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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by the assessee is against order of CIT(A), Pune-6, dated 27.03.2015 relating to assessment year 2010-11 against the order passed under section 143(3) of the Income Tax Act 1961 (in short the ‘Act’).
The assessee has raised following grounds of appeal:- 1. The learned CIT erred in law and on facts in confirming the disallowance u/s 40(a)(i) of Rs.31,22,300/- of payment to its associated enterprise towards lease line charges on the ground that the payment was made without deduction of tax.
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The learned CIT(A) erred in law and on facts in not accepting the payments of lease line charges were reimbursement of expenses and further failed to appreciate that there was no contract between the appellant and the service provider Quest Communication Inc. 3. The learned CIT(A) erred in law and on facts in confirming the action of learned AO in treating the payments as royalties or fees for included services ignoring the provisions of DTAA with USA. The said payments cannot be held to be Royalties or fees for included services in view of the DTAA with USA. 4. Without prejudice to ground no.1 to 3, the amendments relied upon by AO to Section 9(1)(vi) though retrospective, Section 40(a)(i) would not apply for non-deduction as the deductor could not anticipate such amendments and therefore there could be no default as per the law existing on the date of deduction.
The issue raised in the present appeal is in relation to payment of lease line charges by the assessee to its associated enterprises. The Assessing Officer has disallowed the claim of deduction of ₹ 31,22,300/- on the ground that the provisions of section 40(a)(i) of the Act have not been complied with by the assessee.
Briefly, in the facts of the case, the assessee for the year under consideration declared total income of ₹ 1,63,82,191/-. The Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for computing arm's length price in respect of international transactions entered into by the assessee with its associated enterprises. The TPO vide order dated 10.10.2013 under section 92CA(3) of the Act accepted international transactions of assessee at ₹ 19,48,32,921/- with its associated enterprises to be at arm's length. The Assessing Officer during the course of assessment proceedings noted that the assessee had paid lease line charges to Qwest Communications Inc, USA through its associated enterprise T-3 Energy Services Creekmont amounting to ₹ 20,47,432/-. Similarly, for the immediate previous financial year i.e. 2008-09, the assessee had paid ₹ 10,74,870/- during the year only. The assessee was asked as to why no TDS under section 195 of the Act was deducted on the said
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amounts while remitting the same to Non-residents. The assessee in reply, pointed out that the said expenses were pure reimbursement of expenses, having no profit element embedded in it. The assessee also produced back to back expenses bills and it was claimed that the lease line charges did not constitute fees for technical services within the meaning of Explanation 2 to section 9(1)(vii) of the Act. It was also pointed out that lease line charges were not ‘Fees for included services’ under Article 12 of DTAA between India and USA. The assessee claimed that where if any sum paid or payable to Non- resident was chargeable to tax under any provisions of the Income Tax Act, then TDS under section 195 of the Act was to be deducted. However, in the absence of the same, no TDS was required to be deducted. Reliance in this regard was placed on the ratio laid down by the Hon'ble Supreme Court in GE India Technology Centre (P) Ltd. Vs. CIT & Anr. (2010) 193 Taxman 234 (SC). Reliance was also placed on the Special Bench decision in Mahindra & Mahindra Ltd. Vs. DCIT (2009) 30 SOT 374 (Mumbai-Trib) (SB), wherein it was held that in respect of reimbursement of expenses, there was no obligation to deduct tax at source as there was no element of income involved in such payments. Reliance was placed on various other decisions for the same proposition that the payments towards reimbursement of expenses was not in the nature of income and there was no obligation to deduct tax at source under section 195 of the Act. The assessee also pointed out that lease line / bandwidth charges were not royalty for the use of process and it should not be considered so. The submissions of assessee are reproduced by the Assessing Officer under para 7.2 at pages 2 to 6 of the assessment order. The Assessing Officer vide para 7.3 observed that contention of assessee was not correct since it was not reimbursement of expenses to the associated enterprises for any services
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provided by them to the assessee, actually it was payment made to third party Qwest Communication Inc, through associated enterprise of assessee. The said payment was for providing lease lines for communication purposes. The Assessing Officer further observed that in the absence of associated enterprise, if the assessee intended to take services of Qwest Communications, Inc, services would be provided to him at the same rates as charged by associated enterprise. Thus, the amount remitted to third party was income in its hands for the services provided. Hence, it was hit by provisions of section 195 of the Act. The reimbursement of expenses as interpreted by the assessee was held by the Assessing Officer, to be a veil to shadow profit element (income) in the hands of recipient i.e. third party. Further, reference was made to the amendment in definition of ‘royalty’ under section 9 of the Act with retrospective effect, to point out that the intention of Legislature in this regard was clear and explicit. It was pointed out by the Assessing Officer that reason behind the amendment of definition of ‘royalty’ was in the wake of various conflicting decisions on issue of deduction of TDS under section 194J / 195 of the Act on payment of lease line charges. Reference was made to amended provisions of section 9 of the Act and the Assessing Officer held that the said amendment was with retrospective effect and it clarified the position and held as under:- “With the above amendment which is with retrospective effect it is clear that- 1) lt is not necessary that the location of such right, property or information (in this case server etc) is located in India (Explanation 5) and, 2) It is also not necessary that this action will be applicable only when such right, property or information is used directly by the payer (Explanation 5). 3) The definition of „process‟ is clarified as per explanation 6 to bring out clearly the nature of services involved. The lease line charges are squarely covered in the definition of „process‟ and how it is clear that process dot not mean any secret formula as interpreted by the assessee. The lease line charges paid are now clearly spelt out to come under royalty and wherein in case of resident deduction u/s 194J is to be made, in case on non resident deduction u/s 195 is to be done.
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4) The definition of royalty as clarified will be applicable to the definition of royalty as per DTAA also. This is because it is clearly explained by the legislature that this is not something that is added to the meaning of “royalty”. The amendment is made to clarify the section more explicitly and what is included was always there. There is no justification on the count that there is no human intervention at any point of time. While framing the DTAA, the legislature has always the same intent as it has now which is made more clarificatory in view of this amendment. Thus, the definition of royalty as per DTAA has includes and shall be deemed to have always included the clarificatory meaning only. The DTAA is in consonance with the I.T Act only and so there is no question of them being inconsonance. 5) The various court decisions which are quoted by the assessee for non payment of TDS on lease line charges have no significance now. The transmission of every kind whether by satellite cable or optic fibre and used for uplinking / downlinking of signal / data comes under royalty on which TDS was always deductible. And it covers the case where the service provider provides the service through the equipment (be it cable, optic fibre, satellite) and service recipient uses it for the price. It is the business of the service provider to provide the technical service of this kind. It cannot be said that as the service is provided by the provider to many customers it has changed its nature from being technical in nature. In view of the above facts the plea taken by the assessee regarding the DTAA, reimbursement of expenses, no direct payment to Qwest Communications Inc and case laws in their favour stands negated.”
The Assessing Officer further observed that during the year the assessee had made payment of ₹ 20.47 lakhs pertaining to assessment year 2010-11 and also payment of ₹ 10.74 lakhs pertaining to assessment year 2009-10. Relying on the Circular No.10/DV/2013 of CBDT, dated 16.12.2013, the Assessing Officer held that the provisions of section 40(a)(i) of the Act would apply to all payments made during the year, irrespective of the year in which such tax was deductible. Therefore, sum of ₹ 20,47,432/- pertaining to assessment year 2010- 11 and sum of ₹ 10,74,870/- pertaining to assessment year 2009-10 was disallowed under section 40(a)(i) of the Act for default of payment of TDS on royalty under section 195 of the Act, resulting in addition of ₹ 31,22,300/-.
Before the CIT(A), assessee filed written submissions stressing that lease line charges paid to the parent company was not royalty taxable in India and hence, no tax was required to be deducted from the same. The disallowance
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made under section 40(a)(i) of the Act was thus, not warranted. The assessee also filed a Note on lease line charges i.e. services availed by it, which is reproduced under para 8 at pages 12 and 13 of the appellate order. The CIT(A) observed that in case the assessee directly pays the amount to Qwest Communications Inc, USA, it would have been required to deduct TDS as the income was chargeable to tax in the hands of recipient. However, the only distinction was that payment in the case was routed through associated enterprise on the basis of back to back bills, which was claimed as reimbursement. Referring to the ratio laid down by the Mumbai Bench of Tribunal in C.U. Inspections (I) (P) Ltd. Vs. DCIT reported in 156 TTJ 690 (Mumbai-Trib.), the CIT(A) observed that the Tribunal had held such payment could not be treated as reimbursement of expenses. The relevant portion of the order of Tribunal is reproduced by CIT(A) at pages 14 to 16 of the appellate order. The CIT(A) vide para 10 held as under:- “10. Thus, from the above order of Hon‟ble Tribunal, it is clear that routing of expenses through AE and claiming the same as reimbursement is impermissible and is just to thwart the flow of law. Since, in this case, the income in the hands of Qwest Communications Inc would have been taxable had the same been paid directly the appellant cannot be allowed to circumvent the law on the ground of reimbursement.”
Reliance of assessee on the decision of Mumbai Bench of Tribunal in WNS North America Inc. Vs. ADIT in ITA No.821/Mum/2010 for assessment year 2006-07, dated 14.12.2012 (2013) DTR (Mumbai)(Trib) 402 for the proposition that on similar issue of reimbursement of lease line charges paid to associated enterprise, it was held that the same could not be income of associated enterprise as payment was made without mark up, was held to be not correct since the decision in C.U. Inspections (I) (P) Ltd. Vs. DCIT (supra) was dated 06.03.2013 while the decision in WNS North America Inc. Vs. ADIT (supra) was dated 14.12.2012. The CIT(A) held that the later decision of Mumbai Bench of
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Tribunal needs to be followed. As regards the claim of assessee that decision of Mumbai Bench of Tribunal has been upheld by the Hon’ble High Court, the CIT(A) observed that the Hon’ble High Court had simply refused to entertain question Nos.4 and 5 pertaining to this issue on admission stage itself being question of fact. Therefore, he upheld the order of Assessing Officer and confirmed the disallowance of ₹ 31,22,300/-.
The assessee is in appeal against the order of CIT(A).
The learned Authorized Representative for the assessee before us pointed out that the issue raised in the present appeal is with regard to reimbursement of telecommunication charges. He pointed out that Qwest Communications Inc rendered communication services and for the Indian part of operations, the assessee reimbursed the amount to its associated enterprise i.e. T-3, USA. He stated that the case of Assessing Officer was that routing the transaction was through associated enterprise, so making the payment to third party was through associated enterprise. The learned Authorized Representative for the assessee pointed out that T-3, USA had entered into a contract with Qwest Communications Inc and the payment for telecommunication charges were as per the contract. He further stated that T-3, USA raises debit notes on the assessee, who in turn, makes the payment to T-3, USA. He stressed that there was no profit element in the said payment and it is not disputed that it was pure reimbursement of expenses. He referred to the order of Assessing Officer and pointed out that the Assessing Officer stated that it was reimbursement of expenses but he concluded by holding it to be routing through associated enterprise. The learned Authorized Representative for the assessee further
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stated that the TPO had accepted international transactions, by looking at the transactions that it was reimbursement of expenses and no adjustment was made by the TPO. In this regard, he stressed that where the TPO’s order is binding on Assessing Officer, then the Assessing Officer cannot change the character of transaction, at best, the Assessing Officer could have disallowed the said expenses under section 37(1) of the Act. The claim of assessee was that in the absence of any profit element, provisions of section 195 of the Act were not attracted and in the absence of the same, provisions of section 40(a)(i) of the Act were not attracted. He further stated that there was a factual discrepancy in the disallowance made by Assessing Officer at ₹ 31,22,300/-, where sum of ₹ 10,74,870/- pertained to assessment year 2009-10 and the said amount was claimed as deduction in the preceding year and was not claimed as deduction in the instant assessment year. The learned Authorized Representative for the assessee thus, pointed out that at best, the disallowance could be made at ₹ 20,47,432/-. The learned Authorized Representative for the assessee also pointed out that sum of ₹ 10,74,870/- has been allowed as deduction in the preceding year.
He further referred to the second aspect of the order of Assessing Officer, wherein he stated that payment was in the nature of royalty and also in the nature of Fees for Technical Services (FTS), because of amendment to section 9(1)(v) of the Act. The learned Authorized Representative for the assessee referred to the TP study report at page 55 onwards and pointed out that the said transaction of reimbursement of expenses was part of the said report and the TPO had also in its order referred to the reimbursement of lease line charges as an international transaction. The learned Authorized Representative for the
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assessee further referred to the Invoice raised by Qwest Communications Inc on T-3 Energy Services for entire T-3 group, of which India was one part. Reference was made to page 23 of Paper Book in this regard. He further pointed out that T-3, USA in the first instance makes the payment and then the amount is collected from the assessee. The assessee referred to chart filed as Annexure-1 to make its claim. Further, our attention was drawn to Invoice of T-3, USA on the assessee, which is placed at page 25 of the Paper Book and also at page 26 of the Paper Book, where the assessee had transferred money to T-3 through bank draft. He stressed that where lease lines were provided to different global entities worldwide and the assessee was one part of it, then it could not be held that the assessee had made the payment for lease line charges to Qwest Communications Inc. Referring to the decision of Mumbai Bench of Tribunal in WNS North America Inc. Vs. ADIT (supra), it was pointed out that there were two issues; one was reimbursement of expenses, where there was no income element, hence no section 195 of the Act and no 40(a)(i) disallowance and the second issue was the payment made on account of reimbursement of expenses incurred on two trainees, which were arranged for assessee. The first issue was in respect of non application of sections 195 and 40(a)(i) of the Act. Further, he placed reliance on the ratio laid down by the Hon'ble Supreme Court in GE India Technology Cen (P.) Ltd. (2010) 327 ITR 456 (SC) and DIT Vs. A.P. Moller Maersk A S (2017) 392 ITR 186 (SC).
Coming to the next proposition of Assessing Officer that the payment made by assessee was either ‘royalty’ or ‘FTS’. The learned Authorized Representative for the assessee in this regard pointed out that in case of payment made to third party, the question is whether ‘royalty’ or ‘FTS’. He
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referred to the amendment to section 9(1)(vi) of the Act by the Finance Act, 2012 and pointed out that the year under appeal is assessment year 2010-11. He stressed that the assessee had no premonition that retrospective effect would be given by the Finance Act, 2012. Even otherwise, he pointed out that it would not be open to perform impossibility or to envisage that the amendment would take place. He further pointed out that TPO or the Assessing Officer and CIT(A) do not dispute the reimbursement of expenses. Reference was made to the decision of Kolkata Bench of Tribunal in Ershisanye Construction Group India Pvt. Ltd. Vs. DCIT in ITA No.756/Kol/2015, relating to assessment year 2010-11, order dated 12.04.2017, wherein it has been held that in the case of payment for onshore services, then payment has to be made after withholding tax. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court in GE India Technology Cen (P.) Ltd. Vs. CIT (supra) and DIT Vs. A.P. Moller Maersk A S (supra) for the proposition that if there was no profit element in the payments, then there is no need for any withholding tax. He stressed that it cannot be said that for each payment, there has to be withholding of tax. He stressed that where the TPO had accepted reimbursement of expenses to be within arm's length and where the books of account of assessee have not been rejected, so the transaction contained in, needs to be accepted. The learned Authorized Representative for the assessee also stressed that between Qwest Communications Inc and T-3, USA, there was a privity of contract for global utilization of facilities; if individually agreements were entered with each of the entity of T-3, USA, then cost would be affected. He further stressed that T-3, USA had no Permanent Establishment (PE) in India and had entered into an agreement with Qwest Communications Inc outside India to provide lease lines worldwide to its entities. The learned Authorized Representative for the
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assessee strongly relied on the decision of the Hon’ble High Court of Delhi in DIT Vs. (1) New Skies Satellite BV (2) Shin Satellite Public Co. Ltd. (supra) and stated that in any case in the absence of change in term ‘Royalty’ in Indo-USA DTAA, the amended provisions defining ‘Royalty’ under the Act were not applicable.
The learned Departmental Representative for the Revenue on the other hand, stressed that case of assessee is that the payment has been made on cost to cost basis without any mark up and the same was routed through associated enterprise. He stressed that if the amount was paid directly to Qwest Communications Inc, then TDS provisions would be attracted. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. In respect of reimbursement of expenses, the learned Departmental Representative for the Revenue stressed that where associated enterprise had not provided any services then, it could not be a case of reimbursement of expenses. The services were provided by Qwest Communications Inc and the payment to the said third party was made through associated enterprise. In this regard, he submitted that the ratio laid down by Mumbai Bench of Tribunal in C.U. Inspections (I) (P) Ltd. Vs. DCIT (supra) and Kolkata Bench of Tribunal in Ershisanye Construction Group India Pvt. Ltd. Vs. DCIT (supra) were squarely applicable. He also distinguished the case laws on which the learned Authorized Representative for the assessee had relied on. In respect of treatment of said expenses as royalty, the learned Departmental Representative for the Revenue pointed out that it had two facets i.e. process and equipment. The learned Departmental Representative for the Revenue pointed out that some decisions talks of process royalty, whereas Mumbai Bench
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of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ACIT (2014) 44 taxmann.com 1 (Mumbai-Trib.) and Bangalore Bench of Tribunal in Vodafone South Ltd. Vs. DDIT (IT) (2015) 53 taxmann.com 441 (Bangalore – Trib.), followed decision of Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO (2014) 361 ITR 575 (Mad). He referred to the definition of ‘royalty’ under Article 12(3) of DTAA between India and USA, which provided right to use or use itself. He stressed that in Indian Tax Laws, the word ‘use’ was missing.
The learned Authorized Representative for the assessee in rejoinder stressed that no payment was made to Qwest Communications Inc and the payment was made to associated enterprise, who was not the holder of intellectual property, for which the payment was being made to him. The Invoice was raised by Qwest Communications Inc on T-3 USA on usage basis and it was not case of tax planning where constant amount was being paid. He then, referred to the decision of Delhi Bench of Tribunal in M/s. Geo Connect Ltd. Vs. DCIT in ITA Nos.1927/Del/2008 & 127/Del/2011 relating to assessment years 2002-03 & 2003-04 and in DCIT Vs. M/s. Geo Connect Ltd. in ITA Nos.2088/Del/2008 & 5851/Del/2011, relating to assessment year 2002-03, vide order dated 17.01.2017 and stressed that where standard facilities were being provided for transmission, it was neither ‘royalty’ nor ‘FTS’. There is no secret process for such transmission, whereas the definition of ‘royalty’ talks of secret process. In respect of reliance of learned Departmental Representative for the Revenue on the ratio laid down by Mumbai Bench of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ADIT (IT) (supra) and Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO, the learned Authorized Representative for the assessee pointed out that it was contrary to the decision
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of the Hon’ble High Court of Delhi in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (2011) 332 ITR 340 (Del), hence beneficial view be taken.
We have heard the rival contentions and perused the record. The assessee is engaged in the manufacturing of Industrial Valves & Valve Components which were mainly used in Oil Field Service Industry. The assessee during the year had claimed expenditure of ₹ 20,47,432/- being the amount paid on account of reimbursement of expenses to its associated enterprise. The parent company of assessee T-3, USA had entered into an agreement with service provider Qwest Communications Inc for providing of bandwidth services against stated consideration. The said agreement is contract for providing bandwidth services between parent company and Qwest Communications Inc and the parent company in turn, provided bandwidth services to its subsidiaries against reimbursement of lease line charges. The assessee availed lease line services from its parent company and reimbursed the lease line charges to it. The charge was on cost to cost basis and the assessee in view of it reimbursing the said cost which did not involve any profit element did not deduct any tax from the said payment. The case of Revenue on the other hand, is that the assessee was liable to deduct tax at source since the amount was hit by section 195 of the Act and also because after the amendment in definition of ‘royalty’ under section 9 of the Act with retrospective effect by the Finance Act, 2012, the payments were explicitly covered under the term ‘royalty’. Since the assessee had failed to deduct tax at source, the amount was not to be allowed as expenditure in view of the provisions of section 40(a)(i) of the Act. The Assessing Officer disallowed ₹ 20,47,432/- which was claimed by the assessee as reimbursed during the year. The Assessing Officer also disallowed
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sum of ₹ 10,74,870/- relating to the previous year which was paid by the assessee during the year. The case of assessee in this regard was that the said amount was debited in the preceding year and was allowed in the hands of assessee in the preceding year. However, the Assessing Officer held that since the payment was made during instant assessment year and without deduction of tax at source, then the same merits to be disallowed under section 40(a)(i) of the Act. The assessee is in appeal against cumulative disallowance of ₹ 31,22,300/- made under section 40(a)(i) of the Act.
The first aspect which needs to be seen is the factual aspect, wherein in pursuance to the contract between Qwest Communications Inc and T-3, USA, Invoices were raised by Qwest Communications on T-3, USA, copies of which are placed at page 13 onwards of Paper Book. The said Invoices talked about lease line usage by different entities of T-3 group at Oklahoma City, Canada, India, Azura, etc. Consequent thereto, T-3 Energy Services India Ltd. received Invoice from T-3 USA and the amount was remitted through banking channel to T-3, USA. The first set of communications in this regard are placed at pages 13 to 18 of the Paper Book. Thereafter, the documents are placed at pages 19 to 54 of the Paper Book. The learned Authorized Representative for the assessee during the course of hearing has also filed tabulated chart at Annexure-1, wherein the amounts payable on account of lease line charges monthwise are provided. Invoices are raised by Qwest Communications Inc, USA on 7th of each month, copies of which are placed in Paper Book. Thereafter, the dates of payments made by T-3, USA are tabulated which start from 27.04.2009 for the month of April, 2009 and thereafter. Consequently, invoices have been raised upon the assessee i.e. on the date on which payment has been made by T-3,
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USA. However, as against the same, the assessee has made payment on 28.01.2010. The assessee in its transfer pricing report had declared the said transaction with its associated enterprise i.e. T-3, USA as reimbursement of lease line charges pertaining to current year of ₹ 20,47,432/- and of preceding year of ₹ 10,74,870/-. The relevant extract of transfer pricing report is placed at pages 55 and 56 of the Paper Book. The auditor in Annexure – V to Form No.3CEB Audit Report had similarly declared particulars in respect of transactions in providing services to its associated enterprise i.e. on account of reimbursement of lease line charges pertaining to the current year and also to the last year. The said Annexure is placed at page 57 of Paper Book. The TPO has passed the order under section 92CA(3) of the Act, copy of which is placed at pages 58 and 59 of the Paper Book. The perusal of tabulated details of international transactions by the assessee with its associated enterprise, wherein the said transaction was clearly mentioned as that of reimbursement of lease line pertaining to current year and last year with T-3, USA. The TPO after considering the facts and circumstances of the case and document furnished by the assessee has accepted the value of international transactions at arm's length and has not proposed any adjustment to the same. In other words, the first aspect of it being reimbursement of expenses as claimed by the assessee has not been disturbed by the TPO and no adjustment was proposed on the aforesaid by the TPO. The plea of assessee in this regard is that there was contract of providing bandwidth which was between T-3, USA and service provider Qwest Communication Inc, for which an independent agreement was entered into between the two parties. The said contract was for providing bandwidth for global business of T-3, USA and was not restricted to the business of assessee. The transaction between the parties was for commercial
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transactions, under which T-3, USA contracted for provision of services by Qwest Communications Inc on worldwide basis and hence, negotiations of price to be charged for providing lease lines to different entities. The understanding was between T-3, USA and Qwest Communications Inc and the assessee was not part of said understanding though it benefited from the understanding, wherein lease lines were provided for use by the assessee on bandwidth which was made available to entities of T-3, USA worldwide and the assessee was one such entity using the said services and hence, benefiting from reduced rates of charges. Thus, the claim of assessee of reimbursement of expenses to T-3, USA since it was under contract with Qwest Communications Inc, which was the service provider. It is nobody’s case that T-3, USA was the person providing services. However, both the authorities and even learned Departmental Representative for the Revenue before us has urged that the assessee had made payments to Qwest Communications Inc through its associated enterprise, since the amount was reimbursed on cost to cost basis. On the other hand, the assessee pleads that since it had reimbursed the expenses on cost to cost basis and there was no profit element of payments being made to associated enterprise, there was no question of withholding of any tax from such payments. The issue which arises before us is whether such payments made by the assessee against provision of lease line charges are liable for withholding of tax or not.
The second connected issue is whether such payments made to associated enterprise for the lease line charges are ‘royalty’ or ‘FTS’ and hence, liable to tax deduction at source within the meaning of DTAA with USA read with provisions of the Income-tax Act.
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The Hon’ble High Court of Delhi in DIT Vs. (1) New Skies Satellite BV (2) Shin Satellite Public Co. Ltd. (2016) 382 ITR 114 (Del) has elaborated on the general principles relating to international transactions of DTAA vis-à-vis royalty and also the amendment in the Income-tax Act widening the scope of royalty. In the facts before the Hon’ble High Court, the assessee was a company incorporated in Thailand, which was engaged in the business of providing digital broadcasting services as well as consultancy services to its customers, who consist of both Residents and Non-residents. The services were provided through satellites and the assessee had derived income from lease of transponders of its satellites. The assessee therein was the service provider and the receipts were sought to be taxed under section 9(1)(vi) of the Act. The Hon’ble High Court considered the pre-amended and post-amended provisions of the said section and observed that though the Revenue authorities considered the income from data transmission services as taxable as royalty under section 9(1)(vi) of the Act; however, the Tribunal on the basis of ratio laid down in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) did not. The Hon’ble High Court in that case had held that receipts earned from providing data transmission services through provision of space segment capacity on satellites did not constitute royalty within the meaning of section 9(1)(vi) of the Act. It was further held that while providing transmission services to its customers, control of satellite always remained with satellite operator and the customers were only given access to transponder capacity and hence, the payment could not be termed as royalty for the use of a process or equipment. The said decision was in the context of section 9(1)(vi) of the Act and the provisions of DTAA were not considered therein. The Hon’ble High Court in the case of New Skies then took note of the amendment by the Finance Act, 2012, which inserted Explanations 4,
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5 and 6 under section 9(1)(vi) of the Act. The Revenue before the Hon’ble High Court claimed that the said Explanations were clarificatory and it had settled the matter i.e. reasoning in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) could not stand because the basis of that ruling had been undone. The second proposition which was raised was whether DTAA applied and resulted rendering activity non taxable was also argued by the Revenue would not arise, since the DTAA predated the amendment. The Counsel for the assessee therein however, contended that the matter was no longer res integra. It was argued that the Revenue could not contend that any change in the substantive law would automatically result any like change in respect of taxability of transaction or service which was otherwise taxed in terms of DTAA, or which was subject to lower rate of tax mandated by a treaty. Reliance in this regard was placed on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (2009) 310 ITR 320 (Bom) and the Hon’ble High Court of Andhra Pradesh in Sanofi Pasteur Holding SA Vs. Dept. of Revenue and Others (2013) 354 ITR 316 (AP). Reliance was also placed on the ratio laid down by the Hon’ble High Court of Delhi in DIT Vs. Nokia Networks OY (2013) 358 ITR 259 (Del), wherein the context was the efficacy of interpretation given to Statute i.e. Explanation inserted to section 9(1)(vi) of the Act vis-à-vis DTAA. The Hon’ble High Court had rejected that any amendment could change the situation and render the service or activity taxable. The Hon’ble High Court thereafter took note of various decisions on the issue including that of Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. Vs. ITO (supra) and disclined to conclusively determine or record a finding as to whether amendment to section 9(1)(vi) of the Act indeed was clarificatory as the Revenue suggested or prospective, give what its nature may truly be. The Hon’ble High Court further
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commented that the issue of taxability of income of assessee may be resolved without redressal of above question purely because the assessee did not press the said line of argument and had instead stated that ultimate taxability of income shall rest on the interpretation of terms of DTAA. The Hon’ble High Court vide para 39 onwards then took note of Article 12 of the DTAA, under which the State of Residence had the primary right to tax royalty; the Source State shall concurrently have the right to tax the income, to the extent of 15% of total income. The Hon’ble High Court also observed that before the amendment brought about by the Finance Act, 2012, the definition of ‘royalty’ under the Act and DTAA were treated as pari materia. Again reference was made to the ratio laid down in Asia Satellite Telecommunications Co. Ltd. Vs. DIT (supra) and observed that the question was whether in an attempt to interpret the two definitions uniformly i.e. domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. The Hon’ble High Court held as under:- “41. This court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible.”
Referring to the decision of Apex Court in Union of India Vs. Azadi Bachao Andolan & Arn. (2003) 263 ITR 706 (SC) and The Vienna Convention on the Law of Treaties, 1969, the Hon’ble High Court held the amendments to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore, categorically prohibited. The Hon’ble High Court held
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that the words in the treaty would be controlled by definition of those ‘words’ in the treaty, if they are so provided. In case they are not provided, then the domestic law shall mandatorily supply the import to be given to the ‘word’ in question. The Hon’ble High Court concluded by holding that the amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It was thus, held that mere amendment to section 9(1)(vi) of the Act could not result in a change and it was imperative that such amendment was brought about in the agreement as well and hence, the amendments were not applicable to DTAA. The finding of the Hon’ble High Court was thus, as under:- “60. Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the double taxation avoidance agreement, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a double taxation avoidance agreement, unless the said double taxation avoidance agreement are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no double taxation avoidance agreement.”
The above judgment was delivered by the Hon’ble High Court on 08.02.2016.
The learned Authorized Representative for the assessee relied on various decisions of the Hon’ble High Courts for the proposition that telecommunication services rendered by Non-residents outside were not taxable in India. The learned Departmental Representative for the Revenue on the other hand, pointed out that the payment to Non-residents on account of it being routed through holding or related company abroad, was taxable. Both learned Authorized Representatives have relied on series of decisions for the proposition as to
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whether the payments to Non-residents paid directly or routed through a third party on account of lease line charges falls within amended definition of ‘royalty’, which is to be applied retrospectively. In view of the ratio laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (supra) and Delhi Bench of Tribunal in Shin Satellite Public Co. Ltd. Vs. DDIT (IT) (2011) 12 taxmann.com 6 (Del), we are not going into the aspect of the amendment to section 9(1)(vi) of the Act, under which Explanations 4, 5 and 6 have been added, which interalia, amends the definition of ‘royalty’ with retrospective effect. We hold that the same need not to be gone into since the issue otherwise stands decided in favour of assessee. The Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV & Ors. (supra) have held that even though the term ‘royalty’ as used in section 9(1)(vi) of the Act has been amended by introducing Explanation retrospectively, but in view of no change in the definition of ‘royalty’ in DTAA, the beneficial provisions of DTAA would apply. The amendment made under the Act does not affect the terms of DTAA unless and until the same is amended by two Contracting States.
In the present case also, though definition of ‘Royalty’ under the Act had been amended, but the term ‘Royalty’ under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of ‘royalty’ under DTAA, the assessee is not liable to withhold tax on the payments made to its associated enterprise on account of lease line charges. We are not going into different decisions of the Tribunal on this aspect, in view of the ratio laid down by the Hon’ble High Court of Delhi, which though is not jurisdictional High Court but the issue raised in the said appeal is similar to the issue raised before us in the present appeal. We may also point out that the
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Hon’ble High Court of Delhi had also taken note of the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (supra), which in turn, has applied the ratio of the Hon'ble Supreme Court of Canada in R Vs. Melford Developments Inc., 82 DTC 6281 (1982) and observed as under:-
"The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression 'laws in force'. . . While considering the Double Tax Avoidance Agreement the expression 'laws in force' would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agree ment as set out in article I(2). Considering the express language of article I(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the double taxation avoidance agreement was entered into."
In the facts of the case before the Hon’ble Bombay High Court the word ‘royalty’ was not defined in German Treaty and in that context, the Hon’ble Bombay High Court held that they were unable to accept the assessee’s contention that law applicable would be law which existed at the time the DTAA was entered into. In the facts of the case before us, the word ‘royalty’ is defined in DTAA entered into between USA and India and applying the ratio in CIT Vs. Seimens Aktiongesellschaft (supra), we hold that once a term has been defined in DTAA, then the said term is to be applied unless and until the parties to the DTAA amends the same. The Hon’ble High Court of Delhi in DIT Vs. Nokia Networks OY (supra) had applied the proposition laid down by the Hon’ble Bombay High Court in CIT Vs. Seimens Aktiongesellschaft (supra) and held that the amendments could not be read into the treaty. Unilateral amendment by the Indian Government to the term ‘royalty’ by way of amendment to section 9(1)(vi) of the Act cannot be extended to the meaning of the term under DTAA. Hence, we hold reliance of learned Departmental Representative for the Revenue on
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Mumbai Bench of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ACIT (supra) and Bangalore Bench of Tribunal in Vodafone South Ltd. Vs. DDIT (IT) and also Mumbai Bench of Tribunal in C.U. Inspections (I) (P) Ltd. Vs. DCIT (supra) are not to be applied in view of the issue being settled by the Hon’ble High Court of Delhi.
The assessee on the other hand, has relied on the decision in WNS North America Inc. Vs. ADIT (supra) i.e. decision of Mumbai Bench of Tribunal, which has been approved by the Hon’ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman 317 (Bom). The issue before the Hon’ble High Court of Delhi was in the hands of recipient of lease line charges. The assessee therein had recovered internal telecommunication charges from WNS charges and the Tribunal held the amount in question was received by the said assessee as reimbursement of lease line charges and would not qualify either as ‘royalty’ or as income attributable to PE in India and hence, it was held that there was no income earned by the assessee. The question before the Hon’ble High Court was whether the amount received on account of reimbursement of lease line charges would qualify as ‘royalty’ under Article 12 of India – UK Treaty and the second question was in respect of charges being attributable to PE in India. The Hon’ble High Court vide para 5 had noted the decision of Tribunal but had held that since the decision of Tribunal was based on the findings of fact, there was no reason to entertain question Nos.4 and 5.
Applying the principle laid down by the Hon’ble High Court of Delhi in DIT Vs. New Skies Satellite BV (supra), we hold that where the provisions of DTAA overrides the provisions of Income-tax Act and the definition of ‘royalty’ having
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not been undergone any amendment in DTAA, the assessee was not liable to withhold tax on the lease line charges paid by it. The amended provisions of section 9(1)(vi) of the Act brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended.
Now, coming to the next aspect of the issue that reimbursement of charges is not subject to tax in India. The basic principle underlying the same is that where reimbursement of expenses do not include any income element, then the same is not subject to tax in India. The assessee before us has filed extensive evidence in this regard i.e. Qwest Communications Inc had raised charges upon T-3, USA and the portion allocable to the assessee was charged on cost to cost basis. Hence, it cannot be said that there was any income element which has arisen in the case and consequently, we hold that where the assessee had reimbursed the expenses having no income element, there is no requirement to withhold tax out of such payments. The case of Revenue in this regard is that it is not case of reimbursement but is a case of payment to third party through its associated enterprise and hence, the need for withholding tax. We have already decided this issue in the paras hereinabove that under the provisions of DTAA, the term ‘royalty’ is defined and it does not cover any such services availed and payment made and hence, there is no merit in the stand of Revenue in this regard and the same is dismissed. In any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The assessee as recipient of services had reimbursed the same and in the absence of profit / income element, there is no
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liability to deduct tax at source. Hence, the assessee cannot be held to be in default.
The Assessing Officer had also raised the issue of payment being in the nature of fees for technical services. However, in the final analysis disallowance has been made in the hands of assessee for non deduction of tax at source on the payments being made in the nature of royalty i.e. amended provisions of the Income-tax Act. We have already decided the said issue in the paras hereinabove and accordingly, we hold that there is no merit in invoking the provisions of section 40(a)(i) of the Act for non withholding of tax on the amount of charges paid for reimbursing associated enterprise for lease line charges.
Another related aspect of the issue is the acceptance of international transactions to be at arm's length price by the TPO in its order passed under section 92CA(3) of the Act. The international transactions with associated enterprise of reimbursement of expenses on account of lease line charges had been reported in the TP study report. The Assessing Officer made reference to the TPO to benchmark the international transactions undertaken by the assessee. The TPO vide his order under section 92CA(3) of the Act had accepted different international transactions undertaken by the assessee with its associated enterprise at arm's length price and no adjustment has been made in the hands of assessee on this count. Once the transaction with associated enterprise had been accepted to be at arm's length price and the transaction in question was reimbursement of expenses, the order passed by the TPO is binding on the Assessing Officer, not only in respect of determination of arm's length price of transactions but also vis-à-vis nature of international transactions.
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The assessee had declared the same in its TP study report to be reimbursement of expenses on account of lease line charges which has been verified by the TPO as an international transaction and has been accepted as such i.e. nature of expenses i.e. reimbursement of expenses to associated enterprise on account of lease line charges. Once the nature of expenses has been so accepted by the TPO, the Assessing Officer cannot sit in judgment of the TPO order since under the provisions of the Act, the order passed by the TPO is binding upon the Assessing Officer. The Assessing Officer at best could have invoked the provisions of Income Tax Act perse and not question the nature of expenditure i.e. after the TPO accepted to be reimbursement of expenses, the Assessing Officer challenged the same and held it to be ‘royalty’. We find no merit in the order of Assessing Officer in this regard and hence, the assessee succeeds on the alternate plea also. Accordingly, we hold that there is no merit in the disallowance of ₹ 20,47,432/- being payment to associated enterprise towards reimbursement of lease line charges by invoking provisions of section 40(a)(i) of the Act.
Now, coming to the payment of ₹ 10,74,870/-, which relates to the preceding year. Admittedly, the said expenditure was booked in the preceding year and has been allowed in the hands of assessee. Once the same has been so allowed, there is no merit in making the disallowance again in the year under appeal. The said expenditure was reported in TP study report being reimbursement of lease line charges relating to the preceding year, but the same was paid in the year under consideration. The provisions of section 40(a)(i) of the Act are attracted at the first stage i.e. when booked on account of accrual basis or paid, whichever is earlier. If the said provisions had to be applied, then
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the same at best could be applied in the preceding year and not in the year under consideration. Accordingly, we reverse the order of Assessing Officer in this regard. We have already decided this issue on merits of allowability of the said payment but also we hold that the order of Assessing Officer in disallowing the said amount relating to the preceding year by invoking provisions of section 40(a)(i) of the Act is unwarranted and against provisions of the Act. Hence, the same is also cancelled.
In the result, appeal of assessee is allowed.
Order pronounced on this 2nd day of February, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 2nd February, 2018. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : अऩीऱाथी / The Appellant; 1. प्रत्यथी / The Respondent; 2. आयकर आयुक्त(अऩीऱ) / The CIT(A), Pune-6; 3. The Pr. CIT-5, Pune; 4. ववबागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे “फी” / DR 5. ‘B’, ITAT, Pune; गार्ड पाईऱ / Guard file. 6. आदेशािुसार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩुणे / ITAT, Pune