CIENA COMMUNICATIONS INDIA PVT. LTD.,NEW DELHI vs. ACIT, CIRCLE- 6(1), NEW DELHI

PER BEENA A PILLAI, JUDICIAL MEMBER The present appeals have been filed by assessee against order dated 08/12/17 passed by Ld. CIT (A)-2, New Delhi for Assessment Years 2012-13, 2013-14 and 2014-15 on the following grounds of appeal:

ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. ITA no. 3561/ Del/2018 (Asst Yr: 2012-13) “Appeal under section 253(1)(a) of the Income Tax Act, 1961 against the order dated 8 December 2017 (received on 22 March 2018) passed under section 250(6) of the Income Tax Act, 1961 ('the Act') by the Commissioner of Income Tax (Appeals) - II, New Delhi (hereinafter referred to as 'CIT(A)'). 1. That on facts and circumstances of the case and in law, the Assessing Officer ("AO") erred in completing the assessment of the Appellant at an income of INR 6,88,73,302 as against returned loss of INR 1,20,89,997. The CIT(A) has further erred in arbitrarily confirming the addition made in the assessment order by the AO. 2. That on facts and in circumstances of the case and in law, the CIT(A) has grossly erred in upholding the disallowance of technical on-call assistance charges amounting to INR 8,09,63,299 paid by the Appellant invoking provisions of section 40(a)(i) of the Act by holding the same to be fee for technical services and alleging that tax at source was liable to be deducted from such payments. 2.1. That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which were 'technical' in nature. 2.2 That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which 'made available' technical knowledge, experience, skill, know-how or processes. 3. Notwithstanding and without prejudice, the disallowance relating to TAC charges should have been restricted to 30% of the sum payable in view of the amendment to section 40(a)(ia) of the Act, read with 'Article 26 - Non- Discrimination' of India-US Double Taxation Avoidance Agreement. 4. That on facts and in circumstances of the case and in law the AO has erred in charging interest under section 234D of the Act and recovering interest paid under section 244A of the Act. That the above grounds of appeal are without prejudice to each other. That the Appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.”

ITA no. 3562/ Del/2018 (Asst Yr: 2013-14) “Appeal under section 253(1)(a) of the Income Tax Act, 1961 against the order dated 8 December 2017 (received on 22 March 2018) passed under section 250(6) of the Income Tax Act, 1961 ('the Act') by the Commissioner of Income Tax (Appeals) - II, New Delhi (hereinafter referred to as 'CIT(A)'). 1. That on facts and circumstances of the case and in law, the Assessing Officer ("AO") erred in completing the assessment of the Appellant at an income of INR 11,32,24,002 as against returned income of INR 7,39,41,020. The CIT(A) has further erred in arbitrarily confirming the addition made in the assessment order by the AO.

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. 2. That on facts and in circumstances of the case and in law, the CIT(A) has grossly erred in upholding the disallowance of technical on-call assistance charges amounting to INR 3,92,82,982 paid by the Appellant invoking provisions of section 40(a)(i) of the Act by holding the same to be fee for technical services and alleging that tax at source was liable to be deducted from such payments. 2.1. That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which were 'technical' in nature. 2.2 That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which 'made available' technical knowledge, experience, skill, know-how or processes. 3. Notwithstanding and without prejudice, the disallowance relating to TAC charges should have been restricted to 30% of the sum payable in view of the amendment to section 40(a)(ia) of the Act, read with 'Article 26 - Non- Discrimination' of India-US Double Taxation Avoidance Agreement. 4. That on facts and in circumstances of the case and in law the AO has erred in charging interest under section 234B of the Act. That the above grounds of appeal are without prejudice to each other. That the Appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.”

ITA no. 3563/ Del/2018 (Asst Yr: 2014-15) “Appeal under section 253(1)(a) of the Income Tax Act, 1961 against the order dated 8 December 2017 (received on 22 March 2018) passed under section 250(6) of the Income Tax Act, 1961 ('the Act') by the Commissioner of Income Tax (Appeals) - II, New Delhi (hereinafter referred to as 'CIT(A)'). 1. That on facts and circumstances of the case and in law, the Assessing Officer ("AO") erred in completing the assessment of the Appellant at an income of INR 10,64,81,412 as against returned income of INR 6,65,71,450. The CIT(A) has further erred in arbitrarily confirming the addition made in the assessment order by the AO. 2. That on facts and in circumstances of the case and in law, the CIT(A) has grossly erred in upholding the disallowance of technical on-call assistance (TAC) charges amounting to INR 3,99,09,962 paid by the Appellant invoking provisions of section 40(a)(i) of the Act by holding the same to be fee for technical services and alleging that tax at source was liable to be deducted from such payments. 2.1. That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which were 'technical' in nature. 2.2 That on facts and in circumstances of the case and in law, the CIT(A) has erred in upholding that the charges paid by the Appellant were on account of services which 'made available' technical knowledge, experience, skill, know-how or processes.

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. 3. Notwithstanding and without prejudice, the disallowance relating to TAC charges should have been restricted to 30% of the sum payable in view of the amendment to section 40(a)(ia) of the Act, read with 'Article 26 - Non- Discrimination' of India-US Double Taxation Avoidance Agreement. 4. That on facts and in circumstances of the case and in law the AO has erred in charging interest under section 234D of the Act and recovering interest paid under section 244A of the Act. That the above grounds of appeal are without prejudice to each other. That the Appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.”

Ld.Counsel submitted that issues raised in all three Assessment Years are common and emanate from common service agreement dated 01/04/10 entered into between assessee and Ciena Communications Inc. (hereinafter referred to as ‘AE’). For sake of brevity we take-up appeal for Assessment Year 2012- 13. A.Y: 2012-13 2. Brief facts of the case are as under: Assessee filed its return of income on 23/11/12 declaring loss of Rs.1,20,89,997/-. The case was selected for scrutiny and notice under section 143 (2) along with questionnaire and notice under section 143 (1) of the Income Tax Act, 1961 ('the Act') was issued, in response to which Representatives of assessee appeared before Ld. AO. 2.1. Ld. AO observed that assessee was providing services of Annual Maintenance Contract (‘AMC’ for short) and installation, commissioning services, for equipment supplied by its group entities to customers in India. As there was international transaction by assessee with its AE, case was referred to Transfer Pricing Officer (TPO). Ld.TPO did not make any adverse inference

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. in respect of international transaction undertaken by assessee for year under consideration and no additions on account of adjustment to Arm’s Length Price of international transaction was made. 2.2. On perusal of balance sheet, it was observed that assessee made several payments to foreign companies, on which no TDS was deducted. Assessee was show caused vide notice dated 12/02/16, to check withholding tax compliance in respect of payments made to foreign entities. Vide reply dated 09/03/16 assessee submitted that foreign payments include travel expenses, salary expenses, reference fees and technical on-call assistance charges. Assessee submitted that wherever applicable, TDS has been deducted and deposited. Ld.AO from details filed observed that, no TDS was deducted on technical on-call assistance charges paid to AE for technical on-call assistance support received. 2.3. Ld.AO made disallowance of Rs.8,09,63,299/- for non- deduction of TDS under section 195 read with section 40 (a) (i) of the Act, on payment made towards technical on-call assistance charges to AE. 2.4. Aggrieved by order of Ld.AO, assessee preferred appeal before Ld.CIT (A), who upheld addition made by Ld.AO. 3. Aggrieved by order of Ld.CIT (A), assessee is in appeal before us now. 4. Ld.Counsel submitted that Ground No. 1 is general in nature and therefore do not require any adjudication. 5. Ground No. 2 (2.1 and 2.2) is in respect of disallowance amounting to Rs.3,92,82,982/-under section 40 (a) (i) of the Act,

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. on account of technical on-call assistance charges paid by assessee to its AE. 5.1. Ld.Counsel submitted that assessee is engaged in providing AMC in respect of equipment sold by AE’s to customers being telecom operators in India. He submitted that for purposes of rendering services, assessee entered into agreement dated 01/04/10, with its US AE, for provision of such remote on-call support services. He drew our attention to agreement placed in paper book at page 54-62, with specific reference to Clause 4, which deals with “Services”. Referring to Clauses in agreement, he submitted that US AE provides remote on-call support services and emergency technical support services through teams situated outside India, to customers in India. He submitted that these services are provided in the nature of assistance in troubleshooting, and repairs of equipments, wherein equipment will be shipped to US AE by assessee if required. He submitted that there is no on-site support services provided by US AE, and therefore, there is no physical presence of AE in India, in order to constitute Permanent Establishment (PE) . 5.2. By placing reliance upon Double Taxation Avoidance Agreement (DTAA) between India and USA, Ld.Counsel submitted that services rendered by US AE do not involve any “make available” technical knowledge, experience, skill, know- how etc., to assessee, and therefore tax was not required to be deducted on such expenses under provisions of the Act, as well as under India US DTAA. Ld. Counsel relied upon assessment order passed for Assessment Year 2011-12 under section 143 (3) read with 144C of the Act, wherein no addition has been made in

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. respect of the same. He submitted that Assessment Year 2011-12 was first year when assessee made similar payment to its AE, for provision of technical support services. 5.3. In alternative, and without prejudice to above submissions, Ld. Counsel submitted that, Explanation 2 to Section 9 (1) (vii) of the Act is not attracted, since US AE, on remote on-call support services, directly provided to customers in India, and there is no technical know-how or knowledge, that is transmitted to assessee in any manner. He thus submitted that such services cannot be regarded as managerial, technical or consultancy services under section 9 (1) (vii) of the Act, and accordingly falls outside purview of the Act. He placed reliance upon following decisions in support of his arguments: • Decision of Hon’ble Supreme Court in the case of CIT vs. Calcutta Export Company reported in (2018) 93 Taxmann.com 51; • Decision of Hon’ble Delhi High Court in the case of CIT vs. Guy Carpenter and Co. Ltd., reported in (2012) 20 taxman.com 807; • Decision of Hon’ble Delhi High Court in the case of CIT vs. Herbalife International India Pvt. Ltd., reported in (2016) 59 Taxmann.com 205; • Decision of Hon’ble Karnataka High Court in the case of CIT vs. Sun Microsystems India Pvt. Ltd., reported in (2014) 48 Taxmann.com 93; • Decision of Hon’ble Karnataka High Court in the case of CIT vs. D Beers India Minerals Pvt.Ltd., reported in (2012) 21 Taxmann.com 214 Page 7 of 17

ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. • Decision of Hon’ble Madras High Court in the case of Skycell Communications Ltd vs. DCIT reported in (2001) 251 ITR 53; • Decision of Pune ITAT bench in the case of Sandvik Australia Pty. Ltd., vs. DDIT reported in (2013) 31 Taxmann.com 256; • Decision of Hyderabad ITAT in the case of ADIT vs. BHEL-GE- Gas Turbine Servicing Pvt. Ltd. reported in (2012) 24 taxman.com 25. 5.4. Ld.Counsel submitted that TDS could be deducted on any payment made to a non-resident only if its income is chargeable to tax in India. He submitted that the payment received by non-resident do not satisfy the requirements of Sec. 195, and, therefore, no disallowance could be made u/s 40(a)(i) of the Act. 6. On the contrary Ld.Sr.DR submitted that services rendered by AE to assessee made available technical knowledge, experience, skill and know-how which has an enduring benefit and assessee can apply the same for providing services on its own and therefore was taxable in India. He submitted that services rendered by AE remotely to customers of assessee in India, is in relation to equipments manufactured by AE. Ld.Sr.DR placed reliance upon following decisions: • Hon’ble Supreme Court in case of Transmission Corporation of A.P Ltd., vs. CIT reported in (1999) 239 ITR 587; • Hon’ble Supreme Court in case of GE India Technology Cen. (P) Ltd., vs. CIT reported in (2010) 327 ITR 456; • Decision by Kolkata Tribunal in case of Gentex Merchants Pvt. Ltd., vs. DDIT reported in (2005) 94 ITD 2011; Page 8 of 17

ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. • Decision by Delhi Tribunal in case of Godaddy.com LLC vs ACIT reported in (2018) 92 Taxmann.com 241; 6.1. Ld.Sr.DR submitted that Explanation 2 section 195 (1) of the Act supports case of revenue, whereby it clarifies the legislative intent behind amendment made to section 195 (1). The Ld. Sr.DR submitted that assessee should have made an application to Assessing Officer (Ld.AO) to obtain his permission for non-deduction of TDS. Placing reliance upon the decision of Delhi Tribunal in case of Go Daddy.com LLC vs. ACIT (supra), he submitted that as technical services provided by AE, remotely, to customers of assessee, in India related to equipments manufactured by AE, was chargeable to tax as FTS. 7. We have perused submissions advanced by both sides in the light of records placed before us. 7.1. From submissions advanced, it is observed that assessee is providing annual maintenance in respect of equipments manufactured by AE. In respect of the same, assessee entered into an agreement with AE dated 01/04/10, whereby technical on-call advisory services are obtained from AE, in case of problems of outrage, emergency, technical support or system compromised on the basis of priority of cases. Under the agreement, AE is required to provide support services in case of critical/emergency issues to customers of assessee, through call centres remotely. Assessee in view of such services rendered made payments to AE, on which no TDS was deducted, as according to assessee, there is no requirement of withholding tax on such payments. It has also been submitted by Ld.Counsel

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. that AE do not have a PE in India, and therefore is not taxable under India US DTAA. 7.2. Ld. AO made addition in view of amendment to section 40 (a) (i) of the Act read with Article 26 of India US - DTAA. Ld.AO also held that the services rendered by non-resident AE made available technical knowledge, experience or skill and know-how of the process. 8. Before dwelling into the analysis of facts in hand, it would be necessary to understand application of section 40 (a) (i) of the Act, which reads as under: “Section 40(a)(i) [any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable outside India, on which tax has not been paid or deducted under Chapter XVII-B : Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII- B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted. Explanation – For the purposes of this sub-clause,- (A) “royalty” shall have the same meaning as in Explanation 2 to Clause (vi) of sub-section (1) of section 9; (B) “fees for technical services” shall have the same meaning as in Explanation 2 to Clause (vii) of sub-section (1) of section 9;] From the above, it is clear that tax has to be deducted at source, only if the sum is chargeable under this Act.

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. 8.1. In this regard, it is seen that section 9 of the Act provides instances of income under clause (vii) of sub-section (1) of that section envisages that income by way of ‘fee for technical services’ (FTS) payable by resident to a non-resident shall be deemed to accrue or arise in India. Explanation 2 to section 9(1)(vii) of the Act defines the term ‘fee for technical services’ as consideration for rendering of any ‘managerial, technical or consultancy services’ but does not include consideration for construction, mining or any other similar project undertaken. 8.2. Section 90(2) of the Act provides that where the provisions of a tax treaty are applicable to an assessee, then such assessee would be governed by either under provisions of the Act or the applicable tax treaty, whichever is more beneficial. 8.3. AE is a company incorporated in US and accordingly, provisions of Agreement for Avoidance of Double Taxation (DTAA) between India and USA would apply in the instant case. Therefore, AE would be governed by provisions of the Act or India - US DTAA, whichever is more beneficial. 8.4. Article 12 of the India - US treaty provides that "Royalties and fee for included services" arising in India and paid to a resident of USA may be taxable in India at the rates specified in the said Article. 8.5. As per Article 12(4) of India-US DTAA, fee for included services means, any consideration received in connection with rendering of technical or consultancy services: which are ancillary and subsidiary to application or enjoyment of right in any patent, trademark, design or model, plan or secret Page 11 of 17

ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. formula or process or on any information concerning industrial, commercial or scientific experience; or which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design. 8.6. It is our considered opinion that provisions of India- US treaty provide for a restrictive meaning of ‘fee for included services’ vis-a-vis meaning of ‘fee for technical services’ (FTS) under the Act, in as much as, only those technical/consultancy services which are ancillary and subsidiary to application/enjoyment of right, property or information or which 'make available' technical knowledge, skill, knowhow, process etc. would be liable to tax. 8.7. The Memorandum of Understanding ("MOU"), concerning fee for included services in Article 12 to the India - US treaty provides as follows: "Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plant or technical design to such person. (For this purpose, the person acquiring the services shall be deemed to include an agent, nominee, or transferee of such person). This category is narrower than the category described in paragraph 4(a) because it excludes any services that does not make technology available to the person acquiring service. Generally speaking, technology will be considered "made

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. available'' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available." Thus, in accordance with MOU, technology will be considered to be 'made available' when the person acquiring the service is able to apply such technology on his own. 8.8. Analysis of MOU to India-US DTAA regarding, Clause 12 (4) clearly clarifies that in order to fall within ambit of Article 12 (4), mere rendering of services that involves technical knowledge, skill etc. would not be sufficient. It contemplates that the person utilizing such services should be able to make use of technical knowledge, skill etc., on his own, without help of service provider in future. 9. Adverting to facts of case before us, service rendered by AE to assessee is as per agreement dated 01/04/10. According to the agreement, furnished by assessee placed at page 54-62 of paper book, services provided by AE to assessee are in nature of assistance in troubleshooting, isolating the problem and diagnosing related trouble and alarms and equipment repair services wherein the equipments will be shipped to US by assessee as and when required. It has been agreed between the parties that AE would be providing such services remotely and no

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. on-site support services would be provided to customers of assessee. 9.1. It appears from the above description of services rendered by AE that there is use of technical knowledge and/or skill, utilised by AE qualifies as “fee for technical services”, as defined under Explanation 2 to section 9(i)(vii) of the Act. 9.2. As India has double taxation avoidance agreement with US, and Article 12(4) of India-USA DTAA deals with “fee for technical services”, to determine taxability of income received by AE for services rendered in India, the services rendered should satisfy the requirements under Article 12 (4), which requires technical knowledge, experience, skill etc., to be "made available" to the recipient of such services. 9.3. On a careful perusal of the agreement dated 01/04/10 between AE and assessee, it appears that services rendered therein by AE does not satisfy the make available requirement as per article 12 (4) of the Act. Ld. DR placed reliance upon decision of this Tribunal in case of Go daddy.com LLC versus ACIT (supra). We have carefully perused the said decision and has observed that issue therein was regarding payment on account of domain registration services, was treated as royalty within the ambit of Explanation 2 to section 9 (1) (vi) of the Act. Whereas, in the facts of present case issue is, whether, services rendered by AE, on call, from remote place would amount to providing technical services, to cover it within the ambit of Explanation 2 to section 9 (1) (vii) of the Act. 9.4. To our mind, facts in both these cases are not at all similar and therefore ratio laid down by this Tribunal in case of

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D. Go daddy.com LLC versus ACIT (supra) cannot be applied to the facts of the present case. 9.5. From the above discussion we arrive at a conclusion that, revenue received by AE in view of services rendered to assessee’s customer is not taxable in India as per Article 12 (4) of India US DTAA, applicability of section 195 of the Act is not possible. Therefore, we are of the considered opinion, that section 40(a) (i) disallowance is uncalled for. 10. In the result grounds raised by assessee for the year under consideration stands allowed. 11. As the facts and the issue involved in other appeals before us are similar and identical, on the basis of the above discussion, we are of considered opinion that, appeals filed by assessee for Assessment Year 13-14 and 14-15 stand allowed. 12. In the result, appeals filed by assessee for Assessment Years 2012-13 to 2014-15 stand allowed. Order pronounced in the Open Court on 27/09/2018.

Sd/- Sd/- (R.K.PANDA) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dt. 27th September, 2018

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ITA Nos. 3561, 3562 and 3563/Del/2018 A.Y. 2012-13, 2013-14 & 2014-15 Ciena Communications India Pvt. Ltd. vs. ACIT, Circle-6(1), N.D.