BT GLOBAL COMMUNICATIONS INDIA PVT. LTD., NEW DELHI V. DCIT, Circle-4(2), NEW DELHI

ITA 9590/DEL/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 6275 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2015-2016
• Appeal Filed On: 15-12-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA ANAND
• Keywords: Business income; Double taxation relief; Wholly owned subsidiary; TDS
• Section: 6; 2; 40(a)(ia); 195; 80IA; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘C’ BENCH, NEW DELHI (THROUGH VIDEO CONFERENCING] BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER ITA No. 9590/DEL/2019 [A.Y 2015-16) M/s B.T. Global Communications India Pvt. Ltd Vs. The Dy. C.I.T 11 th Floor, Nehru Place Circle – 4(2) New Delhi New Delhi PAN: AAACG 1534 A ITA No. 9437/DEL/2019 [A.Y 2015-16) The Dy C.I.T Vs. M/s B.T. Global Communications India Pvt. Ltd Circle – 4(2) 11 th Floor, Nehru Place, New Delhi New Delhi New Delhi PAN: AAACG 1534 A (Applicant) (Respondent) Assessee By : Shri Deepak Chopra, Adv Shri Rohan Khare, Adv Department By : Ms. Anupama Anand, CIT- DR Date of Hearing : 15.03.2022 Date of Pronouncement : 23.03.2022 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- The above two captioned cross appeals by the assessee and the Revenue are preferred against the order of the ld. CIT(A) - 2, New Delhi dated 27.09.2019 pertaining to Assessment Year 2015-16. Both these appeals were heard together and are disposed of by this common order for the sake of convenience and brevity. 2. We will first address to the appeal of the assessee in ITA No. 9590/DEL/2019. The grievances of the assessee read as under: “The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the order under section 250(6) of the Act (hereinafter referred to as ‘impugned order’), the Hon’ble Commissioner of Income-tax (Appeals)-2, New Delhi [hereinafter referred to as ‘the Hon’ble CIT (A)’] has erred as follows: 1. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in upholding the position adopted by the Learned Assessing Officer (‘Learned AO’) that the network connectivity charges are in 3 the nature of “Royalty” or “Fee for technical services” under the provisions of the Act and the India-United Kingdom Double Taxation Avoidance Agreement (‘India-UK DTAA’). 2. That on the facts and circumstances of the case and in law, the Hon’ble C1T(A) has erred in upholding the disallowance of network connectivity charges under section 40(a)(i) of the Act, in the hands of the Appellant. 3. That on the facts and circumstances of the case and in law, the Hon’ble CIT(A) has erred in disregarding the Appellant’s submission that the subject payments by the Appellant to BT Pic are in the nature of business income of BT Pic and therefore not taxable in India in absence of Permanent Establishment of BT Pic in India in accordance with Article 5 read with Article 7 of the India-UK DTAA. That the above grounds of appeal are without prejudice to each other. That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 3. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. 4 4. Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of BT Telecom India Private Limited and is engaged in providing network connectivity services. The assessee has obtained International Long Distance, National Long Distance and Internet Service Provider license from the Department of Telecommunication. 5. During the course of scrutiny assessment proceedings and on perusal of Form No. 3CEB, the Assessing Officer found that the assessee has paid/credited Rs. 383,87,94,524/- as network connectivity services to British Telecommunications Pic (BT). This amount has been claimed as infrastructure cost. The Assessing Officer found that the assessee has entered into an agreement between BT Pic and BT Ltd. for provision of telecommunication services. The Assessing Officer was of the opinion that the assessee is providing telecommunication services in India by using the telecommunication/ networking skill of the British Company BT PLC. 6. The assessee was asked to furnish details of all the payments made to non-residents, alongwith the reasons/nature of transactions for such payments and was also asked to furnish the details of 5 withholding taxes made on such payments, and if no TDS is made, then the reasons to be provided. 7. The assessee filed detailed reply dated 10.12.2018 wherein it has been submitted that tax has not been withheld on payment for network connectivity services to BT. It was explained that BT does not have a PE in India, the payment is not in the nature of royalty, payment is not for use of any process and payments are not fee for technical services as technical knowledge etc was not made available. 8. It was further explained that the agreement between BT and the assessee is an agreement for provision of services and not for the use or right to use of any equipment /process or for use of any other similar property. 9. The contention of the assessee did not find any favour with the Assessing Officer who was of the firm belief that the provisions of Telegraph Laws (Amendment Act, 1961), wherein telegraph has been defined in section 3(1) of the said Act, squarely apply and came to the conclusion that it has not been using any apparatus provided by BTPLC is also not acceptable. 6 10. Referring to the amendment brought in the provisions of section 195 by introduction of Explanation 2, the Assessing Officer was of the opinion that withholding of tax should be done irrespective of the fact that whether the non-resident has any business connections/presence in India or not. 11. Referring to Article 13(3) of the India UK DTAA, the Assessing Officer was of the opinion that the payment for network connectivity services given to BT PLC is royalty. 12. Placing strong reliance on the judgment of the Hon'ble Madras High Court in the case of Verizon Communications, Singapore Pte Ltd 361 ITR 575, the Assessing Officer came to the conclusion that the payment given/credited by the assessee to BT Pic for network connectivity services is to be treated as payment of royalty within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Act and, therefore, the assessee was liable for withholding of tax u/s 195 of the Act and since the assessee has failed to do so, disallowance of payment u/s 40(a)(ia) of the Act was made to the tune of Rs. 3,83,8794,524/-, which was upheld by the ld. CIT(A). 7 13. A perusal of the TSA Agreement shows that the assessee had installed its own equipment in India for providing necessary bandwidth services to its Indian customers. We find that it is only to achieve the foreign leg of the connectivity that the telecom services of the non- resident service provider were procured. We do not find any merit in this contention of the ld. DR that the assessee does not have any presence/equipment in India. Article 3.2(b) of the TSA reads as under: “ With respect to all customers, OpCo undertakes to develop, operate and maintain at its cost such telecommunications network inside the territory as is reasonably required to provide tele communication services.” 14. TSA clearly mentions that the assessee is required to develop, operate and maintain all telecommunication network within India. We find that there is no equipment of non-resident service provider being in India. We are of the considered view that there is a difference between an agreement that gives “Right to use equipment” and an agreement which involves provisions of services through use of equipment by service provider. 8 15. Our view is fortified by the decision of the Hon'ble Jurisdiction High Court of Delhi in the case of DIT Vs. New Skies Satellite BV 383 ITR 154. 16. The ld. DR has also placed reliance on the judgment of the Hon'ble Madras High Court in the case of Verizon Communications [supra] and at the behest of the ld. DR, the assessee has furnished an undertaking on its letter head that apart from TSA between the assessee and BT, there was no other agreement, technical or otherwise for provision of these services. 17. The contention of the ld. DR that the decision of the Hon'ble High Court of Delhi in the case of New Skies Satellite [supra] involved the DTAA between India and Netherlands and the definition of royalty is between India and UK DTAA are differently worded does not have any merit, in as much as the decision of the Hon'ble Delhi High Court in case of New Skies Satellite [supra] is a consolidated decision which covers two non-resident parties – one – tax resident of Netherlands and the other – tax resident of Thailand and, therefore, the decision deals with the definition of royalty provided for in DTAA between India and Netherlands and India Thailand and definition of Royalty as per India 9 Thailand DTAA is same as definition in India UK DTAA. Therefore, it cannot be said that the decision of the Hon'ble High Court of Delhi in the case of New Skies [supra] is not applicable on the facts of the case in hand. 18. We further find that the Hon'ble High Court of Delhi in the case of New Skies Satellite [supra] has categorically held that the amendments made in domestic law are not effective retrospectively. The definition of the term ‘Royalty under the DTAA which has now been affirmed by the Hon'ble Supreme Court in the case of Engineering Analysis Center of Excellence Pvt Ltd. [2021] 432 ITR 471 wherein it has been held by the Hon'ble Supreme Court that the amendments in the domestic law cannot be read into treaties, unless DTAAs are amended by way of bilateral negotiations. 19. Next proposition made by the ld. DR is that the case in hand is a case of equipment royalty. 20. For this, we would like to refer to the terms of Article 13 of the India –UK DTAA wherein royalty has been defined as under: 10 “13(3) 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 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.” 21. For this contention of the ld. DR, we have to see whether the assessee had any right to use equipment for it to be encompassed under the definition of Royalty under Article 13 [supra]. We have elsewhere referred to clause 3.2(b) of the TSA which provides that equipment in India are owned by the assessee only and BT does not own any equipment in India. 22. We further find that in Article 1A of the TSA, no such right has been provided and all entities are directed to maintain their own equipment. The relevant portion of Article 1A of the TSA reads as under: 11 “Telecommunications services means any transmission, emission, reception of signs, signals, writing, images and sounds or intelligence of any nature by wire, radio, optical, satellite or any other electromagnetic system including but not limited to transmission, switching, applications, voice, internet protocol and data services. These services will be provided through the ownership, management and/or operation of till network tiers (local access, national and international network) and network based application data centres, second and third level service support/ network capacity planning and management of capacity inventory; network build, provide, assure and operate; management of cable and satellite investments, provision of specialist technical services to BT Group and third parties; ownership and management of technical property and /facilities that support the provision of voice and/or data transmission and tiny other service which ore ancillary to the provision of such telecommunication services " 23. It can be seen from the above that all the parties to the agreement are owners who manage and opearte their own equipment for provison of telecommunication services. 24. It would be pertinet to understand the service module by which it can be seen that the aragment between the assessee and BT is in the nature of service contract pursuant to which BT is responsible for 12 provision of network connectivity service for transmision of telecommunication services outside India in consdieration for appropriate service charges. 25. A closer look at the business module shows that network of BT including the related equipment is used by BT. Thus, for provision of network connectivity services of the assessee in relation to its subscribers and no access/control whatsoever in relation to such network, any equipment is provided to the assessee. 26. If we consider the business module in a practical aspect, then we would know that there may be multiple routes by way of any given transmission of telecom traffic can reach the desired destination and the assessee has no knowledge of the equipment being used for provison of the service. 27. For example, if a person is making an international call from India to a resident of UK, then the service provider of that person does not know through which service provider call reaches the desired destination, as service provider in India has no knowledge of the equipment being used for provision of the service. 13 28. Consdiering the facts of the case in hand, the assessee as a service provider is only concerned with the transfer of telecommunication traffic through availing service from BT without having any knowldege or any manner of acess in respect of the equipment being used for these services. Thus, it can be safelyy concluded that the assessee does not obtain/receive any right to use the networking of BT. 29. The entire basis of the findings of the Assessing Officer/ld. CIT(A)/ld. DR is on the fact that the payment made by the assessee is a royalty for use of equipment of BT ignoring the crucial fact that the said payment is to receive international leg of connectivity service and not right to use any equipment of BT. 30. Once again, we have to refer to the decision of the Hon'ble Delhi High Court in the case of New Skies Satellite [supra] wherein the Hon'ble High Court has relied upon the decision given by it in the case of Asia Satellite 332 ITR 340 wherein the Hon'ble High Court has held that where the customer does not use equipment or process of equipment itself payment cannot be termed as royalty for use of a process or equipment. 14 31. Basis the decision of the Hon'ble Madras High Court in the case of Verizon Communicaitons [supra], the Assessing Officer/ld. CIT(A) have framed respective orders. 32. We have carefully perused the decision of the Hon'ble Madras High Court in the csae of Verizon Communications [supra]. We are of the consdiered view that the facts of Verizon Communicaiton [supra] are totally different in terms of who was provididng service and the manner in which was being provided in India. 33. In fact, in the case of Verizon Communicaiton [supra] had itself provided some customers premise, equipment for use to its customers in India under the terms of its contract with Indian customers whereas the facts of the case in hand are devoid of such things. In fact, there is no finding by the Assessing Officer/ld. CIT(A) that any part of BT equipment is located in India or offered by BT for use/operation by the assessee in India. 15 34. The co-ordinate bench in the case of Bharti Airtel 46 CCH 304 has consdiered the issue on identical facts and has distinguished the decision of the Hon'ble Madras High Court in the case of Verizon Communications [supra]. The relevant findings read as under: “18. Further, it would be imperative to mention that the decision of the Hon’ble Madras High Court was distinguished by the co-ordinate bench in the decision of Bharti Airtel Limited v ITO, (2016) 46 CCH 304 (Delhi-Trib) wherein this Hon’blc Tribunal whilst dealing with the issue of Inter-Connect Usage charges (similar to the charges being paid by the Assessee in the case at hand) and whilst correctly following the decisions of the Hon’ble Delhi High Court in New Skies (Supra) held as under:- "64. Recently, the tlon 'hie Delhi High Court in the case