Recently, the Chennai Bench of the Income-tax Appellate Tribunal (Tribunal), in the case of Verizon Communications Singapore Pte. Ltd (Tax-payer) held that the consideration for provision of International Private Leased Circuit (IPLC) / dedicated bandwidth qualify as Royalty under the provisions of Income-tax Act, 1961 (Act) read with the provisions of relevant Double Taxation Avoidance Agreement (DTAA). The Tribunal held that such consideration would be regarded as towards use of process or equipment.
IN THE INCOME TAX APPELLATE TRIBUNAL
CHENNAI BENCH ‘C’ : CHENNAI
[BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER]
I.T.A. Nos. 1311/Mds/2006 & 164/Mds/2007
Assessment years : 2002- 03 & 2003- 04
|M/s Verizon Communications Singapore Pte Ltd.
(formerly MCI Worldcom Asia Pte Ltd) C/o S.R. Batliboi & Co.
No.3, Cenotaph Road TPL Huse IInd Floor, Teynampet Chennai 600 018[PAN – AADCM6355L]
|The ITO International Taxation-I Chennai|
C.O.Nos.20 & 21/Mds/2009
[In I.T.A. Nos. 1311/Mds/2006 & 164/Mds/2007]
Assessment years : 2002-03 & 2003-04
|The ITO International Taxation-I Chennai
|M/s Verizon Communications Singapore Pte Ltd.
(formerly MCI Worldcom Asia Pte Ltd) Chennai 600 018
Date of Judgment: 07.01.11.
O R D E R
PER HARI OM MARATHA, JUDICIAL MEMBER:
This is a bunch of four matters – two appeals by the assessee and two corresponding cross objections by the Revenue. Since identical issues are involved in these cases, we are proceeding to decide them by a common order for the sake of convenience and brevity.
2. Briefly stated, the facts of the case are that the assessee-company namely, MCI Worldcom Asia Pte. Ltd. was incorporated under the Companies Act, 1956, on 15.3.1997. Subsequently, through a special resolution, its name was changed to ‘Verizon Communications Singapore Pte Ltd’ with effect from 24.3.2006 and since then it is known by its new name. The assessee-company, a non-resident company, has filed its return of income for assessment year 2002-03 on 1.10.2003, admitting ‘NIL’ income and also claimed TDS refund of ` 2,69,99,456/-. Initially, the return was processed u/s 143(1) on 4.11.2003 accepting the NIL income filed, but later, the case was scrutinized u/s 143(3) vide which positive income was computed and interest u/s 234A and 234B of the Act was also charged. The assessee-company is engaged in providing international connectivity services largely in the Asia Pacific Region. The Indian Telecom Regulations allow only licensed service provider to provide International Long Distance Telecommunication Services (ILDTS) in India. The assessee- company, is not a licensed service provider in India, but provides only International Private Lease Circuit (IPLC). The Indian Half Circuit services are provided to the customer by the local license provider, namely, Videsh sanchar Nigam Ltd (VSNL). A customer interested in taking leased line between his office in India and any overseas location, enters into two separate contracts for the provision of connectivity services – firstly with MCI Singapore for provision of international connectivity; and secondly, with VSNL for Indian Half Circuit Services Connectivity. The VSNL takes the telecommunication traffic of the customer from the customer office/site in India and transmits the traffic to a virtual point outside India. In doing this, the customer receives two invoices – one, from MCI Singapore for providing the connectivity services outside India; and second, from VSNL for Indian half of the connectivity. The case of the assessee is that it uses telecom services equipment which is situated outside the territory of India in order to provide international connectivity services and do not either ‘own’ or ‘utilize’ any landing station in India for providing international half-circuit-services. It is stated that the landing station or gateway in India used in transmitting the traffic within India belongs to VSNL. This is used by VSNL for providing India end services pursuant to its contract with the customer. As per assessee, none of its equipments is installed within the territory of India in connection with the services rendered by MCI Singapore to Indian customers. MCI Singapore has a Service Agreement with its Indian associate enterprise, namely, MCI Worldcom India (Pvt) Ltd (MCI India) as per the terms of which MCI will render the following services to MCI Singapore:
“(i) Market Development services such as assist in the development of qualitative and quantitative market research, market plan and assist in the design of a communication strategy.
(ii) Liaisoning with customers for obtaining feedback on behalf of MCI Singapore on the quality and efficiency of the services provided by the MCI Singapore and compared to its competitors in India.
(iii) Exploring new service lines/ventures for MCI Singapore in India. (iv) Providing information on potential customers to MCI Singapore.
3. As per the assessee, MCI India does not have any authority to negotiate on behalf of, or to bind MCI Singapore in any manner vis-à-vis potential customers in India. The other angle of assessee’s case is that MCI Singapore does not have a Permanent Establishment (PE) in India. MCI India is sated to be not a subsidiary of MCI Singapore and acts as a channel of communication between the customer and MCI Singapore to obtain customer feedback on telecom services provided by MCI Singapore. The sum and substance of assessee’s case is that MCI India is legally independent of MCI Singapore; that there is no control on MCI India by MCI Singapore, so MCI India is not a PE of MCI Singapore which at best can only be referred to as an ‘Agency-PE’. In the alternative, the case of the assessee is that even if MCI India is taken to be dependent agent of MCI Singapore, it does not constitute a PE of MCI Singapore in India since it does not have the authority to negotiate or conclude contracts nor it secure orders on behalf of MCI Singapore in India. MCI India provides marketing support to MCI Singapore for which it is remunerated at an arm’s length basis. Accordingly, the case of the assessee is that since, MCI Singapore does not have a PE in India no income can be attributed nor taxed in India and hence, payments received by MCI Singapore for international connectivity services are not taxable in India. To explain its case properly, the assessee also filed copies of the following documents before the Assessing Officer:
a) Copy of the agreement entered into between VSNL and MCI Worldcom Asia (Pte) Ltd for the International Private Leased Circuit.
b) Copies of the agreements entered into between MCI World com Asia (Pte) Ltd and their various customers in India.
c) Copy of the agreement entered into between VSNL and MCI Global Access Corporation, USA dated 8.2.2001 for VSNL/WCom Global Network Services.
4. After considering the explanation of the assessee, the Assessing Officer has concluded as under:
“8. Copies of agreements entered into by MCI Worldcom Asia (Pte) Ltd with various Indian customers have been obtained. They are all in a similar format. Some of the agreements have an escalation list annexed which details the service provided by MCI World com Asia (Pte) Ltd in India (directly or through their affiliates). The escalation list contains the names of the persons with phone numbers, whom the customers should contact for fault resolution service. The escalation list filed by he following companies are annexed to the assessment order and this forms part of the assessment order .
i) HCL Infinet Ltd., New Delhi – letter dated 28.02.2005.
ii) Daksh e-Services Pvt. Ltd., Gurgaon, Haryana – letter dated 15.03.2005,
iiil) Stingray Technologies Pvt. Ltd., Noida, New Delhi – letter dated 07,03.2005,
iv) Birla Global Info tech Services Pvt. Ltd., Hyderabad – letter dated 24.02.2005,
v) Jindal Trans world Pvt. Ltd., New Delhi – letter dated 25.02.2005
vi) Manipal Informatics, Manipal, Karnataka – letter dated 22.02.2005.
vii) Infosys Technologies Ltd., Bangalore – letter dated 25.02.2005.
viii) Foundations – Mega Channels Computers Ltd., Chennai – letter dated 17.10,2003,
ix) Hexaware Technologies Ltd., Chennai
x) Infotronics Pvt. Ltd., Chennai – letter dated 26.08,2003.
9. On a perusal of the various agreements entered into by the assessee it is seen that services are being provided to various customers of the assessee in India, by the affiliates of MCI such as MCI India Pte Ltd. and MCI Global Access Corporation, USA. In para 2.3 of the agreement relating to: services entered into with the customers it is stated that “MCI World com may use MCI World com Affiliates or subcontractors to perform some or all of its duties and/or obligations here under.” It is seen from a perusal of the invoices and the letter dated 18.03.2005 raised on the customers that payments for these services are made to the account of MCI Singapore outside India.
10. The payment to the assessee is in the nature of rental charges and call charges (in the preamble to the Masters Service Agreement rental charge is defined as “the fixed monthly rental charge for a Service payable in accordance with clause 4”).
11. On a perusal of the Master Services Agreement with MCI, in the Definitions to Terms and Conditions to the Master Services Agreement it is stated that “Service Equipment” shall mean the equipment, systems, cabling and facilities provided by MCI World com or an MCI World com affiliate in order to make available the service to the customer. Service Equipment shall not include the network or any equipment which is the subject of a separate supply contract between MCI World com and customer. In clause 12 relating to customer obligations, it is mentioned in sub clause 12.8 relating to service equipment that the customer shall be required to deliver, install and keep installed at the customer site, the service equipment. In the clause 12.9.1 it is mentioned that the customer should house the service equipment required to be housed at the customer site in accordance with Worldcom’s reasonable instructions as may be given from time to time. In clause 12.9.2 it is mentioned that the customer shall not move, modify, relocate or in any way interfere with the service equipment or network. In sub-clause 12.9.3 it is mentioned that the customer shall not cause the service equipment to be repaired, serviced or otherwise attended except by an authorised representative of World com. In clause 12.9.4 it is stated that customer shall insure and keep insured all service equipment installed at each customer site. In 12.9.5 it is stated that customer shall not remove, tamper with or obliterate any words or labels on the service equipment. In 12.9.6 it is stated that the title to the service equipment shall at all times belong and remain with Worldcom or the relevant World com affiliate. In 12.9.8 it is stated that customer shall permit Worldcom to inspect or test the service equipment at all reasonable times. In 12.9.9 it is stated that upon termination of the service, customer shall allow World com access to each customer site to remove the service equipment.
12. It is stated in clause 6 relating to fault resolution that World com shall respond to notification of the fault from the company in a specified time frame and that World com shall use all reasonable endeavors to correct any fault as quickly as possible.
13. It is stated in clause 25 that World com shall be entitled at any time to use World com affiliates to perform such obligations in the agreement. A copy of the Master Services Agreement entered into by Wipro with MCI World com has been obtained. This is enclosed herewith.
14. On a perusal of the copies of various agreements (and the escalation clauses annexed thereto) entered into with customers in India it is seen that services are provided in India at various levels.
15. The assessee’s contentions in para 3 cannot be accepted for the following reasons:
16. The assessee has filed a sample Master Service Agreement copy entered into with customers in India. The assessee has stated that the various agreements are in a similar format. The same was obtained from the customers also. An inquiry was made with the Office of MCI World com India (Pvt) Ltd., Chennai to ascertain the nature of service provided to the Indian customers. A statement has been recorded from Shri Mohan Ramaswami, a Telecom Engineer by profession and an employee of M/s. MCI Worldcom India (Pvt) Ltd., Chennai (Head Quarters in New Delhi). A copy of the statement has been given to the assessee on request. Shri Mohan Ramaswami has stated that he along with his team of Service Engineers are attending to fault resolution service for various customers in India for which purpose they coordinate with VSNL and MCI, USA. He has also stated that as a head of the Operations Division he reports to MCI, USA, directly and is not reporting to any of the authorities of MCI India. It is therefore evident that the technical services are rendered to customers in India through employees of the associated concern of MCI World com India Pvt. Ltd.
17. On a perusal of the agreements and from the inquiries made it is seen that the assessee has an enduring business connection in India u/s.9(l) of the Income Tax Act as a result of the source of income in India and location of assets and software in India (through the affiliates of the assessee) and rendering of services in India as discussed above.
(ii) M/s. VSNL Mumbai has vide letter dated 11.03.2005 stated that “MCI has located and installed in VSNL premises equipment and software required for providing frame relay services.” 1he details of this equipment are listed in para 5 above. VSNL has specifically mentioned that “the following equipments are located and installed by MCI in VSNL premises for providing the service of Frame Relay.
Ascend B-SID X 9000
Though it is mentioned in the agreement that the equipment is transferred by MCI to VSNL for a token payment of ` 10,000/- it is seen that the ownership of this equipment is with Mel only for the following reasons:
a) VSNL does not have any right to sell the equipment.
b) The equipment has to be handed over to MCI any time on demand for a payment of ` 10,000/-
c) The payment of ` 10,000/- is only a token amount and not the actual consideration of the equipment.
18 . Hence, it is seen that VSNL is only the custodian of the equipment. Also, MCI holds the ownership of the software as mentioned in the agreement. As discussed above, the assessee has a business connection in India on account of the source of income in India, through assets and services provided (through associated concerns) in India.
19. However, under Article 7(7) of DTAA with Singapore it is stated that “Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.” These payments are in the nature of royalty for the use of equipments (nodal equipment in India, service equipment in USA, etc.) and related ·services. This income by way of royalty is taxable u/s.9(l)(vi) of the Income Tax Act. Under sub-clause (iva) and (vi) of Explanation 2 to section 9(1)(vi) of the Income Tax Act, the consideration for use or right to use any industrial, commercial or scientific equipment and the rendering of any services in this connection would come under the purview of “Royalties”. These are also covered by royalty for the use of equipment under Article 12(3)(b) of DTAA with Singapore, and hence they are to be treated as “royalties”. Hence, these would be taxable at the rate of 10% as specified Article 12(2)(b) of DTAA with Singapore.”
5. In first appeal, the ld. CIT(A) has dismissed the entire claim of the assessee after making elaborate discussion and giving a finding that “to avoid tax liability, apparently, MCI has split the lease charges for the IPLC circuit into two non-existent half circuits. Thus MCI is trying not to acknowledge its liability on the quantum of lease charges arising in India and received by it by resorting to subterfuges. It is a fact that MCI has provided the single, composite and indivisible circuit which constitutes ‘equipment’. It has merely taken VSNL as a “Provisioning Entity” for providing the local part of services in India. In the alternative, the payments made for IPLC service may also be held to be for the use of process and hence, would amount to payment of Royalty. The order of the Assessing Officer that payments received by the appellant was royalty for use of equipment and related services is therefore, confirmed.”
6. Now the assessee is aggrieved and has filed this appeal by taking following grounds:
“1.1 That on the facts and circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) (‘CIT-A ‘) has erred in upholding the order of the Income Tax Officer, International Taxation – I, Chennai (‘the assessing officer’) wherein the assessing officer has held that the amounts received by the appellant from the Indian customers for the provision of international connectivity services outside India is royalty for the use of equipment and related services under Article 12(3)(b) of the India Singapore Tax Treaty and under section 9(1 )(vi) of the Income Tax Act, 1961 (‘Act’).
1.2 That on the facts and circumstances of the case and in law the learned CIT-A has erred in holding that in the alternative, the payment received by the appellant can be classified as royalty for use of ‘process’.
2.1 That on the facts and circumstances of the case and in law, the learned CIT-A has erred in not deleting the interest charged by the assessing officer under section 234A of the Act amounting to ` 68,11,987 and interest under section 234B of the Act amounting to ` 182,78,834.
2.2 That on the facts and circumstances of the case and in law, the learned CIT-A has erred in summarily rejecting the submissions filed by the appellant before him, holding that no detailed arguments were presented by the appellant regarding the levy of interest under section 234A and 234B of the Act. The appellant craves for leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. “
7. From both the sides, oral submissions were made, written submissions were filed and voluminous paper books were also filed in support of their respective claims. We have carefully gone through the entire record made available before us, including the paper books of the parties, written submissions and counter submissions submitted before us. Before we proceed to decide the real controversial issue, we deem it desirable to understand the actual nature and modus of working/service being provided by the assessee in this case, in which a non-resident company and a local service provider are involved. We have to examine if MCI India amounts to a ‘PE’ as defined in the Act or in any other case whether an ‘Agency-PE’ as it has been given the nomenclature by the assessee tantamounts to and is equivalent to a ‘PE’ as per the Act or not. The other allied question to be answered is whether for the use of the equipment in this case, as explained with the help of diagrams, whether payments made to the non-resident satellite companies by the customers are liable to be taxed as royalty under the Income-tax Act and the provisions of the respective DTAA inasmuch as the payment was for use of the ‘Process’ and it was not necessary that the processing should be a secret process. In other words, whether the services by the appellant company through sophisticated equipments including optical fiber under sea cables to the Indian customers would amount to royalty or not. In nut shell, the crux of the matter is whether payment made for the services so provided are subjected to Indian income-tax or not. The undisputed facts of this case are that Indian telecommunication Regulations permit only the licensed service provider to provide services in India. It is also a fact that the appellant is not to a licensed service provider in India and apparently it provide the services only outside India. The appellant is engaged in providing international connectivity services to customers in Asia Pacific region. For this year, NIL income was returned on the premise that the revenues earned by it are in the nature of business profits which are not liable to tax in India because the services are provided wholly outside the territory of India. The Assessing Officer has held that these payments are taxable as royalty having been received for use of equipments and related services u/s 9(1)(i) of the Act as per the terms and conditions of DTAA between India and Singapore. He has also found that these payments received by the assessee may be considered as royalty for the purpose and hence, in that view of the matter, would also be taxable in India. The other reason given by the Assessing Officer is that the appellant has a business connection in India and on account of source of income being in India though the assets and services are provided through associated concerns in India. For taxing the impugned receipts, being connectivity charges, received by the non-resident company, has been brought to tax as royalty income received from different customers in India, the Assessing Officer has given detailed reasons in his order. Likewise, the ld. CIT(A) has also found these amounts received by the non-resident company for providing connectivity through dedicated bandwidth to its Indian customers holding that the amounts paid were royalty for use of the assessee’s ‘equipment’ or for use of the ‘process’. The Assessing Officer has reason to tax this income on the ground that the assessee has an enduring business connection within the meaning of section 9(1) of the Act, as a result of which the source of income being in India and location of assets and software also being in India and the services are also rendered in India. The Assessing Officer has mentioned that in any case, this amount becomes taxable because of the following:
(i) The non-resident assessee , M/s VSNL, Mumbai, had entered into an agreement in the business of providing IPLC and related services to various customers.
(ii) The appellant/assessee had located and installed in the VSNL premises equipments and software required for providing framed relay services viz –
Ascend B-STD X 9000
(iii) The ownership of equipment was always on appellant because VSNL did not have any right to sell the equipment. The equipment has to be handed over to MCI any time on demand for a payment of Rs. 10,000/- which was only a token amount and not the actual consideration of the equipment.
8. Thus, de facto owner of the equipment installed at the premises of VSNL was assessee company itself.
9. Both the representatives tried to explain their point of view even with the help of pictographs. Both sides have given the complete pictures and processes involved. To understand the exact working of the assessee company, we extract the following facts and figures, and diagrams from the papers filed before us and which are not disputed, so it would be easier to understand the real controversy:
In the near term, networks with WDM point-to-point links and electronic regeneration at each node, such as Alcatel’s ring network, are quite practical. However, electronic regeneration can be quite expensive, and in the longer term, the all-optical approach is likely to reduce the node cost significantly.
As we have seen, the all-optical testbed demonstrations were mostly transmission oriented and concerned with the physical layer issues discussed in Chapter 5. They also focused on demonstrating the use of specific types of switches, mux/demuxes, filters, and amplifiers. This is where the major problems are today.
These testbeds have shown that dielectric thin film-based filters in combination with splitters and combiners are good mux/demuxes. They have flat passbands, low loss, and are polarization insensitive. Optomechanical switches have slow switching times (tens of ms) but have low loss, and more important, very low crosstalk. The other types of switches, based on newer technologies, have several problems and are much more expensive today. AOTFs, which can simultaneously switch many channels, were found to have high crosstalk and loss. The same goes for lithium niobate switches and semiconductor amplifier-based switches. The good news is that these switches can switch much faster than optomechanical switches, in the μs to ns time scale, and are more amenable to integration than optomechanical switches. All the OXC and OADM nodes suffer from fairly large losses overall (over 10 dB) and need EDFAs to compensate for them.
In terms of transmission-related issues, losses, amplifier gain equalization; power equalization of channels, and crosstalk were all seen to be major issues. Most of the testbeds could not successfully transmit data all optically through more than a few nodes. However, they give a good indication of the types of networks that will become commercially feasible in the next few years.
1. The Big Picture
Since the beginning of the 21st century there has been a burgeoning demand for communications services. From the ubiquitous mobile phone, providing voice, images, messaging, and more, to the Internet and the World Wide Web, offering bandwidth-hungry applications such as interactive games, music, and video file sharing, the public’s appetite for information continues to grow at an ever-increasing pace. Underneath all of this, essentially unseen by the users, is the optical fiberbased global communications infrastructure – the foundation of the information superhighway. That infrastructure contains the multi wavelength optical networks that are the theme of this book.
Our purpose is to present a general framework for understanding, analyzing, and designing these networks. It is applicable to current network architectures as they have evolved since the mid-1990s, but more importantly it is a planning and design tool for the future. Our approach is to use a generic methodology that will retain its relevance as networks, applications, and technology continue to evolve.
1.1 Why Optical Networks?
Since the fabrication of the first low-loss optical fiber by Corning Glass in 1970, a vision of a ubiquitous and universal all-optical communication network has intrigued researchers, service providers, and the general public. Beginning in the last decades of the 20th century enormous quantities of optical fiber were deployed throughout the world. Initially, fiber was used in point-to-point transmission links as a direct substitute for copper, with the fibers terminating on electronic equipment. Glass fiber was and is the ideal medium because of its many superior properties: extraordinary bandwidth, low loss, low cost, light weight and compactness, strength and flexibility, immunity to noise and electromagnetic interference, security and privacy (it is difficult to tap them), and corrosion resistance. Although all of these qualities make the fiber a technological marvel, fibers do not become networks until they are interconnected in a properly structured architecture. For our purposes, an optical network is a telecommunications network with transmission links that are optical fibers, and with an architecture that is designed to exploit the unique purposes, an optical network is a telecommunications network with transmission links that are optical fibers, and with an architecture that is designed to exploit the unique features of fibers. (Most of the communication systems in use today, including many specialized networks such as cable TV and mobile phone systems, have optical fiber in them somewhere; however, this does not make them optical networks.) As we shall see, suitable architectures for high-performance light wave networks involve complex combinations of both optical and electronic devices. Thus, as used here, the term optical or light wave network does not necessarily imply a purely optical network, but it does imply something more than a set of fibers interconnecting electronic switches.
As optical and photonic technology has advanced, applications to point-to-point transmission have preceded advances in networking. For example, it was clear in the early years of optical fiber transmission that by introducing wavelength division multiplexing (WDM) on existing fibers the capacity of a fiber link could be increased many fold at minimum cost. However, it was only since the early 2000s that the optical switching technology necessary to convert isolated fiber transmission links to optical networks matured sufficiently to permit the commercial deployment of these networks. In the mid-1990s, the optical network (as opposed to optical fiber transmission alone) was still a “blue sky” concept. New optical and photonic devices were being developed and incorporated into experimental networks. But full-ledged multi wavelength networks integrating optical transmission, switching, and user access were still in the research and development stage. At that time the technology push for networking was out in front, but demand for the seemingly unlimited capacity of these networks was essentially nonexistent. As this is being written, the promise of optical networking is finally being fulfilled. The demand pull for these networks has materialized. As low-cost broadband services are made available to the general public, demand for Internet-based applications continues to increase. Equipment manufacturers, communications carriers, and service providers have joined in moving optical networking from feasibility studies to commercial viability in both cost and performance. The focus in the networking community has now shifted to organization, control, manageability, survivability, standardization, and cost-effectiveness, a trend that reflects the maturing of the optical technology as well as the recognition that the optical network is the only way of supporting current and future demand. These networks have played a critical role in reducing communications costs, promoting competition among carriers and service providers, and thereby increasing the demand for new services.
In addition to the technology push and demand pull, a number of other recent developments are contributing to the expansion and effectiveness of optical networks. One is the accelerating removal of the bottleneck in the “last mile” – the distribution network that is the bridge between the high-speed fiber core network and the end users. Until the last decade of the 20th century this distribution network – composed of twisted pairs of copper wires connecting each residential subscriber to the local telephone Central Office – was specifically engineered to a limited bandwidth of 3000 Hz. As a result the user bit rates were restricted to a tiny trickle. This low speed access link separated the various high-speed communications and computing devices located on the premises of the end users (e.g., PCs, TV displays, and music/image/video storage equipment in the home) from the high-capacity network serving this equipment. Considering that the processors in today’s PCs operate at speeds six orders of magnitude faster than a low-speed access link, and the optical fibers in the network have bandwidths nine orders of magnitude wider than the bandwidth of the access link, it is obvious that access was – and is – a severe problem. As long as the last-mile bottleneck is present, the information superhighway is still a dirt road; more accurately, it is a set of isolated multi lane highways with cow paths for entrance and exit ramps. The introduction of broadband access to residential customers by the telephone carriers and the cable operators is a step toward eliminating those cow paths. However, digital subscriber line (DSL) and cable modems are half-measures at best. Direct access to the fiber network by the end user [i.e., fiber to the home (FTTH) or business user] is the ultimate way of removing the bottleneck so that the network remains effective as demand for bandwidth grows. Although FTTH was deployed many years ago in a few demonstration projects, it did not take hold for several reasons, including cost and the absence of services of interest to the customers. Today that has changed because of the proliferation of broadband Internet services. Deployment of glass is now moving from the network core through fiber access networks to the end users. This will undoubtedly stimulate interest in new broadband services that take advantage of high-speed access and in turn produce demand for more bandwidth. At this writing, most of the world’s installed fiber capacity is underutilized – arguably due to the last-mile bottleneck. That should change rapidly as progress in the removal of the bottleneck results in a quantum jump in network traffic, making high-performance optical networks indispensable.
Higher level issues such as deregulation, new ideas for improving the economics of networking, and standardization of control and management techniques in multi vendor networks are also contributing to the growing effectiveness of optical networks. Deregulation, which began in the United States in 1984 with the dismantling of AT&T, has brought with it a new level of competition, with long-haul carriers, local carriers, Internet service providers (ISPs), and cable operators poaching on each other’s domains and using optical fiber capacity to do so. Bandwidth trading has been introduced as a way of improving the utilization of fibers and thereby optimizing profits. A carrier with idle capacity sells it to another carrier with excess demand. This type of exchange requires sophisticated control and management tools for network reconfiguration. More generally, any large network requires complex control and management systems and intelligent network elements for performance monitoring, network reconfiguration, and fault recovery. The systems, protocols, and equipment for performing these functions in traditional telephone and data networks were built over many years by the public carriers and equipment manufacturers. The new optical networks require similar tools, and this is especially important in multi vendor environments. These are now making their appearance in the form of a proposed control plane for optical networks and protocols for systems management in these networks. As more sophisticated control and management functions are incorporated into optical networks the network operators are in a better position to offer high-quality service to their customers, improving the operator’s revenue stream and customer loyalty.
Above all, the lessons of the past show us that tomorrow’s networks must be flexible and versatile enough to adapt to a continuing barrage of new and as-yet unknown services. It is interesting to note that when optical networks were still in an embryonic form, the typical uses envisaged for them were high-tech applications such as high-resolution medical image archiving and remote supercomputer visualization – basically usages generated by a minuscule, elite segment of the population. Today these applications represent but a tiny part of the global network traffic, submerged in a torrent generated by the common man, who has only recently gained access to the enormous opportunities our worldwide communication system has to offer. The networks we conceive today must be “futureproof” so as to be ready for the next unforeseen developments.
1.2 Objectives of an Optical Network Architecture
Today’s and tomorrow’s optical networks must provide the capacity, connectivity, and intelligence necessary to link together a global community of information providers and consumers. A well-designed network performs this function efficiently and reliably. To facilitate a systematic study of networks that achieve this goal, it is useful to formulate a generic model in the form of a multi wavelength network architecture (MWNA). As background for the MWNA we briefly review the current network structures and the services they support.
Until the end of the second millennium, the world of networking consisted of two separate spheres: the traditional telephone networks mainly devoted to providing voice services (operated in a circuit-switched mode) and data networks (operated in a packet-switched mode) for communication between computers. Each type of network was specially engineered and optimized for its own type of service. Circuit switching was the preferred approach to voice transmission, because the voice signal was transmitted as a continuous stream, whereas packet switching was invented to carry data traffic because data signals were bursty in nature, making the circuit-switching approach very inefficient. Because the voice networks operated by the public carriers contained virtually all of the world’s installed communication capacity, the early data networks were constructed as overlays on these networks, running on lines leased from the public carriers mainly AT&T in the United States and the government administrations in Europe. The traffic flow in the early data networks was minute compared to voice traffic essentially confined to businesses, universities, and research laboratories. For this reason the main players in data networking were originally government, research, business, and educational organizations and data processing equipment manufacturers.
As optical fiber became the dominant transmission medium, various standards for exploitation of fiber were developed, including the synchronous optical network (SONET) standard in the United States and a similar synchronous digital hierarchy (SDH) standard in Europe. The SONET/SDH transmission, multiplexing and switching equipment, adapted primarily to circuit-switched applications, was soon augmented by asynchronous transfer mode (ATM) switches and Internet Protocol (IP) routers (cell-switched and packet-switched, respectively) to handle a wide variety of data and multimedia services. By the late 1990s the traditional separation of voice and data networks changed significantly. In a very short time we moved from voicecentric world to a data-centric world, and, more importantly, the techniques of carrying data (packet switching) were extended to an infinite variety of services having no resemblance to those in the traditional computer world. Internet/Web services, running the gamut from interactive computer games through telemedicine to peer-to-peer file sharing, now use IP for transmitting anything from computer data to video (Internet Protocol TV; IPTV) to old-fashioned voice (Voice over IP; VoIP).1
This brings us to the characteristics and requirements of the services supported by the optical networks discussed here. These are extremely diverse in terms of connectivity, bandwidth, performance, survivability, cost, and a host of other features.
Consider the common Internet services offered to the general public (e.g., e-mail and search engines). They serve a vast globally distributed user community. In terms of connectivity, these types of services push networking to its ultimate limits; any end user wants rapid connectivity to anyone or anything in the network. However, in terms of performance, they are undemanding – they can tolerate errors, delays, and occasional down times due to congestion, programming bugs, and equipment failure. Total costs may be high, but they are spread over an enormous user base resulting in a very low cost per user.
In contrast, consider a different type of application, the virtual private network (VPN). This is a subnet carved out of a larger network by a telecommunications carrier and put at the disposal of a single enterprise, which typically controls and manages it. Consequently it has a much smaller user group with more intense utilization per user, far fewer active connections, and tighter control of network performance, including security and reliability. Customer costs per user will be higher, but this is offset by higher performance and more responsiveness to the needs of the customer.
Another example is telemedicine, which requires high-quality communication (e.g., high fidelity medical image encoding and transmission, and rapid response) and where cost is secondary. Different requirements apply to public safety services (e.g., police, fire, and disaster relief), which depend on a high degree of survivability, fault recovery, and availability2 in the face of equipment and line failures, natural disasters, or malicious attacks. Transmission quality is secondary. Similar requirements hold to a lesser degree for financial services (e.g., banks and brokerage houses). In public safety and financial service applications, cost is not the primordial issue.
To ensure satisfactory service, large users of network services (e.g., enterprises operating VPNs) enter into service-level agreements (SLAs) with the service providers. For example, the SLA might specify a level of availability, network delay, packet loss, and other features. These represent promises from the provider to the user, and as such they must be backed up by suitable controls within the underlying network to achieve the performance stated in the SLA. These controls are enforced within a large network by identifying differentiated services, that is, traffic flows that are singled out to be provided with a predictable quality of service (QoS) (e.g., limits on packet loss and delay). Traffic routed through a large network can be tagged to recognize its class of service (CoS), thereby facilitating the satisfaction of service requirements through mechanisms such as priority packet queuing, bandwidth allocation, and service recovery priority.
The various functions executed by the network operator, such as load balancing and QoS-based traffic handling, are known as traffic engineering.
Considering the wide diversity of these service requirements (and we have only mentioned a small sample), it is a challenge to support all of them on a single network. Yet this is not only possible, but it is generally the most efficient way of doing the job. As we will show, the building blocks are now available to assemble multi wavelength optical networks that can sustain large user populations with diverse service requirements of the type just described. This means that, ideally, the MWNA must be structured to offer a special set of features adapted to each service it supports. To see how this is achieved it is convenient to think of the network in terms of its constituent layers, with client-server relations between the neighboring layers. An illustration is the multilayered view shown in Figure 1.1. The architecture is composed of an underlying optical infrastructure the physical layer – which provides basic communication services to a number of independent logical networks (LNs) residing in the logical layer. Each LN organizes the raw capacity offered by the physical layer, adapting it to the needs of the clients it serves, shown in the services layer of the figure. For example, the SONET network shown in Figure 1.1 uses optical wavelength channels provided by the physical layer, transmits optical signals on them, and carries multiplexed communication channels on those signals. The SONET channels can be tailored to support a wide variety of services; two services shown in the figure are plain old telephone service (POTS) and a VPN. In our example, the SONET layer also supports an ATM layer that in turn supports a client IP layer providing Internet access services to end users. Another independent IP network shown in Figure 1.1 is supported directly by the physical layer, providing a telemedicine service, VoIP, and a music/video file-sharing service. In addition, the physical layer provides purely optical connections directly to end users via demand assigned wavelengths (also known as clear channels), thereby bypassing the logical layer altogether.
Thus, the logical layer shown in the figure contains several LNs; some are stacked in a client-server relationship, and others are independent of each other, offering specialized features to the service layer. Stacked logical layers; e.g., IP over ATM over SONET over WDM, have both advantages and disadvantages. For example, different services (e.g., POTS and VPNs) require channels running at different bit rates. The SONET layer supports these different speeds and in addition provides a grooming function, packing the diverse channels onto a common optical wavelength, using time division multiplexing. This “fills up” the wavelength channel for efficient utilization. However, stacked layers mean additional equipment, which is costly, introduces delays and potential points of failure, and is difficult to manage. Therefore, it is desirable to reduce superfluous layers wherever possible. For example, the IP equipment manufacturers propose to provide IP over WDM, short-circuiting the commonly used configurations involving stacked intermediate layers.3 Another view of an optical network is the physical picture of Figure 1.2, showing the network elements in the layers of Figure 1.1. Here the physical layer is portrayed for simplicity as a transparent purely optical core.4
The “glue” in the physical layer that holds the transparent optical network together fits roughly into two basic classes: the optical network nodes (ONNs), which connect the fibers within the network, and the network access stations (NASs), which interface end-user systems and other non-optical equipment to the network. Shown as rectangles in Figure 1.2, the NASs (or stations for short) provide the terminating points (sources and destinations) for the optical signal paths within the physical layer. The communication paths continue in electrical form outside the purely optical part of the network, either terminating at end systems (for example, PCs, telephones, and servers) or traversing electronic multiplexing and switching equipment (e.g., ATM switches, IP routers, or SONET digital cross-connect systems [DCSsJ), shown as hexagons in Figure 1.2. The ONNs (or nodes for short), shown as circles in Figure 1.2, provide the switching and routing functions that control the optical signal paths (also called lightpaths), configuring them to create desired source-destination connections. The stations and nodes contain the optoelectronic and photonic components of the network: lasers, detectors, couplers, filters, optical switches, amplifiers, and so on. These components work together with the fibers to produce the required optical signal connectivity. Although the underlying optoelectronic and photonic technologies have matured considerably since the mid1990s, they are not as well developed as their electronic counterparts. Thus, electronics (in the logical layer) is currently an equal partner with photonics (in the physical layer).
The line between the optical and electronic parts of the network has become fuzzy as technology has advanced, but at this point in our discussion we retain the simplified view that the physical layer is transparent and optical, whereas the logical layers are electronic and “opaque.”
The electronic switching node plays the same role in the logical layer as ONNs play in the physical layer. Our generic term for an electronic switching node (each hexagon in Figure 1.2) is a logical switching node (LSN). The LSNs sort, multiplex, switch, and route signals in the various LNs. In this way they create virtual connections among the entities they serve. These entities may be service provider equipment or user equipment (end systems), as in the case where the LSNs are IP routers connecting ISP servers to customer PCs, or they may be higher layer switching nodes in a client network, as in the case of SONET DCSs serving ATM switches serving IP routers.
Although the focus of this book is the physical layer and its optical components, the logical layers are an integral part of the overall network architectures we discuss here. Therefore, our MWNA includes the logical layers and their electronic components. An understanding of the design and operation of multi wavelength optical networks requires an awareness of the close coupling between the physical layer and the logical layers it serves.
The networks we examine will generally be designed to serve large, heterogeneous, geographically dispersed user populations. Given this fact, and the various service requirements discussed, we can infer a list of general design and operating objectives:
– Support a very large number of end systems
– Support a very large number of concurrent connections, including multiple connections per station and per end system
– Support multicast connections efficiently
– High aggregate network throughput (hundreds of terabits per second)
– High fiber transmission capacity (terabits per second)
– High user bit rate (gigabits per second)
– Small end-to-end delay
– Low error rate (digital)/high signal-to-noise ratio (analog)
– Low processing load in nodes and stations
– Adaptability to changing and unbalanced loads
– Access stations: limited number of optical transceivers per station, limited complexity of optical transceivers, simple tuning techniques
– Optical network nodes: high throughput, minimal signal impairment, and low complexity – Logical switching nodes: efficient channel grooming, simple packet-routing procedures, and controlled traffic load .
– Network: Limited number and length of cables and fibers, efficient use (and reuse) of the optical spectrum, controlled signal impairment in the physical layer, minimization of logical layer complexity.
– Survivability (fault tolerance)
– Efficient, rapid, automated connection provisioning, and reconfiguration
– Built-in intelligence in the network elements for monitoring and control
– Efficient and rapid automatic fault identification and recovery
– An integrated network management system to monitor and coordinate all network layers
As we look at existing and proposed network architectures, it is important to keep these goals in mind.
1.3 Optics versus Electronics: The case for Transparent Multi wavelength Networks
There are certain functions that come naturally to each technology. Referring to the somewhat idealized view of a network in Figure 1.2 based on the assumption of a purely optical physical layer, there is a clean separation between optical/photonic technology, on the one hand, and electronic technology, on the other. The NASs represent the optoelectronic interface (denoted by the boundary labeled e/o) between the electronic domain (the equipment outside the purely optical portion of the network) and the optical domain, sometimes called the optical ether. This interface is the point of demarcation between the physical layer and the logical layers. In a typical purely optical physical layer the optical signal paths are as transparent as a piece of glass.
The stations provide the basic functions of getting the light into the fibers (with lasers) and getting it out (with photodetectors). When the signals are in optical form, photonic technology is well suited to certain simple signal-routing and switching functions within the nodes. With static photonic devices, it is fairly easy to perform functions such as optical power combining, splitting, filtering, and wavelength multiplexing, demultiplexing, and routing. By adding suitable control, the static devices can be controlled dynamically (switched) at slow to fast speeds (milliseconds in the case of mechanical or thermal control and microseconds or nanoseconds in the case of electronic control).
The enormous usable bandwidth of a single fiber (tens of terahertz) is at the same time a great asset and a great challenge. It is technologically impossible to exploit all of that bandwidth using a single high-capacity channel. Thus, to make efficient use of the fiber it is essential to channelize its bandwidth. This is most easily accomplished by superimposing many concurrent signals on a single fiber, each on a different wavelength; that is, by using WDM. Thus this book focuses on multiwavelength or WDM network architectures. The relative ease of signal manipulation in the wavelength (or optical frequency) domain, as opposed to the time domain, suggests that current optical technology is particularly suited to multi wavelength techniques. In WDM networks each optical transmitter (receiver) is tuned to transmit (receive) on a specific wavelength, and many signals operating on distinct wavelengths share each fiber – possibly more than 100 in dense WDM (DWDM) transmission systems.
It should be observed that all photonic routing and switching functions within the optical domain in these networks are linear operations. Thus, at the optical level the network typically consists of only linear devices, either fixed or controllable. It is the property of linearity that makes multi wavelength networking simple and cost effective. To distinguish these linear networks from other types of optical networks, we refer to them frequently as transparent optical networks. Typical nonlinear operations performed in networks include signal detection, regeneration, reading, and modifying the information in the signal, buffering, and logic functions (e.g., packet routing based on header information). Although many nonlinear functions can be performed in the optical domain with present-day technology the current state of the art for these nonlinear devices is not nearly as advanced as it is for linear components. For these reasons, we frequently use the terms transparent optical network and purely optical network interchangeably in this book.5 Nonlinearities make the signal path opaque rather than transparent. Some of the advantages of keeping nonlinear operations out of the signal path are (1) the endto-end optical path behaves as a literally transparent 6 “clear channel” so that there is nothing in the signal path to limit the throughput of the fibers (a transparent channel behaves very much like an ideal communication channel with almost no noise and a very large bandwidth, (2) the architecture of the optical network nodes can be very simple because they have essentially no signal processing to do (optical nodes simplicity also means simplicity of network control and management), and (3) system upgrades involving changes in speed, format, and protocol are easily implemented.
There are also downsides to transparency. First, problems caused by equipment failures tend to propagate throughout the network, making fault management a more complex issue than in nontransparent networks. Similarly, impairments such as switch cross-talk, noise, fiber dispersion, and nonlinear effects accumulate over long paths, limiting the geographic “reach” of an optical connection. Second, by definition, in-band information (e.g., control information carried in packet headers, such as source and destination address, sequence number, channel number, and parity check bits) cannot be used while the signal is in optical form. Because of this, a transparent physical layer cannot perform the various processing functions required in packet switching.
It is important to note that the in-band control information carried with the data in IP (packet-based) or ATM (cell-based) networks is the key to achieving a high degree of virtual connectivity in these networks. Typically, many virtual connections are multiplexed on each network link and sorted (switched) on a packet/cell basis at each IP router or ATM switch using information contained in the packet or cell headers. Maintaining transparency in the physical layer eliminates the intelligence necessary to process this information and therefore tends to produce an optical “connectivity bottleneck” in transparent networks. For all of the aforementioned reasons, there is a case to be made for opaque optical networks [Bala+95].
The properties of electronics are complementary to those of optics. Electronic processing is ideal for complex nonlinear operations, but the limited speed of electronic and optoelectronic devices (e.g., electronic switches, memory devices, and processing units), and the high processing load imposed on electronics in broadband networks, causes a well-known “electronic bottleneck” in optical transmission systems. Putting an electronic termination on an optical fiber reduces the potential multi terabit-per-second throughput of the fiber to a multi gigabit-per-second trickle: the maximum speed that can be expected of an electronic signal. This is the origin of the highway/cow path analogy we used in Section 1.1. More succinctly, optics is fast but dumb, whereas electronics is slow but smart.
A final caveat: whenever we speak of enabling technology it must be understood that it is a fast-moving target. Thus, the state of the art is rapidly evolving in the direction of smarter optics and (somewhat) faster electronics. One consequence of smarter optics is that nonlinear operations can be introduced into a purely optical network using optical processing. For example, optical packet switching can be realized either through purely optical processing or a combination of electronics for header processing and optics for switching, resulting in an opaque optical network capable of very high speed packetswitched operation (see Chapter 10). Another example of smarter optics is the use of optical processing for signal regeneration and wavelength conversion within an otherwise linear signal path (see Chapter 4). Faster electronics is a more questionable issue, because as we push the electronic speed limits, costs rise rapidly.
1.4 Optics and Electronics: The case for multilayered Networks
Because of the size and complexity of the networks we are considering, and because of the fact that light wave technology alone cannot satisfy our networking objectives, we now return to the multilayered model of Figure 1.1 with a more detailed look at the logical layers. Elaborating on the discussion of Section 1.2, we continue with the assumption of a clear separation between optics (in the physical layer) and electronics (in the logical layers); that is, the network has as its physical foundation a multi wavelength purely optical network. Superimposed on the physical layer are one or more LNs, each of which is designed to serve some subset of user requirements and is implemented as an electronic overlay superimposed on the physical layer. Just as a transparent optical network has a physical topology composed of ONNs and fiber links, a logical network has a logical topology composed of LSNs and logical links. A logical link is an electronic transmission channel joining two LSNs. It is carried on an optical path provided by the underlying physical layer.
Each LN organizes the connections it offers to its clients in a specific way, with its own layered architecture. Different LNs may be managed independently or in coordination with others. Typically, an LN will provide services to end systems in the form of virtual connections traversing paths in the logical topology. In MWNAs involving stacked LNs a logical layer acting as a server for a client logical layer (e.g., the ATM layer serving the IP layer in Figure 1.1) will offer its services to the client layer in the form of virtual connections, which can be used as logical links in the client layer. The physical layer makes a large pool of bandwidth available to the LNs in the form of transparent end-to-end connections. These high-bandwidth optical channels may be used to provide a dedicated communications backbone for an LN as in IP over WDM, or the channels may be demand assigned for temporary activities such as response to changing traffic distributions or recovery of faults.
In descending the layers in the optical network architecture, several connections in each client layer are typically multiplexed on a single connection in the corresponding service layer, resulting in fewer but “thicker” connections carried on the optical paths in the underlying physical layer. This results in a connection granularity ranging from fine to coarse as we move down the stack. In each LN the electronic switching equipment acts as a “middleman,” taking high-bandwidth channels offered to it by the layer below it and organizing them into lower bandwidth channels with a format acceptable and cost-effective for the end users and/or client layer it serves. For example, the layer in Figure 1.1 providing IP over WDM makes use of wavelength channels offered to it by
|Physical Layer||Optical Layer|
Figure 1.3 Layered view of an optical network.
the physical layer and “packages” the bandwidth so as to support the flow of IP packets among its end users. Sophisticated network users requiring high bandwidth and the flexibility of a clear channel can dispense with the services of an LN to obtain direct access to demand-assigned wavelength channels as shown in the figure, without the intervention of an electronic middleman.
Returning to the physical picture, Figure 1.2 illustrates in more detail how the end users interface to the network through various layers of logical (electronic) switching equipment, and then through the NASs to the physical layer. For example, a user of Internet access services is shown accessing the network via an IP router on top of an ATM switch on top of a SONET DCS, which uses the services of the transparent physical layer. At the other extreme, a supercomputer is shown accessing the physical layer directly through an NAS.
In Figure 1.3, the architecture of the overall network is shown in a more formal view, reduced to its constituent layers, each one providing support for the layer above it, and using the services of the layer below it – a natural extension of the idea of layered architectures to optical networks. The layering formalism is introduced here to partition a complex set of interactions among network components into a small number of more manageable pieces. The characteristics of the logical layers (LLs) depend on the architectures of the various LN overlays. The physical layer, representing a purely optical network, is now shown divided into an optical layer and a fiber layer. The former contains the optical connections supported by the fibers, and the latter embodies the layout of the physical infrastructure itself: the fibers, switches, and optical transceivers. In Chapter 2. the layered view of optical networks is expanded into a complete multi wavelength network architecture.
Why is a hybrid approach required for optical networks? Although some early structures proposed for local area networks (LANs) and metropolitan area networks (MANs) were purely optical, the current state of the art suggests that neither optics nor electronics alone can provide all the desired features listed in Section 1.2. Using current technology, purely optical wavelength-selective switches are capable of interconnecting as many as 100 fibers operating in a DWDM mode, switching and routing each wavelength independently and yielding aggregate throughput in the range of many terabits per second while supporting hundreds to thousands of optical connections running at speeds of the order of 10 Gbps each. On the other hand, electronic packet/cell switches are currently limited in throughput to approximately 100 Gbps.7 However, they can support a much larger number of relatively low-bitrate virtual connections.
The difference in the two approaches is the granularity we spoke of earlier. Optical switches are operated most easily in a circuit-switched mode, in which the information bearing units (optical wavelength channels) being switched are few but large (in bandwidth) and the holding times for a given switch configuration are long (seconds or more). Circuit-switched operation of the optical nodes is perfectly suitable for the physical layer shown in Figures 1.1 and 1.3. Dedicated connections supporting the various LN’s are normally held in static configurations for duration of hours, days, or more. Demand-assigned connections are held typically for minutes or hours. Thus, the number of circuits being set up and taken down per unit time is relatively small. This type of operation requires little processing and provides a high aggregate throughput. Conversely, electronics is employed in situations in which there arc many information units (e.g., individual packets or cells) being switched per unit time. Because the units are typically small (in number of bits) and because each unit is processed individually, this leads to a heavy processing load, with a relatively low throughput limited by the processing power of the switch. Wide area networks (WANs) must handle both large and small information units: hence the need for marrying both electronic and optical switching technologies. The hybrid approach exploits the unique capabilities of each while circumventing their limitations.
To illustrate the importance of combining optical and electronic technology let us explore the demands placed on large networks. Broadband WANs must be capable of supporting high connectivity, high throughput, and heterogeneous traffic mixes, and they must be flexible in meeting changing demands and unforeseen circumstances such as equipment and link failures. Consider a WAN serving as a backbone that interconnects a large number of users. To reduce access costs, the traffic from small users should be aggregated before it enters the WAN, through the intermediary of an access network a high-speed LAN, a fiber access network, or an electronic switch (e.g., an IP router owned by an ISP). Each of these represents a gateway to the WAN, and there might be 10,000 of these in a network of global scale, each one serving hundreds of active users. The aggregate traffic in and out of each gateway might require connectivity to perhaps 1000 other gateways on the network at anyone time, and the total traffic injected into the network might be of the order of tens of terabits per second. (This example corresponds in orders of magnitude to present-day numbers on the Internet.)
Let us examine the optical, electronic, and hybrid alternatives for supporting these users. Consider first a network supporting gateway interconnection, using purely optical switching. It would resemble a modified version of Figure 1.2, with the access gateways attached directly to NASs without the intervening (electronic) LSNs, as shown in Figure 1.4(a). Costs dictate that there will be considerably fewer optical nodes than NASs (i.e., each node may serve many stations). In the purely optical case, each NAS interfaces one or more gateways to the backbone, so that the NAS must connect its gateways to the other gateways on the network through individual optical connections. This could require millions of relatively low-bit-rate connections (as many as 10,000,000 for the connectivity postulated here). It is the high-connectivity requirement that makes a purely optical approach very difficult. To implement this connectivity, each station must maintain connections, to 1000 other NAS/gateways (assuming 1 gateway per NAS). This means either equipping each station with that many optical transceivers or providing extremely rapid optical connection switching. No matter how it is realized, this degree of connectivity is well beyond the reach of current optical technology.
A purely electronic version of Figure 1.2 has its own’ problems. This would be implemented with electronic rather than optical switches at the network nodes, as shown in Figure 1.4(b), where the ONNs have been replaced by IP routers. This reduces the physical layer to a set of isolated point-to-point transmission links terminating on the electronic routers. Electronics can easily support the required connectivity via virtual connections. However, the electronic processing bottleneck at the switches makes it difficult and expensive to sustain the required multiterabit throughput on the backbone. Because optical switching is still in the early stages of penetrating large networks, current architectures are tilted more to the electronic side (with multiple stacked logicallayers) than the optical side. However, pressures of increasing demand, performance, cost-effectiveness, and fault tolerance are moving networks toward hybrid configurations of the type shown in Figure 1.2.
In a hybrid architecture both high connectivity and high throughput are achieved easily and efficiently. For example, an LN composed of IP routers provides the necessary connectivity through sorting and routing packets at each LSN (see Figure 1.4[c]). The physical layer supports the required throughput over dedicated, high-bandwidth (optical) backbone connections carrying aggregated traffic on logical links between the IP router ports. This example illustrates the fact that the test of a good lightwave network is whether it can achieve both high throughput and high connectivity at a reasonable cost.
Another advantage of the hybrid approach is the versatility achieved by combining optical and electronic technology. This is especially important from the point of view of reconfigurability. For example, frequent changes in fine granularity traffic routing due to changes in customer demand are most easily accommodated by switching in the logical layers; i.e., by using the intelligence built into the IP routers. However, rerouting of masses of coarse granularity traffic due to equipment or link faults is more quickly and efficiently handled in the physical layer by resetting the optical paths through the ONNs using automatic fault recovery mechanisms. Without a reconfigurable layer underneath them, the logical !inks between the IP routers are fixed. We have an IP. network whose logical topology is written in stone.8 Conversely, without an intelligent logical layer above it, the physical layer cannot manipulate the fine-granularity traffic flows among end users. In other words, the logical layers need a re configurable physical layer just as the physical layer needs re configurable logical layers.
1.5 Network Hierarchies
Just as there is a case to be made for a multilayered network architecture, there is also a rationale for a hierarchically structured network. Traditional carriers have all found hierarchies to be useful. In telephone networks, individual subscribers are connected to a nearby Central Office, and Central Offices in the same area are interconnected by a MAN, typically spanning a region of a few hundred kilometers at most. These are usually in the form of rings. Finally, the MANs are interconnected by long-haul networks with mesh topologies. These include ultra long-haul transmission links such as transoceanic cables. In going from local subscriber access through MANs to long-haul networks, efficiency and manageability demand that the granularity of the connections increases, just as it does in going down the layered architecture of Figure 1.1.
The new optical network architectures have similar hierarchies as shown in the example of Figure 1.5. The mesh network in the center is the core long-haul network, which joins the MANs in the form of rings. End users connect to the MAN through access networks joined to the MAN at gateways indicated by the shaded circles in the figure. These access networks might be in optical form (e.g., passive optical networks [PONs]) or electrical form (e.g., traditional LANs or electronic switches). Their purpose is to aggregate traffic from individual users for more efficient and cost-effective transmission on the network.
A characteristic of the hierarchical structure is that as one moves closer to the end user, the number of entities attached to the network grows exponentially. Referring to Figure 1.5, there are many MANs attached to the core, many access networks attached to each MAN, and many end users attached to each access network. Conversely, the amount of traffic originating from each entity declines exponentially as one moves closer to the end user. Because there are so many end users with modest individual traffic demands, the equipment located close to the end users in the access networks must be inexpensive and simple but does not need to be high capacity or high performance. Conversely, the long-haul network contains relatively few optical links and ONNs (the clear circles in Figure 1.5), but they must support high throughput with carefully controlled signal quality and high reliability. For example, transmission on long-haul links is cost-effective when a large amount of capacity is packed into each fiber. This means using large numbers of closely spaced wavelengths; i.e., DWDM with sub nano meter wavelength separations and high bit rates (10 Gbps or higher) on each wavelength. Achieving these numbers over distances of thousands of kilometers is not a trivial feat and requires costly transmitting, amplifying, and receiving equipment.
The MAN must meet criteria somewhere in between these two extremes. For example, a standard called coarse wavelength division multiplexing (CWDM) is adapted to MANs and uses spacing of the order of20 nm. This wide spacing combined with fairly short transmission distances means that relatively inexpensive transmission equipment can he used in these applications.
In addition to the cost-performance issues in the various levels of a hierarchy, there are important control and management issues. The complexity of control and management in a large network grows rapidly with the number of entities being managed. For example, in real-time decision making for fault recovery, speed is of the essence, but speed is compromised if the fault recovery system must deal “microscopically” with every fine-grain active connection in the network. If all traffic among end users in a large network was transported and controlled in the form of low-speed individual connections (e.g., kilo bits per second for a voice call) the number of connections to keep track of in the high-capacity long-haul core would be overwhelming, making the core network unmanageable. Instead, as we move from the end user, through the MANs and into the core, various levels of multiplexing are used, so that the fine-grain end-user connections are bundled into a much smaller set of coarse granularity connections on the long haul links. Manageability is maintained because there is a small number of high-speed connections (and a small amount of hardware ) to control rather than an enormous number of low-speed connections. On the other hand, control and management in a lower level or the hierarchy – a single MAN or access network – can be handled more or less autonomously, dealing only with the relatively small number of “local” entities without an overall view of the complete network. Another way of seeing this is in terms of the multilayered view in Figure 1.1. In a high-speed core of an optical network, control activity is largely confined to high-speed highly multiplexed connections in the physical layer. In moving put to the end users the control functions shift to the higher logical layers, but because the view is local, the total number of entities being controlled is still relatively small.
1.6 A Little History
The idea of a high-speed optical transmission system (in free space) was considered as early as 1958, when the laser was conceived [Schawlow+58], and guided wave optical transmission was exhibited in the laboratory in the mid-1960s [Kao+66]. However, practical optical transmission systems did not become possible until the production of the first low-loss fibers and the invention of the semiconductor laser diode, both around 1970. By refining the optical transceivers and reducing fiber loss, the effectiveness of unamplified optical transmission systems (measured in bitrate- distance product) grew roughly at an exponential rate from the early 1970s to the late 1980s, with bit rates as high as 8 Gbps over distances of 100 km achieved in the mid-1980s [Miller+88]. The first optical- fiber transatlantic cable (using electronic repeaters) was laid in 1988. The distance limitations due to fiber attenuation disappeared in the late 1980s, almost overnight, with the emergence of the erbium doped fiber amplifier (EDFA) [Desurvire+87, Mears+86, Mears+87]. Over the ensuing years interest in long-distance optical transmission using EDFAs grew rapidly [Saito+90]. In laboratory experiments, in which long distances are simulated using closed loops with amplification, and in which fiber dispersion effects are eliminated using solitons, transmission distances have been extended essentially without limit. For example, [Nakazawa+93] reported a 10-Gbps soliton system operating over a total distance of 106 km.
During the late 1970s to the middle 1990s, fiber transmission capacity on a single wavelength roughly doubled each year. Afterward, the focus was on multiwavelength transmission, resulting in a significant jump in aggregate transmission bit rates to the terabits-per-second range in the late 1990s using WDM. A recent example of high-capacity long-distance transmission is reported in [Charlet+04]. It involved a DWDM system using 149 channels at 50-GHz spacing running at 42.7 Gbps each, for a total capacity of 6 Tbps over 6120 km.
While the transmission limitations in both capacity and distance were being surmounted, important developments were taking place at other levels as well. The SONET and SDH standards were developed in the late 1980s [Ballart+89, Boehm90]. Both of them pertain to optical transmission links carrying synchronous bit streams terminated by electronic switches.
Soon after SONET and SDH came on the scene, the concept of a broadband integrated services digital network (B-ISDN) was introduced as a means of supporting all sorts of multimedia services on a common network [CCITT92]. In the 1990s, much activity was devoted to developing ATM as the preferred transport service for B-ISDN. The cell-based transport technique in ATM (essentially a fixedlength, fast packet-switching system) lent itself at the time to a wide variety of multimedia applications and at the same time was well adapted to high-speed switching techniques [de Prycker91].
All of the developments discussed so far were carried out within the traditional voice communications carrier community. However, the early data networks also influenced the structure of to day’s optical networks. The first data networks were developed in the 1970s mainly for business users, utilizing packet switches designed by computer equipment manufacturers to work together in a closed network environment employing proprietary protocols. Examples were IBM’s SNA (Systems Network Architecture) and Digital Equipment’s DEC-NET. Typical applications were airline reservation systems and timeshared computing. Governmental organizations joined with ARPANet in the United States, Datapac in Canada, and Cyclades and Transpac in France. Although Datapac and Transpac were public data networks, ARPANet and Cyclades were experimental and contained the precursors of to day’s dominant global packet-switched network – the Internet. Today’s Internet routing equipment and IP, the Internet Protocol, evolved from the hardware and software developed in the 1970s for ARPANet, which was a pioneering communication network sponsored by the Advanced Research Projects Agency (ARPA) of the U.S. government. ARPANet was developed as an experiment in computer resource sharing, and its driving force was the computer community.
In a competing development, the International Standards Organization (ISO) Open Systems Interconnection (OSI) Reference Model was created in the 1980s as an attempt by international organizations to produce a common standard that would move data communications out of the proprietary networking world, making multivendor networks feasible. However, at the same time that the OSI model was being promoted worldwide by international standards bodies, the Internet was quietly and spontaneously spreading throughout the world. Proprietary networking protocols, which had previously become de facto standards were displaced by 1P, the language of the Internet. ISPs became key players in the networking community, and the World Wide Web, invented in 1989, provided the impetus for a flood of new services requiring a high-capacity, high-connectivity infrastructure, and high-speed user access. The new multimedia applications necessitated broadband access, and, as mentioned in Section 1.1, the telephone and cable carriers responded, respectively, with DSL and cable access. Going beyond these copper-based systems there has been considerable activity by the local exchange carriers (LECs) in fiber-based access: fiber to the curb or node (FTTC or FTTN), building (FTTB), cabinet (FTTCab), and home (FTTH).9 Although most of the developments discussed so far occurred in the logical layers of the network, they were and are continuing to produce challenges throughout the layers of the network architecture in terms of increased network loads and ever escalating performance requirements. It is ultimately the task of the underlying optical infrastructure to respond to these challenges.
Spurred by the early developments in optical and photonic technology, interest in purely optical networks began in the mid-1980s [Henry89]. However, the technological barriers to the deployment of large-scale networks remained formidable until the advent or the fiber amplifier. Systems efforts during the pre-EDFA era were focused on a simple architecture appropriate for LANs or MANs: the broadcast-and-select network [Mukherjee92a]. In a typical network of this type, each access station is equipped with a single laser transmitter capable of generating light at a fixed wavelength and contains a single optical receiver capable of being tuned to the wavelength of any transmitter. Signals from all transmitting stations are combined in a centrally located optical star coupler, a passive device that broadcasts an attenuated version of the combined signals back to each receiver. By selecting the appropriate wavelength, each receiver can accept the signal injected by the corresponding transmitter, thereby creating a transparent connection from the transmitter to that receiver.
Probably the earliest prototype of a broadcast-and-select network was LAMBDANET [Goodman+86, Goodman+87]. Broadcast-and-select networks do not scale well to large sizes primarily because they rely on rapid tuning of optical transceivers over a wide range of wavelengths, they waste optical power, and, most important, they make poor use of the optical spectrum. More general mesh topologies were soon proposed to eliminate the constraints of broadcast-and select networks. In these networks, alternate paths together with wavelength routing produce possibilities for reuse of the optical spectrum [Hill88] as well as recovery from failures.
At about the same time that wavelength routing was proposed, the multihop concept was suggested to obtain high connectivity without requiring expensive, tunable optical transceivers. Multihop networks were early examples of the hybrid approach described in Section 1.4 [Acampora87, Mukherjee92b], relieving the connectivity bottleneck at the optical level by adding packet or cell switches in an electronic LN overlay. From the late 1980s to the present, activity intensified in optoelectronic and photonic technology in the demonstration and deployment of new network architectures and, most recently, in optical network standardization, control, and management.
Some of the important recent technological advances occurred in fiber technology and amplification, extending the usable optical fiber spectrum over a contiguous window from 1200 to 1600 nm. Other advances occurred in microelectromechanical systems (MEMS). These devices were the basis of new high port-count optical switches, tunable filters, and related devices. A wide variety of high-performance devices for WDM based on guided-wave technology were also developed, including tunable lasers, filters, integrated switch fabrics, and optoelectronic subsystems such as integrated optical receivers.
As the fundamental multiwavelength technology for transparent networks was maturing, experimental work was (and is) continuing in more speculative areas entailing nonlinear optical devices for opaque networks. Units such as all-optical switches, optical logic devices, and optical storage elements are of interest to move the nonlinear operations now executed in electronics down to the optical level. (Among the enablers of these devices are photonic crystal fibers [PCFs] whose structures can be tailored to produce a variety of highly nonlinear effects.) Applications are in optical packet switching and optical computing.
In the 1990s, ambitious optical network testbeds were deployed in the United States, Europe, and Japan, involving the maturing multi wavelength technology as well as incorporating the management and control equipment necessary for making these networks operational and reliable [IEEE93, IEEE96, IEEE98]. These testbeds showed for the first time that optical technology could be taken out of the laboratory to produce cost-effective operational networks. Many of the technologies and concepts developed in the testbeds led to commercial products and network deployments that are basic components of our current network infrastructure. Undoubtedly the rapid advances in the enabling technology for optical networks, and its accelerated commercialization at the end of the 1990s, can be largely attributed to the massive infusion of capital to the various players during the “technology bubble” at that time. This produced a host of new start-ups and spin-offs as well as expansions of ongoing activities in the large equipment manufacturers. Although many of the companies that originated the new products have disappeared, the technological progress remains, and will serve as a foundation for the networks of the future.
The period of economic consolidation following the bursting of the bubble brought with it a more down-to-earth view of networking, essentially focusing on the areas of prime concern to the network operator and the customer: costeffectiveness, reliability, fault recovery, and manageability. Focus on costs has led to a trend toward eliminating superfluous electronic and electro-optic components in networks (e.g., the use of IP over WDM without intervening logical layers) and improving operating efficiencies through enhanced traffic grooming and fault recovery techniques. Focus on cost has also produced a concentration on breadand- butter issues such as economic designs in MANs, in contrast to the “hero experiments” in the 1980s, where the objective was to break records for long-haul transmission – at any cost.
Focus on manageability has resulted in solid advances in control and management, including taking control techniques designed for the logical layers of the network and adapting them to the physical layer. As an example, the control protocol known as Generalized Multiprotocol Label Switching (GMPLS) has been proposed for application to control functions in the physical layer. As its name implies, GMPLS is a generalization of Multi protocol Label Switching (MPLS), which was designed as an improvement over the packet-forwarding techniques used in IP networks.
This recent activity provides the context for this book: an advancing and maturing technology base, a steady increase in demand for network capacity and performance, and an industrial base that has positioned itself to meet these demands.
1.7 Overview and Road Map
Lightwave networks can be characterized broadly in terms of three basic features: (1) physical (fiber) topology, (2) functionality in the links, the network nodes, and the access stations, and (3) control algorithms for assigning, routing, and multiplexing connections.
In keeping with the focus of this book on the physical layer, we elaborate on these issues here, emphasizing how they apply to the optical infrastructure. A rich physical topology provides many alternate paths among access stations, increasing the aggregate capacity of the network as well as its potential survivability and adaptability to changing load patterns. But the properties of the physical topology cannot be exploited without sufficient functionality in the links, the network nodes, and the access stations. Also, logical network overlays are generally required to adapt the bandwidth offered by the physical layer to the needs of the end users.
By link functionality we mean good transmission properties (large bandwidthdistance product). Useful functional properties of nodes and stations include controllable switching and multiplexing features. Without controllability in the nodes and stations, optical channel assignments and signal paths must remain fixed at all times so that connections are frozen, and the network has no flexibility in responding to changing conditions. Conversely, a high degree of node and station controllability under the supervision of a network control and management system improves the efficiency of resource utilization, allows the network to maintain satisfactory performance in the face of fluctuating demand, and enables it to reconfigure itself in case of component failures. Of course, controllability implies the existence of suitable control algorithms to coordinate the functions of the various network entities. Three basic features – topology, functionality, and control – interact closely to influence overall network performance.
As might be expected, there are many opportunities for cost-performance trade-offs. Thus, high functionality in the nodes and access stations improves performance, but this comes at a price. The same can be said of the richness of the physical topology. Also, to compensate for the limitations of the network resources, one can attempt to optimize performance through sophisticated control algorithms. However, optimality generally comes at the price of controller complexity. Thus, the cost-performance trade-offs involve complex interactions among all the basic features.
In a field of engineering where the technology is mature (e.g., in digital electronics), systems can be understood, analyzed, and designed with only a limited understanding of the physical principles involved. (A designer of a personal computer is not particularly concerned with electromagnetic theory.) However, when the enabling technology is rapidly evolving, as in the case of optical networks, a more thorough understanding of technology and its relation to system performance is required. Thus, a good grasp of optical networks requires an understanding of the interrelations between two bodies of knowledge that traditionally have been treated separately: the physics of the underlying devices and the mathematical methodology required to analyze, design, and control systems incorporating these devices.
The emphasis of this book is on methodology rather than devices. However, we weave the physical and mathematical sides of networking into an integrated whole by linking physical constraints with performance analysis and design concepts whenever possible. In addition, we attempt to integrate current practice, generic models, and futuristic concepts. By emphasizing linkages across traditional lines, our intention is to break down the compartmentalization that tends to hinder progress. We recognize that integration across a broad range of material presents a challenge to the reader. The interconnections make it difficult to isolate sets of topics matched to the background and interests of each reader, and some readers may feel caught in a tangled web. To help the disoriented traveler, we provide a simple road map in Figure 1.6 as a guide through the labyrinth.
As shown in the figure, the first three chapters are required for an understanding of the rest of the subject matter. These are accessible to readers with only a limited background in networking and physical principles. After the broad view presented in this chapter, Chapter 2 introduces the multiwavelength network architecture, describing the layers of connectivity in a wavelength division multiplexed network. The chapter focuses on the functionality of optical network elements – links, nodes, and access stations – and their relation to network performance. Chapter 3 gives an overview of the various layers of network connections. Purely optical networks are discussed first, starting from the simplest (static) networks and then considering the two controllable classes: wavelength-routed networks and linear lightwave networks.
The former class supports point-to-point connections, whereas the latter supports multipoint connections, representing a more general view of transparent optical networks and their functionality. Because the physical layer alone is generally not sufficient to serve the needs of network users, the chapter concludes with a discussion of logically routed networks – the multilayered networks of Figure 1.1, consisting of electronic overlays on an optical infrastructure. Chapters 2 and 3 are largely qualitative and serve as introductions and “pointers” to material explored quantitatively in later chapters.
The rest of the book may be read more selectively. It is linked to the earlier material, as shown in Figure 1.6. For those with only a limited understanding of the physical side of networking, Chapter 4 provides a concise treatment of physical principles and device technology. It is not intended to be all-encompassing, because other works are solely devoted to these topics; for example, see references [AgrawaI02, Saleh+07]. The material in the first part of the chapter (through Section 4.9) focuses mainly on fundamentals and generic concepts. The latter part of the chapter is devoted to current technology with a focus on physical and technological constraints that limit network performance. These include limits on WDM channelpacking density, optical receiver performance, geographic reach of optical connections, and technological limitations imposed on optical switches. The chapter concludes with methodologies for performance evaluation.
The remaining chapters are more specialized. Chapters 5 through 7 present a thorough treatment of the generic multiwavelength optical network.10 Static networks based on shared optical media are covered in Chapter 5. The chapter discusses multiplexing and multiple-access techniques, traffic flow constraints, capacity assignment, packet switching in the optical layer, and access network applications of passive optical networks. Wavelength-routed and linear lightwave networks are examined in Chapter 6, with discussions of routing and channel assignment, as well as the relationship between optical switch functionality and network performance. Chapter 7 deals with logically routed networks. It is here that the overall multilayered network design problem appears for the first time. We present methodologies for designing a logically routed network to satisfy a prescribed traffic requirement while observing the constraints imposed by a given fiber topology, the limitations of the network components, and the limited capacity of the available optical spectrum.
Chapter 8 considers the very important issue of optical network survivability and fault recovery, specifically ring and mesh topologies and line and path-based recovery techniques. Chapter 9 examines the issue of network control, focusing on the most recent proposals for the optical network control plane, based on GMPLS. Chapter 10 is the most forward-looking part of the book, dealing with recent progress in optical packet, burst, and label switching. We conclude in Chapter 11, tying the generic concepts of earlier chapters to recent trends in network deployment.
An infinite variety of additional engineering issues arise when operating networks in the real world, and these are often missed in an abstract view of things. Parts of Chapters 4 and 7, the opening part of Chapter 8, and all of Chapters 9 and 11 provide examples of contemporary technology, network design, and network operation, as well as the trade-offs between optical and nonoptical networking solutions. These will be of particular interest to those involved in near-term network deployment. However, this is the most “perishable” material in the book. For example, Chapter 9 is important for an understanding of current standardization efforts in network control. However, these are continuing to evolve as this is being written, so that techniques of optical network control and management can be expected to change and progress in future network deployments.
Some of the more advanced and speculative sections in the book may be skipped initially by readers learning about optical networks for the first time. In Chapter 5, Section 5.2.3, Code Division Multiple Access, and parts of Sections 5.5 and 5.6, which deal with demand-assigned connections and packet switching in the optical layer, can be bypassed by those new to the field. The same is true for parts of Chapter 6, including the material on ring decomposition in Section 6.3.5, optimization in Section 6.3.7, and some of the more specialized topics on LLNs in the latter part of the chapter. In Chapter 7, most of the material on point-to-point logically routed networks will be of interest to all readers, whereas Sections 7.4 and 7.5 on hypernets are more futuristic in nature than the rest of the chapter. The latter sections of Chapter 8, on optical layer protection in mesh topologies, are currently important open research areas, and the same can be said of all of Chapter 10.
Readers involved in research on next-generation networks would normally focus on the complement of the subject matter of interest to the novice. Thus, for example, rings, which are “old hat” to the researcher, could be skimmed in favor of more advanced topics; for example, optimization and LLNs in Chapter 6.’Researchers might also focus on hypernets in Chapter 7, general optical layer protection in Chapter 8, and the full range of optical packet-switching issues in Chapter 10. In summary, the reader is invited to customize an itinerary suited to his or her interests in exploring the fascinating world of optical networking. We hope you enjoy the journey.
[Acampora87] A. S. Acampora. A multichannelmultihop local lightwave network. In Proceedings o/the lEEE Global Telecommunications Conference (Globecom), pp. 1459-1467, Tokyo, Japan, November 1987.
1. The increased interest in VoIP, because of its low cost and growing ubiquity is, to paraphrase Shakespeare, the most unkindest cut of all from the computer community to the traditional telephone carriers.
2 Availability is the percentage of time that a network is operational. For example, “five 9s” (99.999%) availability, which is a goal for public carriers, implies 5.25 minutes of downtime per year.
3. In many cases, superfluous LN stacking results from a reluctance of carriers to write off a large investment in legacy systems, which would require a complete revision of existing control and management structures.
4. As will be seen, the physical layer in optical networks often includes electronic components in the form of signal regenerators or electronic switch fabrics, so it is not always purely optical nor is it completely transparent. We have more to say about purely optical signal paths and the meaning of transparency in Sections 1.3 and 1.4.
5. As the state of the art progresses photonic technology is becoming a viable alternative for many nonlinear signal processing operations, so that the linkage between “transparent” (i.e., linear) and “purely optical” is becoming tenuous.
6. Transparency implies that signals with any type of modulation schemes (analog or digital), any bit rate, any type of format, and using any kind of protocol can be superimposed and transmitted without interfering with one another and without their information being modified within the network. Opaque networks do not have these properties.
7 A similar, but not as severe, throughput limitation applies to “opaque” optical switches that are often used in the physical layer to replace purely optical ONNs. An opaque switch converts the optical signals to electronic form for purposes of switching, and in the process it performs signal regeneration, wavelength conversion, and signal monitoring as well. Although this makes an opaque switch much more versatile than a transparent optical ONN, it also produces an electronic bottleneck within the node.
8. One of the reasons for the use of stacked LNs such as ATM and SONET underneath an IP logical network is that the lower logical layers can be used for offering a reconfigurable logical topology to the IP network, partially replacing the functions of a reconfigurable physical layer.
9. Early demonstrations of fiber access date back to 1981 with FTTH by Northern Telecom and 1989 with passive optical access networks by British Telecom.
10 The necessary background in graph theory, Markov chains, and queuing theory is included in Appendices A and C, and some algorithms for special aspects of network switching, provisioning, and control appear in Appendices B, D, E, and G.
10. Having understood the real functioning of the assessee’s activities, we would like to further elaborate that the provisions of IPLC services by the assessee are diagrammatically listed in Annexure 1 of its paper book. We extract the same hereinbelow:
11. As per the assessee, the international leg of the service which is provided outside India and referred to as overseas leg is provided by the assessee. The vehement argument of the ld.AR is that the assessee does not and cannot provide service in India in so far as service within India can be provided only by a licenced service provider. So the Indian leg of the services is provided by VSNL, a public sector undertaking. The ld.AR has argued that the assessee being a tax resident of Singapore, is entitled to the benefit of the provisions of India Singapore Tax Treaty and accordingly, the taxability of receipts in the hands of the assessee during the subject assessment year needs to be examined under the India Singapore Tax Treaty. To support this submission, Article 12(3) of the India Singapore Tax Treaty by which the term ‘royalty’ has been defined as follows:
“(a) payment of any kind received as consideration for the use of, or the right to use, any copyright or a literary, artistic, or a scientific work, including cinematograph film or films or tape used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information.
(b) payment of any kind received as consideration for the use of, or the right to use any industrial, commercial or scientific equipment, other than payments derive ……”
12. So, according to the above definition, only a payment for the use of or right to use any industrial, commercial or scientific equipment or for the use of or right to use a process can be characterized as ‘royalty’. We are in agreement with the contention of the ld.DR that the customer acquires significant economic or possessory interest in the equipment of the assessee to the extent of bandwidth hired by the customer. This capacity is made available on a dedicated basis to the customer for the entire contract period, usually a year. Thus, physical possession is not a must, even according to TAG of OECD. Even if the bandwidth is not used, the customer has to pay the committed charges. Thus, the assessee does not bear any risk of diminution in receipts or increase in expenditure if the customer does not make the use of the capacity. According to the assessee, the contract between the assessee and its customers is for the provision of services and not for providing any right in any equipment and/ or network used by the assessee for providing telecom services. The customer does not ask for or seek its rights to ask for or seek any specific equipment/network; rather the customer has no knowledge of the usage of equipment/network of other operators by the assessee for providing service. The customer has neither knowledge nor is he a party to the interconnect agreements entered into by the assessee with other international telecom operators. In a way, there is not even an identification of the equipment as far as the customer is concerned. The ld.AR has referred to the settled position of law that there must be a consensus ad idem between the contracting parties on the subject matter of the contract that is conspicuous by its absence in the present transactions. With reference to the agreement between the assessee and its customers, it was stated that it is clearly for the provision of services and not for granting any right whatsoever in the network of the assessee. The ld.AR has also tried to explain the principles for drawing a distinction between the transactions for the use of equipment and thus for the rendering of services. In the backdrop of the above, it was stated that the customers do not even know what is the equipment because it is not identified and also that the customers do not have the physical possession of the telecom network infrastructure/equipment. According to the ld.AR, the customers do not hold/possess own, operate, maintain or control the assessee’s telecom network infrastructure/equipment and that they also do not possess significant economic/possessory interest in the telecom network infrastructure/equipment. It was stated that in case of non-performance under the contract, the assessee bears the risk of substantially diminished receipts/increased expenditure. Further contention of the ld.AR is that the telecom networks infrastructure/equipment is concurrently used to provide connectivity services to large number of unrelated users. So, according to ld.AR, none of the conditions laid down by the TAG of the OECD for classifying payments as royalties for use of equipment are satisfied in this case, hence, revenues earned by the assessee from Indian customers from provision of international connectivity services outside India cannot, in any manner, be taxed as royalties for use of the equipment under the Income-tax Act and under the India Singapore Tax Treaty. Lastly, but not in the least it was submitted that the submission of the se is that the agreement between the assessee and its customers is for the provision of services and not for granting any right in the network of the assessee. Moreover, the conditions laid down by TAG and OECD had also not been fulfilled.
13. We have cogitated the entire records in depth. We do not find any merit in the submission put forth on behalf of the assessee. The ld.AR has not been able to assail the finding of the Assessing Officer that the customer acquires significant economic to the extent of bandwidth hired by the customer. The capacity is made available on a dedicated basis to the customer for the entire contract period, usually for a year. The physical possessory interest in the equipment is not a must. Even according to TAG or OECD, the customer has to pay a committed charge whether bandwidth is used or not. The agreement may be only for the provision of services but in effect, it grants right to the extent stated above in the network of the assessee. The decisions relied upon by the Department viz., in the case of M/s Frontline Soft Ltd and Call World Technologies Ltd vs Dy. CIT, 2008-TIOL-422, and that of AAR in the case of Cargo Community Network(P) Ltd , 289 ITR 355, are exactly on the point and are in favour of the Revenue. The amount received by the assessee from the Indian customers is in a way also for the use of the ’process’ and would ultimately amount to payment of royalty. In this case, the decision of Special Bench, New Delhi in the case of New Skies Satellites N.V vs ADIT (Int. Tax), 319 ITR AT 269, on which Department has relied is very much relevant on the subject. We are in agreement with the Assessing Officer that the agreement entered into with VSNL for split billing is only to overcome the telecom regulatory regime prevailing in India. In this regard, the decision of ITAT Delhi in the case of ACIT vs Grandprix Fab(P) Ltd, 34 DTR 248, and that of the Hon’ble Madras High Court in the case of Ansaldo Energia SPA vs ITAT & Others, 310 ITR 2237, support our view. The decision of Hon’ble Supreme Court in the case of BSNL vs Union of India, 282 ITR 273W relied on by the ld.AR is entirely on different facts because that relates to use of ordinary telephone subscribers. A perusal of service agreement shows that the same is with Indian customers on a standard format. It is clear that VSNL is not an affiliate of MCI. It is only a sub-contractor of it. In other words, VSNL is a “Provisioning Entity” on behalf of MCI. In the agreement, under the head “billing by MCI”, it is clearly provided that the invoice issued by MCI to the customer in the International Private Circuit clearly states that it is for circuit billing from the originating “A-end” Chennai in India to terminating “B-end” San Jose, USA. IPLC is an end to end seamless composite service and it cannot be divided into two parts as has been held by the ld. CIT(A) in para 39 of his order for assessment year 2002-03. The agreement entered into with VSNL shows that the circuit has been hired on lease. The media used for the service is cable. This shows that IPLC is a high technology circuit comprising transmission cable and sophisticated instrument. From a detailed analysis of various agreements, a clear picture emerges from which only irrebuttable conclusion is derived that payments for the use of the tangible equipment could be considered as a payment for the use of or the right to use industrial, commercial or scientific equipment. The Technical Advisory Group (TAG) of OECD had formulated the following facts for determining whether the payments are for the use of or right to use, industrial, commercial or scientific equipments:
14. In determining the nature of the payment as Royalty, all the relevant factors having a bearing on the substance of the transaction should be taken into account. In this case, the customer acquires significant, economic or possessory interest in the equipment of the assessee, to the extent of bandwidth hired by the customer. The capacity is made available on a dedicated basis to the customer for the entire contract period, usually a year. Therefore, as stated above, the assessee does not bear any risk of diminution in receipts or increase in expenditure, if the customer does not make use of the capacity. It is significant to mention that the payments made for hiring bandwidth by the customer would correspond to the rental value. The ld.DR has relied on the aforementioned decisions in detail in his written submission and we are in agreement with that submission in toto. In any case, the payment made by the Indian customer to Singapore company is not Royalty for the use of equipment, it is the Royalty for the use of ‘process’. The dispute as to whether such process should be a secret process or not has been resolved by the decision of the ITAT, Special Bench in the case of New Skies Satellites N.V vs ADIT (Int. Tax)(supra) in which it has been held as under:
“On facts, it is held that a process is involved in the transponder through which the telecasting companies are able to uplink the desired images / data and downlink the same in the desired are which inter alia covers Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of “royalty” has not been restricted either by the domestic provisions or by the provisions contained in respective DTAA’s. Insertion of ‘comma’ after the words “secret formula or process” in the respective DTAA ‘s does not give different interpretation to the provisions of DTAA as compared to the provisions of domestic law. The process, even if it is construed to be intellectual property, for falling within the ambit of royalty, it is not necessary that the process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding out that whether a process was actually used by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing use and right to use of the process and, thus, it is royalty within the meaning of clause (iii) of Explanation 2 to Section 9 (1) (vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to Section 9 (1) (vi). “
15. We are in agreement with the ld. CIT(A) when he observes that even if the payments are treated as not relating to the use of equipment, they should be considered as payments for the use of the ‘process’. It has already been explained that on account of the long distance through which the signals are carried by the undersea cables, they become feeble after a distance and have to be amplified at periodical intervals or points of distance. The contention at page 24 of the written submission of assessee-company dated 15.9.2010 is that the decision in the case of ACIT vs Sanskar Info TV(P) Ltd, 24 SOT 87, would not apply to the assessee’s case just because the assessee provides the services through cable network is a distinction without a difference. The argument of the assessee’s counsel that agreement with VSNL for split billing is not correct in view of the decision of the ITAT, New Delhi rendered in the case of ACIT vs Grandprix Fab(P) Ltd, 34 DTR 248, wherein it has been held that merely because the assessee had bifurcated the payment into two groups that by itself was not sufficient to say that there were two independent and distinct contracts entered into by the assessee with the contractor is not a correct contention. In the case of Sanskar Info TV(P) Ltd(supra), it has been held by the ITAT, Mumbai, that fees paid for use of a transponder and up-linking facility on the satellite is towards use of a process and for rendering services in connection with such process. Such payments are taxable in India.
16. We are in agreement with the ld.DR that the cable TV and the Satellite TV used by the TV subscriber is a drastic example to illustrate the point in this case. Cable and Satellite providers deliver their signals in two distinct ways. Cable TV providers have lines buried under the ground that are tapped into with a coax cable that connects to your TV with set top box. The Satellite TV providers send signals through satellites on the ground and in outer space of individual satellite dishes where subscription is purchased. In both the cases, satellite transmission and undersea optic fibre transmission high sophisticated technological ‘process’ is involved though they may be different. A million dollar question now arises whether the payment in this case is for the use of ‘process’ or for the use of ‘equipment’. In satellite transmission, a particular frequency is assigned to the customer and in cable transmission, the customer gets a dedicated bandwidth. This is different from the use of a standard facility like the telephone at our homes. A broadband can be divided into two major categories (i) shared; and(ii) dedicated. Shared internet connections include the popular DSL and Cable broadband connections. Dedicated connections are provided by T1, DS3, and Ethernet business services. The term “business” is to be noticed. Shared Internet services originated to make broadband affordable for residential and home office users. Medium to larger size business have always used dedicated connections for their voice and data circuits. In the bigger picture, the entire internet is a shared bandwidth resource. With a dedicated connection, one’s bandwidth is set aside by the service provider and always available for one’s use. Recently, the ITAT, Delhi Bench in the case of eFunds Corporation vs Asstt. DIT, 42 SOT 165, has held as under:
Deemed to accrue or arise in India
Assessment years 2000-01 to 2005-06 – Whether in order to constitute PE, place of business need not be owned, rented or otherwise under possession or control of enterprise; only requirement is that place should be fixed in context of nature of business being carried out and also no time period test is prescribed for permanence as permanence of establishment has to be determined in context of nature of business being carried on – Held, yes – eFunds Corporation i.e., assessee, was a company incorporated under Iaws of United States and was tax resident of USA – It had a wholly owned subsidiary company, namely, eFunds India, operating in India – Assessee entered into contract with its clients for providing certain IT enabled services and then, the same contract was either assigned or sub-contracted to eFunds India for execution; therefore, both assessee and eFunds India came under legal obligation to provide services to clients of assessee – From Function performed, Assets used and Risks assumed (FAR analysis) by assessees and eFunds India, it was clear that eFunds India was not having requisite software and database needed for providing IT enabled services independently; therefore, to that extent they were made available by assessee to eFunds India free of any charges – Further, eFunds India did not bear any significant risk as ultimate responsibility lay with assessee – It was also noted that sales team of assessee undertook marketing efforts for its affiliates including eFunds India – Whether, on facts, it could be concluded that assessee had business connection in India – Held, yes – Whether in view of aforesaid and further having regard to fact that entire activities of assessee in India were carried out by eFunds India Ltd. (an agent) and said agent had not been remunerated on arm’s length price basis, it was to be held that assessee had PE in India in respect of back office operation and software development services being carded out by subsidiary – Held, yes – Whether, therefore, assessee’s income was liable to tax in India in respect of operations performed by subsidiary company on its behalf – Held, yes – eFunds Corporation v. Asstt. DIT(Delhi).”
17. The above finding of the ITAT, Delhi, also fortify our above conclusion. Consequently, we cannot allow this appeal of the assessee and hence, dismissed.
18. The facts and issue involved in the appeal for assessment year 2003-04 are also exactly the same and therefore, this issue is decided against the assessee with similar reasonings. This appeal also stands dismissed.
19. Since we have dismissed the appeals of the assessee, the cross objections become infructuous and hence, dismissed.
20. In the result, both the appeals of the assessee and the cross objections of the Revenue stand dismissed.
The order pronounced in the open court on 07.01.11.