KDDI CORPORATION,JAPAN vs. DEPUTY COMMISSIONER OF INCOME-TAX (INTERNATIONAL TAXATION), CIRCLE 2(1), BANGALORE, KARNATAKA, BANGALORE

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeals are filed by assessee against the separate orders passed by the Ld.CIT(International Taxation), Circle – 2(1), Bangalore for A.Ys. 2013-14 to 2015-16.

Page 2 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 2. Brief facts of the case are as under: 2.1 It is submitted by the Ld.AR that assessee is incorporate in Japan and is engaged in the business of providing telecommunication services. The assessee provides fixed, mobile, wholesale and associated telecommunication services across the globe.

2.2 It is further submitted that the assessee is a tax resident of Japan in accordance with Article 4 of the Double Taxation Avoidance Agreement between India – Japan (“DTAA” or “tax treaty”) and it is entitled to beneficial provisions of the India – Japan DTAA. It is also submitted that the assessee does not have any presence in India either in form of an office, a branch or any other fixed place of business in India.

2.3 The Ld.AR submitted that for the years under consideration, the assessee provided telecom interconnect facility to various Indian telecom operators including Vodafone South Ltd. and has received payment on account of interconnect usage charges as under: S.No. Assessment Year Amount 1. 2013-14 35,18,79,980/- 2. 2014-15 36,53,06,495/- 3. 2015-16 39,58,29,947/- 2.4 It is submitted that a proceeding u/s. 201 of the act was initiated against Vodafone South Ltd. in respect of alleged non-

Page 3 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 deduction of tax at source on payments made to its non-resident telecom operators for provision of bandwidth capacity and interconnect services. It is submitted that the said charges were considered as taxable by the revenue in case of VSNL both under the provisions of the act and the respective DTAAs.

2.5 On the basis of the proceedings initiated against VSNL, reassessment proceedings was initiated against the assessee for the years under consideration and notice u/s. 148 of the act was issued to the assessee.

2.6 Thereafter the Ld.AO passed an order dated 29.03.2023 u/s. 144C(1) of the act holding that IUC received by the assessee are in the nature of ‘Royalty’ under the provisions of the act, as well under the India-Japan DTAA.

2.7 Aggrieved by the order of the Ld.AO, the assessee filed objections before the DRP. The DRP after hearing the submissions of the assessee, passed direction dated 28.11.2023, and held that, since the revenue has not accepted the decision of the Hon’ble High Court and contemplated filing Special Leave Petition before the Hon’ble Supreme Court, the issue is sub judice and thus, to keep the issue alive the DRP confirmed the proposed addition by the Ld.AO. Further the Ld.DRP, in its directions dated 28.11.2023 ought to tax IUC as other income under Article

Page 4 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 22 of India-Japan DTAA considering IUC is not specifically covered in the definition of royalty under Article 12 of tax treaty.

2.8 On receipt of the DRP directions, the Ld.AO passed the final assessment orders considering the receipt for interconnect utility charges as “royalty” in the hands of the assessee.

2.9 Aggrieved by the final assessment order, the assessee preferred appeal before this Tribunal.

Page 5 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 Page 6 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 Page 7 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024

4.1 Ground no. 1 in all the three appeals are general in nature and therefore do not require adjudication.

Page 8 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024

5.1 The Ld.AR submitted that on merits raised in above grounds, the decision of Hon’ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) & Ors. in 164/2015 & ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015-16 vide order dated 14.07.2023 had decided the similar issue in favour of assessee.

5.2 The Ld.AR submitted that DTAA will prevail over the Income- Tax Act, as held by Hon’ble Karnataka High Court in case of Vodafone Mobile (supra), and it is further submitted that Explanation 5 and 6 do not override the DTAA between India and Japan. Hence, the subject payment received from Vodafone and other telecom operators in India is not taxable as 'royalty' as per DTAA. It is submitted that Hon’ble Karnataka High Court in the case of Vodafone (supra) reversed the ITAT judgment on this point. The substantial questions of law 2,3 and 4 in the decision of Vodafone (supra) by Hon’ble Karnataka High Court has answered the question regarding the IUC charges not amounting to 'royalty'.

Page 9 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 5.3 Without prejudice to the above, the Ld.AR submitted that there is no "use of process" or any "use of equipment". Hence, the entire assumption of "process royalty" / "equipment royalty" does not arise in the case of the assessee.

5.4 The Ld.AR submitted that the provision apparently reads "secret formula or process", and hence the process has to be a "secret process" as held by Hon’ble Delhi Tribunal in the case of Bharti Airtel Limited [2016] 67 taxmann.com 223 (Delhi ITAT).

5.5 Further, it is submitted that, the decision of the Hon’ble Madras High Court in the case of Verizon Communications was dissented by the Hon’ble Delhi High Court in the case of New Skies and by Hon’ble Bombay High Court in the case of Neo Sports. It is also submitted that, when there exists two conflicting judgments - the one favouring the assessee should prevail as observed in case of J&P Coats by the Coordinate Bench of this Tribunal.

5.6 Reliance is placed on the following decisions that are referred to hereinabove: 1. Bharat Sanchar Nigam Ltd. [2017] 87 taxmann.com 152 (Delhi - Trib.) 2. Pan AmSat International Systems Inc. [2006] 9 SOT 100 (DELHI ITAT) 3. Asia Satellite Telecommunications Co Ltd [2011] 197 Taxman 263 (Delhi) 4. New Skies Satellite BV [2016] 68 Taxmann.com 8 (Delhi)

Page 10 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 5. Neo Sport Broadcast (P.) Ltd. [2019] 107 Taxmann.com 17 (Bombay) 6. Viacom18 Media (P.) Ltd. [2022] 134 taxmann.com 243 (Mumbai -Trib.) - Para 9 page 656 of PB which has followed Bom HC decision in Neo Sports as opposed to earlier ITAT adverse view in own case 7. J & P Coats Ltd. No.11/Bang/2014, ITA 382 & 1493/Bang/2015, 2135/Bang/2016 and 1365- 1367/Bang/2019 8. Engineering Analysis Centre of Excellence (P.) Ltd . [2021] 125 taxmann.com 42 (SC)

5.7 It is thus submitted that, in respect of the treatment of the interconnectivity utility charges as ‘Royalty’, has been considered in a recent decision by Hon’ble Karnataka High Court in a group of cases between M/s. Vodafone Idea Ltd. (Formerly known as M/s. Vodafone Mobile Services Ltd. vs. DDIT(IT) & Ors. in & ITA Nos. 64-66/2020 for A.Ys. 2008-09 to 2015- 16 vide order dated 14.07.2023.

5.8 He thus submitted that, the issues pertaining to the present appeals regarding taxing the interconnectivity utility charges (IUC) received by the assessee as Royalty in India stands squarely covered in favour of assessee.

Page 11 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 We have perused the submissions advanced by both sides in the light of records placed before us.

7.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as ‘Royalty’, since the payment is made to “use the process” or “an equipment”.

7.2 It is an admitted fact that various service providers in India entered into agreement with assessee for international carriage and connectivity services against which an interconnectivity charges are received by the assessee. We refer to the term "Process" occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:— 'Explanation 2.: For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;' 7.2.1 The term "process" used under Explanation 2 to section 9(1)(vi) in the definition of 'royalty' does not imply any 'process' which is publicly available. The term "process" occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a Page 12 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 "process" which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows: "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" Clauses (i) & (ii) of the said explanation also use identical terms.

7.2.2 The words which surround the word 'process' in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression 'similar property' used at the end of the list, further fortifies the stand that the terms 'patent, invention, model, design, secret formula or process or trade mark' are to be understood as belonging to the same class of properties viz. intellectual property.

7.2.3 We also note that 'Intellectual property' as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature.

7.2.4 We refer to the commentary in Prof.Klaus Vogel's Commentary on Double Taxation Convention, wherein, the term ‘Royalty’ is defined as under:

Page 13 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 “Paragraph 2 contains definition of the term ‘royalties’. These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right.”

7.2.5 Thus the word "process" thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon’ble Supreme Court in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239.

7.2.6 We refer to the decision of Hon’ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon’ble High Court observed as under: "10.The term (royalty' normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty".

7.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been Page 14 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 granted by the assessee to the service recipients for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) cannot be invoked.

7.2.8 Further we note that by Finance Act, 2012, Explanation 5 & 6 were added with retrospective effect from 1.6.1976 which reads as under:— "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 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."

7.2.9 By insertion of Explanation 5 & 6, meaning of word 'Process' has been widened. As per these explanations, the word 'Process' need not be ‘secret’, and situs of control & possession of right, property or information has been rendered to be irrelevant. However, in our opinion, all these changes in the Act, do not affect the definition of ‘Royalty’ as per DTAA. The word employed in DTAA is 'use or right to use', in contradistinction to, “transfer of all or any rights” or 'use of', in the domestic law. As per Explanation 5 & 6, the word 'process' includes and shall be deemed to included, transmission by satellite (including up-

Page 15 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 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, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person claiming 'royalty' for granting its usage to a third party.

7.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase “use” or “right to use” has been explained. The meaning attached to phrase “use” or “right to use” has been explained in following decisions:  Decision of Authority For Advance Ruling(hereinafter referred to as AAR), in case of Cable & Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76  Decision of AAR in case of ISRO Satellite Centre reported in 2008) 307 ITR 59  Decision of AAR in case of Dell International Services (India) P. Ltd.In.re. reported in (2008) 172 Taxman 418.

7.2.11 The above decisions, lay down that, in order to satisfy 'use or right to use', the control and possession of right, property or information should be with payer.

7.2.12 In the decision of Authority For Advance Ruling, in case of Cable & Wireless Networks India(P.)Ltd., In re(supra), a similar issue was considered wherein Cable & Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable & Wireless Group of companies. Cable & Wireless Networks

Page 16 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable & Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable & Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable & Wireless Networks India(P.)Ltd., to the UK Group company, whether the payment is taxable as ‘royalty’ or ‘FTS’ under section 9(1)(vi)/(vii). The AAR relied on following decisions:  Decision of Hon’ble Supreme Court in case of BSNL vs. UOI reported in (2006) 3 STT 245  Decision of AAR in case of Dell International Services India Ltd. In.re reported in (supra)  Decision of Hon’ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459  Decision of coordinate bench of this Tribunal in case of WIPRO Ltd. Vs. ITO reported in (2003) 86 ITD 407.

7.2.13 The AAR relying on its view in case of Dell International Services India Ltd. In., held as under: 12.5 It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in praesenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in prasenti but under a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant

Page 17 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression "transfer of right to use any goods" occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase 'right to use' implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of applicant that, it has neither possession nor control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words "transfer of right to use the goods" in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is Page 18 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. The word 'use' - what it means: 12.7 Let us now explore the meaning of the key word 'use'. The expression 'use' has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal & Co. v. Secretary to Government of Punjab [1998] 5 SCC 574, the Supreme Court noted that 'in its ordinary meaning', "the word 'use' as a noun, is the act of employing a thing; putting into action or service, employing for or applying to a given purpose". In the New Shorter Oxford Dictionary, more or less the same meaning is given. The very first meaning noted there is: "the action of using something; the fact or state of being used; application or conversion to some purpose". Another meaning given is "Make use of (a thing), especially for a particular end or purpose; utilize, turn to account... cause (an implement, instrument etc.) to work especially for a particular purpose; manipulate, operate". The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below : "The word 'use' means to make use of; convert to one's service; to avail oneself of; to employ". (Miller v. Franklin County) "The word 'use' means the purpose served, a purpose, object or end for useful or advantageous nature". (Brown v. Kennedy) "'Use' means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one's service or to put to one's use or benefit. (Beach v. Liningston) "'Use', as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one's self, to convert to one's service or to put to one's use or benefit". (Esfeld Trucking Inc. v. Metropolitan Insurance Co.) 12.8 The word 'use' in relation to equipment occurring in clause (iva) 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 words "equipment" suggests that there must be some positive act of Page 19 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 utilization, application or employment of equip-ment 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.

13. It is the contention of the revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on account of this. The electronic circuits being 'equipment' are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network. 13.1 There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are: Does the availment of service involve user of equipment belonging to BT or its agent by the applicant ? Is the applicant required to do some positive act in relation to the equipment such as operation and control of the same in order to utilize the service or facility ? Does the applicant deal with any BT equipment for adapting it to its use ? Unless the answer is 'yes', the payment made by the applicant to BTA cannot be brought within the royalty clause (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the applicant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties.

Page 20 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iva) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the so- called equipment, solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact

Page 21 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 alone that the bulk of consideration paid is for the use of that item of equipment. 13.3 In cases where the customers make use of standard facility like telephone connection offered by the service provider, it does not admit of any doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iva) of Explanation 2.

We also refer to the commentary relied by the Ld.Counsel form Prof. Klaus Vogel's Commentary on Double Taxation Convention, wherein ‘Secrete formulae or process’ is defined as under: Secret formulae or processes: This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they enjoy at least relative protection or are capable of being protected. That is why Article 12(2) very properly use, in connection with such formulae, etc., the criterion ‘right to use’, which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the ‘right to use’ already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret. We note that, in case of DCIT v. PanAmSat International Systems Inc., reported in (2006) 9 SOT 100 , Hon’ble Delhi High Court distinguished the decision of Asia Satellite Telecommunication Co.

Page 22 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 Ltd. v. Dy. CITT reported in (2003) 85 ITD 478 and held as under:— 19. The question that first comes up for consideration is whether section 9(1)(vi) of the Income-tax Act, read with the Explanation 2 below thereto, is applicable. This also involves the subsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) which is also a case of a non- resident company based in Hongkong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held in the context of the provisions of clause (iii) of Explanation 2 below section 9(1)(vi), that a "process" is involved when the signals that are uplinked through the earth stations to the transponder get converted into different frequencies and fit for being down-linked via earth stations over the footprint area. It was therefore held that the payment was for the use of a "process" and hence royalty within the meaning of the aforesaid clause. The clause reads as follows : "(iii) the use of any patent, invention, model, design, secret formula or process or trademark or similar property;" It was not disputed before us on behalf of the assessee that the nature of the activity carried on by it is the same as in the case of Asia Satellite Telecommunication Co. Ltd. (supra). If that is so, we have to hold, respectfully following the order of the co-ordinate Bench, that there is a "process" involved in the activity carried on by the assessee before us. In Asia Satellite Telecommunication Co. Ltd.’s case (supra) it was further held that the word "secret" appearing in clause (iii) above qualifies only the word "formula" but not the word "process" and therefore even if the process involved in the operation of the transponder is in the public domain and no longer a secret known only to a few, the payment for the process would still be taxable as royalty. The reason or logic given in paragraph 6.18 of the order by the Tribunal to hold that the word "secret" does not qualify the word "process" is that "there is no comma after the use of the word ‘secret’ till the end of clause (iii) and if the intention has been to apply the word ‘secret’ before the word ‘process’ also, then a comma would have been used after the word ‘formula’" and further that the word "secret" cannot also be applied to the word "trademark" because once registered there is nothing

Page 23 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 secret about the trademark and the impossibility of reading the word "secret" before the word "trademark" further strengthens the view that the word "secret" cannot be read before the word "process" also. This naturally takes us to the question whether there is anything in article 12.3(a) of the DTAA between India and USA which militates against such a view. It must be remembered that India had no DTAA with Hongkong and hence the view taken by the Tribunal (supra) with regard to the clause (iii) of Explanation 2 below section 9(1)(vi) would apply if we were to also interpret the same provision. But article 12.3(a) is worded as below : "The term ‘royalties’ as used in this article means : (a)payments of any kind received as consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use or disposition thereof; and" In Asia Satellite Telecommunication Co. Ltd.’s case (supra) the Tribunal pointed out, while repelling the argument that the word "secret" also qualifies the word "process" appearing in clause (iii) of Explanation 2, that there is no comma after the word "secret" till the end of the clause and had the intention been to qualify the word "process" also with the word "secret" there would have been a comma after the word "process" (by mistake mentioned in the order as "formula"). The Tribunal was thus prepared, with respect, to accept the argument that both the words "formula" and "process" can be said to be qualified by the word "secret" had the clause been drafted as under : "the use of any patent, invention, model, design, secret formula or process, or trademark or similar property" What the Tribunal has pointed out stands fulfilled in article 12.3(a) of the treaty with USA. From the article quoted above, it may be seen that there is a comma after the words "secret formula or process" which indicates that both the words "formula" and "process" are qualified by the word "secret". The requirement thus under the treaty is that both the formula and the process, for which the payment is Page 24 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 made, should be a secret formula or a secret process in order that the consideration may be characterised as royalty. We do agree with the argument of the Special Counsel for the Department, on the strength of the several authorities cited by him, that normally punctuation by itself cannot control the interpretation of a statutory provision and in fact the learned counsel for the assessee did not seriously dispute the proposition. However, the punctuation the use of the comma coupled with the setting and words surrounding the words under consideration, do persuade us to hold that under the treaty even the process should be a secret process so that the payment therefore, if any, may be assessed in India as royalty. The Tribunal in Asia Satellite Telecommunication Co. Ltd.’s case (supra) have recognized that all the items referred to in clause (iii) of Explanation 2 such as patent, invention, model, formula and process etc. are intellectual properties. Similarly, the words which surround the words "secret formula or process," in article 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trademark, design or model, plan, etc. Thus the words "secret formula or process" must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a socii.

20. That takes us to a consideration of the question whether the process carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to be no "secret technology", known only to a few. There is evidence adduced before us to show that the technology is even available in the form of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side of the Department to show that the transponder technology is secret, known only to a few, and is either protected by law or is capable of being protected by law. This aspect of the matter was not required to be considered by the Tribunal in the case of Asia Satellite Telecommunication Co. Ltd. (supra) because the view taken by the Tribunal was that there was no requirement in clause (iii) of Explanation 2 below section 9(1)(vi) of the Act that the process involved, for which the payment is being made, should be a secret process. But in the view we have taken on the language employed by article 12.3(a) of the treaty coupled with the punctuation and the setting and surrounding words, the payment would be considered as royalty only if it is made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a Page 25 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 transponder, the payment for the use of the process assuming it to be so does not amount to royalty.

7.2.14 Similar issue came up before Hon’ble Delhi Tribunal in case of Bharti Airtel vs.ITO (TDS) reported in (2016) 67 taxmann.com 223. The issue considered therein was in respect of payment towards call interconnectivity charged for call transmission on foreign network. The Tribunal therein, on applying ratios pronounced in the above referred decisions, held it not as ‘Royalty’. Therefore in our opinion, the Payments made by the assessee in lieu of services provides by the assessee cannot fall within the ambit of ‘Royalty’ under section 9(1)(vi) Explanation 5 &6.

7.2.15 We also note that the Explanations 5 and 6 to section 9(1)(vi) are not found in the definition of “Royalty” under India- Japan DTAA. The definition of “Royalty” under the DTAA is much more narrower in its scope and coverage, than the definition of “Royalty” contained in section 9(1)(vi) r.w. Explanations 2,5 and 6 of the act.

7.2.16 On perusal of the agreement between the assessee and the end users placed at pages 46 to 64 of paper book for A.Y. 2010-11, it is noted that the installation and operation of sophisticated equipments are with the view to earn income by allowing the users to avail the benefits of such equipments or facility and does not tantamount to granting the use or the right

Page 26 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 to use the equipment or process so as to be considered as royalty within the definition of “royalty” as contained in clause 3 of Article 12 of India-Japan DTAA.

7.2.17 We also note that in the present facts of the case, at no point of time, any possession or physical custody, control or management over any equipment is received by the end users / customers. It is also noted that the process involved in providing the services to the end users / customers is not “secret” but a standard commercial process followed by the industry players. Therefore the said process also cannot be classified as a “secret process”, as is required by the definition of “royalty” mentioned in clause 3 of Article 12 of India-Japan DTAA. We are therefore of the opinion that the receipt of IUC charges cannot be taxed as Royalty under Article 12 in India of India- Japan DTAA.

7.2.18 The above observations are supported by the view expressed by Hon’ble Karnataka High Court in case of Vodafone Idea Ltd. (supra). Hon’ble High Court in the group of cases had considered following questions of law which are as under: “1. Whether the Income-Tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under Section 201 of the Act and that it is not open to the payer to take benefit of the DTAA when he is making payment to a non- resident? 2. Whether the ITAT was correct in holding that amendment to provisions of royalty under Section 9(1)(vi)

Page 27 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 by inserting Explanation 5 and 6 under the Income-tax Act (hereinafter referred to as the 'Act') will also result in amendment of the DTAAS? 3. Whether ITAT was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms "right" & "process" in the clarificatory Explanation 2, 5 and 6 of Section 9(1)(vi) of the Act, and consequently, appellant was bound to deduct tax at source thereon under Section 195 of the Act? 4. Whether the income tax authorities in India have jurisdiction to bring to tax income arising from extra- territorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Treaties and law declared by the Apex Court? 5. Whether the first respondent was correct in holding that for the current assessment year the withholding tax liability should be levied at a higher rate at 20% in accordance with section 206AA of the Act? 6. Whether the Hon'ble Tribunal was right in repelling the contention of the Appellant to the effect that, as a deductor, it cannot be held liable for non-reduction of tax at source for payments made for the Assessment Year 2008-09 to Assessment Year 2012-13 on the basis of a subsequent amendment to Section 9(1)(vi) whereby Explanation 5 and 6 were introduced?” Hon’ble High Court for considering the above questions had looked into the agreement between Vodafone Idea Ltd. and the various service providers from whom Vodafone Idea Ltd. had received the IUC services. Hon’ble High Court also considered the various decisions by other High Courts referred to hereinabove vis-a-vis the arguments advanced by the Ld.Counsel.

Page 28 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 7.2.19 In case of Vodafone Idea Ltd. (supra), Hon’ble Court also observed that the equipments and submarine cables are situated overseas and that Vodafone Idea Ltd. had availed certain services from the non-resident telecom operators and that such agreements would not create a permanent establishment of such non-resident telecom operators in India. Thereafter Hon’ble High Court after verifying the facts of the case having regards to the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 observed and held as under: “12. We have carefully considered the rival contentions and perused the records.

7.2.20 Respectfully following the above view, in case of Vodafone Idea Ltd. (supra), and the discussions hereinabove, we hold that payments received by assessee towards interconnectivity utility charges from Indian customers / end users cannot be considered as Royalty to be brought to tax in India under section 9(1)(vi) of the Act and also as per DTAA.

7.2.21 The payment received by the non-resident assessee amounts to be the business profits of the assessee which is taxable in the resident country and is not taxable in India under Article 5 of the DTAA as there is no case of permanent establishment of the assessee that has been made out by the revenue in India.

Page 32 of 32 S.P. Nos. 7 to 9/Bang/2024 & IT(IT)A Nos. 100 to 102/Bang/2024 Accordingly, the grounds on merit referred to in para 5 stands allowed in favour of assessee. In the result, all the three appeals filed by assessee stands partly allowed.

In the result, all the appeals filed by the assessee stands partly allowed and all the stay petitions filed by the assessee stands dismissed as infructuous. Order pronounced in the open court on 15th April, 2024.