Case Law Details

Case Name : Flag Telecom Group Limited Vs Dy. DIT,( ITAT Mumbai)
Appeal Number : ITA No. 2255/Mum/2006
Date of Judgement/Order : 15/06/2015
Related Assessment Year :
Courts : All ITAT (5168) ITAT Mumbai (1632)

Brief Facts of The Case

In the present case the Hon’ble High Court have dealt with two vital issues and held that standby maintenance charges are not technical services within the meaning of section 9(1)(vii). On the issue of “Restoration Activities” the Hon’ble High court held that amount received from restoration activities cannot be termed as business income as the large portion of the cable Network was outside the Jurisdiction of Territorial waters of India. Only the portion upto 12 nautical miles which is attributing income could only be taken into consideration.

Facts of the case

In the present case, assessee is a company located out of India, who have built high capacity submarine Fiber Optic Telecommunication Link Cable System. They developed build under-sea cable for providing telecommunication link. VSNL was one of the original landing party in the FLAG cable system and Capacity Sales Agreement (CSA) was entered between them on 31.03.1995, which was further amended on 29th April, 1998, by which, VSNL has bought the capacity in the said cable system. Construction and Maintenance Agreement (C&MA) was separately entered between the parties. The CSA & C&MA was for the period of 25 years, which coincides with the life of the cable. In the year under consideration, the assessee has received money from VSNL on account of provision of standby maintenance activities, as in the earlier years. The assessee had mentioned about maintenance service in its return. The AO, held that held that receipts from standby maintenance services were in the nature of ‘fees for technical services’ within the meaning of section 9(1)(vii) and hence it is to be taxed accordingly in India. The assessee also entered into an agreement to provide restoration of traffic to their customers in the event of disruption in the traffic on their cable system. This was the alternative telecommunication link route through its own capacity in the cable. For this purpose, the assessee, had entered into a “Restoration Agreement” with SMW3 Cable Network through which VSNL had an arrangement vide agreement dated 23rd March, 2000. During the year, the assessee has received a sum from the provision of Restoration Services to VSNL under the said Agreement.

The AO decided to tax under FTS as such a rendering of service is basically rendering of technical service by allowing the utilization of spare capacity of its submarine cable Optic fiber system by the assessee.

Contentions of the Assessee

  • The ld. Counsel on behalf of the assessee submitted that this is issue is covered by the earlier orders of Tribunals in the assessment years 1998-99 to 2000-01 where the Tribunal vide its order dated 06.02.2015 had decided that standby maintenance charges cannot be taxed as ‘fee for Technical Services’ within the definition and meaning of section 9(1)(vii). Also, AO as well as CIT(A) has admitted the fact that the facts and issue are similar to the earlier years.
  • The activity of providing a restoration services is, in fact, in the nature of business income as in order to charge business income to tax in India, it should be squarely covered under the relevant provisions of section 9(1)(i). He submitted that under this clause, the income is deemed to accrue or arise in India, if it is accrues or arise, directly or indirectly through or from any business connection from India; or through or from any property in India; or through or from any asset as source of income in India; or through the transfer of a capital asset situated in India. Here, in this case, since no business operations have been carried out in India in respect of restoration activity as the assessee’s distribution and restoration services have been received outside India, therefore, the revenue from these activities are not taxable in India. There is only small part of the entire cable that passes through territorial waters of India, which can be 12 nautical miles from Indian shore. In such a situation it cannot be held that the entire cable is one asset and is deemed to be situated in India. Since the services rendered are in respect of assets outside India and there being no source in India, therefore, the question of taxing revenue in India itself does not arise. He submitted that at the most, business income can be taxed on such an apportionment of revenue in India.

Contentions of The Revenue

  • The Ld. Counsel for the Revenue argued that this matter needs to be set aside and restored back to the file of the AO, firstly, to examine, whether there is any actual maintenance services rendered by the assessee, as the Tribunal, in its finding have observed that ‘if the payment is received on account of actual repairs and maintenance, then same would fall within the ambit of FTS chargeable to tax u/s 9(1)(vii). Secondly, it needs to be examined, whether the assessee has charged any mark-up, over and above the cost for providing standby maintenance activities. Thus, to examine these matters, the issue of standby maintenance charges needs to be set aside to the file of the AO.
  • Regarding the second issue, it was argued that the asset and equipments of the FLAG are lying in India in the landing stations. He further submitted that functions of a submarine cable system is highly technical in nature. He submitted that, if VSNL bought the capacity in the submarine cable system of the FLAG and is also a co-owner, how can then VSNL make payment to the assessee towards use of the capacity on the cable system owned by it. Entire equipment is owned by the assessee in India and hence it cannot be held that there is no asset or source of income in India. The assessee retains the co-ownership of submarine cable system in India. There is an utilization of services of the cable network system by the VSNL by the assessee and hence the assessee’s case clearly falls within the ambit of fee for technical services, as defined in Explanation to section 9(1)(vii).

Held by CIT(A)

  • The ld. CIT(A) while affirming the order of AO observed that standby maintenance charges are “fees for technical services” within the meaning of Sec. 9(1)(vii) of the I.T. Act and therefore taxable in India. VSNL had purchased capacity and has further agreed to pay minimum amount of charges to the appellant so that the appellant maintains cable system for error free use by VSNL and also the fiber optic cable is submerged in the seas which requires lot of maintenance work which is highly technical in nature. The appellant is charging standby maintenance charges from VSNL for technical services rendered by it towards maintenance of such cable maintenance. Accordingly, the ld. CIT(A) held that the standby maintenance as “fees for Technical Services” within the meaning of Explanation (2) to Sec. 9(1)(vii).
  • The Ld. CIT(A) on the issue of “Restoration Activity” held that the receipts from ‘Restoration Activity’ is income derived from the business, because the assessee is making available only its system for transmission of digital data on emergency basis to the customers of SMW3 Cable network for a temporary period. Such a restoration activity cannot be termed as managerial or consultancy services, Accordingly, he held that such payment is to be assessed as business income and is taxable in India u/s 9(1)(i).

The Ld. CIT(A) further held that the computation of income in respect of receipts from restoration facility should be computed on the basis of global profit & loss account of the assessee would wide. After detail discussion, he estimated the Indian income from restoration activity at 10% of the global receipts.

Held by the ITAT

The Hon’ble Tribunal while relying on the Judgments of the previous years in which it was held that standby maintenance charges is not concerned in respect of any actual rendering of services but to maintain infrastructures for co-ordination and setting up conditions for efficient rendering of services in relation to maintenance and repairs of cable system for which there is a separate charge under the C&MA for which the assessee separately charges. Such a repair and maintenance is separate from standby maintenance cost, which is in the nature of reimbursement of fixed cost. Thus, on the facts and circumstances of the case as well as looking to the nature of standby maintenance cost, the Hon’ble Tribunal held that the receipts from standby maintenance charges from VSNL cannot be taxed as FTS, within the definition and meaning of section 9(1)(vii) as there is no rendering of services. However, whenever payment is received on account of actual repair or maintenance carried out, then same would definitely fall within the ambit of FTS chargeable to tax u/s 9(1)(vii). Accordingly the order of the CIT(A) was set aside and assessee’s ground was allowed”.

Held by the High Court

The Hon’ble High Court while deciding the issue of charging maintenance charges as technical services after following the earlier years’ precedence held that the receipt on account of standby maintenance charges is not chargeable as ‘fees for technical services’ within the scope of section 9(1)(vii).

The Hon’ble High Court while deciding the issue of Restoration activity held that the cable of the assessee is merely providing an alternative route to the VSNL for a certain period of time. Hence, it cannot be held that for providing such a standard facility through its cable system, the assessee is rendering any kind of technical services to the VSNL, so as to fall within the ambit of FTS u/s 9(1)(vii). Transmission of a data or telecommunication through a cable is not a rendering of a technical service but a use of technical device/equipment. Therefore, revenue received from restoration activities is not taxable as FTS u/s 9(1)(vii). It can be very well held that income has accrued to the assessee from an asset in India and hence it is deemed to be business income arising in India. However, here all the business operations of the assessee are not carried out in India, therefore reasonable attribution of income from such operations has to be done. In such a situation, Explanation 1A to section 9(1)(i) provides that, in case of a business of which all operations are not carried out in India, then the income of the business shall be deemed to accrue or arise in India only such part of the income, which can be reasonably attributable to the operations carried out in India. In other words, attribution of such income has to be made in accordance with Explanation 1A. The Ld. CIT(A) though held that it is a business income of the assessee to which it should be fully endorse, however he has allocated the income in India by estimating 10% of the global income from restoration activities. Such an apportionment by the CIT(A) was rejected by the Hon’ble High Court as, firstly, the Ld. CIT(A) himself has stated that the working of the loss given by the assessee to show that it has incurred huge loss at global level, cannot be corroborated because there is no availability of certified global statement; and secondly, the global income cannot be the basis for attributing the income in India, when only small portion of cable passes through territorial waters of India and the majority length of the cable is situated outside India. Under the present fact, the most appropriate basis for identifying the income, which can be reasonably attributable to India would be on the basis of the fraction of the length of the entire cable system in the cases where restoration services have been provided in respect of the cable segments connected to India in its territorial waters. The territorial waters extend upto 12 nautical miles in India and hence only 12 nautical miles of the cable system ought to be considered for attributing the income to India. Accordingly, the AO was directed to determine the income of the assessee which is to be taxed in India after apportioning the revenue on the basis of length of the cable in the territorial waters in India on the segments on which restoration have been provided.

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