SAUDI TELECOM COMPANY,KINGDOM OF SAUDI ARABIA vs. ASSISTANT COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-2(2), BENGALURU

The assessee is a non-resident telecommunication operator headquartered in Saudi Arabia. The AO noticed that the assessee has received a payment of Rs.14,85,668 from M/s. Vodafone South India Ltd during the previous year 2011-12 towards inter connect charges and that the income was held to be chargeable to tax in India as royalty in the proceedings u/s. 201 of Vodafone. The AO on examination of records was of the view that the said income received by the assessee is chargeable to tax in India and since Vodafone has not deducted tax at source held that the tax needs to be paid by the assessee as per the provisions of section 191. Accordingly, the AO invoked the provisions of section 147 and issued a notice u/s. 148 on the assessee. The AO in the revision proceedings held the following amounts to be taxed in the hands of the assessee in India:

Aggrieved, the assessee raised objections before the DRP contending the legality of the revisionary proceedings and also the issue on merits. The DRP dismissed the objections raised by the assessee and upheld the additions made by the AO. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO in accordance with the directions of the DRP.

The assessee raised grounds pertaining to the following issues :

The ld. AR submitted that additional grounds challenging the validity of the said DRP Directions issued without a DIN and Impugned Order passed pursuant to the said Directions are purely legal in nature and the same may be admitted for adjudication. Reliance was placed on Jute Corporation of India Ltd. [187 ITR 688 (SC)] and other judgments.

After hearing both the parties, following the Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. Vs. CIT, 229 ITR 383 (SC), the additional ground is admitted for adjudication.

The ld. AR submitted before the bench that grounds pertaining to the validity of reassessment proceedings u/s.147 and grounds pertaining to the interconnect charges are not pressed. Accordingly, these grounds are dismissed as not pressed.

During the course of hearing, the ld. AR and the ld. DR presented detailed arguments with regard to the directions of DRP u/s. 144C(5) being issued without DIN in the body of the order and the validity of the same. Both the parties also presented arguments contending the issue of addition made towards payments received towards capacity transfer by the assessee on merits. For the purpose of adjudication, we will first consider the arguments presented with regard to the merits of the issue.

Brief facts pertaining to the impugned addition of payments received towards capacity transfer by the assessee. The Europe India Gateway (‘EIG’) cable is a submarine communications cable system that links the Indian subcontinent and the United Kingdom (UK) with Terminal Stations at various Terminal Points. To develop and lay down this cable, a consortium was formed which included telecom operators from various countries including the assessee. In this regard, an agreement was entered into among the members of the consortium called the Construction and Maintenance (C&MA) Agreement on May 6, 2008 (Page No. 6 of the paperbook), under which the Assessee was allotted 7.1265% stake in the total capacity of the EIG cable system for an investment of USD 50 million. As per the agreement among the consortium members, there is a capacity allocation to each of the consortium members in the EIG cable system. The concerned member of the consortium is entitled to transfer capacity in the EIG cable system, to other telecommunication entities from its allotted capacity on a private basis with the condition that the transferring EIG party

Thereafter, the Assessee entered into an EIG capacity transfer agreement with Dishnet Wireless Limited (‘Dishnet’) on March 5, 2009 (Page No. 115 of the paperbook), for participation of Dishnet via the assessee in the EIG consortium wherein Dishnet agreed to share 40% of the overall initial investment of the assessee of USD 50 million, amounting to USD 20 million. By virtue of this participation, the assessee agreed to share 40% of its allocated capacity in the EIG cable with Dishnet over the lifetime of the EIG system. The agreement entered with Dishnet was a private agreement to establish a partnership in relation to the participation in the EIG consortium wherein Dishnet was required to indirectly (i.e. through assessee) share the periodic capital costs incurred with respect to the laying out the EIG cable (upto the total investment limit of USD 20 million) in consideration for the stake allotted to Dishnet in the capacity of the EIG cable under the agreement dated March 5, 2009. The subject under the dispute is on this capacity/bandwidth sharing for use by Dishnet. As per the agreement the assessee received a sum of USD 5,749,961 on August 5, 2009 from Dishnet being the first billing milestone.

During the course of re-assessment proceedings the AO noticed that Authority for Advance Ruling (AAR) had in the case of Dishnet has given a ruling (AAR No.863 dated 24.08.2012) that the payments made by Dishnet to the assessee under the EIG capacity transfer

Aggrieved the assessee filed its objections before the DRP. Before the DRP the assessee submitted evidences in support of the receipt of only USD 5,749,961 and also the evidence to substantiate that the cable network became operational from February 2011. The assessee also submitted before the DRP that the AAR ruling is not binding on the assessee. The DRP did not accept the contentions and evidences submitted by the assessee. The DRP upheld the addition by holding that the AAR ruling is binding on AO/DRP which needs to be followed and also that the assessee could not produce any concrete evidence to prove that the assessee has received was only USD 5,749,961. The assessee is in appeal before the Tribunal against the final order of AO passed pursuant to the DRP directions.

The one of the contentions of the ld AR is that there has been no occurrence of any taxable event in the impugned year AY 2012-13 and that the revenue has failed to discharge the onus to show that any income has either arisen or stood received by the assessee during the

The ld AR submitted that the merely based on the AAR ruling in the case of Dishnet has concluded that the assessee has received a sum of USD 20 million from Dishnet for parting with 40% share of the Europe India Gateway cable system, i.e., the EIG cable, with Dishnet, which is in the nature of royalty as a consideration for right to use a process and/or right to use a commercial or scientific equipment and the same is taxable as royalty in the impugned AY. It is further submitted that the view of the Ld. AO that the cable in question was laid in 2009, became operational from FY 11-12 and the payment for this was made in advance, is completely unfounded and devoid of any merit. The ld AR drew our attention the reports of submarinenetworks.com that the services of EIG cable system had commenced during February 2011, which is outside the impugned year and that the assessee had provided affidavit on how the agreement with Dishnet did not crystalize at all. Therefore, it is submitted that notwithstanding that EIG cable system had commenced operation before the impugned year, no service was ever rendered by the assessee to Dishnet. Accordingly the ld AR submitted that no event occurred for taxing the impugned amount during the year under consideration.

Without prejudice to the above, the ld AR submitted that the amount of USD 5,749,961 actually received by the Assessee during the FY 2009-10 cannot be brought to tax in the impugned AY for the

The ld DR on the other had submitted that even assuming that the AAR is not binding on the assessee as contented, the rationale of the ruling is that the impugned amount is a royalty which is taxable in India and accordingly the assessee being in receipt of the said amount is liable to pay tax on the same. The ld DR further submitted that the amount received by the assessee would fall within the provisions of explanation 2 to section 9 and accordingly liable to be taxed in the hands of the assessee.

We heard the rival submissions and perused the material on record. Besides the arguments stating that no taxable event occurred during the year under consideration the ld AR presented arguments raising various other contentions such as receipt being capital in nature,

It is noticed that the assessee has entered into an EIG capacity transfer agreement with Dishnet on March 5, 2009 (Page No. 115 of the paper book), for participation of Dishnet via the assessee in the EIG consortium wherein Dishnet agreed to share 40% of the overall initial investment of USD 50 million, amounting to USD 20 million. It is also noticed that the assessee has received a sum of USD 5,749,961 on August 5, 2009 being the first milestone payment. During the course of hearing the ld AR submitted that since the subsequent payments were not coming through inspite of repeated follow up the assessee offered to bring down the liability and the corresponding extent of capacity sharing to Dishnet through an amendment agreement dated May 16, 2010 (Refer Page No. 132 of the Paper book). i.e., to 11.5% from 40%. It is submitted that Dishnet did not execute the revised agreement and no further transactions happened ensued between the assessee and Dishnet since ultimately Dishnet went into insolvency.

We notice that the only basis for making the addition during AY 2012-13 as stated by the AO during the re-assessment proceedings and in the remand report is that the EIG project commenced during the financial year relevant to AY 2012-13 and on that basis concluded that

We also notice that the DRP has not carried out any independent examination of the issue on merits and has confirmed the addition on similar grounds relying on the remand report from the AO by stating that –

From the above observations of the AO and the DRP it is clear that the revenue has not brought anything on record to substantiate claim that the EIG project commenced during the financial year 2011- 12. The revenue has merely rejected the evidences submitted by the assessee in the form of email correspondence from the Chairman of EIG Management Committee confirming the period of commencement of the EIG cable as February 23, 2011 without any material evidence to prove the contrary. Therefore in our view the claim of the revenue that the taxable event occurred during the impugned year is unsubstantiated. We also see merit in the submission of the ld AR that the assessee cannot be asked to prove the negative fact that no payments are received during the impugned year in the absence of any positive evidence to the contrary. In this regard we notice the observations made by the Hon’ble Supreme Court in the case of K P Varghese v. ITO, [1981] 7 taxman 13 (SC) wherein it is held that “to throw the burden of showing that there is no understatement of the consideration on the assessee would be to cast an almost impossible burden upon him to establish a negative, namely, that he did not

In the light of our decision as given above the other arguments submitted, contending the same issue have become academic. Similarly the additional ground raised by the assessee on the validity of the DRP directions being issued without mentioning the DIN in the body of the said directions has also become academic and therefore is left open. Ground No.15 to 17 are consequential.

In result the appeal of the assessee is allowed.