DCIT (INTERNATIONAL TAXATION), NEW DELHI vs. M/S. TELSTRA SINGAPORE PTE LTD., NEW DELHI

1. Based on the facts and circumstances of the case and in law, the ld. AO, has erred in holding that payments amounting to INR 267,515,533 received by the Appellant from Indian customers ('customers' / 'service recipient' / 'payer') for provision of Telecommunication connectivity services (International Private Leased Circuits, Multiprotocol Label Switching ('MPLS'), IPNPN, etc., hereinafter referred to as 'bandwidth services') as consideration for the use of or the right to use of an equipment and/ or use of a process and! or transfer of rights in a process and/ or services in connection with the above process/ equipment, is taxable as a Royalty under section 9(1 )(vi) of the Income Tax Act, 1961 ('the Act') read with Article 12(3) of the India Singapore Tax Treaty ('Tax Treaty') in contravention of the following well-established facts and legal positions: 1.1 That the Tax Treaty provisions should apply in the Appellant's case and the learned AO while analyzing the whole transaction failed to appreciate in proper perspective, (a) the applicable Tax Treaty provisions, including the attendant protection and benefits arising there from, (b) the applicable case laws on the subject, and (c) the relevant international commentaries and reports in relation thereto. 1.2 That the insertion of Explanations 5 and 6 vide Finance Act 2012 (with retrospective effect from 1 June 1976) to section 9(1 )(vi) of the Act should not apply to and does not alter the tax treatment of a service transaction (as in the Appellant's case). That Explanations 5 and 6 only dispense with the condition of possession or control of the equipment in the hands of the customer and not the condition of use or right to use an equipment and! or process which is codified as a condition under Explanation 2 to section 9(i)(vi) of the Act. 1.3 That the finding of the learned AO that the insertion of Explanations 5 and 6 are only clarificatory in nature is incorrect. That these findings are incorrect because the learned AO has failed to appreciate that the tax treaties in case of the United Mexican States and Hungary (including tax treaties entered into by Indian government after insertion of Explanation 5 and 6) specifically include 'transmission by satellite, cable, optic fibre or similar technology' in the definition of Royalty which clause is conspicuous by its absence in the Tax Treaty which is applicable in the Appellant's case. 1.4 That the learned AO erred in facts and in law by not following the decision of the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA vs Department of Revenue [2013] [354 ITR 316] which correctly holds that the retrospective amendments to the Act cannot be read as an amendment to the tax treaties by virtue of Article 3(2) of the tax treaties. While the judgment of the Hon'ble Andhra Pradesh High Court was in the context of India France tax treaty, the learned AO has failed to appreciate that the rationale of the said judgment is equally applicable to the case of the Appellant in the context of the Tax Treaty.

2. Based on the facts and circumstances of the case and in law, the learned AO has erred in holding that the payments received by the Appellant from Indian customers for provision of Bandwidth services to such customers is Royalty for the use of, or the right to use of an equipment and/ or use of a process and! or transfer of rights in a process and/ or services in connection with above process/ equipment, is taxable under section 9(1)(vi) of the Act read with Article 12(3) of the Tax Treaty in contravention of the following well-established facts and legal positions:-

2.1 That indisputably the transaction is that of a rendition of bandwidth service by the Appellant, wherein the customer enjoys an uninterrupted 24x7 service to receive and send voice and data at a standard rate of reliability and in consideration of which fees are earned by the Appellant. The failure by the Appellant to render the bandwidth service at such a reliability level resulting in non- payment or loss of consideration for the Appellant (except on agreed upon excusable service outages) further factually substantiates and proves that the transaction under question is a pure service transaction, and is not a transaction in the nature of a rental or one involving a grant of use or right to use any equipment in the entire network to the customer. 2.2 That although the rendition of bandwidth service involves a large global network of equipments, which are employed by and under the exclusive dominion and control of the Appellant and other service providers for ultimate delivery of bandwidth services to the service recipients in India, such bandwidth services do not result in the use or right to use any equipment or use of a process by such service recipients. 2.3 That the two standard tests to qualify as an Equipment Royalty, as enunciated through various well- established judicial decisions, commentaries, reports and tax treaty interpretations, would fail when applied in the Appellant's case because: i) There is no contract between the Appellant and any service recipient in India that grants such service recipient the use or right to use any equipment, resulting in handing over of physical possession, control or use of the equipment, or any portion of the underlying telecommunications network, by the service recipient/payer for an agreed consideration; and ii) There is no economic exploitation of the global network for the commercial benefit of the service recipient/payer. 2.4 That the interpretation to be placed on the expression 'use or right to use' has been considered by Courts, AAR, Commentary on the Model Tax Convention by the Organization for Economic Co-operation and Development ('OECD'), Prof. Klaus Vogel commentary on Double Taxation Conventions, 2001, Report of the Technical Advisory Group ('TAG'), all of which unequivocally and consistently state that rendition of a service by a service provider using equipment or apparatus would not constitute Royalty, in contradistinction to specifically allowing or granting the use or right to use of such equipment or apparatus in the hands of the customer by way of renting or leasing of equipment or allowing the customer to commercially exploit such equipment for the customer's own benefit. 2.5. That the ld. AO has erred in holding that provision of bandwidth services involves use/ right to use equipment/ use of process without appreciating that a) no capacity or global network equipment (including cables) are earmarked or dedicated to any service recipient for its exclusive use or economic exploitation to their commercial benefit and further it is a technological impossibility to dedicate any infrastructure or capacity to any particular service recipient! payer; and b) the delivery of bandwidth service is nothing but a contract to transmit voice and data at a particular volume and speed and does not result in dedicating any identified capacity, segment or any portion or allowing any access to such global network of Appellant to the service recipient/ payer. 2.6. That the ld. AO has erred in stating that the provision of IPLC/ MPLS connectivity essentially involves access to the equipment and! or process in the network of the Appellant for connectivity and transmission of data. 2.7. That the ld. AO has failed to appreciate that the arrangement between the Appellant and the Indian payers is for provision of services and can by no stretch of imagination be construed as providing access over its network and! or processes to the customer. 2.8 That the ld. AO erred in not appreciating the following while disregarding the decisions rendered by the AAR in case of Dell International Services Private Limited (2008) (305 ITR 037 AAR) and Cable & Wireless Networks India Pvt. Limited (2009) (315 ITR 72 AAR): i) The AAR, in both Dell International and Cable & Wireless (supra), after detailed discussions in unequivocal terms, held that payment for bandwidth services (identical to the facts of the Appellant's case) would not constitute a Royalty both under section 9(i)(vi) of the Act and Article 12(3) of the relevant tax treaties; ii) The service providers, in both Dell International and Cable & Wireless (supra) are engaged only in rendering bandwidth services to end customers who enjoy an uninterrupted service of receiving and sending voice and data in exchange for a consideration, which is again identical to the facts of the Appellant in its provision of bandwidth services to customers in India; iii) Both the tests, physical possession and control and! or economic exploitation for commercial benefit would not be satisfied in a pure service transaction because the use or right to use of equipment and! or economic exploitation of the segment remains in the hands of the service provider and not in the hands of the ultimate recipient of the bandwidth service, which is also the fact pattern in the Appellant's case; iv) In order to be consideration for the use or right to use of an equipment, both under section 9(i)(vi) of the Act and Article 12(3) of the applicable tax treaties, the same has to be with respect to specifically identified and contracted for equipment and not, as in the Appellant's case, for the provision and consumption of a service. v) The Hon'ble Supreme Court dismissed the Revenue's Special Leave Petition CC 6392/2010 against the decision ofthe AAR in Cable & Wireless (supra). 2.9 That the learned AO erred by contending that various decisions as relied upon by the Appellant do not apply in the case of the Appellant since these involve entirely different fact-situation and were rendered without considered the impact of Explanation 5. The learned AO failed to appreciate that the rationale of the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd v Director of Income Tax (2011) (332 ITR 340)regarding the meaning of the term "use of equipment" in the definition of Royalty (prior to the Explanations 5 and 6 introduced by the Finance Act 2012) would be equally applicable while construing the expression in the Tax Treaty in the absence of any specific amendment to the Tax Treaty definition to the similar effect. 2.10 That the learned AO has erred in disregarding the fact that the case of New Skies Satellite NV and others v ADIT (2009) (319 ITR 269) was set aside and referred back by the Hon'ble Delhi High Court (vide order dated 17 February 2011) to the Hon'ble IT AT for fresh adjudication relying on the principles laid down by the Hon'ble Delhi High Court in case of Asia Satellite Telecommunications (supra). It is also pertinent to note that the case of New Skies Satellite (supra) involved the interpretation of the provisions of the Act as well as the India - Netherlands Tax Treaty and that the Hon'ble ITAT in that case, following the directions of the Hon'ble Delhi High Court and in light of the principles laid down in Asia Satellite Telecommunications (supra) has subsequently ruled in favor of New Skies Satellite vide its order dated 11 March 2011.

2.11 That the ld AO has erred in relying upon the decision of Hon'ble Madras High Court in case of Verizon Singapore Pte Ltd vs. ITO (2011) 45 SOT 263, without appreciating the fact that the said decision incorrectly treats definition of royalty as per the beneficial provisions of the DT AA as pari materia with the provisions of the Act. 2.12 Without prejudice to the above, the ld. AO reliance on the decision of Hon'ble Madras High Court in case of Verizon Singapore Pte Ltd vs. ITO (supra) is misplaced as the judgment by the Hon'ble Madras High Court was in context of the transmission of data through under-sea cables using the Integrated Private Leased Circuit ('IPLC') technology whereas in the case of the Appellant, the transmission of data is based on use of both IPLC and Multi-Protocol Label Switching ('MPLS') technology. 2.13 That the learned AO erred in disregarding the principles laid down by Hon'ble Supreme Court in the case of BSNL vs Union of India (2006) (282 ITR 273) which held that a subscriber to a telephone service does not intend to obtain or acquire any right to use any equipment or any portion of the underlying telecommunications network. Similarly, while availing Bandwidth services, the customer also does not intend to obtain or acquire any right to use any equipment or any portion of the underlying telecommunication network.

3. Based on the facts and circumstances of the case and in law, the learned AO has erred in considering receipts from certain Indian customers in respect of services utilized in business or profession carried on by such customers outside India! for the purpose of making or earning any income from any source outside India as royalty without appreciating the specific exclusion as contained in section 9(1)(vi)(b) of the Act.

4. Without prejudice to the above, on the facts and circumstances of the case and in law, the ld. While holding the entire sums received by the Appellant as taxable in India as per section 9 of the Act read with DT AA between India and Singapore, the ld. AO has erred in not excluding the amount pertaining to use of services provided by Bharti in India.

5. Based on the facts and circumstances of the case and in law, the ld.AO has erred in initiating penalty proceedings under section 271(1)(c) of the Act. The grounds are without prejudice to each other.”

The Assessing Officer passed the final assessment order against which the assessee is in appeal before us.

“2.2 The Appellant would like to submit that the consideration amount received for providing bandwidth services would not be taxable as equipment royalty or process royalty under the Tax Treaty. The Appellant through its submissions in subsequent paragraphs lays emphasis on the following key arguments:

(i) The transaction does not result in equipment royalty under the Tax Treaty as there is no use or right to use any industrial, commercial or scientific equipment by the customer' availing the bandwidth services. Hence, does not fall in the definition of royalty as per Tax Treaty.

(ii) The transaction does not result in process royalty under the Tax Treaty as there is no use of any process by the customer availing the bandwidth services. Hence, does not fall in the definition of royalty as per Tax Treaty. (iii) The Explanations 5 and 6 to section 9(1)(vi) of the Act cannot be read into the Tax Treaty for the definition of equipment and! or process royalty. Further, the Tax Treaty specifically does not include "transmission by satellite, cable, optic fiber or similar technology" in the definition of Royalty under the Tax Treaty, whereas other tax treaties (including treaties entered after insertion of Explanations 5 and 6 vide Finance Act, 2012) do specifically capture such transmissions in the royalty definition.”

I. Directorate of Income Tax vs New Skies Satellite-BV (Supra) II. Asia Satellite Telecommunication Co. Ltd. (supra)

III. Verizon communication India Pvt Ltd. (ITA No.2235/Del/2019) dated 30th March 2019 IV. Thaicom Public Co. Ltd. [2018] 96 taxmann.com 577

12. Coming to the appeal of the Revenue, it was pointed out that the only issue was whether the levy of interest u/s 234B of the Act was consequential or not. The Ld.AR for the assessee stated that the DRP had applied the ratio laid down by the Hon’ble Delhi High Court in DIT vs G.E. Packaged Power Inc.

[2015] 56 taxmann.com 190 (Del.) and no contrary decision was available.

“....... the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement .. .[vide para 60} ......... In Asia Satellite Telecommunications Co. Ltd. 's case (supra) this Court held that income from data transmission services would not qualify as royalty in order for it to be taxable under the Act. The Court first recognized that the definition of royalty in the section is with respect to permission granted to use the right in respect of the patent, invention, process, etc., all essentially forms of intellectual property. This permission restricts itself merely to the letting of the licensed asset. The permission does not go so far as to allow alienation of the asset itself. That being said, it is not so restricted as to qualify as a case where the licensor uses the asset himself albeit for the purposes of his customers Essentially therefore, Asia Satellite Telecommunications Co. Ltd. 's case (supra) held that the presence of control was a critical factor in adjudging whether there was "use" of a particular process .... [vide para 28].”

Further we find Delhi Benches of the Tribunal is several decisions have followed the decision of Hon’ble Delhi High Court and has held that the receipt from band width services do not qualify as ‘Royalty’ as per India Singapore Tax Treaty. Reliance is placed on Verizon Communications Singapore Pte Ltd. Vs. DDIT in order dated 30.03.2020.

per India Thailand Treaty. Similar propositions have been laid down in various other decisions of Tribunal.

23. The assessee on the other hand, has relied on the decision in WNS North America Inc. Vs. ADIT (supra) i.e. decision of Mumbai Bench of Tribunal, which has been approved by the Hon’ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman 317 (Bom). The issue before the Hon’ble High Court of Delhi was in the hands of recipient of lease line charges. The assessee therein had recovered internal telecommunication charges from WNS charges and the Tribunal held the amount in question was received by the said assessee as reimbursement of lease line charges and would not qualify either as ‘royalty’ or as income attributable to PE in India and hence, it was held that there was no income earned by the assessee. The question before the Hon’ble High Court was whether the amount received on account of reimbursement of lease line charges would qualify as ‘royalty’ under Article 12 of India – UK Treaty and the second question was in respect of charges being attributable to PE in India. The Hon’ble High Court vide para 5 had noted the decision of Tribunal but had held that since the decision of Tribunal was based on the findings of fact, there was no reason to entertain question Nos.4 and 5.

24. Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (supra), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act and the definition of ‘royalty’ having not been undergone any amendment in DTAA, the assessee was not liable to withhold tax on the lease line charges paid by it. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended.”

“the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT vs Siemens Aktiongesellschaft 310 ITR 320 (Bom) that the amendments cannot be read into the Treaty.”

22. The Hon’ble Bombay High Court in CIT vs Reliance Infocomm Ltd. Income Tax Appeal No.1395 of 2016 dated 05.02.2019 held that “mere amendments in the Act would not override the provisions of Double tax Avoidance Agreement”.

“3.22. ……….The Hon’ble High Court thereafter took note of various decisions on the issue including that of Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. (supra) and declined to conclusively determine or record a finding as to whether amendment to section 9(i)(vi) of the Act indeed was clarifactory as the Revenue suggested or prospective, give what its nature may truly be. The Hon’ble High Court further commented that the issue of taxability of income of assessee may be resolved without redressal 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.”

Order pronounced in the open court on 30th September, 2020.