as the India-UAE tax treaty.
3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A, 234B and 234C of the Act.
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing to levy fee for default in furnishing of Income Tax Return ('ITR') in accordance with section 234F of the Act.
Africa Limited FZC 5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act for alleged misreporting of income.
The Appellant craves leave to add, amend, alter, delete, rescind, forgo, or withdraw any of the above grounds of appeal either before or during the hearing before the Hon’ble Tribunal. Further, the aforesaid grounds are mutually exclusive and without prejudice to each other.
We have heard Ld. AR and Ld. DR and examined the record. At the outset, Ld. AR who appeared on behalf of the assessee firstlysubmitted that the assessee is UAE based entity having operations in Africa and no work has been done by the assessee for Indian entity in India as the entire work /operations were carried in Africa and therefore any income earned from such work done for the Indian entity outside India is not taxable in India. Secondly, as per the „Network Bandwidth (VSAT) Connectivity‟ contract entered into between the appellant and BT Global Communications India Pvt. Ltd. (BTGC) dated 01.04.2016, herein after referred as „The Contract‟, the assessee may be using data and not using the equipment itself. There is no grant or lease or control of any instrument to the Indian entity and the right to use the process which was not separate but standard process having no secret formula and the payment was made on such use does not tantamount to royalty. Thirdly, various clauses of Page | 8 Africa Limited FZC „The Contract‟would show that the control, maintenance, supplies and title and risk in using the bandwidth facility has remained with the assessee and was never transferred to the Indian entity. Ld. AR referred the paper book 2, pages 3 and 5 which pertains to the „Requirement‟ part of the contract and specifically referred para 1 and 1.1 to stress the point that „Provision of network on VSAT medium for connectivity up to UK and /or India as required and includes installation, maintenance and management in countries like Uganda, Ghana, Kenya, Botswana and Tanzania’ and submitted that no activity was to be carried out within the territory of India. Ld. AR further referred point no. 1.2 which provides „The Services includes provisioning of network bandwidth and associated hardware at the end location(s), router at the end location(s), related equipment interconnection cables and accessories and service management which includes end to end installation, maintenance, 24x7 monitoring and any and all technical support.‟ Ld. AR further referred annexure-1 & 2 of „The Contract‟, table at page 33 and page 20 of the paper book 2 with respect to the place of work provided in „The Contract‟. Ld. AR also referred para 14 of the DRP directions and page 38 of the DRP orders stating that the facts mentioned therein are not correct because the VSAT does not have the satellite services as mentioned in para 44 of the DRP order. Fourthly, it is submitted that the case of Hon'ble Madras High Africa Limited FZC Court in the case of M/s. Verizon Communications Singapore Pte (2014) 361 ITR 575 (Madras HC) was not applicable to the case in hand as the same was distinguishable as has been done by the Delhi Tribunal in for AY 2015-16 order dated 23.03.2022 in the case of M/s. BT Global Communications India Pvt. Ltd. vs. DCIT. Fifthly, Ld. AR submitted that the decision of Hon‟ble Delhi High Court in order dated 24th July 2024 in the case of CIT vs. Telstra Singapore Pte. Ltd. was directly applicable to the case in hand. Ld AR specifically referred pages 154, para-104, pages 156, para 106 (pages 196), pages 222 and 239 of the paper book 3 and relied on various parts of the said decision which we will discuss later in subsequent discussion. Sixthly, the Ld. AR submitted that in response to the show cause notice dated 31.03.2022 u/s 148A(b) of the Act, the assessee submitted the following reasons as to why the receipts earned from BTGC are not „royalty‟ income chargeable to tax in India, in the hands of the assessee:-
(a) As per the provisions of section 90(2) of the Act, assessee is allowed to apply the provisions ofthe Indo-UAE DTAA in comparison to the provision of Income Tax. Therefore, the assessee is entitled to be governed by the provisions of the Article 12 of the India-UAE DTAA on 'Royalties'. The term Africa Limited FZC "royalties" as defined in Article 12 of the India UAE DTAA shows that there has to be use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. It is submitted that the assessee is engaged in the business of providing data / voice transmission services to BTGC and does not, in any manner, allow the use or right to use for any particular equipment or network or part thereof. The assessee's customers do not have the right to use any network related equipment or any process. Therefore, the there is no payment made by BTGC to the assessee in respect of use or right to use the equipment of bandwidth or provision of any process by the assessee to BTGC. In support of this argument, the assessee relied on the case of Cable & Wireless Networks India Private Limited ('C&W India'), reported in [2009] 224 CTR 463.
(b) The Authority for Advance Rulings in the case of Dell International Services (India) Private Limited [2008] 218 CTR 209 (AAR) wherein it was held that the grantee of right must have possession or control over the right so as constitute "use" or "right to use" of the right. It was further held that the payment to the service provider for telecom bandwidth facility is not royalty in the absence of possessory rights or the right to operate or control Africa Limited FZC the functioning of the equipment. The user only makes use of the facility created by the service provider who owned the entire network and the related equipment.
(c) The Hon'ble Mumbai Tribunal in the case of DCIT vs Reliance Jio Infocomm Ltd. [2019] 108 taxmann.com 325, held that the payments for bandwidth services were neither towards use of industrial, commercial or scientific equipment nor towards secret process and it could not be characterized as 'royalty' as per India-Singapore DTAA. It has to be noticed that the provision of Indo UAE DTAAare identical to the provision of Indo Singapore with respect to term „royalty‟.
(d) In the case of BTGC vs. DCIT [ITA No. 9437/DEL/2019], the Hon'ble Delhi Tribunal held that the payment of network connectivity charges shall not qualify as payment in the nature of royalty.
(e) The Hon‟ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. vs. DCIT (2011) 197 taxman 237 (Del) held that the payment for transponder leasing for settlement services does not qualify as royalty.
Africa Limited FZC (f) The Hon‟ble Bombay High Court in the case of Neo Spots Broadcast Pvt. Ltd. (2019) 264 taxman 323 (Bom) has relied the case of Asia Satellite Telecommunications Co. Ltd.(supra) and held that the payments were not in the nature of royalty charges. It was therefore argued that no use or right to use of the equipment was granted by the assessee to BTGC and the receipt by the assessee for providing the subject telecommunications services shall not qualify as „royalty‟ and accordingly, shall not be chargeable to tax in India.
On the other hand, Ld. DR relied on the directions of Ld. DRP and the assessment order passed by AO and submitted that the explanation no. 5 and 6 of section 9(1)(vi) of the Act would be applicable as it was clarified by the explanation 6 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 fiber or by any other similar technology, whether or not such process is secret. It was further argued that the case is covered by explanation 5 and 6 of section 9(1)(vi) of the Act and the Ld. AO has rightly assessed the royalty income. Ld. DR has filed a written submission and the relevant portion of the written submission is reproduced below:-
Africa Limited FZC “3. The Hon'ble Bench heard the AR of the assessee on all of the above grounds and therefore the revenue makes written submission on such relevant grounds, as under:
3.1 The revenue relies heavily on the order of the A.O. and the directions given by the Ld. DRP in the matter and more particularly the provisions of Section 9(1)(vi) of the IT Act. In explanation 2 to this Section, the phrase 'royalty' is defined as under:
"Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (1) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 4488:] (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to s[(iv), (ivo) and] (v)."
3.2 Further, in explanation 5 & 6, the following clarification was inserted w.r.e.f. 01.06.1976: "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;"
3.3 The AO and Ld. DRP (while rejecting the objections of the appellant) have relied upon these clarificatory explanation in the facts of the case of the appellant and in para 6.5 of the order of Ld. DRP, it has unequivocally held that the appellant received payment from Indian Clients which were in the nature of 'royalty for providing services of V-SAT satellite transponder and connectivity process and thus ceding of right to use and use of computer/scientific equipment being digital infrastructure, transponder facilities, computer systems etc. to Indian Clients.
We have considered the rival submissions and examined the record. The question for determination before us is “whether the services provided by the assessee to M/s. BTGC under ‘The Contract’ would amount to the use or right to use of equipment for bandwidth and hence qualified as royalty for the use of the process, if so, its effects?”
As we have discussed earlier that the Ld. AR on behalf of the assessee argued that there was no leasing or control by the Indian entity as it is clear from the various contents of „The Contract‟ that the entire control, management, maintenance, risk, etc. would remain with the assessee /service provider and not with the grantee i.e. the Indian entity. We have examined the relevant part of the contract between the parties. As per para 1 titled as „Service description and Service levels‟, states that the provision of networkonVSAT medium for connectivity up to UK and /or India as required and includes installation, maintenance and management in countries like Uganda, Ghana, Kenya, Botswana and Tanzania. Apart from that the relevant part of „The Contract‟ between the parties as “1.2. The Services includes provisioning of network bandwidth and associated hardware at the end location(s), router at the end location(s), related equipment interconnection cables and accessories and service management which includes end to end installation, maintenance, 24x7 monitoring and any and all technical support.
1.3. The Supplier shall ensure that the network route for this connectivity should act as an independent connectivity from each site up to its converging point. The Supplier shall ensure that network traffic from all sites should converge at UK and India.
1.6. The Supplier shall ensure that all site related technical and maintenance issues must be addressed Immediately. The Mean time to Repair (MTTR) should not exceed 8 hrs. Any delay in repairing a site related issue by the Supplier will attract penalty as set out in Annex 2. The site access is Bank's responsibility.
3. Supplier Obligations 3.1. The Supplier shall be responsible for the upkeep of BT provided equipment if any. All backhaul connectivity upto the BT MPLS shall provide 99.9% uptime on 24 X 7 basis.
3.2. Any and all Site related technical, operational and functional requirements shall be handled by the Supplier as required.
3.7. The Supplier shall be fully liable for consequences arising thereon due to the violation or non-compliance of any legislation by Supplier, Its Contract Personnel or Subcontractor engaged by Supplier. The Supplier shall indemnify without limitation and hold BT harmless against any claim, loss or damage Page | 17 Africa Limited FZC arising out of any and all non-compliance of by the Supplier, its Contract Personnel and/or Subcontractor of applicable legislations. The Supplier shall inform BT of any compliances that BT may need to comply with in view of the applicable legislations.
6.3. Any breach of this obligation by the Supplier shall be deemed to be a material breach of the Contract and the Supplier shall indemnify BT from and against any costs, losses, damages, proceedings, claims, expenses or demands incurred or suffered by BT which arise as a result of such breach.
10.2. Upon receipt of any BT Items, the Supplier shall satisfy itself that they are adequate for the purpose for which they are being provided, and within 14 days of receipt shall notify BT of any defects or deficiencies.
TITLE AND RISK 28.1 Without prejudice to BT's right to reject under the Contract, the title in Supplies shall pass to BT upon delivery and risk shall pass in accordance with the applicable Incoterm. Supplies shall be free from any claims or encumbrance whatsoever, with the exception of Software for which a licence is granted in accordance with the Contract.
28.2 If any Supplies are rejected by BT or the Contract is terminated, title to any Supplies not accepted by BT and any materials or things which have not been incorporated in any part of accepted Supplies, shall re-vest in the Supplier on the expiration of 30 days from the date on which such termination or rejection takes effect unless BT gives notice to the Supplier within such period that it intends to either issue any certificate of commercial service in respect of the rejected Supplies or otherwise retain title in them.
28.3 Any payment made by BT for Supplies, materials or things which re-vest in the Supplier is a sum due to BT from the Supplier.
30.1 The Supplier shall deliver Supplies in accordance with the Contract for time of delivery. If no such time is specified in the Contract, the Supplier shall deliver Supplies as agreed between the parties or, in the absence of agreement, at such time as BT may specify.
30.2 The Supplier shall deliver Supplies ordered by BT in accordance with the Requirements schedule to the Contract.
30.3 The Supplier shall not, without the prior written consent of BT, deliver any part order (by quantity or by item). If Supplies are not available for delivery at the due time, the Supplier shall (without prejudice to BT's rights under the Contract) immediately inform BT by telephone, facsimile or e-mail and confirm such communication in writing.”
It is noticed from the above contents of „The Contract‟that the overall control, maintenance and risk management of the equipment and the process of providing services was the responsibility of the assessee and no right in that regard has been surrendered or transferred to the Indian entity. To understand the term use or right to us in the DTAA, we would like to refer part „H‟, para 78 to 81 of the decision of Hon‟ble Delhi High Court in case of Telstra Singapore Pte Ltd. (supra) as under:-
“H. THE USE/RIGHT TO USE QUESTION
Reverting then to Article 12 of the DTAA itself, we find that paragraph 3 thereof defines ―royalty‖ to mean the payment of consideration for the use or the right to use, any copyright, patent, trademark, design or model plan, secret formula or process, and Page | 19 Africa Limited FZC other activities mentioned therein. The respondents had sought to contend that the service availed of by customers from the respondent assessee would fall within the ambit of ‗secret formula' or process'. It is in the aforesaid context that Mr. Sabharwal had commended for our consideration the principle of noscitur a sociis and had submitted that the word process' must derive colour and meaning from the other intellectual property rights which are spoken of in Para 3 of Article12. There appears to be significant force in that submission when one views Para 3(a) in its entirety.
As noted hereinabove, Article 12(3) defines ‗royalty' to mean payments received for the use or right to use copyrighted articles, patents, trademarks, designs, models, secret formulae or processes. The latter part of Para 3(a) also ropes in consideration that may be received from the alienation of any such right, property, or information. The expression ―use‖ or ―right to use‖ must consequently be understood in the aforesaid light and thus contemplating a positive conferral of a right to employ, possess or utilize a patent, trademark, process or equipment. In order to fall within the ambit of the royalty Article, it would be imperative for the Court discerning a right given to make use of the patent, trademark process or equipment. The key element would be effective control or dominion having been conferred upon an individual or entity for consideration. Use or right to use would necessarily entail the grant of a right to exploit or bring into effective use. A mere advantage or benefit derived from a service provided cannot possibly be countenanced to fall within the meaning of the expression's ―use or ―right to use as they appear in Article 12. What we seek to emphasise is that the use of a service while equipment or process remains with and in the control of the provider cannot attract process or equipment royalty provisions. Similarly, merely because an equipment or process comes to be deployed or used in the course of providing a service would not attract Article 12. This since no dominion or control came to be granted or transferred.
While dealing with the issue of ―use‖ and right to use‖, our Court in Asia Satellite had made the following pertinent observations:-
Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of the term "royalty" appearing in Explanation 2 to clause (vi) of section 9(1) of the Act. Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect Africa Limited FZC of a patent, etc. Thus, what this clause envisages is the transfer of "rights in respect of property" and not transfer of "right in the property". The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable the use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadesh Ranjan Sinha v. Hardeb Banerjee, AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights which are indeterminate in duration and residuary in character. Lump sum consideration is not decisive of the matter. That sum may be agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus, the definition of the term "royalty" in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with the owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. xxxxxxxxxxxx 68. We are inclined to agree with the argument of the learned senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage 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. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant Africa Limited FZC and the appellant had merely given access to a broadband available with the transponder, to particular customers. We may also point out that against the decision of the Authority for Advance Rulings in ISRO case (2008) 307 ITR 59, special leave petition was dismissed by the Supreme Court (see Puran Singh Sahni v. SundariBhagwandasKripalani (1991) 2 SCC 180).
We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asst. CCT 124 STC 426 (Karn) in the following terms (page 433): "9. Thus if the transaction is one of leasing/hiring/letting Simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of 'sale'. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of 'sale'. Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of RashtriyaIspat Nigam Ltd. v. CTO 77 STC 182 (AP). Illustration: (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the 'use of the lorry' for the following reasons : (i) the lorry is never in the control, let Africa Limited FZC alone effective control of the customer ; (ii)the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry ; (iii)the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry ; or the carrier may unload the consignment en-route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km subject to an assured minimum, for a period of one month or one week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit ; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale."
As we go through that decision, it appears that one of the submissions which was addressed before the Court in Asia Satellite was that ―use‖ should be understood as contemplating usage ―simpliciter and that consequently the derivation of any benefit from a process also being liable to be understood as falling within the definition of royalty. It also appears to have been urged that the word ―secretwhich stands prefixed to ―formula would not stand attached to the word ―process. While dealing with the aforesaid submissions, the Court in Asia Satellite held that the royalty article as appearing in the Treaty is concerned with the conferment of rights ―in respect of property‖ as distinguished from rights ―in property. It then went on further to observe that in order to correctly answer the question which stood posited, one would have to examine whether control over equipment or property had been accorded to potential Africa Limited FZC customers. It proceeded to hold that the correct test would be whether "effective and general control" over goods had been given to the customers. It thus follows that a mere benefit that may accrue to a user or a service that may be availed of by a customer cannot possibly fall within the ambit of the expressions ―use or ―right to use.”
The Hon‟ble Delhi High Court in case of M/s B.T. Global Communications India Pvt. Ltd (supra) held in para 14 that „We are of the considered view that there is a difference between an agreement that gives “Right to use equipment” and an agreement which involves provisions of services through use of equipment by service provider.‟ As per the contents of „The Contract‟as extracted and discussed above shows that the facility provided by the assessee to the BTGC was in the form of provision of services through use of equipment of service provider and it is argued on behalf of the assessee that the contract does not give the right to use the equipment in any manner to the Indian entity.
Further the Hon‟ble Bombay High Court in case of CIT vs. M/s. Reliance Infocomm Ltd. (ITA No. 1395 of 2016) dated 5th February 2019 had held as under:-
3 Before the Tribunal as well as before us, the Revenue has principally relied on the amendment to Section 9(1)(vi) of the Income Tax Act, 1961 (for short "the Act"), wherein explanations 5 and 6 were inserted by Finance Act, 2015 w.e.f. 1 st April, 1976. Both these explanations commence with the expression " for the Africa Limited FZC removal of doubts, it is hereby declared that .... ". According to the Revenue, these explanations are in the nature of declatory explanations and merely clarified the position in law and, therefore, the income of the foreign based payee was taxable in India and the Assessee, therefore, had liability to deduct tax at source while making such payments.
4 The entire issue was examined in detail by the Delhi High Court in case of Director of Income Tax v/s. New Skies Satellite BV reported in 382 ITR 114. The High Court while dismissing the Revenue's itxa-1395-2016.odt appeal, in the context of the nature of amendments noted above, held and observed as under:-
The circumstances in this case could very well go to show that the amendment was no more than an exercise in undoing an interpretation of the court which removed income from data transmission services from taxability under Section 9(1)(vi). It would also be difficult, if not impossible to argue, that inclusion of a certain specific category of services or payments within the ambit of a definition alludes not to an attempt to illuminate or clarify a perceived ambiguity or obscurity as to interpretation of the definition itself, but towards enlarging its scope. Predicated upon this, the retrospectivity of the amendment could well be a contentious issue. Be that as it may, this Court is disinclined to conclusively determine or record a finding as to whether the amendment to 9(1)(vi) is indeed merely clarificatory as the Revenue suggests it is, or prospective, given what its nature may truly be. The issue of taxability of the income of the assesses in this case may be resolved without redressal of the above question purely because the assessee has not pressed this line of arguments before the court and has instead stated that even if it were to be assumed that the contention of the Revenue is correct, the ultimate taxability of this income shall rest on the interpretation of the terms of the DTAAs. Learned Counsel for the assessee has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by 5 The Court further observed that mere amendments in the Act would not over- ride the provisions of Double Tax Avoidance Agreement (for short DTAA"). It was held that: "on a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in itxa-1395-2016.odt executive position cannot bring about a unilateral legislative amendment into treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenue slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs. In the said decision, Delhi High Court had also referred and relied upon the decision of this Court in the case of CIT v/s. Siemens Aktiongesellschaft reported in 310 ITR 320, in which it was held that, mere amendment of the Act, would not over-ride the provisions of DTAA treaties".(Emphasis by us)
6 In view of such detailed consideration by the Delhi High Court in the case of New Skies Satellite BV (supra), which is the foreign based company to whom the assessee has made payment in question, where identical issue came up for consideration, we do not find any reason to interfere this Appeal.
The Coordinate Bench of Mumbai Tribunal in case of ACIT vs. Reliance Jio infocomm Ltd. (2020) 77 ITR (T) 578 (Mum Trib.) order dated Page | 26 Africa Limited FZC 15th November 2019 has discussed similar issue in detail. In this case, the Coordinate Bench of Mumbai Tribunal has dealt section 9 read with article 13 of the India-Singapore, DTAA. The provision of article 12 of India UAE DTAA subject matter of the present appeal, to the extent relating to the tax of „royalty‟ which is subject matter of the current dispute, is identical worded. It was contended by the revenue before the Coordinate Bench that the expression „process‟ as mentioned in Indo Singapore DTAA but it is not specifically defined in treaty itself. It was submitted that the Explanation 6 to section 9(1)(vii) was inserted vide Finance Act, 2012 with retrospective effect from 1-6-1976 for expedient tax administration in view of conflicting views expressed by different Courts. It was therefore contended by the revenue that in absence of any specific definition in Indo-Singapore tax treaty, domestic law meaning of expression 'process' must prevail and going by domestic law meaning under Explanation 6 to section 9(1)(vii), any transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic-fiber or by any other similar technology, whether or not such process is secret, is covered by definition of 'royalty' under article 13(3)(a) of Indo-Singapore tax treaty. It was further contended that bandwidth services were transmitted by satellite, cable, optic fiber or other similar technology, payment for bandwidth services Page | 27 Africa Limited FZC would constitute 'royalty' for purpose of article 13(3)(a) of the Indo Singapore DTAA. The said contention was also raised before the Ld. CIT(A) by the revenue who had rejected the same and held that amendments in Act cannot be read into treaty provisions without amending treaty itself and, thus, meaning of term 'process' as defined in Act is for limited purpose of section 9(1)(vii) and cannot be read into DTAA. Ld. CIT(A) thus held that payments made by assessee to Singapore AE for provision of bandwidth services would be in nature of business profits and could not be classified as Fees for Technical services or Royalty either under Act or India-Singapore DTAA and further, in absence of Singapore AE's business connection or a PE in India, the business profits would not be taxable in India. This view taken by the Ld. CIT(A) was upheld and confirmed by the Coordinate Bench of ITAT in the above judgment.
It was contented by the Ld. AR before us that the said finding of Ld. Coordinate Bench, in the facts of circumstances of the preset case is applicable to this case because the issue involved are similar and identical and the provision of India-UAE DTAA regarding the term „royalty‟are identical and similar to the Indo-Singapore DTAA, therefore the impugned
In the case in hand, the Hon‟ble DRP has issued direction stating that the payments or relevant parts thereof received by the appellant /applicant from Indian clients are in nature of Royalty, which have been received on account of charging for optical fibre and V-SAT satellite transponder and connectivity process and/or ceding of right to use and use of commercial / scientific equipment being digital infrastructure, transponder facilities, computer systems, optical fibre network etc. to Indian customers. Accordingly, the AO was directed to proceed.
We respectfully following the judgment of Coordinate Bench of Mumbai Tribunal in case of ACIT vs. Reliance Jio infocomm Ltd. (supra), are of the considered opinion that the above directions of Ld. DRP in pursuance of which final assessment order was passed are not legally sustainable in view of discussion made by us herein above. For the above reasons, we are of the considered opinion that the payment of royalty implies loosing control physical or otherwise upon the equipment or the „process‟ therein by the supplier /owner of the said equipment or process to the guarantee i.e. BTCG, so as to constitute the use or right to use Page | 29 Africa Limited FZC equipment or the process respectively, which according to „The Contract‟ is acquired, owned or controlled by the assessee. Therefore, it is a case of providing services through a facility acquired, owned and used by the assessee and not by the guarantee i.e BTCG. Annexure1 of „The Contract‟ shows that the services are to be provided in the Africa continent i.e. outside India and not in India, hence the argument of Revenue that the assessee has not brought any facts in that regard is factually incorrect, hence not tenable. Further as per the terms of „The Contract‟ between the parties, all the responsibilities to ensure functioning and maintenance and lawful use has been left with the assessee/supplier, which shows that the equipment or the process is to be used by the supplier i.e. assessee and not by the guarantee i.e. BTCG. Thus in view of the above discussion, the question enumerated by us in para 8, is decided in negative and in favour of the assessee/appellant. For these reasons, Ground no. 1 and 2 are decided in favour of the assessee and against the revenue.
With regard to Ground no. 3 and 4 which pertains to levying of the interest u/s 234A, 234B, 234C of the Act as well as initiating penalty u/s 270A of the Act, in our view our above findings on Ground no. 1 and 2, Africa Limited FZC pales into insignificance and has been rendered academic. Therefore, we do not deem it necessary to decide the said grounds and the same are disposed off accordingly.
In the result, the final assessment order passed by AO is set aside and the appeal of the assessee is accordingly allowed in above terms.