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Income Tax Appellate Tribunal, DELHI BENCH: ‘F’, NEW DELHI
Before: SH. I.C. SUDHIR & SH. O.P. KANT
Assessee by Sh. Tarandeep Singh, Adv. Department by Sh. Anuj Arora, CIT(DR) Date of hearing 10.03.2017 Date of pronouncement 24.03.2017 ORDER PER BENCH: These appeals by the assessee and the Revenue emanate from the common order dated 28/11/2007 of Ld. Commissioner of Income-tax (Appeals) for assessment year 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05 respectively. The grounds raised by the assessee in its appeals are almost identical. Similarly, the grounds raised by the Revenue in its appeals are almost identical. As the appeals have emanated from the common order of the ld. CIT(A), all these appeals are heard together and disposed of by this consolidated order for sake of convenience.
2. In respect of assessment year 1999-2000, grounds of appeal raised by the assessee as well as the Revenue are reproduced as under:
Grounds of appeal of the assesee in for AY 1999- 2000:
“1. That on the facts and in law the Assessing Officer (“the AO”) erred in assuming jurisdiction to reassess u/ss 147 read with 148 of the Income Tax Act, 1961 (“the Income Tax Act”) and the Commissioner of Income Tax (Appeals) (“the CIT(A)”) erred in upholding the same as valid. 1A. That the CIT(A) erred in law in holding that the AO could on the facts have a ‘reason to believe’ that income liable to tax had escaped assessment. 1B. That on the facts and in law, the CIT(A) erred in upholding the so called “reasons to believe” which were extraneous and irrelevant in as much as they were nothing but a mere reproduction of the averments made by the Income Tax Authorities in connection with an application filed by Reach Cable Networks Ltd. (“RCNL”) a group company of the Appellant before the Authority for Advance Rulings. 1C. That on the facts and in law, the CIT(A) erred in assuming that jurisdictional prerequisites were met to frame a valid reassessment. 1D. Without prejudice, the CIT(A) erred on the facts and in law in upholding the order of reassessment based upon reasons as supplemented by the AO in the reassessment proceedings.
1E. Without prejudice, the CIT(A) erred on the facts and in law in supplementing the reasons as recorded by the AO in upholding the reassessment proceedings. 1F. Without prejudice, the CIT(A) erred on the facts and in law in failing to appreciate that the initiation of proceedings under sections 147/148 was bad in law given the mechanical approval granted by the Joint Commissioner of Income Tax.
2. That on the facts and in law the Appellant denies it has any liability to be assessed under the Income Tax Act. 2A. That on the facts and in law the CIT(A) erred in failing to take cognizance of the International Telecommunications Regulations (Melbourne 1988) (“the Melbourne Treaty”) to which the Government of India is a signatory and under the terms of which the Appellant is not taxable in India on its receipts from the provision of international telecommunication services. 2B. Without prejudice to the generality of Ground No 2, the Lower Authorities erred in seeking to tax the Appellant in violation of territorial limitations mandated by the Constitution of India read with the Income Tax Act.
3. That on the facts and in law, the CIT(A) erred in holding the Appellant liable to tax in India to the extent of Rs. 26.51 crores being receipts from Indian telecommunication carriers for calls originating from India and terminating in other countries (i.e. “Source 1 Income”). 3A. That on the facts and in law, the CIT(A) erred in holding the Appellant liable to tax in India to the extent of Rs. 21.42 crores being a notional amount (deemed receipts) for (i) calls originating from outside India and terminating in India (i.e. “Source 2 Income”) and (ii) from international customers whose calls neither originated nor terminated in India (i.e. “Source 3 Income”).
That on the facts and in law, the CIT(A) erred in enhancing income determined by the AO by roping in new sources i.e. Source 2 and Source 3 which is not in accordance with, and, without prejudice, in compliance with the mandate of law. 4A. That on the facts and in law, the CIT(A) erred in holding that income from Source 1, Source 2 and Source 3 is deemed to accrue or arise in India. 4B. That on the facts and in law, the CIT(A) erred in upholding the AO’s determination that the Appellant had a liability to tax in India on the premise that: a. The Appellant had a “business connection” in India within the meaning of the said term in section 9(1 )(i) of the Income Tax Act. b. The Appellant had income in the nature of ‘Royalty’ within the meaning of the term in section 9(l)(vi) of the Income Tax Act. c. The existence of a part of a global submarine cable system in the taxable territory of India, which is owned by a consortium of more than 50 international telecommunication carriers (including Videsh Sanchar Nigam Limited (“VSNL”)) can be conceived as ‘Property” and “Asset” of the Appellant in India. d. The Appellant had income for “the use or right to use any industrial, commercial or scientific equipment” within the meaning of the expression under section 9(l)(iva) of the Income Tax Act.
5. That without prejudice and in the alternative on the facts and in law, the CIT(A) erred in attributing income liable to tax in India: a. By adopting the entire receipts from Indian telecommunication carriers pertaining to the calls originating from India and culminating abroad. b. By adopting 0.52% of the Appellant’s global receipts as reduced by the quantum of (a) above as deemed receipts pertaining to calls which originate abroad and either terminate in India or allegedly pass through the submarine cables in Indian waters. c. In adopting the proportion of the length of the undersea cable in Indian waters vis-a-vis the length of the global cable network as the criteria in estimating the deemed income of the Appellant in respect of Source 2 and Source 3.
d. In adopting and applying a net profit rate of 32.5% as a ‘representative profit margin’ of the Appellant.
6. That on the facts and in law, the CIT(A) erred in confirming the levy of interest under sections 234A and 234B of the Income Tax Act. 6.1 That on the facts and in law, without prejudice the CIT(A) erred in not appreciating that the income of the Appellant, if at all taxable in India, would have been subject to withholding tax at source, and, as such, the Appellant was not liable for default xor payment of advance tax.
7. That on the facts in and law, the orders passed by the AO and the CIT(A), are bad in law and void ab-initio. 7.1 Without prejudice to the generality of ground no. 7, the orders passed by the AO and the CIT(A) are vitiated as they violate rules of natural justice, fair play, are based on unsupported presumptions, guesswork and by misplacing the burden of proof on the Appellant. That the above grounds of appeal are without prejudice to each other. That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at time of hearing of this appeal.”
Grounds of appeal of the Revenue in for AY 1999- 2000.
1. On the facts and circumstances of the case, learned CIT(A) has erred in calculating the percentage of cable within Indian EEC Vs. Global Length of submarine cable, for calculating the gross revenue attributable to India, without reducing the length of cable falling in international water from the global length of submarine cable.
2. The order of CIT(A) be set aside and that of Assessing Officer be restored.
The appellant prays for leave to add, amend, modify of alter any grounds of appeal
at the time or before the hearing of the appeal.
3. The Revenue has raised additional grounds in all the years involved, which are identical. The additional grounds raised in AY 1999- 2000 are reproduced as under:
Whether the income received by the assessee from Indian telecom service providers on account of provision of international telecommunication services of delivery of voice/data etc. through submarine cable system is in the nature of Royalty as defined in terms of provisions of section 9(1)(vi) of the Income Tax Act, 1961 (‘the Act’) and hence liable to tax in India.
Whether the income received by the assessee from Indian telecom service providers on account of provision of international telecommunication services of delivery of voice/data etc. through submarine cable system is in the nature of Process Royalty in terms of provisions of Clause (iii) of Explanation 2 to Section 9(1)(vi) in view of the clarificatory amendment in the form of Explanation 6 thereto which has been inserted by Finance Act, 2012 with retrospective effect from 01.06.1976. 3. Whether the income received by the assessee from Indian Telecom Service Providers on account of provision of international telecommunication services of delivery of voice/data etc. through submarine cable system is in the nature of Equipment Royalty in terms of Clause (iv) of Explanation 2 to section 9(1)(vi) in view of the clarificatory amendment in the form of Explanation 5 thereto which has been inserted by Finance Act, 2012 with retrospective effect from 01.06.1976. 4. The facts in brief of the case as culled out from the order of the lower authorities are that the assessee company is incorporated under the laws of Hong Kong and was engaged in the business of providing international connectivity through submarine cables. The assessee derived income mainly from connectivity for International Long-Distance (ILD) calls and from providing IP access. The assessee operated in India through its offices i.e IP customer access centres, located in Delhi and Mumbai. On the basis of the information that the assessee had carried out business in India by providing physical connectivity for International Telecommunication Services (voice, data and Internet) to Indian customers, which were in the nature of royalty and technical services, liable as income under section 9(1)(i) and 9(1)(iv) read with Explanation- 2 of the Income-tax Act, 1961 (in short ‘the Act’) in respect of assessment years 1999-2000 to 2004-05, the Assessing Officer recorded the reasons that income of the assessee escaped assessment and issued notice under section 148 of the Act on 03/03/2006 for all the years under consideration. The assessee filed return of income on 08/08/2006. On 25/08/2006, the Assessing Officer (AO) communicated the reasons recorded for issue of notice under section 148 of the Act to the assessee. The assessee filed its objection against the reasons recorded for issue of notice under section 148 of the Act and the Assessing Officer disposed of the objections raised by the assessee by a consolidated order dated 13/10/2006 for all the year under consideration. According to the AO, the assessee did not furnish the requisite information and therefore, the AO passed the assessment order under section 144 of the Act. The Assessing Officer held that the assessee had business connection in India and earned income by way of royalty and fee for technical services and was taxable respectively under section 9(1)(vi) read with Explanation - 2 and 9(1)(vii) read with explanation-2 of the Act. The Assessing Officer computed total taxable income and taxed at the rate of 20% on gross basis for all the six assessment years involved.
4.1 The Ld. CIT-A considered the income earned by the assessee under three sources as under: (i) Sources 1 receipt from international telecommunication business (date, voice and internet) with Indian parties under agreement as well as through use of submarine cable systems parts of which were located in Indian taxable territory (hereinafter referred to as income from source 1). (ii) Source 2 the receipt from the customer located in other countries whose international voice or data call were terminated to landing station of various parties located in India using 1110 kms undersea cable systems of appellant in Indian taxable territory (hereinafter referred to as income from source 2) (iii) Source 3 income from business of international telecommunications services provided to the customer located in other countries using parts of three cable systems situated in Indian territory i.e. 1110 kms of undersea cable, however, none of voice and data call of these foreign customers either originates or terminates on landing stations of parties located in India but a part of undersea cable system of appellant located in Indian taxable territory was used for transmissions of these data/voice calls between landing stations located in countries other than in India (hereinafter referred to as income from source 3) 4.2 After detailed discussion, the Ld. CIT-A allowed part relief to the assessee and confirmed the quantum of taxable profit and royalty, which is mentioned on table-6 of the impugned order, which is reproduced as under:
F.Y./A.Y. Net taxable profit (source 1 Royalty from source-1 Addition made for A.Y. 1999-00 to 2000- which is taxable on by the AO 01, from source 2 & 3 for gross basis u/s 115A (in crore) A.Y. 1999-00 to 2004-05) of the Act (confirmed (confirmed in this order) in this order) (in crore) (in crore) 1998-99 8.62 + 6.96 NIL 564 (A.Y. 1999-00) 15.58 1999-00 7.7 + 6.22 NIL -do- (A.Y. 2000-01) 13.92 2000-01 8.10 + 6.54 NIL -do- (A.Y. 2001-02) 14.64 2001-02 5.15 19.62 -do- (A.Y. 2002-03) 2002-03 4.19 15.97 -do- (A.Y. 2003-04) 2003-04 1.71 6.52 -do- (A.Y. 2004-05)
4.3 Aggrieved, the assessee and the Revenue are in appeal raising the grounds and additional grounds as reproduced above.
At the outset, Ld. counsel of the assessee submitted before us that the assessee has opted for settlement of the disputes raised in appeals, under the ‘Direct Taxes Dispute Resolution Scheme, 2016’ (in short ‘the scheme’) in respect of assessment years 1999-2000 to 2004-05 and decided to withdraw the appeals for the captioned assessment years for complying with the requirement of the ‘scheme’. The Ld. counsel submitted that under the scheme the assessee made declaration under section 202 of the scheme with respect to the ‘specified tax’, and thus entitled to settle its tax disputes and the designated authority has issued a certificate in this regard.
The Ld. counsel submitted that the disputes involved in the appeal are in respect of retrospective amendment brought in the Act w.e.f.
01/06/1976, which is clear from additional grounds nos. 1.1 and 1.2. raised by the Revenue.
He further submitted that section 203(3)(a) of the scheme has prescribed for withdrawal of appeal in respect of ‘specified tax’.
The learned counsel further submitted that present request of the assessee seeking withdrawals of its appeal is on the premise that declaration filed by the assessee under the scheme is accepted by the designated authority (as defined in section 201(1)(b) of the ‘scheme’) and such designated authority passes an order under section 204 of the scheme accepting the assessee’s declaration in setting the dispute under the scheme.
The Ld. counsel further submitted that once it’s declaration is accepted by the designated authority in terms of above, the Department’s appeals filed in the captioned matter would become infructuous inter alia by reason of section 203(6) of the scheme.
On the contrary, Ld. CIT(DR) submitted that the Department was not having any objection for withdrawal of the appeals of the assessee, however, as far as appeals of the Revenue, are concerned, he had sought directions from the relevant authorities for not pursuing the appeal of the revenue, which are awaited.
We have heard the rival submissions and perused the relevant material on record. Under the ‘Direct Text Dispute Resolution Scheme, 2016’, any person who makes a declaration under section 202 of the ‘scheme’ inter alia with respect to ‘specified tax’, is entitled to settle its tax disputes on fulfillment of prescribed conditions. For this purpose, the term ‘specified tax’ has been defined under section 201(1)(g) of the ‘scheme’ to mean a tax:
(i) the determination of which is in consequence of or validated by any amendment made to the Income-tax Act or the Wealth-tax Act with retrospective effect and relates to a period prior to the date on which the Act amending the Income-tax Act or the Wealth-tax Act, as the case may be received the assent of the President; and (ii) a dispute in respect of such tax is pending on the 29th day of February, 2016
Under the scheme the declaration is required to make to the designated authority in the prescribed form. Further, section 203(3) of the scheme has provided withdrawal of appeal filed by the declarant as under:
“(3) Where the declaration is in respect of specified tax and the declarant has – (a) filed any appeal before the Commissioner of Income Tax (Appeals) or the Commissioner of Wealth-tax (Appeals) or the Appellate Tribunal or the High Court or the Supreme Court or any writ petition before the High Court or the Supreme Court against any order in respect of the specified tax, he shall withdraw such appeal or writ petition with the leave of the court wherever required and furnish proof of such withdrawal along with the declaration referred to in sub-section (1).” (b) Initiated any proceeding for arbitration, conciliation or mediation or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India whether for protection of investment or otherwise, he shall withdraw such notice or the claim, if any, in such proceedings prior to making the declaration and furnish proof thereof along with the declaration referred to in sub-section (1).”
Further, the section 203(5) of the scheme has provided revival of the appeal in following conditions:
“(5) Where, - (a) any material particular furnished in the declaration is found to be false at any stage; or (b) the declarant violates any of the conditions referred to in this Scheme; or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him under sub-section (4). It shall be presumed as if the declaration was never made under the Scheme and all the consequences under the Income-tax Act or the Wealth-tax Act, as the case may be, under which the proceedings against the declarant are or were pending, shall be deemed to have been revived.”
Further, the section 203(6) of the scheme has restricted any appellate authority etc. to proceed to decide an issue relating to the specified tax. The relevant section of the scheme is reproduced as under:
“203(b) No appellate authority or arbitrator, conciliator or mediator shall proceed to decide any issue relating to the specified tax mentioned in the declaration and in respect of which an order had been made under sub-section (1) of section 204 by the designated authority or the payment of the sum determined under that section.”
On behalf of the assessee, the learned counsel submitted that the assessee has filed declaration before the designated authority in the prescribed form and the designated authority has issued a certificate in terms of section 204(1) of the scheme. The learned counsel filed a copy of a certificate issued by the designated authority under subsection (1) of section 204 of Finance Act, 2016 of the scheme. In the said certificate, against the assessed income of Rs.1,50,62,43,228/- for all the six years involved, specified tax has been computed at Rs.38,67,99,128/-, out of which Rs.12,02,23,076/- was already paid as mentioned in the certificate. Regarding the balance ‘specified tax’ of Rs.26,65,76,052/-, the Ld. CIT(DR) has submitted a letter signed by the DCIT, Circle- 3(1), International taxation New Delhi ,confirming the payment .
In view of above, we find that under section 203(3) of the scheme, the assessee is eligible for withdrawing its appeals and it has requested for withdrawing the same. Accordingly, we allow the request of the assessee and hence, all these appeals are rendered infructuous. 17. As regard to the appeals filed by the Revenue, the Ld. counsel has submitted that the issue involved in those appeals are related to specified tax and the Ld. CIT(DR) has also not disputed this fact, however, the learned CIT(DR) wanted to get permission from the respective Commissioner of Income Tax, for not pursuing the appeals of the Revenue. In our opinion, the section 203(6) of the scheme is clearly laid down that no appellate authority etc. shall proceed to decide the issue relating to ‘specified tax’ mentioned in the declaration and in respect of which order under section 204(1) of the scheme has been made or the payment of the sum determined under that section has been made. We find that in the instant case, the designated authority has issued order under section 204(1) of the scheme and the assessee has also made payment of the tax determined there-under, and thus, we cannot proceed to decide the issue involved in the Revenue’s appeals. Moreover, in case of any material particulars furnished in the declaration by the assessee are found false, the Revenue is at liberty to request for recalling the order of the Tribunal in view of Section 203(5) of the Scheme. Accordingly, these appeals are also rendered infructuous.
Consequently, all the appeals of the assessee and the Revenue are rendered infractuous, and hence we are not required to adjudicate these appeals.
In the result, all the appeals filed by the assessee as well as by the Revenue are dismissed. The decision is pronounced in the open court on 24th March, 2017.