J & P Coats Limited, Bangalore V. DCIT, Bangalore

ITA 382/BANG/2015

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7483 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 15-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Double taxation relief; Retrospective amendment; Advance ruling; TDS; Capital Gains
• Section: 195; 251; 9(1); 9(1); 9(1); 72; 13; 22

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER Appeal Nos. and Assessment Year Appellant Respondent IT(IT)A No.11/Bang/2014 2008-09 M/s. J & P Coats Ltd., C/o. Deloitte Haskins and Sells, Anchorage-II, 100/2, Richmond Road, Bengaluru – 560 025. PAN : AAACJ 3713 G The Commissioner of Income Tax-IV, Bengaluru. IT(TP)A No.382/Bang/2015 2010-11 -do- DCIT (International Taxation), Circle – 1(1), Bengaluru. IT(TP)A No.2135/Bang/2016 2012-13 M/s. J & P Coats Ltd., 1, George Square, Glasgow, Scotland G2 1AL, United Kingdom. PAN : AAACJ 3713 G -do- IT(TP)A No. 1493/Bang/2015 2011-12 -do- -do- IT(IT)A No.1365/Bang/2019 2013-14 -do- -do- IT(IT)A No.1366/Bang/2019 2014-15 -do- DCIT (International Taxation), Circle – 1(2), Bengaluru. IT(IT)A No. 1367/Bang/2019 2015-16 -do- -do- Appellant by:ShriAjay Rotti, CA Respondent by :Shri K. V. Arvind,Standing Counsel for Department Date of hearing:11.11.2021 Date of Pronouncement:29.11.2021 IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 2 of 37 O R D E R Per Bench: These 7 appeals filed by the Assessee against various orders of CIT(A) are in relation to AY 2008-09 , 2010-11 to 2015-16, as detailed below: (i)IT(IT) A.No. 11/Bang/2014 is an appeal against the order dated 11.2.2014 of CIT(A)-IV, Bangalore, in relation to AY 2008-09. (ii) IT(TP) A.No.382/Bang/2015 is an appeal against the final order of assessment dated 14.1.2015 of DCIT, International taxation., Circle 1 (1), Bangalore, passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2010-11. (iii) IT(TP) A.No.1493/Bang/2015, is an appeal against the final order of assessment dated 16.10.2015 of DCIT, International taxation., Circle 1 (1), Bangalore, passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (Act) in relation to AY 2011-12. (iv)IT (TP) A.No.2135/Bang/2016 is an appeal by the Assessee against the final order of assessment dated 5.10.2016 passed by the DCIT(International Taxation), Circle-1(1), Bangalore, u/s.143(3) read with Sec.144C(13) of the Income Tax Act, 1961, in relation to AY 2012-13. (v to vii): IT (TP) A.No. 1365 to 1367/Bang/2019 are appeals is an appeal against the common order dated 28.3.2019 of CIT(A)-12, Bangalore, in relation to AY 2013-14 to 2015-16. 2. These appeals involve one common issue, except for one additional issue in one of the appeals i.e., appeal for AY 2010-11. All these appeals were heard together and we deem it convenient to pass a common order. We will deal with the appeal for AY 2012-13 as a lead case and the decision taken therein will be equally IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 3 of 37 applicable to other AYs also, as the facts and circumstances of the case are identical in all AYs, in so far as the common issue is concerned. 3. The Assessee is a foreign company incorporated under the laws of United Kingdom and a tax resident of United Kingdom (UK). The Assessee is engaged in the business of manufacture and trading of sewing threads and other goods in the UK and globally possesses the requisite expertise and experience by virtue of having several qualified personnel in its employment and provides technical and managerial services in relation to its business to other group concerns. 4. Under an Agreement dated 1.1.2008, titled “Management Services Agreement”, the Assessee agreed to provide certain services to Madura Coasts Pvt.Ltd. (MCPL) a company incorporated under the Companies Act, 1956. The list of services so agreed to be provided by the Assessee to MCPL is set out Schedule-I to the said agreement. The services agreed to provided included (i) management and other services, (ii) Global Information Technology, (iii) Legal, risk and management, (iv) Finance and Tax, (v)Treasury, (vi) Human rsources and (vii) Operational services. Under the head global Information Technology, the Assessee agreed to provide the following services to MCPL. 1.Specifying and guiding roll out of global IT applications 2.Identifying the best practices for implementation, support and operation of IT systems 3.Establishing standards for hardware, software and networking in IT operations and ensuing compliance 4.Establishing standards for SAP operations to ensure best practices across global operations 5.Global vendor selection and management of relationship and contracts IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 4 of 37 6.Site visits for briefing, reviews and consultations for IT operations 5. There was another agreement dated 1.1.2008 titled “Applications Support and Wide Area Network Support Services Agreement, between the Assessee and MCPL. Under this agreement, the Assessee agreed to provide MCPL, two type of services viz., (i)application support services, i.e., the Assessee has by virtue of an agreement with IBM, UK and SAP (UK) Ltd., right to make available to subsidiary companies/associate enterprises of Assessee certain customised systems and application. The said software has been installed on computer systems operated by the users and the Assessee has developed the capability to provide application support for users of the said software. The Assessee agreed to provide application support to MCPL. (ii)Wide Area Network Services: The Assessee has ageeement with British Telecom Plc., UK (BT) whereby BT provides wide area network services to subsidiary companies and associated enterprises of the Assessee. The Assessee with a view to formalise the arrangement with provision of wide area network services has entered into the agreement. The support services covered under the ambit of Wide Area Network Support services are described in Schedule-II to the Agreement. 6. Clause-5 of the agreement provides as follows: 5. Wide Area Network Support Services 5.1During the Term 1.11(1 as from the Effective Date the Service Provider shall make Wide Area Network Support Services available to the User in accordance with the User's reasonable requirements. These requirements shall include, inter alias, IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 5 of 37 5.1.1 setting up a global wide area network capable of supporting transaction processing; 5.1..2 providing global wide area network access to sites of India business - operations that meet required service levels for transaction processing and messaging; 5.1.3 carrying out periodic inspection and maintenance activities on the network hardware and communication links to ensure continued provision of assured service - levels to the User. 5.1.4 supporting addition,: relocation, bandwidth change and termination of network sites as and when necessary to meet the User's changing requirements and business growth.” 7. The consideration payable for providing the aforesaid services is found in clause 6.6 and 6.7 and the same reads thus: “Wide Area Network Support Service Fces 6.6 The Service Provider shall recharge the User the fee charged by BT based o the User network nodes in the global WAN. 6.7 The Service Provider shall provide the following documentation for the fees charged for Application Support, Services and Wide Area Network' Support Services: Details of services rendered and Documents explaining the basis of charge and supporting the cos calculations, 8. The Assessee in order to render Wide Area Network Support Service (WAN services) to MCPL and other group entities across the globe had entered into agreement with BT dated 11.04.2006 called the Master Global Framework Agreement (hereinafter referred to as MGFA) whereby BT agreed to provide services to the Assessee. Schedule 18 to the Agreement gives a list of sites at which BT will provide services. The list includes India and includes sites used by MCPL in India. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 6 of 37 9. The MGFA defines “services” and “sites” as follows: "Services" means the services to be provided by BT to Coats at any given time during the Term and as described under Schedule 1 (Services) and any other services agreed by the Parties to be provided by BT to Coats Group under this Agreement; "Sites" means the Sites which are used by Coats Group and to which BT has agreed to provide the Services as such Sites are listed in Schedule 18 (Coats Site List) and may be added to or removed in accordance with Schedule 9 (Change Control Procedure); 10. Persons to whom services are to be rendered is set out in clause 3 of MGFA as follows: 3.1 Coats is entering into this Agreement for the benefit of each member of Coats Group and agrees to procure the performance of the members of Coats Group to the terms of this Agreement. 3.2 BT shall provide the Services, from the Effective Date in accordance with this Agreement and the Local Agreements. 11. “Local Agreement” has been defined under the MGFA to mean: “Local Agreement" means an agreement entered into between the relevant member of BT Group and the relevant member of Coats Group in relation to one or more countries based on this Agreement substantially in accordance with the example set out within Schedule 8 (Pro-Forma Local Agreement)” 12. Therefore the Agreement by which the Assessee agreed to provide WAN services to the Assessee referred to in the earlier part of this order would be covered under the definition of “Local Agreeement” under the MGFA. 13. Schedule I to the MGFA details the services and the relevant clauses in so far as the issue to be decided in this appeal is concerned reads as follows: “SCHEDULE 1 SERVICES IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 7 of 37 1. Purpose of Schedule This Schedule describes the scope of the Services to be provided to the Sites by BT to Coats under this Agreement. 2. Scope of Services The scope of Services are defined as a BT Global WAN with BT's end to end Managed Services including all network elements as set out in Schedule 18 (Coats Site List) and management of those services where the service boundary is the Ethernet Port on the router (CPE) presented to the customer LAN, inclusive of the private WAN connections detailed in this Schedule. 3. Sites BT will provide the Services described in this Agreement to the Sites as set out in Schedule 18. This list provides the detailed Site addresses (including postcode) for each Site where Services are to be provided and it describes which Services are provided to which Sites. This list shall be amended from time to time as part of the Change Control Procedure and in accordance with this Agreement. 4. Service Commencement - Transition As agreed in the Transition Plan, BT will deliver a Global WAN netwcrk as more fully described in Schedule 15 (Transition). 5. Services This Section contains a detailed description of the Services BT will provide to the Sites. 5.1 Network Connectivity BT will provide network connectivity to the Sites based on a BT MPLS (Multi-protocol Label Switching) Class of Service 6 (CoS) model. With the exception of the data centres all site connectivity will be via a single access link and a router with ISDN capability (ISDN to be supplied by Coats) for the purpose of resilient backup. The data centres at Ipiranga (Brazil), Guangzhou (China), Charlotte (USA) and Vienna (Austria) are to be provided with dual access links, in all cases routed diversely (subject to Coats Site IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 8 of 37 infrastructure providing for such diverse routing) and dual MPLS Ports each supporting Class of Service 2. A number of Sites will be connected via a private WAN connection to an existing Coats Site for onward connectivity to the BT MPLS network. These are detailed as follows: Site Connected to MPLS network via: Mauritius Long line to Stockley Park site, UK Madagascar Lonq line to Hammarsdale site, South Africa Zimbabwe Long line to Hammarsdale site, SA Bangladesh (Dhaka) Long line to Bangalore HQ site, India Bangladesh (Chittagong) Local connection to Dhaka site, India, then via long line to Bangalore (as above) Pakistan (Karachi) Long fine to Stockley Park site. UK Pakistan (Lahore) Local connection to Karachi site, Pakistan, then long line to Stockley Park (as above) Sri Lanka (Colombo) Lonq line to Bangalore HQ site, India Sri Lanka (Horana) Local connection to Colombo site, Sri Lanka, then long line to Bangalore (as above) Sri Lanka (Kelaniya) Local connection to Colombo site, Sri Lanka, then long line to Bangalore (as above)+ Morocco (Casabianca) Long line to Stockley Park site, UK Tunisia (Tunis) Long line to Stockley Park site, UK 5.2 Network Equipment The routers provided will be Cisco, as defined in Schedule 18 (Coats Site List), with standard Interface Operating System (IOS) software. Besides the above, Schedule – I also refers to management services (i.e., help desk for user), service desk, fault management, etc. These are incidental to use of WAN by the user.” 14. The user MCPL has made payments to the Assessee under different heads of expense in relation to services provided, expenses recharged etc. and TDS has been made wherever the payer felt that TDS is applicable. Details of the total received/ receivables related to or connected to India in the hands of JPCL for FY 2011-12 are as under: IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 9 of 37 Sl. No. Name and address of the party Nature of transactions Accruals during the year –Rs. Whether receipts offered to tax? 1. Madura Coats Private Limited Purchase of shade cards 6,74,847Not liable to tax in India for the following reasons: a) Purchase transaction 13) In the nature of business income and in the absence of a PE not taxable 2 Madura Coats Private Limited Royalty for use of technology 37,75,02,201 , 4 Yes 3 Madura Coats Private Limited Management services fee 7,78,98,476 Yes 4 Madura Coats Private Limited SAP- Charges 7,12,27,118 Yes 5 Madura Coats Private Limited BT-rental Charges 3,85,69,353 No 6 Madura Coats Private Limited Reimbursement expenses 60,311 No 7 Madura Coats Private Limited Others 72,94,828 Yes 15. From the above chart one can observe that MCPL paid a sum of Rs.3,85,69,353/- as BT rental Charges to the Assessee and this sum was not offered to tax by the Assessee. The dispute in these appeals is as to whether the BT rental charges are chargeable to tax in India in the hands of the Non-resident Assessee. The AO called upon the Assessee to explain as to why BT Charges of Rs.3,85,69,353/- was not offered to tax. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 10 of 37 16. The Assessee’s plea in response to the query was; (i) what the Assessee received as BT Charges from MCPL is nothing but a reimbursement of cost which the Assessee paid to BT and such reimbursements cannot be characterized as income. In this regard, it is not disputed that the Assessee provided back-to back invoices vide its submissions dated 28 February 2014 before the AO and there has been no adverse finding in this regard. The Assessee placed reliance on the following judicial precedents which have held that reimbursement of cost based on cost sharing agreement is not liable to tax in India: a)CIT v. Expeditors International (India) (P) Ltd — 24 Taxmann 76 (Delhi High Court) b)ABB Limited - AAR No 834 of 2009 (AAR) c)Decta v. CIT — 103 Taxman 525 (AAR) d)DIT v KRUPP UDHE GMBH — ITA No. 2626 of 2009 (Del) e)CIT v. Dunlop Rubber Co. Ltd. (Now Dunlop Holdings Ltd) — 142 ITR 493 (Cal) f)CIT v. Tejaji Farasram Kharawalla Ltd. — 67 ITR 95 (SC) g)CIT v. Industrial Engineering Projects (P) Ltd — 202 ITR 1014 (Del) f)Owen v. Pook (Inspector of Taxes) — 74 ITR 147 (HL) h)ACIT vs Modicon Network (P) Ltd — 14 SOT 204 (Del) (ii) The Assessee is a tax resident of United Kingdom (UK) and therefore taxability of income of a non-resident in India on the income from whatever source which: IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 11 of 37 is received or is deemed to be received in India; or accrues or arises or is deemed to accrue or arise to it in India It is only when the receipt in question can be characterized as “Royalty” under the provisions of the applicable Indo-UK Double Taxation Avoidance Agreements (`DTAA') will there be liability to tax in India. The term "Royalty" has been defined in Explanation 2 to section 9(l)(vi) of the Act as follows: "Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for— (i)the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii)the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii)the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv)the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v)the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 12 of 37 (vi)the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)." Under Article 13 of Indo-UK DTAA Paragraph 3(a) and 3(b) defines the term 'royalties' as under: "For the purposes of this Article, the term "royalties" means: (a)payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b)payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic." The assessee submitted that the Authority for Advance Rulings (AAR) has in the following rulings held that connectivity charges paid for use of telecom bandwidth would not be characterized as 'royalty' under the Act and the DTAA— Dell International Services India - 305 ITR 37 (AAR) ISRO Satellite Centre vs DIT - 307 1TR 59 (AAR) Cable and Wireless Networks India (P) Ltd vs DIT - 315 1TR 72 (AAR) It was highlighted that the AAR has propounded the following principles in this regard — IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 13 of 37 The provision of telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the service provider does not amount to a lease of equipment. The service provider utilises its own network and provides a facility that enables the service recipient to transmit voice and data through the media of telecom bandwidth and accordingly there is no use or right to use equipment within the meaning of clause (via) of Explanation 2 to section 9(1)(vi) of the Act. Provision of bandwidth facility does not tantamount to use of or right to use any secret process. The AAR mentioned that similar bandwidth services through private circuits are being provided by many other telecom operators and hence the royalty definition relating to secret process is not attracted while providing telecom bandwidth facility. Reliance was placed on the following judicial precedents in support of Assessee’s contention that provision of telecom bandwidth facility would not be characterised as royalty under the Act and the DTAA— A In this regard, the Hon'ble High Court of Delhi in the case of CIT Vs. Expeditors International (India) Private Limited ITA No.1088 of 2011 Judgment dated 16.12.2011 it has been held that amount paid to its parent company on account of ....., communication uplink charges and other reimbursement of expenses incurred by parent company will not be chargeable to tax and no TDS obligation arises for the same. Similar view was upheld by the Delhi Tribunal in a recent case of Convergys Customer Management Group Inc v ADIT — [2013] 58 SOT 69 (Delhi ITAT). DIT (IT) v WNS Global Services (UK) Ltd [2013] 32 taxmann.com 54 (Bombay High Court) WNS North America Inc. v. ADIT [2012] 152 TTJ 145 (Mumbai Trib.) IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 14 of 37 ITO v M/s. Madura Coats (P) Ltd. - ITA No. 1711 & 1712 / Bang / 2005 (Bang Trib.) Wipro Limited v ITO - 133 Taxman 149 (Bang. Trib.) Bharat Sanchar Nigam Limited & Others v Union of India — (2006) 3 SCC I (SC) In the case of Asia Satellite Telecommunication Co. Ltd. vs. DIT — (197 Taxmann 263), the Delhi High Court held that the payment for use of transponder capacity for uplinking / downlinking data would not constitute royalty. It was submitted that in line with the judicial precedents cited above, payment made by MCPL to Assessee as recoup of connectivity charges do not fall within the definition of "royalties" under the Act and Indo-UK DTAA. It was pointed out that Bangalore Bench of the Tribunal in the case of ITO v M/s. Madura Coats (P) Ltd. - ITA No. 1711 & 1712 / Bang / 2005) in respect of the very same payment in the context of tax deduction obligation has held that the telecom bandwidth facility would not be characterised as royalty under the Act and the DTAA. (iii) The Assessee submitted that the payment in question cannot be taxed as Fees for Technical Services (FTS) also. In this regard, the Assessee submitted that under the Act, FTS has been defined in Explanation 2 to clause (vii) to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration 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". It was submitted that data connectivity is primarily provided by BT. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 15 of 37 The Assessee merely recoups a portion of the costs from MCPL based on usage by MCPL. Accordingly, the payments made by MCPL to Assessee would not fall within the ambit of the term `fees for technical services' under the Act in the absence of any services being rendered by Assessee to MCPL. The Assessee placed reliance on the decision of the Madras High Court in Skycell Communications Ltd v DCIT [2001] 251 ITR 53 (Mad) and Delhi High Court in CIT And Others v Bharti Cellular And Others [2008] 175 Taxman 573 (Del) in which it was held that provision of cellular services cannot be treated as technical services. Without prejudice to the aforesaid submission, it was submitted that under Article 13 of Indo UK DTAA deals with Royalty and fees for technical services. Paragraph 4 of Article 13 defines the term 'fees for technical services' to mean: "For the purposes of paragraph 2 of this Article, and subject to paragraph 5, of this Article, the term "fees for technical services" means payments of any kind of any person in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) which: (c)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or (d)are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or (e)make available technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was submitted that in terms of paragraph 4(e) of Article 13 of DTAA, payments of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) would be regarded as fees for technical services' if it 'makes IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 16 of 37 available' technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. It was submitted that the India-UK DTAA does not define the term "make available". There is no Protocol to the DTAA either from where one may determine the meaning of the term as used in the DTAA. However, the Indo- US DTAA has a similar definition for the term "fees for technical services". The Indo-US DTAA also contains a Memorandum of Understanding (MOU) explaining the meaning of the term 'fees for included services' as appearing in Article 12 of the Indo-US DTAA. The MOU describes in some detail the category of services which is defined in Para 4 of Article 12 of the Indo-US DTAA. The MOU also provides example of services intended to he covered within the definition of included services and those intended to be excluded. Indian courts have held that where the DTAA with one country is not clear about ail definition of any particular term, the explanatory clauses in another DTAA with simila wordings can be used. In this regard, reliance was placed on the following judicia precedents: The AAR in lntertek Testing Services India (P) Ltd — 175 Taxman 375 (AAR relied upon the Memorandum of Understanding, examples and explanatior appended to the DTAA between India and United States of America in order tc arrive at a better understanding of the treaty law between India and Unite( Kingdom. The Karnataka High Court in A.E.G Telefunken v. CIT -233 ITR 129 (Kar) compared the DTAA entered with German Democratic Republic with the DTAA entered with Finland for achieving a better understanding of the term fees foi technical services. The Mumbai Tribunal Bench in Raymond Ltd v DCIT — 86 ITD 791 (T Born) reliec upon the Memorandum of Understanding, examples and explanation appended tc the DTAA between India and United States of America in order to arrive at a better understanding of the treaty law between India and United Kingdom. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 17 of 37 The Assessee submitted that the MOU under the Indo-US DTAA can be used to explain the concept of 'make available' under the Indo- UK DTAA. Under Para 4(b) of Article 12 of the Indo-US DTAA, technical and consultancy services are considered as included services only if they make available technical knowledge, expertise, skill, knowhow or processes or consists of the development and transfer of a technical plant or technical design to such person. The MOU explains that the category of services included in para 4(b) of article 12 is narrower because it excludes any service that does not make technology available to the person acquiring the service. The MOU further states that the technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service within the meaning of paragraph 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make technology available. Reliance was placed on the following judicial precedents wherein it was held that the fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service. Airports Authority of India 273 ITR 437 (AAR) Raymond Ltd v DCIT 80 TTJ 120 (Bombay Tribunal) De Beers India Private Limited - ITA No: 3402/B/04 (Bangalore Tribunal) It was submitted that in the instant case, the entire work of providing connectivity is carried out by BT using its own technology and agents. It was submitted that there is no transfer of technology at any point of time when connectivity is provided by BT to Assessee or by Assessee to MCPL. Further, the provision of connectivity is not possible without having recourse to BT and hence the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 18 of 37 definition of 'fees for technical services' is not attracted .In view of the foregoing, we submit that, even if it is presumed that services have been rendered, the amounts received by JPCL would not fall within the definition of 'fees for technical services' under the Indo-UK DTAA. Therefore, the receipts of Assessee would not be subject to tax in India. (iv) It was submitted that business profits of a non-resident are taxable in India only if the non-resident has: Business Connection in India under the Act or Permanent Establishment ("PE") in India under the relevant DTAA (in the present case, under the Indo-UK DTAA). It was submitted that the Assessee does not have a Business Connection in India under the Act or a Permanent Establishment ("PE") in India as per the provisions of Indo-UK DTAA. In the absence of a PE or a business connection in India, it was submitted that the receipts pertaining to the recoveries of data connectivity charges would not be taxable as business profits in India. 17. The AO rejected the theory of cost to cost reimbursement on the ground that what is to be seen is whether the payment is for services rendered then whether the charge for the services is equivalent to the cost or not becomes immaterial. Once the income falls under the category mentioned in Sec.9(1)(vi) of the Act i.e., royalty, then it is taxable, irrespective of whether it is equivalent to the cost of the service provider. 18. The AO thereafter examined the nature of payment in the light of the definition of “Royalty” under the Act and as per the DTAA. He referred to clause (via) of explanation-2 to Sec.9(1)(vi) of the Act which provides that IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 19 of 37 consideration for “the use or right to use any industrial, commercial or scientific equipment” is regarded as Royalty. He also referred to the definition of Royalty as given in Article 13(3)clause (b) of DTAA which also has a similar clause “payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment”. According to the AO, the consideration received by the Assessee from MCPL was a consideration received for “use” or “right to use” two way dedicated bandwidth and the equipment associated with the network and therefore the payment was in the nature of Royalty. We have already seen that the Assessee has placed reliance on decisions of AAR in the case of Dell International Services (supra), Cable & Wireless Networks (I) Pvt.Ltd., (supra) and ISRO Satellite Centre (supra) wherein it was held that providing telecom bandwidth facility by means of dedicated circuits and other network installed and maintained by the service provider does not amount to a lease of equipment. The AO distinguished those decisions by pointing out observations of the AAR in the case of Dell International Services(supra) wherein the AAR observed “May be, a fraction of the equipment in visible form may find its place at the applicant’s premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that the bulk of consideration paid is for the use of that item of equipment”. According to the AO the above observations shows that what has to be seen is the importance of the equipment installed in the customer’s premises for establishing connectivity. He referred to Schedule 18 of the MGFA where importance has been assigned to the routers at various sites and the type of network connectivity and the capacity of the network. Since MCPL was aware of the two-way dedicated bandwidth and the equipments provided by BT, the payment by MCPL to the Assessee is in the nature of “Royalty”. The AO thereafter referred to a part of paragraph 13.1 of AAR’s ruling in the case of Dell (supra). We have reproduced the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 20 of 37 whole paragraph and highlighted the portion quoted by the AO in the order of assessment, so that one can understand the context in which the AAR has given it’s conclusions: “13.1. There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment—whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are : Does the availment of service involve user of equipment belonging to BT or its agent by the applicant ? Is the applicant required to do some positive act in relation to the equipment such as operation and control of the same in order to utilize the service or facility ? Does the applicant deal with any BT equipment for adapting it to its use? Unless the answer is ‘yes’, the payment made by the applicant to BTA cannot be brought within the royalty cl. (iva). In our view, the answer cannot be in the affirmative. Assuming that circuit is equipment, it cannot be said that the applicant uses that equipment in any real sense. By availing of the facility provided by BTA through its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT’s equipment as such would not have figured in the minds of parties. As stated earlier, the expression ‘use’ occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word ‘use’ in cl. (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the Revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke cl. (iva) in such a case because the element of service predominates.” IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 21 of 37 19. After quoting the above highlighted portion of the ruling of AAR, the AO proceeded to hold that the services provided by BT requires use of Routers belonging to BT by MCPL and a positive act is required to be done by MCPL in relation to the router installed at its premises by BT. MCPL has to provide the necessary infrastructure in its premises to host the router and has to adapt their Local Area Network to work with the BT routers. Since the answer is yes as per the decision of the Hon’ble AAR, the payment for the use of the network amounts to Royalty. 20. The AO thereafter referred to another part of the ruling in Paragraph 13.1 (which we have quoted above in bold letters and underlined) by AAR in the case of Dell(supra) and observed that as per Schedule 17 of the MGFA wherein it is provided that the Assessee should provide reasonable location and operating environment, free of any charge for BT equipment (i.e., rack and shelf space, power socket, ambient temperature control, customer connectivity and IP address allocation and management). The above clause in the MGFA according to the AO showed that both the Assessee and MCPL were aware of the Routers being placed in their premises and it was mind of the parties when the MGFA was entered into regarding the use of equipment. 21. The AO thereafter referred to clause 6.1 of the MGFA paragraph 4.3 of Handbook and diagram of the BT Network and was of the view that routers are very important for MCPL to receive services from the Assessee. Therefore the AO concluded that consideration paid by MCPL is for “right to use” equipment i.e., the routers. The AO has also referred to multi protocol label switching MPLS (referred to in the MGFA) and concluded that the entire system of MPLS is based on the routers. He also referred to clause 6.1 of the MGFA which IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 22 of 37 provides that initial trouble shooting will be done by the Assessee wherever any problem occurs in use of Wide Area Network connectivity. According to the AO it is only if the Assessee is aware of the equipment installed in its premises can it trouble shoot. The Assessee does constant checking of the equipment installed in the premises of MCPL and therefore there was a right to use the equipment. 22. The AO thereafter made reference to the decision of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte. Ltd v. ITO (International Taxation) [2013] 39 taxmann.com 70 wherein it was held that the consideration received by the non-resident taxpayer from the Indian customers for provision of bandwidth/telecommunications services outside India was for the 'use of, or the right to use equipment' and, therefore, royalty under section 9(1)(vi) of the Act. It was also held that alternatively, the payments can also be considered for the use of process provided by the taxpayer and therefore, royalty under the Act. The Hon’ble Court also held that even if the payment is not treated as one for the use of the equipment,, the use of the process was provided whereby through assured bandwidth the customer is guaranteed the transmission of the date and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the Assessee out of the scope of royalty. Thus the consideration being for the use and the right to use of the process, it is royalty with the meaning of clause (iii) of Expln.2 to Sec.9(1)(vii) of the Act. Clause(iii) of Expln.-2 to Sec.9(1)(vi) provides that consideration received for use of any patent, invention, model, design, secret formula or process or trade mark or similar property, would be royalty. According to the AO even though the statutory provisions use the expression secret process, even ordinary/simple process shall be covered by the definition. In coming to the above conclusion the AO relied on the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 23 of 37 decision of the Special Bench ITAT Delhi in the case of New Skies Satellites N.V. Vs. ACIT (Intl.Tax) (2009) (126 TTJ 1) has taken the view that the provision of the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desired area is a “process”. To constitute “royalty”, it is not necessary that the process should be a “secret process”. The fact there is a ‘comma’ after the words “secret formula or process” in the DTAA does not mean that a different interpretation has to be given to the DTAA as compared to the Act. The argument that there is no “use” of the satellite by the payer as it has no control or possession of the satellite is not acceptable. To constitute “royalty”, it is not necessary that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The fact that the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently assessable as “royalty” under the Act and the DTAA. This decision has been reversed by the Hon’ble Delhi High Court in the decision of New Skies Satellites N.V. 68 taxmann.com 8. The AO also took recourse to the provisions of Expln. 5 & 6 to Sec.9(1)(vi) of the Act in support of his conclusions as above, though these provisions are not found in the definition of Royalty under the DTAA. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 24 of 37 23. For all the above reasons the AO brought to tax, the BT charges received by the Assessee from MCPL in his draft assessment order. The Assessee filed objections before the Dispute Resolution Panel (DRP) against the conclusions of the AO in the draft assessment order. The DRP upheld the order of the AO. The AO passed the final order of assessment in which he brought to tax BT charges as royalty. Aggrieved by the aforesaid addition, the Assessee is in appeal before the Tribunal. 24. The arguments advanced by the parties are almost identical to the arguments advanced before the AO. The Ld.AR for the Assessee brought our notice the terms of the Application support and Wide Area Network support services between the Assessee and MCPL and submitted that the Wide Area Network support services provided were merely connectivity services and are not for use of any equipment or process as understood by the revenue and therefore cannot be characterized as “Royalty” either under the Act or under the DTAA. It was submitted that the Assessing Officer’s reliance on the decision of Hon’ble Madras High Court in Verizon Singapore Pte. Ltd. vs ITO (supra) and decision of Special Bench of ITAT, Delhi, in New Skies Satellite (supra) was misplaced. It was submitted that the Hon’ble Delhi High Court has reversed the decision of Special bench in New Skies Satellite BV which is reported in 68 taxmann.com 8, and the issue stands covered by Asia Satellite Telecommunications Co. Ltd. vs DCIT [2011] 332 ITR 340 (Del.). It was submitted that the consideration amount received for providing bandwidth services would not be taxable as equipment royalty or process royalty under the Tax Treaty. The transaction does not result in equipment royalty under the Tax Treaty as there is no use or right to use any industrial, commercial or scientific equipment by the customer' availing the bandwidth services. The transaction does not result in process royalty under the Tax Treaty as there is no use of any process by the customer availing the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 25 of 37 bandwidth services. Hence, does not fall in the definition of royalty as per Tax Treaty. Explanations 5 and 6 to section 9(1)(vi) of the Act cannot be read into the Tax Treaty for the definition of equipment and/or process royalty. Further, the Tax Treaty specifically does not include "transmission by satellite, cable, optic fiber or similar technology" in the definition of Royalty under the Tax Treaty, whereas other tax treaties (including treaties entered after insertion of Explanations 5 and 6 vide Finance Act, 2012) do specifically capture such transmissions in the royalty definition. He stressed that provision of bandwidth services for digital transmission of data by the Assessee does not result in use of any equipment or process by the customer. Hence, the consideration received for services does not fall in the definition of ‘Royalty’ under the Tax Treaty. It was reiterated that the Assessee and MCPL have no interest in the equipment whatsoever and did not have control over the equipment or the process and the payment was for providing standard services from BT. It was submitted that mere fact that some equipments are installed and maintained by the service provider at the sites will not amount to lease of equipment. The service provider BT utilizes its own network and provides a facility that enables Coats group to transmit voice and data through the media of telecom bandwidth and accordingly there is no use or right to use equipment. The use of the router is for the limited purpose of obtaining the services from BT. It was submitted that use of router is akin to a set top box kept at homes of the subscribers of television channels or direct to home (DTH) operators. The equipment (i.e., set top box) at the house of the subscriber belongs to the service provider. It cannot be said that the subscriber is paying for “use of equipment”. The subscriber is paying for services and the equipment is required for such a purpose. Reference was made to decision of Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt.Ltd. Vs. CIT Civil Appeal Nos. 8733-8734 of 2018 wherein it was held that the enlarged definition of Royalty as IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 26 of 37 per the Act as amended by the Finance Act, 2012 cannot be applied to India-UK DTAA. 25. The learned DR primarily reiterated the stand of the revenue as contained in the order of assessment. His submission was that reimbursements to the extent it is for rendering services has to be regarded as income. In this regard he relied on the decisions which has been cited by the AO in the order of assessment. He placed reliance on the decision of the Hon’ble Madras High Court in the case of Verizon Communications Singapore Pvt.Ltd. (supra) for the proposition that payment of use of bandwidth facility would be in the nature of royalty both under the Act and the DTAA between India and Singapore and that decision will equally apply to India-UK DTAA. 26. We have heard the rival submissions perused the material on record. The issue which arises in the present appeal filed by the Assessee for different Assessment Years is against the chargeability of amount received from MCPL by the Assessee towards BT charges for providing WAN connectivity/bandwidth services outside India as equipment/process royalty u/s 9(1)(vi) of the Act and/or Article 13(3) of the India UK DTAA. The Assessee is a tax resident of UK. The bandwidth services are provided as standard services wherein the customer enjoys an uninterrupted service to transmit voice and data at standard rate of reliability. The Assessee claims that such rendition of service using an equipment/process and the customer being only a recipient of service would not attract equipment/process royalty, as the transaction would not fall within the expression “use or right to use”. Mere receipt of service using equipment under the control, possession and operation of service provider would only be transaction of a service and not to “use or right to use” an equipment, and would not attract ‘Royalty’ under the Act or the Tax Treaty. The Revenue authorities are of the view that the consideration received IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 27 of 37 by the Assessee falls within the definition of Royalty (either as use of equipment or use of process) both u/s 9(1)(vi) of the Act and also under provisions of Tax Treaty. 27. The view canvassed by the Assessee finds support in the following decisions. Dell International Services (India) (P) Ltd.’s, ("Dell India") parent company Dell-US entered into a master service agreement (MSA) with BT America (BTA) a non-resident company formed and registered in USA under which BTA provided the applicant with two-way transmission of voice and data through telecom bandwidth. The purpose of entering into such arrangement was to enable Dell entities in the respective countries to utilize the services of BTA. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e. USA and India. Under the agreement, a fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. Installation charges as specified in the order form are also payable initially. The payment to BTA is net of any Indian taxes, including withholding taxes, as may be applicable. There was no equipment of BTA at the Dell India’s premises and Dell India has no rights over any equipment held by BTA for providing the bandwidth. Dell India sought ruling that the payments made to BTA are not liable to be taxed in India either under the treaty provisions or s. 9(1) of the IT Act, 1961. The Hon'ble Authority for Advance Ruling held that the word 'use' in relation to equipment occurring in Expln-2 (iva) to Sec.9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the word "equipment" suggests that there must be some positive act of utilization, application or IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 28 of 37 employment of equipment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. The Hon'ble Delhi High Court in the case of DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8/238 Taxman 577/382 ITR 114 and CIT v. Siemens Aktiongesellschaft [2009] 177 Taxman 8/310 ITR 320 (Bom.) have also taken similar view in the context of use of transponder facility. This view has been affirmed by the Mumbai ITAT in the case of Dy. CIT v. Reliance Jio Infocomm Ltd. [2019] 108 taxmann.com 325 (Mum.), wherein it has been held that u/s.9(1)(vi) of the Act, payment for 'bandwidth services' is not assessable as 'royalty' if the Assessee only has access to services and not to any equipment. The Assessee also did not have any access to any process which helped in providing of such bandwidth services. All infrastructure & process required for provision of bandwidth services was always used and under the control of the service provider and was never given either to the Assessee or to any other person availing the said services. 28. The view canvassed by the Revenue finds support from the decision of the Hon’ble Madras High court in the case of Verizon Singapore Pte.Ltd.(supra) The Assessee company, Verizon Communication Singapore Pte Limited originally called as MCI WorldCom Asia Pte Limited, is a non- resident company engaged in the business of providing international connectivity services. (IPLC). IPLC (International Pvt. Leased Circuit) is an end to end managed dedicated bandwidth service that provides internet service to customers for various applications. The international leg of the telecom services provided outside India is provided by the Assessee. The gateway/the landing station in India used in transmitting the traffic within India belonged to VSNL and is used by VSNL for providing Indian end services pursuant to its contract with the customer. On the above facts, the question before the Hon’ble Court was as to Whether the Tribunal was right on facts and in IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 29 of 37 law in holding that the payments received by Verizon Communications Singapore Pvt.Ltd., the appellant from the Indian customers for provision of Bandwidth/Telecom Services outside India is royalty for the ‘use of, the right to use equipment’ u/s 9(1)(vi) of the Act? And Whether these payments received constitute royalty for the ‘use of, or the right to use equipment’ u/s 12(3)(b) of the Tax Treaty(DTAA between India and Singapore)? The Hon’ble Madras High Court held that the payments made to the non-resident company were for the ‘use of equipment’. In addition, the Court also held that such payments may also be held to be in relation to the ‘use of process’ since the provision of assured bandwidth and guaranteeing the transmission of data and voice would qualify for the same, irrespective of the fact that the bandwidth is shared with others. After the insertion of Explanation 5, possession, control of such right, property or information usage directly by the payer, location of the right are not matters of concern in deciding the character of payment as 'royalty’. The customer has a significant economic interest in the Assessee's equipment to the extent of the bandwidth hired by the customer. The bandwidth capacity made available on a dedicated basis for the entire contract period, even if it does not involve a possessory interest, the amount received by the Assessee in a way is also for the use of process. The definition of 'royalty' under DTAA and the Indian Income-tax Act are in para materia. As rightly pointed out by the revenue, Explanation 6 defines 'process' to mean and include transmission by satellite (cable, optic fibre, or by any other similar technology, whether or not such process is secret. 29. The provisions of Expln-5 and 6 referred to in the decision of the Hon’ble Madras High Court in the case of Verizon Communication (supra) reads thus: Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not— (a) the possession or control of such right, property or information is with the payer; (b) such IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 30 of 37 right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;" It is pertinent to mention here that Explanations 5 and 6 have been inserted by the Finance Act 2012, with retrospective effect from 1.6.1976. The Hon'ble Madras High Court relying upon above insertions of Explanations 5 and 6 to section 9(1)(vi) of the Income Tax Act, by the Finance Act 2012, has held that payment made by Indian customers to a Singapore company for providing end-to-end internet connectivity (bandwidth services) outside India was taxable as royalty under the Income Tax Act. It is an admitted position that but the above explanation 5 and 6 are not found in the definition of Royalty under the India-UK DTAA. The Hon'ble Supreme Court in the case of "Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT" [2021] 125 taxmann.com 42, has in the context of taxability or otherwise of consideration paid for use of computer software as royalty, by holding that the payments made by resident Indian end- users/distributors to nonresident computer software manufacturers/suppliers, as consideration for the resale of the computer software through End User License Agreements (EULAs)/distribution agreements, can't be considered as payment of royalty for the use of copyright in the computer software as per provisions of Article 12(3) of the applicable DTAAs and further that the provisions contained in section 9(1)(vi) of the Income Tax Act along with explanations 2 and 4 thereof, not being more beneficial to the Assessees, will not have any application. We find that the Hon’ble Delhi High Court in New Skies Satellite (supra) has also taken the same view and has observed in the said decision that Hon’ble High Court of Madras in Verizon Communications Singapore Pte. Ltd. (supra) declined to IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 31 of 37 conclusively determine or record a finding as to whether amendment to section 9(i)(vi) of the Act by insertion of Expln.5 to Section 9(1)(vi) of the Act, indeed was clarificatory as the Revenue suggested or prospective and the Court was of the view that the issue of taxability of income of Assessee may be resolved without redress of above question purely because the Assessee did not press the said line of argument and had instead stated that ultimate taxability of income shall rest on the interpretation of terms of DTAA. 30. It was submitted by the learned counsel for the Assessee that internationally, it is accepted that when payments are made for such services, they are not in the nature of ‘royalties’. It has been internationally accepted that payments for satellite broadcasting services, transponder services, bandwidth services etc. are not to be considered ‘royalties’. It is also accepted that bandwidth fees cannot be considered as payments for the ‘use of process’. In so far as use or use of equipment is concerned, as long as there is no control established over the equipment. This view has been endorsed by the OECD Model Commentaries as well. This view has specifically been upheld by the Authority for Advance Rulings in India in the case of Dell International (supra) and the Hon’ble Delhi High Court in the case of Asia Satellite (supra). The amendment to the definition of Royalty by the Finance Act, 2012 with retrospective effect has expanded the definition of “Royalty”, by laying down that consideration paid may be classified as made for the ‘use of equipment’ and thus, classified as ‘royalties’ irrespective of the possession or control of the equipment with the payer or use by the payer or the location of the equipment being in India. However, this retrospective amendment does not impact the definition of ‘royalties’ in the tax treaties entered into by India. India-UK DTAA defines “Royalty” to include payments for the use or the right to use of industrial, commercial or scientific equipment and the use or the right to use of a secret formula or process as ‘royalties’. The definition of Royalty under the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 32 of 37 DTAA, is much narrower in its scope and coverage than the definition of 'Royalty' as contained in section 9(1)(vi) read with Explanations 2, 5 and 6 of the Act. Installation & operation of sophisticated equipments or a standard facility with a view to earn income by allowing the users to avail the benefits of such equipments or standard facility does not tantamount to granting the use or the right to use that equipment or process so as to be considered as royalty within the above definition of 'royalty' contained in clause 3(b) of Article 13 of the India-UK DTAA. At no point of time, the customer gain any possession or physical custody, control or management over any equipment. Payment of bandwidth charges can't be considered as 'Royalty'. Also, the process involved to provide the bandwidth service is not "secret", but a standard commercial process followed by the industry players. Therefore, the said process can't be classified as a "secret process", as is required by the above- mentioned clause 3(b) of Article 13 of the DTAA. 31. The law is well settled, that in so far as provisions which impose a tax liability on the subject, if the words used are ambiguous and reasonable open to two interpretations benefit of interpretation is given to the subject. In State of West Bengal vs. Kesoram Industries Limited, (2004)10 SCC 201 has summed up the following principles applicable to the interpretation of a taxing statute: “(i) In interpreting a taxing statute, equitable considerations are entirely out of place. A taxing statute cannot be interpreted on any presumption or assumption. A taxing statute has to be interpreted in the light of what is clearly expressed; it cannot imply anything which is not expressed; it cannot import provisions in the statute so as to supply any deficiency; IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 33 of 37 (ii) Before taxing any person, it must be shown that he falls within the ambit of the charging section byclear words used in the section; and (iii) If the words are ambiguous and open to two interpretations, the benefit of interpretation is given to the subject and there is nothing unjust in a taxpayer escaping if the letter of the law fails to catch him on account of Legislature’s failure to express itself clearly”. 32. We have already seen the two divergent views one taken by the Hon’ble Delhi High Court in the case of Asia Satellite (supra) and Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and the other view taken by the Hon’ble Madras High Court in the case of Verizon Communication (supra). There is no decision of the Hon’ble Karnataka High Court brought to our notice, which is the jurisdictional High Court as far as this Tribunal is concerned. Applying the rule that if two interpretations are possible on tax liability benefit of interpretation is given to the subject, we follow the ruling of the Hon’ble Delhi High Court in the case of Asia Satellite (supra) and Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and hold that in the case of Assessee, the consideration received for providing bandwidth facility will not be taxable as equipment royalty or process royalty. The plea of the Assessee in this regard is accepted and the relevant grounds of appeal in all the 7 appeals are allowed, as admitted by both the parties, the facts and circumstances of the case are identical. 33. The revenue has not made out a case for taxing the receipts in question as FTS. The plea of the Assessee was that in terms of paragraph 4(e) of Article 13 of DTAA, payments of any kind in consideration for the rendering of any technical or consultancy services (including the provision of services of a technical or other personnel) would be regarded as fees for technical services' IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 34 of 37 if it 'makes available' technical knowledge, experience, skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. We do not wish to go into these arguments as the revenue has not taxed the sum in question as FTS. It is also not the case of the revenue that the Assessee has permanent establishment in India and therefore the receipts even if considered as business income, cannot be taxed in India. Even on this aspect, there is no discussion and it is admitted case of the revenue that the sum in question cannot be taxed as business income. 34. In so far as AY 2010-11 is concerned, there is one additional issue and that issue is with regard to taxing a sum of Rs. 4,49,395 received by the Assessee from MCPL towards cost of shrink-wrapped software, which the Assessee purchased from software vendors and sold to the Assessee. The taxed the aforesaid receipt treating it as royalty by following the decision of the Hon’ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 345 ITR 494 (Karn.). It was the plea of the Assessee before DRP that there was no transfer of right in respect of the copyright by the software vendors to the Assessee. There was no commercial exploitation of the copyright of the software vis-à-vis third parties. The Assessee had a right to use the software only within its own business, as end-user software. The Assessee acquired a ‘copyrighted article’ and not a ‘copyright’ and that software is goods. The contention was rejected by the DRP. Aggrieved by the addition made by the AO in the final order of assessment, the Assessee is in appeal before the Tribunal. 35. We have heard the rival submissions. Admittedly, the issue has been set at rest by the decision of Hon'ble Supreme Court in a recent case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs CIT (supra). Hon'ble Supreme Court IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 35 of 37 while considering the issue of royalty on sale of software have considered the decision of Hon'ble Karnataka High Court in case of CIT vs Samsung Electronics Co Ltd. (supra) and various other decisions. We note that Hon'ble Supreme Court considered the issue by observing as under:- "3. One group of appeals arises from a common judgment of the High Court of Karnataka dated 15.10.2011 reported as CIT v. Samsung Electronics Co. Ltd., (2012) 345 ITR 494, by which the question which was posed before the High Court, was answered stating that the amounts paid by the concerned persons resident in India to non- resident, foreign software suppliers, amounted to royalty and as this was .so, the same constituted taxable income deemed to accrue in India under section 9(1)(vi) of the Income Tax Act, 1961 ["Income Tax Act"], thereby making it incumbent upon all such persons to deduct tax at source and pay such tax deductible at source ['I'DS"] under section 195 of the Income Tax Act. This judgment dated 15.10.2011 has been relied upon by the subsequent impugned judgments passed by the High Court of Karnataka to decide the same question in favour of the Revenue. The appeals before us may be grouped into four categories: i) The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non- resident supplier or manufacturer. ii) The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or manufacturers and then reselling the same to resident Indian end-users. iii) The third category concerns cases wherein the distributor happens to be a foreign, non-resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributors or end-users. iv) The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/ equipment." Hon'ble Supreme Court, considered various arguments advanced by the Revenue as well as the assessee's and came to the conclusion as under: CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAs mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 36 of 37 Income Tax Act to deduct tax at source, as the distribution agreements/EULAs in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the income Ta Act (section 9(1)(vi, along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of these cases. 169. Our answer to the question posed before us, is that the amounts paid by resident Indian end-users/distributors to non-resident computer software manufacturers/ suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. 170.The appeals from the impugned judgments of the High Court of Karnataka are allowed, and the aforesaid judgments are set aside. The ruling of the AAR in Citrix Systems (AJAR) (supra) is set aside. The appeals from the impugned judgments of the High Court of Delhi are dismissed." We note that case of present Assessee falls within the third category analyzed by Hon'ble Supreme Court. Respectfully following the above view by Hon'ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. Vs. CIT (Supra), We hold that purchase of software in the present facts does not amount to give rise to any taxable income in India as the provisions of sec.9(1)(vi) along with Explanation- 2 or the relevant provisions of the Indo-UK DTAA are not applicable to present Assessee's. Accordingly, we allow the relevant ground of appeal. IT(IT)A Nos.11/Bang/2014, 1365 to 1367/Bang/2019 IT(TP)A Nos.382, 1493/Bang/2015, 2135/Bang/2016 Page 37 of 37 36. In the result, the appeals are allowed. Pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (CHANDRA POOJARI) (N.V.VASUDEVAN) ACCOUNTANT MEMBER VICE PRESIDENT Bangalore, Dated : 29.11.2021. /NS/* Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.