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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI CHANDRA POOJARI
per the Act as amended by the Finance Act, 2012 cannot be applied to India-UK DTAA.
The learned DR primarily reiterated the stand of the revenue as contained in the order of assessment. His submission was that reimbursements to the extent it is for rendering services has to be regarded as income. In this regard he relied on the decisions which has been cited by the AO in the order of assessment. He placed reliance on the decision of the Hon’ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. (supra) for the proposition that payment of use of bandwidth facility would be in the nature of royalty both under the Act and the DTAA between India and Singapore and that decision will equally apply to India-UK DTAA.
We have heard the rival submissions perused the material on record. The issue which arises in the present appeal filed by the Assessee for different Assessment Years is against the chargeability of amount received from MCPL by the Assessee towards BT charges for providing WAN connectivity/bandwidth services outside India as equipment/process royalty u/s 9(1)(vi) of the Act and/or Article 13(3) of the India UK DTAA. The Assessee is a tax resident of UK. The bandwidth services are provided as standard services wherein the customer enjoys an uninterrupted service to transmit voice and data at standard rate of reliability. The Assessee claims that such rendition of service using an equipment/process and the customer being only a recipient of service would not attract equipment/process royalty, as the transaction would not fall within the expression “use or right to use”. Mere receipt of service using equipment under the control, possession and operation of service provider would only be transaction of a service and not to “use or right to use” an equipment, and would not attract ‘Royalty’ under the Act or the Tax Treaty. The Revenue authorities are of the view that the consideration received
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by the Assessee falls within the definition of Royalty (either as use of equipment or use of process) both u/s 9(1)(vi) of the Act and also under provisions of Tax Treaty.
The view canvassed by the Assessee finds support in the following decisions. Dell International Services (India) (P) Ltd.’s, ("Dell India") parent company Dell-US entered into a master service agreement (MSA) with BT America (BTA) a non-resident company formed and registered in USA under which BTA provided the applicant with two-way transmission of voice and data through telecom bandwidth. The purpose of entering into such arrangement was to enable Dell entities in the respective countries to utilize the services of BTA. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e. USA and India. Under the agreement, a fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. Installation charges as specified in the order form are also payable initially. The payment to BTA is net of any Indian taxes, including withholding taxes, as may be applicable. There was no equipment of BTA at the Dell India’s premises and Dell India has no rights over any equipment held by BTA for providing the bandwidth. Dell India sought ruling that the payments made to BTA are not liable to be taxed in India either under the treaty provisions or s. 9(1) of the IT Act, 1961. The Hon'ble Authority for Advance Ruling held that the word 'use' in relation to equipment occurring in Expln-2 (iva) to Sec.9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the word "equipment" suggests that there must be some positive act of utilization, application or
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employment of equipment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. The Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8/238 Taxman 577/382 ITR 114 and CIT v. Siemens Aktiongesellschaft [2009] 177 Taxman 8/310 ITR 320 (Bom.) have also taken similar view in the context of use of transponder facility. This view has been affirmed by the Mumbai ITAT in the case of Dy. CIT v. Reliance Jio Infocomm Ltd. [2019] 108 taxmann.com 325 (Mum.), wherein it has been held that u/s.9(1)(vi) of the Act, payment for 'bandwidth services' is not assessable as 'royalty' if the Assessee only has access to services and not to any equipment. The Assessee also did not have any access to any process which helped in providing of such bandwidth services. All infrastructure & process required for provision of bandwidth services was always used and under the control of the service provider and was never given either to the Assessee or to any other person availing the said services.
The view canvassed by the Revenue finds support from the decision of the Hon’ble Madras High court in the case of Verizon Singapore Pte.Ltd.(supra) The Assessee company, Verizon Communication Singapore Pte Limited originally called as MCI WorldCom Asia Pte Limited, is a non- resident company engaged in the business of providing international connectivity services. (IPLC). IPLC (International Pvt. Leased Circuit) is an end to end managed dedicated bandwidth service that provides internet service to customers for various applications. The international leg of the telecom services provided outside India is provided by the Assessee. The gateway/the landing station in India used in transmitting the traffic within India belonged to VSNL and is used by VSNL for providing Indian end services pursuant to its contract with the customer. On the above facts, the question before the Hon’ble Court was as to Whether the Tribunal was right on facts and in
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law in holding that the payments received by Verizon Communications Singapore Pvt.Ltd., the appellant from the Indian customers for provision of Bandwidth/Telecom Services outside India is royalty for the ‘use of, the right to use equipment’ u/s 9(1)(vi) of the Act? And Whether these payments received constitute royalty for the ‘use of, or the right to use equipment’ u/s 12(3)(b) of the Tax Treaty(DTAA between India and Singapore)? The Hon’ble Madras High Court held that the payments made to the non-resident company were for the ‘use of equipment’. In addition, the Court also held that such payments may also be held to be in relation to the ‘use of process’ since the provision of assured bandwidth and guaranteeing the transmission of data and voice would qualify for the same, irrespective of the fact that the bandwidth is shared with others. 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’. The customer has a significant economic interest in the Assessee's equipment to the extent of the bandwidth hired by the customer. 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 definition of 'royalty' under DTAA and the Indian Income-tax Act are in para materia. As rightly pointed out by the revenue, Explanation 6 defines 'process' to mean and include transmission by satellite (cable, optic fibre, or by any other similar technology, whether or not such process is secret.
The provisions of Expln-5 and 6 referred to in the decision of the Hon’ble Madras High Court in the case of Verizon Communication (supra) reads thus: 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
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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;"
It is pertinent to mention here that Explanations 5 and 6 have been inserted by the Finance Act 2012, with retrospective effect from 1.6.1976. The Hon'ble Madras High Court relying upon above insertions of Explanations 5 and 6 to section 9(1)(vi) of the Income Tax Act, by the Finance Act 2012, has held that payment made by Indian customers to a Singapore company for providing end-to-end internet connectivity (bandwidth services) outside India was taxable as royalty under the Income Tax Act. It is an admitted position that but the above explanation 5 and 6 are not found in the definition of Royalty under the India-UK DTAA. The Hon'ble Supreme Court in the case of "Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT" [2021] 125 taxmann.com 42, has in the context of taxability or otherwise of consideration paid for use of computer software as royalty, by holding that the payments made by resident Indian end- users/distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale of the computer software through End User License Agreements (EULAs)/distribution agreements, can't be considered as payment of royalty for the use of copyright in the computer software as per provisions of Article 12(3) of the applicable DTAAs and further that the provisions contained in section 9(1)(vi) of the Income Tax Act along with explanations 2 and 4 thereof, not being more beneficial to the Assessees, will not have any application. We find that the Hon’ble Delhi High Court in New Skies Satellite (supra) has also taken the same view and has observed in the said decision that Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. (supra) declined to
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conclusively determine or record a finding as to whether amendment to section 9(i)(vi) of the Act by insertion of Expln.5 to Section 9(1)(vi) of the Act, indeed was clarificatory as the Revenue suggested or prospective and the Court was of the view that the issue of taxability of income of Assessee may be resolved without redress of above question purely because the Assessee did not press the said line of argument and had instead stated that ultimate taxability of income shall rest on the interpretation of terms of DTAA.
It was submitted by the learned counsel for the Assessee that internationally, it is accepted that when payments are made for such services, they are not in the nature of ‘royalties’. It has been internationally accepted that payments for satellite broadcasting services, transponder services, bandwidth services etc. are not to be considered ‘royalties’. It is also accepted that bandwidth fees cannot be considered as payments for the ‘use of process’. In so far as use or use of equipment is concerned, as long as there is no control established over the equipment. This view has been endorsed by the OECD Model Commentaries as well. This view has specifically been upheld by the Authority for Advance Rulings in India in the case of Dell International (supra) and the Hon’ble Delhi High Court in the case of Asia Satellite (supra). The amendment to the definition of Royalty by the Finance Act, 2012 with retrospective effect has expanded the definition of “Royalty”, by laying down that consideration paid may be classified as made for the ‘use of equipment’ and thus, classified as ‘royalties’ irrespective of the possession or control of the equipment with the payer or use by the payer or the location of the equipment being in India. However, this retrospective amendment does not impact the definition of ‘royalties’ in the tax treaties entered into by India. India-UK DTAA defines “Royalty” to include payments for the use or the right to use of industrial, commercial or scientific equipment and the use or the right to use of a secret formula or process as ‘royalties’. The definition of Royalty under the
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DTAA, is much narrower in its scope and coverage than the definition of 'Royalty' as contained in section 9(1)(vi) read with Explanations 2, 5 and 6 of the Act. Installation & operation of sophisticated equipments or a standard facility with a view to earn income by allowing the users to avail the benefits of such equipments or standard facility does not tantamount to granting the use or the right to use that equipment or process so as to be considered as royalty within the above definition of 'royalty' contained in clause 3(b) of Article 13 of the India-UK DTAA. At no point of time, the customer gain any possession or physical custody, control or management over any equipment. Payment of bandwidth charges can't be considered as 'Royalty'. Also, the process involved to provide the bandwidth service is not "secret", but a standard commercial process followed by the industry players. Therefore, the said process can't be classified as a "secret process", as is required by the above- mentioned clause 3(b) of Article 13 of the DTAA.
The law is well settled, that in so far as provisions which impose a tax liability on the subject, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject. In State of West Bengal vs. Kesoram Industries Limited, (2004)10 SCC 201 has summed up the following principles applicable to the interpretation of a taxing statute:
“(i) In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency;
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(ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section byclear words used in the section;
and
(iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of Legislature’s failure to express itself clearly”.
We have already seen the two divergent views one taken by the Hon’ble Delhi High Court in the case of Asia Satellite (supra) and Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and the other view taken by the Hon’ble Madras High Court in the case of Verizon Communication (supra). There is no decision of the Hon’ble Karnataka High Court brought to our notice, which is the jurisdictional High Court as far as this Tribunal is concerned. Applying the rule that if two interpretations are possible on tax liability benefit of interpretation is given to the subject, we follow the ruling of the Hon’ble Delhi High Court in the case of Asia Satellite (supra) and Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and hold that in the case of Assessee, the consideration received for providing bandwidth facility will not be taxable as equipment royalty or process royalty. The plea of the Assessee in this regard is accepted and the relevant grounds of appeal in all the 7 appeals are allowed, as admitted by both the parties, the facts and circumstances of the case are identical.
The revenue has not made out a case for taxing the receipts in question as FTS. The plea of the Assessee was that in terms of paragraph 4(e) of Article 13 of DTAA, payments of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) would be regarded as fees for technical services'
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if it 'makes available' technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. We do not wish to go into these arguments as the revenue has not taxed the sum in question as FTS. It is also not the case of the revenue that the Assessee has permanent establishment in India and therefore the receipts even if considered as business income, cannot be taxed in India. Even on this aspect, there is no discussion and it is admitted case of the revenue that the sum in question cannot be taxed as business income.
In so far as AY 2010-11 is concerned, there is one additional issue and that issue is with regard to taxing a sum of Rs. 4,49,395 received by the Assessee from MCPL towards cost of shrink-wrapped software, which the Assessee purchased from software vendors and sold to the Assessee. The taxed the aforesaid receipt treating it as royalty by following the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 345 ITR 494 (Karn.). It was the plea of the Assessee before DRP that there was no transfer of right in respect of the copyright by the software vendors to the Assessee. There was no commercial exploitation of the copyright of the software vis-à-vis third parties. The Assessee had a right to use the software only within its own business, as end-user software. The Assessee acquired a ‘copyrighted article’ and not a ‘copyright’ and that software is goods. The contention was rejected by the DRP. Aggrieved by the addition made by the AO in the final order of assessment, the Assessee is in appeal before the Tribunal.
We have heard the rival submissions. Admittedly, the issue has been set at rest by the decision of Hon'ble Supreme Court in a recent case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (supra). Hon'ble Supreme Court
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while considering the issue of royalty on sale of software have considered the decision of Hon'ble Karnataka High Court in case of CIT vs Samsung Electronics Co Ltd. (supra) and various other decisions. We note that Hon'ble Supreme Court considered the issue by observing as under:- "3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non- resident, foreign software suppliers, amounted to royalty and as this was .so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 ["Income Tax Act"], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source ['I'DS"] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. The appeals before us may be grouped into four categories: i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non- resident supplier or manufacturer. ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/ equipment." Hon'ble Supreme Court, considered various arguments advanced by the Revenue as well as the assessee's and came to the conclusion as under: CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the
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Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the income Ta Act (section 9(1)(vi, along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 170.The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AJAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed." We note that case of present Assessee falls within the third category analyzed by Hon'ble Supreme Court. Respectfully following the above view by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Supra), We hold that purchase of software in the present facts does not amount to give rise to any taxable income in India as the provisions of sec.9(1)(vi) along with Explanation- 2 or the relevant provisions of the Indo-UK DTAA are not applicable to present Assessee's. Accordingly, we allow the relevant ground of appeal.
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In the result, the appeals are allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (CHANDRA POOJARI) (N.V.VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated : 29.11.2021. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order
Assistant Registrar ITAT, Bangalore.