THE DDIT (I.T) 1(1), V. M/S. FLAG LTD.,

ITA 1192/MUM/2004

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88246 (ITAT-MUMBAI)
• Duration Of Justice: 10 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-02-2015
• Appeal Filed By: Department
• Bench Allotted: L
• Next Hearing Date: 30-10-2014
• Assessment Year: 1999-2000
• Appeal Filed On: 27-02-2004
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Double taxation relief; Deemed to accrue or arise in india; Retrospective amendment; Additional evidence
• Section: 234B; 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 6254/MUM/2003 ASSESSMENT YEAR: 1998-99 M/S. FLAG LIMITED C/O CHATURVEDI & SHAH, CHARTERED ACCOUNTANT, 814-815, TULSIANI CHAMBERS, NARIMAN POINT 400 021 VS. DCIT CIR - 2(1) MUMBAI (APPELLANT) (RESPON DENT) ITA NO. 1168/MUM/2004 ASSESSMENT YEAR: 1999-2000 M/S. FLAG LIMITED C/O CHATURVEDI & SHAH, CHARTERED ACCOUNTANT, 814-815, TULSIANI CHAMBERS, NARIMAN POINT 400 021 VS. A SSISTANT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION)- 1(1) MUMBAI (APPELLANT) (RESPON DENT) ITA NO. 6710/MUM/2004 ASSESSMENT YEAR: 2000-01 M /S. FLAG TELECOM GROUP LTD. C/O CHATURVEDI & SHAH, CHARTERED ACCOUNTANT, 814-815, TULSIANI CHAMBERS, NARIMAN POINT 400 021 VS. JOINT DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION)-3, MUMBAI (APPELLANT) (RESPON DENT ) ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 2 ITA NOS. 6613/MUM/2003, ASSESSMENT YEAR: 1998-99 ASST. DIT (IT) - 1(1) MUMBAI VS. M/S. FLAG LIMITED C/O CHATURVEDI & SHAH, CHARTERED ACCOUNTANT, 814-815, TULSIANI CHAMBERS, NARIMAN POINT 400 021 (APPELLANT) (RESPONDENT) ITA NOS. 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1999-2000 & 2000-01 DY. DIT(IT) - 1(1) MUMBAI VS. M/S. FLAG LIMITED C/O CHATURVEDI & SHAH, CHARTERED ACCOUNTANT, 814-815, TULSIANI CHAMBERS, NARIMAN POINT 400 021 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI JE HA N GIR MISTRI REVENUE BY : SHRI GIRISH DAVE DATE OF HEARING : 14. 1 1.2014 DATE OF ORDER : 06.02.2015 ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 3 PER AMIT SHUKLA, JM: THE AFORESAID CROSS APPEALS HAVE BEEN FILED BY EITH ER PARTIES AGAINST SEPARATE IMPUGNED ORDER PASSED BY CIT (A) X XXI, MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3). SINCE THE ISSUES INVOLVED IN ALL THE APPEALS ARE SIMILAR ARISING OUT OF IDENT ICAL SET OF FACTS, THEREFORE, SAME WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THIS CONSOLIDATED ORDER. 2. IN ORDER TO UNDERSTAND THE FACTS AND IMPLICATION THEREOF ON THE ISSUES RAISED BY BOTH THE PARTIES, WELL FIRST TAKE UP CROSS APPEALS FOR THE A.Y. 1998-99, WHICH IS ARISING OUT OF THE IMPUGNED ORDER DATED 23.05.2003. IN ASSESSEES APPEAL FOLLOWING GROUNDS HAVE BEEN RAISED:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) XXXI [CIT(A)] ERRED IN HOLDING THAT INCOME FROM CAPAC ITY SALES EARNED UNDER THE CAPACITY SALES AGREEMENT DATED MAR CH 31, 1995 ENTERED INTO BETWEEN THE APPELLANT AND VIDESH SANCHAR NIGAM LIMITED (VSNL) IS TAXABLE IN INDIA UNDER SE CTION 9(1)(I) OF THE INCOME-TAX CT, 1961 (ACT). 2. WITHOUT PREJUDICE TO GROUND NO. 1, THE LEARNED C IT(A) ERRED IN NOT ACCEPTING THE APPELLANTS CONTENTION THAT TH E REVENUE CHARGEABLE TO TAX IN INDIA, AS PER EXPLANATION TO S ECTION 9(1)(I) OF THE ACT, BE COMPUTE D BY APPLYING THE PROPORTION OF THE CABLE LENGTH SITUATED IN INDIA VIS--VIS THE TOTAL CABLE LENGTH WORLD- WIDE. 3. WITHOUT PREJUDICE TO GROUND NO. 1 AND 2, THE LEA RNED CIT(A) ERRED IN COMPUTING THE REVENUES CHARGEABLE TO TAX I N INDIA, AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, BY A PPLYING THE PROPORTION OF CAPACITY SALES EARNED FROM VSNL TO TH E WORLDWIDE CAPACITY SALES EARNED BY THE APPELLANT. 4. THE LEARNED CIT(A) ERRED IN HOLDING THAT STANDBY MAINTENANCE REVENUES EARNED BY THE APPELLANT FROM VSNL UNDER TH E CONSTRUCTION AND MAINTENANCE AGREEMENT (C&MA) BET WEEN THE APPELLANT AND THE LICENSED INTERNATIONAL TELECOMMUN ICATIONS CARRIERS (INCLUDING VSNL), ARE TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1)(VII) OF THE A CT. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 4 2.1 WHEREAS THE REVENUE HAS RAISED THE FOLLOWING GR OUNDS:- 1. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, TH E LD.CIT(A) WAS NOT CORRECT IN HOLDING THAT PAYMENT MADE BY THE VSNL IN RESPECT OF CAPACITY WAS IN THE NATURE OF BUSINES S INCOME AND NOT ROYALTY INCOME/FEES FROM TECHNICAL SERVICES AS HELD BY THE AO. 2. THUS, THE LD.CIT(A) WAS NOT CORRECT IN HOLDING T HAT THE RATE PRESCRIBED UNDER SECTION 115A OF THE INCOME TAX ACT , 1961 WAS NOT APPLICABLE IN RESPECT OF THE ABOVE INCOME. 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) WAS NOT CORRECT IN DELETING THE INTEREST CHARGED U/S 23 4B OF THE I.T. ACT, 1961. ISSUES FOR ADJUDICATION:- 3. FROM THE AFORESAID GROUNDS, FOLLOWING ISSUES CAN BE CULLED OUT, WHICH REQUIRES OUR ADJUDICATION:- (I) FIRSTLY, WHETHER THE INCOME FROM CAPACITY SALES EARNED UNDE R THE CAPACITY SALES AGREEMENT DATED MARCH 31, 1995 BETWE EN THE ASSESSEE AND VSNL IS TAXABLE IN INDIA AS BUSINESS INCOME O R INCOME UNDER THE HEAD ROYALTIES OR FREE FOR TECHNICAL SERVICES (FTS). IF THE INCOME IS TAXABLE IN INDIA U/S 9(1)(I) AS BUSINESS INCOME, TH EN THE BASIS ON WHICH SUCH INCOME IS TO BE CHARGED IN INDIA, WHETHER MILL , WHOLE OR PART. (II) SECONDLY, WHETHER THE INCOME EARNED FROM STANDBY MAINTENANCE ACTIVITY IS LIABLE FOR TAX IN INDIA AS FEE FOR TEC HNICAL SERVICES (FTS) U/S 9(1)(VII) OF THE ACT? (III) LASTLY, WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE ASSESSEE IS LIABLE TO PAY INTEREST U/S 234B OF THE ACT? ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 5 FACTS IN BRIEF 4. THE RELEVANT FACTS QUA THE ISSUES INVOLVED ARE T HAT, FLAG LIMITED IS A COMPANY INCORPORATED IN BERMUDA, FROM WHERE IT IS MANAGED AND CONTROLLED. SINCE, INDIA DOES NOT HAVE ANY TAX TREA TY WITH BERMUDA, THEREFORE DOMESTIC LAW, THAT IS, INDIAN INCOME TAX ACT IS APPLICABLE. THE SAID COMPANY WAS SET UP TO BUILD HIGH CAPACITY SUBM ARINE FIBRE OPTIC TELECOMMUNICATION LINK CABLE SYSTEM THAT IS, UNDERS EA CABLE FOR PROVIDING TELECOMMUNICATION LINK BETWEEN UNITED KIN GDOM AND JAPAN. SUCH A TELECOMMUNICATION CABLE WAS TO BE KNOWN AS FIBRE OPTIC LINK AROUND THE GLOBAL CABLE SYSTEM [I.E., FLAG CABLE S YSTEM]. THIS FIBRE OPTIC CABLE SYSTEM WAS BUILD TO INCREASE THE TELECO MMUNICATION TRAFFIC BETWEEN AND AMONG WESTERN EUROPE, MIDDLE EAST, SOUT H ASIA, SOUTH EAST ASIA AND FAR EAST. FOR THIS PURPOSE THE ASSESS EE COMPANY HAD ENTERED INTO MEMORANDUM OF UNDERSTANDING (MOU) ON 1 9 TH JULY 1993, BY AND AMONG 13 PARTIES WHICH WERE MOSTLY NATIONAL TELECOMMUNICATION COMPANIES BELONGING TO DIFFERENT NATIONS, FOR THE PURPOSE OF PLANNING AND IMPLEMENTATION OF THE SAID SUBMARINE FABRIC OPTIC TELECOMMUNICATION LINK CABLE SYSTEM LINKING W ESTERN EUROPE (STARTING FROM UK), MIDDLE EAST, SOUTH ASIA, SOUTH EAST ASIA AND FAR EAST (ENDING IN JAPAN). THE ASSESSEE HAS BEEN TERME D AS FOUNDING PARTY, WHEREAS THE 13 PARTIES TO THE MOU HAVE BEEN TERMED AS LANDING PARTIES, LATER ON THESE LANDING PARTIES KEPT ON IN CREASING. MOST PART OF THE CABLE HAS BEEN LAID DOWN IN THE SEA BED AND FOR THE PURPOSE OF CONNECTION IN THE TERRESTRIAL LAND, THE CABLE COMES ASHORE IN CERTAIN COUNTRIES, CONNECTING WITH THE DOMESTIC TELECOMMUNI CATION SYSTEM, WHICH HAS BEEN TERMED AS LANDING STATIONS. THE WH OLE OF THE SUBMARINE CABLE SYSTEM BETWEEN FLAG INTERFACE POINT S HAS BEEN DIVIDED ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 6 INTO SEA SEGMENTS I.E. S1, S2, ; AND TERRESTRIAL SEGMENTS T1, T2.. & X1, X2. THE LAYOUT OF THE CABLE CAN BE ILLUSTRATED FROM THE FOLLOWING DIAGRAM: IN INDIA, VIDESH SANCHAR NIGAM LIMITED (VSNL) WAS O NE OF THE ORIGINAL LANDING PARTY TO THE MOU IN THE CABLE SYSTEM AND PA RT OF THE CONSORTIUM TO THE FLAG CABLE SYSTEM. FOR THE PURPOSE OF SELLIN G THE CAPACITY IN THE CABLE SYSTEM, CABLE SALES AGREEMENT (CSA) WAS ENTER ED INTO AMONGST THE PARTIES. ON 31.03.1995, CSA WAS ENTERED BETWEEN ASSESSEE AND VSNL, WHICH WAS FURTHER AMENDED ON 29 TH APRIL 1998, BY WHICH VSNL HAD BOUGHT THE CAPACITY IN THE SAID CABLE SYSTEM. T HE ASSESSEE HAS SOLD THE CAPACITY TO VSNL FOR US $ 28,940,000. THE CSA P ROVIDED FOR THE OWNERSHIP RIGHTS IN THE FLAG CABLE SYSTEM WITH ALL THE RIGHTS AND ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 7 OBLIGATIONS IN THE CAPACITY SOLD I.E., VSNL CAN TRA NSFER, ASSIGN OR SELL THE CAPACITY. IT ALSO LAYS DOWN THE CONCEPT OF STANDBY MAINTENANCE, PAYMENTS, OBLIGATIONS, MANAGEMENT DECISIONS ETC. TH E ENTIRE PROCEDURE FOR OWNERSHIP OF CAPACITY IN THE CABLE SYSTEM AND A LL OTHER TERMS AND CONDITIONS HAS BEEN CONTAINED IN A SEPARATE AGREEME NT TITLED AS CONSTRUCTION AND MAINTENANCE AGREEMENT (C&MA). AS PER THE TERMS, ONCE C&MA COMES INTO FORCE, THE CSA WILL COME TO AN END. THE C&MA WAS FOR THE PERIOD OF 25 YEARS, WHICH COINCIDES WIT H THE LIFE OF THE CABLE. 5. THIS RECEIPT OF US $ 28.94 MILLION RECEIVED FROM VSNL TOWARDS SALES OF CAPACITY IN THE CABLE SYSTEM IS THE SUBJE CT MATTER OF DISPUTE, AS THE ASSESSEE CLAIMED THAT IT IS FROM SALE OF GOODS FROM A NON-RESIDENT TO A RESIDENT WHICH CANNOT BE TAXED IN INDIA, AS THE C SA AND C&MA WITH VSNL HAS BEEN EXECUTED BY FLAG OUTSIDE INDIA ON PRI NCIPAL TO PRINCIPAL BASIS AND THE PAYMENT FOR THE SALE OF CAPACITY HAS ALSO BEEN MADE OUTSIDE INDIA; WHEREAS, DEPARTMENTS CASE IS THAT T HE PAYMENT IS FOR RIGHT TO USE IN THE CABLE, HENCE, TAXABLE AS RO YALTY IN INDIA U/S 9(I)(VI). IN THE NOTES TO THE COMPUTATION FILED ALO NG WITH THE RETURN OF INCOME, THE ASSESSEE HAS GIVEN DETAILED EXPLANATION AS TO WHY SUCH A RECEIPT FROM CAPACITY SALES AND STANDBY MAINTENANCE AGREEMENT CANNOT BE TAXED IN INDIA. ALTERNATIVELY, IT WAS CONTENDED THAT ONLY THE AMOUNT ATTRIBUTABLE TO INDIA ON THE RATIO OF LENGTH OF CAB LE IN THE TERRITORIAL WATER OF INDIA CAN BE TAXED IN INDIA. THESE NOTES HAVE B EEN INCORPORATED BY THE ASSESSING OFFICER FROM PAGES 1 TO 5 OF THE ASSE SSMENT ORDER. 6. THE ASSESSING OFFICER AFTER NOTING DOWN THE PREL IMINARY FACTS AND ON PERUSAL OF CSA DATED 31.03.1995, (FURTHER AMENDE D ON 20.04.1998) AND C&MA INTERPRETED IN THE FOLLOWING MANNER:- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 8 (I) THERE IS NO OWNERSHIP IN TERMS OF PASSING OF AN Y PHYSICAL OBJECT OR MACHINE. IN THIS CASE, WITHOUT GOODWILL O F FLAG, VSNL CANNOT USE THE ASSIGNABLE CAPACITY, SINCE IT REQUIR ES ACTIVATION. THEREFORE, IT IS NOT A ROUTINE SALES AGREEMENT AND WHAT IS BEING SOLD EVEN IN THE TERMS OF CSA IS NOT A PHYSICAL OBJ ECT BUT RIGHT TO USE THE ASSIGNABLE CAPACITY IN THE CABLE. (II) PURCHASE OF THE CAPACITY DOES NOT RESULT INTO REAL SENSE OF OWNERSHIP, AS THE WORD OWNER USED IN C&MA DOES NO T MEAN ANYTHING MORE THAN A RIGHT TO USE THE CABLE SYSTEM FOR THE NEXT 25 YEARS. (III) FLAG TAKES THE RESPONSIBILITY FOR THE SUPPLY CONTRACT FOR THE PROVISION AND INSTALLATION OF SUBMARINE CABLE SYSTE M AND SEGMENTS AND IN ADDITION TO THIS, RECURRING COST IS SHARED B Y THE FLAG AS WELL AS BY THE VSNL. THE VSNL HAS INDEFEASIBLE RIGHT TO USE (IRU) IN LIEU OF 1/3 RD PAYMENT OF SUCH COST. FLAG HAS DEVELOPED THE TECHNICAL DESIGN OF THE FLAG CABLE SYSTEM AND INSUR ES THE TECHNICAL COMPLIANCE OF THE ENTIRE CABLE SYSTEM. IT IS THE RE SPONSIBILITY OF THE FLAG TO MAKE AVAILABLE TO VSNL TECHNICAL INFORM ATION RELATING TO THE CONSTRUCTION AND OPERATION OF THE FLAG CABLE SYSTEM AND VSNL HAS TO TREAT SUCH INFORMATION AS CONFIDENTIAL. THUS, WHAT FLAG IS PROVIDING TO VSNL IS BASICALLY TECHNICAL KN OW-HOW. (IV) IN TERMS OF C&MA WHICH PROVIDES FOR JOINT OWNE RSHIP IN THE CABLE BY VARIOUS SIGNATORIES HAS BEEN INSERTED, TO AVOID COMPLICATIONS IN THE EVENT ANY OF THE SIGNATORIES I NTERPRET THE MEANING OF THE TERM OWNERSHIP LITERALLY. THE JOINT CO-OWNERSHIP IS MERELY MEANT TO PROTECT THE CABLE AND TO ENSURE THA T NO SIGNATORY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 9 DISRUPT ITS RESPECTIVE OWNERSHIP SEGMENT. OTHERWISE IT WILL RENDER ENTIRE CABLE USELESS TO ALL THE SIGNATORIES. (V) BASICALLY, THE CABLE IS OWNED BY THE FLAG FOR A LL TIME TO COME, HOWEVER, FOR A CONSIDERATION, FLAG HAS PERMITTED US E OF DISTINCT SEGMENT OF THE CABLE BY DIFFERENT TELECOMMUNICATION COMPANIES/LANDING PARTIES. WITHOUT THE TECHNICAL KN OW-HOW AVAILABLE WITH THE FLAG, THE PORTION OF THE SEGMENT WILL BE USELESS, AS IT REQUIRES ACTIVATION BY FLAG, CONTINUOUS OPERA TION AND MAINTENANCE, SUPPLY OF TECHNICAL KNOW-HOW OF INTERN ATIONAL STANDARD ON A CONTINUING BASIS. 7. FROM THE ABOVE ANALYSIS, THE ASSESSING OFFICER C AME TO A CONCLUSION THAT PAYMENT MADE BY VSNL TO FLAG IS NOT HING BUT IN THE NATURE OF ROYALTY ON FEES FOR TECHNICAL KNOW-HOW AND, THEREFORE, TAXABLE U/S 9(I). HE FURTHER HELD THAT VSNL HAD NOT PURCHASED ANY PART OF THE CABLE BUT ONLY DISTINCT CAPACITIES IN THE TE CHNICAL DEVICE, I.E., FIBRE OBTIC CABLE AND IT IS PREVENTED FROM THE ASSIGNING AND TRANSFERRING THE RIGHTS WITHOUT THE CONSENT OF OTHERS. THUS, THE REC EIPTS IN THE HANDS OF THE ASSESSEE DOES NOT ARISE AS A CONSEQUENCE OF SAL E OF ANY ARTICLE OR COMMODITY BUT THE USE OF RIGHT TO USE ASSIGNABLE CAPACITY IN THE CABLE SYSTEM AND HENCE, IT IS TAXABLE U/S. 9(1)(VI) & ALS O U/S 9(1)(VII). ACCORDINGLY, HE TAXED THE ENTIRE PAYMENT MADE BY VS NL TO FLAG FOR US$ 28.94 MILLION IN INDIA. SIMILARLY, THE INCOME FROM STANDBY MAINTENANCE ACTIVITIES OF US$ 5,12,955/- WHICH WAS SEPARATELY R ECEIVED WAS ALSO HELD BY HIM AS TAXABLE UNDER THE HEAD FEE FOR TECHNICAL SERVICES WITHIN THE MEANING OF SECTION 9(1)(VII), BECAUSE THE MAINTENAN CE REQUIRES HIGHLY SKILLED AND TECHNICAL PERSONNEL. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 10 8. BEFORE THE LD. CIT (A), THE ASSESSEE SUBMITTED T HAT, WHAT HAS BEEN RECEIVED BY WAY OF SALE OF CAPACITY IN THE CAB LE SYSTEM IS BUSINESS INCOME. THE VSNL HAD PURCHASED THE CAPACITY AFTER P AYING THE CONSIDERATION AND BECAME THE CO-OWNER OF THE CABLE SYSTEM AND ENJOYED ALL THE RISKS AND REWARDS OF THE OWNERSHIP IN THE CAPACITY. NOTHING HAS BEEN EARNED OR ACCRUED IN INDIA, AS THE C&MA AND CSA HAVE BEEN EXECUTED OUTSIDE INDIA ON PRINCIPAL TO PR INCIPAL BASIS. THE VSNL HAS ALL THE OWNERSHIP, RIGHTS AND OBLIGATIONS IN THE CAPACITY LIKE TRANSFER OR ASSIGNMENT OF THE CAPACITY, STANDBY MAI NTENANCE PAYMENT OBLIGATION AND ALL OTHER DECISIONS IN RESPECT OF TH E CAPACITY PURCHASED BY IT IN THE CABLE SYSTEM. THE VSNL CAN USE THE CAPACI TY FOR ITSELF OR RESALE IT TO OTHERS OR GRANT INTEREST TO ANY PERSON IN THE CAPACITY FOR THE LIFE TIME OF THE CABLE SYSTEM. THE VSNL IS NOT ONLY THE MEMBER OF THE MANAGEMENT COMMITTEE BUT ALSO HAS A RIGHT TO VOTE. ALL THESE TERMS IN THE AGREEMENT GOES TO SHOW THAT, VSNL HAS BECOME TH E OWNER OF THE CAPACITY AND HENCE IN THE CABLE SYSTEM. DICTIONARY MEANING OF OWNER AND OWNERSHIP WAS ALSO RELIED UPON BY THE ASSESSE E ALONG WITH FOLLOWING DECISIONS:- MAHABIR COMMERCIAL CO. LTD. VS COMMISSIONER OF INC OME-TAX (86 ITR 417) (SC) COMMISSIONER OF INCOME-TAX VS. MEWAR TEXTILE MILLS LLTD. (91 ITR 542) (SC) COMMISSIONER OF INCOME-TAX VS. KIRLOSKAR OIL ENGINE S LTD. (135 ITR 762) (BOM) INCOME-TAX OFFICER VS. SRIRAM BEARINGS LTD. (224 IT R 724) (SC) ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 11 BESIDES THIS, VARIOUS CLAUSES OF CSA AND C&MA WERE REFERRED TO IN SUPPORT OF ITS CONTENTION, AS TO WHAT WAS THE INTEN TION OF THE PARTIES, TERMS OF AGREEMENT AND OTHER CONDITIONS AMONGST THE PARTIES. 9. THE LD.CIT (A) AFTER GOING THROUGH THE MATERIAL PLACED ON RECORD, OBSERVED THAT THE AMOUNT RECEIVED BY THE ASSESSEE F ROM VSNL IS ON ACCOUNT OF SALE OF CAPACITY ONLY IN THE CABLE SYSTE M AND IT IS NORMAL BUSINESS ACTIVITY OF THE ASSESSEE. HENCE, THE CONSI DERATION ARISING THEREFROM PARTAKES THE NATURE OF THE BUSINESS INCOM E, BUT THIS BUSINESS INCOME IS TAXABLE U/S 9(1)(I) IN INDIA, WHICH NEEDS TO BE ATTRIBUTED. 10. ON THE ASSESSEES ALTERNATE CONTENTION AND THE GROUND THAT IF THE REVENUE COLLECTED IS AT ALL CHARGEABLE TO TAX IN IN DIA, IN THE HANDS OF THE ASSESSEE, THEN ONLY THE PROPORTION OF CABLE LENGTH SITUATED IN INDIA VIS- A-VIS THE TOTAL CABLE LENGTH WORLDWIDE SHOULD BE WO RKED OUT. THE LD. CIT(A) HOWEVER DID NOT ACCEPT THE ASSESSEES METHOD OF ATTRIBUTION ON THE BASIS OF CABLE LENGTH. THE ASSESSEE HAD ALSO SU BMITTED VARIOUS ALTERNATIVE METHODS FOR ATTRIBUTING THE INCOME IN I NDIA LIKE, BASED ON PROPORTIONATE LENGTH OF THE CABLE IN INDIA OR BASED ON PROPORTIONATE CAPACITY SOLD TO VSNL, ETC. HOWEVER, THE LD. CIT(A) HELD THAT THE INCOME ATTRIBUTABLE TO INDIA CAN BE WORKED OUT ON T HE BASIS OF PROPORTIONATE WORLDWIDE PROFIT. THE RELEVANT WORKIN G FOR THE ATTRIBUTION OF INCOME TAXABLE IN INDIA WAS WORKED OUT BY HIM AS UNDER:- REVENUE EARNED FROM VSNL ON SALE OF CAPACITY : U S$ 28,940,000 REVENUE EARNED WORLDWIDE ON SALE OF CAPACITY : U S$ 363,936,000 WORLDWIDE PROFITS AS PER WORKING OF THE APPELLANT : US$ 84,360,000 PROFITS ATTRIBUTABLE TO INDIA : US$ 28,940,000 X 84,360,000 US$ 363,936,000 ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 12 = US$ 6,708,263 11. SO FAR AS THE AOS CONCLUSION THAT THE AMOUNT R ECEIVED BY THE ASSESSEE IS TAXABLE AS ROYALTY OR FEES FOR TECH NICAL SERVICES, THE LD. CIT(A) REJECTED THE ENTIRE REASONING OF THE AO, AFT ER ANALYZING THE TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN THE ASSESSE E AND VSNL. THE ASSESSEES SUBMISSION IN THIS REGARD HAS BEEN DEALT BY THE LD. CIT(A) IN PARA 5.2, 5.3 AND 5.4. THE LD. CIT(A) AFTER CONSI DERING THE AOS REASONING AND ASSESSEES SUBMISSION HELD THAT THE C SA AS WELL AS VARIOUS CLAUSES OF C&MA MAKES IT AMPLY CLEAR THAT THE CONSIDERATION PAID BY THE VSNL IS TOWARDS PURCHASE OF THE CAPACIT Y IN THE CABLE SYSTEM AND NOT ON ACCOUNT OF USE OR RIGHT TO USE OF EQUIPMENT OR ON ACCOUNT OF ANY USE OF TECHNICAL INFORMATION. THE RE LEVANT OBSERVATION OF THE LD. CIT(A) IN THIS REGARD IS AS UNDER:- THOUGH IT IS TRUE THAT CERTAIN TECHNICAL INFORMATI ON (NOT BEING IN THE NATURE OF ANY SPECIALIZED KNOW-HOW OR TECHNICAL SERVICES) WOULD BE SHARED WITH VSNL AS AN INTEGRAL PART OF TH E ABOVE ARRANGEMENT TO ENABLE VSNL TO SERVE AS A LENDING PA RTY ON THE CABLE SYSTEM. HOWEVER, NO SEPARATE CONSIDERATION IS ATTRIBUTABLE IN RESPECT OF THE TECHNICAL INFORMATION PROVIDED TO VSNL IN THIS REGARD AND THE ENTIRE CONSIDERATION OF US$ 28,940,0 00 IS TOWARDS PURCHASE OF CAPACITY BY VSNL. FURTHERMORE, THE SAME TECHNICAL INFORMATION IS PROVIDED TO EACH LANDING PARTY REGAR DLESS OF THE AMOUNT OF THE CAPACITY IT BUYS. THE PAYMENT FOR SAL E OF CAPACITY, IN ISOLATION, DOES NOT ENVISAGE PROVISION OF ANY SE RVICES OF A TECHNICAL NATURE OR ROYALTIES. THE AUTHORIZED REPRE SENTATIVE EVEN TOOK PLANS TO EXPLAIN HOW THE AMENDMENT BROUGHT IN THE DEFINITION OF ROYALTY AS GIVEN IN EXPLANATION 2 T O SECTION 9(1)(VI) TO INCLUDE CONSIDERATION FOR USE OR RIGHT TO USE AN Y INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BY THE FINANCE A CT, 2001 CANNOT BE APPLIED IN THE PRESENT CASE AS THE SAME H AS COME INTO EFFECT FROM 01.04.2002 ONLY. THEREFORE, IN THESE CI RCUMSTANCES I DO NOT SUBSCRIBE TO THE VIEW OF THE ASSESSING OFFIC ER THAT THE PAYMENT RECEIVED BY THE APPELLANT TOWARDS CSA IS CO VERED U/S 9(1)(VI) AND 9(1)(VII) OF THE I.T. ACT, 1961 AND TH IS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE APPELLANT. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 13 12. REGARDING TAXABILITY OF STANDBY MAINTENANCE R EVENUE EARNED BY THE ASSESSEE UNDER C&MA AS BEING FEE FOR TECHNICAL SERVICES, HE HELD THAT SAME HAS RIGHTLY BEEN THE TAXED AS FEE FOR TEC HNICAL SERVICES UNDER SECTION 9(1)(VII). HIS REASONS ARE ELABORATED IN PA RA 6.3 FROM PAGES 19 TO 22 OF THE APPELLATE ORDER. 13. THUS, THE LD. CIT(A) HELD THAT:- FIRSTLY , THE PAYMENT RECEIVED BY THE ASSESSEE FROM VSNL IS TOWAR DS SALE OF CAPACITY WHICH IS TAXABLE AS BUSINESS INCOM E IN INDIA U/S 9(1)(I). SECONDLY, THE INCOME WHICH CAN BE SAID TO BE ATTRIBUTABLE IN INDIA IS TO BE WORKED OUT ON THE BASIS OF PROPORTIONATE WORLDWI DE PROFIT AS WORKED OUT BY HIM IN THE MANNER INCORPORATED ABOVE. THIRDLY, SUCH A PAYMENT OF US$ 28.94 MILLION CANNOT BE TAXE D AS ROYALTY OR FEE FOR TECHNICAL SERVICES UNDER 9(1 )(VI) OR 9(I)(VII). LASTLY, THE PAYMENT RECEIVED ON ACCOUNT OF STANDBY MAINTEN ANCE IN TERMS OF C&MA IS TAXABLE IN INDIA AS FEE FOR TECHN ICAL SERVICES U/S 9(1)(VII). ARGUMENTS/ CONTENTIONS RAISED BY THE ASSESSEE:- 14. BEFORE US, LEARNED SENIOR COUNSEL, SHRI J.D. MI STRY, FIRST OF ALL EXPLAINED THE ENTIRE CONCEPT OF THE FIBRE OPTIC CAB LE SYSTEM AS LAID DOWN BY THE FLAG AND HOW THE ENTIRE SYSTEM IS OPERATED A ND THE CAPACITY IS SOLD TO THE CO-SIGNATORIES, WHO ARE THE LANDING PAR TIES IN VARIOUS COUNTRIES. HE EXPLAINED THAT, UNDERSEA CABLE IS DIV IDED INTO VARIOUS SEGMENTS AND WHENEVER THE CABLE COMES TO THE SHORE, SAME IS CONNECTED TO A LANDING POINT FROM WHERE THE CABLE I S CONNECTED TO THE LOCAL DOMESTIC TELECOM SYSTEM OF THE COUNTRY OF THE LANDING PARTY. THIS ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 14 CABLE STATION, I.E., THE LANDING POINT STATION IS B UILT WITH THE AID OF ASSESSEE BUT IS OWNED BY THE LANDING PARTY. THEREAF TER, LEARNED SENIOR COUNSEL SUBMITTED THAT THE ENTIRE CONCEPT OF SALE A ND OWNERSHIP OF THE LANDING PARTIES, HEREIN THIS CASE VSNL, HAS TO BE U NDERSTOOD RIGHT FROM MOU DATED 19.07.1993; CAPACITY SALES AGREEMENT DATE D 31.03.1995 AND THE CONSTRUCTION AND MAINTENANCE AGREEMENT. TO EXPLAIN THAT THERE IS A CONCEPT OF JOINT CO-OWNERSHIP IN THE CABLE SYS TEM AND THERE IS NOTHING OF RIGHT TO USE BUT SALE OF CAPACITY IN T HE CABLE SYSTEM, MR. MISTRY SUBMITTED THAT, ALL THE DOCUMENTS IN THE AGR EEMENTS HAVE TO BE CONSIDERED IN A LITERAL MANNER AND THE TRUE INTENT OF THE PARTIES. HE SUBMITTED THAT THE MOU WAS THE FIRST DOCUMENT EXECU TED BETWEEN THE FLAG AND VARIOUS OTHER INTERNATIONAL TELECOMMUNICAT IONS CARRIERS FOR THE PURPOSE OF PLANNING AND DESIGNING A SUBMARINE FIBRE OPTIC TELECOMMUNICATION CABLE SYSTEM LINKING WESTERN EURO PE, MIDDLE EAST, SOUTH ASIA, SOUTH EAST ASIA AND FAR EAST ASIA WHICH RUNS UP TO 27,000 KMS. MOU WAS ENTERED FOR THE CO-OPERATION OF THE CO NCERNED PARTIES WHO WERE REQUIRED TO PLAN, DESIGN AND CONSTRUCT THE ENTIRE CABLE SYSTEM AND TO DETERMINE THE RIGHTS AND OBLIGATIONS OF THE VARIOUS PARTIES INVOLVED. 15. TO DEMONSTRATE THE INTENT AND PURPOSE OF JOINT CO-OWNERSHIP OF THE CAPACITY IN THE ENTIRE CABLE SYSTEM, HE POINTED OUT TO FOLLOWING CLAUSES OF THE MOU:- 2. THE INTENTIONS OF THE PARTIES ARE: 2.1 TO PLAN JOINTLY FOR THE IMPLEMENTATION OF THE F LAG CABLE SYSTEM IN ORDER TO MEET THE PROJECTED TRAFFIC REQUI REMENTS OF THE PARTIES AND THEIR CORRESPONDENTS THROUGH AT LEAST T HE YEAR 2010, AND TO INTERCONNECT THE FLAG CABLE SYSTEM WITH OTHE R CABLE SYSTEMS AND WITH OTHER TELECOMMUNICATIONS FACILITIE S, INCLUDING ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 15 INTERNATIONAL EARTH STATION/ SATELLITE NETWORKS, TO ENHANCE THE UTILIZATIONS OF THE FLAG CABLE SYSTEM AND TO PROVID E MUTUAL RESTORATIONS. 2.2 TO DEVELOP THE DRAFT FLAG C&MA UNDER THE FLAG C ABLE SYSTEM WILL BE PROCURED, CONSTRUCTED, OPERATED AND MAINTAINED; 2.3 TO ATTEND INFORMATION MEETINGS(S) AND DATA GATH ERING MEETING(S) TO BE HELD PRIOR TO THE SIGNING OF THE C &MA. 2.4 TO PARTICIPATE IN THE INTERIM MANAGEMENT COMMIT TEE IN ACCORDANCE WITH PARAGRAPHS 9 THROUGH 12 FROM THESE CLAUSES, HE SUBMITTED THAT THE PARTIES I NTENDED FOR THE JOINT INVOLVEMENT OF THE VARIOUS PARTIES, RIGHT FROM THE INITIAL STAGE OF PLANNING THE WHOLE CABLE SYSTEM AND TO HOW THAT THE PARTIES TO THE MOU WILL HAVE JOINT OWNERSHIP OF THE CAPACITY IN THE CA BLE SYSTEM. IF THE FLAG INTENDED TO ONLY GRANT A RIGHT TO USE THE CAPACIT Y IN THE CABLE SYSTEM OF THESE PARTIES, THEN THEY WOULD NOT HAVE BEEN MADE P ARTY TO THE SAID MOU. HE FURTHER REFERRED TO CLAUSES 9 AND 10 MOU WH ICH READS AS UNDER:- 9. AN INTERIM MANAGEMENT COMMITTEE (HEREINAFTER RE FERRED TO AS THE INTERIM MANAGEMENT COMMITTEE) SHALL BE EST ABLISHED AND SHALL CONSIST OF ONE REPRESENTATIVE OF EACH OF THE PARTIES, INCLUDING THE FOUNDING PARTY. THE INTERIM MANAGEMEN T COMMITTEE SHALL ADVISE THE FOUNDING PARTY ON ALL DE CISIONS NECESSARY TO REALIZE THE OBJECTIVES AND PURPOSE OF THIS MOU, AND SHALL PERFORM SUCH TASKS AND ACTIVITIES AS MAY BE R EQUIRED, INCLUDING, BUT NOT LIMITED TO: 9.1 COLLECTING REQUIRED TRAFFIC INFORMATION AND STU DIES; 9.2 UNDERTAKING REQUIRED TECHNICAL, ECONOMIC, AND C OMMERCIAL STUDIES AS NECESSARY; 9.3 PREPARING APPROPRIATE DOCUMENTATION FOR PRESENT ATION TO POTENTIAL PARTIES; ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 16 9.4 DEVELOPMENT THE C&MA FOR APPROVAL AND EXECUTION PRIOR TO THE PLACEMENT OF THE FLAG CABLE SYSTEM SUPPLY CONTR ACT; 9.5 PREPARING A PROJECT IMPLEMENTATION SCHEDULE REQ UIRED TO IMPLEMENT THIS MOU; 9.6 WORKING TOGETHER TO DEVELOP INITIAL PLANS FOR T HE REQUIRED INTERCONNECTION OF THE FLAG CABLE SYSTEM WITH OTHER CABLE SYSTEMS AND WITH OTHER TELECOMMUNICATIONS FACILITIE S, INCLUDING INTERNATIONAL EARTH STATION/ SATELLITE NETWORKS, SO AS TO PROVIDE MUTUAL RESTORATION, AND TO ENSURE CONCERTED ACTION WITH THE OWNERS OF SUCH OTHER CABLE SYSTEM AND OTHER APPROPR IATE PARTIES TO THIS END; 9.7 PROVIDING APPROPRIATE AND NECESSARY INFORMATION REGARDING EACH PROSPECTIVE CABLE LANDING STATION IN ORDER TO SATISFY THE OBJECTIVES AND PURPOSE OF THIS MOU; 9.8 PREPARING AND PROVIDING TERMS AND CONDITIONS FO R THE USE OF CABLE LANDING STATIONS IN THE FLAG CABLE SYSTEM; 9.9 MAKING AVAILABLE APPROPRIATE, ORDINARY AND NECE SSARY INFORMATION, INCLUDING CONTRACT TERMS AND CONDITION S, RELATING TO TERMINAL COUNTRY INLAND EXTENSION SYSTEM CHARGES AN D DOMESTIC NETWORK TRANSIT CHARGES; 9.10 REQUESTING AND RECEIVING REPORTS RELATING TO T HE FLAG CABLE SYSTEM PROCUREMENT ACTIVITIES; 9.11 REVIEWING THE PROGRESS OF ALL ACTIVITIES UNDER TAKEN TO ENSURE THE PERFORMANCE OF THIS MOU; AND 9.12 PROVIDING FULL COOPERATION WITH EACH OTHER ON MATTERS CONCERNING THE FLAG CABLE SYSTEM. 10. THE FOLLOWING RULES AND PROCEDURES SHALL APPLY TO THE INTERIM MANAGEMENT COMMITTEE: 10.1 THE FOUNDING PARTY SHALL PROVIDE THE CHAIRPERS ON OF THE INTERIM MANAGEMENT COMMITTEE. THE INTERIM MANAGEMEN T COMMITTEE WILL MEET ON THE CALL OF THE CHAIRPERSON OR WHENEVER REQUESTED BY TWO OR MORE LANDING PARTIES ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 17 10.2 EXCEPT AS OTHERWISE PROVIDED IN PARAGRAPH 4, A LL DECISIONS MADE BY THE INTERIM MANAGEMENT COMMITTEE SHALL BE S UBJECT KIN THE FIRST INSTANCE TO FULL PARTICIPATION AND CONSUL TATION AMONG THE DESIGNATED REPRESENTATIVE OF THE PARTIES, WITH A VI EW TOWARDS REACHING A CONSENSUS. FOLLOWING CONSULTATIONS, A DE CISION SHALL BE TAKEN BY THE FOUNDING PARTY WITH THE CONCURRENCE OF AT LEAST TWO LANDING PARTIES. 10.3 PROCEEDINGS OF THE INTERIM MANAGEMENT COMMITTE E WILL BE DOCUMENTED IN THE FORM OF OFFICIAL, AGREED MINUTES. THE AFORESAID CLAUSES RELATE TO APPOINTMENT AND FUN CTIONING OF THE MANAGEMENT COMMITTEE WHICH INCLUDED PARTICIPATION O F ALL THE CONCERNED PARTIES INCLUDING VSNL IN THE DECISION MA KING PROCESS RELATING TO THE CABLE SYSTEM. HE SUBMITTED THAT, IF FLAG INT ENDED TO GRANT VSNL, ONLY RIGHT TO USE THE CAPACITY IN THE CABLE SYSTEM, THEN IT WOULD NOT HAVE GRANTED THE VSNL THE RIGHT TO PARTICIPATE IN THE DE CISION MAKING PROCESS IN THE CABLE SYSTEM. HE FURTHER DREW OUR ATTENTION TO CLAUSE 17 OF THE MOU WHICH READ AS UNDER:- 17 THE PARTIES INTEND TO ACQUIRE CAPACITY IN THE F LAG CABLE SYSTEM. THE MINIMUM INVESTMENT UNIT (HEREINAFTER RE FERRED TO AS THE MIU) ALLOWED IN THE FLAG CABLE SYSTEM SHALL R EPRESENT THE MINIMUM OWNERSHIP INTEREST SHARE THAT SHALL ALLOW T HE USE OF A 2.048 MBPS STREAM. ADDITIONAL CAPACITY SHALL BE AVA ILABLE ONLY IN WHOLE MULTIPLES OF MIUS. THE INTENDED CAPACITY ASSI GNMENTS OF THE PARTIES IN THE FLAG CABLE SYSTEM SHALL BE PRELI MINARILY INFORMED TO THE FOUNDING PARTY BY THE PARTIES AT ON E OR MORE DATA GATHERING MEETINGS AND AGREED UPON BY THE PART IES, AND APPROPRIATE SCHEDULES SHALL BE INCLUDED IN THE C&MA . THIS CLAUSE CLEARLY INDICATES THE INTENTION OF THE PARTIES, WHICH WAS TO ACQUIRE THE CAPACITY IN THE CABLE SYSTEM. 16. HE FURTHER EXPLAINED THAT THE SALE OF CAPACITY IN THE CABLE SYSTEM AND THE TERMS OF PURCHASE BY VSNL ARE CONTAINED IN CAPACITY SALES AGREEMENT DATED 31.03.1995 AS AMENDED ON 20.04.1998 . UNDER THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 18 TERMS OF CSA, CONSIDERATION OF US $ 28.94 MILLION W AS PAYABLE BY VSNL TO THE ASSESSEE TOWARDS THE PURCHASE OF CAPACITY IN THE CABLE SYSTEM. THE PROCEDURE FOR OWNERSHIP AND MAINTENANCE ARE CON TAINED IN CONSTRUCTION AND MAINTENANCE AGREEMENT BETWEEN THE ASSESSEE AND THE LANDING PARTIES, I.E., VSNL WHO HAS PURCHASED THE C APACITY IN THE CABLE SYSTEM UNDER THE TERMS OF C&MA. THE VSNL IS ENTITLE D TO COMMON UNDIVIDED OWNERSHIP IN THE CABLE IN ADDITION TO RI GHT TO USE THE PURCHASED CAPACITY FOR A PERIOD OF 25 YEARS, WHICH IN FACT COINCIDES WITH THE LIFE OF THE CABLE. HENCE SALE OF CAPACITY WAS F OR ENTRE LIFE OF THE CABLE. THE TERMS AND VARIOUS CLAUSES OF C&MA CLEAR LY DEMONSTRATE THAT THE OWNERSHIP OF THE ASSIGNABLE CAPACITY VESTS WITH THE PURCHASING PARTY, THAT IS, VSNL. SO FAR AS TECHNICAL INFORMATI ON SHARED WITH VSNL IS CONCERNED AS ALLEGED BY THE AO, THEY WERE NOT IN TH E NATURE OF ANY SPECIALIZED KNOW-HOW FOR TECHNICAL SERVICES. IT WAS AN INTEGRAL PART OF ARRANGEMENT TO ENABLE THE VSNL TO SERVE AS LANDING PARTIES ON THE CABLE SYSTEM. THERE IS NO SEPARATE CONSIDERATION IN RESPE CT OF THE TECHNICAL INFORMATION AS IT WAS PART AND PARCEL OF SALE CONSI DERATION OF US$ 28.94 MILLION. THE C&MA CATEGORICALLY PROVIDES THAT VSNL HAS ALL THE OWNERSHIP RIGHTS AND OBLIGATION IN RESPECT OF THE C APACITY, I.E., TRANSFER, ASSIGNMENT, TO TAKE DECISION ETC. IN RESPECT OF THE CAPACITY IN THE CABLE SYSTEM. AS PER THE CSA, TITLE TO THE CABLE SYSTEM A ND THE CAPACITY STANDS TRANSFERRED TO THE VSNL WITH ALL RIGHTS AND OBLIGATION AND THE VSNL BECOMES THE COMPLETE OWNER. THIS HAS BEEN FURT HER PROVIDED IN CLAUSE (3) OF C&MA. LEARNED COUNSEL FURTHER DREW OU R ATTENTION TO CLAUSE 1 AND 2 OF CSA, WHICH DEALS WITH THE SALE OF CAPACITY IN THE CABLE SYSTEM AND THE TERMS OF PAYMENT. THESE CLAUSES READ AS UNDER:- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 19 1. S CAPACITY: FLAG HEREBY AGREES TO SELL, AND PUR CHASER AGREES TO PURCHASE THE S CAPACITY SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THIS AGREEMENT. THE S CAPACITY SHALL I NCLUDE ALL OF THOSE RIGHTS AND OWNERSHIP INTEREST SPECIFIED WITH RESPECT TO SEGMENTS S OF THE SUBMARINE SYSTEM IN THE C&MA. (E) UPON PAYMENT BY PURCHASER OF THE ENTIRE PURCHAS E PRICE SPECIFIED IN PARAGRAPH 2(A), TITLE TO THE S CAPACIT Y SHALL BE TRANSFERRED AND SHALL BE OWNED BY PURCHASER IN ACCO RDANCE WITH PARAGRAPH 3.1 OF THE C&MA.. FURTHER, CLAUSE 3 OF C&MA DEALING WITH THE CONCEPT OF OWNERSHIP IS VERY RELEVANT WHICH READS AS UNDER:- 3. OWNERSHIP 3.1 EACH SEGMENT S SHALL BE OWNED BY THE RESPECTIVE SIGNATORIES, RETROACTIVE TO THE RFPA DATE, IN COMMON AND UNDIVID ED SHARES IN THE PROPORTIONS SET OUT IN SCHEDULE D IN RESPECT OF SUCH SEGMENT UPON PAYMENT TO THE FOUNDING SIGNATORY IN ACCORDANC E WITH TERMS AND CONDITIONS OF APPLICABLE CAPACITY SALES A GREEMENTS. EACH SIGNATORY SHALL HAVE THE RIGHT TO ACTIVATE AND USE ITS ASSIGNABLE CAPACITY IN EACH RELEVANT SEGMENT S AS O F THE RFPA DATE AND SHALL BE RESPONSIBLE AS OF THAT DATE FOR A LL OBLIGATIONS ARISING AS AN INCIDENT OF OWNERSHIP IN THE FLAG CAB LE SYSTEM, INCLUDING, WITHOUT LIMITATION, PAYMENT OF OPERATION AND MAINTENANCE CHARGES PURSUANT TO PARAGRAPH 11, PROVI DED, HOWEVER, THAT IF PAYMENT FOR SUCH ASSIGNABLE CAPACI TY IS NOT RECEIVED WITHIN THIRTY (30) DAYS OF THE DUE DATE UN DER THE APPLICABLE CAPACITY SALES AGREEMENT, OWNERSHIP WILL NOT VEST RETROACTIVELY, AND THE FOUNDING SIGNATORY MAY, WITH OUT PREJUDICE TO ANY OTHER REMEDIES IT MAY HAVE, DEACTIVATE SUCH ASSIGNABLE CAPACITY. 3.2 AS AN INCIDENT OF OWNERSHIP OF SEGMENT S, EACH SIGNATORY SHALL HAVE THE RIGHT TO USE SUCH PART OF THE ASSIGN ABLE CAPACITY IN EACH RELEVANT SEGMENT IN ACCORDANCE WITH PARAGRAPH 13 FOR THE DURATION OF THIS AGREEMENT. 3.3 EACH SEGMENT T AND SEGMENTS X-1 AND X-2 SHALL B E OWNED BY THE LANDING PARTY SIGNATORY IN WHOSE COUNTRY THE RELEVANT SEGMENT IS PHYSICALLY SITUATED. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 20 3.4 EACH SIGNATORY MAY DEAL WITH ITS OWNERSHIP SHAR E IN ANY SEGMENT S AND THE RIGHT TO USE ITS PART OF THE ASSI GNABLE CAPACITY IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, BUT NO SIGNATORY SHALL OTHERWISE HAVE OR EXERCISE IN RELATION TO ANY SUCH SEGMENT ANY RIGHT INCIDENT TO A RIGHT OF OWNERSHIP OF PROPE RLY EXCEPT JOINTLY WITH ALL OTHER SIGNATORIES. 17. FROM THESE CLAUSES, MR. MISTRY SUBMITTED THAT I T IS QUITE EVIDENT THAT VSNL HAS ALL THE OWNERSHIP RIGHTS AND OBLIGATI ONS IN RESPECT OF CAPACITY PURCHASED IN THE CABLE SYSTEM. IT IS ONLY WHEN A OWNERSHIP RIGHT IS GIVEN THAT SUCH OBLIGATIONS ARE ASSOCIATED WITH AND WOULD NOT HAVE BEEN THERE, IF FLAG HAD GRANTED ONLY THE RIGH T TO USE THE CAPACITY IN THE CABLE SYSTEM TO THE VSNL. HE ALSO EMPHASIZED CLAUSE 4.1 OF C&MA WHICH PROVIDES THAT THE MANAGEMENT COMMITTEE S HALL MAKE ALL THE DECISIONS ON BEHALF OF THE SIGNATORIES TO IMPLE MENT THE PURPOSE OF THE AGREEMENT AND HOW THE SIGNATORIES DESIGNATE THE IR REPRESENTATIVE TO ATTEND THE MEETINGS. EVEN THE VSNL HAD THE REPRESEN TATION AND THE VOTING RIGHTS. SUCH A RIGHT IS ONLY POSSIBLE WHERE THERE IS OWNERSHIP AND NOT MERELY A SIMPLE RIGHT TO USE THE CAPACITY. CLAU SE 11 PROVIDES THAT VSNL HAS OBLIGATION TO PAY STANDBY MAINTENANCE CHAR GES FOR UP GRADATION AND MAINTENANCE COST OF THE CAPACITY THAT THEY OWN ON THE CABLE SYSTEM. CLAUSE 13.1 PROVIDES FOR ASSIGNABLE C APACITY WHICH WOULD BE IN THE FORM OF MIUS WHICH IS OWNED BY EACH SIGN ATORIES. HE SUBMITTED THAT, THE VERY FACT THAT PURCHASERS OF TH E CAPACITY CAN SELL OR GRANT A RIGHT TO USE THE CAPACITY IN THE CABLE SYST EM TO SOME OTHER PARTY, CLEARLY INDICATES THAT SIGNATORY IS THE OWNE R OF THE CAPACITY IN THE CABLE SYSTEM. THE CONCEPT OF TRANSFER, ASSIGN O R DISPOSING OFF THE CAPACITY BY THE PURCHASERS/ SIGNATORIES HAVE BEEN P ROVIDED IN CLAUSE 13.4 AND 13.5 WHICH READ AS UNDER:- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 21 13.4 A SIGNATORY SHALL BE ENTITLED TO ASSIGN, TRAN SFER OR DISPOSE OF ITS ASSIGNABLE CAPACITY TO AN AFFILIATE OF SUCH SIGNATORY, SUBJECT TO ANY APPLICABLE LAWS AND REGULATIONS (INCLUDING L AWS AND REGULATIONS RELATING TO REGISTERED PRIVATE OPERATIN G AGENCY STATUS. ) A SIGNATORY EXERCISING ITS RIGHTS UNDER T HIS PARAGRAPH 13.4 SHALL GIVE WRITTEN NOTICE TO THE FOUNDING SIGN ATORY IN A TIMELY MANNER OF SUCH ASSIGNMENT, TRANSFER OR DISPO SITION, AND SHALL GUARANTEE BY WRITTEN INSTRUMENT REASONABLY SA TISFACTORY IN FORM AND SUBSTANCE TO THE FOUNDING SIGNATORY, ALL O F THE OBLIGATIONS HEREUNDER ASSIGNED, TRANSFERRED OR DISP OSED OF TO SUCH AFFILIATE. 13.5 A SIGNATORY SHALL BE ENTITLED TO TRANSFER ITS ASSIGNABLE CAPACITY ASSIGNED TO THAT SIGNATORY TO ANOTHER SIGN ATORY OR INTERNATIONAL TELECOMMUNICATIONS ENTITY LOCATED IN THE COUNTRY OF THAT SIGNATORY. A SIGNATORY EXERCISING ITS RIGHTS U NDER THIS PARAGRAPH 13.5 SHALL GIVE WRITTEN NOTICE TO THE FOU NDING SIGNATORY IN A TIMELY MANNER OF SUCH TRANSFER. THESE CLAUSES GIVE THE PURCHASER (VSNL) AN UNRESTRI CTED RIGHT TO ASSIGN, TRANSFER, OR DISPOSE OF THE CAPACITY PURCHASED TO A N AFFILIATE. HE ALSO DREW OUR ATTENTION TO VARIOUS OTHER CLAUSES AND THE SCOPE AND MEANING OF SUCH CLAUSES TO EXPLAIN THE CONCEPT OF OWNERSHIP IN THE CABLE SYSTEM AND HOW EACH SIGNATORY PROPORTIONATELY OWNS COMMON AND UNDIVIDED SHARES IN THE RELEVANT SEGMENTS OF THE CABLE. 18. MR. MISTRY FURTHER ELABORATED THE CONCEPT OF TH E TERMOWNER AND OWNERSHIP AS UNDERSTOOD IN GENERAL LAW WITH AID O F BLACKS LAW DICTIONARY AND VARIOUS OTHER DICTIONARIES AND SUBMI TTED THAT, IF THE CONCEPT OF THE OWNERSHIP IS TO BE SEEN FROM THE TER MS OF VARIOUS CLAUSES OF CSA AND C&MA, THEN IT IS QUITE APPARENT THAT VSN L HAS ALL THE OWNERSHIP RIGHTS AND OBLIGATIONS IN RESPECT OF THE CAPACITY IN THE CABLE SYSTEM TO THE EXCLUSION OF OTHERS. VSNLS INTEREST IS CLEARLY FOR ITS OWN BENEFIT AND TO THE EXCLUSION OF OTHERS AND HAS COMP LETE FREEDOM TO DECIDE, HOW THE CAPACITY IS TO BE USED. HE FURTHER MADE A DISTINCTION ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 22 BETWEEN THE CAPACITY AND THE CABLE AND SUBMITTED TH AT A CABLE HAS TO BE UNDERSTOOD AS SHEATH OR CLOTHING OF THE OPTIC FIBRE THROUGH WHICH DATA IS TRANSFERRED. THE MEANING AND THE TERM OF CAPACITY A S INTENDED BY THE PARTIES HAS TO BE SEEN IN A HOLISTIC CONCEPT. THE C ABLE AS SUCH HAS NO MEANING, EXCEPT FOR ITS CAPACITY TO TRANSFER DATAS. IT IS THE CAPACITY IN THE CABLE SYSTEM WHICH IS BEING SOLD BY THE FLAG. T HE INTENTION OF THE PARTIES IS FURTHER CORROBORATED BY THE ENTRIES IN T HE BOOKS OF ACCOUNT. HERE FLAG HAS TREATED THE CAPACITY AS STOCK-IN-TRAD E IN THE ACCOUNTS. IN SUPPORT, MR. MISTRY DREW OUR ATTENTION TO AUDITED A CCOUNTS OF FLAG AS ON 31.12.1997. FROM THE SAID ACCOUNTS, HE POINTED OUT THAT THE FLAG HAS ACCOUNTED THE CAPACITY SOLD AS SALE OF GOODS AND COST OF CONSTRUCTION AND LAYING THE CABLE HAS BEEN ACCOUNTED AS COST OF GOODS SOLD IN THE BOOKS OF ACCOUNT AND THE SAME IS REFLECTED IN STATE MENT OF OPERATIONS. THE DIFFERENCE BETWEEN THE SALE CONSIDERATION RECEI VED AND COST OF GOOD SOLD HAVE BEEN TREATED AS PROFIT IN THE BOOKS. RELE VANT EXTRACT OF THE STATEMENT OF OPERATION AS APPEARING IN THE ACCOUNTS HAS BEEN AS UNDER:- 1997 REVENUES $ CAPACITY SALES, NET OF DISCOUNTS 335,982 STANDBY MAINTENANCE REVENUES 4,011 SALES AND OTHER OPERATING EXPENSES COST OF CAPACITY SOLD 196,190 THE ACCOUNTING POLICY FOLLOWED BY THE FLAG WAS ALSO REFERRED BY HIM WHICH IS REPRODUCED HEREUNDER:- 2. SIGNIFICANT ACCOUNTING POLICIES ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 23 A) SALES AND COST OF RECOGNITION REVENUES ARE RECOGNIZED UPON THE DATE THE RISKS AND REWARDS OF OWNERSHIP ARE TRANSFERRED TO THE PURCHASER, WHICH I S THE DATE THE CAPACITY IS MADE AVAILABLE FOR ACTIVATION AND STAND BY MAINTENANCE AND REPAIR BILLINGS COMMENCE. THIS POLI CY APPLIES TO BOTH AGREEMENTS COVERING THE SALES OF CAPACITY WHIC H ARE ACCOUNTED FOR AS OUTRIGHT SALES AND THOSE ACCOUNTED FOR AS SALES- TYPE- LEASES. THE COST OF THE FLAG SYSTEM RELATING TO CAPACITY SO LD IS RECOGNIZED AS COST OF SALES UPON RECOGNITION OF REV ENUES. THE COMPANY CALCULATES COST OF SALES SEPARATELY FOR EAC H SEGMENT. A SEGMENT REPRESENTS A PORTION OF THE FLAG SYSTEM B ETWEEN ANY TWO LANDING COMPANIES. THE AMOUNT CHARGED TO COST O F SALES FOR ANY GIVEN SEGMENT IS BASED ON THE RATIO OF CAPACITY SALES RECOGNIZED AS REVENUES IN THE PERIOD FOR THAT SEGME NT TO TOTAL EXPECTED REVENUE ON THAT SEGMENT OVER THE ENTIRE LI FE OF THE FLAG SYSTEM MULTIPLIED BY THE TOTAL CONSTRUCTION CO ST ALLOCATED TO THAT SEGMENT. THIS CALCULATION OF COST OF SALES MAT CHES COST WITH THE RELATIVE SALES VALUE OF EACH SALE TO TOTAL EXPE CTED REVENUES. MR. MISTRY FURTHER SUBMITTED THAT THE CAPACITY NOT SOLD HAS BEEN RECORDED IN THE BOOKS AS PART OF ITS CURRENT ASSET S UNDER THE HEAD CAPACITY AVAILABLE FOR SALE AND NOT A AS FIXED AS SETS, THE RELEVANT EXTRACT FROM THE BALANCE SHEET IS REPRODUCED HEREUN DER:- 1997 ASSETS $ CURRENT ASSETS: CAPACITY AVAILABLE FOR SALE 1,20,948 SALES AND OTHER OPERATING EXPENSES FIXED ASSETS, NET 1,147 THE VALUE OF CAPACITY AVAILABLE FOR SALE AND CONSTR UCTION IN PROGRESS HAS BEEN DECLARED IN THE FOLLOWING MANNER:- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 24 CAPACITY AVAILABLE FOR SALE IS RECORDED AT THE LOW ER OF COST OR FAIR VALUE LESS COST TO SELL AND WILL BE CHARGED TO COST OF SALES AS CAPACITY IS SOLD IT HAS BEEN FURTHER CLARIFIED BY THE LEARNED COUNSE L THAT THE FLAG HAS NOT TREATED THE CAPACITY OR CABLE UNDER THE HEAD FIXED ASSETS AND ONLY CERTAIN OFFICE FURNITURE AND EQUIPMENTS ARE APPEARI NG UNDER THE HEAD FIXED ASSETS IN THE FINANCIAL STATEMENT WHICH ARE A S UNDER:- 1997 $ O FFICE FURNITURE 500 LEASEHOLD IMPROVEMENTS 167 COMPUTER EQUIPMENT 802 AUTOS 78 1,547 LESS - ACCUMULATED DEPRECIATION (400) NET BOOK VALUE 1,147 19. AFTER REFERRING TO THE ACCOUNTS OF FLAG, MR. J. D. MISTRY REFERRED TO THE ACCOUNTS OF THE VSNL AND ALSO FILED COPY OF FIN ANCIAL ACCOUNT AND ANNUAL REPORT OF VSNL, TO POINT OUT THAT IN THE SAI D REPORT IT HAS BEEN STATED THAT VSNL HAS BOUGHT THE LINK AND CAPACITY I N THE SUBMARINE FIBRE OPTIC CABLE SYSTEM, WHICH GOES TO PROVE THE CONTENT ION OF THE ASSESSEE THAT THERE WAS A SALE BY THE ASSESSEE AND PURCHASE BY THE VSNL. THE VSNL HAS TREATED THE SAID PURCHASE OF CAPACITY IN T HE CABLE AS FIXED ASSET AND DEPRECIATION HAS BEEN CLAIMED ON THE BAS IS OF EXPECTED LIFE OF THE CABLE SYSTEM. THIS HAS BEEN SPECIFICALLY GIVEN IN THE ACCOUNTING POLICIES AND NOTES TO THE ACCOUNT RELATING TO FIXED ASSETS. THUS, IN NO MANNER IT CAN BE HELD THAT THE PAYMENT RECEIVED IS TOWARDS USE OF CABLES, WITHIN THE AMBIT AND SCOPE OF ROYALTY AS DEFINED IN SECTION 9(1)(VI). ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 25 20. HE FURTHER SUBMITTED THAT THE CONTENTION OF THE DEPARTMENT THAT THE SAID RECEIPT FROM SALE OF CAPACITY TO VSNL IS ROYALTY OR FEE FOR TECHNICAL SERVICES IS TOTALLY MISPLACED. THE INCOM E RECEIVED BY THE ASSESSEE IS PURELY IN THE NATURE OF BUSINESS INCOME WHICH IS FROM SALE OF GOODS, HEREIN THIS CASE CAPACITY IN THE CABLE. HOWE VER SUCH A BUSINESS INCOME CANNOT BE TAXED UNDER 9(1)(I) OF THE ACT, BE CAUSE NO INCOME HAS ACCRUED OR ARISEN THROUGH OR FROM ANY BUSINESS CONN ECTION, ANY PROPERTY, ANY ASSET OR SOURCE OF INCOME IN INDIA. R EFERRING TO SECTION 9(1)(I) AND VARIOUS EXPLANATIONS THERETO, HE SUBMIT TED THAT NONE OF THE PARAMETERS OR CONDITIONS STATED THEREIN ARE MET IN THE CASE OF THE ASSESSEE SO AS TO TREAT THE AMOUNT RECEIVED FROM SA LES AS INCOME TAXABLE IN INDIA. THE TERM USED IN SECTION 9(1)(I), THROUGH OR FROM WAS EXPLAINED BY HIM BY REFERRING TO THE LAW LEXICO N WHICH DEFINES THROUGH AS MEDIUM AGENCY OR INSTRUMENT; AND IN OXFORD DICTIONARY IT HAS BEEN DEFINED AS BY MEANS OF; AND FROM MEANS INDICATING SOURCE OR PROVENANCE. HERE IN THIS CASE, HE SUBMITTED TH AT, ONCE THE CAPACITY IS SOLD IN THE CABLE SYSTEM, THE ASSESSEE CEASES TO BE THE OWNER OF THE CAPACITY AND THE INCOME CANNOT BE TERMED TO BE AS I NCOME THROUGH OR FROM A SOURCE OR ASSET IN INDIA BECAUSE NOTHING I S SOLD IN INDIA AND THERE IS NO ASSET IN INDIA, ALSO THERE IS NO SOURCE IN INDIA. IN EXPLANATION 4 TO 9(1)(I) THE EXPRESSION THROUGH HAS BEEN CLAR IFIED TO INCLUDE BY MEANS OF, IN CONSEQUENCE OF OR BY REASON OF. THE CAPACITY SOLD BY THE FLAG DOES NOT IN ANY WAY CAN BE THROUGH ANY ASS ET OR SOURCE SITUATED IN INDIA. THERE IS NO INCOME FROM THE USE OF THE CAPACITY IN THE CABLE SYSTEM BUT BY SALE OF CAPACITY. THE CABLE IS ONLY THE CASING OR THE HOUSING FOR THE CAPACITY. IN SUPPORT HE CITED THE E XAMPLE OF A PERSON BUYING A COCA-COLA AND STATED THAT WHAT IS ACTUALLY BOUGHT AND PAID BY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 26 THE PERSON IS DRINK CONTAINED IN THE BOTTLE AND NOT THE BOTTLE WHICH IS MERELY A CONTAINER IN WHICH THE COCA-COLA DRINK IS STORED. THE LD. CIT (A) HAS NOT SPECIFIED UNDER WHICH LIMB OF SECTION 9 (1)(I) THE ASSESSEES TRANSACTION IS COVERED. HE FURTHER SUBMITTED THAT M OST OF THE SEGMENTS IN THE CABLE SYSTEM ARE NOT RELATED OR CONNECTED TO INDIA, ONLY SEGMENT S-6 THAT RUNS BETWEEN THE FLAG INTERFACE POINT AT T HE CABLE STATION AT FUJAIRAH (UAE) AND FLAG INTERFACE POINT AT THE CABL E STATION AT MUMBAI (INDIA) AND SEGMENT S-7 WHICH RUNS BETWEEN FLAG INT ERFACE POINT AT CABLE STATION AT MUMBAI AND FLAG INTERFACE POINT AT THE CABLE STATION AT PENANG (MALAYSIA). SIMPLY BECAUSE SMALL PORTION OF THE CABLE PASSES THROUGH INDIA, IT CANNOT BE CONSTRUED THAT CAPACITY SOLD LIES IN THE CABLE SITUATED IN INDIA. THUS, INCOME FROM SALE OF CAPACI TY IN THE CABLE SYSTEM DOES NOT ARISE THROUGH OR FROM ANY BUSINESS CONNECT ION IN INDIA. FURTHER CAPACITY CANNOT BE ALSO TERMED AS PROPERTY OR ANY ASSET OR SOURCE OR CAPITAL ASSET IN INDIA AS THE CAPACITY SOLD IS AN AMORPHOUS THING, IT CANNOT HAVE ANY TERRITORIAL LINK. C&MA AND CSA HAVE BEEN EXECUTED BY THE ASSESSEE OUTSIDE INDIA ON PRINCIPAL TO PRINCIPA L BASIS AND OWNERSHIP INTEREST IN THE CAPACITY HAS BEEN SOLD AND TRANSFER TO VSNL OUTSIDE INDIA. NO PART OF THE RECEIPT CAN BE TAXED IN INDIA UNDER 9(1) (I). IN SUPPORT OF HIS CONTENTION, HE STRONGLY PLACED RELIA NCE UPON CBDT CIRCULAR NO. 23 DATED 23.07.1969, WHEREIN IT HAS BE EN CLARIFIED THAT THE INCOME OF A NON-RESIDENT IS NOT TAXABLE PROVIDED TH E CONTRACT TO SELL IS MADE OUTSIDE INDIA AND THE SALE IS ON A PRINCIPAL-T O-PRINCIPAL BASIS. THE CIRCULAR FURTHER STATES THAT NO LIABILITY WILL ARIS E ON ACCRUAL BASIS TO A NON-RESIDENT ON THE PROFITS MADE BY HIM WHERE THE T RANSACTIONS OF SALE BETWEEN THE TWO PARTIES ARE ON A PRINCIPAL-TO-PRINC IPAL BASIS. EXPLANATION 1(A) TO SECTION 9(1)(I) ALSO MAKES THIS POSITION CL EAR. THIS CBDT CIRCULAR ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 27 CLARIFYING SECTION 9(1)(I) HAS ALSO BEEN CONSIDERED AND AFFIRMED BY VARIOUS COURTS INCLUDING THE FOLLOWING JUDGMENTS:- (I) CIT VS. KIRLOSKAR OIL ENGINES LTD. (1982) 135 I TR 762 (MUM) (II) INCOME-TAX OFFICER AND OTHERS VS. SRIRAM BEARI NGS LTD. (1997) 224 ITR 724 (SC) (III) ADDL. CIT VS. SKODA EXPORT (1998) 172 ITR 358 (AP) (IV) CIT VS. QUANTAS AIRWAYS LTD. (2002) 256 ITR 84 (DEL) (V) CIT VS. HINDUSTAN SHIPYARD LTD. 109 ITR 158 (AP ) (VI) CIT VS AHMEDABAD MANUFACTURING & CALICO PRINTI NG C. (1983) 139 ITR 806 (GUJ.) (VII) CIT VS. DAVY ASHMORE INDIA LTD. (1991) 190 IT R 626 (CAL.) THOUGH THIS CIRCULAR HAS BEEN WITHDRAWN BY THE CBDT VIDE CIRCULAR NO. 7 OF 2009 DATED 22.10.2009, HOWEVER, THE SAID CIRCU LAR WILL NOT HAVE ANY RETROSPECTIVE EFFECT. THE EARLIER CIRCULAR WILL BE RELEVANT FOR THE ASSESSMENT YEAR INVOLVED HERE-IN THIS CASE. THE SUB SEQUENT CIRCULAR WITHDRAWING THE EARLIER CIRCULAR WILL NOT BE APPLIC ABLE FROM RETROSPECTIVE DATE, HAS BEEN UPHELD IN THE FOLLOWING CASES. DDIT VS. SEIMENS AKTIENGESELLSCHAFT 310 ITR 320 (BO M) BASF (INDIA) LTD. VS. W. HASAN, CIT 280 ITR 136 (BO M) CIT VS MODEL EXIMS KANPUR 358 ITR 72 (ALL) DY. CIT VS. SANJIV GUPTA 135 TTJ 641 (LUCKNOW) DCIT VS. ANGELIQUE INTERNATIONAL LTD. 55 SOT 226 (D ELHI) 21. REGARDING TAXABILITY OF THE SAID RECEIPT AS RO YALTY AS HELD BY THE AO UNDER 9(1)(VI), HE SUBMITTED THAT THE SALE OF CA PACITY CANNOT BE CONSIDERED TO BE ROYALTY AS THE CABLE SYSTEM IS NOT A PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA, PROCESS, TRADE MARK OR SIMILAR PROPERTY. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 28 THE ASSESSEE IS NOT IMPARTING ANY INFORMATION CONCE RNING ANY KNOWLEDGE, EXPERIENCE OR SKILL, NOR IS THERE IS ANY TRANSFER OF ANY RIGHT IN RESPECT OF ANY COPY RIGHT, LITERARY, ARTISTIC OR SC IENTIFIC. RELIANCE WAS PLACED BY HIM ON THE DECISION OF CALCUTTA HIGH COUR T IN THE CASE OF CIT VS. DAVY ASHMORE INDIA LTD. 190 ITR 626. FURTHER TH E PAYMENT IS ALSO NOT IN THE NATURE OF RIGHT TO USE ANY INDUSTRIAL, COMMERCIAL, OR SCIENTIFIC EQUIPMENT FIRSTLY, BECAUSE THE SAID CLAUSE IN EXPLANATION 2 TO SECTION 9(1)(VI) HAS BEEN BROUGHT IN THE STATUTE W.E.F. 01. 04.2002 WHICH IS NOT APPLICABLE IN THIS YEAR AND SECONDLY, IT IS A CASE OF PURE SALES AND NONE OF THE CLAUSES IN THE CSA OR C&MA PROVIDES FOR USE OR RIGHT TO USE OF ANY EQUIPMENT. AS REGARD TAXABILITY OF INCOME FROM CAPA CITY SALES AS FTS U/S 9(1)(VII), HE SUBMITTED THAT THE ASSESSING OFFICER THOUGH HAS DISCUSSED THE SAME IN THE ASSESSMENT ORDER BUT FINALLY HELD I T TO BE TAXABLE AS ROYALTY U/S 9(1)(VI). 22. COMING TO THE APPORTIONMENT OF THE PROFITS TO I NDIA, MR. MISTRY SUBMITTED THAT, ASSESSEES ALTERNATE CONTENTION BEF ORE AUTHORITIES BELOW WAS THAT, REASONABLE PROPORTION OF INCOME FROM THE CAPACITY SALES WHICH AT BEST CAN BE TAXED IN INDIA WOULD BE THE PORTION OF CABLE LAID IN THE TERRITORIAL WATERS OF INDIA. REGARDING ATTRIBUTION OF INCOME TO THE EXTENT OF THE OPERATION CARRIED OUT IN INDIA, RELIANCE UPO N FOLLOWING DECISIONS WAS PLACED; CARBORANDUM CO. VS. CIT (108 ITR 335) AND CIT VS. TOSHOKU (125 ITR 525) AND BY THE BOMBAY HIGH COURT IN THE CASE OF THE CIT VS. TATA CHEMICAL LTD. (94 ITR 85). B ASED ON THE SAME PRINCIPLE, IT WAS CONTENDED THAT THE ONLY ACTIVITY CARRIED OUT IN INDIA BY THE ASSESSEE WOULD CONFINED TO THE PORTION OF THE CABLE LAID IN THE TERRITORIAL WATER OF INDIA, WHICH IS 12 NAUTICAL MILES AND PUT IN THE LA ND WHICH WILL COME TO 57.6 KMS. THUS, THE REVENUE ATTRIBUTABLE TO INDIA S HOULD BE DETERMINED ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 29 BASED ON THE PORTION OF THE LENGTH OF THE CABLE IN INDIA VIS--VIS A LENGTH OF THE CABLE WORLDWIDE WHICH IS 26,969 KMS. THE OTH ER ALTERNATIVE CONTENTION FOR ATTRIBUTION OF PROFITS TO THE OPERAT IONS CARRIED OUT IN INDIA, IT HAS BEEN SUBMITTED BY THE ASSESSEE THAT ONLY SEG MENTS S-6 AND S-7 ARE CONNECTED TO INDIA AND CONSIDERING THE RATIO OF SALES COST AND OPERATION EXPENSES IN PROPORTION OF THE LENGTH OF T HE CABLE IN THESE SEGMENTS TO THE TOTAL CABLE LENGTH OF THE CABLE SYS TEM, THE PROFIT THAT COULD BE ATTRIBUTABLE TO INDIA WOULD COME TO US $ 1 850. THE WORKING OF WHICH HAS BEEN FILED SEPARATELY. THE ATTRIBUTION DO NE BY THE LD. CIT (A) ON THE BASIS OF REVENUE EARNED IN INDIA VIS-A-VIS R EVENUE EARNED WORLDWIDE, IS NOT CORRECT AND SUFFERS FROM VARIOUS FALLACIES, FIRSTLY, FOR THE REASON THAT THERE IS NO REVENUE EARNED IN INDIA AND SECONDLY, ONLY THE INCOME WHICH IS ATTRIBUTABLE TO OPERATIONS IN I NDIA CAN ONLY BE SUBJECTED TO TAX IN INDIA. SUBMISSION ON STANDBY MAINTENANCE CHARGES 23. REGARDING THE SECOND ISSUE, WHETHER STANDBY MAI NTENANCE CHARGES EARNED BY THE ASSESSEE FROM VSNL UNDER C&MA AGREEMENT IS TAXABLE IN INDIA AS FTS U/S 9(1)(VII) OR NOT, MR. J .D. MISTRY SUBMITTED THAT, UNDER THE TERMS OF C&MA THE ASSESSEE HAD AGRE ED TO ARRANGE FOR MAINTENANCE TO KEEP THE CABLE SYSTEM IN PROPER WORK ING CONDITION AT ALL TIMES. THESE MAINTENANCE ACTIVITIES ARE OF TWO TYPE S, ONE FOR ARRANGEMENT FOR STANDBY COVER, THAT IS, HAVING THE CABLE SHIPS ON STANDBY TO REPAIR ANY BREAKS OR DAMAGES IN THE SUBM ARINE CABLE; AND SECOND FRO ACTUAL REPAIRS. THE PAYMENT REGARDING FO RM IS IN DISPUTE. THE REASON FOR STANDBY MAINTENANCE IS THAT, THE ENTIRE CABLE IS IN THE SEA BED AND IF THERE IS ANY BREAKAGE, THE SAME SHOULD B E REPAIRED AS EARLY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 30 AS POSSIBLE SO THAT COMMUNICATION AND TRANSMISSION OF DATA DOES NOT GETS AFFECTED. THIS DOES NOT AMOUNT TO ACTUALLY REN DERING OF SERVICES, BUT A FACILITY FOR READY TO USE. IN CASE THERE IS A CTUAL MAINTENANCE BEING CARRIED OUT ON THE BEHEST OF THE VSNL, THE SAME IS CHARGED AND IS OFFERED FOR TAX AS FTS IN INDIA. THE RELEVANT CLAUS E IN THE C&MA IN THIS REGARD HAS BEEN ELABORATED IN CLAUSE 10.5 AND 11.1. THE CLAUSE 10.5 PROVIDES OVERALL NETWORK SURVEILLANCE AND OVERALL C OORDINATION OF MAINTENANCE AND REPAIR OPERATIONS OF THE FLAG CABLE SYSTEM. THE ASSESSEE IS REQUIRED TO COORDINATE THE DEPLOYMENT O F VESSELS FOR REPAIR AND MAINTENANCE OPERATIONS IN ACCORDANCE WITH THE P ROCEDURE DEFINED IN THE FLAG OPERATION AND MAINTENANCE PLAN (FOMP). CLA USE 11.1 OF C&MA PROVIDES THAT, COST OF STANDBY CHARGES, PROCUREMENT OF CABLE SHIP SERVICES, SHIP DEPRECIATION, INSURANCE, IN-PORT EXP ENSES ETC. IS TO BE RECOVERED BY THE ASSESSEE THROUGH FIXED CHARGES PAY ABLE BY THE SIGNATORIES. FURTHER IT GIVES DETAILS OF ACTIVITIES , EXPENSES AND COSTS INCURRED BY THE ASSESSEE WITH REGARD TO STANDBY MAI NTENANCE ACTIVITIES. UNDER THIS CLAUSE, THE FIXED PAYMENTS ARE MADE FOR THE MAINTENANCE OF SEGMENTS S, X1 AND X2, THE FNOC, THE PROCUREMENT OF CABLE SHIP SERVICES COVERING, INTER ALIA, SHIP DEPRECIATION, S HIP RETROFIT, CREW INSURANCE (EXCEPT INSURANCE AT SEA), IN-PORT EXPENS ES, THE STORAGE OF SUBMERSIBLE PLANT, REMOTELY OPERATED VEHICLES AND O THER DEVICES WHEN INCLUDED IN THE WET MAINTENANCE ZONE AGREEMENT STAN DBY CHARGES. 24. MR. MISTRY POINTED OUT THAT, AS IS CLEARLY EVID ENT, FROM THESE CLAUSES, THESE STANDBY MAINTENANCE CHARGES ARE NOT MADE IN RESPECT OF ANY ACTUAL SERVICES, LEAVE ALONE ANY TECHNICAL SERV ICES TO BE RENDERED TO THE SIGNATORIES, BUT ARE PART OF THE ASSESSEES NOR MAL BUSINESS OPERATIONS. THESE ACTIVITIES ARE PURELY ADMINISTRAT IVE AND CO-COORDINATIVE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 31 IN NATURE. THE STANDBY CHARGES ARE IN FACT, ON ACCO UNT OF NOT PROVIDING ANY SERVICE BUT MERELY SETTING UP CONDITIONS FOR TH E EFFICIENT RENDERING OF TECHNICAL SERVICES. EXPLANATION 2 TO SECTION 9(1 )(VII) DEFINES FTS, WHICH STIPULATES THAT RENDERING FOR MANAGERIAL, TEC HNICAL OR CONSULTANCY SERVICES. THERE SHOULD BE RENDERING OF SERVICES WHI CH MEANS TO DO SOMETHING. HERE IN THIS CASE THERE IS NO ACTUAL REN DERING OF ANY SERVICES BUT AN INFRASTRUCTURE IS CREATED ON STANDBY BASIS F OR READY TO RENDER SERVICES. IN CASE OF RENDERING OF SERVICES BY THE A SSESSEE AND PAYMENT RECEIPT THEREOF, IS DEFINITELY TAXABLE AS FTS IN IN DIA. THE FIXED COST ON STANDBY MAINTENANCE CANNOT BE SAID TO BE FTS, BUT B USINESS INCOME WHICH FOR THE REASONS SUBMITTED EARLIER CANNOT BE T AXED IN INDIA. THUS, THE LEARNED SENIOR COUNSEL SUBMITTED THAT THE ASSES SEE IS ONLY REQUIRED TO ARRANGE FOR STANDBY MAINTENANCE IN RESPECT OF TH E CABLE SYSTEM FOR WHICH THE OTHER CO-OWNERS HAVE TO PAY FIXED ANNUAL CHARGES. THE STANDBY CHARGES ARE IN FACT PAYABLE NOT FOR PROVIDI NG SERVICES BUT FOR ARRANGING FOR STANDBY MAINTENANCE. THERE IS ALSO NO MARK UP ON STANDBY MAINTENANCE. IN THE C&MA THERE IS SEPARATE CHARGE FOR ANY ACTIVITY THAT MAY ACTUALLY BE REQUIRED TO UNDERTAKE OR ARRANGE BY THE ASSESSEE. TO ILLUSTRATE THIS POINT, HE GAVE AN EXAM PLE OF THE FIRE STATION WHICH IS EQUIPPED WITH NECESSARY FIRE LIGHTING EQUI PMENT, MANNED BY THE APPROPRIATE PERSONNEL, AT ALL TIMES. THIS RESUL TS IN FIXED OVERHEADS COMPRISING OF SALARIES OF THE PERSONNEL, RENT OF TH E PREMISES ETC.) BEING INCURRED IRRESPECTIVE OF FACT WHETHER THERE IS A FI RE OR NOT. THESE EXPENSES MAY THEN BE CHARGED BY THE FIRE STATION TO THE USERS, SIMILAR TO THE STANDBY MAINTENANCE CHARGES CHARGED BY THE ASSE SSEE TO VSNL. IN THE EVENT OF A FIRE, THE FIRE STATION WOULD TAKE TH E NECESSARY MEASURES TO RESTORE THE USERS PREMISES, FOR WHICH THERE COU LD BE A SEPARATE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 32 CHARGE, OVER AND ABOVE THE STANDBY CHARGE. FROM THI S EXAMPLE, HE SUBMITTED THAT IT IS EVIDENT THAT THE STANDBY CHARG E IS NOT FOR PROVIDING ANY SERVICE, AS SUCH, BUT IS FOR MAKING ARRANGEMENT S IN THE EVENT THAT ANY REPAIR/MAINTENANCE IS REQUIRED. ACCORDINGLY, IT IS EVIDENT THAT THE ASSESSEE IS NOT RENDERING ANY SERVICE TO ANY CUSTOM ER BUT IS ONLY CARRYING OUT ITS NORMAL BUSINESS OPERATIONS. THEREF ORE, THE REVENUES RECEIVABLE FROM VSNL FOR STANDBY CHARGES CANNOT BE TREATED AS SERVICE FEES, LEAVE ALONE TECHNICAL SERVICE FEES UNDER SECT ION 9(1)(VII) OF THE ACT. HE FURTHER SUBMITTED THAT THERE CANNOT BE RENDERING OF ANY MANAGERIAL OR CONSULTANCY SERVICES BY THE ASSESSEE FOR STANDBY MAINTENANCE CHARGES. IN SUPPORT OF THIS CONTENTION, LEARNED SEN IOR COUNSEL STRONGLY RELIED UPON THE DECISION OF THE MADRAS HIGH COURT I N THE CASE OF SKYCELL COMMUNICATIONS LIMITED AND ANOTHER VS. DCIT AND OTH ERS (251 ITR 53) AND OTHER DECISIONS. OBJECTIONS RAISED ON BEHALF OF THE REVENUE 25. ON BEHALF OF THE DEPARTMENT, LD. SPECIAL COUNSE L, SHRI GIRISH DAVE, FIRST OF ALL RAISED A PRELIMINARY OBJECTION THAT SO ME OF THE ANNEXURE/SCHEDULES TO C&MA AGREEMENT HAVE NOT BEEN FILED BY THE ASSESSEE. THERE HAVE BEEN MULTIPLE C&MA AGREEMENTS WHICH SHOULD BE READ TOGETHER. HE REQUESTED THE BENCH TO DIRECT THE ASSESSEE TO SUBMIT VARIOUS SUPPLY AGREEMENTS, SCHEDULE J TO C&MA AND O THER RELEVANT DOCUMENTS WHICH HAVE BEEN REFERRED IN THE AGREEMENT S. HE ALSO FILED A PETITION UNDER RULE 29 PRAYING FOR DIRECTION TO THE ASSESSEE FOR SUBMISSION OF ADDITIONAL EVIDENCE LIKE MAINTENANCE ZONE AGREEMENTS, WET MAINTENANCE AGREEMENTS, STANDBY CHARGES, SCHE DULE J TO C&MA ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 33 AND SOME OF THE AGREEMENT WHICH HAVE BEEN REFERRED IN THE AGREEMENTS AND ANNEXURES FILED BY THE ASSESSEE. 26. RESPONDING STRONGLY, MR. J.D. MISTRY SUBMITTED THAT ALL THE RELEVANT ANNEXURES AS REQUIRED BY THE DEPARTMENT DURING THE COURSE OF THE HEARING BEFORE THE TRIBUNAL FROM TIME TO TIME AND O N EARLIER OCCASIONS HAD BEEN FILED IN THE FORM OF THE PAPER BOOK, EVEN THOUGH SAID DOCUMENTS HAVE NEITHER BEEN REFERRED NOR RELIED UPO N BY THE AO OR BY LD. CIT(A). REGARDING MULTIPLE C&MA, HE SUBMITTED T HAT THERE IS NO CHANGE IN THE CONTENT OR TERMS OF C&MA EXCEPT FOR T HE FACT THAT WHENEVER NEW SIGNATORY/PARTICIPANT JOINS THE CABLE SYSTEM, NEW AGREEMENT IS ENTERED ONLY TO INCLUDE THE NEW PARTIC IPANT. THERE IS NO CHANGE EITHER IN THE TERMS OR CONDITIONS OR THE CON TENTS OF THE C&MA. REGARDING SUPPLY AGREEMENTS, HE SUBMITTED THAT THE SAME HAVE ALREADY BEEN FILED AND IS THE PART OF THE RECORD, FILED BEF ORE THE TRIBUNAL. THIS HAS BEEN FILED SEPARATELY BY THE DEPARTMENT ALSO. T HE SUPPLY AGREEMENTS IN RESPECT OF EQUIPMENTS WITH KDD AND AT &T ARE ALREADY PART OF THE PAPER BOOK. THE WHOLE ISSUE HERE REVOLV ES AROUND CSA AND C&MA AND THE RELEVANT SCHEDULES THEREOF WHICH HAS A LREADY BEEN MADE PART OF THE RECORD. WITHOUT PREJUDICE, THE DOCUMENT S WHICH HAVE NOT BEEN CONSIDERED EITHER BY THE AO OR BY THE LD. CIT( A), THE SAME CANNOT BE FURNISHED, BECAUSE THE DEPARTMENTAL REPRESENTATI VE NOW CANNOT IMPROVE UPON THE CASE OF THE AO AS WELL AS THE LD. CIT(A). MOST OF THE DOCUMENTS AS REQUESTED BY SHRI GIRISH DAVE, HAVE AL READY BEEN FILED. EVERY TIME NEW DOCUMENTS CANNOT BE FILED WHICH HAS NEITHER ANY RELEVANCE NOR ANY BEARING TO THE ISSUE INVOLVED.THE PRIMARY DOCUMENTS FOR ADJUDICATING THE ISSUE HAVE ALREADY BEEN SUBMIT TED. HERE IN THIS CASE, THERE IS ONE MORE DIFFICULTY THAT, EARLIER TH E ASSESSEE COMPANY WAS ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 34 BERMUDA BASED, OWNED BY THE DIFFERENT PARTY WHO IS DIFFERENT FROM THE CURRENT SHAREHOLDERS AND THE OWNER OF THE COMPANY A S ENTIRE FLAG CABLE SYSTEM HAD GONE INTO HUGE LOSSES. EARLIER THE ASSES SEE WAS REPRESENTED BY M/S. ARTHUR & ANDERSON WHICH HAS NOW BEEN DISSOL VED. WHATEVER DETAILS WERE AVAILABLE FROM THE SAID FIRM HAVE BEEN FILED. MOREOVER THERE IS NO SUCH DOCUMENT WHICH HAS BEEN REQUIRED BY THE AO OR LD. CIT(A), HAS NOT BEEN FILED BY THE ASSESSEE. COMPLETE RECORD S AS AND WHEN REQUIRED BY THE AUTHORITIES BELOW AND ALSO BY THE D R IN THE EARLIER HEARING HAVE ALREADY BEEN PROVIDED. TO ILLUSTRATE T HAT THE ADDITIONAL DOCUMENTS WHICH HAD BEEN FILED HAS NO BEARING, HE R EFERRED TO SOME OF SUCH DOCUMENTS. IN SUPPORT OF THIS CONTENTION THAT THE DEPARTMENT NOW CANNOT MAKE OUT A DIFFERENT CASE OTHER THAN WHAT HA S BEEN ADJUDICATED AND DECIDED BY THE AO AND LD. CIT(A) ON THE BASIS O F MATERIAL ON RECORD, HE STRONGLY RELIED UPON THE DECISION OF SPE CIAL BENCH IN THE CASE OF MAHINDRA & MAHINDRA LTD. (2009) 313 ITR [AT 263] (MUM) (SB). DECISION ON THE OBJECTIONS RAISED BY THE DEPARTMENT 27. AFTER CONSIDERING THE RIVAL SUBMISSIONS ON THE PRELIMINARY OBJECTIONS AND THE PETITION FILED UNDER RULE 29 BY THE DEPARTMENTAL REPRESENTATIVE, WE ARE OF THE OPINION THAT THE DOCU MENTS AND THE EVIDENCES WHICH ARE REQUIRED FOR ADJUDICATION OF TH E ISSUES INVOLVED ARE ALREADY THERE ON THE RECORD AND THE DOCUMENTS WHICH HAVE NEITHER BEEN CONSIDERED BY THE AO NOR BY THE LD. CIT(A), NOW AT THIS STAGE CANNOT BE ADMITTED, UNLESS IT IS SHOWN BY THE PARTIES THAT SU CH AN ADDITIONAL DOCUMENTS HAVE VERY VITAL BEARING ON THE ISSUES AND CHANGES THE ENTIRE COLOUR OF THE CONTROVERSY INVOLVED, THE ASSESSEE CA NNOT BE DIRECTED TO ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 35 FURNISH FURTHER RECORDS WHEN SPECIFIC RELEVANCE HAS NOT BEEN POINTED BY THE DEPARTMENT. VOLUMES OF PAPERS HAVE ALREADY BEEN FILED CONTAINING SEVERAL SCHEDULES. NOW AFTER 11 YEARS OF FILING OF APPEAL AND THE FIRM EARLIER REPRESENTING THE CASE IS NO LONGER AVAILABL E, IT IS VERY DIFFICULT TO WAIT FOR FURTHER DOCUMENTS, WHICH HAS NOT BE REQUIR ED BY DEPARTMENT EARLIER. HENCE, WE ARE PROCEEDING TO DECIDE THE IS SUE AS PER THE DOCUMENTS/ RECORDS SUBMITTED BEFORE US WHICH ARE IN FACT ARE ALREADY ADDITIONAL TO THE DOCUMENTS FILED BEFORE THE AO AS WELL AS LD. CIT (A). THE D.R.S PETITION AND OBJECTIONS ARE THEREFORE RE JECTED. SUBMISSIONS OF THE DEPARTMENT ON MERITS. 28. ON THE MERITS OF THE ISSUE, MR. GIRISH DAVE ON BEHALF OF THE DEPARTMENT, FIRSTLY, SUMMARIZED THE CONTENTION OF T HE LEARNED SENIOR COUNSEL AND ALSO FILED A COPY OF WRITTEN SUBMISSION S OF THE ARGUMENTS AND THE CONTENTIONS RAISED BY HIM BEFORE US. IN ADD ITION TO THAT, HE HAS ALSO FILED A PRINT OUT FORM WIKIPEDIA GIVING THE DI AGRAM AND THE CROSS SECTIONS/ COMPONENTS OF THE UNDERSEA CABLE OPTIC FI BRE AND COPY OF EXTRACTS AS DOWNLOADED FROM INTERNET OF SEC FILING BY THE ASSESSEE IN FORM 20-F AND 20-FA WITH US SECURITY EXCHANGE COMMI SSION IN USA. BESIDES THIS SEVERAL OTHER REFERENCE AND DECISIONS HAVE BEEN FILED WHICH SHALL BE DISCUSSED IN THE LATER PART OF THIS ORDER. 29. MR. GIRISH DAVE SUBMITTED THAT THE CAPACITY ACQ UIRED BY VSNL HAS BEEN SHOWN IN TERMS OF 51 MIUS IN RESPECT OF 23 DES TINATION COUNTRIES WITH FLAG LANDING POINT AVAILABLE AT 23 LANDING STA TIONS AS PER SCHEDULE 1 OF CSA. VSNL DOES NOT OWN ANY CAPACITY IN A PARTICU LAR SEGMENT (S) IN THE FLAG SYSTEM. AS PER CLAUSE 3.1 OF C&MA, SIGNATO RY ACQUIRES A RIGHT FOR ACTIVATION AND USE OF THE ASSIGNABLE CAPACITY A LONE. WHAT IS ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 36 ASSIGNABLE CAPACITY AND IN WHICH PARTICULAR SEGMENT , THIS CAPACITY IS ASSIGNED IS QUITE VAGUE, BECAUSE 51 MIUS WHICH IS T HE REQUIRED CAPACITY FOR TRANSMISSION TO 23 DESTINATION COUNTRIES, DOES NOT PROVIDE OWNERSHIP IN ANY PARTICULAR SEGMENTS. FURTHER ACTIVATION IS D ONE BY THE FLAG, SUBJECT TO FULFILLMENT OF CERTAIN CONDITIONS. WHAT VSNL IS GETTING IS ONLY INDEFEASIBLE RIGHT TO USE (IRU) IN THE EQUIPMENT PL ACED IN ITS CABLE STATION. THUS, WHAT IS THE EXACT OWNERSHIP OF THE V SNL IN THE CABLE SYSTEM IS NOT CLEAR. THE MAIN QUESTION TO BE DECIDE D HERE IS, WHETHER THE AGREEMENT PROVIDING FOR RIGHT TO USE THE SEG MENT CAPACITY RETAINING THE OWNERSHIP OVER THE CABLE SYSTEM AND L ANDING POINTS BY FLAG, CAN BE SAID TO BE A SALE OF CABLE CAPACITY OR MERE RIGHT TO USE OF THE CABLE CAPACITY SUBJECT TO FULFILLMENT OF CER TAIN OBLIGATIONS UNDER THE AGREEMENT. FURTHER, WHETHER CAPACITY TO TRANSMI T THE DATA THROUGH CABLE SYSTEM CAN BE SAID TO BE AN ASSET BEING CAP ABLE OF INDEPENDENT EXISTENCE AND CAPABLE OF BEING DELIVERED TO THIRD P ARTIES DE-HORS THE OWNERSHIP IN THE CABLE SYSTEM, WHICH CARRIES SUCH D ATA AS CANVASSED BY THE ASSESSEE. THE ANSWER WOULD BE NEGATIVE. HE ALSO FILED A DIAGRAM OF A TYPICAL SUBMARINE CABLE SYSTEM TO SHOW THAT THE O PTICAL FIBRE IS COVERED BY LAYERS OF VARIOUS MATERIALS AND IT IS TH E OPTIC FIBRE WHICH IS USED FOR THE TRANSMISSION OF DATA. 30. HE SUBMITTED THAT, ONE HAS TO UNDERSTAND THE EN TIRE CONCEPT AS TO HOW THE CABLE SYSTEM WORKS. THE TRANSMISSION OF ELE CTRONIC OR ELECTROMAGNETIC SIGNAL TAKES PLACE AT ATOMIC OR SUB ATOMIC LEVEL AND THE TRANSMISSION CAPACITY OF CABLE WILL DEPEND UPON THE ATOMIC STRUCTURE OF THE MATTER OF WHICH THE CABLE IS MADE OF. HENCE, TH E CAPACITY OF CABLE TO TRANSMIT THE DATA IS NOT AN INDEPENDENTLY EXISTING ASSET. THE CAPACITY TO TRANSMIT IS THE INTRINSIC QUALITY OF THE MATERIAL U SED IN THE CABLE THROUGH ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 37 WHICH DATA/SIGNALS CAN PASS/RUN. IT IS NOT EVEN AN INCORPOREAL ASSET, RATHER IT IS THE ABILITY OF THE CABLE ITSELF. THE C APACITY TO TRANSMIT IS ONLY THE MEDIUM WHICH THE CABLE IS CAPABLE OF AND THEREF ORE CAPACITY TO TRANSMIT CANNOT BE SEEN AS SEPARATE ASSET DISTINCT FROM THE CABLE SYSTEM. IT IS A GENERAL PRINCIPLE THAT THE INHERENT CAPABILITIES OF ANY MATTER CANNOT BE SEPARATED FROM THAT OF MATTER ITSE LF. LIKE ONE CANNOT SAY THAT THE GLITTERING ABILITY OF GOLD CAN BE SOLD SEPARATELY WITHOUT SELLING THE GOLD METAL ITSELF. THE ASSET IN THIS SC ENARIO IS THE CABLE WITH ITS NETWORK WHICH HAS CAPACITY TO TRANSMIT THE DATA AND NOT THE CAPACITY ITSELF ON A STANDALONE BASIS. THE CAPACITY CANNOT B E USED IF THERE WERE NO CABLE OR NETWORK. THE TRANSFER/DELIVERY/SALE OF TRANSMISSION CAPACITY OF CABLE, THEREFORE, CANNOT BE COMPLETED WITHOUT TH E SALE/DELIVERY/TRANSFER OF CABLE WHICH TRANSMITS IT. THE SALE OF DATA/ SIGNALS PASSING THROUGH THE CABLE IS QUITE DIFFEREN T FROM THE SALE OF TRANSMISSION CAPACITY OF THE CABLE. ONLY THE DIGITA L DATA/ SIGNALS, WHICH RUNS THROUGH THE CABLE BY VIRTUE OF INHERENT CAPACI TY OF THE CABLE TO ALLOW GENERATION OF ELECTROMAGNETIC WAVES WHICH IN TURN ENABLES THE TRANSMISSION, CANNOT BE SOLD SEPARATELY, BECAUSE AF TER THE TRANSMISSION OF DATA/ SIGNAL, THE CABLE AND ITS CAPACITY TO GENE RATE ELECTROMAGNETIC WAVES AND TRANSMISSION REMAINS INTACT FOR USE AGAIN AND AGAIN. IF THE LD. COUNSELS ARGUMENT THAT TRANSMISSION CAPACITY H AS BEEN SOLD AND DELIVERED TO PURCHASER IS ACCEPTED, THEN IT WOULD L EAD TO ABSURD CONCLUSION MEANING THEREBY THAT ONCE THE DATA/ SIGN AL IS TRANSMITTED THROUGH THE CABLE EVEN ONCE, THE CABLE NETWORK WHIC H HOUSED THE CAPACITY WOULD BECOME LIKE AN EMPTY 'SHELL' WITH NO CAPACITY TO TRANSMIT AGAIN AS THE CAPACITY ALREADY STANDS TRANSFERRED TO OTHER PARTY. HOWEVER, THE CAPACITY OF CABLE IS A CONTINUOUS ABIL ITY OF THE CABLE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 38 THROUGH THE LIFE TIME OF CABLE. THE TRANSMISSION CA PACITY IS INTRINSIC QUALITY OF CABLE ITSELF AND CANNOT BE RECOGNIZED/SO LD/TRANSFERRED DE-HORS THE SALE/TRANSFER OF CABLE ITSELF WHOSE CAPACITY IT IS. THEREFORE, TRANSMISSION CAPACITY HAS TO BE RECOGNIZED ONLY IN ASSOCIATION WITH THE CABLE SYSTEM AND WHETHER THERE IS SALE OF CAPACITY OR MERE RIGHT TO USE THE CAPACITY THROUGH THE CABLES, HAS TO BE SEEN WIT H REFERENCE TO COMPLETE CABLE SYSTEM WITHOUT DISSECTING IT INTO TW O SEPARATE ASSETS I.E. (I) CABLE NETWORK AND (II) ITS CAPACITY TO TRANSMIT . THIS HE SUBMITTED CAN BE BETTER APPRECIATED BY FOLLOWING EXAMPLES; THE BE ST EXAMPLE CAN BE THE SALE OF ELECTRICITY WHICH IS AGAIN ONLY AN ELEC TROMAGNETIC WAVES/SIGNAL CAPABLE OF RUNNING THROUGH THE WIRES/C ABLES WHERE BY ALLOWING THE CONSUMERS TO USE THE CABLE NETWORK FOR WITHDRAWING ELECTRICITY, BUT IN NO CASE THE CABLE BECOMES DEVOI D OF ITS CAPACITY TO TRANSMIT TO OTHER CONSUMERS NOR DOES IT MEAN THAT E LECTRICITY BOARD HAS SOLD THE TRANSMISSION CAPACITY OF CABLES TO ITS CON SUMERS. SIMILARLY, WHEN A CONSUMER AGREES TO DOWNLOAD OR UPLOAD A PART ICULAR VOLUME OF DATA THROUGH INTERNET NETWORK PROVIDED BY ISPS USER THE TRANSMISSION CAPACITY UPTO A SPECIFIED QUANTITY OF DATA AS PER T HE PLAN OPTED, BUT IN NO WAY IT AMOUNTS TO PURCHASE OF TRANSMISSION CAPAC ITY OF INTERNET NETWORK. THE CUSTOMER PAYS FOR THE TIME OF USE OR Q UANTITY OF DATA SENT OR RECEIVED THROUGH THE NETWORK. IN THE PRESENT CAS E ALSO WHAT THE PARTIES ARE PAYING TO FLAG IS FOR THE VOLUME OF DAT A (MIUS) TRANSMITTED THROUGH THE SPECIFIED SEGMENT. SIMILAR IS CASE WHEN A LANDLINE TELEPHONE CONNECTION IS OBTAINED WHEREIN THE CUSTOMER CAN USE THE TRANSMISSION CAPACITY OF TELEPHONE LINE FOR TRANSMITTING THE VOI CE DATA BUT THAT DOES NOT MEAN THAT THE TRANSMITTING CAPACITY OF CABLE IS SOLD TO CUSTOMER BY TELEPHONE CO. THE SOFTWARE EMBEDDED AND INTEGRATED INTO AN MACHINE'S ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 39 DIGITAL SYSTEM TO RUN IT, CANNOT BE SAID TO HAVE IN DEPENDENT/ SEPARATE EXISTENCE FROM THE MACHINE WHICH IT RUNS. THIS LEAD S TO ANOTHER ASPECT THAT, WHETHER THERE CAN AT ALL BE ANY SALE OF INTRI NSIC CAPACITY OF CABLE TO TRANSMIT WITHOUT THE TRANSFER OF OWNERSHIP OF THE C ABLE ITSELF? ONCE IT IS SHOWN THAT SUCH CAPACITY IS NEITHER AN ASSET, INCOR POREAL OR INTANGIBLE NOR CAN IT EXIST INDEPENDENT OF THE CABLES, THEN IT CANNOT BE SOLD WITHOUT THE SALE OR DELIVERY OF THE CONCERNED CABLE. EVEN I N CASE OF SPECTRUM ALSO WHICH IS AGAIN ONLY AN INTANGIBLE FREQUENCY AT WHICH DATA CAN BE TRANSMITTED THROUGH MEDIUM OF AIR, ONLY THE LICENSE TO USE THE SPECTRUM COULD BE SOLD AND THERE CAN BE NO SALE OF SPECTRUM OR FREQUENCY CARRYING CAPACITY OF THE AIR. IT IS NOT 'GOODS' UND ER THE SALE OF GOODS ACT. 31. HE FURTHER SUBMITTED THAT, ANOTHER ASPECT TO B E LOOKED INTO IS, WHETHER THE CAPACITY TO TRANSMIT SIGNALS/DATA ITSEL F CAN BE TERMED AS DELIVERABLE 'GOODS' EVEN IN THE INCORPOREAL FORM? W HAT IS TRANSMITTED IN THE COURSE OF COMMUNICATION IS THE MESSAGE THROUGH ELECTROMAGNETIC WAVES WHICH ARE FORMED DUE TO MATERIAL COMPOSITION OF THE CABLE. ELECTROMAGNETIC WAVE ITSELF IS NOT TRANSMITTED. IT IS ONLY THE SIGNAL/ DATA WHICH GETS TRANSMITTED THROUGH SUCH MEANS. THE CAPA CITIES ARE NEITHER DELIVERED, STORED OR POSSESSED BUT ARE MERELY THE M EDIUM OF COMMUNICATION. FURTHER, THESE ELECTROMAGNETIC WAVES CANNOT FULFILL THE CRITERIA LAID DOWN FOR 'GOODS' EITHER IN ART. 366(1 2) OR IN THE STATE LEGISLATIONS. IF THERE ARE NO DELIVERABLE GOODS IN EXISTENCE AT ALL, THEN THERE CANNOT BE SALE OF CAPACITY WITHOUT THE DELIVE RY OF POSSESSION OF CABLE WHOSE CAPACITY IT IS. THIS VIEW HE SUBMITTED THAT, IS SUPPORTED BY DECISION IN CASE OF BHARAT SANCHAR NIGAM LTD 282 IT R 273(SC). ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 40 32. IT IS ALSO NOT THE CASE THAT THE USE OF THE CA PACITY IN A PARTICULAR SEGMENT WAS EXCLUSIVE TO ONE PARTY ONLY. THE CABLE AT ALL TIMES IS CAPABLE OF CARRYING A HIGH VOLUME OF DATA FROM ONE END TO ANOTHER. WHEN ANY PARTICULAR SEGMENTS CAPACITY OF CABLE NETW ORK HAS BEEN ASSIGNED (NOTIONALLY WITHOUT ANY PHYSICAL SEPARATIO N OF VARIOUS SEGMENTS) TO ANY PARTY, IT COULD ONLY MEAN THAT PAR TICULAR PARTY IS ENTITLED TO COMMERCIALLY EXPLOIT THE CABLE DATA IN THAT SEGMENT EQUIVALENT TO THE PERCENTAGE OF THE RIGHTS TO USE T HE CAPACITY ACQUIRED BY IT. BUT THAT DOES NOT MEAN THAT THE DATA OF OTHE R PARTIES DOES NOT PASS THROUGH THAT PARTICULAR SEGMENT. THUS, THE TRA NSMISSION CAPACITY IN A PARTICULAR SEGMENT ACQUIRED BY ANY PARTY IS NOT A BSOLUTE OR EXCLUSIVE. IT IS ONLY SHARING OF THE CAPACITY IN A PARTICULAR SEGMENT WITH OTHERS WHICH PROVES THAT THERE IS NO ABSOLUTE SALE OF THE CAPACITY IN A PARTICULAR SEGMENT TO THE EXCLUSION OF OTHERS. EVEN THE RIGHT TO ASSIGN THE ACQUIRED CAPACITY SEGMENT BY A PARTY TO OTHER PARTIES IS WIT H CONSENT OF FLAG LTD AS PER THE TERMS OF C&MA AND IT DOES NOT MEAN THAT THE ACQUIRING PARTY HAS AN ABSOLUTE AND EXCUSIVE RIGHT AS OWNER OF THE CAPACITY IN A SEGMENT. THESE ARE ONLY NON EXCLUSIVE RIGHTS TO USE THE CAPACITY OF THE CABLE IN A SEGMENT UNLIKE IN CASE OF A SALE WHERE T HE RIGHT TO USE BECOMES EXCLUSIVE TO THE ACQUIRING PARTY. INTERDEPE NDENCE OF OWNERSHIP OF CAPACITIES BETWEEN VARIOUS PARTIES FURTHER SHOWS THAT THERE COULD NOT BE ABSOLUTE SALE OF A PARTICULAR CAPACITY SEGMENT T O ANYONE PARTY AND THAT IT WAS MERELY IN NATURE OF RIGHT TO USE, THOUG H IN RECITALS OF AGREEMENT THE WORD 'OWNERSHIP' AND 'SALE' ARE USED. SUBSTANCE HAS TO PREVAIL OVER THE FORM. HE SUBMITTED THAT THIS VIEW IS ALSO STRENGTHENED BY THE FACT THAT IN OVERLAND SEGMENTS, THE OWNERSHI P RIGHTS ON CABLES HAVE ALSO BEEN TRANSFERRED TO PARTIES AND OTHER PAR TIES HAVE ONLY BEEN ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 41 GIVEN RIGHT TO USE SUCH OVERLAND SEGMENTS EVEN THOU GH THE OVER LAND SEGMENT CAPACITY IS NOT OWNED BY SUCH OTHER PARTIES . THE FACT THAT VARIOUS FOUNDING PARTIES HAVE COME TOGETHER TO SHAR E THE RISKS AND CARRYING CERTAIN OBLIGATIONS AND PAY FOR THE MAINTE NANCE OF CABLE NETWORK ON PROPORTIONATE BASIS, DOES NOT MEAN THAT THERE WAS INTENTION TO SELL THE CABLE CAPACITIES, EVEN IF THEIR CONDUCT TO SHARE THE RISK AND CARRY OBLIGATIONS WERE AKIN IN SOME SENSE TO THE CO NDUCT OF PURCHASER. MERE RECITAL IN AGREEMENT FOR OWNERSHIP OF CAPACITY AND RIGHTS TO FURTHER ASSIGN SUCH CAPACITY TO THIRD PARTIES CANNOT MEAN T HAT THERE IS SALE OF CAPACITY DE-HORS THE CABLE, WHEN IN SUBSTANCE SUCH CAPACITY CANNOT EXIST/DELIVERED INDEPENDENTLY. IF THE CABLE AND ITS CAPACITY ARE TREATED TO BE EXISTING SEPARATELY AFTER THE SALE AS ARGUED BY LD. COUNSEL, THEN IN A HYPOTHETICAL SITUATION IF THE BUYER OF A SEGMENT FO R SOME REASON RESCINDS THE AGREEMENT, CAN IT BE SAID THAT SUCH CA PACITY OF CABLE WILL NOT REMAIN THE CAPACITY OF THE CABLE SYSTEM AND BE LYING STILL WITH ORIGINAL PURCHASER UNTIL SOLD TO SOME OTHER PARTY. THE EXAMPLE GIVEN BY LD. COUNSEL THAT WHEN COKE IS SOLD FOR A PRICE, THE BOTTLE IS ONLY A MEDIUM AND HENCE CANNOT BE THE SUBJECT MATTER OF SA LE JUST AS IN CASE OF SALE OF CAPACITY WITHOUT SALE OF CABLES, IS NOT APPLICABLE IN INSTANT CASE AS THE COKE AND BOTTLE ARE TWO DISTINCT AND INDEPEN DENTLY EXISTING ITEM. THE CAPACITY TO HOLD COKE IS NOT AN INTRINSIC CAPAC ITY OF BOTTLE AND BOTTLE CAN BE USED FOR VARIOUS OTHER PURPOSES OR NOT USED TO STORE ANYTHING OR ALTERNATIVELY COKE CAN BE STORED/ SOLD/ DELIVERED I N VARIOUS OTHER MEDIUMS. BUT IN THE INSTANT CASE, THE SIGNAL CARRYI NG CAPACITY IS INTRINSIC AND IT REMAINS AS INTEGRAL PART OF IT, IRRESPECTIVE WHETHER RIGHT TO USE OF CAPACITY IS GIVEN OR NOT OR IT IS GIVEN TO ONE OR M ANY PARTIES. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 42 33. ON THE ISSUE OF BUSINESS CONNECTION; MR. GIRISH DAVE CONTENDED THAT THE LD. COUNSEL WHILE ARGUING NON APPLICABILIT Y OF 9(1)(I), HAS STATED THAT CAPACITY SEGMENT LYING OUTSIDE INDIA, ACQUIRED BY AN INDIAN COMPANY IS NOT AN ASSET IN INDIA AND AFTER THE CAPA CITY IS SOLD IN A SEGMENT OUTSIDE INDIA, THE CABLE PASSING THROUGH IN DIA DOES NOT HOUSE THAT SEGMENT CAPACITY IN INDIA. LD. SR. COUNSEL HE HAD FURTHER STATED THAT AFTER THE DATE OF ACTIVATION, THE CAPACITY DOE S NOT BELONG TO IT AND HENCE NO INCOME CAN ACCRUE TO FLAG FROM/THROUGH SUC H CAPACITY SALES. THIS ARGUMENT OF LD. COUNSEL IS BASED ON ASSUMPTION THAT CAPACITY IS DISTINCT ASSET THAN THE CABLE SYSTEM AND THAT CAPAC ITY OF CABLE IS RESTRICTED TO THE SEGMENTS ONLY WHICH HAVE BEEN ALL OCATED TO A PARTICULAR PARTY. BOTH THESE ASSUMPTIONS ARE MISPLACED AS ALRE ADY EXPLAINED. THE LD. COUNSEL IS ERRONEOUSLY IDENTIFYING THE SITUS OF CAPACITY OF CABLE BASED ON LOCATION OF THE SEGMENT ACQUIRED BY VSNL. ON ONE HAND, HE ARGUES THAT CAPACITY AND THE CABLE ARE TWO DISTINCT AND INDEPENDENT ASSETS AND CAPACITY CAN BE SOLD WITHOUT TRANSFERRIN G THE CABLE WHOSE CAPACITY IT IS AND ON OTHER HAND HE IDENTIFIES THE SITUS OF CAPACITY OF THE CABLE BASED TO BE LINKED TO THE SEGMENT LOCATION FO R WHICH SEGMENT CAPACITY HAS BEEN ACQUIRED. AS SUBMITTED EARLIER TH E CAPACITY IS INSEPARABLE ABILITY OF CABLE AND IF THE CAPACITY HA S TO BE INEXTRICABLY LINKED AND BE INTRINSIC PART OF CABLE, THEN THE CAP ACITY HAS TO BE IDENTIFIED ONLY AS A PART OF CABLE FOR ITS ENTIRE L ENGTH AND SUCH CAPACITY CANNOT BE RESTRICTED TO THE SITUS OF SPECIFIC SEGME NTS ONLY. THE CAPACITY OF THE CABLE TO TRANSMIT IS EVERYWHERE AND NOT REST RICTED TO THE SITUS OF SEGMENT ACQUIRED BY VSNL ONLY. HENCE IT WOULD BE IL LOGICAL TO DECIDE THAT CAPACITY IS SITTING ONLY AT PLACES WHERE THE S EGMENT IS LOCATED WHEN THERE ARE 25% OF CAPACITY WHICH HAS NOT BEEN ACQUIR ED AT ALL BY ANYONE. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 43 WHERE WOULD SUCH UNUSED CAPACITY LIE? THE BIFURCATI ON OF THE ENTIRE CABLE LENGTH INTO VARIOUS SEGMENTS COULD BE ONLY NO TIONAL FOR ALLOCATION OF CAPACITIES IN DIFFERENT REGIONS TO DIFFERENT PAR TIES, BUT IT DOES NOT MEAN THAT THE CAPACITY OF CABLE IN A PARTICULAR SEG MENT IS RESTRICTED TO THAT SEGMENT OF CABLE ONLY OR SUCH CAPACITY IS DIFF ERENT THAN CAPACITY IN ANY OTHER SEGMENT OR THAT THE CAPACITY OF A SEGMENT CAN BE USED WITHOUT THE USING THE CAPACITY IN OTHER SEGMENTS. I N FACT THERE IS PROVISION FOR RE-ROUTING THE TRANSMISSION THROUGH O THER SEGMENTS IF THERE IS PROBLEM IN A PARTICULAR ON SEGMENT. THIS ALSO SH OWS THAT THE ASSIGNED CAPACITIES OF SEGMENT ARE ONLY NOTIONAL AND THE ENT IRE CAPACITY RUNS THROUGH THE ENTIRE NETWORK. EACH SEGMENT CANNOT BE USED ON STANDALONE BASIS WITHOUT BEING CONNECTED TO CABLE N ETWORK AND LANDING POINTS AND HENCE THE SEGMENT CANNOT BE LOOKED UPON AS A WORKING UNIT OF THE CABLE NETWORK. IT IS ONLY A NOTIONAL UNIT FO R ASSIGNMENT OF DIFFERENT PORTIONS OF NETWORK TO DIFFERENT PARTIES AND INCOME SHARING. 34. MR. DAVE FURTHER SUBMITTED THAT IF AT ALL THE T ERRITORIAL NEXUS OF CAPACITY IS TO BE TRACED, THEN IN SUCH A SCENARIO, THE BEST LOGICAL APPROACH WOULD BE TO TRACE IT TO THE PLACE WHERE TH E CABLE PASSES AND ALLOWS THE ACCESS TO EXPLOIT THE CABLE CAPACITY BY THE PURCHASER. IN THIS CASE IT IS UNDISPUTED THAT THE CABLE SYSTEM PASSES THROUGH INDIA AND THE LANDING POINTS IS ALSO IN INDIA THROUGH WHICH THE D ATA COMES TO INDIA AND DATA IS SENT FROM INDIA BY THE USER WHICH IS AL SO THE INDIAN CO I.E VSNL. THOUGH THE SEGMENT FOR WHICH VSNL HAS THE RIG HT TO USE IS FOR A SEGMENT LOCATED OUTSIDE INDIA, BUT IT IS THE SAME C ABLE PASSING THROUGH INDIA WHICH TAKES THE INPUT DATA TO THAT PARTICULAR SEGMENT OUTSIDE INDIA THROUGH THE LANDING POINTS IN INDIA. THE INPUTS INT O THE SEGMENTS OF CABLE SYSTEM ARE POSSIBLE ONLY THROUGH THE LANDING POINTS. THUS, THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 44 CAPACITY OF CABLE IN ANY SEGMENT CAN BE USED OR ACC ESSED ONLY THROUGH LANDING POINTS. THE LANDING POINTS ARE INEXTRICABLY LINKED TO THE CABLE SYSTEM FOR THE USE OF ITS CAPACITY. JUST AS ONE CAN NOT SAY THE WHEELS OF A CAR ARE NOT PART OF CAR BECAUSE THEY ARE NEEDED T O USE THE CAR, SIMILARLY THE CABLE SYSTEM CANNOT BE USED WITHOUT L ANDING POINTS WHICH ARE INEXTRICATELY LINKED AND PART OF A WORKING CABL E NETWORK. THE LANDING POINTS ARE OWNED BY FLAG AND NOT THE LANDING PARTY. HENCE, IT CANNOT BE SAID THAT LANDING POINTS DO NOT HAVE ANY CONNECT ION TO CABLE WHICH IS ALSO OWNED BY FLAG OR TO THE SEGMENTS WHICH ARE ASS IGNED TO DIFFERENT PARTIES BY FLAG. THEREFORE, THE LOCATION OF LANDING POINT IN INDIA AND THE INDIAN CO BEING THE LANDING PARTY IN INDIA COMPRISE S OF AN ASSET WHICH IS PART OF CABLE NETWORK LOCATED IN INDIA AND ALSO THE SOURCE OF INCOME IN INDIA AS REQUIRED U/S 9(1)(I). IT IS THE CABLE SYST EM PASSING THROUGH INDIA AND THE LANDING POINTS IN INDIA WHICH IS USED BY VSNL TO TRANSMIT THE DATA INTO THE CABLE SYSTEM TO EARN ITS INCOME T HOUGH FOR A SEGMENT LOCATED OUTSIDE INDIA. THE SOURCE OF INCOME TO VSNL MAY BE FROM TRANSMITTING THE DATA IN A SEGMENT OUTSIDE INDIA BU T THE ASSET INCLUDING THE LANDING CABLES AND LANDING POINTS IN INDIA AND WHEN VSNL IS ALSO THE LANDING PARTY IS LOCATED IN INDIA, THEREFORE, HAS A NEXUS TO INDIA U/S 9(1) (I). IN VIEW OF EXPLANATION 4 TO SECTION 9(1)(I), T HE MEANING OF WORD 'THROUGH' AN ASSET APPEARING U/S 9(1)(I) HAS BEEN M ADE WIDE ENOUGH TO INCLUDE THE CABLE SYSTEM WITH ITS INHERENT AND IN-S EPARABLE CAPACITY PASSING THROUGH INDIA AND THE EXPRESSION FROM A SOU RCE OF INCOME IN INDIA WILL ALSO INCLUDE AN INDIAN CO WHO USES SUCH CABLE PASSING THROUGH INDIA FOR THE RIGHT TO USE THE CABLE THOUGH FOR A S EGMENT OF CABLE OUTSIDE INDIA. THE ASSET IS CABLE SYSTEM AND NOT TH E CAPACITY OF CABLE AND HENCE THE CONTENTION THAT AFTER SALE OF CAPACIT Y THERE IS NO ASSET ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 45 OWNED BY FLAG IN INDIA IS INCORRECT. THEREFORE, IT IS THE CABLE SYSTEM WHICH HAS TERRITORIAL NEXUS IN INDIA THROUGH THE LA NDING POINTS WHICH NEEDS TO BE CONSIDERED FOR DETERMINING THE TERRITOR IAL NEXUS AND NOT THE SITUS OF THE SEGMENT CAPACITY. 35. THE CONTENTION OF LD. SR. COUNSEL THAT THERE I S NO CONNECTION BETWEEN ACQUISITION OF CAPACITY SEGMENT AND THE LAN DING POINT EVEN WHEN THEY ARE WITH SAME PARTY ON THE GROUND THAT TH E LANDING PARTY IS GIVEN A DISCOUNT ON THE PAYMENT TO BE MADE FOR SEGM ENT CAPACITY, IS ALSO MISPLACED. UNDER THE AGREEMENTS, THE LANDING P OINTS EQUIPMENTS ARE CONTRIBUTED FROM THE FUNDS OF FLAG LTD AND HENC E OWNED BY FLAG. THE EXPENDITURE ON BUILDING HOUSING TO THE LANDING POINTS IS REIMBURSED BY ALL PARTIES IN THE RATIO OF CAPACITY ACQUIRED BY THEM. THIS SHOWS THAT THE FLAG HAS PRESENCE IN INDIA IN THE FORM OF LANDI NG EQUIPMENT CONTRIBUTED BY IT AND THE SHARED COST OF BUILDING H OUSING THE LANDING POINT. THE DISCOUNT GIVEN TO LANDING PARTY ALSO HAS NEXUS WITH LANDING POINT, BECAUSE IN ORDER TO MAKE AVAILABLE THE INPUT FACILITY TO THE CABLE, LANDING POINT EQUIPMENT IS MUST FOR ANYONE TO USE T HE CAPACITY OF CABLE. IF THE CAPACITY WAS BEING ASSIGNED BY FLAG THEN THE FACILITY TO INPUT THE SIGNAL INTO NETWORK SHOULD ALSO BE RESPONSIBILITY O F THE OWNER OF CABLE SYSTEM I.E. FLAG BUT BY APPOINTING THE LANDING PART Y, THE LIABILITY TO MAKE SUCH INVESTMENTS BY OWNER HAS BEEN SHIFTED TO THE P ARTY WHO IS ACQUIRING THE CAPACITY SEGMENT AND A DISCOUNT IS GI VEN TO LANDING PARTY BUT FOR WHICH SUCH LIABILITY WAS THAT OF FLAG HENCE THE DISCOUNT TO LANDING PARTY IS IN LIEU OF INVESTMENT MADE BY LAND ING PARTY WHICH WAS OTHERWISE WAS TO BE PROVIDED BY THE OWNER(FLAG). TH ERE WOULD HAVE BEEN NO DISCOUNT IF THE LANDING EQUIPMENTS WERE TO BE ARRANGED BY FLAG. HENCE THE LANDING PARTY AND PAYMENT UNDER CSA ARE A LSO INEXTRICABLY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 46 LINKED. THE FACT THAT OUT OF ALL THE PARTIES ACQUIR ING THE CAPACITY SEGMENT, SOME OF THEM ARE ALSO THE LANDING PARTIES WHO HAVE MADE INVESTMENTS IN LANDING EQUIPMENTS SUGGESTS THAT THE RE IS NO SALE OF CAPACITY, BUT ONLY TRANSFER OF RIGHT TO USE, BECAUS E IT IS ILLOGICAL FOR A LANDING PARTY TO INVEST IN LANDING EQUIPMENT TO PUR CHASE THE CAPACITY SEGMENT WHEREAS THE OTHER PARTIES WHO ARE ALSO THE PURCHASER OF CAPACITY SEGMENT WITHOUT BEING A LANDING PARTY OR M AKING INVESTMENTS AS THAT OF A LANDING PARTY. THIS PROVES THAT IT IS ONLY RIGHT TO USE WHICH IS BEING ACQUIRED AND THE PARTY WHICH CHOOSES TO BE A LANDING PARTY GETS A DISCOUNT DUE TO INVESTMENT MADE BY IT ON LANDING EQ UIPMENT. 36. MR. DAVE ON THE ISSUE OF TREATMENT GIVEN IN ACC OUNTS BY THE FLAG, SUBMITTED THAT IN ACCOUNTS OF FLAG LTD, THE FACT TH AT COST OF CABLE HAS BEEN CLAIMED AS EXPENDITURE AND SALES OF CAPACITY I S SHOWN AS INCOME, PROVES THAT THE CABLE AND CAPACITY ARE ONE AND THE SAME THING, BUT MEASURED IN DIFFERENT UNITS FOR PURPOSE OF ASCERTAI NING THE PROFITS IN ACCOUNTS WHEREIN THE COST OF CABLE IS RECOVERED BY SALE IN TERMS OF CAPACITY. IF THE CABLE IS STILL IN THE PHYSICAL CON TROL OF FLAG EVEN AFTER BEING CLAIMED AS EXPENDITURE AND CAPACITY SALES CRE DITED AS INCOME IN ACCOUNTS, IT DOES NOT MEAN THAT THE CABLE HAS CEASE D TO EXIST AND THAT THE CAPACITY FROM THE CABLE HAS BEEN SEPARATED AND SOLD. AN ACCOUNTING TREATMENT OF CABLE AS CONSUMABLE GOODS WILL NOT DET ERMINE THE TRUE CHARACTER OF AN INCOME, IF IN SUBSTANCE THE CABLE A LONG WITH ITS CAPACITY IS STILL VERY MUCH INTACT AND UNDER THE CONTROL AND POSSESSION OF FLAG. THE FLAG IS STILL MAINTAINING THE CABLE THOUGH FOR A SEPARATE CHARGES AND SEPARATE AGREEMENTS. THE MAINTENANCE AGREEMENTS ARE FOR THE ENTIRE LIFE OF THE CABLE NETWORK. HENCE THE MERE FACT THAT THE COST OF CABLE NETWORK HAS BEEN COMPLETELY CLAIMED AS EXPENDITURE AND NOTHING ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 47 REMAINS AS AN ASSET IN BALANCE SHEET WOULD NOT MEAN THAT THE CABLE SYSTEM HAS CEASED TO EXIST THEREAFTER, OTHERWISE HO W THE MAINTENANCE AGREEMENT WOULD BE IMPLEMENTED. THUS, THE CAPACITY ACQUIRED BY INDIAN CO (EVEN FOR SEGMENT OUTSIDE INDIA), THE CAB LE NETWORK OWNED BY FLAG PASSING THROUGH INDIA, THE LANDING POINTS IN I NDIA FOR PROVIDING INPUT INTO CABLE NETWORK ARE INEXTRICABLY LINKED AN D DUE TO THEIR LOCATION IN INDIA AND USER BY INDIAN CO FOR USE OF CAPACITY THROUGH SUCH CABLE NETWORK AND LANDING POINTS, THERE IS TERRITORIAL NE XUS AND THE INCOME IS ATTRIBUTABLE TO OPERATIONS IN INDIA BY FLAG. 37. MR. DAVE FURTHER ELABORATED THAT THE CABLE COME S TO ASHORE AT A BEACH MAINHOLE FROM WHERE IT RUNS TO BURIED CONDUIT S TO THE CABLE STATIONS. THE STATION IN TURN CONTAINS VARIOUS EQUI PMENTS WHICH ENABLE THE INFORMATION SENT ON THE CABLE TO SWITCH INTO DO MESTIC SYSTEM. CABLE LANDING STATION AND DUCTING HAS BEEN DESIGNATED AS SEGMENT T, WHICH IS BUILT AND OWNED BY THE LANDING PARTY, HOWEVER, THE CABLE AND THE RELATED EQUIPMENTS BELONGS TO THE ASSESSEE. THE ASS ESSEE HAD ENTERED INTO AGREEMENT WITH AT&T & KDD FOR THE SUPPLY OF EQ UIPMENTS FOR INSTALLING THE LANDING STATIONS, THE PAYMENT OF WHI CH IS MADE BY THE ASSESSEE. THIS IS EVIDENT FROM THE AGREEMENT DATED 22.11.1996 AND 02.12.1996 WITH AT&T & KDD RESPECTIVELY. THE ASSESS EE HAS MADE HUGE PAYMENTS, FOR THE COST OF EQUIPMENTS SUPPLY AND SER VICES. THIS GOES TO SHOW THAT THE ASSESSEE HAS BUILT THE LANDING STATIO N SO THAT THE CABLE SYSTEM CAN BE USED BY THE VSNL. THUS, THE ASSESSEE NOT ONLY HAS A PRESENCE IN INDIA BUT ALSO GOES TO PROVE THAT, WHAT THE ASSESSEE HAS GIVEN TO THE VSNL IS THE USER RIGHTS OF THE CAPACIT Y IN THE CABLE NETWORK. 38. FURTHER ON THE ISSUE OF TAXABILITY OF RECEIPT AS ROYALTY, HE SUBMITTED THAT THE CABLE NETWORK, THE LANDING EQUIP MENT AND THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 48 SEGMENT CAPACITY ARE PART OF ONE COMMERCIAL ASSET O WNED BY FLAG AND QUALIFY AS 'EQUIPMENT' OWNED BY FLAG LTD. THE INVES TMENT IN LAYING CABLES IS OF FLAG AND THE EQUIPMENTS ARE ALSO PROCU RED BY FLAG. IT IS ONLY THE DIFFERENT SEGMENTS ON NOTIONAL BASIS WHICH HAVE BEEN GIVEN USER RIGHTS TO DIFFERENT PARTIES AND THERE IS NO SALE/DE LIVERY OF CAPACITY TO THE SO CALLED BUYERS. FURTHER THE TRANSMISSION OF DATA IS BY WAY OF USE OF A COMPLICATED PROCESS SUPPORTED BY VARIOUS SOFTWARE A ND OTHER SOPHISTICATED EQUIPMENTS, THE USE OF IT ALLOWS THE USE OF 'PROCESS' ALSO. IT IS ONLY THE RIGHT TO USE THE COMMERCIAL 'EQUIPME NT' OR 'PROCESS' WHICH HAS BEEN GIVEN BY FLAG TO DIFFERENT PARTIES ON THE BASIS OF SEGMENTS OF CABLE NETWORK. TO QUALIFY AS ROYALTY, IT IS NOT N ECESSARY THAT SUCH EQUIPMENT OR PROCESS BE UNDER PHYSICAL POSSESSION O R CONTROL OF USER. THE CONTROL OR 'USER' OF THE EQUIPMENT, OR PROCESS HAS TO BE SEEN FROM PRACTICAL ANGLE. ONCE IT IS MADE AVAILABLE FOR USER ON PAYMENT OF FEES AND SUCH PROCESS IS USED ACCORDING TO NEED OF CUSTO MER, THERE IS USE OF SUCH PROCESS IRRESPECTIVE OF THE FACT THAT SUCH EQU IPMENT OR PROCESS IS NOT DIRECTLY UNDER PHYSICAL CONTROL OF USER. MERE E CONOMIC INTEREST IN COMMERCIAL EQUIPMENT WITH RIGHT TO USE IS ENOUGH TO TAKE SUCH PAYMENTS AS ROYALTY U/S 9(1)(VI). IN SUPPORT OF ALL HIS CONTENTIONS, MR. DAVE STRONGLY RELIED UPON FOLLOWING DECISIONS AND R EAD OUT THE RELEVANT PORTIONS FROM THESE JUDGMENTS:- (1) VERIZON COMMUNICATIONS SINGAPORE PTE LTD 361 IT R 575(MAD) (2) REUTERS TRANSACTION SERVICES LTD IN ITA NO 6947 /MUM/2012 (3) VIACOM 18 MEDIA PVT. LTD. IN ITA NO. 1584/MUM /2010 (4) DISHNET WIRELESS LTD. (2012) 24 TAXMANN.COM 298 ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 49 39. LASTLY, MR. GIRISH DAVE ALSO FILED SEC FILING O F INFORMATION 20-F & FORM 20FA WITH US SECURITY EXCHANGE COMMISSION FILE D IN USA BY ASSESSEE AND READ OUT VARIOUS PARAGRAPHS. FROM THER E HE POINTED OUT THAT THE PARTIES, TO WHOM CAPACITY HAS BEEN SOLD WH ERE REFERRED TO AS CUSTOMERS AND NOT AS OWNERS, WHICH GOES TO SHOW THAT THE FLAG DOES NOT CONSIDER THE LANDING PARTIES AS OWNERS. THIS ALSO GOES TO PROVE THE DEPARTMENTS POINT OF VIEW THAT ONLY RIGHT TO USE O F THE CAPACITY IN THE CABLE SYSTEM HAS BEEN GRANTED TO VSNL. FURTHER, HE STATED THAT IN NORMAL CLUB CABLE SYSTEM, THERE IS A JOINT CO-OWNER SHIP OF THE CABLE SYSTEM AND THE OWNERS FUND THE PROPORTIONATE COST OF THE CONSTRUCTION OF THE CABLE SYSTEM AND IN RETURN RECEIVE A SHARE O F CAPACITY IN THE CABLE SYSTEM. HERE-IN THIS CASE THE FLAG IS THE OWNER OF THE ENTIRE CABLE SYSTEM AND ONLY A CAPACITY IN THE CABLE SYSTEM IS S OLD TO THE VARIOUS PARTIES. THIS CAPACITY IN NO MANNER CAN BE SAID TO BE ASSET, CORPOREAL OR INCORPOREAL. HE ALSO POINTED THAT LANDING STATION I S OWNED BY THE FLAG, SINCE IT IS MENTIONED THAT THE LANDING PARTIES WILL COMPENSATED FOR THE BUILDING AND OPERATING OF THE LANDING STATION BY CH ARGING TO THE PARTIES ENTERING THE FLAG SYSTEM THROUGH LANDING STATION. L ASTLY, REFERRING TO THE PARA OF CAPACITY AVAILABLE FOR SALE AT PAGE 23 OF SEC FILING, TO DEMONSTRATE THAT THE CABLE SYSTEM WAS AN ASSET OF T HE ASSESSEE AND IT CONTRADICTS THE ARGUMENT OF THE LEARNED COUNSEL THA T THERE ARE NO SUBSTANTIAL FIXED ASSETS IN THE FINANCIAL STATEMENT OF THE ASSESSEE. HE ALSO FILED CERTAIN DOCUMENTS LIKE A COMPILATION ON TAX MANAGEMENT FOREIGN INCOME PORTFOLIO US INTERNATIONAL TAXATION OF TELECOM FOR THE TREATMENT OF TAX IN SUCH A CABLE SYSTEM WHICH WE SH ALL REFER TO IN OUR LATER PART OF THE ORDER AND INTERNATIONAL TELECOMMU NICATION ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 50 TRANSMISSION SYSTEM NETWORK MODE INTERFACE EXPLAINI NG THE ENTIRE SUBMARINE CABLE SYSTEM. REJOINDER BY SHRI J.D. MISTRY 40. FIRST OF ALL, LEARNED SENIOR COUNSEL, SHRI J.D. MISTRY STRONGLY OBJECTED TO FILING OF ADDITIONAL PAPERS WHICH HAD N O CORRELATION WITH THE ISSUES INVOLVED AND NEITHER THEY HAVE BEEN CONSIDER ED BY THE AO NOR BY THE LD. CIT(A) AND THEREFORE, SAME SHOULD NOT BE AC CEPTED OR CONSIDERED AT THIS STAGE. HOWEVER, WITHOUT PREJUDIC E HE SUBMITTED THAT IN THE SEC FILING, REFERENCE TO THE PARTIES AS CUS TOMERS CANNOT BE ADVERSELY VIEWED BECAUSE THE PARTIES TO WHOM THE CA PACITY HAVE BEEN SOLD WERE IN FACT CUSTOMERS OF THE ASSESSEE AS THE ASSESSEE WAS IN THE BUSINESS OF SELLING THE CAPACITY IN THE CABLE SYSTE M. IN FACT PAGE 22 OF SEC FILING REFLECTS THAT REVENUE IS ON ACCOUNT OF S ALE OF CAPACITY WHICH WERE RECOGNIZED ON THE DATE ON WHICH THE RISKS AND REWARDS OF THE OWNERSHIP IS TRANSFERRED TO THE PURCHASER, THAT IS, ON SUCH DATE WHEN THE CAPACITY IS MADE AVAILABLE FOR ACTIVATION. THIS IN FACT STRONGLY SUPPORTS THE CASE OF THE ASSESSEE. REGARDING LANDIN G STATION OWNED BY THE FLAG, LEARNED COUNSEL SUBMITTED THAT THE CHARGE S ARE RECOUPED FROM THE LANDING PARTIES AND, IF AT ALL, IT WOULD BE TAX ABLE IN THE HANDS OF THE LANDING PARTIES AS THIS RECEIPT IS NOT SUBJECT MATT ER OF APPEAL AND IN NO WAY CONNECTED WITH THE SALE OF CAPACITY BY ASSESSEE TO VSNL. IN FACT THE DEFINITION OF LANDING STATION AS DEFINED IN SEC FIL ING CLEARLY STATES, THAT POINT AT WHICH FLAG SYSTEM CONNECTS TO THE DOMESTIC TELEPHONE NETWORK IN A LANDING COUNTRY. EACH LANDING STATION IS CONST RUCTED, OPERATED AND OWNED BY THE LANDING PARTY. REGARDING ARGUMENT THA T CABLE SYSTEM WAS AN ASSET OF THE ASSESSEE, HE SUBMITTED THAT ASS ESSEE CAPITALIZES DIRECT AND INDIRECT EXPENDITURE INCURRED IN CONNECT ION WITH THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 51 CONSTRUCTION OF THE FLAG SYSTEM AND SUCH CAPITALIZE D EXPENDITURE ARE CHARGED TO THE COST OF THE SALES AS REVENUE FROM TH E SALE OF CAPACITY. THE CAPACITY AVAILABLE FOR SALE IS STOCK OF THE ASS ESSEE, THOUGH IS AN ASSET, BUT NOT A FIXED ASSET. THE CAPACITY AVAILABL E FOR SALE AND CONSTRUCTION IN PROGRESS AS MENTIONED AT PAGES 50 A ND 51 OF SEC FILING CLEARLY PROVIDES THAT, CAPACITY AVAILABLE FOR SALE IS RECORDED AT THE LOWER OF THE COST OR FAIR VALUE LESS COST TO SALE AND IS CHARGED TO COST OF SALES AS CAPACITY SOLD. THIS PROVES THE CONTENTION OF THE ASSESSEE THAT CAPACITY IN CABLE IS STOCK-IN-TRADE. REGARDING FILI NG OF OTHER DOCUMENTS, HE OBJECTED THAT THE LEARNED SPECIAL COUNSEL FOR TH E REVENUE IS TRYING TO IMPROVE UPON THE ORDER OF THE AO RATHER THAN SUPPOR T OR DEFEND THE CONCLUSION DRAWN BY THE AO. IN FACT HE HAS POINTED DEFECTS IN THE FINDING OF THE AO AS WELL THE LD. CIT(A) AND TRIED TO ARGUE THE MATTER AFRESH DE-HORS THE REASONING AND THE CONCLUSION DRAWN BY THE AO A S WELL AS LD. CIT(A). HE CANNOT BE PERMITTED TO GO BE YOND THE DOCUMENTS AVAILABLE ON RECORD AND RELIED UPON BY THE LOWER AU THORITIES. 41. REGARDING MR. DAVES CONTENTION THAT MERE RECIT AL IN AGREEMENT FOR OWNERSHIP OF CAPACITY AND RIGHTS TO ASSIGN SUCH CAPACITY TO 3 RD PARTIES CANNOT MEAN THAT THERE IS A SALE OF CAPACIT Y DE-HORS THE CABLE, WHEN IN SUBSTANCE SUCH CAPACITY CANNOT EXIST OR CAP ABLE OF BEING DELIVERED INDEPENDENTLY, MR. MISTRY SUBMITTED THAT, IT IS NOT OPEN FOR THE DEPARTMENT TO INTERPRET THE AGREEMENT AND INTENTION OF THE PARTIES DIFFERENTLY THAN WHAT HAS BEEN COMMERCIALLY AGREED TO BETWEEN THE PARTIES. WHEN THE TWO INDEPENDENT PARTIES ENTER INT O COMMERCIAL AGREEMENT AND UNDERSTOOD THE AGREEMENT IN A PARTICU LAR MANNER CONFIRMING THE OWNERSHIP RIGHTS, THEN THE DEPARTMEN T CANNOT DECIDE THE COMMERCIALITY OF THE AGREEMENT BUT ONLY ITS TAXABIL ITY OR NON-TAXABILITY. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 52 HERE THERE IS NO ALLEGATION EITHER BY THE AO OR BY THE CIT(A), THAT AGREEMENT IS A COLOURABLE DEVICE TO CAMOUFLAGE THE REAL TRANSACTION. HE SUBMITTED THAT DURING THE COURSE OF THE HEARING, SH RI GIRISH DAVE HAS REFERRED TO VARIOUS SCHEDULES THAT VSNL HAS PURCHAS ED VARIOUS MIU CAPACITY AND IT ALSO PROVIDES DETAILS OF CAPACITY W ITH SEGMENT OF PURCHASER WITH OWNERSHIP AND IRU LEASES. HOWEVER, I N THIS CASE THE VSNL HAS BOUGHT THE CAPACITY IN TERMS OF MIUS AND NOT BY WAY OF IRU OR LEASE. THE CAPACITY HAS BEEN SOLD BY TRANSFERRIN G THE OWNERSHIP WITH ALL RIGHTS AND OBLIGATION. REGARDING HIS MAIN CONTE NTION THAT CAPACITY IS NOT AN INDEPENDENT ASSET AND CANNOT BE SOLD DE-HORS THE CABLE SYSTEM, BECAUSE CAPACITY TO TRANSMIT IS INTRINSIC QUALITY O F THE MATERIAL USED IN THE CABLE THROUGH WHICH DATA/SIGNAL PASSES AND IT I S NOT EVEN AN INCORPOREAL ASSET BUT ABILITY OF THE CABLE ITSELF, THEREFORE, TRANSFER/DELIVERY/SALE OF TRANSMISSION CAPACITY OF CABLE CANNOT BE COMPLETED WITHOUT SALE/DELIVERY/TRANSFER OF CABLE W HICH TRANSMITS IT; MR. MISTRY CLARIFIED THAT NOWHERE IN THE AGREEMENT THE CABLE AND THE CAPACITY HAS BEEN TREATED AS TWO SEPARATE ITEMS. NE ITHER OF THE PARTIES HAVE UNDERSTOOD IN TWO DIFFERENT ITEMS OF TRANSACTI ON. FURTHER HIS CONTENTION THAT INTER-DEPENDENCE OF OWNERSHIP OF CA PACITY BETWEEN VARIOUS PARTIES SHOW THAT THERE IS NO ABSOLUTE SALE OF A PARTICULAR CAPACITY SEGMENT TO ANY PARTY AND THEREFORE, IT IS MERELY RIGHT TO USE EVEN THOUGH IN THE RECITALS OF THE AGREEMENT, OWNE RSHIP AND SALE ARE USED, IS ALSO DE-HORS THE UNDERSTANDING OF THE PARTIES AND THE AGREEMENT. HIS MAIN EMPHASIS IS THAT SUBSTANCE HAS TO PREVAIL OVER FORM. SUCH A SUBMISSION OF THE LEANED SPECIAL COUNS EL CANNOT BE ACCEPTED IN THE WAKE OF MATERIAL AVAILABLE ON RECOR D AND THERE IS NO FINDING THAT FLAG AND VSNL HAVE COLLUDED TO AVOID A NY TAX LIABILITY. THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 53 ENTIRE SUBMISSION IS BASED ON ASSUMPTION THAT THE A SSET I.E. CABLE BELONGS TO THE FLAG AND SOME DIFFERENT THING ALTOGE THER HAVE BEEN SOLD TO VSNL. THE ENTIRE CONCEPT AND BUSINESS MODEL OF T HE FLAG HAS TO BE UNDERSTOOD ALONG WITH THE INTENTION OF THE PARTIES AND THE ACCOUNTING TREATMENT OF THE FLAG AS WELL AS VSNL. FLAG HAS ACC OUNTED THE CAPACITY SOLD AS SALE OF GOODS AND THE COST OF CONSTRUCTIN G AND LAYING THE CABLE HAS BEEN ACCOUNTED AS COST OF GOODS SOLD IN THE B OOKS OF ACCOUNTS. ACCORDINGLY, THE CAPACITY IN THE CABLE SYSTEM IS SH OWN AS STOCK-IN-TRADE IN ITS ACCOUNTS, WHICH THE ASSESSEE HAS SOLD IN FRA CTIONS TO VARIOUS ENTITIES AND ONCE THE ENTIRE CAPACITY IN THE CABLE SYSTEM IS SOLD, THE ASSESSEE WOULD BE LEFT WITH NOTHING. THE OWNERS OF THE CABLE SYSTEM AND THE CAPACITY IN IT ARE THE ENTITIES WHO HAVE PU RCHASED THE SAME FROM THE ASSESSEE. FLAG HAS CONSTRUCTED THE CABLE S YSTEM AND IS IN THE BUSINESS OF SELLING THE CAPACITY IN THE CABLE SYSTE M TO VARIOUS PARTIES. THE PARTIES CAN PURCHASE ONLY THE CAPACITY THEY NEE D AND FLAG BEARS THE RISK OF SELLING THE CAPACITY ON THE CABLE SYSTEM TO RECOVER ITS COST OF CONSTRUCTING AND OPERATING THE CABLE SYSTEM. THE ME DIUM OF EXPRESSING THE SALE UNIT DOES NOT IN ANY WAY RESULT IN THE CAP ACITY NOT BEING AN ASSET WHICH IS NOT CAPABLE OF BEING SOLD. FLAG HAS SOLD THE CAPACITY TO VARIOUS PARTIES EITHER IN TERMS OF WHOLE MIUS OR H ALF MIUS IN VARIOUS SEGMENTS AS REQUIRED BY THE PARTIES. ACCORDINGLY, O WNING OF CAPACITY JOINTLY WITH OTHER PARTY DOES NOT MEAN THAT VSNL IS NOT AN OWNER OF THE PURCHASED CAPACITY. FOR INSTANCE, IN CASE OF FLAG T HE SAME CAN BE OWNED BY ONE PERSON OR SEVERAL PERSONS IN PROPORTIO NS AS MAY BE AGREED BETWEEN THEM. 42. REGARDING DEPARTMENTS CONTENTION ON THE ISSUE OF BUSINESS CONNECTION IN INDIA, THE MAIN ARGUMENT OF THE MR. D AVE HAS BEEN THAT ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 54 THE CAPACITY OF THE CABLE IN ANY SEGMENT CAN BE USE D OR ACCESSED THROUGH LANDING POINTS WHICH ARE INEXTRICABLY LINK TO THE CABLE SYSTEM FOR THE USE OF ITS CAPACITY AND THAT THE EQUIPMENTS AT LANDING POINT IN INDIA ARE OWNED BY FLAG AND NOT BY VSNL, THEREFORE, THE L OCATION OF LANDING POINT IS IN INDIA COMPRISES AN ASSET WHICH IS PART OF CABLE NETWORK LOCATED IN INDIA AND ALSO SOURCE OF INCOME IN INDIA AS CONTEMPLATED U/S 9(1)(I); FURTHER THE LANDING POINTS IS USED BY VSNL TO TRANSMIT DATA INTO CABLE SYSTEM TO EARN ITS INCOME, THEREFORE, THE CAB LE SYSTEM WHICH HAS A TERRITORIAL NEXUS IN INDIA THROUGH LANDING POINTS S HOULD BE CONSIDERED FOR DETERMINING THE TERRITORIAL NEXUS; FURTHER THE WORD THROUGH USED IN EXPLANATION 4 TO 9(1)(I) IS VIDE ENOUGH TO INCLUDE THE CABLE SYSTEM WITH ITS INHERENT AND INSEPARABLE CAPACITY PASSING THROU GH INDIA AND EXPRESSION FROM THE SOURCE OF INCOME IN INDIA WILL ALSO INCLUDE AND INDIAN COMPANY WHO USES SUCH CABLE PASSING THROUGH INDIA. IN REJOINDER, MR. MISTRY SUBMITTED THAT, THE LANDING S TATION AT MUMBAI IS OWNED BY VSNL AND NOT BY FLAG. THIS IS AMPLY CLEAR FROM CLAUSE 3.3 OF C&MA WHICH READS AS UNDER:- 3.3 EACH SEGMENT T AND SEGMENT X-1 AND X-2 SHALL B E OWNED BY THE LANDING PARTY SIGNATORY IN WHOSE COUNTRY THE RELEVANT SEGMENT IS PHYSICALLY SITUATED. MR. J.D. MISTRY FURTHER CLARIFIED THAT AS PER THE I NDIAN TELECOM REGULATION, A LANDING STATION CANNOT BE OWNED BY AN Y NON-RESIDENT AND THIS EVIDENT FROM RELEVANT EXTRACTS OF RECOMMENDAT IONS ON MEASURES TO PROMOTE COMPETITION IN INTERNATIONAL PRIVATE LEASED CIRCUITS IN INDIA GIVEN BY TELECOM REGULATORY AUTHORITY OF INDIA (TRA I), WHEREIN IT IS CLEARLY MENTIONED THAT THE LANDING STATION IN MUMBA I IN RESPECT OF THE FLAG CABLE SYSTEM IN OWNED BY VSNL. THUS, THERE CAN BE NO DISPUTE THAT ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 55 THE LANDING STATION OR EQUIPMENT THEREIN DOES NOT B ELONG TO THE ASSESSEE. 43. FURTHER, WHEN THE CSA WAS ENTERED PURSUANT TO W HICH SALE WAS MADE TO VSNL, THERE WAS NO CABLE LYING IN INDIA, AC CORDINGLY NO PART OF THE SALE MADE TO VSNL CAN BE SAID TO BE ATTRIBUTABL E TO INDIA. MERELY, THE FACT THAT VSNL HAS MADE PAYMENT TO THE ASSESSEE FOR STANDBY MAINTENANCE EXPENSES FOR VARIOUS YEARS DOES NOT GIV E RISE TO BUSINESS CONNECTION IN INDIA. THUS, THE ENTIRE PREMISE OF TH E MR. DAVES ARGUMENT IS ERRONEOUS. 44. ON THE ISSUE OF TAXABILITY OF RECEIPTS AS ROY ALTY, THE MAIN CONTENTION OF THE DEPARTMENT HAD BEEN THAT THE CABL E NETWORK, THE LANDING EQUIPMENT AND THE SEGMENT CAPACITY IS A PAR T OF ONE COMMERCIAL ASSET OWNED BY FLAG, WHICH QUALIFIES WITHIN THE MEA NING OF EQUIPMENT AS DEFINED IN CLAUSE (IVA) OF EXPLANATION 2 TO SECT ION 9(1)(VI); FURTHER WHETHER THERE CAN BE DIFFERENT ROYALTY FOR DIFFEREN T SEGMENTS WHICH ARE ON NOTIONAL BASIS THAT SEGMENTS HAVE BEEN GIVEN USE R RIGHTS TO DIFFERENT PARTIES AND IN FACT THERE IS NO SALE/DELIVERY OF CA PACITY TO THE SO CALLED BUYERS; FURTHER THE TRANSMISSION OF DATA IS BY WAY OF USING A COMPLICATED PROCESS THROUGH SOPHISTICATED EQUIPMENT AND HENCE IT IS USE OF PROCESS AS DEFINED IN EXPLANATION 2 TO SEC TION 9(1)(VI). IN THIS REGARD, MR. MISTRY REBUTTED THAT, FIRST OF ALL, CLA USE (IVA) OF EXPLANATION 2 TO SECTION 9(1)(VI) CANNOT BE HELD TO BE APPLICABLE IN THIS YEAR AS THE SAME WAS BROUGHT IN THE STATUTE W.E.F. 01.04.2002 A ND SECONDLY, IF THE SALE HAS BEEN MADE ON OWNERSHIP BASIS THERE CANNOT BE CASE OF ROYALTY. THE TESTS OF OWNERSHIP HAVE BEEN CLEARLY ELABORATED IN C&MA, LIKE IN ORDER TO DETERMINE WHETHER THERE IS A SALE OR NOT, THE FOLLOWING TESTS ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 56 NEED TO BE CONSIDERED FROM THE TERMS OF C&MA. LIKE DISPOSITION CLAUSE WHO WOULD BE ENTITLED TO THE SALE PROCEEDS ON DISPO SITION OF THE ASSET: IN THIS CASE, AS PER CLAUSE 23.2 OF THE C&MA, THE N ET PROCEEDS ON DISPOSITION OF THE CABLE SYSTEM WOULD BE SHARED AMO NGST THE SIGNATORIES IN PROPORTION TO THEIR OWNERSHIP RIGHTS. RIGHT TO ASSIGN: THE FACT THAT THE PURCHASER OF CAP ACITY CAN SELL OR GRANT A RIGHT TO USE THE CAPACITY IN THE CABLE SYSTEM TO SOME OTHER PARTY CLEARLY INDICATES THAT THE SIGNATORY IS THE OWNER O F THE CAPACITY IN THE CABLE SYSTEM PURCHASED BY IT I.E. VSNL IN THE INSTA NT CASE. IN VIEW OF THE ABOVE, IT IS EVIDENT THAT VSNL IS THE OWNER OF THE CAPACITY PURCHASED BY IT FORMS THE ASSESSEE. 45. FURTHER THE DECISIONS RELIED UPON BY THE LEARNE D SPECIAL COUNSEL ARE ALSO NOT APPLICABLE, BECAUSE OF THE PECULIAR FA CTS OF THE ASSESSEE CASE AND ALSO THAT THESE DECISIONS ARE BASED ON CON CEPT OF USE OF EQUIPMENTS. THE STRONG RELIANCE PLACED ON 3 DECISIO NS, BY MR. DAVE, THAT IS, (I) DISHNET WIRELESS LTD. (II) VERIZON COM MUNICATION (SUPRA) AND (III) VIACOM 18 MEDIA PVT. LTD. (SUPRA); ARE NOT AT ALL APPLICABLE, FIRSTLY, BECAUSE THESE COMPANIES ARE PROVIDING TELECOMMUNICA TION SERVICES IN INDIA WHEREAS THE ASSESSEE IS NOT PROVIDING ANY SUC H SERVICES; SECONDLY, THESE JUDGMENT WERE RENDERED IN RESPECT OF USE OF E QUIPMENT AND PROVISIONS OF SERVICES. FURTHER DISTINGUISHING POIN T WERE ALSO HIGHLIGHTED BY LEARNED SENIOR COUNSEL. 46. LASTLY, SHRI J.D. MISTRY ON HIS CONCLUSION BROU GHT TO VERY IMPORTANT FACT SUBMITTED THAT ITAT MUMBAI BENCH IN THE CASE O F VSNL, WHO IS THE BUYER OF THE CAPACITY, FOR THE A.Y. 1997-98 [ITA NO . 3061/MUM/2013] AND 1998-99 (ITA. NO. 3438/MUM/2003), HAS CONSIDERE D THE EXACT ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 57 QUESTION, AS TO WHETHER VSNL COULD BE REGARDED AS O WNER OF THE CAPACITY PURCHASED IN THE FLAG CABLE SYSTEM AND IS ELIGIBLE TO CLAIM DEPRECIATION U/S 32 OF THE ACT. THE TRIBUNAL HAS CL EARLY HELD THAT VSNL WAS 'OWNER' OF THE CAPACITY PURCHASED IN THE FLAG C ABLE SYSTEM AND WAS ENTITLED TO CLAIM DEPRECIATION U/S 32 ON THE SAME. THE RELEVANT EXTRACT OF THE ORDER FOR A Y 1998-99 IS REPRODUCED AS UNDER : '20. PER CONTRA, THE COUNSEL REITERATED THAT THE AS SESSEE HAS ACQUIRED PART OWNERSHIP OF THE OPTICAL FIBRE CABLE PURSUANT TO THE CAPACITY SALES AGREEMENT ENTERED INTO BETWEEN FLAG LIMITED AND OTH ER TELECOMMUNICATION ENTITIES WORLD-OVER. AS SECTION 3 2 ITSELF PROVIDES THAT THE ASSESSEE CAN BE PART OWNER ALSO FOR THE CL AIM OF DEPRECIATION, THE COUNSEL FURTHER DREW OUR ATTENTION TO THE DECIS ION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 1997-98 IN ITA NO. 3061/MUM/2003 AND SUBMITTED THAT A SIMILAR ISSUE CA ME UP FOR ADJUDICATION BEFORE THE TRIBUNAL VIDE GROUND NO.5 W HEREIN THE DEPRECIATION ON INDEFEASIBLE RIGHT TO USE UNDERSEA CABLES WAS 111 DISPUTE. IN THAT CASE, THE TRIBUNAL AT PAGE-5 PARA 17 THUS HELD: 'LEARNED D.R. WAS NOT ABLE TO FACTUALLY CONTRADICT THAT THE CLAIM OF THE ASSESSEE, THAT IT IS THE MEMBER OF THE INTERNATIONA L CONSORTIUM THAT OWNED THE CABLES, AND THAT IT IS A PART OWNER WITH THE RI GHT TO TRANSFER IT'S TO OTHER AND ALSO A RIGHT TO SHARE THE SALE PROCEED ON DECOM MISSIONING OF THE SYSTEM IN PROPORTION TO THE RIGHTS HELD BY IT. WHEN THESE FACTS ARE NOT IN DISPUTE, WE HAVE NO HESITATION IN UPHOLDING THE ORD ER OF THE FIRST APPELLATE AUTHORITY IN DISMISSING GROUND NO.5 OF THE REVENUE. ' WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE O RDERS OF THE LOWER AUTHORITIES AND ALSO THE ORDER OF THE TRIBUNAL IN A SSESSEE'S OWN CASE IN ITA NO. 3062/MUM/2003. THE FACTS OF THE PRESENT CAS E ARE IDENTICAL ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 58 WITH THE FACTS BEFORE THE TRIBUNAL IN ASSESSMENT YE AR 1997-98 AND AS NO NEW FACTS HAVE BEEN BROUGHT ON RECORD WHICH MAY PER SUADE US TO TAKE A DIFFERENT VIEW, RESPECTFULLY FOLLOWING THE FINDIN GS OF THE TRIBUNAL IN ASSESSEE'S OWN CASE IN ITA 3062/MUM/2003 (SUPRA), W E HAVE NO HESITATION IN CONFIRMING THE FINDINGS OF THE CIT(A) . GROUND NO. 2 IS ACCORDINGLY DISMISSED. 47. REGARDING TAXABILITY OF STANDBY MAINTENANCE CHA RGES, HE REITERATED HIS SUBMISSION THAT THERE IS NO RENDERING OF SERVIC ES AND NO ACTUAL SERVICES HAS BEEN PROVIDED TO THE VSNL AND THEREFOR E, THERE SAME CANNOT BE HELD TO BE IN THE NATURE OF FTS. D E C I S I O N 48. WE HAVE CAREFULLY CONSIDERED THE ENTIRE GAMUT O F ARGUMENTS MADE BY THE RIVAL PARTIES BEFORE US, FINDINGS GIVEN IN T HE IMPUGNED ORDERS AND THE MATERIAL REFERRED TO BY THE PARTIES. THE FIRST ISSUE FOR OUR ADJUDICATION ARISING OUT OF GROUNDS RAISED BY BOTH THE PARTIES IN THEIR RESPECTIVE APPEALS IS, WHETHER THE PAYMENT OF US $ 28,940,000 RECEIVED BY THE ASSESSEE FROM VSNL IS TAXABLE IN INDIA AS B USINESS INCOME U/S 9(1)(I) OR UNDER THE HEAD ROYALTIES UNDER SECTION 9(1)(VI). IF THE INCOME IS TAXABLE U/S 9(1)(I) AS BUSINESS INCOME, THEN HOW MUCH INCOME CAN BE SAID TO BE ATTRIBUTABLE TO TAX IN INDIA, WHETHER WH OLE OR PART OR NIL. THE ASSESSEES CASE BEFORE US IS THAT THE ENTIRE PAYMEN T IS NOT TAXABLE IN INDIA AT ALL. AS CULLED OUT FROM THE IMPUGNED ORDER S AND THE ARGUMENTS OF THE PARTIES, THIS ISSUE HAS TO BE EXAMINED FROM THE PERSPECTIVE, WHETHER THERE IS A, SALE OF CAPACITY IN THE CABLE SYSTEM LAID DOWN BY THE FLAG OR WHETHER THERE IS ONLY RIGHT TO USE OF CAPACITY IN THE CABLE SYSTEM. IN THE TAX MANAGEMENT FOREIGN INCOME PORTFO LIO US ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 59 INTERNATIONAL TAXATION OF TELECOM FOR THE TREATMENT OF TAX IN A AN UNDERSEA FIBRE OPTIC CABLE SYSTEM (AS REFERRED BY S HRI GIRISH DAVE BEFORE US), IN THE CONTEXT OF TELECOM CABLE NETWORK HAS CL ARIFIED THAT THE TRANSFER OF ASSET IN THE AGREEMENTS MUST BE SOMEWHA T METAPHYSICALLY INDENTIFIED AS AN AMOUNT OF DIGITAL CAPACITY. THE C ABLE HAS BEEN IDENTIFIED IN TERMS OF ITS CAPACITY TO TRANSMIT AND NOT AN INDEPENDENT ASSET DE-HORS ITS CAPACITY. THIS ENTIRE CONCEPT OF CAPACITY US ED IN AGREEMENT BY THE PARTIES TO A TELECOM NETWORK CABLE HAS TO BE UNDERSTOOD FROM THE TERMS OF CONTRACT AND NOT SOLEL Y ON SCIENTIFIC TERM OR TECHNICAL ANGLE. THE BUSINESS TRANSACTION IS ALW AYS CONTRACTUALLY DRIVEN, THE CHARACTERIZATION OF WHICH ULTIMATELY DE PENDS ON THE TERMS AND CONDITIONS OF THE AGREEMENT AND FACTS AND CIRCU MSTANCES OF EACH CASE. THE CONVEYANCE OF CAPACITY USED IN THE CABLE IN THE CASE OF TELECOM CABLE NETWORK CAN BE CHARACTERIZED AS EITHE R, SALE OR LEASE OR RIGHT TO USE THE CAPACITY IN THE CABLE NETWORK . THE KEY FACTOR IN DETERMINATION OF, WHETHER THE SALE HAS TAKEN PLACE IS TO SEE, WHETHER THE BENEFIT AND BURDENS OF OWNERSHIP WITH ALL THE R IGHTS AND OBLIGATIONS AND RISKS HAVE BEEN SHIFTED FROM SELLER TO THE BUYE R OR NOT. WHETHER OR NOT THE TRANSFER IS TREATED AS A SALE, IS ALWAYS A QUESTION OF FACT THAT CAN BE ONLY ASCERTAINED FROM THE INTENTION OF THE PARTI ES AS EVIDENCED BY THE WRITTEN AGREEMENTS IN THE LIGHT OF THE ATTENDING FA CTS AND CIRCUMSTANCES. IN CASE OF PROVIDING RIGHTS TO USE OF CAPACITY, I T HAS TO BE SEEN WHETHER THE ENTITY WHICH OWNS THE UNDERLYING CABLE OR EQUIPMENT HAS AGREED TO ALLOW THE TRANSFEREE TO USE ITS NETWORK. IN THAT CASE, THE TRANSFEREE WILL HOOK TO THE NETWORK OF THE OPERATOR IN ORDER TO SEND CALLS OR TRANSFER DATA OR INFORMATION FROM ONE NETWORK TO ANOTHER. UNDER SUCH AN AGREEMENT A TRANSFEREE GENERALLY ACQUIRES RIGHT TO SEND CERTAIN ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 60 AMOUNT OF DATA OR INFORMATION OVER FIBRE OPTIC NETW ORK FOR A CERTAIN PERIOD OF TIME UNDER CERTAIN TERMS AND CONDITIONS. SUCH AN AGREEMENT DOES NOT HAND OVER THE OWNERSHIP CONTROL. FOR THE D ETERMINATION AS TO WHETHER THE TELECOM CAPACITY AGREEMENT IS FOR THE P ROVISION OF RIGHT TO USE OR SALE OF A CAPACITY IN THE CABLE NETWORK, IT IS REQUIRED TO EXAMINE, IF THE PROPERTY OWNER (HERE CABLE NETWORK OWNERS) HAS FIRSTLY, RETAINED THE OWNERSHIP CONTROL AND POSSESSION OF TH E PROPERTY; SECONDLY, HAS RETAINED THE RISK OF LOSS OF THE PROPERTY; AND LASTLY, RESERVED THE RIGHT TO REMOVE THE PROPERTY FROM THE PREMISE OF A PURCHASER. IF THE OWNER OF THE PROPERTY HAS TRANSFERRED THE OWNERSHIP AND CONTROL OVER THE PROPERTY TO A PURCHASER, THEN SUCH A CONTRACTU AL AGREEMENT WILL BE CHARACTERIZE AS SALE AND NOT A CONTRACT FOR RIGH T TO USE THE CAPACITY OR SERVICE CONTRACT. THUS, THE RELEVANT FACTS AND CIRC UMSTANCES OF THE CASE AS WELL AS THE TERMS OF AGREEMENT ARE CRUCIAL FOR D ETERMINATION. HENCE THE FACTS ARE AGAIN REITERATED IN BRIEF. 49. THE ASSESSEE, THAT IS, FLAG IS A BERMUDA BASED COMPANY WHICH HAS BUILT HIGH CAPACITY SUBMARINE FIBRE OPTIC TELECOMMU NICATION CABLE PROVIDING A TELECOMMUNICATION LINK BETWEEN THE UK A ND JAPAN. THE LAYOUT OF THE CABLE ROUTE WITH VARIOUS TERRESTRIAL LINK IN VARIOUS COUNTRIES HAS ALREADY BEEN EXPLAINED IN THE EARLIER PART OF T HE ORDER. THE ENTIRE CABLE IS DIVIDED INTO VARIOUS SEGMENTS W HICH HAVE BEEN TERMED AS SEGMENT S WHICH COMPRISES OF SEGMENT S1 TO S14 AND SEGMENT X1 AND X2. WHEREVER THE CABLE COMES ASHORE TO A TERRESTRIAL LAND OF A GIVEN COUNTRY, IT RUNS INTO BURIED CONDUI TS TO CABLE STATION WHICH HAS BEEN TERMED AS LANDING STATION. THE LAN DING STATION IN TURN CONTAINS VARIOUS EQUIPMENTS WHICH ENABLE THE INFORM ATION SEND DOWN TO ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 61 THE CABLE TO SWITCH INTO THE DOMESTIC SYSTEM OF THE LAND IN WHICH THE LANDING STATIONS STANDS. THIS LANDING STATIONS HAS BEEN TERMED AS SEGMENT T. THE DOMESTIC TELECOMMUNICATION COMPANI ES IN EACH COUNTRY WHERE THE CABLE LANDS HAVE BEEN TERMED AS LANDING PARTIES OR SIGNATORIES. WAY BACK IN 19 TH JULY, 1993, THE ASSESSEE ENTERED INTO MOU WITH VARIOUS OTHER INTERNATIONAL TELECOMMUNICATION CARRIERS FOR THE PURPOSE OF PLANNING, DESIGNING AND CONSTRUCTING SUB MARINE FIBRE OPTIC TELECOMMUNICATION CABLE. FOR THIS PURPOSE THE MOU E LABORATED THE RIGHTS AND OBLIGATIONS OF THE VARIOUS PARTIES INVOL VED IN THE FLAG SYSTEM. AT THE TIME OF THE SIGNING OF THE MOU, THERE WERE 1 3 PARTIES OTHER THAN THE ASSESSEE, WHICH INCLUDED VSNL ALSO. THUS, IT WA S A KIND OF A CONSORTIUM, THE PURPOSE OF WHICH WAS TO GET JOINT O WNERSHIP OF THE CAPACITY IN THE CABLE SYSTEM. THIS HAS BEEN SPECIFI CALLY ENUNCIATED IN CLAUSE 2 WHICH HAS BEEN INCORPORATED IN THE EARLIER PART OF THE ORDER. THE ORGANIZATIONAL SET UP, AND THE WORKING OF INTER IM MANAGEMENT COMMITTEE HAS BEEN LAID DOWN IN CLAUSE 9 AND CLAUSE 10. ALL THE SIGNATORY PARTIES INTENDED TO ACQUIRE THE CAPACITY IN THE FLAG CABLE SYSTEM IN TERMS OF MINIMUM INVESTMENT UNIT (MIU). T HE MOU WAS EFFECTIVE TILL C&MA IS EXECUTED BY THE PARTIES. THE REAFTER, THE ASSESSEE ENTERED INTO CAPACITY SALES AGREEMENT (CSA). WITH V SNL THE CSA WAS ENTERED INTO 31.03.1995 (FURTHER AMENDED ON 20.04.1 998). UNDER THE TERMS OF CSA, VSNL HAD TO PAY US $ 28.94 MILLION TO THE ASSESSEE TOWARDS PURCHASE OF CAPACITY. THE VSNL HAD PURCHASE D 51 MIUS IN THE FLAG CABLE SYSTEM WHICH WAS IN THE FOLLOWING MANNER :- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 62 SR. NO. DESTINATION COUNTRY FLAG LANDING POINT NO. OF MIUS COST/MIUS UPTO LANDING POINT IN US $ THOUSANDS TOTL COST UPTO LANDING POINT IN US$ THOUSNADS 1 ISRAEL EGYPT 1 450 450 2 HONGKONG HONGKONG 3 900 2700 3 KOREA KOREA 1 1020 1020 4 USA(MCI) JAPAN 1 1020 1020 UK 2 1050 2100 5 UK MCL UK 3 1050 3150 6 POLAND ITALY 1 705 705 7 QATAR UAE 3 324 972 8 USA (US SPRINT) JAPAN 1 1020 1020 UK 1 1050 1050 9 SPAIN SPAIN 1 840 840 10 UKRAINE ITALY 1 705 705 11 BAHRAIN UAE 1 324 324 12 THAILAND THAILAND 2 840 1680 13 GERMANY ITALY 2 705 1410 14 UAE UAE 14 324 4536 15 OMAN UAE 2 324 648 16 HUNGARY ITALY 1 705 705 17 JAPAN (IDC) JAPAN 1 1020 1020 18 PHILIPPINES THAILAND 1 840 840 19 RISSOA (RPSSTE;CP,) ITALY 2 705 1010 20 IRAN UAE 1 324 324 21 CANADA UK 2 1050 2100 22 MALASIA MALAYSIA 2 840 1680 ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 63 23 BELGIUM UK 1 1050 1050 51 33459 LANDING POINT DISCOUNT 1172.95 NET COST OF CAPACITY IN FLAG 32286.05 THE NET PAYABLE AMOUNT TO FLAG FOR 51 MIUS WAS ACCO RDINGLY DETERMINED AT US $ 28,940,000. FURTHER MIUS HAS BEEN PURCHASED IN THE SUBSEQUENT YEARS, ALSO. 50. THE PROCEDURE FOR THE OWNERSHIP AND HOW TO USE THE CAPACITY HAS BEEN ELABORATED AND CONTAINED IN C&MA BETWEEN THE A SSESSEE AND THE VSNL. THE TERMS AND CONDITIONS AND THE CONCEPT OF O WNERSHIP HAS BEEN GIVEN IN CLAUSE 3.1 TO 3.4 OF THE C&MA WHICH HAS AL READY BEEN REPRODUCED EARLIER. FROM THE TERMS OF THE CLAUSES G IVEN IN CSA AND C&MA, IT IS AMPLY BORNE OUT THAT THE VSNL HAS GOT A LL THE OWNERSHIP RIGHTS AND OBLIGATIONS IN RESPECT OF THE CAPACITY P URCHASED IN THE CABLE SYSTEM. NOT ONLY THAT, CLAUSE 4.1 CLEARLY PROVIDED THAT THE MANAGEMENT COMMITTEE WHICH INCLUDED THE VSNL SHALL MAKE ALL DE CISION ON BEHALF OF THE SIGNATORIES TO IMPLEMENT THE PURPOSE OF THE AGR EEMENT. CLAUSE 13.4 OF THE C&MA PROVIDES THAT VSNL IS ENTITLED TO ASSIG N, TRANSFER OR DISPOSE OF ITS ASSIGNABLE CAPACITY TO A AFFILIATE OF SUCH S IGNATORY. CLAUSE 13.5 PROVIDED THAT VSNL CAN TRANSFER CAPACITY TO ANY OTH ER SIGNATORY OR ANY A TOTAL COST OF 51 MIUS IN FLAG 33459 B LANDING POINT DISCOUNT 1173 C 10% DISCOUNT OFF (2) 3346 D SYSTEM WIDE TOTAL 28940 ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 64 OTHER INTERNATIONAL TELECOMMUNICATION ENTITY. BOTH THE CLAUSES HAVE ALREADY BEEN REPRODUCED IN THE EARLIER PART. THUS, CLAUSE 13.5 GIVES UNRESTRICTED RIGHT TO VSNL TO TRANSFER ITS ASSIGNAB LE CAPACITY, THOUGH SUCH A TRANSFER HAS TO BE WITH THE CONSENT OF EACH SIGNATORY OR INTERNATIONAL TELECOMMUNICATION ENTITY TO WHOM SUCH CAPACITY IS ASSIGNED. THIS CLAUSE IS MERELY TO ENSURE THAT THE NEW PARTY JOINING THE CABLE SYSTEM ADHERES TO THE TERMS AND CONDITIONS OF THE C&MA AND THE INTENT OF THE SIGNATORIES. FURTHER CLAUSE 23.2 PROV IDES FOR TERMINATION OF C&MA AND IN THAT EVENT NET ASSET OF THE ENTIRE CABL E SYSTEM WILL BE DISPOSED OFF AND ANY PROCEEDS OF COST WILL BE DISTR IBUTED AMONG SIGNATORIES IN PROPORTION TO EACH SIGNATORYS SHARE S. 51. FROM THE AFORESAID CLAUSES OF THE AGREEMENT IT IS ABSOLUTELY CLEAR THAT THE BENEFIT AND THE BURDENS OF THE OWNERSHIP H AS SHIFTED FROM SELLER TO THE BUYER. HERE THE BUYER, VSNL HAS ALL THE RISK S AND REWARDS OF OWNERSHIP WHICH IS UNFETTERED BY THE FLAG, INASMUCH AS THE VSNL HAS NOT ONLY THE EXCLUSIVE DOMAIN ON THE RIGHTS TO USE BUT ALSO RIGHT TO RESALE OR TRANSFER ITS INTEREST IN THE CAPACITY IN THE CABLE SYSTEM TO THE EXCLUSION OF THE FLAG. THE ASSESSEE HAS NO RIGHT ON THE CAPACITY ONCE SOLD. IT DOES NOT RETAIN ANY OWNERSHIP, CONTROL AND POSSESSION OF THE CAPACITY SOLD TO THE VSNL. UNDER THE TERMS OF THE C &MA, THE VSNL ALSO HAS RIGHT TO VOTE ON IMPORTANT MATTERS RELATING TO THE MANAGEMENT OF CABLE SYSTEM. THE VSNL IN ALL TERMS BECOMES ABSOLUT E OWNER AFTER THE PURCHASE OF THE CAPACITY TO THE EXCLUSION OF THE FL AG AND OTHERS. THUS, UNDER THE C&MA THE VSNL SATISFIES THE CHARACTERISTI C OF A OWNER AND OWNERSHIP IN RESPECT OF THE CAPACITY IN THE CABLE SYSTEM. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 65 52. THE INTENTION OF THE PARTIES AND THEIR CONDUCT CAN ALSO BE GAUGED BY THE ACCOUNTING TREATMENT GIVEN BY THE PARTIES. A S ALREADY REFERRED TO EARLIER AT SEVERAL PLACES, THE FLAG HAS RECOGNIZED ITS REVENUE FROM SALE OF CAPACITY ON THE DATE OF THE RISKS AND REWARDS OF OWNERSHIP HAVE BEEN TRANSFERRED TO THE PURCHASER. THE CAPACITY HAS BEEN TREATED AS STOCK-IN- TRADE AND THE CAPACITY WHICH HAS BEEN LEFT OR AVAI LABLE IN THE BALANCE SHEET IS A PART OF CURRENT ASSET UNDER THE HEAD CAPACITY AVAILABLE FOR SALE. IT HAS NOT BEEN TREATED AS A FIXED ASSET. TH E RELEVANT PORTIONS OF THE STATEMENT GIVEN IN THE AUDITED ACCOUNTS HAVE AL READY BEEN NOTED EARLIER. THE ASSESSEE HAS CAPITALIZED THE DIRECT AN D INDIRECT EXPENDITURES INCURRED IN CONNECTION WITH THE CONSTRUCTION OF THE CABLE SYSTEM AND SUCH CAPITALIZED EXPENDITURE ARE CHARGED TO THE COS T OF THE SALES AS REVENUE, AS AND WHEN THE SALE OF CAPACITY IS RECOGN IZED. THE FIXED ASSETS AS APPEARING IN THE ACCOUNTS ONLY CONSISTED OF CERTAIN OFFICE FURNITURES, EQUIPMENTS ETC. NOT ONLY THIS, THE TREA TMENT OF PURCHASE MADE BY THE VSNL IN ITS FINANCIAL STATEMENT ALSO GO ES TO SHOW THAT VSNL HAS ALSO TREATED IT AS PURCHASE OF FIXED ASSETS AND NOT AS AN ITEM OF EXPENDITURE. THIS IS EVIDENT FROM THE ACCOUNTING PO LICIES AND THE NOTES ON ACCOUNTS WHICH HAS ALREADY BEEN REFERRED ABOVE. ALL THESE FACTS AND CIRCUMSTANCES AND THE INTENT OF THE PARTIES AS EVID ENCED FROM THE AGREEMENTS, CLEARLY GOES TO SHOW THAT ASSESSEE HAS SOLD THE CAPACITY WITH BENEFIT AND BURDEN OF OWNERSHIP OF THE CAPACIT Y TO THE VSNL. THUS, IT CAN VERY WELL BE INFERRED, THAT THE PAYMENT RECE IVED FROM THE VSNL IS FROM SALE OF CAPACITY IN THE CABLE SYSTEM. HAD THER E BEEN INTENTION OF GIVING ONLY RIGHT TO USE OF CAPACITY, THE FLAG WO ULD HAVE RETAINED THE OWNERSHIP, CONTROL AND POSSESSION OF THE CAPACITY A ND VSNL WOULD HAVE ALLOWED TO USE ITS NETWORK. ONCE A RIGHT TO USE IS GIVEN TO A PARTY, THEN ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 66 THERE IS NO REQUIREMENT OF PASSING THE OWNERSHIP WI TH ALL THE RISKS, RIGHTS AND OBLIGATIONS. 53. NOW, WHETHER CAPACITY CAN BE A SUBJECT MATTER O F SALE OR THERE COULD ONLY BE A RIGHT TO USE. BEFORE US, SHRI GIR ISH DAVE HAS CANVASSED A VERY IMPORTANT CONTENTION THAT, THERE CANNOT BE C ONCEPT OF SALE OF CAPACITY IN THE CABLE SYSTEM, BECAUSE THE CAPACITY IN A CABLE IS UNDERSTOOD IN THE TERMS OF ITS CAPACITY OF TRANSMIS SION OF ELECTRONIC OR ELECTROMAGNETIC SIGNAL DEPENDING UPON THE STRUCTURE OF THE MATTER OF WHICH THE CABLE IS MADE. HE ALSO DREW OUR ATTENTION TO THE STRUCTURE OF THE SUBMARINE CABLE SYSTEM WHICH HAS VARIOUS LAYERS OF PROTECTIVE MATERIALS OF DIFFERENT ELEMENTS TO THE CORE, WHICH IS FIBRE OPTIC. THIS FIBRE OPTIC IS ONLY A MEDIUM THROUGH WHICH TRANSMIS SION OF DATA AND SIGNALS ETC. ARE TRANSMITTED. THE CAPACITY OF CABLE TO TRANSMIT THE DATA CANNOT EXIST INDEPENDENTLY, BECAUSE CAPACITY TO TRA NSMIT IS THE INTRINSIC QUALITY OF THE MATERIAL USED IN THE CABLE. IT IS NO T EVEN AN INCORPOREAL ASSET. HERE IN THIS CASE THE CAPACITY CANNOT BE SAI D TO BE AN ASSET HAVING INDEPENDENT EXISTENCE DE-HORS THE CABLE. HOW CAN A CABLE BE REMAINED THE PROPERTY OF THE ASSESSEE AND AT THE SA ME TIME CAPACITY WHICH IS THE INTRINSIC QUALITY OF TRANSMISSION OF D ATA CAN BE SOLD, INDEPENDENTLY. THUS, THERE CANNOT BE ANY SALE OF IN TRINSIC CAPACITY OF A CABLE WITHOUT THE TRANSFER OF OWNERSHIP OF THE CABL E ITSELF. IT CANNOT BE CLASSIFIED AS GOODS UNDER THE SALES OF GOODS ACT. THUS, THE TRANSFER/DELIVERY/SALE OF TRANSMISSION CAPACITY OF A CABLE CANNOT BE COMPLETED WITHOUT THE SALE/DELIVERY/TRANSFER OF THE CABLE WHICH TRANSMITS IT. HE HAD FURTHER CLARIFIED THAT, IF THE ARGUMENT OF THE ASSESSEE IS ACCEPTED THAT TRANSMISSION CAPACITY HAS BEEN SOLD AND DELIVERED TO THE PURCHASER, THEN IT WOULD LEAD TO A BSURD CONCLUSION THAT ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 67 ONCE THE DATA IS TRANSMITTED THROUGH CABLE EVEN ONC E, THE CABLE NETWORK WHICH HOUSED THE CAPACITY WOULD BECOME LIKE AN EMPT Y SHELL. 54. TECHNICALLY SPEAKING, WHAT SHRI DAVE HAS CANVAS SED BEFORE US APPEARS TO BE CORRECT, BECAUSE THE CABLE DE-HORS THE CAPACITY IS SIMPLY A SHEATH AND NO PARTY WILL BUY THE CABLE FOR ITS TELE COMMUNICATION NETWORK WITHOUT ITS CAPACITY TO TRANSMIT ELECTRONIC OR ELEC TROMAGNETIC SIGNALS OR DATAS. IN OUR UNDERSTANDING ALSO THE ENTIRE PURPOSE OF THE FIBRE OPTIC IS TRANSMISSION OF DATA, INFORMATION, SIGNALS ETC. WHI CH IS USED FOR THE TELECOMMUNICATION PURPOSES. THE MAIN CHARACTERISTIC OF THE CABLE IS TRANSMISSION OF CAPACITY ONLY. IT IS THIS CAPACITY IN THE CABLE FOR WHICH RIGHTS OR IRUS ARE GRANTED TO THE USERS OF TELECOM NETWORK. THE PROVIDERS OF TELECOMMUNICATION NETWORK GIVE THE IND EFEASIBLE RIGHT TO USE OF CAPACITY IN THE CABLE, BECAUSE TELECOM CABLE IS UNDERSTOOD ONLY IN TERMS OF ITS DIGITAL CAPACITY. THEY DO NOT GIVE RIG HT IN THE CABLE PER SE, THAT IS, HOW MUCH LENGTH OF CABLE IS TO BE SOLD OR RIGHT IS TO BE GIVEN. ONCE WE SPEAK ABOUT CAPACITY IN THE CABLE SYSTEM IT CANNOT BE DE-HORS EACH OTHER. WE AGREE WITH THE CONTENTION OF SHRI GI RISH DAVE THAT CABLE IS ONLY A MEDIUM, HOWEVER, WE DISAGREE WITH HIS CON CLUSION THAT CAPACITY IS NOT CAPABLE OF SALE, BECAUSE CAPACITY DE-HORS THE CABLE AND VICE VERSA HAS NO MEANING IN THE CONTEXT OF TELECOM MUNICATION CABLE NETWORK. IT IS THE CAPACITY ALONE WHICH IS THE SUBJ ECT MATTER OF EITHER AGREEMENT TO SALE, AGREEMENT FOR RIGHT TO USE OR INDEFEASIBLE RIGHT TO USE, AGREEMENT FOR LEASE OR AGREEMENT FOR SERVI CE, ETC., WHEN ANY AGREEMENT OR UNDERSTANDING IS ENTERED WITH THE TELE COMMUNICATION NETWORK PROVIDERS. HERE THE TERMINOLOGY OF CAPACITY HAS TO BE COMMERCIALLY UNDERSTOOD FROM THE PERSPECTIVE OF THE TWO PARTIES AND NOT MERELY ON TECHNICAL OR SCIENTIFIC MEANING OF TE RMS. IT HAS TO BE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 68 UNDERSTOOD IN COMMERCIAL TERMS ONLY AS INTENDED BY THE PARTIES. THIS EXACTLY HAS BEEN CLARIFIED IN THE COMMENTARY OF US TAXATION OF TELECOM (SUPRA) AS FILED BY SHRI GIRISH DAVE. IF THE LOGICA L CONCLUSION OF MR. DAVES ENTIRE ARGUMENT IS TAKEN INTO ACCOUNT, THEN THERE CAN ONLY BE AGREEMENT FOR RIGHT TO USE WITH THE PROVIDERS OF TE LECOMMUNICATION NETWORK AND NOT FOR ANY OTHER PURPOSE. THE ONLY AGR EEMENT WHICH CAN BE ENTERED WITH THE TELECOMMUNICATION CABLE NETWORK PROVIDERS IS ONLY FOR RIGHT TO USE DE-HORS THE INTENTION OF THE PARTIES OR THEIR COMMERCIAL TERMS OF AGREEMENT. IN OUR OPINION THIS ARGUMENT CA NNOT BE ACCEPTED, BECAUSE IT DEPENDS UPON THE INTENTION OF THE PARTIE S AND HOW THEY COMMERCIALLY ENTER INTO AN AGREEMENT AND AGREE TO T HE TERMS AND CLAUSES AS THEY MUTUALLY UNDERSTAND AND ACCEPT. THE REVENUE OR COURTS CANNOT INTERPRET THE TERMS OF AGREEMENT AS ENTERED COMMERCIALLY AND UNDERSTOOD BY THE PARTIES, UNLESS IT IS FOUND THAT AGREEMENT HAS BEEN MADE PURPOSELY TO CAMOUFLAGE THE REAL TRANSACTION. ONCE, WE SAY THAT CAPACITY AND THE CABLE ARE INEXTRICABLY LINKED AND INSEPARABLE, THEN CAPACITY ITSELF BECOMES A PROPERTY WHICH CAN BE A S UBJECT MATTER OF TRANSFER OR SALE. HEREIN THE PRESENT CASE, THE AGRE EMENTS ENTERED BY THE ASSESSEE AS WELL AS BY THE LANDING PARTIES (INCLUDI NG VSNL), THE CAPACITY HAS BEEN UNDERSTOOD AS A SALEABLE COMMODITY. EVEN T HE FLAG HAS ACCOUNTED THE CAPACITY SOLD AS SALE OF GOODS AND TH E COST OF CONSTRUCTING AND LAYING THE CABLE HAS BEEN ACCOUNTE D AS COST OF GOODS SOLD. IT HAS NOT BEEN TREATED AS TWO ENTIRELY DIFFE RENT ITEMS, ONE WHICH WILL REMAIN WITH THE ASSESSEE AND OTHER WHICH WOULD BE SOLD. IT IS NOT THE CASE OF THE ASSESSEE THAT THEY ARE EXCLUSIVE OF EACH OTHER. MR. DAVES ENTIRE PREMISE OF HIS ARGUMENTS RESTS UPON A FOUNDATION THAT CABLE REMAINS WITH THE ASSESSEE AND IT ONLY INTENDS TO SELL THE CAPACITY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 69 ALONE. THIS IS NEITHER BORNE OUT FROM THE AGREEMENT NOR IT IS THE CASE OF THE ASSESSEE. 55. HERE IN THIS CASE THERE IS NO ALLEGATION BY THE DEPARTMENT THAT THE AGREEMENT BETWEEN THE ASSESSEE AND THE VSNL (WHICH IS A GOVERNMENT OF INDIA UNDERTAKING) HAS BEEN CAMOUFLAGED OR USED AS A COLOURABLE DEVICE TO EVADE ANY KIND OF TAX OR GIVE ANY DIFFERE NT COLOUR TO HIDE THE ACTUAL TRANSACTION. EITHER WE GO BY THE FORM OR THE ECONOMIC SUBSTANCE OF THE TRANSACTION FLOWING FROM THE TERMS AND CONDI TIONS OF THE AGREEMENT, THE ONLY CONCLUSION WHICH CAN BE DRAWN I S THAT, THE INTENTION OF THE PARTIES ALL ALONG WITH THE OTHER FACTS AND C IRCUMSTANCES WAS FOR TRANSACTION OF SALE. HERE, EITHER WE LOOK AT THE FO RM OR LOOK THROUGH THE SUBSTANCE, THE ONLY PICTURE WHICH EMERGES IS THAT, PARTIES INTENDED TO SELL AND NOT TO GIVE OR GET RIGHT TO USE. THE A GREEMENT ALONE IS THE KEY FACTOR WHICH NEEDS TO BE EXAMINED FOR ASCERTAIN ING THE TRUE COMMERCIAL CHARACTER AND NATURE OF THE TRANSACTIONS . THE ENTIRE CONCEPT OF THE BUSINESS MODEL OF THE FLAG HAS TO BE UNDERST OOD. THE FLAG HAS CONSTRUCTED THE CABLE BY CALLING OTHER PARTIES TO J OIN IN THE FLAG CABLE SYSTEM BY WHICH THE FLAG WILL SELL THE CAPACITY IN TERMS OF MIU IN THE CABLE SYSTEM AND THE OTHER PARTIES WILL PURCHASE TH E SAID CAPACITY IN VARIOUS SEGMENTS. IN ALL THE AGREEMENTS THE WORD C APACITY HAS BEEN DEFINED IN TERMS OF SALEABLE UNITS WHICH IS BE SOLD /PURCHASED AMONGST THE PARTIES. THE PARTIES CAN PURCHASE ONLY THE CAPA CITY THEY NEED AND THE ASSESSEE BEARS THE RISK OF SELLING THE CAPACITY . HERE THE ASSET CANNOT BE CONSTRUED AS PORTION OF FIBRE OPTIC CABLE ALONE BUT THE CAPACITY IN THE CABLE. THE ASSET HERE IS TO BE IDENTIFIED AS AN AMO UNT OF DIGITAL CAPACITY IN THE CABLE, WHICH IS THE SUBJECT MATTER OF TRANSF ER. NOBODY WILL BUY A CABLE SANS THE CAPACITY IN THE CABLE. IT IS ALSO VE RY PERTINENT TO NOTE HERE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 70 THAT IN CASE OF VSNL, THE CAPACITY PURCHASED BY IT HAS BEEN TREATED AS FIXED ASSETS ON WHICH DEPRECIATION HAS BEEN CLAIM ED FOR THE PERIOD OF LIFE OF THE CABLE. EVEN THE TRIBUNAL FOR THE SAME A SSESSMENT YEAR HAS CATEGORICALLY HELD THAT VSNL IS ENTITLED FOR DEPREC IATION U/S 32 ON THE CAPACITY. HAD THERE BEEN RIGHT TO USE, THEN VSNL WOULD NOT HAVE TREATED IT AS PURCHASED ASSET. THIS CONCLUSIVELY GO ES TO PROVE THAT THE CONDUCT AND INTENT OF THE PARTIES WAS FOR SALE AND IN A WAY IT HAS BEEN RATIFIED BY THE TRIBUNAL. 56. THE OTHER ARGUMENT OF MR. DAVE WHICH HAS BEEN E MPHATICALLY CONTENDED BEFORE US IS THAT, IT IS NOT THE CASE THA T THE USE OF CAPACITY IN A PARTICULAR SEGMENT WAS EXCLUSIVE TO ONE PARTY ONL Y. THE ACQUISITION OF CAPACITY IN A PARTICULAR SEGMENT BY ANY PARTY IS NO T ABSOLUTE OR EXCLUSIVE, BECAUSE EVERY PARTY HAS A RIGHT IN ALL T HE SEGMENTS. EVERYBODY SHARING A CAPACITY IN A PARTICULAR SEGMEN T WITH OTHER GOES TO PROVE THAT THERE IS NO ABSOLUTE SALE OF CAPACITY IN A PARTICULAR SEGMENT TO THE EXCLUSION OF OTHERS. THUS, THERE IS ONLY NON EXCLUSIVE RIGHTS TO USE THE CAPACITY OF THE CABLE IN A SEGMENT UNLIKE IN TH E CASE OF SALE WHERE THE RIGHT TO USE BECOMES EXCLUSIVE TO THE ACQUIRING PARTY. AS STATED IN THE EARLIER PART OF OUR FINDING THAT THE SUBJECT MA TTER OF SALE IS THE CAPACITY WHICH HAS BEEN SOLD IN TERMS OF MIU. THE C APACITY IN A PARTICULAR SEGMENT HAS AN EXCLUSIVE RIGHT QUA THE O WNER WHICH CAN BE USED IN THE MANNER IN WHICH THE OWNER PROPOSES. THE RE CAN BE SEVERAL OWNER OF CAPACITY IN A PARTICULAR LENGTH OF THE CAB LE. FOR EXAMPLE, IF BETWEEN TWO DESTINATIONS VARIOUS PARTIES HAVE BOUGH T THE CAPACITIES, THEY WILL HAVE ALL THE RIGHTS OF OWNERSHIP IN THEIR RESPECTIVE CAPACITY. INTERDEPENDENCE OF OWNERSHIP OF CAPACITY IN A CABLE BETWEEN VARIOUS PARTIES CANNOT LEAD TO A CONCLUSION THAT ONE PARTY IS ACQUIRING THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 71 OWNERSHIP IN THE CAPACITY TO THE EXCLUSION OF OTHER PARTY. IF VSNL HAS BOUGHT 51MIUS IN THE FLAG CABLE SYSTEM, WHICH IS RU NNING ACROSS IN ALL THE SEGMENTS, IT HAS NOT ONLY THE EXCLUSIVE OWNERSH IP IN 51 MIUS, BUT ALSO THE EXCLUSIVE RIGHT TO USE THE SAID CAPACITY I N THE MANNER IN WHICH IT LIKES, THAT IS, IT CAN ASSIGN OR TRANSFER OR SALE T O ANY OTHER PARTY. MR DAVES OTHER CONTENTION THAT MERE RECITAL IN THE AG REEMENT FOR OWNERSHIP CAPACITY AND RIGHTS TO FURTHER ASSIGN SUC H CAPACITY TO 3 RD PARTIES CANNOT MEAN THAT THERE IS A SALE OF CAPACIT Y, WHEN IN SUBSTANCE SUCH CAPACITY CANNOT EXIST OR CAPABLE OF BEING DELI VERED INDEPENDENTLY, CANNOT BE ACCEPTED, BECAUSE WE HAVE ALREADY HELD TH AT CAPACITY AND CABLE ARE NOT EXCLUSIVE OF EACH OTHER AND CAPACITY IS A PROPERTY IN THE AGREEMENT WHICH CAN BE SOLD OR TRANSFERRED. CONCEPT UALLY IT HAS TO BE UNDERSTOOD THAT CAPACITY AS INTENDED BY THE PARTIES IN THE AGREEMENT IS A PROPERTY WHICH CAN BE SOLD OR TRANSFERRED AND IT IS NOT THE CASE OF THE ASSESSEE THAT DE-HORS THE CABLE THE CAPACITY CAN BE SOLD INDEPENDENTLY. THE ENTIRE CABLE SYSTEM HAS BEEN BUILT TO COMMERCIA L SELL THE CAPACITY. THE ENTIRE PREMISE OF SHRI GIRISH DAVE HINGES UPON THE PRESUMPTION THAT THE ASSESSEE HAS TREATED THE CAPACITY AND THE CABLE AS A TWO DIFFERENT ITEMS ALTOGETHER, THAT IS, THE CABLE BELO NGS TO THE FLAG AND CAPACITY BELONG TO THE OTHER PARTIES. AT LEAST THIS PREMISE IS NOT APPARENTLY FLOWING FROM THE AGREEMENT. IN FACT IN T HE AGREEMENT, IT HAS BEEN STATED THAT THE CAPACITY HAS BEEN SOLD TO THE PARTIES FOR USING BY THEM EXCLUSIVELY FOR A PERIOD OF 25 YEARS, WHICH IS ALSO THE PERIOD OF LIFE OF THE CABLE. AFTER 25 YEARS, ONCE THE LIFE OF THE CABLE COMES TO AN END, THEN THE WHOLE CABLE SYSTEM WILL CEASE TO EXIST. EV EN IN THE ACCOUNTS OF THE FLAG, ONCE THE ENTIRE CAPACITY IS SOLD, THEN NO THING IS LEFT IN THE BOOKS OF THE FLAG. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 72 57. IT IS ONCE AGAIN REITERATED THAT, IT IS NEITHER THE CASE OF THE DEPARTMENT NOR HAS BEEN PROVED BEFORE US, THAT THE TRANSACTION BETWEEN THE FLAG AND VSNL IS NOT REAL AND WE ARE RE QUIRED TO LOOK THROUGH THE AGREEMENT FROM THE ANGLE THAT THE PARTI ES HAVE CAMOUFLAGED THE ENTIRE ARRANGEMENT OF SALE, WHICH I NSTEAD SHOULD BE INTERPRETED OR TAKEN AS AGREEMENT FOR RIGHT TO USE. REVENUE HAS NOT BROUGHT ANYTHING ON RECORD THAT THE PARTIES HAVE AC TED OR CONDUCTED THEIR AFFAIRS CONTRARY TO THE TERMS OF THE AGREEMEN T. IT IS ALSO NOT THE CASE THAT THE FLAG HAS AGREED TO ALLOW THE VSNL TO USE ITS NETWORK AND AT THE SAME TIME RETAINED THE OWNERSHIP CONTROL AND POSSESSION OF THE CABLE. FURTHER IT IS NOT THE CASE THAT FLAG HAS VES TED ITSELF WITH THE RIGHT TO REMOVE THE CAPACITY IN THE CABLE ASSIGNED TO VSN L AFTER THE PERIOD OF CONTRACT. RATHER THERE IS A CLAUSE OF DISPOSITION, WHERE THE BENEFITS ARE DISTRIBUTED AMONGST ALL THE SIGNATORIES, INCLUDING VSNL. IN CASE HAD THERE BEEN ONLY RIGHT TO USE TO BE GIVEN, THEN THE OWNERSHIP RIGHT TO THE EXCLUSION OF THE FLAG COULD NOT HAVE BEEN GIVEN TO THE VSNL. IN OTHER WORDS, IF RIGHT TO USE IS GIVEN THEN OWNERSHIP IS N OT TRANSFERRED. THUS, IN OUR CONCLUSION WHICH IS BASED ON THE APPARENT TERMS AND CONDITIONS OF THE AGREEMENT BETWEEN THE PARTIES, THERE IS NO ASSI GNMENT OF RIGHT TO USE BUT SALE OF CAPACITY IN THE CABLE SYSTEM. WHETHER IT IS A CASE OF ROYALTY 58. NOW WE WILL COME TO THE QUESTION, WHETHER THE R ECEIPTS CAN BE TAXED AS A ROYALTY. SINCE WE HAVE ALREADY HELD TH AT, THERE IS NO RIGHT TO USE, THEN THERE IS NO QUESTION OF TREATING THE PAYM ENT AS ROYALTY. HOWEVER, WE WILL EXAMINE THE ISSUE OF ROYALTY IN TH E LIGHT OF THE ARGUMENTS PLACED BY THE EITHER PARTIES. THE ASSESSI NG OFFICER HAS ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 73 TREATED THE PAYMENT AS A ROYALTY ON THE GROUND THAT FLAG HAS GRANTED TO VSNL, ONLY RIGHT TO USE THE CABLE SYSTEM FOR 25 YEA RS AND VSNL HAS TO PAY FURTHER AMOUNT ON ACCOUNT OF THE MAINTENANCE AS THE FLAG IS CARRYING OUT THE OPERATION AND MAINTENANCE OF SERVI CES. THEREFORE, THE PAYMENT MADE BY THE VSNL IS IN THE NATURE OF ROYAL TY AND ALSO FEES FOR TECHNICAL SERVICES, BECAUSE IT IS RUNNING TECHNICA L SERVICES IN THE CABLE SYSTEM. THUS, THE LUMP SUM CONSIDERATION OF US $ 28 .94 MILLION IS FOR THE USE OF THE CABLE FOR 25 YEARS AND HENCE IT CAN BE TERMED AS LUMP SUM CONSIDERATION FOR ROYALTY/FTS. MR. GIRISH DAVE HAD CONTENDED THAT THE ENTIRE CABLE NETWORK, THE LANDING EQUIPMENTS WH ICH HAS BEEN SUPPLIED AND INSTALLED BY THE ASSESSEE AND SEGMENT CAPACITY ARE PART OF ONE COMMERCIAL ASSET OWNED BY THE FLAG, WHICH QUALI FIES AS EQUIPMENT OWNED BY THE FLAG. THE ENTIRE INVESTMENT IN LAYING OF THE CABLE HAS BEEN MADE BY FLAG AND THE EQUIPMENTS ARE ALSO PROCU RED BY THE FLAG. IT IS ONLY IN THE DIFFERENT SEGMENTS ON THE NOTIONAL B ASIS, THE PARTIES HAVE BEEN GIVEN USER RIGHTS AND THERE IS NO SALE/DELIVER Y OF CAPACITY TO THE SO CALLED BUYERS. FURTHER A TRANSMISSION OF DATA IS BY WAY OF A USE OF A COMPLICATED PROCESS AND SOPHISTICATED EQUIPMENTS, T HUS THE USE OF IT, FALLS WITHIN THE AMBIT OF USE OF PROCESS ALSO. TH EREFORE, THE ENTIRE PAYMENT IS FOR ROYALTY ONLY. ALL HIS OTHER PREV IOUS ARGUMENTS WERE ONLY TO EXPLAIN THAT THE PAYMENT HAS BEEN MADE FOR RIGHT TO USE WHICH IS NOTHING BUT PAYMENT FOR ROYALTY. HE ALSO RELIED UPO N 4 DECISIONS AND READ OUT THE ENTIRE FACTS AND THE RATIO LAID DOWN I N THE SAID JUDGMENTS, WHICH HAVE BEEN REFERRED TO IN THE EARLIER PART. 59. AS HELD EARLIER, THE ASSESSEE RIGHT FROM THE ST AGE OF ENTERING THE MOU WITH THE PARTIES, SIGNING OF CAPACITY SALES AGR EEMENT AND C&MA AGREEMENT, CLEARLY INTENDED TO SALE THE CAPACITY WI TH TRANSFER OF ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 74 COMPLETE OWNERSHIP, RISKS AND RIGHTS. THE ENTIRE AG REEMENT WAS FOR THE PERIOD OF 25 YEARS WHICH COINCIDED WITH THE LIFE OF THE CABLE. IN THE C&MA AGREEMENT THERE ARE CLEAR CUT CLAUSES FOR THE OWNERSHIP AND THE TEST OF WHICH HAS BEEN GIVEN AT SEVERAL PLACES. FOR EXAMPLE IN THE CLAUSE OF DISPOSITION, THAT IS, WHO WOULD BE ENTITL ED TO THE SALE PROCEEDS ON THE DISPOSITION OF THE ASSETS, CLAUSE 23.2 CLEAR LY ENVISAGES THAT THE NET PROCEEDS ON DISPOSITION OF THE CABLE SYSTEM WOU LD BE SHARED AMONGST THE SIGNATORIES IN PROPORTION TO THEIR OWNE RSHIP RIGHTS. NOT ONLY THAT, THERE IS RIGHT TO ASSIGN THE CAPACITY, WHICH IS BORNE OUT FROM THE FACT THAT PURCHASER OF THE CAPACITY CAN SELL OR GRA NT RIGHT TO USE THE CAPACITY IN THE CABLE SYSTEM TO SOME OTHER PARTY. A LL THIS CLEARLY INDICATE THAT THE SIGNATORY BECOMES THE OWNER OF THE CAPACIT Y IN THE CABLE SYSTEM AFTER THE PURCHASE, THAT IS, THE VSNL IN THE INSTANT CASE. THIS FACT FURTHER ESTABLISHES THAT THERE IS NO PAYMENT F OR SIMPLY USER OF THE CAPACITY. IN CASE OF A ROYALTY, AGREEMENT, THE CO MPLETE OWNERSHIP IS NEVER TRANSFERRED TO THE OTHER PARTY. THE CONCEPT O F TRANSFER OF OWNERSHIP TO THE EXCLUSION OF THE OTHER PERTY IS DE NUDED IN THE CASE OF ROYALTY. WHAT IS ENVISAGED IN SECTION 9(1)(VI) RE AD WITH EXPLANATION THERETO, IS THAT THERE SHOULD BE TRANSFER OF RIGHTS OF ANY KIND OF THE PROPERTY AS DEFINED THEREIN; OR IMPARTING OF ANY IN FORMATION IN RESPECT OF VARIOUS KINDS OF PROPERTY; OR USE OF RIGHTS TO U SE OF ANY EQUIPMENTS ETC. THE RELEVANT, EXPLANATION 2 OF SECTION 9(1)(VI ) READS AS UNDER:- EXPLANATION 2- FOR THE PURPOSE OF THIS CLAUSE ROY ALTY MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCO ME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD CAPITAL GAINS ) FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING TH E GRANTING OF A LICENSE) IN RESPECT OF A PATENT, ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 75 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; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING TECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXPERIENCE OR SKILL; [(IVA) THE USE OR RIGHT TO USE ANY INDUSTR IAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 4 4BB] (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING T HE GRANTING OF A LICENSE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FIL MS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION O R TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING , BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS ; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION WIT H THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO [(IV), (IVA) AND] (V). NONE OF THE ABOVE CLAUSES AS ENUMERATED IN EXPLANAT ION 2 WOULD BE APPLICABLE ON THE FACTS OF THE ASSESSEES CASE. THE REASON BEING THAT, ONCE ANY KIND OF RIGHT IS TRANSFERRED OR ANY RIGHT TO USE IS GIVEN WITHIN THE AFORESAID DEFINITION, THEN THERE IS NO TRANSFER OF ANY OWNERSHIP WITH ALL THE RIGHTS AND OBLIGATION. IF THE CONSIDERATION HAS BEEN RECEIVED FOR ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 76 TRANSFERRING THE OWNERSHIP WITH ALL RIGHTS AND OBLI GATIONS THEN SUCH A CONSIDERATION CANNOT BE TAXED UNDER THE HEAD ROYAL TY. THUS, CHARACTERIZATION OF THE TRANSFER HAS TO BE SEEN IN THE TERMS OF THE CONTRACT AND AGREEMENT ENTERED BY THE PARTIES, WHIC H HERE IN THIS CASE IS FOR SALE AND NOT FOR SIMPLE USER. 60. NOW WE WILL DISCUSS THE DECISIONS RELIED UPON B Y SHRI GIRISH DAVE:- (I) DISHNET WIRELESS LTD, IN RE (2012) 24 TAXMA N.COM 298 (AAR):- IN THIS CASE, THE ASSESSEE COMPANY, DISHNET WIRELES S LTD. WAS A COMPANY INCORPORATED IN INDIA AND WAS ENGAGED IN TH E BUSINESS OF PROVIDING TELECOMMUNICATION SERVICES IN NUMBER OF T ELECOM CIRCLES IN INDIA. A SAUDI ARABIA BASED COMPANY, STC HELD 18 .5% SHARE HOLDING IN THE ASSESSEE COMPANY. THE STC OWNS CONTR OLS AND OPERATES TELECOMMUNICATION NETWORK INFRASTRUCTURE I N SAUDI ARABIA AND ELSEWHERE STC WAS A PART OF CONSORTIUM WHO HAD ENTERED INTO C&MA AGREEMENT TO PLAN AND LAY A CABLE SYSTEM CALLE D AS EUROPE INDIA GATEWAY SUBMARINE CABLE KNOWN EIG. THE MEMBE RS OF THE CONSORTIUM WERE ENTITLED TO TRANSFER CAPACITY IN TH E EIG CABLE SYSTEM TO OTHER TELECOMMUNICATION ENTITIES FROM ITS ALLOTTED CAPACITY. IN PURSUANCE THEREOF, SAT ENTERED INTO CA PACITY TRANSFER AGREEMENT WITH THE ASSESSEE WHICH IS AN INDIAN CO. FOR TRANSFER OF PART OF THE CAPACITY OUT OF ITS TOTAL ALLOCATED CAP ACITY OF THE EIG CABLE SYSTEM. IN TERMS OF THE SAID AGREEMENT, SAT H AS TRANSFERRED RIGHT TO USE 40% OF ITS ALLOTTED CAPACITY IN THE EI G SYSTEM TO THE ASSESSEE FOR CONSIDERATION OF $ 20 MILLION. THE ASS ESSEE HAD APPROACHED THE AAR, TO RENDER THE RULINGS MAINLY ON THE FOLLOWING QUESTIONS:- ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 77 WHETHER PAYMENTS BY THE ASSESSEE TO SAUDI TELECOM LIMITED (STC) UNDER THE TERMS OF THE EIG CAPACITY TRANSFER AGREEMENT TOWARDS ACQUISITION OF THE EIG CAPACITY COMPRISE IN COME CHARGEABLE TO TAX IN INDIA? WHETHER PAYMENTS BY THE ASSESSEE TO STC UNDER THE T ERMS OF THE EIG CAPACITY TRANSFER AGREEMENT TOWARDS ANNUAL OPERATION AND MAINTENANCE CHARGES, WOULD BE IN THE NATURE OF FTS WITHIN THE MEANING OF THE TERM IN EXPLANATION 2 TO CLAUSE (VII) OF SECTION 9(1) OF THE ACT.? THE ASSESSEES STAND WAS THAT THE CAPACITY IN THE E IG CABLE SYSTEM HAS BEEN ACQUIRED BY STC FOR PROVIDING TELEC OMMUNICATION SERVICES AND HENCE IT WOULD BE A CAPITAL ASSET OF S TC. BY TRANSFERRING 40% OF THE CAPACITY TO THE ASSESSEE, T HERE WAS A TRANSFER OF A CAPITAL ASSET AND SUCH A GAIN ON TRAN SFER OF CAPITAL ASSET HAD NOT ARISEN IN INDIA, AS THE CAPITAL ASSET WAS NOT SITUATED IN INDIA. ON THE OTHER HAND, THE REVENUES STAND WA S THAT THE CAPACITY ACQUIRED BY STC UNDER THE C&MA AGREEMENT I S NOT CAPABLE OF BEING TRANSFERRED, INDEPENDENT OF THE C& MA AGREEMENT. FROM THE TERMS OF THE AGREEMENT AND THE RELEVANT CLAUSES, IT WAS POINTED OUT THAT STC HAS NOT TRANSF ERRED ANY CAPITAL ASSET AND IT WAS NOT THE CASE OF PURCHASE B Y THE ASSESSEE OR TRANSFER OF EIG SYSTEM FROM SAT TO ASSESSEE. THE RIGHT GIVEN TO THE ASSESSEE IS ONLY A RIGHT TO USE THE CAPACITY IN EIG SYSTEM AND HENCE THE CONSIDERATION PAID IS IN THE NATURE OF RO YALTY. AFTER ANALYZING THE AGREEMENTS, THE AUTHORITY NOTED THAT THE AGREEMENT CANNOT BE UNDERSTOOD AS A TRANSFER OF OWNERSHIP IN THE SYSTEM, BECAUSE THE STC HAS ONLY GIVEN RIGHT TO ASSIGN THE ALLOCATED CAPACITY. EVEN THE AGREEMENT BETWEEN STC AND THE AS SESSEE ALSO ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 78 SUGGESTED THAT IT IS ONLY THE RIGHT TO PARTICIPATE IN THE USE OF EIG SYSTEM THAT WAS GIVEN TO THE ASSESSEE. IT WAS HELD THAT TRANSFER OF A CAPITAL ASSET IS DIFFERENT FROM THE TRANSFER OF R IGHT TO USE AND THERE IS NO TRANSFER OF CAPITAL ASSET THAT GENERATE S CAPITAL GAIN IN THE CASE OF THE ASSESSEE. THUS, THE CONSIDERATION P AID WAS FOR RIGHT TO ACCESS AND THE RIGHT TO USE, THEREFORE IT IS TO BE TAXED AS ROYALTY. ON THE ISSUE OF PAYMENT OF ANNUAL OPERATIO N AND MAINTENANCE CHARGES, THE AUTHORITY HELD THAT THE SH ARE OF CHARGES PAID CANNOT BE TREATED AS FTS. THUS, IN THE TERMS O F THE AGREEMENT THE STC HAS ONLY GRANTED RIGHT TO USE THE CAPACITY IN THE EIG SYSTEM IN TERMS OF AGREEMENT BETWEEN THEM. NOW HERE IN THE PRESENT CASE THE SAID DECISION IS C LEARLY DISTINGUISHABLE ON THE FACTS AND ALSO THE RATIO-DEC IDENDI. THE SAID DECISION IF AT ALL CAN BE SAID TO BE RELEVANT, IN C ASE WHEN VSNL GRANTS RIGHT TO USE CAPACITY TO SOME OTHER ENTITY. IT DOES NOT APPLY IN CASE OF ASSESSEE. THE OTHER IMPORTANT THING, THE AUTHORITY HELD THAT THE ANNUAL OPERATION AND MAINTENANCE CHARGES C ANNOT BE TAXED AS FTS. (II) VIACOM 18 MEDIA PVT. LTD. VS. ADIT REPORTED IN (2014) 162 TTJ (MUM) 336. IN THIS CASE THE ISSUE INVOLVED WAS, WHETHER THE TR ANSPONDER FEES PAYABLE BY THE ASSESSEE TO X CORPORATION WAS IN THE NATURE OF ROYALTY AS PER THE PROVISIONS OF INDO-US DTAA. THE ASSESSEE COMPANY WAS INCORPORATED IN THE INDIA, PRIMARILY EN GAGED IN TELECASTING/BROAD CASTING TELEVISION CHANNELS IN IN DIA; IT IS ALSO ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 79 ENGAGED IN MARKETING OF ADVERTISING AIR TIME OF THE SE CHANNELS, DISTRIBUTION OF THE CHANNELS MARKETING AND DISTRIBU TION OF FILMS ETC. THE ASSESSEE HAS BEEN PROVIDED 24 HOUR SATELLITE SI GNAL RECEPTION AND RETRANSMISSION SERVICES I.E. TRANSPONDER SERVIC ES BY INTEL SAT CORPORATION. IN CONSIDERATION FOR THE TRANSPONDER S ERVICES, THE ASSESSEE HAS TO PAY TRANSPONDER SERVICE FEE TO INTE L SAT. PM THESE FACTS IT WAS HELD BY THE AUTHORITIES BELOW AN D ALSO CONFIRMED BY THE TRIBUNAL THAT, THE PAYMENT IN QUESTION PAYAB LE TO INTEL SAT WAS FOR USER FOR TRANSPONDER CAPACITY AND HENCE TAX ABLE AS ROYALTY, BOTH UNDER THE DOMESTIC LAW AS WELL AS UND ER DTAA. THE FACTS OF THE CASE ARE ENTIRELY DIFFERENT FROM THE P RESENT CASE, THEREFORE THE DECISION CANNOT BE HELD TO BE APPLICA BLE AT ALL. (III) VERIZON COMMUNICATES SINGAPORE PTE LTD. VS. I TO REPORTED IN (2014) 361 ITR 575 (MAD) HERE-IN-THIS CASE THE ASSESSEE COMPANY WAS A NON RE SIDENT COMPANY ENGAGED IN THE BUSINESS OF PROVIDING INTERN ATIONAL CONNECTIVITY SERVICES BAND WIDTH SERVICES OR TELECO M SERVICES IN ASIA PACIFIC REGION INCLUDING INDIA. THE ASSESSEE P ROVIDED POINT TO POINT PRIVATE LINE USED BY ORGANIZATIONS TO COMMUNI CATE BETWEEN OFFICES AT DIFFERENT COUNTRIES I.E. TRANSPORTATION OF VOICE DATA AND VIDEO TRAFFIC. SINCE THE ASSESSEE WAS NOT LICENSED SERVICE PROVIDER UNDER THE INDIAN LAWS, VSNL UNDERTOOK TO PROVIDE TH E INDIAN LEG OF INTERNATIONAL SERVICE TO THE CUSTOMER. THUS ANY CUSTOMER INTERESTED OF TAKING A LEASE CONNECTION BETWEEN ITS OFFICE IN INDIA AND OVERSEAS LOCATION, ENTERS INTO AN ARRANGEMENT W ITH THE ASSESSEE FOR THE PROVISION OF INTERNATIONAL CONNECT IVITY IN THE ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 80 OVERSEAS LEG AND WITH VSNL FOR INDIAN HALF OF THE C ONNECTIVITY. VSNL TRANSMITS THE TRAFFIC OF THE CUSTOMER IN INDIA TO A VIRTUAL POINT OUTSIDE INDIA. IT WAS STATED BY THE ASSESSEE THAT IT USES ITS TELECOM SERVICES EQUIPMENT SITUATED OUTSIDE INDIA I N PROVIDING THE INTERNATIONAL HALF CIRCUIT AND THEREFORE PAYMENT RE CEIVED BY THE ASSESSEE IS NOT TAXABLE IN INDIA. THE DEPARTMENTS CASE WAS THAT PAYMENT RECEIVED BY THE ASSESSEE IN PROVIDING IPLC WAS TAXABLE AS ROYALTY FOR USE OR RIGHT TO USE OF COMMERCIAL AND SCIENTIFIC EQUIPMENT, U/S 9(1)(VI) AND ALSO UNDER ARTICLE 12(3 ) OF DTAA BETWEEN INDIA AND SINGAPORE. IT IS IN THIS CONTEXT AND ON THE PERUSAL OF SERVICE AGREEMENT BETWEEN THE ASSESSEE A ND ITS CUSTOMER, THE HONBLE HIGH COURT HELD THAT IT WAS U SE OF SCIENTIFIC EQUIPMENT, HENCE TAXABLE AS ROYALTY. IT IS IN THIS BACKGROUND AND FACTS THAT THE HONBLE HIGH COURT HAS DISCUSSED THE ENTIRE ISSUE AND CONCEPT OF ROYALTY AT GREAT LENGTH. THUS THIS D ECISION IS AGAIN NOT APPLICABLE IN THE CASE OF PRESENT CASE. (IV) REUTERS TRANSACTION SERVICES LTD. ITA NO. 6947 /MUM/2012, ITAT MUMBAI BENCH ORDER DATED 18.07.2014. IN THIS C ASE THE ASSESSEE A UK BASED COMPANY WAS ENGAGED IN THE BUSI NESS OF PROVIDING ELECTRONIC DEAL MATCHING SYSTEM ENABLING THE AUTHORIZED DEALER IN FOREIGN EXCHANGE SUCH AS BANKS TO AFFECT DEALS ON SPOT FOREIGN EXCHANGE WITH OTHER FOREIGN EXCHANGE DEALER S. THE MAIN SERVER OF THE ASSESSEE WAS LOCATED IN GENEVA AND IT HAS EXECUTED A DEAL FOR SERVICES MARKETING AGREEMENT WITH INDIAN COMPANY WHICH MARKETED THE SERVICES OF THE ASSESSEE TO THE SUBSCRIBERS IN INDIA. HEREIN THIS CASE THE ISSUE INVOLVED IS COMPL ETELY ON ACCOUNT ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 81 OF SERVICE AGREEMENT AND FOR RENDERING OF SERVICES. THUS, THIS CASE IS ALSO NOT APPLICABLE AT ALL. 61. HOWEVER FORM THE AFORESAID DECISIONS/ RULINGS, ONE THING IS AMPLY CLEAR THAT TERMS AND CONDITIONS AGREED UPON IN THE AGREEMENT BETWEEN THE PARTIES IS THE CRUCIAL POINT FOR DECIDING THE N ATURE OF CONTROVERSY, CHARACTERIZATION OF RECEIPTS AND ISSUE OF TAXABILIT Y. THE ECONOMIC SUBSTANCE OF THE TRANSACTION FLOWING FROM THE WRITT EN AGREEMENTS BETWEEN THE PARTIES IS THE KEY FACTOR FOR DETERMINA TION OF NATURE AND TAXABILITY OF RECEIPT. 62. IN OUR CONCLUSION BASED ON THE DISCUSSIONS IN T HE FORGOING PARAGRAPH, THE PAYMENT OF US $ 28.94 MILLION RECEIV ED BY THE ASSESSEE FROM VSNL IS ON ACCOUNT OF SALES AND HENCE CONSTITU TES BUSINESS INCOME OF THE ASSESSEE. THE FINDING AND THE CONCLUSION OF THE LD.CIT(A) BASED ON THE TERMS OF THE AGREEMENT AND FACTS OF THE CASE ON THIS SCORE, THAT THE RECEIPTS IN QUESTION IS BUSINESS INCOME OF TH E ASSESSEE AND NOT ROYALTY IS UPHELD. ACCORDINGLY, THE SAID PAYMENT CANNOT BE TAXED AS ROYALTY UNDER SECTION 9(1)(VI). 63. NOW COMING TO THE ISSUE OF BUSINESS CONNECTION AND TAXABILITY OF RECEIPTS IN INDIA WITHIN THE AMBIT OF SECTION 9(1)( I). THE SAID SECTION READS AS UNDER:- 9(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCR UE OR ARISE IN INDIA:- (I) ALL INCOME ACCRUING OR ARISING, WHETHER DIRECTL Y OR INDIRECTLY, THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, O R THROUGH OR FROM ANY PROPERTY IN INDIA, OR THROUGH OR FROM ANY ASSE OR SOURCE OF INCOME IN INDIA OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 82 THUS, UNDER THIS CLAUSE INCOME IS DEEMED TO ACCRUE IN INDIA IF IT ACCRUES, DIRECTLY OR INDIRECTLY: (A) THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, OR (B) THROUGH OR FORM ANY PROPERTY IN INDIA, OR (C) THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN I NDIA, OR (D) THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. THE IMPORTANT WORDS WHICH HAVE BEEN USED HERE ARE, THROUGH AND FROM. THE LAW LEXICON DEFINES THE MEANING OF THE W ORD THROUGH WHICH CONNOTES MEDIUM OR AGENCY OR INSTRUMENT. IT I S ALSO UNDERSTOOD AS BY MEANS OF. THE WORD FROM INDICATES SOURCE O R PROVENANCE. EXPLANATION 4 TO SECTION 9(1)(I) CLARIFIES THAT THE EXPRESSION THROUGH SHALL MEAN AND INCLUDE BY MEANS OFF, IN CONSEQUE NCE OF OR BY REASON OF. THUS, INCOME WHICH IS CHARGEABLE TO TAX IN INDIA SHOULD ACCRUE OR ARISE IN INDIA BY MEANS OF OR IN CONSE QUENCE OF OR BY REASON OF OF ANY BUSINESS CONNECTION IN INDIA OR ANY PROPERTY IN INDIA OR ANY ASSET OR SOURCE OF INCOME IN INDIA OR TRANSF ER OF A CAPITAL ASSET SITUATED IN INDIA. 64. WE HAVE TO EXAMINE, WHETHER THE PAYMENT MADE BY VSNL FOR PURCHASING OF CAPACITY IN THE CABLE TO THE ASSESSEE AMOUNTS TO ACCRUING OR ARISING OF INCOME TO THE ASSESSEE IN INDIA, WITH IN THE AFORESAID 4 PARAMETERS. FIRST OF ALL, HERE-IN-THIS CASE THERE I S NO QUESTION OF ANY TRANSFER OF ANY CAPITAL ASSET SITUATED IN INDIA OR INCOME FROM ANY PROPERTY IN INDIA. THE FLAG DOES NOT HAVE ANY CAPIT AL ASSET OR PROPERTY IN INDIA, WHICH HAS BEEN TRANSFERRED TO VSNL. HERE WE HAVE TO BASICALLY EXAMINE, WHETHER INCOME HAS ACCRUED TO THE ASSESSEE FROM ANY BUSINESS CONNECTION IN INDIA OR ANY ASSET OR SOU RCE OF INCOME IN INDIA. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 83 THE ASSESSEE HAS SOLD CAPACITY IN VARIOUS SEGMENTS OF THE CABLE SYSTEM LYING FROM UK TO JAPAN. IN INDIA THE CABLE COMES AS HORE IN MUMBAI WHICH IS CONNECTED TO A LANDING STATION. THIS LANDI NG STATION HAS VARIOUS EQUIPMENTS WHICH IS CONNECTED TO THE LANDING PARTY S DOMESTIC SYSTEM. SEGMENT S-6 RUNS BETWEEN FLAG INTERFACE POINT LANDI NG STATION AT THE FUJERA (UAE) TO LANDING STATION MUMBAI (INDIA). SEG MENT S-7 RUNS BETWEEN FLAG INTERFACE POINT AT LANDING STATION AT MUMBAI AND FLAG INTERFACE POINT LANDING STATION AT PENANG (MALAYSIA ). THE ASSESSEES CASE IS THAT, FIRSTLY, ONCE THE CAPACITY IS SOLD BY THE FLAG, THE INCOME THEREOF CANNOT BE SAID TO BE BY MEANS OF ANY ASSET OR SOURC E SITUATED IN INDIA. IT DOES NOT RECEIVE INCOME FROM USE OF CAPACITY ALB EIT BY SALE OF CAPACITY. THE CABLE IS ONLY THE SHEATH OR HOUSING F OR THE CAPACITY; SECONDLY, THE SALE OF CAPACITY IN THE CABLE SYSTEM DOES NOT ARISE THROUGH AND FROM BUSINESS CONNECTION IN INDIA, BECAUSE SALE HAS BEEN MADE TO VSNL WHICH IS UNCONNECTED TO THE ASSESSEE; AND LAST LY, THE LANDING STATION IS OWNED BY THE LANDING PARTIES OF THE RESP ECTIVE COUNTRIES. THUS, THERE IS NEITHER ANY BUSINESS CONNECTION IN INDIA, NOR ANY ASSET OR SOURCE OF INCOME IN INDIA, THEREFORE, NOTHING IS TA XABLE IN INDIA. IN SUPPORT OF THE CONTENTION THAT LANDING STATION IS N OT OWNED BY THE ASSESSEE, LEARNED COUNSEL HAD SUBMITTED RELEVANT EX TRACTS ISSUED BY TRAI THAT LANDING STATION IN MUMBAI IN RESPECT OF F LAG CABLE SYSTEM IS OWNED BY VSNL. ON THE OTHER HAND, THE CONTENTION OF MR. GIRISH DAVE HAD BEEN THAT, THE ASSIGNED CAPACITY OF THE SEGMENT IS ONLY NOTIONAL AND ENTIRE CAPACITY RUNS THROUGH THE ENTIRE NETWORK. EA CH SEGMENT CANNOT BE USED ON STANDALONE BASIS WITHOUT BEING CONNECTED TO THE CABLE NETWORK AND LANDING POINTS, HENCE THE SEGMENT CANNO T BE LOOKED UPON AS A WORKING UNIT OF THE CABLE NETWORK. IF AT ALL T HE TERRITORIAL NEXUS OF ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 84 THE CAPACITY IS TO BE TRACED, THEN THE BEST LOGICAL APPROACH WOULD BE TO TRACE IT TO THE PLACE WHERE CABLE PASSES AND ALLOWS THE ACCESS POINT TO EXPLOIT THE CABLE CAPACITY BY THE PURCHASER. IN THI S CASE, CABLE SYSTEM PASSES THROUGH INDIA AND THE LANDING POINTS IS ALSO IN INDIA THROUGH WHICH DATA COMES TO INDIA AND IS SENT FROM INDIA. T HE ENTIRE CAPACITY OF THE CABLE IN ANY SEGMENT CAN BE USED OR ACCESSED ON LY THROUGH LANDING POINTS IN INDIA AND HENCE LANDING POINTS ARE INEXTR ICABLY LINK TO THE CABLE SYSTEM. HIS CASE HINGES UPON THE PREMISE THAT LANDI NG POINTS ARE OWNED BY THE FLAG AND NOT BY THE LANDING PARTY, BECAUSE T HE LANDING STATION AND THE EQUIPMENTS THEREIN HAVE BEEN CONSTRUCTED AN D SUPPLIED BY THE FLAG ONLY. THIS HE CONTENDED ON THE BASIS OF SUPPLY AGREEMENTS AS REFERRED TO BY HIM DURING THE COURSE OF HEARING. TH US, THE ASSETS INCLUDING THE LANDING CABLE AND LANDING POINTS IS S ITUATED IN INDIA AND THEREFORE THE WORD THROUGH AN ASSET APPEARING U/S 9(1)(I) WILL COVER THE ASSESSEES CASE. THE SOURCE OF INCOME IS ALSO IN INDIA AS IT IS AN INDIAN COMPANY WHO USES SUCH CABLE WHICH IS PASSING THROUGH INDIA. FURTHER, THERE IS A TERRITORIAL NEXUS IN THE FORM O F CABLE NETWORK AND THE LANDING POINTS OF THE FLAG IN INDIA, THEREFORE, INC OME IS ATTRIBUTABLE TO BUSINESS OPERATIONS IN INDIA BY FLAG. 65. SINCE SECTION 9 CREATES A DEEMING FICTION, WHER EBY INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA, THEREFORE, IT H AS TO BE STRICTLY CONSTRUED WITHIN THE PARAMETERS OF EXPRESSION USED IN THE SECTION. FIRST OF ALL, WE HAVE TO SEE WHETHER THERE IS A BUSINESS CONNECTION IN INDIA. THE MEANING OF BUSINESS CONNECTION WAS NOT DEFINED EARLIER IN THE ACT, NOW IT HAS BEEN ELABORATED IN EXPLANATION 2 TO SECT ION 9(1)(I), WHICH PROVIDES THAT BUSINESS ACTIVITY CARRIED OUT THROUGH A PERSON WHO IS ACTING ON BEHALF OF NONRESIDENT AND FURTHER ILLUSTR ATES THE KIND OF ACTIVITY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 85 SUCH PERSON CARRIES OUT IN INDIA THIS EXPLANATION T HOUGH HAS BEEN INSERTED W.E.F. 01.04.2004 AND MAY NOT BE APPLICABL E IN THIS YEAR, HOWEVER FOR UNDERSTANDING THE CONCEPT SOME GUIDANCE CAN DEFINITELY BE DRAWN. THE TERM BUSINESS CONNECTION CONNOTES SOME T YPE OF ESTABLISHMENT, AGENCY OR SUBSIDIARY OR DEPENDENT AG ENT OR LIKE. THE CONNECTION IN INDIA MUST BE IN THE FORM OF ANY CONC ERN IN THE NATURE OF TRADE, COMMERCE OR MANUFACTURE BY WHICH NON-RESIDEN T EARNS INCOME. THERE SHOULD BE A CONTINUITY OF BUSINESS RELATIONSH IP WITH THE CONCERN OR PERSON IN INDIA WITH THE NON-RESIDENT. HERE IS NO S UCH CONCERN OR PERSON IN INDIA WITH WHOM THE ASSESSEE HAS ANY BUSINESS CO NNECTION. THE VSNL CANNOT BE HELD TO BE A PERSON OR CONCERN HAVING A B USINESS CORRECTION IN INDIA AS IT IS AN INDEPENDENT ENTITY, WHO HAS AGREE D TO BE A LANDING PARTY IN THE AGREEMENT. FLAG IS NOT EARNING INCOME THROUGH ANY AID OR ASSISTANCE OF VSNL AS VSNL IS NOT CARRYING OUT ANY BUSINESS FOR FLAG IN INDIA. THUS, HERE IN THIS CASE THERE IS NO INCOME A CCRUING OR ARISING FROM BUSINESS CONNECTION IN INDIA. 66. NOW, WHETHER THE INCOME HAS ACCRUED OR ARISEN T HROUGH OR FORM ANY ASSET OR SOURCE IN INDIA. WHAT COULD BE THE ASSET B ELONGING TO ASSESSEE IN INDIA? DEPARTMENTS CONTENTION IS THAT THE CABLE WHICH PASSES THROUGH INDIA HAS ACCESS POINT IN INDIA THROUGH LAN DING STATION THROUGH WHICH ENTIRE CAPACITY IN THE CABLE SYSTEM CAN BE AC CESSED. HENCE, THE LANDING STATION AND ENTIRE CABLE CAPACITY ATTACHED TO IT IS THE ASSET OF THE ASSESSEE. FROM THE TERMS OF CLAUSE 3.3 OF C&MA, IT IS CLEAR AMONGST THE PARTIES THAT LANDING STATION IS TO BE OWNED BY THE LANDING PARTY SIGNATORY IN WHOSE COUNTRY THE RELEVANT SEGMENT IS PHYSICALLY SITUATED. EVEN THOUGH THE LANDING STATION AND THE EQUIPMENTS HAS B EEN BUILT AND INSTALLED BY THE FLAG, BUT THE PROPORTIONATE COST I S SHARED BY THE VSNL ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 86 AND IT IS EMBEDDED AS A PART OF THE COST OF THE SAL E MADE BY THE FLAG. FURTHER, IT HAS BEEN BROUGHT ON RECORD THAT AS PER THE INDIAN TELECOM REGULATION, NON-RESIDENT IS PROHIBITED TO OWN THE L ANDING STATION IN INDIA. THERE IS NO TITLE OR OWNERSHIP OF LANDING ST ATION TO THE FLAG, RATHER IT BELONGS TO THE VSNL. IN INDIA, SEGMENT S-6 AND S -7 IS JOINING TO THE LANDING POINT WHICH IS CONNECTED TO THE ENTIRE CABL E SYSTEM FROM UK TO JAPAN. OF THESE SEGMENTS S-6 & S-7 LIES IN TERRITOR IAL WATERS OF INDIA IN TERMS OF 12 NAUTICAL MILES IN WATER AND SOME PART I N LAND WHILE CONNECTING TO THE LANDING POINT IN MUMBAI. ONCE THE ASSESSEE SELLS THE CAPACITY IN THE CABLE SYSTEM, THEN IT BELONGS TO TH E VSNL TO THE EXCLUSION OF THE ASSESSEE. THE CAPACITY SOLD, NO LO NGER IS AN ASSET OF THE ASSESSEE. THUS, NEITHER THE LANDING STATION NOR THE CAPACITY IN THE CABLE IS AN ASSET OF THE ASSESSEE IN INDIA, HENCE THERE I S NO INCOME ACCRUING OR ARISING THOUGH OR FROM ASSET OF THE ASSESSEE IN INDIA. LASTLY, REGARDING SOURCE FROM INDIA. THE SOURCE OF INCOME M UST LIE IN INDIA SO AS TO BE DEEMED TO BE INCOME IN INDIA. THE SOURCE M UST FLOW FROM AN ASSET, WHICH HERE IN THIS CASE THERE IS NO ASSET BE LONGING TO ASSESSEE THROUGH OR FROM WHICH ASSESSEE IS HAVING INCOME. TH E ASSESSEE, WHO IS A NON-RESIDENT COMPANY HAS SOLD THE CAPACITY TO AN INDIAN ENTITY AND HENCE NO INCOME HAS ACCRUED OR ARISEN IN INDIA WITH IN THE DEEMING PROVISION OF SECTION 9(1)(I), AS THE SALE HAS CONCL UDED OUTSIDE INDIA ON PRINCIPAL TO PRINCIPAL BASIS. THE CBDT CIRCULAR NO. 23 DATED JULY 23, 1969 (SUPRA) REFERRED TO BY LD. SENIOR COUNSEL WOULD BE SQUARELY APPLICABLE IN THE CASE OF THE ASSESSEE IN THIS YEAR, AS IT HAS NOW BEEN QUITE SETTLED BY VARIOUS DECISION (AS REFERRED BY THE ASSESSEE BE FORE US) THAT LATER CIRCULAR WITHDRAWING THIS CIRCULAR WILL NOT HAVE RE TROSPECTIVE EFFECT. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 87 67. NOW COMING TO EXPLANATION 1(A) TO SECTION 9(1)( I), WHICH CLARIFIES THAT THE INCOME FROM OPERATION OF BUSINESS DEEMED U NDER CLAUSE (I) OF SUB SECTION (1), IS TO BE REASONABLY BE ATTRIBUTED TO THE OPERATION CARRIED OUT IN INDIA. THE SAID EXPLANATION WILL NOT BE APPLICABLE, AS THERE IS NO DEEMED INCOME ACCRUING OR ARISING TO ASSESSEE IN INDIA WITHIN THE AMBIT OF SECTION 9(1)(I). THE QUESTION OF ATTRIBUTI ON WILL ONLY ARISE, ONCE IT IS ESTABLISHED THAT INCOME HAS ACCRUED OR ARISEN TO ASSESSEE WITHIN THE DEEMING FICTION OF SECTION 9(1)(I). THEREFORE, THE ATTRIBUTION MADE BY THE CIT(A) ON PROPORTIONATE BASIS OF WORLDWIDE REVENUE AND GROSS PROFIT IS NOT CORRECT AND UNCALLED FOR THE LD. CIT(A) HAS NOT CULLED OUT HOW THERE IS A BUSINESS CONNECTION, ASSET OR SOURCE OF INCOME IN INDIA. UNLESS THE DEEMING INCOME FALLS WITHIN THE PARAMETERS OF SECTI ON 9(1)(I), NO ATTRIBUTION CAN BE MADE. THUS, SO FAR AS PAYMENT OF US $ 28.94 MILLION RECEIVED BY THE ASSESSEE FROM SALES OF CAPACITY MAD E TO VSNL IS NOT TAXABLE EITHER AS ROYALTY U/S 9(1)(VI) OR BUSINE SS INCOME ACCRUING OR ARISING IN INDIA WITHIN THE DEEMING PROVISION OF SE CTION 9(1)(I). ACCORDINGLY, ASSESSEES GROUND NO.1 ON THIS SCORE I S ALLOWED AND GROUND NOS. 2&3 HAVE BECOME ACADEMIC, WHEREAS, DEPARTMENT S GROUND NO.1 IS DISMISSED AND GROUND NO.2 HAS BECOME PURELY ACADEMI C. SO FAR AS ISSUE OF FTS ON SUCH PAYMENT IS CONCERNED, REVENUE HAS MA INLY ARGUED THAT IT IS A CASE OF ROYALTY AND NOT FTS. EVEN THE AO HA S NOT ANALYZED THAT, HOW SUCH A PAYMENT FALLS WITHIN THE AMBIT OF FTS WH ILE COMING TO HIS CONCLUSION. OTHERWISE ALSO IN VIEW OF OUR FINDING A S ABOVE, IT CANNOT BE HELD THAT PAYMENT IN QUESTION FALLS WITHIN THE REAL M OF FTS. HENCE, THIS ASPECT RAISED IN GROUND NO1. IN DEPARTMENTS APPEAL IS DISMISSED. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 88 TAXABILITY OF STANDBY MAINTENANCE CHARGES 68. THE SECOND ISSUE RELATES TO TAXABILITY OF STAN DBY MAINTENANCE CHARGES AS FEES FOR TECHNICAL SERVICES U/S 9(1)(VI I), AS RAISED BY THE ASSESSEE IN GROUND NO. 4. AS STATED EARLIER, THE AS SESSEE ALONG WITH CONSORTIUM OF OTHER PARTIES HAS BUILT THE SUBMARINE FIBRE OPTIC CABLE PROVIDING TELECOMMUNICATION LINK BETWEEN UK AND JAP AN. UNDER THE TERMS OF C&MA THE FLAG CABLE SYSTEM IS TO BE JOINTL Y OPERATED AND MAINTAINED IN EFFICIENT WORKING CONDITION OR ALONG WITH THE FOUNDING SIGNATORY I.E. FLAG AND THE LANDING PARTY SIGNATORI ES. THE OPERATION AND MAINTENANCE DUTIES AND RIGHTS HAS BEEN ELABORATED I N PARA 10 ALONG WITH VARIOUS SUB CLAUSES. THE ENTIRE CABLE SYSTEM I S TO BE OPERATED AND MAINTAINED BY FOUNDING SIGNATORY IN CO-ORDINATION W ITH RELEVANT LANDING PARTY SIGNATORY. FLAG NETWORK OPERATION CENTRE (FNO C) HAS TO PROVIDE OVERALL NETWORK SERVICE SURVEILLANCE AND OVER ALL C O-ORDINATION OF MAINTENANCE AND REPAIR OPERATIONS OF FLAG CABLE SYS TEM. THE FLAG HAS TO CO-ORDINATE THE DEPLOYMENT OF THE VESSELS FOR REPAI RS AND MAINTENANCE OPERATION IN ACCORDANCE WITH THE PROCEDURE DEFINED. PARA 11 ALONG WITH VARIOUS SUB CLAUSES PROVIDES THE RESPONSIBILITY FOR OPERATION AND MAINTENANCE COST. CLAUSE 11.11 GIVES THE DETAILS OF ACTIVITIES, EXPENSES AND COST INCURRED. THE RELEVANT CLAUSE READS AS UND ER:- 11.1 THE COST OF STANDBY MAINTENANCE OF SEGMENTS S. X-1 AND X-2, INCLUDING, BUT NOT LIMITED TO, THE MAINTENANCE OF SEGMENTS S X-1 AND X-2, THE FNOC, THE PROCUREMENT OF CABLE SHI P SERVICES COVERING, INTER ALIA, SHIP DEPRECIATION, SHIP RETRO FIT, CREW, INSURANCE (EXCEPT INSURANCE AT SEA), IN-PORT EXPENS ES, THE STORAGE OF SUBMERSIBLE PLANT, REMOTELY OPERATED VEH ICLES AND OTHER DEVICES WHEN INCLUDED IN THE WET MAINTENANCE ZONE AGREEMENT STANDBY CHARGES, SHALL BE RECOVERED BY TH E FOUNDING ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 89 SIGNATORY THROUGH FIXED CHARGES PAYABLE BY THE SIGN ATORIES AND OTHER HOLDERS OF ASSIGNABLE CAPACITY, IN ACCORDANCE WITH SCHEDULES H-1 THROUGH H-55 AND J. ADJUSTED TO REFLE CT INFLATION. 11.2 THE COST OF RUNNING CHARGES, WHICH SHALL BE LI MITED TO RECOVERY THE DIRECT INCREMENTAL COSTS INCURRED IN C ONNECTION WITH A REPAIR OPERATION INVOLVING SEGMENT S OR SEGMENT X -1 OR SEGMENT X-2, INCLUDING, BUT NOT LIMITED TO, THE COS T OF FUEL, AT SEA INSURANCE, ADDITIONAL CREW AT SEA, CREW OVERTIME, V ICTUAL LING, TELECOMMUNICATIONS, MOBILIZATION AND DE-MOBILIZATIO N EXPENSES, CONSUMABLES, REPLENISHED EQUIPMENT, AND REMOTELY OP ERATED VEHICLES, THE EXTENT NOT INCLUDED IN THE WET MAINTE NANCE AGREEMENT STANDBY CHARGES, SHALL BE APPORTIONED AMO NG SIGNATORIES (EXCLUDING THE FOUNDING SIGNATORY) AND OTHER HOLDERS OF ASSIGNABLE CAPACITY ON THE AFFECTED SEGMENT S OR SEGMENT X- 1 OR SEGMENT X-2 IN ACCORDANCE WITH SCHEDULE F. 69. THUS, UNDER THE C&MA THE RESPONSIBILITY OF MAIN TENANCE AND REPAIRS BELONGS TO BOTH, ASSESSEE AND THE LANDING P ARTIES. THE MAINTENANCE ACTIVITIES UNDER TAKEN BY THE ASSESSEE FOR THE PURPOSE OF STANDBY MAINTENANCE WHICH IS THE IMPUGNED ISSUE, WA S FOR THE ARRANGEMENT FOR STANDBY COVER AND MAINTENANCE AND O PERATION OF FNOC. SO FAR AS STANDBY MAINTENANCE CHARGES IS CONC ERNED, IT IS NOT IN RESPECT OF ANY ACTUAL RENDERING OF SERVICES BUT TO MAINTAIN INFRASTRUCTURES FOR CO-ORDINATION AND SETTING UP CO NDITIONS FOR EFFICIENT RENDERING OF SERVICES IN RELATION TO MAINTENANCE AN D REPAIRS OF CABLE SYSTEM. THERE IS A SEPARATE CHARGE FOR REPAIR AND M AINTENANCE UNDER THE C&MA WHEREBY, THE ASSESSEE IS ACTUALLY REQUIRED TO UNDERTAKE REPAIR AND MAINTENANCE AND FOR WHICH THE ASSESSEE SEPARATE LY CHARGES. SUCH A REPAIR AND MAINTENANCE IS SEPARATE FROM STANDBY MAI NTENANCE COST, WHICH IS IN THE NATURE OF REIMBURSEMENT OF FIXED CO ST. THE STANDBY MAINTENANCE IS A FIXED ANNUAL CHARGE WHICH IS PAYAB LE NOT FOR PROVIDING OR RENDERING SERVICES BUT FOR ARRANGING STANDBY MAI NTENANCE ARRANGEMENT WHICH IS REQUIRED FOR A SITUATION WHEN EVER SOME REPAIR ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 90 WORK IN THE UNDERSEA CABLE OR TERRESTRIAL CABLE IS ACTUALLY TO BE PERFORMED OR RENDERED. IT IS A FACILITY OR INFRASTR UCTURE MAINTAINED FOR READY TO USE OR RENDER THE TECHNICAL SERVICES OR RE PAIR SERVICES, IF REQUIRED. ON THESE FACTS WE HAVE TO EXAMINE WHETHER ASSESSEE IS PROVIDING ANY SERVICE TO VSNL IN RESPECT OF STANDBY MAINTENANCE. 70. EXPLANATION 2 TO SECTION 9(1)(VII) DEFINES FEE S FOR TECHNICAL SERVICES IN THE FOLLOWING MANNER:- EXPLANATION (2)- FOR THE PURPOSE OF THIS CLAUSE, FEES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION (INCLUD ING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGER IAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICE OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CONSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MINING OR LIKE PROJ ECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE IN COME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD SALARIES. FROM THE ABOVE DEFINITION IT IS EVIDENT THAT IF THE INCOME IS TO BE CHARACTERIZED AS FTS, THEN IT HAS TO BE NECESSARILY FROM THE SERVICES PROVIDED FOR THE FOLLOWING TYPES, VIZ; MANAGERIAL , TECHNICAL OR CONSULTANCY. ANOTHER VERY IMPORTANT PHRASE PRECED ING THE WORD MANAGERIAL, TECHNICAL AND CONSULTANCY SERVICES IS, RENDERING. THE WORD RENDERING QUALIFIES THE OTHER TERMS USED FOR THE FTS. THE WORD RENDERING CONNOTES TO PROVIDE OR DELIVER OR TO DO SOMETHING. THUS, RENDERING SERVICES MEAN SOME KIND OF ACTUAL S ERVICES IS BEING PROVIDED OR DELIVERED WHICH ARE IN THE NATURE OF MA NAGERIAL TECHNICAL OR CONSULTANCY. THE WORD MANAGERIAL HAS TO BE UNDERS TOOD IN THE CONTEXT OF RUNNING AND MANAGING THE BUSINESS OF THE CLIENT OR ONE WHO IS IN CHARGE FOR MANAGEMENT AND CONTROL OF ITS BUSINESS. HERE THE PAYMENT MADE BY VSNL IS NOT IN THE NATURE OF MANAGERIAL. AG AIN THE TERM CONSULTANCY HAS TO BE UNDERSTOOD AS ADVISORY SERV ICES WHEREIN ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 91 NECESSARY ADVICE AND CONSULTATION IS GIVEN TO THE C LIENT FOR THE PURPOSE OF CLIENTS BUSINESS. IT IS ACT OF CONSULTING OR GI VING ADVICE OR GUIDANCE. AGAIN HERE-IN-THIS CASE THERE IS NO CONSULTANCY SER VICES. THE WORD TECHNICAL SERVICES CONNOTE SERVICES WHICH ARE PRO VIDED IN TECHNICAL FIELD OR BY THE PERSON WHO HAS SKILL, KNOWLEDGE EXP ERTISE IN THE AREA OF TECHNICAL OR SCIENCE. HERE-IN-THIS CASE IF THE ASSE SSEE IS PROVIDING SOME KIND OF REPAIR SERVICES IN THE CABLE SYSTEM, THEN I T CAN BE TERMED AS TECHNICAL SERVICES, HOWEVER, IF THERE IS NO ACTUAL RENDERING OF SERVICES, BUT MERE COLLECTION OF ANNUAL CHARGE TO RECOVER THE COST OF STANDBY FACILITY, AGREED BY ALL THE MEMBERS OF THE CONSORTI UM ON PROPORTIONATE COST BASIS, THEN IT CANNOT BE HELD THAT IT IS PROVI DING ANY KIND OF TECHNICAL SERVICES. HERE THE MOST CRUCIAL POINT WHI CH HAS TO BE SEEN IS FIRSTLY, WHETHER THERE IS ANY ACTUAL RENDERING OF S ERVICES; SECONDLY, IS THERE ANY MARK UP OR ELEMENT OF PROFIT IN THE CHARG E RECEIVED FOR STANDBY MAINTENANCE; AND LASTLY WHETHER IT IS IN TH E NATURE OF FIXED ANNUAL CHARGE WHICH IS TO BE RECOVERED AS PROPORTIO NATE COST OF MAINTAING THE STANDBY FACILITY READY FOR CARRYING O UT ANY MAINTENANCE OR REPAIR SERVICES. THIS CHARGE IS DIFFERENT FROM AN A NNUAL MAINTENANCE CONTRACT, WHEREBY REPAIRS AND MAINTENANCE IS COVERE D FOR A CERTAIN PERIOD OR SERVICES. IN THE PRESENT CASE AS EVIDENT FROM THE CLAUSE 11.1, THAT SO FAR AS STANDBY MAINTENANCE CHARGES IS CONCE RNED, IT IS IN THE FORM OF FIXED ANNUAL CHARGE WHICH IS IN THE NATURE OF REIMBURSEMENT. IT HAS BEEN ALSO BROUGHT ON RECORD THAT ONLY ACTUAL CO ST INCURRED HAS BEEN RECOVERED FROM VSNL IN PROVIDING THE STANDBY MAINTE NANCE SERVICES. THERE IS NO PROFIT ELEMENT OR MARK UP INVOLVED. THE ASSESSEE HAS ALSO PROVIDED THE DETAILS OF RECEIPT AND COST INVOLVED I N PROVIDING STANDBY ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 92 MAINTENANCE SERVICES TO VSNL FOR A.YS. 1998-99, 199 9-2000 AND 2000- 01 WHICH ARE AS UNDER:- PARTICULARS AMOUNT IN US$ A.Y. 1998 - 99 A.Y.1999 - 00 A.Y. 2000 - 01 REVENUES FROM STANDBY MAINTENANCE ACTIVITIES 512,955 1,226,860 2,072,453 TOTAL COSTS INCURRED (AS PER AUDITORS CERTIFICATE) (857,093) (2,0,77,219) (2,800,495) PROFIT/(LOSS) FROM STANDBY MAINTENANCE ACTIVITIES (344,138) (850,359) (728,042) IT HAS BEEN CONTENDED THAT THERE IS A LOSS IN THIS ACCOUNT. 71. THUS, ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AS WELL AS LOOKING TO THE NATURE OF STANDBY MAINTENANCE COST, WE HOLD THAT THE RECEIPTS FROM STANDBY MAINTENANCE CHARGES FROM VSNL CANNOT BE TAXED AS FTS, WITHIN THE DEFINITION AND MEANING OF SECTIO N 9(1)(VII) AS THERE IS NO RENDERING OF SERVICES. HOWEVER, WHENEVER PAYMENT IS RECEIVED ON ACCOUNT OF ACTUAL REPAIR OR MAINTENANCE CARRIED OUT , THEN SAME WOULD DEFINITELY FALL WITHIN THE AMBIT OF FTS CHARGEABLE TO TAX U/S 9(1)(VII). ACCORDINGLY THE ORDER OF THE CIT(A) IS SET ASIDE AN D ASSESSEES GROUND ON THIS SCORE IS ALLOWED. 72. THE LAST ISSUE RELATES TO CHARGING OF INTEREST U/S 234B AS RAISED BY THE DEPARTMENT IN GROUND NO. 2. AS ADMITTED BY BOTH THE PARTIES, THIS ISSUE IS COVERED BY THE DECISION OF HONBLE JURISDI CTIONAL HIGH COURT IN ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 93 THE CASE OF DIT (INTERNATIONAL TAXATION VS. NGC NET WORK ASIA LLC REPORTED IN 313 ITR 187 (BOM). THUS, RESPECTIVELY F OLLOWING THE BINDING PRECEDENCE, WE HOLD THAT ASSESSEE HAS NOT COMMITTED ANY DEFAULT IN PAYMENT OF ADVANCE TAX AND HENCE THERE IS NO LIABIL ITY TO PAY INTEREST U/S 234B. 73. ACCORDINGLY THE GROUNDS RAISED BY THE REVENUE I S DISMISSED, WHEREAS, THE GROUNDS RAISED BY THE ASSESSEE IS TREA TED AS ALLOWED IN PART. APPEALS FOR THE A.YS. 1999-2000 & 2000-01 74. IN THE CROSS APPEALS FOR THE A.Y. 1999-2000, AN D A.Y. 2000-01 THE REVENUE AS WELL AS THE ASSESSEE HAVE RAISED SIMILAR GROUNDS, WHICH ARE IDENTICAL TO GROUND RAISED BY EITHER PARTIES IN A.Y . 1998-99. FOR SAKE OF READY REFERENCE, GROUNDS RAISED BY THE EITHER PARTI ES ARE REPRODUCED HERE-IN-BELOW:- ITA NO. 1168/MUM/2004 (GROUNDS RAISED BY THE ASSESS EE) 1. THE LEARNED COMMISSIONER OF INCOME-TAX APPEALS- XXX I [CIT(A)] ERRED IN HOLDING THAT INCOME FROM CAPACITY SALES EARNED U NDER THE CAPACITY SALES AGREEMENT DATED APRIL 20, 1998 ENTERED INTO B ETWEEN THE APPELLANT AND VIDESH SANCHAR NIGAM LIMITED (VSNL) IS TAXABLE IN INDIA UNDER SECTION 9(1)(I) OF THE INCOME-TAX ACT, 1961. 2. WITHOUT PREJUDICE TO GROUND NO. 1, THE LD. CIT(A) E RRED IN NOT ACCEPTING THE APPELLANTS CONTENTION THAT THE REVENUES CHARGE ABLE TO TAX IN INDIA, AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, B E COMPUTED BY APPLYING THE PROPORTION OF THE CABLE LENGTH SITUATED IN INDI A VIS--VIS THE TOTAL CABLE LENGTH WORLDWIDE. 3. WITHOUT PREJUDICE TO GROUND NOS. 1 AND 2, THE LD. C IT(A) ERRED IN COMPUTING THE REVENUES CHARGEABLE TO TAX IN INDIA, AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, BY APPLYING THE PROPORT ION OF CAPACITY SALES ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 94 EARNED FROM VSNL TO THE WORLDWIDE CAPACITY SALES EA RNED BY THE APPELLANT. 4. THE LD. CIT(A) ERRED IN HOLDING THAT STANDBY MAINTE NANCE REVENUES EARNED BY THE APPELLANT FROM VSNL UNDER THE CONSTR UCTION AND MAINTENANCE AGREEMENT (C&MA) BETWEEN THE APPELLANT AND THE LICENSES INTERNATIONAL TELECOMMUNICATIONS CARRIERS (INCLUDIN G VSNL), ARE TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1) (VII) OF THE ACT. ITA NO. 1192/MUM/2004 (GROUNDS RAISED BY THE DEPART MENT) 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN HOLDING THAT PAYMENT RECEIVED B Y THE ASSESSEE TOWARDS CAPACITY SALES AGREEMENT IS NOT COVERED U/S 9(1)(VI) AND 9(1)(VII) OF THE I.T. ACT, 1961, BUT IS TAXABLE AS BUSINESS INCOME? 2. WITHOUT PREJUDICE TO Q. NO. 1 ABOVE, WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) WA S RIGHT IN CALCULATING LOSS ON SALE OF CAPACITY TO VSNL AT USD FOR THE A.Y . 1999-2000? 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OR TH E CASE, THE CIT (A) WAS RIGHT IN DELETING THE INTEREST CHARGED U/S 234B OF THE I.T. ACT. 1961? ITA NO. 6710/MUM/2004 (GROUNDS RAISED BY THE ASSESS EE) 1. THE LEARNED COMMISSIONER OF INCOME-TAX APPEALS- XXX I [CIT(A)] ERRED IN HOLDING THAT INCOME FROM CAPACITY SALES EARNED U NDER THE CAPACITY SALES AGREEMENT DATED DECEMBER 2, 1999 ENTERED INTO BETWEEN THE APPELLANT AND VIDESH SANCHAR NIGAM LIMITED (VSNL) IS TAXABLE IN INDIA UNDER SECTION 9(1)(I) OF THE INCOME-TAX ACT, 1961. 2. WITHOUT PREJUDICE TO GROUND NO. 1, THE LD. CIT(A) E RRED IN NOT ACCEPTING THE APPELLANTS CONTENTION THAT THE REVENUES CHARGE ABLE TO TAX IN INDIA, AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, B E COMPUTED BY APPLYING THE PROPORTION OF THE CABLE LENGTH SITUATED IN INDI A VIS--VIS THE TOTAL CABLE LENGTH WORLDWIDE. 3. WITHOUT PREJUDICE TO GROUND NOS. 1 AND 2, THE LD. C IT(A) ERRED IN COMPUTING THE REVENUES CHARGEABLE TO TAX IN INDIA, AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, BY APPLYING THE PROPORT ION OF CAPACITY SALES EARNED FROM VSNL TO THE WORLDWIDE CAPACITY SALES EA RNED BY THE APPELLANT. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 95 4. THE LD. CIT(A) ERRED IN HOLDING THAT STANDBY MAINTE NANCE REVENUES EARNED BY THE APPELLANT FROM VSNL UNDER THE CONSTR UCTION AND MAINTENANCE AGREEMENT (C&MA) BETWEEN THE APPELLANT AND THE LICENSES INTERNATIONAL TELECOMMUNICATIONS CARRIERS (INCLUDIN G VSNL), ARE TAXABLE IN INDIA AS FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1) (VII) OF THE ACT. ITA NO. 7193/MUM/2004 (GROUNDS RAISED BY THE DEPART MENT) 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN HOLDING THAT PAYMENT RECEIVED B Y THE ASSESSEE TOWARDS CAPACITY SALES AGREEMENT IS NOT COVERED U/S 9(1)(VI) AND 9(1)(VII) OF THE I.T. ACT, 1961, BUT IS TAXABLE AS BUSINESS INCOME? 2. WITHOUT PREJUDICE TO Q. NO. 1 ABOVE, WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) WA S RIGHT IN CALCULATING LOSS ON SALE OF CAPACITY TO VSNL AT USD FOR THE A.Y . 1999-2000? 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OR TH E CASE, THE CIT (A) WAS RIGHT IN DELETING THE INTEREST CHARGED U/S 234B OF THE I.T. ACT. 1961? THUS, THE AFORESAID GROUNDS ARE SIMILAR TO GROUNDS RAISED IN THE CROSS APPEALS FOR THE A.Y. 1998-99, THEREFORE, IN VIEW OF THE FINDING GIVEN IN THE APPEAL FOR THE A.Y. 1998-99, THE SAME WILL APPL Y MUTATIS MUTANDIS IN THE AFORESAID APPEALS ALSO, AS THEY ARE ARISING OUT OF SIMILAR SET OF FACTS ISSUES AND CIRCUMSTANCES. ACCORDINGLY, THE ASSESSEE S APPEAL IN ITA NO. 1168/M/2004 FOR THE A.Y. 1999-2000, AND ITA NO. 671 0/MUM/2004 FOR THE A.Y. 2000-01 ARE TREATED AS PARTLY ALLOWED, WH EREAS REVENUES APPEAL IN ITA NO. 1192/MUM/2004 FOR THE A.Y. 1999-2 000 AND ITA NO. 7193/MUM/2004 FOR THE A.Y. 2000-01 ARE DISMISSED. 75. IN THE RESULT, THE ASSESSEE APPEAL FOR ALL THE THREE ASSESSMENT YEARS IS PARTLY ALLOWED, WHEREAS THE REVENUES APPE AL FOR ALL THESE ASSESSMENT YEAR ARE TREATED AS DISMISSED. ITA NOS. 6254/MUM/2003 1168 & 6710/MUM/2004 ITA NOS. 6613/MUM/2003, 7193 & 1192/MUM/2004 ASSESSMENT YEAR: 1998-99, 1999-2000 2000-01 96 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF FEBRUARY, 2015. SD/- SD/- (R.C. SHARMA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 6.02.2015 *SRIVASTAVA COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR L BENCH //TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.