M/S. FLAG TELECOM GROUP LTD (ERSTWHILE FLAG LTD)(FLAG), MUMBAI V. THE DCIT (IT)-1(1), MUMBAI

ITA 2255/MUM/2006

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92918 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-06-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 24-03-2015
• Assessment Year: 2001-2002
• Appeal Filed On: 12-04-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GIRISH DAVE SPL
• Keywords: Capital asset; Business income; Depreciation; Deemed to accrue or arise in india
• Section: 143(3); 234B

Judgement Text

M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L , MUMBAI . . , , BEFORE SHRI R C SHARMA , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICI AL MEMBER ITA M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG), C/O. CHATURVEDI & SHAH., 814 - 815, TULSIANI CHAMBERS, 212, NARIMAN POINT, MUMBAI - 400 021 .: PAN: AAACF 4015 D VS DY. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) , RANGE - 1(1), SCINDIA HOUSE, BALLARD ESTATE, MUMBAI - 400 001 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JEHANGIR MISTRI RESPONDENT BY : SHRI GIRISH DAVE, SPL. COUNSEL ITA NO. : 225 5 /MUM/20 06 (ASSESSMENT YEAR: 200 1 - 0 2 ) ITA NO. : 2256 /MUM/20 06 (ASSESSMENT YEAR: 2002 - 03 ) ITA NO. : 5043 /MUM/20 06 (ASSESSMENT YEAR: 2003 - 04 ) ITA NO. : 537 /MUM/20 09 (ASSESSMENT YEAR: 2004 - 05 ) ITA NO. : 538 /MUM/20 09 (ASSESSMENT YEAR: 2005 - 06 ) ITA NO. : 2511 /M UM/20 09 (ASSESSMENT YEAR: 2006 - 07 ) ITA NO. : 4685 /MUM/20 11 (ASSESSMENT YEAR: 2007 - 08 ) ITA NO. : 7138 /MUM/20 11 (ASSESSMENT YEAR: 2008 - 09 ) JT. DIRECTOR (OSD) (IT) RG.1, R. NO. 117, 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI - 400 038 VS M/S FLAG TELE COM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG), C/O. CHATURVEDI & SHAH., MUMBAI - 400 021 .: PAN: AAACF 4015 D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI GIRISH DAVE, SPL. COUNSEL RESPONDENT BY : SHRI JEHANGIR MISTRI ITA NO. : 2525 /MUM/20 06 (ASSESSMENT YEAR: 2001 - 02 ) ITA NO. : 2526 /MUM/20 06 (ASSESSMENT YEAR: 2002 - 03 ) ITA NO. : 5014 /MUM/20 06 (ASSESSMENT YEAR: 2003 - 04 ) M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 2 ITA NO. : 1169 /MUM/20 09 (ASSESSMENT YEAR: 2004 - 05 ) ITA NO . : 1170 /MUM/20 09 (ASSESSMENT YEAR: 2005 - 06 ) ITA NO. : 3 2 86 /MUM/20 09 (ASSESSMENT YEAR: 2006 - 07 ) ITA NO. : 8 365 /MUM/20 11 (ASSESSMENT YEAR: 2008 - 09 ) /DATE OF HEARING : 09 - 0 4 - 201 5 / DATE OF PRONOUNCEMENT : 15 - 0 6 - 201 5 ORDER PER BENCH : A FORESAID CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST SEPARATE IMPUGNED ORDERS PASSED BY C IT(A), MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) FOR THE ASSESSMENT YEARS 2001 - 02 TO 2008 - 09, AS PER DETAILS MENTIONED ABOVE IN THE TITLE OF THE CASE. SINCE COMMON ISSUES ARE INVOLVED IN ALL THE APPEALS ARISING OUT OF IDENTICAL SET OF THE FACT S THEREFORE, ALL THESE APPEALS WERE HEARD TOGETHER AND ARE BEING DISPOSED O F F BY WAY OF THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE & BREVITY. 2. TO UNDERSTAND THE IMPLICATION OF THE ISSUES INVOLVED, THE FACTS OF THE C ROSS APPEALS F OR THE ASSESSME NT YEAR 2001 - 02 A RE TAKEN - UP FIRST. IN THE ASSESSEES APPEAL , BEING ITA NO. 2255/MUM/2006, FOLLOWING GROUNDS HAVE BEEN RAISED: GROUND NO.1 : ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) XXXI [CIT(A)] ERRED IN HOLDING THAT INCOME FROM STANDBY MAINTENANCE REVENUES EARNED BY THE APPELLANT UNDER THE CONSTRUCTION AND MAINTENANCE AGREEMENT (C&MA) FROM VSNL ARE TAXABLE IN INDIA . GROUND NO. 2: ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) FURTHER ERRED IN TREATING THAT THE STANDBY MAINTENANCE REVENUES EARNED BY THE APPELLANT ARE IN M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 3 THE NATURE OF FEES FOR TECHNICAL SERVICES UNDER SECTION 9(1)(VII) OF THE ACT . GROUND NO.3: ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, WITHOUT PREJUDICE TO GROUND NO .1, THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE APPELLANTS CONTENTION THAT THE REVENUES CHARGEABLE TO TAX IN INDIA, BE COMPUTED AS PER EXPLANATION TO SECTION 9(1)(I) OF THE ACT, BY APPLYING THE PROPORTION OF THE CABLE LENGTH SITUATED IN INDIA VIS - - VIS THE TOTAL CABLE LENGTH WORLD - WIDE. GROUND NO.4: ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERRED IN HOLDING THE RESTORATION REVENUES EARNED BY THE APPELLANT UNDER RESTORATION AGREEMENT ARE TAXABLE IN INDIA. GROUND NO.5: ON THE F AC TS AND CIRCUMSTANCES OF THE CASE, WITHOUT PREJUDICE TO GROUND NO. 4 , THE LEARNED CIT(A) ERRED IN HOLD ING THAT 10% OF RECEIPTS (I.E. 10% OF USD 441,854) FROM RESTORATION REVENUES EARNED BY THE APPELLANT UNDER THE RESTORATION AGREEMENT ARE TAXABLE IN INDIA AS BUSINESS INCOME . GROUND NO.6: ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, WITHOUT PREJUDICE TO GROUND NO.4 & GROUND NO. 5, THE LEARNED CIT(A) ERRED IN ACCEPTING THE APPELLANTS CONTENTION THAT THE REVENUES EARNED BY THE APPELLANT, IN THE FORM OF RESTO RATION SERVICES DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, BY APPLYING THE PROPORTION OF THE CABLE LENGTH SITUATED IN INDIA VIS - - VIS THE TOTAL CABLE LENGTH WORLD - WIDE. GROUND NO.7: ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED CIT(A) ERR ED IN NOT DELET ING THE LEVY OF INTEREST U/S 234D OF THE ACT BY THE LEARNED A.O. ON THE APPELLANT . WHEREAS, I N THE DEPARTMENTS APPEAL , BEING ITA NO. 2525/MUM/2006, FOLLOWING GROUNDS HAVE BEEN RAISED: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PAYMENT RECEIVED BY THE ASSESSEE FROM PROVISI ON OF RESTORATION M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 4 ACTIVITY IS NOT TAXABLE AS FEES FOR T ECHNICAL SERVICES BUT IS TAXABLE AS BUSINESS INCOME. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT THE PAYMENT RECEIVED BY THE ASSESSEE FROM PROVISION OF RESTORATION ACTIVITY IS TAXABLE AS BUSINESS INCOME IS ESTIMATED AT 10% OF THE RESTORATION ACTIVITY RECEIPTS WITHOUT GROSSING UP. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE INTEREST CHARGED U/S 234B OF THE I.T. ACT, 1961. 3 . FROM THE ABOVE GROUNDS, THE FOLLOWING ISSUES CAN BE CULLED OUT, WHICH REQUIRES OUR ADJUDICATION IN THE IMPUGNED APPEALS: (I) WHETHER THE INCOME EARNED FROM STANDBY MAINTENANCE ACTIVITY IS LIABLE FOR TAX IN INDIA AS FEES FOR TECHNICAL SERVICES (FTS) UNDER SECTION 9(1)(VII) OF THE INCOME TAX ACT, 1961 (THE ACT)? (II) WHETHER THE INCOME EARNED FROM RESTORATION ACTIVITY IS LIABLE FOR TAX IN INDIA EITHER AS FEES FOR TECHNICAL SERVICES (FTS) UNDER SECTION 9(1)(VII) OF THE ACT OR AS BUSINESS INCOME UNDER SECTION 9(1)(I) OF THE ACT? (III) WHETHER THE ASSESSEE IS LIABLE TO PAY INTEREST UNDER SECTION 234B OF THE ACT? (IV) WHETHER THE ASSESSE E IS LIABLE TO PAY INTEREST UNDER SECTION 234D OF THE ACT? 4 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE , FLA G LIMITED IS A COMPANY INCORPORATED IN BERMUDA, WHICH WAS SET - UP TO BUILD HIGH CAPACITY SUBMARINE FIBER OPTIC TELECOMMUNICATION LINK CABL E SYSTEM. IT HAS BUILD UNDER - SEA CABLE FOR PROVIDING TELECOMMUNICATION LINK BETWEEN UNITED KINGDOM & JAPAN. IN INDIA, VIDESH SANCHAR NIGAM LIMITED (VSNL) WAS ONE OF THE ORIGINAL L A NDING PARTY IN THE FLAG CABLE SYSTEM. FOR THE PURPOSE OF SELLING THE CAPACIT Y IN THE CABLE SYSTEM TO VARIOUS L A NDING PARTIES, INCLUDING V SNL , C A PACITY S ALES A GREEMENT (CSA) WAS ENTERED INTO AMONGST L A NDING PARTIES AND FLAG ON 31.03.1995, WHICH WAS M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 5 FURTHER AMENDED ON 29 TH APRIL, 19 9 8, BY WHICH, VSNL HAS BOUGHT THE CAPACITY IN THE S AID CABLE SYSTEM. THE ENTIRE PROCEDURE FOR THE OWNERSHIP OF CAPACITY IN THE CABLE SYSTEM AND ALSO FOR PROVIDING STANDBY MAINTENANCE ACTIVITIES CONTAINS IN THE CONSTRUCTION AND MAINTENANCE AGREEMENT (C&MA) SEPARATELY ENTERED BETWEEN THE PARTIES. THE CSA & C & MA WAS FOR THE PERIOD OF 25 YEARS, WHICH COINCIDES WITH THE LIFE OF THE CABLE. UNDER THE TERMS OF C & MA, THE FLAG CABLE SYSTEM IS TO BE JOINTLY OPERATED AND MAINTAINED IN EFFICIENT WORKING CONDITION ALONG WITH FLAG AND L A NDING PARTIES SIGNATORIES. 5 . IN THE YEAR UNDER CONSIDERATION , THE ASSE S SEE HAS RECEIVED A SUM OF RS. US $ 2,694,317 FROM VSNL ON ACCOUNT OF PROVISION OF STANDBY MAINTENANCE ACTIVITIES, AS IN THE EARLIER YEARS. IN THE NOTE S TO THE COMPUTATION FILED WITH THE RETURN OF INCOME, THE ASSESSEE HA D FILED A DETAILED NOTE IN THIS REGARD, WHICH HAVE BEEN INCORPORATED BY THE AO IN PARA 2.1 OF THE ASSESSMENT ORDER. THE AO , HOWEVER HELD THAT, THERE IS NO MATERIAL CHANGE IN THE FACTS OF THE CASE, AS COMPARED TO THE FACTS FOR AY 1998 - 99, WHEREIN , IT WAS HELD THAT RECEIPT S FROM STANDBY MAINTENANCE SERVICES/ CHARGES ARE IN THE NATURE OF FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF SECTION 9(1)(VII) AND HENCE IT IS TO BE TAXED ACCORDINGLY IN INDIA . THE RELEVANT OBSER V ATION OF THE AO IS AS UNDER: IT I S SEEN, THAT IN THE YEAR UNDER CONSIDERATION, THERE IS NO MATERIAL CHANGE IN THE FACTS OF THE CASE, AS COMPARED TO THE FACTS OBTAINING IN AY 1998 - 99. THE ONLY CHANGE IS IN THE QUANTUM OF RECEIPTS. ACCORDINGLY, FOLLOWING THE REASONING GIVEN BY THE ASSESSING OFFICER IN AY 1998 - 99, IT IS HELD THAT THE RECEIPTS OF THE ASSESSEE ON ACCOUNT OF STANDBY MAINTENANCE SERVICES OF US $ 2,694,317 ARE HELD TO BE IN THE NATURE OF FEES FOR TECHNICAL SERVICES AS PER THE ASSESSMENT ORDER FOR AY 1998 - 99, AND ARE TAXED @ 20% . M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 6 6 . THE LD. CIT(A) TOO HELD THAT THIS ISSUE IS SIMILAR TO THE EARLIER YEARS AND UPHELD THE ORDER OF THE AO AFTER OBSERVING AND HOLDING AS UNDER: THE ISSUE IS WHETHER THE STANDBY MAINTENANCE CHARGES PAID FOR THE MAINTENANCE OF THE FIBER OPTIC CABLE IS A BUSINESS RECEIPT OR IT IS FEES FOR TECHNICAL SERVICES. THE ISSUE HAS BEEN EXAMINED BY THE AO IN AY 1998 - 99, 99 - 00 & 00 - 0 1 . THE AO HAS CONSISTENTLY HELD IN ALL THESE YEARS THAT STANDBY MAINTENANCE CHARGES ARE FEES FOR TECHNICAL SERVICES WITHIN THE ME ANING OF SEC. 9(1)(VII) OF THE I.T. ACT AND THEREFORE TAXABLE IN INDIA. MY PREDECESSOR HAD DECIDED APPEAL FOR A.Y. 1998 - 99 AND 99 - 00 & 00 - 01. IN AY 1998 - 99, HE HAS DISCUSSED THE ISSUE IN PARA 6.3 OF HIS ORDER DATED 23.5.2003 IN APPEAL NO. CIT(A)XXXI/DCCIT CIR. 23(1)/IT - 17/01 - 02/03 - 04 AND HAS HELD THAT THE PAYMENT FOR STANDBY MAINTENANCE CHARGES IS FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF EXPLANATION 2 TO SEC. 9(1)(VII) OF THE I.T. ACT. HE HAS FOLLOWED HIS FINDING IN AY 1999 - 00 AND 2000 - 01 AND HAS HELD SIMILARLY. I HAVE EXAMINED THE FACTS. THERE IS NO DIFFERENCE IN THE FACTS DURING THE AY 2001 - 02 COMPARED TO PREVIOUS ASSESSMENT YEARS. THE APPELLANT COMPANY IS MAINTAINING FIBER OPTIC CABLE IN GOOD CONDITION FOR USE BY VIZ. VSNL & OTHER PARTIES. VSNL HAVING PURCHASED CAPACITY HAS FURTHER AGREED TO PAY MINIMUM AMOUNT OF CHARGES TO BE PAID TO THE APPELLANT SO THAT THE APPELLANT MAINTAINS CABLE SYSTEM FOR ERROR FREE USE BY VSNL. THE FIBER OPTIC CABLE AS MODERN TECHNOLOGICAL SYSTEM CABLE IS SUBMERGED IN THE SEAS. THE MAINTENANCE OF THE SAME IS HIGHLY TECHNICAL EXPERTISE WORK. THE CABLE HAVING BEEN SOLD TO THE VSNL & OTHER PARTIES FOR THE PERIOD OF 25 YEARS . THE APPELLANT IS CHARGING STANDBY MAINTENANCE CHARGES FROM VSNL FOR TECHNICAL SERVICES RENDERED BY IT TOWARDS MAINTENANCE OF SUCH CABLE MAINTENANCE. ACCORDINGLY, I FIND NO FORCE IN THE ARGUMENTS OF THE APPELLANT AND HOLD THAT THE STANDBY MAINTENANCE AS FEES FOR TECHNICAL SERVICES WITHIN THE MEANING OF EXPLANATION (2) TO SEC. 9(1)(VII) AND AGREE WITH MY PREDECESSOR IN THIS REGARD. ACCORDINGLY, THE M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 7 APPEAL ON THIS POINT IS DISMISSED AND FINDING OF THE AO IS UPHELD. 7 . BEFORE US, LD. SR. COUNSEL , SHRI J D MISTRI SUBMITTED THAT EXACTLY SIMILAR ISSUE WAS INVOLVED IN THE ASSESSMENT YEAR S 1998 - 99 TO 2000 - 01 WHEREIN , THE MATTER HAS REACHED UPTO THE STAGE OF THE TRIBUNAL AND TRIBUNAL VIDE ITS ORDER DATED 06.02.2015 HAD DECIDED TH IS ISSUE IN FAVOUR OF THE ASSES S EE BY HOLDING THAT THE PROVISION OF STANDBY MAINTENANCE CHARGES CANNOT BE TAXED AS FEE FOR TECHNIC AL SERVICES WITHIN THE DEFINITION AND MEANING OF SECTION 9(1)(VII) . HENCE, THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE TRIBUNAL IN THE EARLIER YEARS AND EVEN AO AS WELL AS CIT(A) HAS ADMITTED THE FACT THAT THE FACT S AND ISSUE ARE SIMILAR TO THE E ARLIER YEARS. 8 . ON THE OTHER HAND, LD. SPL . COUNSEL, ON BEHALF OF THE REVENUE , SHRI GIRISH DAVE SUBMITTED THAT THIS MATTER NEEDS TO BE SET ASIDE AND RESTORED BACK TO THE FILE OF THE AO, FIRSTLY, TO EXAMINE , WHETHER THERE IS ANY ACTUAL MAINTENANCE SERVICE S RENDERED BY THE ASSESSEE , A S THE TRIBUNAL, IN ITS FINDING HAVE OBSERVED THAT IF THE PAYMENT IS RECEIVED ON ACCOUNT OF ACTUAL REPAIRS AND MAINTENANCE, THEN SAME WOULD FALL WITHIN THE AMBIT OF FTS CHARGEABLE TO TAX U/S 9(1)(VII ). SECONDLY, IT NEEDS TO BE EXAMINED, WHETHER THE ASSESSEE HAS CHARGED ANY MARK - UP, OVER AND ABOVE THE COST FOR PROVIDING STANDBY MAINTENANCE ACTIVITIES . HE FURTHER SUBMITTED THAT THE REVENUE FROM THESE ACTIVITIES CANNOT BE SAID TO BE ANNUAL CHARGES SINCE THE AMOUNT OF INCOME FROM TH ESE ACTIVITIES ARE VARYING ACROSS VARIOUS ASSESSMENT YEARS AND THERE BEING NO MODIFICATION OR AMENDMENT IN THE AGREEMENT, THERE COULD NOT BE SUCH A VARIATION. THUS, TO EXAMINE THESE MATTERS, THE ISSUE OF STANDBY MAINTENANCE CHARGES NEEDS TO BE BE SET ASIDE TO THE FILE OF THE AO. 9 . IN REJOINDER, MR. MISTRI SUBMITTED THAT THE MATTER NEED NOT BE SET ASIDE, FIRSTLY BECAUSE , THE AO AS WELL AS CIT(A) HAVE CATEGORICALLY HELD THAT THE FACTS AND ISSUES INVOLVED ARE SIMILAR TO THAT IN THE EARLIER YEARS AND S ECONDLY , THE MAINTENANCE CHARGES M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 8 VARY FROM TIME TO TIME DEPENDING UPON THE INFRASTRUCTURE AT A GIVEN TIME. ALL THESE ISSUES HAVE BEEN DISCUSSED IN DETAIL IN THE EARLIER YEARS; THEREFORE, THE TRIBUNAL ORDER SHOULD BE FOLLOWED. 1 0 . WE HAVE HEARD RIVAL CONTENTIONS AND ALSO THE FINDING GIVEN IN THE IMPUGNED ORDERS. BOTH THE AO AS WELL AS CIT(A) HAVE HELD THAT THIS ISSUE HAD BEEN EXAMINED IN THE EARLIER YEARS AND DEPARTMENTS CONSISTENT PLEA HAD BEEN THAT , SUCH A STANDBY MAINTENANCE CHARGES ARE FOR RENDERING OF TECHN ICAL SERVICES. IT HAS ALSO BEEN ADMITTED THAT THERE IS NO DIFFERENCE IN THE FACTS OF THE EARLIER YEARS, PRESENT YEAR AS WELL AS OF THE SUBSEQUENT YEARS AND ACCORDINGLY , THIS HAS TO BE DECIDED IN LIGHT OF THE FINDINGS GIVEN IN THE EARLIER YEARS . THIS ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL, WHEREIN, IT WAS HELD THAT STANDBY MAINTENANCE CHARGES DO NOT FALL WITHIN THE REALM OF TECHNICAL SERVICES. AFTER CONSIDERING THE ENTIRE FACTS OF THE CASES , T HE RELEVANT FINDING OF THE TRIBUNAL ON THIS IS SUE ARE AS UNDER: 68. THE SECOND ISSUE RELATES TO TAXABILITY OF STANDBY MAINTENANCE CHARGES AS FEES FOR TECHNICAL SERVICES U/S 9(1)(VII), AS RAISED BY THE ASSESSEE IN GROUND NO. 4. AS STATED EARLIER, THE ASSESSEE ALONG WITH CONSORTIUM OF OTHER PARTIES HAS BUILT THE SUBMARINE FIBER OPTIC CABLE PROVIDING TELECOMMUNICATION LINK BETWEEN UK AND JAPAN. UNDER THE TERMS OF C&MA THE FLAG CABLE SYSTEM IS TO BE JOINTLY OPERATED AND MAINTAINED IN EFFICIENT WORKING CONDITION OR ALONG WITH THE FOUNDING SIGNATORY I.E. FLAG AND THE LANDING PARTY SIGNATORIES. THE OPERATION AND MAINTENANCE DUTIES AND RIGHTS HAS BEEN ELABORATED IN PARA 10 ALONG WITH VARIOUS SUB CLAUSES. THE ENTIRE CABLE SYSTEM IS TO BE OPERATED AND MAINTAINED BY FOUNDING SIGNATORY IN CO - ORDINATION WITH REL EVANT LANDING PARTY SIGNATORY. FLAG NETWORK OPERATION CENTRE (FNOC) HAS TO PROVIDE OVERALL NETWORK SERVICE SURVEILLANCE AND OVER ALL CO - ORDINATION OF MAINTENANCE AND REPAIR OPERATIONS OF FLAG CABLE SYSTEM. THE FLAG HAS TO CO - ORDINATE THE DEPLOYMENT OF THE VESSELS FOR REPAIRS 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 I NCURRED. THE RELEVANT CLAUSE READS AS UNDER: - 11.1 THE COST OF STANDBY M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 9 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 SHIP SERVICES COVERING, INTER ALIA, SHIP DEPRECIATION, SHIP RETROFIT, CREW, INSURANCE (EXCEPT INSURANCE AT SEA), IN - PORT EXPENSES, THE STORAGE OF SUBMERSIBLE PLANT, REMOTELY OPERATED VEHICLES AND OTHER DEVICES WHEN INCLUDED IN THE WET MAINTENANCE ZONE AGREEMENT STANDBY CHARGES, SHALL BE RECO VERED BY THE FOUNDING SIGNATORY THROUGH FIXED CHARGES PAYABLE BY THE SIGNATORIES AND OTHER HOLDERS OF ASSIGNABLE CAPACITY, IN ACCORDANCE WITH SCHEDULES H - 1 THROUGH H - 55 AND J. ADJUSTED TO REFLECT INFLATION. 11.2 THE COST OF RUNNING CHARGES, WHICH SHALL BE LIMITED TO RECOVERY THE DIRECT INCREMENTAL COSTS INCURRED IN CONNECTION WITH A REPAIR OPERATION INVOLVING SEGMENT S OR SEGMENT X - 1 OR SEGMENT X - 2, INCLUDING, BUT NOT LIMITED TO, THE COST OF FUEL, AT SEA INSURANCE, ADDITIONAL CREW AT SEA, CREW OVERTIME, VI CTUAL LING, TELECOMMUNICATIONS, MOBILIZATION AND DE - MOBILIZATION EXPENSES, CONSUMABLES, REPLENISHED EQUIPMENT, AND REMOTELY OPERATED VEHICLES, THE EXTENT NOT INCLUDED IN THE WET MAINTENANCE AGREEMENT STANDBY CHARGES, SHALL BE APPORTIONED AMONG 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 MAINTENANCE AND REPAIRS BELONGS TO BOTH, ASS ESSEE AND THE LANDING PARTIES. THE MAINTENANCE ACTIVITIES UNDER TAKEN BY THE ASSESSEE FOR THE PURPOSE OF STANDBY MAINTENANCE WHICH IS THE IMPUGNED ISSUE, WAS FOR THE ARRANGEMENT FOR STANDBY COVER AND MAINTENANCE AND OPERATION OF FNOC. SO FAR AS STANDBY MAI NTENANCE CHARGES IS CONCERNED, IT IS NOT IN RESPECT OF ANY ACTUAL RENDERING OF SERVICES BUT TO MAINTAIN INFRASTRUCTURES FOR CO - ORDINATION AND SETTING UP CONDITIONS FOR EFFICIENT RENDERING OF SERVICES IN RELATION TO MAINTENANCE AND REPAIRS OF CABLE SYSTEM. THERE IS A SEPARATE CHARGE FOR REPAIR AND MAINTENANCE UNDER THE C&MA WHEREBY, THE ASSESSEE IS ACTUALLY REQUIRED TO UNDERTAKE REPAIR AND MAINTENANCE AND FOR WHICH THE ASSESSEE SEPARATELY CHARGES. SUCH A REPAIR AND MAINTENANCE IS SEPARATE FROM STANDBY MAINTE NANCE COST, WHICH IS IN THE NATURE OF REIMBURSEMENT OF FIXED COST. THE STANDBY MAINTENANCE IS A FIXED ANNUAL CHARGE WHICH IS PAYABLE NOT FOR PROVIDING OR RENDERING SERVICES BUT FOR ARRANGING STANDBY MAINTENANCE ARRANGEMENT WHICH IS REQUIRED FOR A SITUATION WHENEVER SOME REPAIR WORK IN THE UNDERSEA CABLE OR TERRESTRIAL CABLE IS ACTUALLY TO BE PERFORMED OR RENDERED. IT IS A FACILITY OR INFRASTRUCTURE MAINTAINED FOR READY TO USE OR RENDER THE TECHNICAL M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 10 SERVICES OR REPAIR SERVICES, IF REQUIRED. ON THESE FACTS W E 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 FEES FOR TECHNICAL SERVICES IN THE FOLLOWING MANNER: - EXPLANATION (2) - FOR THE PURPOSE OF THIS CLAUSE, FEES FOR TECHNICAL SERVICES MEANS ANY CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDERATION) FOR THE RENDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES (INCLUDING THE PROVISION OF SERVICE OF TECHNICAL OR OTHER PERSONNEL) BUT DOES NOT INCLUDE CO NSIDERATION FOR ANY CONSTRUCTION, ASSEMBLY, MINING OR LIKE PROJECT UNDERTAKEN BY THE RECIPIENT OR CONSIDERATION WHICH WOULD BE INCOME 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 PRECEDING THE WORD MANAGERIAL, TECHNICAL AND CONSULTANCY SERVICES IS, R ENDERING. 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 SERVICES IS BEING PROVIDED OR DELIVERED WHICH ARE IN THE NATURE OF MANAGERIAL TECHNICAL OR CONSULTANCY. THE WORD MANAGERIAL HAS TO BE UNDERSTOOD 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 VS NL IS NOT IN THE NATURE OF MANAGERIAL. AGAIN THE TERM CONSULTANCY HAS TO BE UNDERSTOOD AS ADVISORY SERVICES WHEREIN NECESSARY ADVICE AND CONSULTATION IS GIVEN TO THE CLIENT FOR THE PURPOSE OF CLIENTS BUSINESS. IT IS ACT OF CONSULTING OR GIVING ADVICE OR GUIDANCE. AGAIN HERE - IN - THIS CASE THERE IS NO CONSULTANCY SERVICES. THE WORD TECHNICAL SERVICES CONNOTE SERVICES WHICH ARE PROVIDED IN TECHNICAL FIELD OR BY THE PERSON WHO HAS SKILL, KNOWLEDGE EXPERTISE IN THE AREA OF TECHNICAL OR SCIENCE. HERE - IN - THIS CASE IF THE ASSESSEE IS PROVIDING SOME KIND OF REPAIR SERVICES IN THE CABLE SYSTEM, THEN IT 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 FACIL ITY, AGREED BY ALL THE MEMBERS OF THE CONSORTIUM ON PROPORTIONATE COST BASIS, THEN IT CANNOT BE HELD THAT IT IS PROVIDING ANY KIND OF TECHNICAL SERVICES. HERE THE MOST CRUCIAL POINT WHICH HAS TO BE SEEN IS FIRSTLY, WHETHER THERE IS ANY ACTUAL RENDERING OF SERVICES; SECONDLY, IS THERE ANY MARK UP OR ELEMENT OF PROFIT IN THE CHARGE RECEIVED FOR STANDBY MAINTENANCE; AND LASTLY WHETHER IT IS IN THE NATURE OF FIXED ANNUAL CHARGE WHICH IS TO BE RECOVERED M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 11 AS PROPORTIONATE COST OF MAINTAINING THE STANDBY FACILITY R EADY FOR CARRYING OUT ANY MAINTENANCE OR REPAIR SERVICES. THIS CHARGE IS DIFFERENT FROM AN ANNUAL MAINTENANCE CONTRACT, WHEREBY REPAIRS AND MAINTENANCE IS COVERED FOR A CERTAIN PERIOD OR SERVICES. IN THE PRESENT CASE AS EVIDENT FROM THE CLAUSE 11.1, THAT S O FAR AS STANDBY MAINTENANCE CHARGES IS CONCERNED, 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 COST INCURRED HAS BEEN RECOVERED FROM VSNL IN PROVIDING THE STANDBY MAI NTENANCE SERVICES. THERE IS NO PROFIT ELEMENT OR MARK UP INVOLVED. THE ASSESSEE HAS ALSO PROVIDED THE DETAILS OF RECEIPT AND COST INVOLVED IN PROVIDING STANDBY MAINTENANCE SERVICES TO VSNL FOR A.Y S. 1998 - 99, 1999 - 2000 AND 2000 - 01 WHICH ARE AS UNDER: - PART ICULARS 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 MAINTEN ANCE 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 CASE AS WELL AS LOOKING TO THE NATURE OF STANDBY MAINTENANCE COST, WE HOLD THAT THE RECEIPTS FROM STA NDBY MAINTENANCE CHARGES FROM VSNL CANNOT BE TAXED AS FTS, WITHIN THE DEFINITION AND MEANING OF SECTION 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 AND ASSESSEES GROUND ON THIS SCORE IS ALLOWED. 1 1 . IT IS NOT IN DISPUTE THAT THE STANDBY CHARGES IS A FIXED ANNUAL CHARGE, W HICH IS PAYABLE NOT FOR PROVIDING OR RENDERING SERVICES ALBEIT FOR ARRANGING STANDBY MAINTENANCE ARRANGEMENT, WHICH IS REQUIRED FOR A SITUATION WHENEVER SOME REPAIR WORK IN UNDER - SEA CABLE OR TERRESTRIAL CABLE IS ACTUALLY REQUIRED TO BE PERFORMED OR RENDER ED. IT IS A FACILITY OR INFRASTRUCTURE MAINTAINED FOR READY TO USE F OR RENDER ING THE TECHNICAL SERVICES OR FOR REPAIRING SERVICES, IF REQUIRED. THERE IS NO ACTUAL RENDERING OF THE SERVICES QUA THE STANDBY MAINTENANCE CHARGES. M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 12 HERE, IT IS NOT THE CASE OF AO OR CIT(A) THAT STANDBY MAINTENANCE CHARGES IS ON ACCOUNT OF ACTUAL R EPAIR OR M AINTENANCE CARRIED OUT BY THE ASSESSEE. HENCE, FOLLOWING THE EARLIER YEARS PRECEDEN CE , WE HOLD THAT THE RECEIPT ON ACCOUNT OF STANDBY MAINTENANCE CHARGES IS NOT CHARGEABLE A S FEES FOR TECHNICAL SERVICES WITHIN THE SCOPE OF SECTION 9(1)(VII). ACCORDINGLY, THE GROUND NO. 1 & 2 ARE TREATED AS ALLOWED AND GROUND NO. 3 WILL BECOME PURELY ACADEMIC IN VIEW OF THE FINDING S GIVEN ABOVE. 1 2 . THE NEXT MAIN ISSUE INVOLVED IS WITH REGA RD TO TAXABILITY OF RESTORATION ACTIVITY WHETHER IT IS TAXABLE IN INDIA EITHER AS FEE FOR TECHNICAL SERVICES U/S 9(1)(VII) OR ELSE AS BUSINESS INCOME UNDER SECTION 9(1)(I). FURTHER, IF IT IS TAXABLE AS BUSINESS INCOME , THEN HOW MUCH IS ATTRIBUTABLE TO OP ERATIONS IN INDIA. 1 3 . BRIEFLY STATED THE RELEVANT FACTS QUA THE ISSUE INVOLVED ARE THAT , THE ASSESSEE HAS BUILT A SUBMARINE FIBER OPTIC TELECOMMUNICATION CABLE TO LINK TELECOM T RAFFIC BETWEEN AND AMONGST WESTERN EUROPE, MIDDLE EAST, SOUTH ASIA, SOUTH EA ST ASIA AND F AR EAST. THE CAPACITY IN THE SAID CABLE SYSTEM HAS BEEN SOLD TO VARIOUS L A NDING PARTIES, WHICH ARE MOSTLY NATIONAL TELECOMMUNICATION COMPANIES BELONGING TO DIFFERENT NATIONS. THE UNSOLD CAPACITY RESTS WITH THE ASSESSEE AS ITS STOCK . THIS ENTIR E ISSUE OF SALES OF CAPACITY AND ITS TAXABILITY IN INDIA HAS BEEN DEALT IN DETAIL BY THE TRIBUNAL IN THE APPEAL OF THE EARLIER YEARS. THE ASSESSEE IN THIS YEAR HAD ENTERED INTO AN ARRANGEMENT WITH CERTAIN TELECOM CABLE OPERATORS TO PROVIDE RESTORATION OF T RAFFIC TO THEIR CUSTOMERS IN THE EVEN T OF DISRUPTION IN THE TRAFFIC ON THEIR CABLE SYSTEM. UNDER THESE ARRANGEMENTS , IF THERE IS DISRUPTION IN THE TRAFFIC ON A PARTICULAR SEGMENT O F THE OTHER CABLE OPERATOR , THE ASSESSEE PROVIDES THE ALTERNATIVE TELECOMMUN ICATION LINK ROUTE THROUGH ITS OWN CAPACITY IN THE CABLE. IN INDIA, VSNL HAD AN ARRANGEMENT WITH SEA - ME - WE3 , HEREIN REFERRED TO AS (SMW3) , FOR CARRYING ITS TELECOMMUNICATIONS TRAFFIC ON SEGMENTS TO AND FROM M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 13 INDIA AND BETWEEN THE SEGMENTS NOT CONNECTED TO I NDIA. IN CASE OF A DISRUPTION IN THE TRAFFIC ON A PARTICULAR SEGMENT ON SMW - 3 CABLE, THE OPERATOR SMW 3 APPROACHES THE ASSESSEE FOR RESTORATION OF THE TRAFFIC ON A PARTICULAR SEGMENT THROUGH ITS CABLE . FOR THIS PURPOSE, THE ASSESSEE, HAD ENTERED INTO A RES TORATION AGREEMENT WITH SMW3 C ABLE N ETWORK VIDE AGREEMENT DATED 23 RD MARCH, 2000. THE ASSESSEE AGREED TO PROVIDE FOR RESTORATION OF TRAFFIC TO VSNL THROUGH ITS CABLE IN CASE OF DISRUPTION IN THE SMW3 CABLE ON VARIOUS SEGMENTS. IN SUCH A CASE OF RESTORATIO N ACTIVITY, THE ASSESSEE INVOICES THE RESTORATION CALLING PARTY I.E. V SNL , DIRECTLY FOR THE R ESTORATION ACTIVITY . THUS, THE ASSESS EE PROVID E S ALTERNATIVE ROUTE OF TELECOMMUNICATION WHICH IS END TO END CONNE CTIVITY TO V SNL , IN CASE THERE IS A DISRUPTION I N THE SMW3 CABLE SYSTEM. IN OTHER WORDS, IF SMW3 IS PROVIDING TELECOMMUNICATION LINK THROUGH ITS CABLE BETWEEN X PLACE TO Y PLACE TO VSNL AND IF THERE IS ANY DISRUPTION ON THIS SEGMENT, THEN SMW3 APPROACHES THE ASSESSEE, WHO IS ALSO HAVING SPARE CAPACITY I N THE CABLE BETWEEN PLACE X AND PLACE Y, TO ALLOW VSNL TO LINK ITS TELECOMMUNICATION TRAFFIC WITH THE CABLE OF ASSESSEE FOR THE TEMPORARY PERIOD OF RESTORATION. DURING THE YEAR, THE ASSESSEE HAS RECEIVED A SUM OF US $ 4,41,854 FROM THE P ROVISION OF RESTORA TION SERVICES TO VSNL UNDER THE SAID AGREEMENT. IN RESPONSE T O THE SHOW CAUSE NOTICE AS TO WHY IT SHOULD NOT BE TAXED AS FTS , THE ASSESSEE BEFORE THE AO, SUBMITTED THAT THE PAYMENT MADE BY V SNL FOR RESTORATION ACTIVITY IS NEITHER TOWARDS ROYALTY NOR TOWA RDS FEE FOR TECHNICAL SERVICES . ASSESSEES DETAILED SUBMISSIONS IN THIS REGARD HAVE BEEN INCORPORATED BY THE AO FROM PAGES 3 TO 7 OF THE ASSESSMENT ORDER. THE AO HELD THAT SUCH A RENDERING OF SERVICE IS BASICALLY RENDERING OF TECHNICAL SERVICE BY ALLOWIN G THE UTILIZATION OF SPARE CAPACITY OF ITS SUBMARINE CABLE OPTIC FIBER SYSTEM BY THE ASSESSEE. THE RELEVANT FACTS, NOTED BY THE AO AND HIS CONCLUSION FOR TAXING THE SAID RECEIPT U/S 9(1)(VII) IS AS UNDER: M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 14 THUS, THE FOLLOWING FACTS CAN BE ASCERTAINED IN TH IS REGARD: (I) FLAG HAS ENTERED INTO A CAPACITY SALES AGREEMENT WITH VSNL, THE NODAL TELECOMMUNICATIONS SERVICE PROVIDER IN INDIA. THE CAPACITY IS BORNE BY ITS SOPHISTICATED OPTICAL FIBER CABLE SYSTEM. (II) SIMILARLY, SEA - ME - WE3, ANOTHER OPTICAL FIBER CABLE SYSTEM, IS HAVING AN ARRANGEMENT WITH VSNL FOR PROVIDING END - TO - END CONNECTIVITY. (III) AS PER THE AGREEMENT BETWEEN FLAG AND SEA - ME - WE3 DATED 23.03.2000, IT IS AGREED THAT IF AND WHEN, THERE IS A DISRUPTION IN THE SEA - ME - WE3 CABLE SYSTEM, FLAG WILL PROVIDE THE CONNECT IVITY TO VSNL, ON ITS OWN CABLE SYSTEM, UTILIZING ITS AVAILABLE SPARE/FREE CAPACITY. (IV) THIS IS POSSIBLE AS VSNL IS ALREADY LINKED WITH FLAG SYSTEM, AND FLAG IS HAVING UTILIZED EXCESS CAPACITY. (V) IT IS VSNL, WHO IS MAKING THE PAYMENT TO FLAG, AND NOT SEA - ME - WE3 , AS IT IS VSNL, WHICH IS BENEFITING FROM THE END - TO - END CONNECTIVITY ON SPARE CAPACITY OF FLAG, WHICH IT IS USING TO IMPART FACILITIES TO ITS USERS. 4.2.5 IN EFFECT, WHAT HAS BEEN TERMED AS RESTORATION ACTIVITY IS BASICALLY RENDERING OF TECHNICAL SERVIC E BY ALLOWING THE UTILIZATION OF SPARE CAPACITY ON ITS SUBMARINE FIBER - OPTIC CABLE SYSTEM BY FLAG. THE ASSESSEE HAS CLAIMED THAT IF AT ALL IT HAS TO BE TAXED, THEN THE REVENUE ATTRIBUTABLE TO INDIA SHOULD BE DERIVED BY USING THE RATIO LENGTH OF CABLE IN I NDIA , AND APPLYING THIS TOTAL LENGTH OF CABLE WORLDWIDE METHOD, IT HAS SUBMITTED THAT THE REVENUES ATTRIBUTABLE TO INDIA WOULD BE USD 943.7 OUT OF USD 441854, AS PAID BY VSNL. THE ABOVE METHOD BEGS FOR THE QUESTION AS TO WHY, AT ALL, VSNL HAS TO FLAG THE AMOUNT OF USD 441854, IF ONLY USD 943.7 COULD BE ATTRIBUTED TO IT. THE FACT REMAINS THAT, AS PER THE TERMS OF THE AGREEMENT, THIS ARRANGEMENT IS TEMPORARY. OWNERSHIP IS NOT TRANSFERRED FLAG IS SIMPLY ALLOWING VSNL TO UTILIZE THE TECHNICAL FACILITY AS AVAILABLE WITH IT, IN THE FORM OF THE SOPHISTICATED CABLE SYSTEM. THE SAME IS TAXABLE U/S 9(1)(VII) OF THE I.T. ACT, 1961. 4.2.6 ACCORDINGLY, IT IS HELD THAT THE RECEIPTS OF THE ASSESSEE ON ACCOUNT OF RESTORATION SERVICES OF US $ 441,854 ARE HE LD TO BE IN THE NATURE OF FEES FOR TECHNICAL, AND ARE TAXED @ 20%. IT IS SEEN FROM CLAUSE D.6 OF THE AGREEMENT, THAT FLAG IS RECEIVING THE PAYMENTS FREE OF ALL TAXES. THUS, THE AMOUNT OF REVENUE HAS TO BE GROSSED FOR COMPUTATION OF INCOME. M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 15 1 4 . IN THE FIRST APPEAL, THE LD. CIT(A) ON THE OTHER HAND HELD THAT THE RECEIPTS FROM RESTORATION ACTIVITY IS INCOME DER IVED FROM THE BUSINESS , B ECAUSE THE ASSES S EE IS MAKING AVAILABLE ONLY ITS SYSTEM FOR TRANSMISSION OF DIGITAL DATA ON EMERGENCY BASIS TO THE CUST OMERS OF SMW3 CABLE NETWORK FOR A TEMPORARY PERIOD. SUCH A RESTORATION ACTIVITY CANNOT BE TERMED AS MANAGERIAL OR CONSULTANCY SERVICES , C ARRYING OF DIGITAL DATA OF ITS CUSTOMER ON ITS CABLE DOES ALSO DOES NOT MEAN RENDERING OF ANY TECHNICAL SERVICES TO THE CUSTOMER. ACCORDINGLY, H E HELD THAT SUCH PAYMENT IS TO BE ASSESSED AS BUSINESS INCOME AND IS TAXABLE IN INDIA U/S 9(1)(I). 1 5 . THEREAFTER, THE LD. CIT(A) HELD THAT THE COMPUTATION OF INCOME IN RESPECT OF RECEIPTS FROM RESTORATION FACILITY SHOULD BE COMPU TED ON THE BASIS OF GLOBAL PROFIT & LOSS ACCOUNT OF THE ASSESSEE WOULD WIDE . AFTER DETAIL DISCUSSION, HE ESTIMATED THE INDIAN INCOME FROM RESTORATION ACTIVITY AT 10% OF THE GLOBAL RECEIPTS. 1 6 . BEFORE US, LD SENIOR COUNSEL FOR THE ASSESSEE, SHRI J D MISTR I, AFTER EXPLAINING THE NATURE OF RESTORATION ACTIVITY, SUBMITTED THAT THE VERY NATURE OF THE RESTORATION ACTIVITY HAS TO BE SEEN , WHETHER IT FITS INTO THE DEFINITION OF TECHNICAL SERVICES AS DEFINED IN EXPLANATION 2 TO SECTION 9(1)(VII) OR NOT. THE RELEVA NT PROVISIONS ENSHRINED IN THE E XPLANATION ENVISAGES THAT THE PAYMENT SHOULD BE IN CONSIDERATION FOR RE NDERING OF ANY MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES . HERE, IN THIS CASE, THE PROVISION FOR RESTORATION ACTIVITY IS CERTAINLY NOT IN THE NATURE O F MANAGERIAL OR CONSULTANCY SERVICES. BECAUSE T HE MANAGERIAL SERVICES ARE SERVICES IN THE NATURE OF MANAGING BY DIRECTION , REGULATION, ADMINISTRATION OR SUPERVISION OF ACTIVITIES VERIFIED BY ANOTHER. IN THE PRESENT CASE, THE ASSESSEE IS NOT PROVIDING ANY S ERVICES TO MANAGE THE AFFAIRS OF VSNL. THE CONSULTANCY SERVICES IMPLY PROVIDING OF ADVISORY SERVICES, WHICH HERE IN THIS CASE NO SUCH SERVICE IS BEING PROVIDED TO VSNL, WHILE ARRANG ING FOR RESTORATION ACTIVITIES. REGARDING M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 16 TECHNICAL SERVICES, HE SUBMITTED THAT THE ASSESSEE IS MERELY PROVIDING A STANDARD FACILITY OF CARRYING TELECOMMUNICATIONS TRAFFIC TO OTHER CAPACITY PROVIDER, SUCH AS SMW3 O N TEMPORARY BASIS IN THE EVENT OF DISRUPTION IN ITS TRAFFIC . WHEN A RESTORATION CALLING PARTY I.E. VSNL DECIDES TO AV AIL OF THE CONNECTIVITY FROM THE ASSESSEE, THERE IS NEITHER TRANSFER OF TECHNOLOGY NOR RENDERING OF ANY TECHNICAL SERVICES. CUSTOMER S LIKE VSNL ONLY RECEIVE END - TO - END CONNECTIVITY TO ENABLE I T TO CARRY ON ITS NORMAL TRANSMISSION BUSINESS ACTIVITY. SIMPLY USING HIGHLY SOPHISTICATED TECHNICAL EQUIPMENT OR CABLE FOR PROVI D ING CAPACITY TO THE CUSTOMER DOES NOT MAKE IT A PROVISION F OR A TECHNICAL SERVICE TO THE CUSTOMER. IN SUPPORT OF HIS CONTENTION, HE STRONGLY RELIED UPON A DECISION OF MADRAS HIGH COURT IN TH E CASE OF SKY - CELL COMMUNICATIONS LTD VS DCIT, REPORTED IN 254 ITR 53 AND ITAT BANGALORE BENCH DEC I SION IN THE CASE OF VIPRO LTD. 80 TTJ 191. THUS, THERE IS NO TECHNICAL SERVICE PROVIDED BY THE ASSESSEE WHILE PROVIDING A STANDARD FACILITY OF CARRYING TELEC OMMUNICATION TRAFFIC THROUGH ITS CAPACITY IN THE CABLE. 17 . HE FURTHER SUBMITTED THAT T HE ACTIVITY OF PROVIDING A RESTORATION SERVICES IS, IN FACT, IN THE NATURE OF BUSINESS INCOME OF THE ASSESSEE AS HELD BY THE CIT(A). THUS, TO THIS EXTENT, HE STRONGLY RELIED UPON THE FINDING OF THE CIT(A) THAT IT IS A BUSINESS INCOME . HOWEVER, HE SUBMITTED THAT IN ORDER TO CHARGE BUSINESS INCOME TO TAX IN INDIA , I T SHOULD BE S QUA R E LY COVERED UNDER THE RELEVANT PROVISIONS OF SECTION 9(1)(I). HE SUBMITTED THAT UNDER THIS CLAUSE , THE INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA , IF IT IS ACCRUES OR ARISE , DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION FROM INDIA ; OR THROUGH OR FROM ANY PROPERTY IN INDIA ; OR THROUGH OR FROM ANY ASSET A S SOURCE OF INCOME IN IN DIA ; OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA. HERE, IN THIS CASE, SINCE NO BUSINESS OPERATIONS HAVE BEEN CARR IED OUT IN INDIA IN RES P ECT OF RESTORATION ACTIVITY AS THE ASSESSEES DISTRIBUTION AND RESTORATION SERVICES HAVE BEEN RECEIVED OUTSIDE INDIA, THEREFORE, THE M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 17 REVENUE FROM THESE ACTIVITIES ARE NOT TAXABLE IN INDIA. HE CLARIFIED THAT , ONLY A SMALL PORTION/PART OF THE ENTIRE CABLE RUNS THROUGH THE TERRITORIAL WATERS OF INDIA. THE ASSESSEE DOES NOT HAVE ANY BUSINESS CO NNECTI ON S OR OPE R A TION OR ANY PROPERTY IN INDIA W ITH RESPECT TO THE PROVISION OF RESTORATION ACTIVITIES. THE MAJORITY OF THE SEGMENTS OF THE BULK CABLE SYSTEM ON WHICH RESTORATION HAVE BEEN PROVIDED, IS LOCATED OUTSIDE INDIA AND THERE IS ONLY SMALL PART OF THE ENTIRE CABL E THAT PASSES THROUGH TERRITORIAL WATERS OF INDIA, WHICH CAN BE 12 NAUTICAL MILES FROM INDIA N SHORE. IN SUCH A SITUATION I T CANNOT BE HELD THAT THE ENTIRE CABLE IS ONE ASSET AND IS DEEMED TO BE SITUATED IN INDIA. THUS , ASSESSEE DOES NOT HAVE ANY ASSET OR S OURCE IN INDIA THROUGH WHICH THE REVENUES FROM RESTORATION ACTIVITIES HAVE BEEN RECEIVED. SINCE THE SERVICE S RENDERED ARE IN RESPECT OF ASSETS OUTSIDE INDIA AND THERE BEING NO SOURCE IN INDIA, THEREFORE , THE QUESTION OF TAXING REVENUE IN INDIA ITSELF DOES NOT ARISE. 1 8 . WITHOUT PREJUDICE TO THE AFORESAID ARGUMENTS AND BY WAY OF AN ALTERNATIVE ARGUMENT, THE SHRI J D MISTRI SUBMITTED THAT, IN CASE THE INCOME FROM RESTORATION ACTIVITIES IS HELD TO BE TAXABLE AS BUSINESS INCOME IN INDIA U/S 9(1)(I), THEN ATT RIBUTION OF INCOME HAS TO BE MADE IN TERMS OF EXPLANATION 1(A) TO SECTION 9(1)(I), WHICH PROVIDES THAT IN CASE OF THE OPERATION OF ENTITY ARE NOT CARRIED OUT IN INDIA, THEN ONLY SUCH PART OF INCOME AS IS REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OU T IN INDIA SHALL BE TAXABLE IN INDIA. HERE, IN THIS CASE THE ONLY ACTIVITY CARRIED OUT BY THE ASSESSEE IN INDIA IF AT ALL CAN BE ATTRIBUTED, IS THAT , IT HAS SMALL PORTION OF CABLE SYSTEM LAID IN THE TERRITORIAL WATERS OF INDIA. IN SUCH A SITUATION, THE MOS T APPROPRIATE BASIS FOR IDENTIFYING THE INCOME, WHICH CAN BE REASONABLY ATTRIBUTED TO INDIA, WOULD BE ON THE BASIS OF A FRACTION OF A LENGTH OF THE ENTIRE CABLE SYSTEM, WHICH FALLS WITHIN TERRITORIAL WATERS OF INDIA, WHICH IS ONLY 12 NAUTICAL MILES . HENCE, ONLY 12 NAUTICAL MILES CABLE SYSTEM OUGHT TO BE CONSIDERED IN INDIA. HE SUBMITTED THAT, DURING THE RELEVANT YEARS UNDER CONSIDERATION, THERE WERE THREE SEGMENTS IN WHICH M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 18 RESTORATION ACTIVITIES WERE UNDERTAKEN, THAT W ERE CONNECTED TO THE CABLE L A NDING STAT ION IN THE TERRITORIAL WATER IN INDIA I.E. FUJAIRAH TO MUMBAI, MI U RA TO MUMBAI AND MUMBAI TO SINGAPORE. HE ALSO FILED A CHART SHOWING A DETAIL S OF RESTORATION CHARGES RECEIVED OVER THE Y EARS (WHICH ARE SUBJECT MATTER OF A P PEALS BEFORE US) AND THE SEGMENT S ON WHICH RESTORAT ION SERVICES WERE PROVIDED ; LENGTH OF THE CABLE SEGMENT ; LENGTH OF THE CABLE IN THE TERRITORIAL WATERS IN INDIA AND THE APPORTIONMENT OF THE REVENUE TO INDIA. HE SUBMITTED THAT AT THE MOST, BU S I NESS INCOME CAN BE TAXED ON SUCH A APPORTIONM ENT OF REVENUE IN INDIA. THE BASIS ON WHICH THE LD. CIT(A) HAS WORKED OUT, IS ABSOLUTELY INCORRECT AS HE HAS ESTIMATED 10% OF THE ENTIRE G LOBAL RECEIPT, WHEN ONLY A VERY SMALL PORTION OF CABLE IS CONNECTED TO INDIA. SUCH AS ESTIMATION OF LD. CIT(A) CANNOT BE UPHELD, F IRSTLY, IT WAS CATEGORICALLY SUBMITTED BEFORE H IM THAT OVERALL REVENUE FROM THE RESTORATION ACTIVITIES AT THE GLOBAL LEVEL WAS AT LOSS AND SECONDLY, THE ENTIRE CABLE NETWORK HAS NOTHING TO DO WITH THE RESTORATION ACTIVITY, EXCEPT FOR A SMALL PO RTION OF CABLE AND ACCORDINGLY, SUCH AN ALLOCATION ON ESTIMATE BASIS IS VERY UNREASONABLE . 19 . ON THE OTHER HAND, B EFORE US, THE LD. SPECIAL COUNSEL , SHRI GIRISH DAVE SUBMITTED THAT VSNL IS A L A NDING PARTY OF THE FLAG CABLE SYSTEM , WHICH HAS USED THE CAPA CITY OF THE CABLE OWNED BY THE FLAG FOR THE PURPOSE OF RESTORATION SERVICES. THE RESTORATION HAS BEEN PROVIDED TO THE VSNL FOR WHICH FLAG HAS RAISED BILL DIRECTLY TO VSNL FOR AVAILING THE CABLE SERVICES TO THE VSNL IN INDIA. THE ASSET AND EQUIPMENTS OF THE FLAG ARE LYING IN INDIA IN THE L A NDING STATIONS. HE FURTHER SUBMITTED THAT FUNCTIONS OF A SUBMARINE CABLE SYSTEM IS NOT A SIMPLE PROCESS BUT HIGHLY TECHNICAL IN NATURE. I N SUPPORT OF HIS CONTENTIONS, HE PROVIDED A CHART AND THE DETAILS FROM PUBLIC DOMAIN, WHICH CONTAIN S INFORMATION ABOUT THE SUBMARINE CABLE SYSTEM AND THE VARIOUS EQUIPMENTS USED . FROM SUCH INFORMATION, HE POINTED OUT THAT PROVIDING RESTORATION SERVICES IN SUBMARINE CABLES , IS A HIGHLY M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 19 TECHNICAL JOB WHICH REQUIRE HIGH TECHNICAL SKILLS AND E QUIPMENTS. HE ALSO REFERRED TO THE EQUIPMENTS REQUIRED I N THE ENTIRE CABLE SYSTEM, THROUGH WHICH SUCH CABLE SYSTEM IS OPERATED. HE ALSO HANDED OVER A HANDBOOK ON LAWS AND POLICY OF SUBMARINE CABLE SYSTEM AND REFERRED TO CHAPTER VI OF THE SAID HAND - BOOK AN D EXPLAINED THE PROVISIONS WITH RESPECT TO REPAIR AND MAINTENANCE OF SUBMARINE CABLE SYSTEM. AFTER EXPLAINING THE ENTIRE PROCESS, HE REFERRED TO THE RESTORATION AGREEMENT AND RELEVANT CLAUSES FOR RESTORATION OF SMW 3 CABLE NETWORK AND CABLE SYSTEM OF THE FLAG. HE SUBMITTED THAT VSNL WHO I S ALREADY A CUSTOMER OF THE ASSESSEE IS USING CABLE SYSTEM OF THE FLAG AS WELL AS ALSO THE CABLE OF SMW3 FOR TRANSMISSION & TELECOMMUNICATION DATA. THE AGREEMENT HAS BEEN ENTERED INTO BETWEEN FLAG AND SMW3 TO ALLOW THE VSN L TO USE THE SYSTEM OF FLAG I N THE CASE OF DISRUPTION IN SMW 3 CABLE, SO AS TO ENSURE UN - INTERRUPTED TRANSMISSION OF TELECOMMUNICATION DATA. HE SUBMITTED THAT, IF VSNL BOUGHT THE CAPACITY IN THE SUBMARINE CABLE SYSTEM OF THE FLAG AND IS ALSO A CO - OWNER, HOW CAN THEN VSNL MAKE PAYMENT TO THE ASSESSEE TOWARDS USE OF THE CAPACITY ON THE CABLE SYSTEM OWNED BY IT. AFTER REFERRING TO THE VARIOUS CLAUSES OF THE RESTORATION AGREEMENT, HE SUBMITTED THAT SERVICES PROVIDED BY THE ASSESSEE TO THE VSNL ARE PURELY TECHNIC AL SERVICES. HE FURTHER REITERATED THAT THE ASSESSEE RETAINS THE CO - OWNERSHIP OF THE SYSTEM TILL MUMBAI AND IS ALSO THE OWNER OF THE EQUIPMENT IN THE CABLE LANDING STATION FOR MONITORING THE SUBMARINE CABLE SYSTEM. THIS CABLE LANDING STATION PROVIDES P OI N T OF POWER TO THE SUBMARINE CABLE SYSTEM AND RECEIVING AND PROCESSING OF SIGNALS FOR COMMUNICATION TO THE DOMESTIC NETWORK SYSTEM OF VSNL. THEREAFTER, VSNL CONNECTS THE CABLE THROUGH AN INTERFACE POINT AT A L A NDING STATION INTO ITS BACKHAUL SYSTEM. THUS, EN TIRE EQUIPMENT IS OWNED BY THE ASSES S EE IN INDIA AND HENCE IT CANNOT BE HELD THAT THERE IS NO ASSET OR SOURCE OF INCOME IN INDIA. HE REFERRED TO THE STATEMENT OF FACTS SUBMITTED BY THE ASSESSEE BEFORE THE CIT(A) , FROM T HERE HE POINTED OUT THAT IT HAS BEEN STATED M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 20 THAT THE ASSESSEE RE TAINS THE CO - O W N ERSHIP OF SUBMARINE CABLE SYSTEM IN INDIA. THE FINDING OF THE CIT(A) IS NOT CORRECT THAT THE RECEIPTS FROM THE RESTORATION ACTIVITY ARE IN THE NATURE OF BUSINESS INCOME. THERE IS AN UTILIZATION OF SERVICES OF THE CABLE NETWORK SYSTEM BY THE VSNL BY THE ASSESSEE AND HENCE THE ASSESSEES CASE CLEARLY FALLS WITHIN THE AMBIT OF FEE FOR TECHNICAL SERVICES, AS DEFINED IN EXPLANATION TO SECTION 9(1)(VII). HE FURTHER POINTED OUT THAT THE LD. CIT(A) HAS NOT APPRECIATED THE FACT THAT THERE ARE TWO TYPES OF ACTIVITIES CARRIED ON BY THE ASSESSEE, ONE ACTIVITY OF CAPACITY SALES AND ANOTHER PROVIDING OF SERVICES. IN THE SECOND ACTIVITY , THE ASSES S EE IS PROVIDING SERVICE T O S M W3, WHICH IN TURN IS BEING PROVIDED TO VSNL FOR WHICH T HE ASSESSEE DIRECTLY BILLS TO VSNL AND GETS THE PAYMENTS FOR SUCH SERVICES. THUS THE PAYMENT FROM VSNL IS TO BE TAXED AS FTS. LASTLY, HE SUBMITTED THAT THE RESTORATION ACTIVITY IS NOT AN ORDINARY ACTIVITY, BUT REQUIRES HIGHLY TECHNICAL EXPERTISE FOR RESTOR ING THE CABLE TRANSMISSION THROUGH ITS OWN CABLES AND HENCE IT CLEARLY FALLS IN THE NATURE OF FTS. 2 0 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT FINDING S GIVEN IN THE IMPUGNED ORDER. THE ASSESSEE HAS BUILT A HIGH CAPACITY SUBMARINE OPT IC FIBER TELECOMMUNICATIONS LINK CABLE SYSTEM AND HAS SOLD THE CAPACITY IN THE SAID CABLE SYSTEM TO VARIOUS L A NDING PARTIES INCLUDING VSNL. THE VSNL HAS BOUGHT THE CAPACITY FOR ITS TELECOMMUNICATION TRANSMISSION IN VARIOUS SEGMENTS OF THE FLAG CABLE SYSTEM . THE UNSOLD CAPACITY IN THE CABLE LIES BACK WITH THE ASSESSEE. THE VSNL A PART FROM OPERATING ITS TELECOMMUNICATION IN THE FLAG CABLE SYSTEM ALSO HA S AN ARRANGEMENT FOR TELECOMMUNICATION SERVICES/TRANSMISSION I N THE CABLE OF ANOTHER OPERATOR/ PARTY, SMW3. T HE SMW3 HAD ENTERED INTO AN AGREEMENT WITH THE FLAG THAT IT WILL PROVIDE RESTORATION OF TRAFFIC TO SMW3 CUSTOMERS, INCLUDING VSNL IN THE EVENT OF DISRUPTION IN THE TRAFFIC ON S MW 3 CABLE. FOR THIS PURPOSE THE FLAG PROVIDES ALTERNATIVE ROUTE FOR TRANSMISSION OF DATA USING ITS SPARE CAPACITY AVAILABLE WITH IT IN ITS CABLE SYSTEM. M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 21 2 1 . NOW, WHETHER SUCH AN ACTIVITY OF PROVIDING RESTORATION SERVICES IS IN THE NATURE OF TECHNICAL SERVICES WITHIN THE AMBIT OF SECTION 9(1)(VII) OR NOT. SECTION 9(1)(VII) R.W. EXPLA NATION (2) PROVIDE S THAT THE PAYMENT MADE IN CONSIDERATION FOR THE RENDERING OF MANAGERIAL, TECHNICAL OR CONSULTANCY SERVICES FALLS WITHIN THE CATEGORY OF FEES FOR TECHNICAL SERVICES WHICH IS TAXABLE IN INDIA U/S 9(1)(VII). IN THIS CASE, SUCH A RESTORATI ON ACTIVITY DOES NOT FALL WITH IN THE NATURE OF MANAGERIAL OR CONSULTANCY SERVICES , BECAUSE THERE WAS NO RENDERING O R MANAGING BY DIRECTION, REGULATION, ADMINISTRATION OR SUPERVISION OF ACTIVITIES BY THE FLAG TO THE VSNL. NEITHER IT IS PROVIDING ANY ADV ISORY SERVICES FOR ARRANGING OF RESTORATION ACTIVITIES TO THE VSNL . THE ASSESSEE ALREADY HAS A CABLE SYSTEM NETWORK IN WHICH IT HA S SPARE CAPACITY , WHICH IS BEING PROVIDED TO THE VSNL ON BEHALF OF SMW3 IN CASE OF DISRUPTION IN SMW 3 CABLE NETWORK. IT IS A K IND OF PROVIDING A STANDARD FACILITY FOR CARRYING TELECOMMUNICATION TRAFFIC TO OTHER TELECOMMUNICATION/CAPACITY PROVIDER. WHEN A RESTORATION CALLING PARTY LIKE VSNL AVAILS THE NETWORK LINK IN THE CABLE OF THE ASSESSEE, NO TRANSFER OF TECHNOLOGY IS INVOLVED NOR HAVE ANY TECHNICAL SERVICES BEEN RENDERED. THE VSNL ONLY RECEIVES END TO END CONNECTIVITY FOR A TEMPORARY PERIOD TILL THE CABLE OF SMW 3 IS RESTORED FOR THE TRAFFIC. HERE THE EXISTING CABLE WITH ITS SPARE CAPACITY WITH THE FLAG IS BEING ALLOWED TO BE U SED FOR TRANSMITTING THE DATA. SIMPLE U SE OF SOPHISTICATED TECHNICAL EQUIPMENT FOR PROVIDING THE CAPACITY IN THE CABLE TO THE VSNL I P SO FACTO DOES NOT LEAD TO ANY INFERENCE THAT ANY TECHNICAL SERVICES IS BEING PROVIDED /RENDERED BY THE FLAG TO THE VSNL. ALR EADY A CABLE SYSTEM OF THE ASSESSEE IS WORKING AND I S IN OPERATION AND WHAT IS BEING PROVIDED IS THE LINK FOR TRANSMISSION IN THE CABLE. AS P ER THE REQUIREMENT IT IS PROVIDING ITS NETWORK TO THE VSNL AS AN ALTERNATE ROUTE TO THE SMW3 CABLE FOR THE TEMPORAR Y PERIOD. WE ARE UNABLE TO APPRECIATE THE ARGUMENT OF SHRI GIRISH DAVE THAT , SINCE THE SUBMARINE CABLE SYSTEM IS HIGHLY TECHNICAL IN NATURE AND INVOLVES M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 22 SOPHISTICATED PROCESS AND TECHNICAL EQUIPMENTS , THEREFORE, THE TRANSMISSION OF DATA THROUGH SUCH A CABL E AMOUNTS TO RENDERING OF TECHNICAL SERVICES. THE CABLE SYSTEM THOUGH MAY BE HIGHLY SOPHISTICATED PROCESS AND FOR TRANSMISSION OF DATA TECHNICAL EQUIPMENTS ARE REQUIRED, BUT THIS ITSELF DOES NOT QUALIFY THAT ASSESSEE THROUGH SUCH A CABLE IS RENDERING TECHN ICAL SERVICES TO THE VSNL. UNDER THE RESTORATION ACTIVITY TH E CABLE OF THE ASSESSEE IS MERELY PROVIDING AN ALTERNATIVE ROUTE TO THE VSNL FOR A CERTAIN PERIOD OF TIME . HENCE , IT CANNOT BE HELD THAT FOR PROVIDING SUCH A STA N DARD FACILITY THROUGH ITS CABLE SY STEM , THE ASSESSEE IS RENDERING ANY KIND OF TECHNICAL SERVICES TO THE VSNL , SO AS TO FALL WITHIN THE AMBIT OF FTS U/S 9(1)(VII). FOR RENDERING OF TECHNICAL SERVICES THERE HAS TO BE DELIVERY OF TECHNICAL SKILLS THROUGH HUMAN ELEMENT OR THERE IS A CONSTANT H UMAN ENDEAVOR IN PROVIDING TECHNICAL SERVICE OR ADVICE OR MAKE AVAILABLE SUCH A TECHNICAL SKILLS OR SERVICES . BUT IF ANY TECHNICAL EQUIPMENT DEVELOPED BY HUMAN HAS BEEN PUT TO OPERATION AUTOMATICALLY , THEN USAGE OF SUCH A TECHNOLOGY PER SE CANNOT BE HELD A S RENDERING OF TECHNICAL SERVICES. TRANSMISSION OF A DATA OR TELECOMMUNICATION THROUGH A CABLE IS NOT A RENDERING OF A TECHNICAL SERVICE BUT A USE OF TECHNICAL DEVICE/EQUIPMENT. THIS PROPOSITION HAS BEEN WELL EXPLAINED BY THE HONBLE MADRAS HIGH COURT IN T HE CASE OF SKY SALES COMMUNICATIONS LTD ( SUPRA ). THUS, IN OUR OPINION S UCH A STANDARD FACILITY FOR TRANSMISSION OF DATA AND TELECOMMUNICATION TRAFFIC BY CABLE OPERATORS CANNOT BE TERMED AS RENDERING OF TECHNICAL SERVICES. ACCORDINGLY , FINDING OF THE LD. CIT (A) THAT IT IS NOT FEE FOR TECHNICAL SERVICES IS UPHELD. THE OTHER ARGUMENTS OF SHRI DAVE THAT LANDING STATION BELONGS TO THE ASSESSEE IS NOT ACCEPTABLE AS THIS ASPECT OF THE MATTER HAS ALREADY BEEN DEALT IN DETAIL IN OUR EARLIER YEAR S ORDER. 22. FURTHER , F ROM THE PERUSAL OF THE RESTORATION AGREEMENT AND VARIOUS CLAUSES, IT CANNOT BE INFERRED THAT THERE IS ANY ACTUAL RENDERING OF TECHNICAL SERVICES BY THE ASSESSEE. NOTHING IS M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 23 SUGGESTIVE OF THE FACT THAT UNDER THE RESTORATION AGREEMENT SOME KIND OF TECHNIC AL SKILL, TECHNICAL SERVICES ARE BEING PROVIDED, EXCEPT FOR THE KINDS OF RESTORATIONS WHICH CAN BE UNDERTAKEN AND TERMS THEREOF FOR THE CONNECTIVITY AND PAYMENT. THUS ON THE SE FACTS, WE HOLD THAT REVENUE RECEIVED FROM RESTORATION ACTIVITIES IS NOT TAXABL E AS FTS U/S 9(1)(VII). 2 3 . NOW COMING TO THE ISSUE , WHETHER PROVIDING OF SUCH RESTORATION SERVICES IS IN THE NATURE OF BUSINESS INCOME OR NOT. THE ASSESSEES CASE HAD BEEN THAT NO BUSINESS OPERATIONS WERE CARRIED OUT IN INDIA IN RESPECT OF THE RESTORAT ION ACTIVITIES AS THE REVENUE FROM SUCH SERVICES HAVE BEEN RECEIVED OUTSIDE INDIA AND THERE IS NO BUSINESS CONNECTION OR ANY ASSET OR SOURCE OF INCOME IN INDIA, BECAUSE MAJORITY OF THE FLAG CABLE SYSTEM ON WHICH RESTORATION HAS BEEN PROVIDED IS LOCATED OUT SIDE INDIA. SECTION 9(1)(I) IS A DEEMING PROVISION WHICH PROVIDES THAT INCOME IS DEEMED TO ACCRUE AS ARISE IN INDIA, IF IT ACCRUES, DIRECTLY OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CORRECTION IN INDIA ; OR THROUGH OR FROM ANY PROPERTY IN INDIA ; OR THROUG H OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA ; OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA. THE FLAG HAS A N UNDER - SEA NETWORK CABLE TELECOMMUNICATION SYSTEM FROM UK TO JAPAN FOR PROVIDING TELECOMMUNICATION LINK TO VARIOUS COUNTRIES. THE LAYOUT OF UNDERSEA CABLE ROUTE IS AS SUCH THAT, IT H AS VARIOUS TERRESTRIAL LINK IN VARIOUS COUNTRIES , W HEREFROM THE CABLE NETWORK COMES TO ASHORE TO A L A NDING STATION, WHICH ARE MOSTLY OWNED BY THE L A NDING PARTIES. T HE FLAG SALES THE CAPACITY IN THE CABLE SYSTEM TO THE VARIOUS L A NDING PARTIES, WHICH FACT TOO HAS BEEN NOTED BY THE AO AS WELL BY THE CIT(A) IN THE IMPUGNED ORDER AND ALSO HELD BY US, IN THE EARLIER YEARS. AFTER SELLING THE CAPACITIES, THE FLAG IS LE FT WITH SPARE CAPACITY , WHICH HERE IN THIS CA SE HAS BEEN USED FOR PROVIDING RESTORATION ACTIVITY SERVICES TO SMW 3 WHICH IN TU RN HAS BEEN PROVIDED TO VSNL. A PORTION OF THE CABLE LEN G TH FALLS WITHIN THE M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 24 TERRITORIAL WATERS OF INDIA FROM WHERE IT CONNECTS TO MUMBAI AND FROM THERE IT AGAIN GOES TO OTHER COUNTRIES. IN CASE OF SALE OF THE CAPACITY, THE L A NDING PARTIES BEC O ME THE COMPLETE OWNER OF THE CAPACITY TO THE EXCLUSION OF ASSESSEE AS HELD IN EARLIER YEARS . HOWEVER, THE SPARE CAPACITY WHICH LIES IN THE CABLE BELONGS TO THE ASSESSEE , THROUGH WHICH IT HAS PROVIDED THE RESTORATION NETWORK TO THE VSNL. THE PORTION OF THE ASSET I.E. CABLE THROUGH WHICH RESTORATION ACTIVITY HAS BEEN PROVIDED ALSO HAS CONNECTION IN INDIA IN AS MUCH AS IT LIES WITHIN THE TERRITORIAL WATER S OF INDIA. ACCORDINGLY, IT CAN BE V ERY WELL HELD THAT INCOME H AS ACCRUED TO THE ASSESSEE FROM AN ASSET IN INDIA AND HENCE IT IS DEEMED TO BE BUSINESS INCOME ARISING IN INDIA . HOWEVER, HERE ALL THE BUSINESS OPERATIONS OF THE ASSESSEE ARE NOT CARRIED OUT IN INDIA , THEREFORE REASONABLE ATTRIBU TION OF INCOME FROM SUCH OPERATIONS HAS TO BE DONE. I N SUCH A SITUATION , EXPLANATION 1A TO SECTION 9(1)(I) PROVIDES THAT, IN CASE OF A BUSINESS OF WHICH ALL OPERATIONS ARE NOT CARRIED OUT IN INDIA, THEN THE INCOME OF THE BUSINESS SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA ONLY SUCH PART OF THE INCOME , WHICH CAN BE REASONABLY ATTRIBUTABLE TO THE OPERATIONS CARRIED OUT IN INDIA. IN OTHER WORDS, ATTRIBUTION OF SUCH INCOME HAS TO BE MADE IN ACCORDANCE WITH EXPLANATION 1A. THE LD. CIT(A) THOUGH HELD THAT IT I S A BUSINESS INCOME OF THE ASSESSEE TO WHICH WE FULLY ENDORSE , H OWEVER HAS ALLOCATED THE INCOME IN INDIA BY ESTIMATING 10% OF THE GLOBAL INCOME FROM RESTORATION ACTIVITIES. SUCH AN APPORTIONMENT BY THE CIT(A) CANNOT BE HELD TO BE TENABLE AT ALL , FIRSTLY, THE LD. CIT(A) HIMSELF HAS STATED THAT THE WORK ING OF THE LOSS GIVEN BY THE ASSESSEE TO SHOW THAT IT HAS INCURRED HUGE LOSS AT GLOBAL LEVEL, CANNOT BE CORROBORATED BECAUSE THERE IS NO AVAILABILITY OF CERTIFIED GLOBAL STATEMENT ; AND S ECONDLY, THE GLOBAL INCOME CANNOT BE THE BASIS FOR ATTRIBUTING THE INCOME IN INDIA, WHEN ONLY SMALL PORTION OF CABLE PASSES THROUGH TERRITORIAL WATERS OF INDIA AND THE MAJORITY LENGTH OF THE CABLE IS SITUATED OUTSIDE INDIA. UNDER THE PRESENT FACT, THE MOST APPROPRIATE BASIS FOR IDE NTIFYING M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 25 THE INCOME, WHICH CAN BE REASONABLY ATTRIBUTA BLE TO INDIA WOULD BE ON THE BASIS OF THE FRACTION OF THE LENGTH OF THE ENTIRE CABLE SYSTEM IN THE CASES WHERE RESTORATION SERVICES HAVE BEEN PROVIDED IN RESPECT OF THE CABLE S EGMENTS CONNECTED TO INDIA IN ITS TERR ITORIAL WATERS . THE TERRITORIAL WATERS EXTEND UPTO 12 NAUTICAL MILES IN INDIA AND HENCE ONLY 12 NAUTICAL MILES OF THE CABLE SYSTEM OUGHT TO BE CONSIDERED FOR ATTRIBUTING THE INCOME TO INDIA. THE ASSESSEE HAS PROVIDED THE CHART OF THE SEGMENTS O N WHICH THE RESTORATION ACTIVITIES HAVE BEEN UNDERTAKEN BY WAY CONNECT ION TO THE CABLE L A NDING STATION IN THE TERRITORIAL WATERS IN INDIA, WHICH WAS FROM FUJIRAH TO MUMBAI, MIURA TO MUMBAI AND MUMBAI TO SINGAPORE. THE ASSESSEE HAS ALSO FILED A STATEMENT SH OWING THE DETAILS OF RESTORATION CHARGES OVER THE YEARS GIVING THE DETAILS OF S EGMENTS ON WHICH THE RESTORATION HAS BEEN PROVIDED ; LENGTH OF THE S EGMENT , LENGTH OF THE CABLE IN TERRITORIAL WATERS OF INDIA AND APPORTIONMENT OF REVENUE TO INDIA. IN PRINCIPLE , WE UPHOLD THE METHOD OF ATTRIBUTION OF REVENUE AS GIVEN IN THE SAID STATEMENT, HOWEVER THE AO IS DIRECTED TO DETERMINE THE INCOME OF THE ASSESSEE WHICH IS TO BE TAXED IN INDIA AFTER APPORTIONING THE REVENUE ON THE BASIS OF LENGTH OF THE CABLE IN THE TERR ITORIAL WATERS IN INDIA ON THE SEGMENTS ON WHICH RESTORATION HAVE BEEN PROVIDED. THE WORKING GIVEN IN CHART SUBMITTED BY THE ASSESSEE SHALL BE VERIFIED BY THE AO , SO AS TO DETERMINE THE CORRECT BUSINESS INCOME WHICH I S TO BE TAXED IN INDIA. WITH THESE OBSE RVATIONS, THE GROUND RAISED BY THE ASSESSEE IS TREATED AS PARTLY ALLOWED, WHEREAS REVENUES GROUND NO. 1 & 2 ARE TREATED AS DISMISSED. 2 4 . THE NEXT ISSUE RELATES TO LEVY OF INTEREST U/S 234B. 2 5 . AS ADMITTED BY BOTH THE PARTIES, THIS ISSUE IS SIMILAR TO THE ISSUE INVOLVED IN THE APPEAL FOR ASSESSMENT YEAR 1998 - 99, 1999 - 2000 & 2000 - 01, WHEREIN, THE TRIBUNAL AFTER FOLLOWING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF DIT VS NGC NETWORK M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 26 ASIA LLC REPORTED IN 313 ITR 187, HELD THAT THERE WAS NO LI ABILITY TO PAY INTEREST U/S 234B. 2 6 . LASTLY , COMING TO THE ISSUE OF INTEREST UNDER SECTION 234D, IT HAS BEEN ADMITTED BY THE LD. COUNSEL THAT THE LEVY OF INTEREST U/S 234D WOULD BE APPLICABLE IN THESE YEARS ALSO IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN CIT VS. INDIAN OIL CORPORATION LTD.(2012) 25 TAXMANN.COM 284. ACCORDINGLY, THE THIS ISSUE IS DECIDED AGAINST THE ASSESSEE. 27. REGARDING CROSS APPEALS FOR THE AYS 2002 - 03 TO 2008 - 09 , IT HAS BEEN ADMITTED BY BOTH THE PARTIES THAT THE AFORES AID ISSUE S AS DISCUSSED ABOVE, ARE COMMON AND IDENTICAL TO THE GROUNDS RAISED IN ALL THE IMPUGNED APPEALS AND ARE ARISING OUT OF IDENTICAL SET OF FACTS , THEREFORE, THE FINDING GIVEN ABOVE FOR THE AY 2001 - 2002 WILL APPLY MUTATI S MUTANDIS IN ALL THE APPEALS IMPUGNED BEFORE US . REGARDING ATTRIBUTION OF BUSINESS INCOME IN INDIA, THE AO WILL WORK OUT THE INCOME IN THE MANNER INDICATED ABOVE. ACCORDINGLY, THE GROUNDS RAISED IN ALL THE APPEALS BY THE ASSESSEE ARE TREATED AS PARTLY ALLOWED , WHEREAS THE GROUNDS RAIS ED BY THE REVENUE IN ALL ITS APPEAL ARE TREATED AS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH JUNE , 2015. SD/ - SD/ - ( . . ) ( ) ( R C SHARMA ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 15 TH JUNE , 2015 / COPY TO: - 1) / THE APPELLANT. M/S FLAG TELECOM GROUP LIMITED (ERSTWHILE FLAG LIMITED)(FLAG) ITA NO. 2255 / M UM /20 06 & 14 OTHER GROUP APPEALS 27 2) / THE RESPONDENT. 3) THE CIT (A) - 31/XXXI , MUMBAI. 4) THE CIT CONCERN___/DIT(INTERNATIONAL TAXATION) , MUMBAI. 5) , , / THE D.R. L BENCH, MUMBAI. 6) COPY TO GUARD FILE. / BY ORDER / / TRUE COPY / / / , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR.PS