DCIT (IT) 4(1)(1), MUMBAI vs. RELIANCE JIO INFOCOMM LTD, MUMBAI

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-57, Mumbai, dated 21.10.2016 that was passed by him while disposing off the appeal filed by the assessee under Sec. 248 of the Income Tax Act,1961 (for short „I-T Act‟). The revenue assailing the order of the CIT(A) has raised before us the following grounds of appeal:

The assessee in the course of the appellate proceedings submitted before the CIT(A) that the amount remitted by it to RJIPL for provision of bandwith services was the latters business income. It was averred by the assessee that as RJIPL did not have any business connection or a Permanent Establishment (for short „PE‟) in India, therefore, as per Article 7 of the India-Singapore DTAA the amount remitted by the assessee to RJIPL could not have been brought to tax in India. In sum and substance, it was the contention of the assessee that as the payments made to RJIPL towards bandwith services was the latters business profits, therefore, the same in the absence of its PE or a business connection in India could not be taxed in India as per Article 7 of the India-Singapore DTAA. Insofar the nature of the bandwith services rendered by RJIPL to the assessee was concerned, it was submitted that as the provision of the said services were fully automatic and did not involve any human intervention, therefore, the same did not fall within the realm of „fees for technical services‟ (for short „FTS‟) as defined under Sec.9(1)(vii) of the I-T Act. In fact, it was the contention of the assessee that as the remittance towards bandwith services was a simpliciter payment of a „fee‟ for use of a standard facility that was provided to all those willing to pay for it, therefore, the same could not be held as fees received for rendering of technical services. In support of his aforesaid contention reliance was placed by the assessee on the judgement of the Hon‟ble Supreme Court in the case of CIT Vs. Bharti Cellular Ltd. (2010) 193 taxman 97 (SC). Alternatively, it was the contention of the assessee that as rendering of the bandwith services by RJIPL to the assessee did not “make available” any technical knowledge or experience to the assessee, thus the same on the said count also could not be brought within the sweep of the definition of FTS under Article 12 of the India- Singapore DTAA. Apart there from, it was submitted that the payment P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. made by the assessee to RJIPL could also not be construed as “royalty” under the I-T Act, as well as under the India-Singapore DTAA. In order to buttress his aforesaid claim, it was submitted by the assessee that neither RJIPL had in any way transferred all or any rights in respect of any “process” to the assessee, nor was the assessee making use of any such “process”. In sum and substance, it was the claim of the assessee that it was merely receiving standard bandwith services from RJIPL. It was the contention of the assessee that as the amount paid to RJIPL was neither towards use of (or obtaining right to use) industrial, commercial or scientific equipment nor towards use of (or obtaining right to use) any process, therefore, the same could not be brought within the definition of the term “royalty” as envisaged in the I-T Act. Apart there from, it was submitted by the assessee that the consideration received by RJIPL also did not qualify as royalty as per its narrow definition under the India-Singapore DTAA. It was submitted by the assessee that for a payment to qualify as “royalty” under the India-Singapore DTAA, it was indispensably required that the consideration paid for the process, if any, was for a “secret process” i.e the IPR in the process was owned/registered in the name of the payee. It was thus submitted by the assessee that as it had made the payment to RJIPL for availing bandwith services which were standard telecom services and not for making any use of a “process”, whether secret or not, therefore, the same clearly fell beyond the realm of the definition of “royalty” both under the I-T Act and the India- Singapore tax treaty.

The CIT(A) after deliberating on the contentions advanced by the assessee observed that RJIPL did neither have any business connection or a PE in India. Accordingly, it was observed by him that in the absence of any business connection or PE in India the income earned by the said foreign entity under the „agreement‟ for provision of P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. bandwith services would not be liable to tax in India. Insofar the contentions advanced by the assessee that the payments made to RJIPL were for availing standard telecom services and not by way of FTS were concerned, the same did find favour with the appellate authority. In fact, the CIT(A) after deliberating on the terms of the „agreement‟ observed that as the assessee was only availing standard bandwith services which did not require any human intervention, therefore, the same could not be regarded as „technical services‟, and thus the payment made by the assessee for the same could not be characterised as FTS under Sec.9(1)(vii) of the I-T Act. Insofar the definition of FTS envisaged in India-Singapore DTAA was concerned, the CIT(A) taking cognizance of Article 12(3) of the tax treaty observed that as RJIPL by providing bandwith services did not “make available” any technical knowledge, experience, skill, knowhow or process to the assessee which was simply availing the said standard facility, thus the same could also not be construed as FTS under the India-Singapore tax treaty.

It was further observed by the CIT(A) that the assessee had only received an access to service and not any access to any equipment that was deployed by RJIPL for providing the bandwith services. Apart there from, it was observed by the CIT(A) that the assessee also did not have any access to any process which helped in providing such bandwith services. In fact, it was noticed by him that all infrastructure and process required for provision of bandwith services was always used and had remained under the control of RJIPL and was never given either to the assessee or to any person availing such services. Further, it was observed by the CIT(A) that as the process involved to provide the bandwith services was not “secret” i.e the Intellectual Property Rights (for short “IPR”) in the process was not owned/registered in the name of RJIPL, but was a standard P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. commercial process followed by the industry players, thus the same could not be classified as a “secret process” as was required under the India-Singapore DTAA for the same to qualify as “royalty. The CIT(A) taking cognizance of the definition of “royalty” under the India- Singapore DTAA, observed that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) industrial, commercial, scientific equipment, nor towards use of (or for obtaining right to use) any process, therefore, the payments made by the assessee for availing bandwith services could not be held as “royalty” either under the I-T Act or the tax treaty. In the backdrop of his aforesaid observations the CIT(A) concluded that the payments made by the assessee to RJIPL for provision of bandwith services were in the nature of “business profits” and could not be classified as FTS or royalty either under the I-T Act or India-Singapore DTAA. On the basis of his aforesaid deliberations, it was further observed by him that as RJIPL did not have any business connection or a PE in India, therefore, the business profits could not be taxed in India. In the backdrop of his aforesaid observations the CIT(A) finding favour with the claim of the assessee that no tax was deductible on the payment/credit made to RJIPL, allowed the appeal.

Aggrieved, the revenue has assailed the order of the CIT(A) in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee adverted to the facts of the case and took us through the relevant observations of the CIT(A) in context of the issue under consideration. The ld. A.R took us through the “Grounds of appeal” raised by the revenue before us and submitted that the order of CIT(A) has been assailed before us only to the extent he had concluded that the payment made by the assessee to RJIPL for providing bandwith services were in the nature of “business profits” and could not be classified as “royalty” either under the I-T Act or the India-Singapore P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. DTAA. In sum and substance, it was the contention of the ld. A.R that the revenue has accepted the observations of the CIT(A) that the payment made by the assessee to RJIPL could not be held as FTS. Insofar the issue as to whether the CIT(A) was right in law and facts of the case in concluding that the amount remitted by the assessee to RJIPL was not to be held “royalty” was concerned, the ld. A.R took us through the definition of „royalty‟ as envisaged in Explanation 2 to Sec.9(1)(vi) of the I-T Act. It was averred by the ld. A.R that as the consideration was not paid by the assessee for the use or right to use any industrial, commercial or scientific equipment of RJIPL, thus the same was not covered by the definition of “royalty” as defined in clause (iva) to Explanation 2 of Sec.9(1)(vi) of the I-T Act. Apart there from, the ld. A.R in order to buttress his claim that the payment made by the assessee for the bandwith services also did not fell within the realm of the definition of the term „royalty‟ under Article 12(3) of the India-Singapore DTAA, took us through the same. In fact, the ld. A.R in order to fortify his aforesaid contention submitted that unlike the definition of term “royalty” as used in India-Hungary DTAA wherein “transmission by satellite, cable, optic fibre or similar technology...” was specifically included within the definition of “royalty” under Article 12(3) of the said tax treaty, no such mention was available in the definition of the same as envisaged in the India-Singapore Tax Treaty. It was further submitted by the ld. A.R that though the legislature in all its wisdom had vide the Finance Act, 2012 with retrospective effect from 01.06.1976 incorporated “Explanation 6” to Sec. 9(1)(vi) of the I-T Act, which therein clarifies 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, however, no such mention was P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. available in the narrow meaning of the term “royalty” in the India- Singapore tax treaty. In sum and substance, it was the contention of the ld. A.R that now when the definition of „royalty‟ as envisaged in Article 12(3) of the India-Singapore tax treaty does not provide for inclusion of transmission by satellite, cable, optic fibre or by any other similar technology within the realm of the definition of “royalty”, therefore, the consideration received by RJIPL from the assessee for rendering of the bandwith services could not be characterised as royalty in its hands.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and the judicial pronouncements relied upon by them. We find that our indulgence in the present appeal has been sought by the revenue to adjudicate as to whether the CIT(A) is correct in concluding that the amount paid by the assessee for availing bandwith services to RJIPL did not constitute “royalty” and was its “business profits”. Admittedly, as the revenue has not assailed the observations of the CIT(A) that the payments made by the assessee to RJIPL cannot be held as FTS, therefore, we confine ourselves to the issue to the extent the same has been assailed by the revenue before P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. us. As is discernible from the record, the assessee pursuant to the terms of the „agreement‟ had only received standard facilities i.e bandwith services from RJIPL. In fact, as observed by the CIT(A), the assessee only had an access to services and did not have any access to any equipment deployed by RJIPL for providing the bandwith services. Apart there from, the assessee also did not have any access to any process which helped in providing of such bandwith services by RJIPL. As a matter of fact, all infrastructure and process required for provision of bandwith services was always used and under the control of RJIPL, and the same was never given either to the assessee or to any other person availing the said services. We are persuaded to subscribe to the observations of the CIT(A) that as the process involved to provide the bandwith services was not a “secret” i.e IPR in the process was not owned/registered in the name of RJIPL, but was a standard commercial process that was followed by the industry players, therefore, the same could not be classified as a “secret process” which would have been required for charactering the aforesaid payment made by the assessee to RJIPL as “royalty” under the India-Singapore DTAA. We are further in agreement with the view taken by the CIT(A) that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) Industrial, commercial or scientific equipment, nor towards use of (or for obtaining right to use) any secret formula or process, therefore, the same could not be classified as payment of “royalty” by the assessee. Insofar the ld. D.R had tried to press into service Explanation 6 to Sec. 9(1)(vi), in order to drive home his contention that the payment made by the assessee to RJIPL for availing the bandwith services would fall within the sweep of „royalty‟ is concerned, we are unable to persuade ourselves to accept the same. In our considered view, the amendment in Sec. 9(1)(vi) will not have any bearing on the definition of „royalty‟ as P a g e | Deputy Commissioner of Income tax (IT)-4(1)(1) Vs. M/s Reliance Jio Infocomm Ltd. contemplated in the India-Singapore DTAA. Our aforesaid view is fortified by the order of the Hon‟ble High Court of Bombay in the case of The Commissioner of Income-tax (IT)-4 Vs. M/s Reliance Infocomm Ltd. (ITA No, 1395 of 2016, dated 05.02.2019). The Hon‟ble High Court in its aforesaid judgment had after referring to the judgments of the Hon‟ble High Court of Delhi in the case of DIT Vs. New Skies Satellite BV (2016) 382 ITR 114 (Del) and CIT Vs. Aktiongesellschaft (2009) 310 ITR 320 (Del), had after deliberating on the amendment made available on the statute by the Explanation 6 to Sec. 9(1)(vi), observed that mere amendment in the I-T Act would not override the provisions of DTAA treaties. In the backdrop of our aforesaid observations, we shall now further deliberate on the definition of „royalty‟ as contemplated in the India-Singapore tax treaty. In our considered view there is substantial force in the contention advanced by the ld. A.R that though the term “royalty” as used in Article 12 of India-Hungary DTAA takes within its sweep “...transmission by satellite, cable, optic fibre or similar technology”, however, the definition of „royalty‟ in the India-Singapore tax treaty with which we are concerned has a narrow meaning. In fact, we find that despite the fact that the India-Singapore tax treaty was amended by Notification No. SO 935(E), dated 23.03.2017, however, the definition of „royalty‟ therein envisaged had not been tinkered with and remains as such. We thus in terms of our aforesaid observations are of the considered view that the amount received by RJIPL from the assessee for providing standard bandwith services could not be characterised as „royalty‟ as per the India- Singapore DTAA, and as rightly observed by the CIT(A), was in fact the “business profits” of RJIPL. Insofar the taxability of the aforesaid “business profits” is concerned, we find that as RJIPL did not have any business connection or a PE in India, therefore, the same as per