Case Law Details
RELEVANT PARAGRAPH
9. (1) The following incomes shall be deemed to accrue or arise in India :—
(i) to (v) xx xx xx xx xx xx xx xx xx
(vi) income by way of royalty payable by—
(a) the Government ; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
xx xx xx xx xx xx xx xx xx
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 licence) 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 section44BB; ]”
xx xx xx xx xx xx xx xx xx
The relevant provisions of Article 13 of the treaty are as under:
“ARTICLE 13 -Royalties and fees for technical services –
1.xx xx xx xx xx xx xx xx xx xx
(2) However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed :
xx xx xx xx xx xx xx xx xx xx xx xx xx xx xx 3. 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.
xx xx xx xx xx xx xx xx xx xx”
According to the applicant, in the proposed business model, no intellectual property rights are involved; C&W UK has not granted to it any right to use any intellectual property or any equipment. The Commissioner, on the other hand, states that the payment made by the applicant is clearly for using secret process. According to him the technology involved in the process of transmission of voice/data contains proprietary resources. It is not a case of mere rendition of service, but the quality of service and secrecy are also material. It is further stated that the services to be availed by the applicant would amount to the use of a secret process and thus is covered by royalty as stipulated in article 13(3) of the treaty. But, no material has been placed before us to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India Pvt.Ltd.(supra) . In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers outside India. Dell India had an agreement with BT America for the entire service for which it made payment directly to BT America. One of the issues that arose for consideration was whether the payment made by the applicant to BT America was in the nature of royalty falling either under clause (iii) of Explanation- 2 of section 9(1) or article 12(3) of the tax avoidance treaty between India and USA, which is materially similar to the provisions of article 13(3) of the treaty between India and UK. The Authority held –
“14. Whether the payment made by the applicant to BTA is in the nature of royalty falling under clause (iii) of Explanation 2 and/or Article 12(3) of the Treaty?
14.1. It is one of the contentions of the Revenue that the applicant makes use of or is conferred with the right to use a `process’ within the meaning of clause (iii) to Explanation (2) to Section 9(1) of the Act. That clause speaks of “the use of any patent, invention, model, design, secret formula or process or trade mark or similar property”. It is contended, relying on the decision of ITAT in the case of Asia Satellite Telecommunications Company Ltd. vs. Deputy Commissioner of IT (ITA No.166/DEL/2001* dated 1.11.2002) that the word `secret’ only qualifies the expression `formula’ and cannot be read before the word `process’. On such interpretation, it is submitted by the Revenue in its comments that the services provided to the applicant are clearly in the nature of a process and not in the nature of standard facility and the applicant has used and has been conferred with the right to use such process. However, this contention has not been urged before us by the learned Counsel for the Department for the obvious reason that the language used in the relevant clause of the Treaty does not support any such interpretation. The expression in Article 12(3) (referred to at para 7.1 supra) is “for the use of or the right to use any copyright, patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” It is thus clear that formula/process are part of the same group and the adjective `secret’ governs both. The reasoning of ITAT in the aforementioned case, based on the absence of comma after process and the impact of the immediately following word, `trade mark’, does not hold good in view of the clear language in Article 12(3) of the Treaty. It has been so pointed out very rightly by another Bench of ITAT in Panamsat International Systems Inc. vs. Dy. Commissioner Income-tax (ITA. No.1796/DEL/ 2001 dated 11.8.2006) at paragraph 6.18. Going by such interpretation, it cannot be held that there is, in the instant case, the use of or the right to use a secret process. In fact it is nobody’s case that any secret process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the Treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect.”
The Authority also considered in detail the question whether consideration was payable for using or for the right to use any equipment through which connectivity was provided. That question was answered in the negative. We are of the view that on the same reasoning the applicant does not pay for using any secret process in the present case also.
8.2 We may now consider the next submission of the Revenue that, since the services are yet to commence, it is premature to say whether C&W UK will install any equipment at the premises of the applicant in India. We notice from the pleadings and averments of the applicant that C&W UK will be providing telecom services to the applicant outside India. The network of the applicant will inter-connect with the network of C&W UK at Marseilles in France. Thus the telecom signal will move on the network of the applicant from India to Marseilles. It is beyond Marseilles that the network and equipment of C&W UK will be used for transmission of the signal. We also notice from the draft agreement that there is neither any stipulation for provision of any equipment nor payment of any fee for the same. On the basis of the records placed before us, we are of the view that no case is made out to presume that any equipment will be installed by C&W UK at the premises of the applicant in India and the applicant will pay for the same. The averment of the Commissioner is based merely on the doubt entertained by him for which he has not shown any basis. The affidavits filed by the applicant after first hearing clarify the factual position in this regard. In the light of the view taken by us, it is not necessary to examine the TAG report.
8.3 The Revenue has thus failed to show how the payments made by the applicant will be royalty income in the hands of C&W UK.
9.
9.1 We may now take up the last issue which relates to permanent establishment. As already pointed out, the Revenue has mentioned about the existence of another group company in India whose address is alleged to have been used by the applicant as its registered office. The applicant has submitted that the Cable and Wireless India Limited which is a company incorporated in UK, has set up a branch office in India under Reserve Bank of India (RBI) permission, a copy of which has been filed. This branch office performs ancillary telecom services, such as network designing , project implementation services and providing network management and maintenance services. This branch has not been granted any licence by the Department of Telecommunication to carry out NLD/ ILD services. The applicant also states that its registered office does not share the premises with the above branch office. We find that the applicant and the branch office of Cable and Wireless India Ltd. are separate legal entities which perform different types of telecom services. The said branch office is not in the business of providing voice / data transmission service.
9.2 The Revenue also states that it cannot be said at this point of time whether C&W UK would be deputing its personnel to provide technical and maintenance support to the applicant. The applicant states that there is no such stipulation in its agreement with C&W UK. From the case presented before us, there is no reasonable basis to entertain the doubt that C&W UK will depute its technical personnel for providing maintenance and support to the applicant.
9.3 The next contention of the Revenue is that the applicant will be entering into an agreement with the Indian customers for providing end-to-end international long distance telecom transmission, the Indian leg of which will be provided by the applicant and the foreign leg will be provided by the C&W UK. Thus the contract between the applicant and the Indian customers would indirectly bind C&W UK, so far as the international leg of the transmission is concerned. As such the applicant would be acting as an agency PE for C&W UK. The applicant states that it does not act on behalf of the C&W UK in India, nor does it conclude any contract on behalf of that company. The applicant in its independent capacity negotiates and concludes contracts with its customers on principal-to- principal basis, to which C&W UK is not a party. Similarly, the agreement with C&W UK is also on principal-to- principal basis, the Indian customer not being a party to the same. The breach of one type of contract does not affect the rights and obligation arising under the other type of contract.
10. In the light of the above discussion, we have come to the conclusion that the payments made by the applicant to C&W UK are in the nature of business profits. In the absence of there being any permanent establishment of C&W UK In India, this income is not at all taxable here. Since this income is not chargeable to tax under the Act, there is no question of making any deduction at source under section 195. In the result, we answer all the questions in negative. Pronounced in the open Court of the Authority on this 30th day of June, 2009.
