Sutherland Global Services P Ltd., CHENNAI V. ITO, CHENNAI

ITA 919/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7976 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 19-11-2015
• Assessment Year: 2012-2013
• Appeal Filed On: 11-04-2014
• Court: TRIBUNAL
• Department Lawyers: M M BHUSARI
• Assessee Lawyers: S SRIDHAR
• Keywords: Business income; Double taxation relief; Non-deduction of tax
• Section: 234B; 27

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , . ' # , $ #% BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER . /ITA NOS. 917 TO 920/MDS/2014 / ASSESSMENT YEARS : 2011-12 AND 2012-13 M/S. SUTHERLAND GLOBAL SERVICES P. LTD., NO.45A, VELACHERY MAIN ROAD, VIJAYANAGARAM, CHENNAI 600 042. PAN AAECS8093A ( /APPELLANT) V. THE INCOME-TAX OFFICER, (INTERNATIONAL TAXATION)-II, CHENNAI. RESPONDENT) / APPELLANT BY : SHRI S. SRIDHAR, ADVOCATE / RESPONDENT BY : SHRI M.M.BHUSARI, CIT ! / DATE OF HEARING : 19.11.2015 '# ! / DATE OF PRONOUNCEMENT : 15.02.2016 & / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS BY THE ASSESSEE ARE DIRECTED AGAIN ST THE COMMON ORDER OF THE COMMISSIONER OF INCOME-TAX(APPE ALS) DATED 3.2.2014 FOR THE ASSESSMENT YEARS 2011-12 AND 2012-13. - - ITA 917 TO 920/14 2 SINCE, THE ISSUES INVOLVED IN THESE APPEALS ARE COM MON, THESE ARE CLUBBED TOGETHER, HEARD TOGETHER AND DISPOSED O FF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IN THESE APPEALS IS WITH REGARD TO CONFIRMING THE FINDING OF THE AO BY THE CIT(APPEALS) HOLDING THAT ASSESSEE IS IN DEFAULT U/ S.201(1) AND 201/(1A) OF THE ACT IN RESPECT OF TAXABILITY OF SOF TWARE BANDWIDTH AND REIMBURSEMENT OF EXPENSES. 3. FIRST, WE TAKE UP THE ISSUE RELATING TO CONFIRMI NG THE ORDER OF THE AO BY THE CIT(APPEALS), HOLDING THAT THE PRO VISIONS OF SEC.9(1)(VI) OF THE ACT, IS APPLICABLE TO THE PAYME NT MADE TO THE SOFTWARE LICENSE BY TREATING THE SAME AS ROYALTY CONCLUDING THAT THE ASSESSEE IS LIABLE FOR DEDUCTION OF TAX U/S.195 OF THE ACT. 4. THE FACTS OF THE CASE ARE THAT T HE ASSESSING OFFICER IN RESPECT OF SOFTWARE PURCHASE HAS OBSERVED THAT THE AMOUNT PAID FOR USAGE OF SOFTWARE IS TAXABLE AS ROYALTY AS PER SECTION 9(L)(VI) OF THE INCOME TAX ACT. HE OBSERVED THAT THE EXAMINATION OF THE VOUCHERS FOR SOFTWARE PURCHA SED REVEALED THAT REMITTANCE IS FOR THE SOFTWARE MAINTE NANCE FEES AND NOT SOFTWARE PURCHASES AND CONCLUDED THAT WHAT - - ITA 917 TO 920/14 3 HAS BEEN PURCHASED IS NOT THE SOFTWARE BUT. THE RIG HT TO USE IT. THE ASSESSING OFFICER ON EXAMINATION OF THE AGR EEMENTS WITH THE SOFTWARE PROVIDERS CONCLUDED THAT THE ASSE SSEE HAS GOT A LICENSE TO USE THE SOFTWARE FOR A PARTICU LAR TENURE SUBJECT TO CERTAIN TERMS AND CONDITIONS. HE DISTINGUISHED THE CASE LAWS RELIED UPON BY THE ASSESSEE IN THE FO LLOWING CASES :. IN THE CASE OF TATA CONSULTANCY SERVICES. (271 ITR 401) AS SEEN FROM THE CONTRACT WITH DNATA, DUBAI, ASSESS EE HAS NOT PURCHASED ANY SOFTWARE READY TO USE AS CONTENDED NOR IS DNATA A SUPPLIER OF OFF THE SHELF SOFTWARE. DNATA IS THE OWNER OF A SOFTWARE CALLED RAPID WHICH IS USED IN PASSENGER REVENUE ACCOUNTING SYSTEM. AS PER THE CONTRACT ENTERED INTO WITH SGS I NDIA DNATA. DUBAI ALLOWS THE LATER TO USE THE SOFTWARE SUBJECT TO CERTAIN TERMS AND CONDITIONS. THE CLIENT M/S SGS INDIA LTD IS BOUND TO PAY THE LICENCE AND USAGE FEES ON QUARTERLY BASIS. HERE, THE PAYMENT MADE IS MAINLY FOR LICENCE CHARGES FOR THE USAGE OF SOFTWAR E AND IT IS DISTINCT FROM PURCHASE OF SOFTWARE. THE AMOUN T PAID FOR THE USAGE OF SOFTWARE IS TAXABLE AS 'ROYALTY' A S PER SECTION 9 (1)(VI) OF THE ACT. THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF MOTOROLA INC (95 ITD 269)[DEL S13] DISTINGUISHED TH E COPYRIGHT OF A SOFTWARE AND COPYRIGHTED SOFTWARE AN D HELD THAT THE PAYMENT FOR A COPYRIGHTED ARTICLE CAN NOT BE TREATED AS ROYALTY AND NOT TAXABLE IN THE HANDS OF THE NON-RESIDENT. THE ABOVE DECISION WAS RENDERED BY TH E AAR, RELATES TO CELLULAR COMPANY EXPLOITING THE SOF TWARE - - ITA 917 TO 920/14 4 RIGHTS., AS, THE CASE THE APPELLANT ENGAGED IN BPO WITH CALL CENTRE OPERATIONS, THE FACTS ARE ENTIRELY DIFF ERENT. AS MAY BE SEEN FROM THE SOFTWARE LICENCE AGREEMENT WIT H DNATA THE APPELLANT WAS PERMITTED TO USE COPYRIGHT THOUGH IT IS NON EXCLUSIVE END NON TRANSFERABLE. AS PER SECTION 9(1)(VI) OF THE ACT ROYALTY MEANS AND INCLU DE THE GRANTING OF ANY LICENSE - - 4.1 THE AO HAS ANALYSED SECTION 9(1)(VL) OF THE ACT AND HAS HELD THAT IN THE INSTANT CASE THOUGH COPYRIGHT VEST S WITH THE OWNER OF THE SOFTWARE, IT ALLOWS THE ASSESSEE TO US E THE SOFTWARE BY GRANTING LICENCE SUBJECT: TO CERTAIN TERMS AND C ONDITIONS. HENCE THE PAYMENT MADE BY THE ASSESSEE, TOWARDS PUR CHASE OF SOFTWARE ARE HELD TO BE ROYALTY FOR USAGE OF SOFT WARE AND TAXABLE IN THE HANDS OF THE NON-RESIDENT. 4.2 THE AO HAS ALSO ANALYSED DTAA OF UAE AND OBSER VED THAT THERE IS NO SPECIFIC CLAUSE OF ROYALTY AND HENCE DOMESTIC LAW WILL PREVAIL. IN RESPECT OF DTAA WITH US. ARTIC LE 12(3) WILL PREVAIL AND SO CONCLUDED THAT AS MAY BE SEEN FROM T HE COPY OF AGREEMENT WITH DNATA AND OTHERS, THE SERVICE PROVID ERS HAVING ABSOLUTE COPYRIGHT HAVE AGREED TO PART WITH THEIR R IGHTS TO USE THE SAME SUBJECT TO CERTAIN TERMS AND CONDITIONS. THE RIGHT OF ALIENATION OF COPYRIGHT, THOUGH FOR LIMITED PURPOSE , IS TANTAMOUNT - - ITA 917 TO 920/14 5 TO ROYALTY AS DESCRIBED IN ARTICLE 12(3) OF THE IND IA USA DTAA. 4.3 THE AO HAS THUS CONCLUDED THAT SOFTWARE LI CENSE FEE ARE TAXABLE U/S.9(1)(VI) OF THE ACT AND ALSO UNDER DTAA . HENCE THERE IS DEFAULT ON THE PART OF THE ASSESSEE TO DEDUCT TA X UNDER SECTION 195 OF THE ACT. AGGRIEVED BY THIS, THE ASSESSEE WE NT IN APPEAL BEFORE THE CIT(APPEALS), WHO CONFIRMED THE FINDING OF THE ASSESSING OFFICER. AGAINST THIS, THE ASSESSEE IS I N APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIAL ON RECORD AND CASE LAW RELIED ON BY THE PARTIES. THE M AIN CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE PUR CHASED CERTAIN OFF THE SHELF SOFTWARE FROM VARIOUS SOFTWAR E SUPPLIERS ON A NON-EXCLUSIVE/NON-TRANSFERABLE BASIS FOR ENABLING T HE CALL RECORDING FOR CERTAIN TIME AS PER THE CONTRACT, FOR PROCESSING THE AIRLINE COUPONS AND OTHER SUCH SERVICES. THE ASSES SEE WAS GIVEN ONLY A COPYRIGHTED ARTICLE AND THE OWNERSHIP OF SUCH SOFTWARE REST WITH THE SUPPLIERS OF THE SOFTWARE AL L THE TIME. ALL THESE SOFTWARE ARE TAKEN ON LICENSE FROM OWNERS OF SOFTWARE AND USED FOR BUSINESS ON A NON-EXCLUSIVE BASIS. ACCORD ING TO HIM, - - ITA 917 TO 920/14 6 THE PAYMENT FOR PURCHASE OF SOFTWARE CANNOT BE CONS IDERED AS PAYMENT OF ROYALTY AS PER THE ACT AS WELL AS APPL ICABLE UNDER DTAA AND THEREBY IT CANNOT BE TREATED AS THE ASSESS EE IS IN DEFAULT FOR NOT WITHHOLDING U/S.195 OF THE ACT BEFO RE MAKING THE PAYMENT. 5.1 ACCORDING TO THE LD. AR, THE ASSESSEE HAS N OT PURCHASED THE IP RIGHTS IN THE SOFTWARE. THE ASSESSEE IS NOT IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND RESALE. THE ASSESSEE H AS MADE PAYMENT TOWARDS SOFTWARE MAINTENANCE FEE AND LICENC E TO USE IT. AS PER EXPLANATION UNDER ARTICLE 12, ROYALTY DEFI NED AS UNDER : TYPICALLY, ARTICLE 12 DEFINES ROYALTIES AS PAYM ENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF , OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTI STIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR W ORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR US E IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING, A NY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL SCIENTIFIC EXPERIENCE, INCLU DING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE, OR DISPOSITION THEREOF: 5.2 AS PER EXPLANATION 4 TO SEC.9(1)(VI) OF THE ACT, THE MAINTENANCE FEES PAID HAS TO BE TREATED AS ROYALTY . THUS, - - ITA 917 TO 920/14 7 WHEN THE ASSESSEE ACQUIRES THE RIGHT TO USE SOFTWAR E, THE PAYMENT SO MADE WOULD AMOUNT TO ROYALTY. HOWEVER , IN CASES WHERE PAYMENTS ARE MADE FOR THE PURCHASE OF SOFTWAR E AS A PRODUCT, THE CONSIDERATION PAID CANNOT BE CONSIDERE D TO BE FOR USE OR THE RIGHT TO USE OF IT. IT IS WELL SETTLED THAT WHERE SOFTWARE IS SOLD AS A PRODUCT, IT WOULD AMOUNT TO SALE OF GO ODS. IN THE CASE OF TATA CONSULTANCY SERVICES V. STATE OF ANDHR A PRADESH (271 ITR 401), THE SUPREME COURT EXAMINED THE TRANS ACTIONS RELATING TO THE PURCHASE AND SALE OF SOFTWARE RECOR DED ON A CD IN THE CONTEXT OF THE ANDHRA PRADESH GENERAL SALES TAX ACT. THE COURT HELD THAT THE SAME TO BE GOODS WITHIN THE MEANING OF SEC.2(B) OF THE SAID ACT AND CONSEQUENTLY EXIGIBLE TO SALES TAX UNDER THE SAID ACT. CLEARLY, THE CONSIDERATION PAI D FOR PURCHASE OF GOODS CANNOT BE CONSIDERED AS ROYALTY. THUS, IT IS NECESSARY TO MAKE A DISTINCTION BETWEEN THE CASES WHERE CONSI DERATION IS PAID TO ACQUIRE THE RIGHT TO USE A PATENT OR A COPY RIGHT AND CASES WHERE PAYMENT IS MADE TO ACQUIRE PATENTED OR A COPY RIGHTED PRODUCT/MATERIAL. IN CASES, WHERE PAYMENTS ARE MADE TO ACQUIRE PRODUCTS WHICH ARE PATENTED OR COPYRIGHTED, THE CON SIDERATION PAID WOULD HAVE TO BE TREATED AS A PAYMENT FOR PURC HASE OF THE - - ITA 917 TO 920/14 8 PRODUCT RATHER THAN CONSIDERATION FOR USE OF THE PA TENT OR COPYRIGHT. IN THE PRESENT CASE, WHAT WAS TRANSFERR ED IS COPYRIGHT AND THE RIGHT TO USE THE COPYRIGHT GIVE RISE TO RO YALTY PAYMENT. BEING SO, IN OUR OPINION, THE FINDING OF THE CIT(AP PEALS) IN OBSERVING THAT GRANTING OF ANY LICENSE TO USE THE S OFTWARE AMOUNTS TO ROYALTY AND THE PROVISIONS OF SEC.9(1) (VI) ARE APPLICABLE. ACCORDINGLY, WE ARE OF THE OPINION THA T THE AUTHORITIES ARE JUSTIFIED IN HOLDING THAT THE ASSESSEE IS IN DE FAULT U/S.201(1)/201(1A) OF THE ACT FOR NON-DEDUCTION OF T.D.S. ON THE IMPUGNED PAYMENT. THIS GROUND OF APPEAL OF THE ASS ESSEE IS DISMISSED. 6. THE NEXT GROUND IN THESE APPEALS IS WITH R EGARD TO NON- PAYMENT OF TDS ON BANDWIDTH CHARGES. 7. THE FACTS OF THE CASE ARE THAT THE AO HA S STATED THAT THERE IS DEDICATED UNDERSEA CABLE. BANDWIDTH CHARGE S ARE CHARGES FOR GETTING A DEDICATED LEASE LINE FOR MAKI NG INTERNATIONAL VOICE BASED CALLS. IT IS STATED BY TH E ASSESSEE THAT THE SERVICES WERE RENDERED OUTSIDE INDIA BY THE SER VICE PROVIDERS I.E WITHIN INDIA THE CONNECTIVITY IS PROVIDED BY BS NL/MTNL ETC. AND BEYOND THE TERRITORY OF INDIA THESE SERVICES AR E PROVIDED BY - - ITA 917 TO 920/14 9 THE FOREIGN TELECOM OPERATORS. THE ASSESSEE HAS ADM ITTED THAT THERE IS A DEDICATED UNDER THE SEA CABLE PROVIDED F OR THE UNINTERRUPTED USE OF SGS PVT LTD. IT IS STATED THAT BASED ON THE CAPACITY UTILIZATION THE PAYMENT IS CHARGED AND THA T THEY ARE TAXABLE AS ROYALTY U/S.9(1)(VI) OF THE ACT. THE SERVICES RENDERED BY THE NON-RESIDENT TOWARDS BANDWIDTH CHARGES ARE T AXABLE AS ROYALTY AS PER SECTION 9(I)(VI) OF THE ACT. SINCE T HE PAYMENT IS MADE FOR USE OF ANY PATENT, INVENTION MODEL OR DESI GN SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERT Y, THESE SERVICES ARE TAXABLE AS ROYALTY. FURTHER IN EXPLA NATION 6 TO SECTION 9(1) (VI) OF THE ACT, IT IS STATED THAT 'P ROCESS' INCLUDES AND SHALL BE DEEMED TO HAVE ALWAYS INCLUDED TRANSMISSION BY SATELLITE (INCLUDING UP-LINKING, AM PLIFICATION. CONVERSION FOR DOWN-LINKING OF ANY SIGNAL), CABLE, OPTIC FIBRE OR BY ANY OTHER SIMILAR TECHNOLOGY, WHETHER OR NOT SUCH P ROCESS IS SECRET. 7.1 IT IS NOTICED THAT IN THE CERTIFICATION GIVEN BY THE CA IN FORM 15CB, IT IS STATED THAT SINCE SERVICES ARE REN DERED OUTSIDE INDIA, IT IS NOT TAXABLE AND NO TDS HAS BEE N DEDUCTED. THIS IS NOT ACCEPTABLE TO THE A.O., IN VI EW OF THE - - ITA 917 TO 920/14 10 EXPLANATION TO SECTION 9(1) OF THE ACT. AS FAR AS R OYALTY AND FEES FOR TECHNICAL SERVICES ARE CONCERNED, IT IS TAXABLE IRRESPECTIVE OF THE FACT WHETHER THE SERVICES ARE RENDERED IN INDIA OR THE NON- RESIDENT HAS A PERMANENT PLACE OF ESTABLISHMENT IN INDIA. THUS, SO ALONG AS THE SERVICES RENDERED BY THE NON-RESIDE NT ARE UTILIZED BY THE INDIAN COMPANY IT IS TAXABLE AND AT TRACTS TDS. IN VIEW OF THE ABOVE IT IS CLEAR THAT THE BANDWIDTH CH ARGES PAID BY THE ASSESSEE ARE CHARGEABLE TO TAX IN THE HANDS OF THE NON- RESIDENT AS ROYALTY AND THEREFORE, ASSESSEE IS LI ABLE TO DEDUCT TAX ON THE SAID PAYMENT AS PER SECTION 195 OF THE A CT. THEREFORE, THE AO CALLED FOR DETAILS AND THE QUESTI ON NOS.7 & 45 AND ITS REPLY ARE AS FOLLOWS : QUESTION NO. 7 : PLEASE EXPLAIN THE TRANSACTIONS R ELATING TO BANDWIDTH CHARGES, TELECOMMUNICATION CHARGES, CONNECTIVITY CHARGES AND WHY TDS HAS NOT BEEN DEDUC TED ON THESE PAYMENTS ANSWER NO. 7 : AS ALREADY STATED TELECOMMUNICATION CHARGES/CONNECTIVITY ARE BROAD TERMINOLOGY WHICH RE LATE TO THE USAGE OF THE COMMUNICATION LINKS PROVIDED BY TELECOMMUNICATION OPERATORS FOR TRANSPORTING VOICE AND DATA. BANDWIDTH CHARGES REFER TO THE USAGE OF LINKS WHICH ARE TYPICALLY TAKEN FROM US COMPANIES FOR TRANSPORT ING VOICE AND DATA TO INDIA. IN RESPECT OF DIALLING OUT TO CUSTOMERS IN THE US OR OTHER COUNTRIES, THE TELECOM OPERATORS SEPARATELY CHARGE FOR CALL CHARGE S FOR THE DURATION OF THE CALLS. THESE ARE COVERED UNDER THE ABOVE 3 CATEGORIES. SINCE THESE ARE SERVICES IN {HE NATURE - - ITA 917 TO 920/14 11 OF UTILITY SERVICES LIKE ELECTRICITY, IN OUR OPINIO N, THEY ARE NOT LIABLE FOR TDS. QUESTION NO 45 : FROM THE PERUSAL OF THE FORM 15CA AND 15CB IT IS SEEN THAT A SUM OF ` 53,17, 15,836/- HAS BEEN PAID TO VARIOUS NON- RESIDENTS TOWARDS BANDWIDTH CH ARGES DURING 11-12. PLEASE EXPLAIN THE NATURE OF THE PAYM ENT AND WHY NO TDS HAS BEEN MADE ON THE SAID TRANSACTION. ANSWER NO. 45: CONNECTIVITY AND BANDWIDTH CHARGES R EFER TO THE PAYMENT FOR LEASE LINE CIRCUITS PROVIDED BY THE TELECOM COMPANIES ABROAD. THOSE ARE USED FOR TRANSPORTING VOICE AND DATA FOR OUR BPO OPERATIONS. THESE ARE IN THE NATURE OF UTILITY SERVICES AND DO NOT COME. UNDER ROYALTY OR TECHNICAL SERVICES AND HENCE NO TD S HAS BEEN MADE. FROM THE DETAILS YOU HAD SHOWN TO ME IT IS SEEN THAT THERE ARE PAYMENTS FOR NON-TELECOM COMPAN IES. WE WILL LOOK INTO THAT AND REVERT BACK WITH DETAILS BY 31 JAN 2013. 7.3 IT IS FURTHER STATED THAT THESE ARE IN THE NATU RE OF UTILITY SERVICES AND THERE IS NO TECHNOLOGY MADE AV AILABLE TO THE ASSESSEE AND THERE ARE SEVERAL DECISIONS TO SUPPORT THIS VIEW AND HENCE NO TAX HAS BEEN DEDUCTED. THE AO HAS ALS O HELD THAT AS PER ARTICLE 12(3) OF INDO US DTAA, THE PAYM ENTS ARE TAXABLE IN INDIA. AS PER ARTICLE 12 (3) INDO USA D TAA, THE PAYMENT MADE FOR BANDWIDTH CHARGES ARE TAXABLE IN I NDIA. THE RELEVANT PARA DEFINING THE MEANING OF THE TERM ROY ALTIES IN THE SAID DTAA READS AS UNDER: THE TERM ROYALTIES AS USED IN THIS ARTICLE MEANS: - - ITA 917 TO 920/14 12 PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FO R THE USE OF: OR THE RIGHT TO USE, ANY COPYRIGHT OF A LITERARY, ARTISTIC, OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS OR WORK ON FILM, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RA DIO OR TELEVISION BROADCASTING, ANY PATENT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, O R FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, INCLUDING GAINS DERIVED FROM THE ALIENATION OF ANY SUCH RIGHT OR PROPERTY WHICH ARE CONTINGENT ON THE PRODUCTIVITY, USE, OR DISPOSITION THEREOF. HENCE THE AO OBSERVED THAT TDS SHOULD HAVE BEEN MAD E AND FAILURE TO DEDUCT T.D.S. IS RESULTED TREATING THE A SSESSEE IN DEFAULT U/S.201(1)/201(1A) OF THE ACT. AGGRIEVED B Y THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS). 8. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE CR UX OF THE ENTIRE GAMUT OF THE ISSUE HARPING AROUND IN THE PRE SENT CASE CONVERGES TO THE FOLLOWING OBSERVATION OF THE COURT VIZ., 'MERELY BECAUSE THE SERVICE IS PROVIDED THROUGH SOPHISTICAT ED TECHNICAL EQUIPMENT, IT DOES NOT BY ITSELF, RENDER THE SERVICE AS A TECHNICAL SERVICE.' THE CIT(APPEALS) FURTHER OB SERVED THAT THE ASSESSEE IS ALSO TAKING THE FOLLOWING 'QUOTE' TO IT S RESCUE. 'IN THE MODERN DAY WORLD, ALMOST EVERY FACET OF ON E'S LIFE IS LINKED TO SCIENCE AND TECHNOLOGY INASMUCH AS NUMERO US THINGS USED OR RELIED UPON IN EVERYDAY LIFE IS THE RESULT OF SCIENTIFIC AND TECHNOLOGICAL DEVELOPMENT. EVERY INS TRUMENT OR GADGET THAT IS USED TO MAKE LIFE EASIER IS THE R ESULT OF - - ITA 917 TO 920/14 13 SCIENTIFIC' INVENTION OR DEVELOPMENT AND INVOLVES T HE USE OF TECHNOLOGY. ON THAT SCORE, EVERY PROVIDER OF EVERY INSTRUMENT OR FACILITY USED BY A PERSON CANNOT BE R EGARDED AS PROVIDING TECHNICAL SERVICE. TECHNICAL SERVICE R EFERRED IN SECTION 9(1)(VII) CONTEMPLATES RENDERING OF A 'SERV ICE' TO THE PAYER OF THE FEE. MERE COLLECTION OF A 'FEE' FOR U SE OF A STANDARD FACILITY PROVIDED TO ALL THOSE WILLING TO PAY FOR IT DOES NOT AMOUNT TO THE FEE HAVING BEEN RECEIVED FOR TECHNICAL SERVICES'. 8.1 ACCORDING TO THE CIT(APPEALS), THERE IS NO DENI AL BY THE ASSESSEE THAT .THE 'BANDWIDTH CHARGES' WERE PAID TO THE PROVIDER OF A DEDICATED BANDWIDTH - A SCIENTIFICALL Y DEVELOPED TECHNOLOGICAL ARRANGEMENT CONSISTING OF 'UNDER THE SEA CABLE' TOGETHER WITH NECESSARY EQUIPMENT - FOR THE SEAMLESS USAGE BY IT. THE PAYMENTS WERE MADE BY THE ASSESSEE TO THE NON-RESIDENT PROVIDER TOWARDS BANDWIDTH CHARGES. TH ERE IS ALSO NO DENIAL BY THE ASSESSEE THAT IT ENJOYED THE UNINT ERRUPTED RIGHT TO USE THE BANDWIDTH. THE APPELLANT HAS ALWAYS BEEN AT EASE TO HAVE FACT TO FACE OPERATIONAL CONTACT WITH THE EQUI PMENT. THE ASSESSEE PAID THE BANDWIDTH CHARGES AS CONSIDERATIO N FOR USING THE BANDWIDTH. THE POINT-TO-POINT COMMUNICATI ON COULD BE POSSIBLY ESTABLISHED AS PER THE REQUIREMENTS OF THE ASSESSEE ONLY BY THE COMMISSIONING OF THE BANDWIDTH COMMUNICATION LINE. - - ITA 917 TO 920/14 14 8.2 THE CIT(APPEALS) OBSERVED THAT IT IS IMMATERIAL THAT THE RIGHT TO USE THE DEDICATED BANDWIDTH WAS UNDER THE CONTROL OF THE PROVIDER OR NOT. BUT INDISPUTABLY NOTICEABLE F ACT IN THIS CASE IS THAT THE ASSESSEE HAS BEEN ENJOYING A SIGNIFICAN T ECONOMIC AND COMMERCIAL INTEREST IN THE BANDWIDTH HIRED BY I T. THE BANDWIDTH CAPACITY MADE AVAILABLE ON A DEDICATED BA SIS TO THE ASSESSEE, EVEN IF IT DOES NOT INVOLVE A POSSESSORY INTEREST, THE AMOUNT PAID IS ALSO FOR THE USE OF PROCESS. THE D EFINITION OF 'ROYALTY' UNDER DTAA AND I.T. ACT ARE IN PARI MATER IA. AS PER EXPLANATION 6 U/S 9(1)(VI) OF THE ACT, POSSESSION, CONTROL, ETC. OF SUCH RIGHT ON THE DEDICATED BANDWIDTH LINE ARE NOT MATTERS OF CONCERN IN DECIDING THE CHARACTER OF PAYMENT AS 'RO YALTY'. THE ASSESSEE 'NO DOUBT ENJOYED THE RIGHT TO USE THE TRANSMISSION BY CABLE OR OPTIC FIBRE OR SATELLITE A S THE CASE MAY BE. THIS USAGE/USE BY THE ASSESSEE OF THE COMMUNIC ATION FACILITY ENABLED BY SATELLITE LINKS AND CABLE THROU GH THE BANDWIDTH LINE IS NOTHING BUT USING THE PROCESS AS PER EXPLANATION 2(III) U/S 9(L)(VI) OF THE I.T. ACT, AN D THEREFORE. THE CONSIDERATION PAID THEREOF IS 'ROYALTY'. THE PAYMEN T UNDER CONSIDERATION IS FOR THE USE OR RIGHT TO USE OF THE - - ITA 917 TO 920/14 15 EQUIPMENT OF BANDWIDTH AND HENCE IT SHALL QUALIFY T O BE ROYALTY FOR THE USE OF THE PROCESS. THE USE OF 'PROCESS' WAS PROVIDED TO THE ASSESSEE THOUGH THE ASSURED BANDWID TH FOR GUARANTEEING THE ASSESSEE THE TRANSMISSION OF THE D ATA AND VOICE. THUS THE 'BANDWIDTH CHARGES' BEING CONSIDERA TION, FOR THE USE AND THE RIGHT TO USE OF THE PROCESS, IS 'ROYALT Y' WITHIN THE MEANING OF CLAUSE (III) OF EXPLANATION 2 TO SEC.9(1 )(VI) OF THE I.T. ACT, 1961. THE PAYMENTS MADE FOR PROVIDING COMMUNIC ATION BANDWIDTH SHALL BY ALL MEANS, INCLUDING THE DTAA, R OYALTY. ACCORDING TO THE CIT(APPEALS), THE PAYMENTS OF 'BAN DWIDTH CHARGES' FOR THE USE OF THE CIRCUIT OF DEDICATED CO MMUNICATION BANDWIDTH PAID BY THE ASSESSEE SHALL BE 'ROYALTY' A ND TAXABLE INCOME IN THE HANDS OF THE NON-RESIDENT U/S 9(1)(VI ) OF THE I.T. ACT, THE ASSESSEE SHOULD HAVE DEDUCTED THE TAX AT S OURCE BEFORE PAYING THE BANDWIDTH CHARGES, WHICH IT FAILE D TO DO SO. THEREFORE, THE CIT(APPEALS) DID NOT ACCEPT THE CONT ENTIONS OF THE LD. AR AND CONFIRMED THE FINDING OF THE AO. AG AINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 9. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIAL ON - - ITA 917 TO 920/14 16 RECORD AND CASE LAW RELIED ON BY THE PARTIES. IN OUR OPINION, SIMILAR ISSUE WAS CONSIDERED BY THE MADRAS HIGH COU RT IN THE CASE OF VERIZON COMMUNICATIONS SINGAPORE PTE. LTD. V. ITO(INTERNATIONAL TAXATION) [361 ITR 575], WHEREIN IT WAS OBSERVED AS UNDER : UNDER SECTION 9(1)(VI)(B) OF THE INCOME-TAX ACT, 1 961,WHERE INCOME BY WAY OF ROYALTY IS PAYABLE BY A PERSON WHO IS A RESIDENT TO A NON-RESIDENT, IT SHALL BE TAXABLE AS INCOME UNDER THE PROVISIONS OF THE ACT. EXPLANATION 2 TO S UB-CLAUSE (VI) GIVES THE DEFINITION OF ROYALTY. ROYALTY M EANS THE CONSIDERATION FOR TRANSFER OF INTELLECTUAL PROPERTY RIGHTS, FOR IMPARTING ANY INFORMATION REGARDING THE WORKING OF, OR THE USE OF THE INTELLECTUAL PROPERTY RIGHTS, USE OF ANY INTELLECTUAL PROPERTY, IMPARTING ANY INFORMATION CONCERNING TECH NICAL, INDUSTRIAL, COMMERCIAL, SCIENTIFIC KNOWLEDGE, EXPER IENCE OR SKILL ; USE OR RIGHT TO USE ANY INDUSTRIAL, COMMERC IAL OR SCIENTIFIC EQUIPMENT BUT NOT INCLUDING THE AMOUNTS REFERRED TO IN SECTION 44BB, TRANSFER OF ALL OR ANY RIGHTS I NCLUDING THE GRANTING OF A LICENCE IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDE O TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADIO BROADCASTING BUT NOT INCLUDIN G CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBIT ION OF CINEMATOGRAPHIC FILMS OR RENDERING OF ANY SERVICES IN CONNECTION WITH THE ACTIVITIES REFERRED TO IN SUB-C LAUSES (I) TO (IV), (IVA) AND (V). THE AMENDMENT RELATING TO ROY ALTY, PARTICULARLY THE REFERENCE TO USE OR RIGHT TO USE A NY INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EQUIPMENT, ETC ., WAS INSERTED WITH EFFECT FROM APRIL 1, 2002, BY THE FIN ANCE ACT, 2001. EXPLANATIONS 4 AND 5 WERE INSERTED BY THE FIN ANCE ACT, 2012, WITH EFFECT FROM JUNE 1, 1976. UNDER EXP LANATION 5, THE LEGISLATURE SOUGHT TO CLARIFY THE DEFINITION OF ROYALTY TO INCLUDE CONSIDERATION IN RESPECT OF ANY RIGHT, P ROPERTY OR INFORMATION WHETHER OR NOT POSSESSION OR CONTROL OF SUCH - - ITA 917 TO 920/14 17 RIGHT, PROPERTY OR INFORMATION IS WITH THE PAYER, S UCH RIGHT, PROPERTY OR INFORMATION IS USED DIRECTLY BY THE PAY ER, THE LOCATION OF SUCH RIGHT, PROPERTY OR INFORMATION IS IN INDIA. EXPLANATION 6 FURTHER CLARIFIES THAT THE EXPRESSION PROCESS INCLUDED TRANSMISSION BY SATELLITE (INCLUDING UP-LI NKING, AMPLIFICATION, CONVERSION FOR DOWN-LINKING OF ANY S IGNAL), CABLE, OPTIC FIBRE OR BY ANY OTHER SIMILAR TECHNOLO GY, WHETHER OR NOT SUCH PROCESS IS SECRET. THUS, AFTER THE AMEN DMENT INTRODUCED IN THE YEAR 2012, WITH EFFECT FROM JUNE 1, 1976, IRRESPECTIVE OF POSSESSION, CONTROL WITH THE PAYER OR USE BY THE PAYER OR LOCATION IN INDIA, THE CONSIDERATION W OULD NEVERTHELESS BE TREATED AS ROYALTY. THE ASSESSEE, A NON-RESIDENT COMPANY, WAS ENGAGED I N THE BUSINESS OF PROVIDING INTERNATIONAL CONNECTIVITY SE RVICES (BANDWIDTH SERVICES OR TELECOM SERVICES) IN THE ASI A PACIFIC REGION INCLUDING TO CUSTOMERS IN INDIA FOR TRANSMIS SION OF DATA AND VOICE. THE AGREEMENT BETWEEN THE ASSESSEE AND THE CUSTOMER, CALLED SERVICE ORDER FORM, GAVE THE N ATURE OF SERVICE CONTRACTED TO BY THE CUSTOMER AND THE TERMS SUBJECT TO WHICH SERVICES WERE GIVEN. THE DATA SERVICE ORDE R FORM STATED THAT IT SHALL BE READ IN CONJUNCTION WITH TH E TERMS OF THE ASIA PACIFIC MASTER TERMS AND CONDITIONS, WHICH THE CUSTOMER AGREED PRIOR TO EXECUTING THE SERVICE ORDE R. THE ASIA PACIFIC MASTER TERMS AND CONDITIONS, THE PAREN T DOCUMENT, WHICH GOVERNED THE PROVISION OF SERVICES TO THE CUSTOMERS BY MCI-IN THE ASIA PACIFIC REGION, GAVE T HE SCOPE OF THE AGREEMENT AS CONCERNING (A) MASTER TERMS AND CONDITIONS, (B) SPECIFIC TERMS WHICH APPLIED TO PAR TICULAR CATEGORIES OF SERVICE AS ATTACHED IN THE SCHEDULE T O THE MASTER TERMS, AND (C) THE SERVICE ORDER. TO THE EXT ENT THAT THERE WAS ANY INCONSISTENCY BETWEEN THE TERMS SET O UT IN (A), (B) AND (C), THE SERVICE ORDER WOULD PREVAIL O VER THE SCHEDULE AND MASTER TERMS. EACH SERVICE ORDER ISSUE D AND ACCEPTED PURSUANT TO THE TERMS OF THE AGREEMENT WOU LD CREATE AN INDIVIDUAL CONTRACT RELATIONSHIP BETWEEN THE PARTIES TO SUCH SERVICE ORDER. THE RELATIONSHIP WOU LD BE GOVERNED BY THE MASTER TERMS AND SCHEDULES TOGETHER WITH RELEVANT SERVICE ORDER IN ADDITION TO THE PROVISION S SET FORTH IN THE AGREEMENT; THE SERVICE WOULD ALSO BE SUBJECT TO ALL - - ITA 917 TO 920/14 18 MANDATORY LOCAL LAW REQUIREMENTS, INCLUDING BUT NOT LIMITED TO THE REGULATORY AND DATA PROTECTION REQUIREMENTS IN THE RESPECTIVE COUNTRIES. THE INTERNATIONAL LEG OF THE TELECOM SERVICES PROVIDED OUTSIDE INDIA WAS PROVIDED BY THE ASSESSEE. SINCE IN INDIA, UNDER THE INDIAN TELECOMMUNICATIONS REGULATIONS, ONLY LICENSED SERVI CE PROVIDERS COULD PROVIDE INTERNATIONAL LONG DISTANCE COMMUNICATION SERVICES ON THE INDIAN LEG, AND THE A SSESSEE WAS NOT A LICENSED SERVICE PROVIDER UNDER THE INDIA N LAWS, VIDESH SANCHAR NIGAM LIMITED (VSNL) A PUBLIC SECTOR UNDERTAKING PROVIDED THE INDIAN LEG OF THE INTERNAT IONAL SERVICE TO THE CUSTOMERS. THUS, A CUSTOMER INTEREST ED IN TAKING A LEASE CONNECTION BETWEEN ITS OFFICE IN IND IA AND AN OVERSEAS LOCATION ENTERED INTO AN ARRANGEMENT WITH THE ASSESSEE FOR THE PROVISION OF INTERNATIONAL CONNECT IVITY IN THE OVERSEAS LEG AND WITH VSNL FOR THE INDIAN HALF OF T HE CONNECTIVITY. VSNL TRANSMITTED THE TRAFFIC OF THE C USTOMER IN INDIA FROM THE CUSTOMER'S OFFICE IN INDIA TO A VIRT UAL POINT OUTSIDE INDIA AND THE ASSESSEE TRANSMITTED IT UP TO THE CUSTOMER LOCATION OUTSIDE INDIA. THE ASSESSEE USED ITS TELECOM SERVICE EQUIPMENT SITUATED OUTSIDE INDIA IN PROVIDING THE INTERNATIONAL HALF CIRCUIT. THE GATEW AY/THE LANDING STATION IN INDIA USED IN TRANSMITTING THE T RAFFIC WITHIN INDIA BELONGED TO VSNL AND WAS USED BY VSNL FOR PROVIDING INDIAN END SERVICES PURSUANT TO ITS CONTR ACT WITH THE CUSTOMER. THE ASSESSING OFFICER CAME TO THE CON CLUSION THAT THE PAYMENT RECEIVED BY THE ASSESSEE IN PROVID ING INTERNATIONAL PRIVATE LEASED CIRCUIT WAS TAXABLE AS ROYALTY FOR USE OF OR RIGHT TO USE OF COMMERCIAL AND SCIENT IFIC EQUIPMENT UNDER SECTION 9(1)(VI) OF THE ACT READ WI TH EXPLANATION 2 THERETO, AND ARTICLE 12(3) OF THE DOU BLE TAXATION AVOIDANCE AGREEMENT (DTAA) BETWEEN INDIA A ND SINGAPORE REJECTING THE ASSESSEES CONTENTION THAT THE PAYMENT WAS NOT ROYALTY OR PAYMENT MADE FOR PROVIDI NG TECHNICAL SERVICES AND THAT THE QUESTION OF ANY LIA BILITY TO PAY ADVANCE TAX OR INTEREST UNDER SECTION 234B OF THE A CT DID NOT ARISE. THE ASSESSEE APPEALED TO THE COMMISSIONER (APPEALS), WHO CONFIRMED THE ORDER OF THE ASSESSING OFFICER. ON FURTHER APPEAL, THE TRIBUNAL HELD THAT EVEN IF T HE PAYMENTS WERE TREATED AS NOT RELATING TO THE USE OF - - ITA 917 TO 920/14 19 EQUIPMENT, THEY SHOULD BE CONSIDERED AS PAYMENT FOR THE USE OF PROCESS, THAT THE PAYMENTS WERE FOR THE USE OF TANGIBLE EQUIPMENT AND COULD BE CONSIDERED AS PAYME NT FOR THE USE OF OR RIGHT TO USE INDUSTRIAL, COMMERCIAL A ND SCIENTIFIC EQUIPMENT, THAT THE DEDICATED BANDWIDTH WAS SET ASI DE BY THE SERVICE PROVIDER FOR THE EXCLUSIVE USE OF THE C USTOMER. THE TRIBUNAL CONFIRMED THE VIEWS OF THE ASSESSING O FFICER. ON APPEAL TO THE HIGH COURT : HELD, DISMISSING THE APPEALS, THAT THE RECEIPTS WER E LIABLE TO BE TREATED AS ROYALTY FOR THE USE OF INTERNATIONA L PRIVATE LEASED CIRCUIT UNDER SECTION 9(1)(VI) READ WITH EXP LANATION 2(IVA) AND CORRESPONDINGLY ARTICLE 12(3) OF THE DTA A BETWEEN INDIA AND SINGAPORE. EVEN IF THE PAYMENT WA S NOT TREATED AS ONE FOR THE USE OF THE EQUIPMENT, THE US E OF THE PROCESS WAS PROVIDED BY THE ASSESSEE, WHEREBY THROU GH THE ASSURED BANDWIDTH THE CUSTOMER WAS GUARANTEED T HE TRANSMISSION OF THE DATA AND VOICE. THE FACT THAT T HE BANDWIDTH WAS SHARED WITH OTHERS HAD TO BE SEEN IN THE LIGHT OF THE TECHNOLOGY GOVERNING THE OPERATION OF THE PR OCESS AND ITSELF DID NOT TAKE THE PAYMENT OUT OF THE SCOP E OF ROYALTY. THUS, THE CONSIDERATION BEING FOR THE USE AND THE RIGHT TO USE THE PROCESS, IT WAS ROYALTY WITHIN T HE MEANING OF CLAUSE (III) OF EXPLANATION 2 TO SECTION 9(1)(VI ) OF THE ACT. THIS WAS BECAUSE : (I) THE SERVICE AGREEMENT WITH THE CUSTOMER, SERVIC E AGREEMENT WITH VSNL AND THE ONE BETWEEN THE CUSTOME R AND VSNL, WERE PART AND PARCEL OF ONE COMPOSITE AGREEMENT SPLIT INTO FOUR FOR THE PURPOSES OF CONVE NIENCE AND THE NATURE OF SERVICES TO BE OFFERED THROUGH TH E DIFFERENT AGENCIES HAVING A BEARING ON EACH OTHER. THE ULTIMA TE AIM, HOWEVER, WAS TO GIVE THE CUSTOMER A POINT-TO-POINT PRIVATE LINE TO COMMUNICATE BETWEEN OFFICES THAT WERE GEOGRAPHICALLY DISPERSED THROUGHOUT THE WORLD FOR T HE PURPOSES OF ACCESSING BUSINESS DATA EXCHANGE, VIDEO CONFERENCING OR ANY OTHER FORM OF TELECOMMUNICATION . THE PARTIES HAD AGREED TO ONE STOP SHOPPING, WHICH AL LOWED AN ORGANISATION, NAMELY, THE CUSTOMER TO PLACE A SINGL E ORDER WITH A SINGLE CARRIER FOR TWO PRIVATE LEASED CIRCUI TS FOR TWO - - ITA 917 TO 920/14 20 OFFICES IN TWO DIFFERENT COUNTRIES, HERE THE INDIAN HALF BY VSNL AND THE OTHER HALF BY MCI. THE CONTRACT ENSURE D THAT THE CUSTOMER HAD AN ACTIVE INTERNET DEDICATED TO TH AT PARTICULAR CUSTOMER AT A PARTICULAR SPEED AGREED UP ON. VSNL WAS A PROVISIONING ENTITY WHOSE SERVICES THE ASSESSEE HAD TO DIRECT THE CUSTOMER TO AVAIL OF, SI NCE AS PER THE INDIAN LAW, THE ASSESSEE WAS NOT THE LICENSED O PERATOR IN THE INDIAN HALF CIRCUIT. THE ARRANGEMENT BETWEEN THE ASSESSEE AND VSNL HAD TO BE NECESSARILY INTEGRATED AND TECHNICALLY AND FINANCIALLY VIABLE HAVING REGARD TO THE CLOSE FUNCTIONAL RELATIONSHIP BETWEEN THE TWO. THUS, THE SERVICE AGREEMENT ASSURING THE SERVICE WAS POSSIBLE AND WOR KABLE ONLY WHEN THE ASSESSEE AND VSNL WERE CONSIDERED AS RENDERING THE SERVICE JOINTLY IN THEIR RESPECTIVE L EG. THUS, THE TWO HALFS BEING MIRROR IMAGES OF EACH OTHER AND GOI NG BY THE TERMS OF THE AGREEMENTS, THE ASSESSEE RENDERED SERVICE IN INDIA AND THE CONSIDERATION RECEIVED ATTRACTED T HE INCIDENCE OF TAXATION IN INDIA. (II) BANDWIDTH IS DEFINED AS THE AMOUNT OF TRAFFIC THAT IS ALLOWED TO OCCUR BETWEEN THE CUSTOMER WEBSITE AND T HE REST OF THE INTERNET. A USER HAVING A PARTICULAR INTERNA TIONAL PRIVATE LEASED CIRCUIT SERVICE CONNECTION HAS A DED ICATED BANDWIDTH BETWEEN THE COMPUTER AND THE INTERNET PRO VIDER THOUGH THE PROVIDER ITSELF MAY HAVE 1000 SUCH SERVI CE CONNECTIONS TO OTHER LOCATION. THE SERVICE PROVIDER HAS TO HAVE ENOUGH BANDWIDTH TO SERVE A PERSON'S COMPUTING NEEDS AS WELL AS ALL OF ITS OTHER CUSTOMERS. THUS, BEING HIGH SPEED INTERNET CONNECTION, TO ACHIEVE THIS, THE EQU IPMENT AT THE CUSTOMER'S END MUST HAVE THE CAPACITY TO SEND A ND RECEIVE DATA AT THE REQUIRED SPEED. IN ORDER THAT T HE CONTRACTED BANDWIDTH WAS PROVIDED, THE MASTER AGREE MENT READ WITH THE SERVICE ORDER CLEARLY GAVE THE SELECT ED BANDWIDTH FOR EACH CUSTOMER WHICH WAS ASSUMED END-T O- END AND TO THIS END, THE EQUIPMENT AT THE CUSTOMER' S END WAS DELIVERED BY THE ASSESSEE ITSELF. THE CUSTOMER' S RESPONSIBILITY AS STATED IN THE AGREEMENT THUS POIN TED OUT THAT DURING THE CURRENCY OF THE AGREEMENT, THE CUST OMER COULD NOT IN ANY MANNER TINKER WITH IT OR ITS RIGHT S IN ANY MANNER ALIENATED. THERE WAS USE OF EQUIPMENT AND CA BLE IN - - ITA 917 TO 920/14 21 THE TRANSMISSION OF THE DATA/VOICE FROM ONE END TO THE OTHER AND IT WAS DIFFICULT TO ACCEPT THE CASE OF THE ASSE SSEE THAT THE NATURE OF TRANSACTION WAS ONLY THAT OF SERVICE. THE AGREEMENT PROVIDED AN INDEFEASIBLE RIGHT TO THE CUS TOMER TO USE THE FACILITY OF COMMUNICATING THE DATA/VOICE AN D HAD AN INTERNET IN THE MATCHING HALF CIRCUITS FOR PROVIDIN G THE REQUIRED TELECOMMUNICATION SERVICES AT THE ASSURED SPEED. THUS THE EFFICACY OF TRANSMITTING DATA/VOICE DEPEND ED ON THE ORIGINATING SIGNAL FROM THE CUSTOMERS END WHICH ME ANT THERE WAS THE USE OF THE EQUIPMENT BY THE CUSTOMER INSTALLED BY THE ASSESSEE. IN THE CIRCUMSTANCES, TH E ASSESSEE COULD NOT BE CONSIDERED MERELY TO BE PROVI DING THE SERVICE TO THE CUSTOMER. (III) ALTHOUGH THE AGREEMENT BETWEEN THE ASSESSEE A ND VSNL STATED THAT ONE WAS NOT THE AGENT OR THE REPRESENTATIVE OF THE OTHER, THIS DID NOT MEAN THAT VSNL HAD PROVIDED ITS SERVER INDEPENDENTLY WITHOUT ANY CONNE CTION WHATSOEVER WITH THE SERVICE ORDER THAT THE CUSTOMER PLACED WITH THE ASSESSEE. A READING OF THE SERVICE AGREEME NT SHOWED THAT THE PARTIES AGREED THAT THE PROVISIONIN G ENTITIES IN THE INDIAN HALF CIRCUIT SHALL BE VSNL AND IN GET TING THE SEAMLESS END-TO-END CONNECTIVITY, THE CUSTOMER ENTE RED INTO A FURTHER AGREEMENT WITH VSNL. IF THE AGREEMENT WIT H VSNL HAD TO HAVE NO RELEVANCE OR REFERENCE TO THE CUSTOM ER AGREEMENT WITH THE ASSESSEE, THERE WAS NO NEED AT A LL IN THE SERVICE AGREEMENT TO REFER TO VSNL AS THE PROVI SIONING ENTITY OR FOR THAT MATTER TO GO FOR ONE-STOP SHOPPI NG. THUS, THE END-TO-END PROVISIONING IN ONE SINGLE CIRCUIT W AS ASSURED BY THE ASSESSEE AND IF BY REASON OF ANY REGULATORY LAWS OF THE COUNTRY THE ASSESSEE WAS UNABLE TO EXTEND ITS S ERVICE BY ITSELF BUT WENT FOR SUCH OTHER LICENSED AUTHORIT Y, IT DID SO ONLY AS A PROVISIONING ENTITY TO MAKE UP FOR THE GA P CAUSED BY THE STATUTORY LIMITATION ON THE LICENCE AND THUS IT DID NOT MEAN THAT THESE FACILITIES WERE INDEPENDENT HAVING NO CONNECTION AND RELEVANCE WHATSOEVER TO THE CONNECTI VITY OFFERED BY THE ASSESSEE. THE VARIOUS CONTRACTS EXEC UTED PURSUANT TO THE SERVICE CONTRACT WITH THE CUSTOMER WERE CLOSELY LINKED TO THE SINGLE TRANSACTION OF PROVIDI NG END-TO- END INTERNATIONAL PRIVATE LEASED CIRCUIT FACILITY T O THE - - ITA 917 TO 920/14 22 CUSTOMER AND IN ORDER TO EXECUTE THEM, IF THE ASSES SEE HAD TO ENTER INTO SEVERAL AGREEMENTS OR SUB-AGREEMENTS, SUCH AGREEMENTS COULD NOT BE LOOKED AT IN ISOLATION HAVI NG NO RELEVANCE TO THE SERVICE AGREEMENT. PROVIDING SERVI CE WAS NOT POSSIBLE WITHOUT THE USE OF THE EQUIPMENT ENSUR ING THE ASSURED BANDWIDTH FOR TRANSMISSION OF DATA AND VOIC E WHICH PROVIDED THE INTERNET ACCESS TO THE CUSTOMER TO AND FRO. (IV) AFTER THE INSERTION OF EXPLANATION 5, POSSESSI ON, CONTROL OF SUCH RIGHT, PROPERTY OR INFORMATION USAGE DIRECT LY BY THE PAYER, LOCATION OF THE RIGHT WERE NOT MATTERS OF CO NCERN IN DECIDING THE CHARACTER OF PAYMENT AS ROYALTY AND BUT FOR THE USE OF THE CONNECTIVITY BY THE PAYER, THE SERVI CE AGREEMENT ITSELF HAD NO MEANING. THE CUSTOMER HAD A SIGNIFICANT ECONOMIC INTEREST IN THE ASSESSEE'S EQU IPMENT TO THE EXTENT OF THE BANDWIDTH HIRED BY THE CUSTOMER. THE SERVICE ORDER FORM SHOWED THE CUSTOMER CONTRACTING FOR INTERNATIONAL PRIVATE LEASED CIRCUIT SERVICE AND MC I-WAS APPOINTED AS ITS AGENT AS REGARDS THE PROVISION OF DIRECT SUPPLY SERVICE. THE ONE STOP SHOPPING WAS A FACILIT Y WHICH THE CUSTOMER WAS PROVIDED WITH FOR AVAILING OF THE ECONOMIC INTEREST IN THE SERVICES PROVIDED. THE BANDWIDTH CA PACITY MADE AVAILABLE ON A DEDICATED BASIS FOR THE ENTIRE CONTRACT PERIOD, EVEN IF IT DID NOT INVOLVE A POSSESSORY INT EREST, THE AMOUNT RECEIVED BY THE ASSESSEE IN A WAY WAS ALSO F OR THE USE OF PROCESS. THE SERVICE ORDER FORM CLEARLY POIN TED OUT THAT THE ASSESSEE WAS AT LIBERTY TO CHANGE THE EQUI PMENT, MODIFY THE CONFIGURATION OR CHANGE THE ROUTING OF T HE NETWORK IN PROVIDING THE SERVICE AND THE ASSESSEE C OULD PROVIDE THE SERVICE EITHER DIRECTLY OR THROUGH A PR OVISIONING ENTITY. THUS, THE ASSESSEE PROVIDED THE INDIAN CUST OMER AN INTEGRATED COMMUNICATION SYSTEM CALLED INTERNATIONA L PRIVATE LEASED CIRCUIT, PART OF WHICH OUTSIDE INDIA WAS TAK EN CARE OF BY THE ASSESSEE AND THE PART INSIDE INDIA THROUGH V SNL, WHICH COULD NOT BE DISSECTED AS TWO INDEPENDENT CON TRACTS HAVING NO BEARING AT ALL ON EACH OTHER. (V) THE DEFINITION OF ROYALTY UNDER ARTICLE 12 OF THE DTAA BETWEEN INDIA AND SINGAPORE AND THE ACT ARE IN PARI MATERIA. EXPLANATION 6 DEFINES PROCESS TO MEAN AN D - - ITA 917 TO 920/14 23 INCLUDE TRANSMISSION BY SATELLITE (INCLUDING UPLINK ING, AMPLIFICATION, CONVERSION FOR DOWN-LINKING OF ANY S IGNAL) CABLE, OPTIC FIBRE, OR BY ANY OTHER SIMILAR TECHNOL OGY, WHETHER OR NOT SUCH PROCESS IS SECRET. THUS, APART FROM THE RELEVANCE AND APPLICABILITY OF CLAUSE (IVA) THAT TH E PAYMENT WAS FOR THE USE OR RIGHT TO USE OF THE EQUIPMENT, T HE PAYMENT FOR THE BANDWIDTH AMOUNTED TO ROYALTY FOR T HE USE OF THE PROCESS AND BY REASON OF THE LONG DISTANCE, TO MAINTAIN THE REQUIRED SPEED, BOOSTERS WERE KEPT AT PERIODICAL INTERVALS. GOING BY THIS TOO, IN ANY EVE NT, THE PAYMENT RECEIVED BY THE ASSESSEE WAS RIGHTLY ASSESS ED AS ROYALTY AND WOULD CONSTITUTE SO FOR THE PURPOSES OF THE DTAA. OBITER DICTA : IN A VIRTUAL WORLD, THE PHYSICAL PRE SENCE OF AN ENTITY HAS TODAY BECOME AN INSIGNIFICANT ONE ; THE PRESENCE OF THE EQUIPMENT OF THE ASSESSEE, ITS RIGHTS AND TH E RESPONSIBILITIES OF THE ASSESSEE, VIS-A-VIS THE CUS TOMER AND THE CUSTOMERS' RESPONSIBILITIES CLEARLY SHOW THE EX TENT OF THE VIRTUAL PRESENCE OF THE ASSESSEE WHICH OPERATES THR OUGH ITS EQUIPMENT PLACED IN THE CUSTOMER'S PREMISES THROUGH WHICH THE CUSTOMER HAS ACCESS TO DATA ON THE SPEED AND DE LIVERY OF THE DATA AND VOICE SENT FROM ONE END TO THE OTHE R. THE EXPLANATIONS INSERTED THUS CLEARLY POINT OUT THAT T HE TRADITIONAL CONCEPTS RELATING TO CONTROL, POSSESSIO N, LOCATION ON ECONOMIC ACTIVITIES AND GEOGRAPHIC RULES OF SOUR CE OF INCOME RECEDE TO THE BACKGROUND AND ARE NOT OF ANY RELEVANCE IN CONSIDERING THE QUESTION UNDER SECTION 9(1)(VI) READ WITH EXPLANATION 2. THIS IS MORE SO WHEN IT CO MES TO THE QUESTION OF DEALING WITH ISSUES ARISING ON ACCO UNT OF MORE COMPLEX SITUATIONS BROUGHT IN BY TECHNOLOGICAL DEVELOPMENT BY THE USE OF AND ROLE OF DIGITAL INFOR MATION, GOODS, ETC., AND THE FOREIGN ENTERPRISE DOES NOT NE ED A PHYSICAL PRESENCE AT ALL IN A COUNTRY FOR CARRYING ON BUSINESS. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF TH E MADRAS HIGH COURT, WE REJECT THIS GROUND OF APPEAL RAISED BY TH E ASSESSEE. - - ITA 917 TO 920/14 24 10. THE NEXT GROUND IN THESE APPEALS IS WITH REGARD TO REIMBURSEMENT OF EXPENSES. 11. THE FACTS OF THE CASE ARE THAT THE AO CLASSIFIE D REIMBURSEMENT OF EXPENSES UNDER THE HEAD BUSINES S DEVELOPMENT COMMISSION AND BANDWIDTH CHARGES EVEN T HOUGH THESE WERE SHOWN AS REIMBURSEMENT TO THE PARENT COM PANY AND OTHER GROUP COMPANIES FOR COMMON EXPENSES INCURRED BY THEM. THE A.O. OBSERVED THAT IT IS NOT PROPER TO CLASSIFY UNDER NOMINAL HEADS WHEN THE PAYMENT WAS SPECIFICALLY PAID TO THE PARENT COMPANY AND NOT TO THE ORIGINAL SERVICE PROVIDER AG AINST DEBIT NOTE CHARGED BY THE PARENT COMPANY WITHOUT ANY MARK -UP AND THIS IS TO BE LIABLE FOR DEDUCTION OF TAX AT SOURCE S. AGAINST THIS, THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(APPEALS) . 12. ON APPEAL, THE CIT(APPEALS) OBSERVED THAT THE P AYMENTS ARE NOT PURELY REIMBURSEMENTS HAVING NO IDENTITY OR PROPRIETY OF THEIR OWN. EVERY PAYMENT OF EXPENDITURE SHALL BE H AVING CERTAIN CHARACTERS MAKING IT LIABLE TO BE CLASSIFIED UNDER A PARTICULAR ACCOUNT HEAD. AS SUCH 'REIMBURSEMENT OF EXPENSES' - ITSELF ON ITS OWN CANNOT CONSTITUTE AN INDEPENDENT HEAD OF AC COUNT. THE - - ITA 917 TO 920/14 25 CIT(APPEALS) FURTHER OBSERVED THAT THE INVOICES PER TAINING TO THE SO CALLED REIMBURSEMENT OF EXPENSES WERE FOUND BY T HE AO TO BE SPEAKING ABOUT THE NATURE OF PAYMENTS INVOLVED I N THOSE REIMBURSEMENTS. THE PAYMENTS RELATED TO (1) PURCHAS E OF SOFTWARE (2) BANDWIDTH CHARGES (3) COMMISSION PAYME NTS, ETC. THEREFORE IT HAS BECOME APPARENT THAT THE REIMBURSE MENTS CONSTITUTE A MIXTURE OF SO MANY KINDS OF PAYMENTS W HICH SHOULD HAVE BEEN GENUINELY ACCOUNTED FOR UNDER THE APPROPR IATE HEADS AND ACCOUNT. FURTHER, THE CIT(APPEALS) OBSERVED TH AT WHEREAS THE ASSESSEE HAS NOT DONE SO FAR THE REASONS BEST K NOWN TO IT. HAD THE PAYMENTS (CALLED REIMBURSEMENTS) BEEN PROPE RLY ACCOUNTED FOR UNDER THE RESPECTIVE HEAD OF ACCOUNT, THE AO WOULD HAVE ASSESSED WITHOUT ANY DIFFICULTY. A CONF OUNDING SITUATION HAS BEEN CREATED BY THE ASSESSEE, ITSELF BY INDULGING IN UNFAIR AND UNAPPROVED ACCOUNTING PROCEDURES. ACCOR DING TO THE CIT(APPEALS), WHEN ADEQUATE OPPORTUNITIES WERE PROV IDED TO THE ASSESSEE, DURING THE COURSE OF ASSESSMENT AND APPEA L PROCEEDINGS, IT COULD NOT FURNISH A SEGREGATED STAT EMENT OF EXPENSES TOGETHER WITH THE RELEVANT INVOICES AND VO UCHERS PERTAINING TO SUCH REIMBURSEMENTS. UNDER THESE CIR CUMSTANCES, - - ITA 917 TO 920/14 26 IT IS QUITE NATURAL FOR THE AO TO RESORT TO A PERMI SSIBLE ASSUMPTION THAT THE ASSESSEE COULD HAVE CHOSEN TO MAKE THE PAY MENTS THROUGH THE PRESENT COMPANY INSTEAD OF MAKING DIREC T PAYMENTS TO THE OVERSEAS SERVICE PROVIDERS WITH THE INTENTIO N TO AVOID TAX DEDUCTION AT SOURCE. ACCORDINGLY, THE CIT(APPEALS) HELD THAT THE AO RIGHTLY CLASSIFIED THE REIMBURSEMENT EXPENSES TO THE RESPECTIVE HEADS. AGGRIEVED BY THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 13. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. SIMILAR ISSUE CAME FOR CONSIDERATION BEFORE THE TRIBUNAL IN THE CASE OF ASHOK LEYLAND LTD. V. DCIT [313 ITR (AT) 191], WHEREIN IT WAS HELD AS FOLLOWS: IN ORDER TO INVOKE THE PROVISIONS OF SECTIO N 195 OF THE INCOME-TAX ACT, 1961, IN THE CONTEXT OF A NON- RESIDENT, IT IS SINE QUA NON THAT THE AMOUNT MUST B EAR TAXABLE CHARACTER. WHERE THE PERSON RESPONSIBLE FO R MAKING THE PAYMENT IS NOT SURE AS TO WHICH PART OF THE AMOUNT OF INCOME REFERRED TO IN SECTION 195(2) OF T HE ACT IS CHARGEABLE TO TAX, HE CAN APPLY TO THE ASSES SING OFFICER TO DETERMINE THE PROPORTION OF THE SUM SO CHARGEABLE AND ON SUCH APPLICATION THE ASSESSING OFFICER IS REQUIRED TO MAKE AN ORDER DETERMINING TH E PROPORTION OF SUCH INCOME ON WHICH TAX IS TO BE DEDUCTED AT SOURCE. IT PRE-SUPPOSES THAT THE PERSO N RESPONSIBLE FOR MAKING THE PAYMENT IS IN NO DOUBT T HAT TAX IS PAYABLE IN RESPECT OF SOME PART OF THE AMOUN T TO BE REMITTED BUT IS NOT SURE WHAT SHOULD BE THE PORT ION - - ITA 917 TO 920/14 27 SO TAXABLE OR THE AMOUNT OF THE TAX TO BE DEDUCTED. IT IS EVIDENT FROM A PERUSAL OF SECTION 195 OF THE ACT TH AT IT IS APPLICABLE IN THE CONTEXT OF SUCH SUMS WHICH ARE CHARGEABLE TO TAX UNDER THE ACT. IT IS THEREFORE, NECESSARY TO ENQUIRE AS TO WHETHER THE AMOUNT IN QUESTION COULD BE CHARGED TO TAX. THE ASSESSEE-COMPANY MANUFACTURING MOTOR VEHICLES ENTERED INTO A TECHNICAL ASSISTANCE AGREEM ENT WITH AVL GMBH AUSTRIA, FOR SUPPLY OF DESIGNS, DRAWI NGS AND CONSULTANCY IN THE DEVELOPMENT OF ENGINES. UND ER THE AGREEMENT THE ASSESSEE WAS REQUIRED TO REIMBURS E EXPENDITURE TOWARDS AIR FARE, ACCOMMODATION AND SUBSISTENCE COST FOR THE PERSONNEL DEPUTED BY THE AUSTRIAN FIRM TO INDIA IN ADDITION TO FEES FOR TECH NICAL KNOW-HOW. ON DEPUTING PERSONNEL FOR ASSISTING THE ASSESSEE-COMPANY IN IMPARTING THEIR TECHNICAL EXPERTISE, THE AUSTRIAN FIRM RAISED FOUR INVOICES T OWARDS REIMBURSEMENT OF ITEMS OF EXPENSES. THE ASSESSEE APPLIED FOR A CERTIFICATE FOR NON-DEDUCTION OF TAX AT SOURCE UNDER SECTION 195(2) OF THE INCOME-TAX ACT, 1961, ON SUCH REIMBURSEMENTS. THE ASSESSING OFFICE R DECLINED TO GRANT THE EXEMPTION AND DIRECTED THE ASSESSEE TO DEDUCT TAX AT 10 PER CENT ON SUCH REIMBURSEMENTS WHICH WAS CONFIRMED BY THE COMMISSIONER (APPEALS). ON APPEAL: HELD, DISMISSING THE APPEAL, THAT THERE WAS N OTHING ON RECORD TO INDICATE AS TO HOW SUCH REIMBURSEMENT COULD BE TERMED AS BUSINESS INCOME OF THE ASSESSEE. THE REIMBURSEMENTS WERE MADE IN THE PROCESS OF EXECUTING THE AGREEMENT. THE EXPENDITURE BEING PAR T AND PARCEL OF THE PROCESS OF ADVICE OF TECHNICAL CHARACTER, THE PAYMENT ON ACCOUNT OF REIMBURSEMENT ALSO ATTRACTED THE PROVISIONS OF SECTION 195(2) OF THE ACT. THE COMMISSIONER (APPEALS) TOOK THE CORRECT V IEW IN THE MATTER AND HIS ORDER COULD NOT BE INTERFERED WITH. - - ITA 917 TO 920/14 28 IN VIEW OF THE AFORESAID DECISION OF THE TRIBUNAL, WHEREIN THE PRESENT ACCOUNTANT MEMBER IS A PARTY TO THE ORDER, WE DISMISS THIS GROUND OF APPEAL. 14. IN THE RESULT, ALL THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON MONDAY, THE 15 TH OF FEB., 2016 AT CHENNAI. SD/- SD/- ( $% & ) ( ' ( ) $ ) *%+,-,./01,2345,.62,+778,293 : ;< /JUDICIAL MEMBER ! ;<=>>70.?,.?@A1BA2 ': /CHENNAI, C; /DATED, THE FEB., 2016. MPO* ;D EFGF /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. H3 /CIT(A) 4. H /CIT 5. FIJ K /DR 6. JLM /GF.