In absence of DTAA No tax on payments received by non-resident for IUC from Indian company

Globe Teleservices Ltd. Vs DCIT (ITAT Bangalore)

In the realm of international taxation, the case of Globe Teleservices Ltd. vs. DCIT holds significant importance, particularly in clarifying the taxability of payments received by non-resident entities from Indian companies. The crux of the dispute revolved around whether Interconnect Usage Charges (IUC) received by Globe Teleservices Ltd., a Hong Kong-based company, from Vodafone South Ltd., an Indian entity, could be deemed as royalty under section 9(1)(vi) of the Income Tax Act.

The intricate legal battle commenced when the Assessing Officer (AO) asserted that the income of Globe Teleservices Ltd. was subject to taxation in India as royalty. This assertion was based on the failure of the deductor to withhold Tax Deducted at Source (TDS) under section 191 of the Income Tax Act. Additionally, section 201 was invoked due to cumulative defaults by the deductor. Consequently, the AO initiated reassessment proceedings by issuing a notice under section 148 of the Act.

The crux of the matter lay in the characterization of the payments received by Globe Teleservices Ltd. as royalty under section 9(1)(vi) of the Act. The Dispute Resolution Panel (DRP) upheld the AO’s view, citing a decision of the Madras High Court in the case of M/s. Verizon Communications. As a result, additions were made to the assessee’s income for the relevant assessment years.

However, Globe Teleservices Ltd. contended that the payments received from Indian customers could not be taxed in India under section 9(1)(vi) or Explanation 5 and 6 of the Act. Despite the absence of a Double Taxation Avoidance Agreement (DTAA) between India and Hong Kong during the relevant assessment years, the company argued that the payments were not taxable in India.

To support its contention, Globe Teleservices Ltd. cited the decision of Vodafone Idea Ltd. vs. DDIT, wherein it was held that amendments to the Act could not be incorporated to construe the definition of ‘royalty’ in the relevant Article of the DTAA. Additionally, the company referred to decisions of the Hon’ble Karnataka High Court and a Coordinate Bench regarding similar cases involving Hong Kong-based companies.

The crux of the matter lay in the interpretation of the term ‘process’ under Explanation 2 to section 9(1)(vi) of the Act. The Income Tax Appellate Tribunal (ITAT) analyzed previous decisions and emphasized that there was no transfer of intellectual property rights or exclusive rights granted by Globe Teleservices Ltd. to the Indian service provider.

Furthermore, the tribunal examined the insertion of Explanation 5 and 6 by the Finance Act, 2012, which widened the meaning of ‘process.’ However, it concluded that the conditions for considering the payments as royalty were not met in the present case.

Ultimately, the ITAT ruled in favor of Globe Teleservices Ltd., holding that the payments received could not be considered as royalty under section 9(1)(vi) of the Act. Moreover, it determined that there was no permanent establishment of the company in India, leading to the conclusion that the receipts were taxable as business profits in the recipient country.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

Present appeals arises out of the final assessment orders passed separately on 04.01.2024 for A.Ys. 2014-15 and 2017-18. The Ld.AR submitted that the issues contested in both the appeals are identical and are in respect of the interconnect utility charges that was held to be royalty in the hands of the assessee u/s. 9(1)(vi) of the act.

2. The Ld.AR at the outset submitted that Ground nos. 1-2 for A.Y. 2014-15 and Ground no. 1 for A.Y. 2017-18 has been challenging the reopening of the assessment. However, as the issue on merit is in favour of assessee by various decisions of this Tribunal, assessee did not wish to press the legal issue raised in these grounds. In support of the same, assessee has filed a letter which is scanned and reproduced as under: Accordingly, ground nos. 1-2 for A.Y. 2014-15 and ground no. 1 for A.Y. 2017-18 stands dismissed as not pressed.

Accordingly, ground nos. 1-2 for A.Y. 2014-15 and ground no. 1 for A.Y. 2017-18 stands dismissed as not pressed.

3. The Ld.AR submitted that Ground nos. 3-4 for A.Y. 2014-15 and Ground nos. 2-3 for A.Y. 2017-18 are on single issue of payment received towards IUC held as royalty in the hands of the assessee u/s. 9(1)(vi) of the act.

4. Brief facts of the case are as under:

4.1 Assessee is a non-resident company registered in Hongkong. It had received payment of Rs.20,19,231/- for A.Y. 2014-15 and Rs.36,97,710/- for A.Y. 2017-18 from M/s. Vodafone South Ltd., an Indian entity during the relevant assessment years. On examination of records, the Ld.AO was of the opinion that the assessee’s income was chargeable to tax in India as the deductor did not deduct TDS under the provisions of section 191 of the act that would fasten to assessee. The Ld.AO further observed that provisions of section 201 were invoked in the Deductor’s case on a cumulative default by the deductor for not deducting tax and remitting the money to the non-resident companies. Based on these background, the Ld.AO reopened the assessment by issuing notice u/s. 148 of the act for the years under consideration in the case of assessee. Various details were called for and the objections of the assessee was dealt with.

4.2 The assessment was passed u/s. 147 of the act by holding the income received by assessee from the Indian company as royalty u/s. 9(1)(vi) of the act r.w. Explanation 2 and 6.

4.3 Against the draft assessment order, the assessee filed the objections before the DRP. The DRP upheld the view of the Ld.AO by relying on the decision of Hon’ble Madras High Court in case of M/s. Verizon Communications reported in 361 ITR 275. The Ld.DRP thus upheld that the receipt by the non-resident assessee from the Indian customer in lieu of bandwidth services provided, were to be treated as royalty within the meaning of clause (iii) to Explanation 2 to section 9(1)(vi) of the Act. Identical view was taken by the DRP in both the assessment years under consideration.

4.4 On receipt of the DRP directions, the Ld.AO for both the assessment years under consideration made addition in the hands of the assessee in respect of payment received from against the IUC charges as Royalty u/s. 9(1)(vi) of the Act.

4.5 Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.

5. At the outset, it is submitted that, the assessee is headquartered in Hongkong did not have Double Taxation Avoidance Agreement during the relevant assessment years under consideration. It is submitted that, the DTAA between India and Hongkong has been notified to be into force from 30.11.2018.

The Ld.AR submitted that though there was no DTAA between India and Hongkong for the relevant AYs under consideration, the payment received from Indian customers cannot be taxed in India u/s. 9(1)(vi) Explanation 2 or to that extent Explanation 5 and 6 of the Act. He submitted that Hon’ble Jurisdictional High Court in case of Vodafone Idea Ltd. vs. DDIT reported in (2023) 152 taxmann.com 575 has considered the issue in the hands of the deductor, wherein the third question of law referred by the deductor assessee was answered in favour of the deductor assessee by holding as under:

“Re: Question No. 3 as follows:

• the Amendments made in the Act cannot be incorporated while construing the scope of the definition of the term ‘royalty’ in the relevant Article of the DTAA21 and the payments made by assessee cannot be characterised as “royalty” as defined in the relevant Article of DTAA;
• in Viacom 18 Media Limited Vs. ADIT22 rendered by ITAT Mumbai and relied upon by the ITAT for the A.Ys. 2009-10 to 2011-12’ the ITAT has held that TDS was deductable at source. However, for subsequent years in assessee’s own cases23, the ITAT has taken a different view and held that the definition in the DTAA could not be enlarged by relying upon the provisions of Explanations 5 and 6;
• that, for a payment to be characterised as one for use of, or for the right to use certain intellectual property, firstly, the grantor of that right should be denuded from that property and it should vest completely with the recipient and secondly, the possession, dominion and control over such property should be fully granted to the user. The amendment brought by the Finance Act, 2012 by insertion of Explanation 5 seeks to do away with the second condition but the first condition remains unchanged;
• the NTOs have not denuded themselves of utilising the process. The payment made by assessee to the NTOs is not the payment for the use or the right to use process or the equipment as alleged by the Revenue’ as held by the judgment of the Delhi High Court in Asia Satellite Telecommunications Company Limited Vs. Director of Income Tax²⁴ and Director of Income Tax Vs. New Skies Satellite BV²⁵.”

6. The Ld.AR further referred to the decision of Coordinate Bench of this Tribunal an identical situation arose of a company that was headquartered in Hongkong. It was the case of HCG Global Communications vs. DCIT reported in (2024) 158 com 633 and M/s. PCCW Global Ltd. vs. ACIT in IT(IT)A No. 785/Bang/2022 vide order dated 08.11.2023. It was also Hongkong based company where there was no treaty under DTAA during the relevant Assessment Years under consideration therein.

7. He submitted that in above cases, this Tribunal has analysed the provisions of the act referring to the observations of Hon’ble Karnataka High Court in case of Vodafone Idea Ltd. (supra) and came to the conclusion that interconnect utility charges cannot be taxed as royalty in India u/s. 9(1)(vi) of the Act in the hands of the non-resident assessee as there is no “use” or “process” or a equipment that was made available to the customers in India. He also referred to the following decisions which have discussed the applicability of section 9(1)(vi) for the IUC charges in great detail:-

• Vodafone Idea Limited (Earlier Known as `Vodafone South Limited’) Which Now Stands Merged With ‘Idea Cellular Ltd’.) ITA No.160/2015 to 164/2015 and 64/2020 to 66/2020. [Karnataka High Court]
• HCG Global Communications Ltd. [2024] 158com 633 [Bangalore — ITAT] [Entity based in Hong-Kong]
• Orange (formerly known as France Telecom) [2024] 158 com 186 [Bangalore — ITAT].
• Telecom Italia Sparkle Singapore Pte. Ltd. [2023] 155 com 404 [Bangalore — ITAT] [Not Royalty as per Section 9(1)(vi), Refer Para 9.1 Onwards]
• Al Telekom Austria Aktiengesellschaft [2023] 156com 155 [Bangalore — ITAT].
• Telefonica Depreciation Espana SA [2023] 154 com 436[Bangalore — ITAT].
• Dialog Axiata PLC [2024] 159com 6 [Mum-ITAT].
• Telefonica UK Ltd. [2023] 203 ITD 171[Mum-ITAT].

8. On the contrary, the Ld.DR relied on the observations of the authorities below.

We have perused the submissions advanced by both sides in the light of records placed before us.

8.1 We note that the revenue characterised the payments received by assessee towards interconnectivity utility charges as Royalty under the Act, since the payment is made to “use the process” or “an equipment”.

8.2 It is an admitted fact that, service provider in India entered into agreement with assessee for international carriage and connectivity services, against which, an interconnectivity charges were received by the assessee. We refer to the term “Process” that occurs under clause (i), (ii) and (iii) to Explanation 2 to Section 9(vi). It reads as under:—

‘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;’

8.2.1 The term “process” used under Explanation 2 to section 9(1)(vi) in the definition of ‘royalty’ does not imply any ‘process’ which is publicly available. The term “process” occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9(1)(vi) means a “process” which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows:

“(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property”

Clauses (i) & (ii) of the said explanation also use identical terms.

8.2.2 The words which surround the word ‘process’ in clauses (i) to (iii) of Explanation 2 to section 9(1 )(vi), refer to various species of intellectual properties such as patent, invention, model, design, formula, trade mark etc. The expression ‘similar property’ used at the end of the list, further fortifies the stand that the terms ‘patent, invention, model, design, secret formula or process or trade mark’ are to be understood as belonging to the same class of properties viz. intellectual property.

8.2.3 We also note that ‘Intellectual property’ as understood in common parlance means, Knowledge, creative ideas, or expressions of human mind that have commercial value and are protectable under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature.

8.2.4 We also refer to the commentary in Prof. Klaus Vogel’s Commentary on Double Taxation Convention, wherein, the term ‘Royalty’ is defined as under:

“Paragraph 2 contains definition of the term ‘royalties’. These relate, in general, to rights or property constituting different forms of literary and artistic property, the elements of intellectual property specified in the text and information concerning industrial, commercial or scientific experience. The definition applies to payments for the use of, or the entitlement to use, rights of the kind mentioned, whether or not they have been, or are required, registered in a public register. The definition covers both payments made under a license and compensation which a person would be obliged to pay for fraudulently copying or infringing the right.”

8.2.5 Thus the word “process” thus must also refer to specie of intellectual property, applying the rule of, ejusdem generis or noscitur a sociis, as held by Hon’ble Supreme Court in case of CIT vs. Bharti Cellular reported in (2011) 330 ITR 239.

8.2.6 We refer to the decision of Hon’ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459 wherein Hon’ble High Court observed as under:

“10.The term (royalty’ normally connotes the payment made to a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty”.

8.2.7 It is an admitted fact that there is no transfer of any intellectual property rights or any exclusive rights that has been granted by the assessee to the service recipient for using such intellectual property. Therefore Explanation 2 to section 9(1)(vi) of the Act cannot be invoked.

8.2.8 Further we note that by Finance Act, 2012, Explanation 5 & 6 were added with retrospective effect from 1.6.1976 which reads as under:—

“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 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.”

8.2.9 By insertion of Explanation 5 & 6, meaning of word ‘Process’ has been widened. As per these explanations, the word ‘Process’ need not be ‘secret’, and situs of control & possession of right, property or information has been rendered to be irrelevant. As per Explanation 5 & 6, the word ‘process’ includes and shall be deemed to 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. Most importantly, the Explanation does not do away with the requirement of successful exclusivity of such right in respect of such process being with the person  claiming ‘royalty’ for granting its usage to a third party.

8.2.10 We may also refer to the following decisions of AAR wherein meaning of the phrase “use” or “right to use” has been explained.

• Decision of Authority For Advance Ruling(hereinafter referred to as AAR), in case of Cable & Wireless Networks India(P.)Ltd., In re, reported in (2009) 182 Taxman 76
• Decision of AAR in case of ISRO Satellite Centre reported in 2008) 307 ITR 59
• Decision of AAR in case of Dell International Services (India) P. Ltd.In.re. reported in (2008) 172 Taxman 418.

8.2.11 The above decisions, lay down that, in order to satisfy ‘use or right to use the control and possession of right, property or information should be with service recipient.

8.2.12 In the decision of Authority For Advance Ruling, in case of Cable & Wireless Networks India(P.)Ltd., In re(supra), a similar issue was considered wherein Cable & Wireless Networks India(P.)Ltd was a company incorporated in India part of Cable & Wireless Group of companies. Cable & Wireless Networks India(P.)Ltd., was engaged in providing international long distance and domestic long distance telecommunication services in India. As per the agreement Cable & Wireless Networks India(P.)Ltd., would provide the Indian leg of service of using its own network and equipments and network of other domestic operators. Similarly, the international leg of services would be provided by the UK group company using its international infrastructure and equipments. The Cable & Wireless Networks India(P.)Ltd., sought for advance ruling in respect of nature of payments made by Cable & Wireless Networks India(P.)Ltd., to the UK Group company, whether the payment is taxable as ‘royalty’ or ‘FTS’ under section 9(1)(vi)/(vii). The AAR relied on following decisions:

• Decision of Hon’ble Supreme Court in case of BSNL vs. UOI reported in (2006) 3 STT 245
• Decision of AAR in case of Dell International Services India Ltd. In.re reported in (supra)
• Decision of Hon’ble Madras High Court in case of CIT vs. Neyveli Lignite Corpn. Ltd. reported in (2000) 243 ITR 459
• Decision of coordinate bench of this Tribunal in case of WIPRO Ltd. Vs. ITO reported in (2003) 86 ITD 407.

8.2.13 The AAR relying on its view in case of Dell International Services India Ltd. In., held as under:

12.5 It seems to us that the two expressions ‘use’ and ‘right to use’ are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in praesenti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in praesenti but under a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression “transfer of right to use any goods” occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on ‘control’. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction whereas the phrase ‘right to use’ implies the existence of such control. Even in a case where the customer is authorized to use the equipment of which he is put in possession, it cannot be said that such right is bereft of the element of control. We may clarify here that notwithstanding the above submission, it is the case of applicant that, it has neither possession nor control of any equipment of BTA.

12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions ‘use’ and ‘right to use’ is that of BSNL v. UOI (2006) 3 STT 245 (SC). Even that case turned on the interpretation of the words “transfer of right to use the goods” in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber’s mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction.

The word ‘use’ – what it means:

12.7 Let us now explore the meaning of the key word ‘use’. The expression ‘use’ has a variety of meanings and is often employed in a very wide sense, but the particular meaning appropriate to the context should be chosen. In S.M. Ram Lal & Co. v. Secretary to Government of Punjab [1998] 5 SCC 574, the Supreme Court noted that ‘in its ordinary meaning’, “the word ‘use ‘ as a noun, is the act of employing a thing; putting into action or service, employing for or applying to a given purpose”. In the New Shorter Oxford Dictionary, more or less the same meaning is given. The very first meaning noted there is: “the action of using something; the fact or state of being used; application or conversion to some purpose”. Another meaning given is “Make use of (a thing), especially for a particular end or purpose; utilize, turn to account… cause (an implement, instrument etc.) to work especially for a particular purpose; manipulate, operate”. The various shades of meanings given in the decided cases in America are referred to in Words and Phrases, Permanent Edition Vol. 43A. Some of them are quoted below :

“The word ‘use’ means to make use of; convert to one’s service; to avail oneself of; to employ”. (Miller v. Franklin County)

“The word ‘use’ means the purpose served, a purpose, object or end for useful or advantageous nature”. (Brown v. Kennedy)

“‘Use’ means to employ for any purpose, to employ for attainment of some purpose or end, to convert to one’s service or to put to one’s use or benefit. (Beach v. Liningston)

“‘Use’, as a noun, is synonymous with benefit and employment and as a verb has meaning to employ for any purpose, to employ for attainment of some purpose or end, to avail one’s self, to convert to one’s service or to put to one’s use or benefit”. (Esfeld Trucking Inc. v. Metropolitan Insurance Co.)

12.8 The word ‘use’ in relation to equipment occurring in clause (iva) 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 words “equipment” suggests that there must be some positive act of utilization, application or employment of equip-ment 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.

13. It is the contention of the revenue that dedicated private circuits have been provided by BTA through its network for the use of the applicant. The utilization of bandwidth upto the requisite capacity is assured on account of this. The electronic circuits being ‘equipment’ are made available for constant use by the applicant for transmission of data. The access line is installed for the benefit of the applicant. Therefore, the consideration paid is towards rent for circuits and the physical components that go into the system. It is further contended that rendition of service by way of maintenance and fault repairs is only incidental to the dominant object of renting the automated telecommunication network.

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 clause (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 clause (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 clause (iva) in such a case because the element of service predominates.

13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the access line installed by BTA or its agent or the components embedded in it. The operation, control and maintenance of the so-called equipment, solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA’s network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. 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.

13.3 In cases where the customers make use of standard facility like telephone connection offered by the service provider, it does not admit of any doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of ‘royalty’ in clause (iva) of Explanation 2.

8.2.14 We also refer to the commentary relied by the Ld. Counsel form Prof. Klaus Vogel’s Commentary on Double Taxation Convention, wherein ‘Secrete formulae or process’ is defined as under:

Secret formulae or processes: This covers Know-how in the narrower sense of the term viz., all business, secrets of a commercial or industrial nature. In most of the countries, they enjoy at least relative protection or are capable of being protected. That is why Article 12(2) very properly use, in connection with such formulae, etc., the criterion ‘right to use’, which is pertinent to them (letting) as it is in the case of absolute proprietary rights. As a rule, the ‘right to use’ already come into existence in these instance by authorized information(legitimate disclosure of secrets) . It may be restricted in the point of time in respect of the period following the expiry of the license. On the difference between a product with relatively simple technology, and a business secret.

9. Also Hon’ble Karnataka High Court in case of Vodafone Idea Ltd. (supra) has already answered question of law no. 3 in favour of assessee by holding that payment to NTOs for providing inter connect services and transfer of capacity in foreign countries cannot be charged as royalty as there is no “use” or “right to use” process or equipment as alleged by the revenue. Hon’ble High Court also held that granter of the right (being the non-resident assessee in the present assessee) to be denuded from the property, and it should vest completely with the recipient (in the present case the Indian telecom operator), which condition does not satisfy in the present facts of the case. The Hon’ble High Court also observed that the possession, dominion and control over such property should be fully granted to the user and so long as the NTOs (non-resident assessee in the present case) have not denuded themselves of utilizing the process, the payment made by the Indian telecom operators to such NTOs cannot be held to be the payment for the “use” or the “right to use” the process or equipment.

10. Admittedly there is no treaty between India and Hong Kong, the country of which the assessee is a tax resident. Therefore the payment received by assessee has to be analysed under the Income Tax Act alone. We note that the decision relied by the Ld.AR in the following cases has analysed the taxability of the identical payment received by the assessee therein for similar services, under the provisions of Income Tax Act, having regards to section 9(1)(vi); Explanation 2, 5 and 6 also. And this Tribunal has held that payments made by an Indian telecom company for identical services, as rendered by the present assessee will not fall within the ambit of Royalty under section 9(1)(vi), Explanation 2,5 and 6. There has been nothing contrary to the above observations brought on record by the revenue.

a) Telefonica De Espana SA vs. ACIT/DCIT reported in [2023] 154 com 436 (Bangalore – Trib.)

b) Telefonica De Espana SA vs. DCIT in IT(IT)A Nos. 215 & 216/Bang/2023 by order dated 17.08.2023

c) Al Telekom Austria Aktiengesellschaft vs. DCIT in IT(IT)A Nos. 336, 338 & 339/Bang/2023 by order dated 25.08.2023

d) Telecom Italia Sparkle Singapore Pvt. Ltd. vs. DCIT in IT(IT)A Nos. 579 & 580/Bang/2020 & IT(IT)A No. 1138/Bang/2022 by order dated 31.08.2023

11. Based on the above discussion and respectfully following the decision of Hon’ble Karnataka High Court in case of Vodafone Idea Ltd. (supra), we hold that the payments received by the assessee cannot be held to be royalty under section 9(1)(vi) of the Act. Further the revenue has not made out a case that there is a permanent establishment of assessee in India in order to tax the receipt by assessee in India as it is arising from extra territorial sources. Accordingly, in our opinion, the payments received by assessee amounts to be business profits of the assessee which is taxable in the recipient country. Accordingly, ground nos. 3-4 for A.Y. 2014-15 and ground nos. 2-3 for A.Y. 2017-18 stands allowed.

In the result, both the appeals filed by the assessee for both the years under consideration stands partly allowed.

Order pronounced in the open court on 25^th April, 2024.