Income Tax Appellate Tribunal - Chennai
Sutherland Global Services P Ltd., ... vs Ito, Chennai on 22 August, 2019
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, CHENNAI
ी चं पज
ू ार , लेखा सद य एवं ी जी. पवन कुमार, या$यक सद य के सम%
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER
आयकर अपील सं./ITA Nos. 917 to 920/Mds/2014
नधा रण वष /Assessment Years : 2011-12 and 2012-13
M/s. Sutherland Global The Income-tax Officer,
Services P. Ltd., v. (International Taxation)-II,
No.45A, Velachery Main Road, Chennai.
Vijayanagaram, ( यथ /Respondent)
Chennai - 600 042.
PAN AAECS8093A
(अपीलाथ /Appellant)
अपीलाथ क ओर /Appellant by : Shri S. Sridhar, Advocate
यथ क ओर से/Respondent by : Shri M.M.Bhusari, CIT
सन
ु वाई क तार ख/Date of Hearing : 19.11.2015
घोषणा क तार ख/Date of Pronouncement : 15.02.2016
आदे श /O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER
These appeals by the assessee are directed against the common order of the Commissioner of Income-tax(Appeals) dated 3.2.2014 for the assessment years 2011-12 and 2012-13. -2- ITA 917 to 920/14 Since, the issues involved in these appeals are common, these are clubbed together, heard together and disposed off by this common order for the sake of convenience.
2. The first ground raised by the assessee in these appeals is with regard to confirming the finding of the AO by the CIT(Appeals) holding that assessee is in default u/s.201(1) and 201/(1A) of the Act in respect of taxability of software bandwidth and reimbursement of expenses.
3. First, we take up the issue relating to confirming the order of the AO by the CIT(Appeals), holding that the provisions of sec.9(1)(vi) of the Act, is applicable to the payment made to the software license by treating the same as 'royalty' concluding that the assessee is liable for deduction of tax u/s.195 of the Act.
4. The facts of the case are that the Assessing Officer in respect of software purchase has observed that the amount paid for usage of software is taxable as 'royalty' as per section 9(l)(vi) of the Income Tax Act. He observed that the examination of the vouchers for software purchased revealed that remittance Is for the software maintenance fees and not software purchases and concluded that what -3- ITA 917 to 920/14 has been purchased is not the software but. the right to use it. The Assessing Officer on examination of the Agreements with the software providers concluded that the assessee has got a license to use the software for a particular tenure subject to certain terms and conditions. He distinguished the case laws relied upon by the assessee in the following cases :.
In the case of Tata Consultancy Services. (271 ITR 401) As seen from the contract with DNATA, Dubai, assessee has not purchased any software ready to use as contended nor is DNATA a supplier of off the shelf software. DNATA is the owner of a software called RAPID which is used in passenger revenue accounting system. As per the contract entered into with SGS India DNATA. Dubai allows the later to use the software subject to certain terms and conditions. The client M/s SGS India Ltd is bound to pay the Licence and usage fees on quarterly basis. Here, the payment made is mainly for Licence charges for the usage of software and it is distinct from purchase of software. The amount paid for the usage of software is taxable as "royalty" as per Section 9 (1)(vi) of the Act.
The Special Bench of the Delhi Tribunal in the case of Motorola Inc (95 ITD 269)[Del S13] distinguished the copyright of a software and copyrighted software and held that the payment for a copyrighted article cannot be treated as royalty and not taxable in the hands of the non-resident. The above decision was rendered by the AAR, relates to cellular company exploiting the software -4- ITA 917 to 920/14 rights., As, the case the Appellant engaged in BPO with call centre operations, the facts are entirely different. As may be seen from the software licence Agreement with DNATA the Appellant was permitted to use copyright though it is non exclusive end non transferable. As per section 9(1)(vi) of the Act Royalty means and include the granting of any license"
- - 4.1 The AO has analysed Section 9(1)(vl) of the Act and has
held that In the instant case though copyright vests with the owner of the software, it allows the assessee to use the software by granting licence subject: to certain terms and conditions. Hence the payment made by the assessee, towards purchase of software are held to be 'royalty' for usage of software and taxable In the hands of the non-resident.
4.2 The AO has also analysed DTAA of UAE and observed that there is no specific clause of 'royalty' and hence domestic law will prevail. In respect of DTAA with US. Article 12(3) will prevail and so concluded that as may be seen from the copy of agreement with DNATA and others, the service providers having absolute copyright have agreed to part with their rights to use the same subject to certain terms and conditions. The right of alienation of copyright, though for limited purpose, is tantamount -5- ITA 917 to 920/14 to royalty as described in Article 12(3) of the India USA DTAA. 4.3 The AO has thus concluded that Software license fee are taxable u/s.9(1)(vi) of the Act and also under DTAA. Hence there is default on the part of the assessee to deduct tax under Section 195 of the Act. Aggrieved by this, the assessee went in appeal before the CIT(Appeals), who confirmed the finding of the Assessing Officer. Against this, the assessee is in appeal before us.
5. We have heard both the parties, perused the material on record and case law relied on by the parties. The main contention of the assessee is that the assessee purchased certain off the shelf software from various software suppliers on a non-exclusive/non-transferable basis for enabling the call recording for certain time as per the contract, for processing the airline coupons and other such services. The assessee was given only a copyrighted article and the ownership of such software rest with the suppliers of the software all the time. All these software are taken on license from owners of software and used for business on a non-exclusive basis. According to him, -6- ITA 917 to 920/14 the payment for purchase of software cannot be considered as payment of 'royalty' as per the Act as well as applicable under DTAA and thereby it cannot be treated as the assessee is in default for not withholding u/s.195 of the Act before making the payment.
5.1 According to the ld. AR, the assessee has not purchased the IP rights in the software. The assessee is not in the business of software development and resale. The assessee has made payment towards software maintenance fee and licence to use it. As per Explanation under Article 12, 'royalty' defined as under :
"Typically, Article 12 defines 'royalties' as "payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof:"
5.2 As per Explanation 4 to sec.9(1)(vi) of the Act, the maintenance fees paid has to be treated as 'royalty'. Thus, -7- ITA 917 to 920/14 when the assessee acquires the right to use software, the payment so made would amount to 'royalty'. However, in cases where payments are made for the purchase of software as a product, the consideration paid cannot be considered to be for use or the right to use of it. It is well settled that where software is sold as a product, it would amount to sale of goods. In the case of Tata Consultancy Services v. State of Andhra Pradesh (271 ITR 401), the Supreme Court examined the transactions relating to the purchase and sale of software recorded on a CD in the context of the Andhra Pradesh General Sales Tax Act. The Court held that the same to be goods within the meaning of sec.2(b) of the said Act and consequently exigible to sales tax under the said Act. Clearly, the consideration paid for purchase of goods cannot be considered as 'royalty'. Thus, it is necessary to make a distinction between the cases where consideration is paid to acquire the right to use a patent or a copyright and cases where payment is made to acquire patented or a copyrighted product/material. In cases, where payments are made to acquire products which are patented or copyrighted, the consideration paid would have to be treated as a payment for purchase of the -8- ITA 917 to 920/14 product rather than consideration for use of the patent or copyright. In the present case, what was transferred is copyright and the right to use the copyright give rise to 'royalty' payment. Being so, in our opinion, the finding of the CIT(Appeals) in observing that granting of any license to use the software amounts to 'royalty' and the provisions of sec.9(1)(vi) are applicable. Accordingly, we are of the opinion that the authorities are justified in holding that the assessee is in default u/s.201(1)/201(1A) of the Act for non-deduction of T.D.S. on the impugned payment. This ground of appeal of the assessee is dismissed.
6. The next ground in these appeals is with regard to non- payment of TDS on bandwidth charges.
7. The facts of the case are that the AO has stated that there is dedicated undersea cable. Bandwidth charges are charges for getting a dedicated lease line for making international voice based calls. It is stated by the assessee that the services were rendered outside India by the service providers i.e within India the connectivity is provided by BSNL/MTNL etc. and beyond the territory of India these services are provided by -9- ITA 917 to 920/14 the foreign Telecom operators. The assessee has admitted that there is a dedicated under the sea cable provided for the uninterrupted use of SGS Pvt Ltd. It is stated that based on the capacity utilization the payment Is charged and that they are taxable as 'royalty' u/s.9(1)(vi) of the Act. The services rendered by the non-resident towards bandwidth charges are taxable as royalty as per section 9(I)(vi) of the Act. Since the payment is made for use of any patent, invention model or design secret formula or process or trade mark or similar property, these services are taxable as 'royalty'. Further in Explanation 6 to section 9(1) (vi) of the Act, it is stated that 'process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification. conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.
7.1 It is noticed that in the certification given by the CA in Form 15CB, it is stated that since services are rendered outside India, it is not taxable and no TDS has been deducted. This is not acceptable to the A.O., in view of the -10- ITA 917 to 920/14 explanation to section 9(1) of the Act. As far as Royalty and Fees for Technical services are concerned, it is taxable irrespective of the fact whether the services are rendered in India or the non- resident has a Permanent Place of establishment in India. Thus, so along as the services rendered by the non-resident are utilized by the Indian company it is taxable and attracts TDS. In view of the above it Is clear that the bandwidth charges paid by the assessee are chargeable to tax in the hands of the non- resident as 'royalty' and therefore, assessee is liable to deduct tax on the said payment as per section 195 of the Act. Therefore, the AO called for details and the question Nos.7 & 45 and its reply are as follows :
"Question No. 7 : Please explain the transactions relating to Bandwidth charges, telecommunication charges, connectivity charges and why TDS has not been deducted on these payments Answer No. 7 : As already stated telecommunication charges/connectivity are broad terminology which relate to the usage of the communication links provided by telecommunication operators for transporting voice and data. Bandwidth charges refer to the usage of links which are typically taken from US companies for transporting voice and data to India. In respect of dialling out to customers in the US or other countries, the telecom operators separately charge for call charges for the duration of the calls. These are covered under the above 3 categories. Since these are services in {he nature -11- ITA 917 to 920/14 of utility services like electricity, in our opinion, they are not liable for TDS.
Question No 45 : From the perusal of the form 15CA and 15CB it is seen that a sum of ` 53,17, 15,836/- has been paid to various non- residents towards bandwidth charges during 11-12. Please explain the nature of the payment and why no TDS has been made on the said transaction.
Answer No. 45: Connectivity and bandwidth charges refer to the payment for lease line circuits provided by the telecom companies abroad. Those are used for transporting voice and data FOR our BPO operations. These are in the nature of utility services and do not come. under royalty or technical services and hence no TDS has been made. From the details you had shown to me it is seen that there are payments for non-telecom companies. We will look into that and revert back with details by 31 JAN 2013. "
7.3 It Is further stated that these are in the nature of utility services and there is no technology made available to the assessee and there are several decisions to support this view and hence no tax has been deducted. The AO has also held that as per Article 12(3) of Indo US DTAA, the payments are taxable in India. As per Article 12 (3) Indo USA DTAA, the payment made for bandwidth charges are taxable in India. The relevant para defining the meaning of the term 'royalties' in the said DTAA reads as under:
"The term royalties as used in this Article means:-12- ITA 917 to 920/14
payments of any kind received as a consideration for the use of: or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof. "
Hence the AO observed that TDS should have been made and failure to deduct T.D.S. is resulted treating the assessee in default u/s.201(1)/201(1A) of the Act. Aggrieved by this, the assessee went in appeal before the CIT(Appeals).
8. On appeal, the CIT(Appeals) observed that the crux of the entire gamut of the issue harping around in the present case converges to the following observation of the Court viz., "merely because the service is provided through sophisticated technical equipment, it does not by itself, render the service as a technical service." The CIT(Appeals) further observed that the assessee is also taking the following 'quote' to its rescue.
"In the modern day world, almost every facet of one's life is linked to science and technology inasmuch as numerous things used or relied upon in everyday life is the result of scientific and technological development. Every instrument or gadget that is used to make life easier is the result of -13- ITA 917 to 920/14 scientific' invention or development and Involves the use of technology. On that score, every provider of every instrument or facility used by a person cannot be regarded as providing technical service. Technical service referred in section 9(1)(vii) contemplates rendering of a 'service' to the payer of the fee. Mere collection of a "fee" for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services".
8.1 According to the CIT(Appeals), there is no denial by the assessee that .the 'Bandwidth charges' were paid to the provider of a dedicated bandwidth - a scientifically developed technological arrangement consisting of 'under the sea cable' together with necessary equipment - for the seamless usage by it. The payments were made by the assessee to the non-resident provider towards bandwidth charges. There is also no denial by the assessee that it enjoyed the uninterrupted right to use the bandwidth. The appellant has always been at ease to have fact to face operational contact with the equipment. The assessee paid the bandwidth charges as consideration for using the bandwidth. The point-to-point communication could be possibly established as per the requirements of the assessee only by the commissioning of the bandwidth communication line.
-14- ITA 917 to 920/148.2 The CIT(Appeals) observed that it is immaterial that the right to use the dedicated bandwidth was under the control of the provider or not. But indisputably noticeable fact in this case is that the assessee has been enjoying a significant economic and commercial interest in the bandwidth hired by it. The bandwidth capacity made available on a dedicated basis to the assessee, even if it does not involve a possessory interest, the amount paid is also for the use of process. The definition of 'Royalty' under DTAA and I.T. Act are in pari materia. As per Explanation 6 u/s 9(1)(vi) of the Act, possession, control, etc. of such right on the dedicated bandwidth line are not matters of concern in deciding the character of payment as 'Royalty'. The assessee "no doubt enjoyed the right to use the transmission by cable or optic fibre or satellite as the case may be. This usage/use by the assessee of the communication facility enabled by satellite links and cable through the bandwidth line is nothing but using the process as per Explanation 2(iii) u/s 9(l)(vi) of the I.T. Act, and therefore. the consideration paid thereof is 'Royalty'. The payment under consideration Is for the use or right to use of the -15- ITA 917 to 920/14 equipment of bandwidth and hence it shall qualify to be 'Royalty' for the use of the process. The use of 'process' was provided to the assessee though the assured bandwidth for guaranteeing the assessee the transmission of the data and voice. Thus the 'bandwidth charges' being consideration, for the use and the right to use of the process, is 'Royalty' within the meaning of clause (iii) of Explanation 2 to sec.9(1)(vi) of the I.T. Act, 1961. The payments made for providing communication bandwidth shall by all means, including the DTAA, Royalty. According to the CIT(Appeals), the payments of 'bandwidth charges' for the use of the circuit of dedicated communication bandwidth paid by the assessee shall be 'Royalty' and taxable income in the hands of the non-resident u/s 9(1)(vi) of the I.T. Act, the assessee should have deducted the tax at source before paying the bandwidth charges, which it failed to do so. Therefore, the CIT(Appeals) did not accept the contentions of the ld. AR and confirmed the finding of the AO. Against this, the assessee is in appeal before us.
9. We have heard both the parties, perused the material on -16- ITA 917 to 920/14 record and case law relied on by the parties. In our opinion, similar issue was considered by the Madras High Court in the case of Verizon Communications Singapore Pte. Ltd. v. ITO(International Taxation) [361 ITR 575], wherein it was observed as under :
"Under section 9(1)(vi)(b) of the Income-tax Act, 1961,where income by way of royalty is payable by a person who is a resident to a non-resident, it shall be taxable as income under the provisions of the Act. Explanation 2 to sub-clause
(vi) gives the definition of "royalty". "Royalty" means the consideration for transfer of intellectual property rights, for imparting any information regarding the working of, or the use of the intellectual property rights, use of any intellectual property, imparting any information concerning technical, industrial, commercial, scientific knowledge, experience or skill ; use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB, transfer of all or any rights including the granting of a licence in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films or rendering of any services in connection with the activities referred to in sub-clauses (i) to
(iv), (iva) and (v). The amendment relating to "royalty", particularly the reference to use or right to use any industrial, commercial or scientific equipment, etc., was inserted with effect from April 1, 2002, by the Finance Act, 2001. Explanations 4 and 5 were inserted by the Finance Act, 2012, with effect from June 1, 1976. Under Explanation 5, the Legislature sought to clarify the definition of "royalty"
to include consideration in respect of any right, property or information whether or not possession or control of such -17- ITA 917 to 920/14 right, property or information is with the payer, such right, property or information is used directly by the payer, the location of such right, property or information is in India. Explanation 6 further clarifies that the expression "process" included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. Thus, after the amendment introduced in the year 2012, with effect from June 1, 1976, irrespective of possession, control with the payer or use by the payer or location in India, the consideration would nevertheless be treated as "royalty".
The assessee, a non-resident company, was engaged in the business of providing international connectivity services (bandwidth services or telecom services) in the Asia Pacific region including to customers in India for transmission of data and voice. The agreement between the assessee and the customer, called service order form, gave the nature of service contracted to by the customer and the terms subject to which services were given. The data service order form stated that it shall be read in conjunction with the terms of the Asia Pacific master terms and conditions, which the customer agreed prior to executing the service order. The Asia Pacific master terms and conditions, the parent document, which governed the provision of services to the customers by MCI-in the Asia Pacific region, gave the scope of the agreement as concerning (a) master terms and conditions, (b) specific terms which applied to particular categories of service as attached in the schedule to the master terms, and (c) the service order. To the extent that there was any inconsistency between the terms set out in
(a), (b) and (c), the service order would prevail over the schedule and master terms. Each service order issued and accepted pursuant to the terms of the agreement would create an individual contract relationship between the parties to such service order. The relationship would be governed by the master terms and schedules together with relevant service order in addition to the provisions set forth in the agreement; the service would also be subject to all -18- ITA 917 to 920/14 mandatory local law requirements, including but not limited to the regulatory and data protection requirements in the respective countries. The international leg of the telecom services provided outside India was provided by the assessee. Since in India, under the Indian Telecommunications Regulations, only licensed service providers could provide international long distance communication services on the Indian leg, and the assessee was not a licensed service provider under the Indian laws, Videsh Sanchar Nigam Limited (VSNL) a public sector undertaking provided the Indian leg of the international service to the customers. Thus, a customer interested in taking a lease connection between its office in India and an overseas location entered into an arrangement with the assessee for the provision of international connectivity in the overseas leg and with VSNL for the Indian half of the connectivity. VSNL transmitted the traffic of the customer in India from the customer's office in India to a virtual point outside India and the assessee transmitted it up to the customer location outside India. The assessee used its telecom service equipment situated outside India in providing the international half circuit. The gateway/the landing station in India used in transmitting the traffic within India belonged to VSNL and was used by VSNL for providing Indian end services pursuant to its contract with the customer. The Assessing Officer came to the conclusion that the payment received by the assessee in providing international private leased circuit was taxable as "royalty" for use of or right to use of commercial and scientific equipment under section 9(1)(vi) of the Act read with Explanation 2 thereto, and article 12(3) of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore rejecting the assessee's contention that the payment was not royalty or payment made for providing technical services and that the question of any liability to pay advance tax or interest under section 234B of the Act did not arise. The assessee appealed to the Commissioner (Appeals), who confirmed the order of the Assessing Officer. On further appeal, the Tribunal held that even if the payments were treated as not relating to the use of -19- ITA 917 to 920/14 equipment, they should be considered as payment for the use of process, that the payments were for the use of tangible equipment and could be considered as payment for the use of or right to use industrial, commercial and scientific equipment, that the dedicated bandwidth was set aside by the service provider for the exclusive use of the customer. The Tribunal confirmed the views of the Assessing Officer. On appeal to the High Court :
Held, dismissing the appeals, that the receipts were liable to be treated as "royalty" for the use of international private leased circuit under section 9(1)(vi) read with Explanation 2(iva) and correspondingly article 12(3) of the DTAA between India and Singapore. Even if the payment was not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer was guaranteed the transmission of the data and voice. The fact that the bandwidth was shared with others had to be seen in the light of the technology governing the operation of the process and itself did not take the payment out of the scope of royalty. Thus, the consideration being for the use and the right to use the process, it was "royalty" within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. This was because :
(i) The service agreement with the customer, service agreement with VSNL and the one between the customer and VSNL, were part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim, however, was to give the customer a point-to-point private line to communicate between offices that were geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. The parties had agreed to "one stop shopping", which allowed an organisation, namely, the customer to place a single order with a single carrier for two private leased circuits for two -20- ITA 917 to 920/14 offices in two different countries, here the Indian half by VSNL and the other half by MCI. The contract ensured that the customer had an active internet dedicated to that particular customer at a particular speed agreed upon.
VSNL was a provisioning entity whose services the assessee had to direct the customer to avail of, since as per the Indian law, the assessee was not the licensed operator in the Indian half circuit. The arrangement between the assessee and VSNL had to be necessarily integrated and technically and financially viable having regard to the close functional relationship between the two. Thus, the service agreement assuring the service was possible and workable only when the assessee and VSNL were considered as rendering the service jointly in their respective leg. Thus, the two halfs being mirror images of each other and going by the terms of the agreements, the assessee rendered service in India and the consideration received attracted the incidence of taxation in India.
(ii) Bandwidth is defined as the amount of traffic that is allowed to occur between the customer website and the rest of the internet. A user having a particular international private leased circuit service connection has a dedicated bandwidth between the computer and the internet provider though the provider itself may have 1000 such service connections to other location. The service provider has to have enough bandwidth to serve a person's computing needs as well as all of its other customers. Thus, being high speed internet connection, to achieve this, the equipment at the customer's end must have the capacity to send and receive data at the required speed. In order that the contracted bandwidth was provided, the master agreement read with the service order clearly gave the selected bandwidth for each customer which was assumed end-to- end and to this end, the equipment at the customer's end was delivered by the assessee itself. The customer's responsibility as stated in the agreement thus pointed out that during the currency of the agreement, the customer could not in any manner tinker with it or its rights in any manner alienated. There was use of equipment and cable in -21- ITA 917 to 920/14 the transmission of the data/voice from one end to the other and it was difficult to accept the case of the assessee that the nature of transaction was only that of service. The agreement provided an indefeasible right to the customer to use the facility of communicating the data/voice and had an internet in the matching half circuits for providing the required telecommunication services at the assured speed. Thus the efficacy of transmitting data/voice depended on the originating signal from the customer's end which meant there was the use of the equipment by the customer installed by the assessee. In the circumstances, the assessee could not be considered merely to be providing the service to the customer.
(iii) Although the agreement between the assessee and VSNL stated that one was not the agent or the representative of the other, this did not mean that VSNL had provided its server independently without any connection whatsoever with the service order that the customer placed with the assessee. A reading of the service agreement showed that the parties agreed that the provisioning entities in the Indian half circuit shall be VSNL and in getting the seamless end-to-end connectivity, the customer entered into a further agreement with VSNL. If the agreement with VSNL had to have no relevance or reference to the customer agreement with the assessee, there was no need at all in the service agreement to refer to VSNL as the provisioning entity or for that matter to go for one-stop shopping. Thus, the end-to-end provisioning in one single circuit was assured by the assessee and if by reason of any regulatory laws of the country the assessee was unable to extend its service by itself but went for such other licensed authority, it did so only as a provisioning entity to make up for the gap caused by the statutory limitation on the licence and thus it did not mean that these facilities were independent having no connection and relevance whatsoever to the connectivity offered by the assessee. The various contracts executed pursuant to the service contract with the customer were closely linked to the single transaction of providing end-to- end international private leased circuit facility to the -22- ITA 917 to 920/14 customer and in order to execute them, if the assessee had to enter into several agreements or sub-agreements, such agreements could not be looked at in isolation having no relevance to the service agreement. Providing service was not possible without the use of the equipment ensuring the assured bandwidth for transmission of data and voice which provided the internet access to the customer to and fro.
(iv) After the insertion of Explanation 5, possession, control of such right, property or information usage directly by the payer, location of the right were not matters of concern in deciding the character of payment as "royalty" and but for the use of the connectivity by the payer, the service agreement itself had no meaning. The customer had a significant economic interest in the assessee's equipment to the extent of the bandwidth hired by the customer. The service order form showed the customer contracting for international private leased circuit service and MCI-was appointed as its agent as regards the provision of direct supply service. The one stop shopping was a facility which the customer was provided with for availing of the economic interest in the services provided. The bandwidth capacity made available on a dedicated basis for the entire contract period, even if it did not involve a possessory interest, the amount received by the assessee in a way was also for the use of process. The service order form clearly pointed out that the assessee was at liberty to change the equipment, modify the configuration or change the routing of the network in providing the service and the assessee could provide the service either directly or through a provisioning entity. Thus, the assessee provided the Indian customer an integrated communication system called international private leased circuit, part of which outside India was taken care of by the assessee and the part inside India through VSNL, which could not be dissected as two independent contracts having no bearing at all on each other.
(v) The definition of "royalty" under article 12 of the DTAA between India and Singapore and the Act are in pari materia. Explanation 6 defines "process" to mean and -23- ITA 917 to 920/14 include transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal) cable, optic fibre, or by any other similar technology, whether or not such process is secret. Thus, apart from the relevance and applicability of clause (iva) that the payment was for the use or right to use of the equipment, the payment for the bandwidth amounted to royalty for the use of the process and by reason of the long distance, to maintain the required speed, boosters were kept at periodical intervals. Going by this too, in any event, the payment received by the assessee was rightly assessed as "royalty" and would constitute so for the purposes of the DTAA.
Obiter dicta : In a virtual world, the physical presence of an entity has today become an insignificant one ; the presence of the equipment of the assessee, its rights and the responsibilities of the assessee, vis-a-vis the customer and the customers' responsibilities clearly show the extent of the virtual presence of the assessee which operates through its equipment placed in the customer's premises through which the customer has access to data on the speed and delivery of the data and voice sent from one end to the other. The Explanations inserted thus clearly point out that the traditional concepts relating to control, possession, location on economic activities and geographic rules of source of income recede to the background and are not of any relevance in considering the question under section 9(1)(vi) read with Explanation 2. This is more so when it comes to the question of dealing with issues arising on account of more complex situations brought in by technological development by the use of and role of digital information, goods, etc., and the foreign enterprise does not need a physical presence at all in a country for carrying on business.
Respectfully following the aforesaid decision of the Madras High Court, we reject this ground of appeal raised by the assessee. -24- ITA 917 to 920/14
10. The next ground in these appeals is with regard to reimbursement of expenses.
11. The facts of the case are that the AO classified "reimbursement of Expenses" under the head 'business development commission and bandwidth charges even though these were shown as reimbursement to the parent company and other group companies for common expenses incurred by them. The A.O. observed that it is not proper to classify under nominal heads when the payment was specifically paid to the parent company and not to the original service provider against debit note charged by the parent company without any mark-up and this is to be liable for deduction of tax at sources. Against this, the assessee went in appeal before the CIT(Appeals).
12. On appeal, the CIT(Appeals) observed that the payments are not purely reimbursements having no identity or propriety of their own. Every payment of expenditure shall be having certain characters making it liable to be classified under a particular account head. As such 'Reimbursement of expenses' - itself on its own cannot constitute an independent head of account. The -25- ITA 917 to 920/14 CIT(Appeals) further observed that the invoices pertaining to the so called reimbursement of expenses were found by the AO to be speaking about the nature of payments involved in those reimbursements. The payments related to (1) purchase of software (2) bandwidth charges (3) commission payments, etc. Therefore it has become apparent that the reimbursements constitute a mixture of so many kinds of payments which should have been genuinely accounted for under the appropriate heads and account. Further, the CIT(Appeals) observed that whereas the assessee has not done so far the reasons best known to it. Had the payments (called reimbursements) been properly accounted for under the respective head of account, the AO would have assessed without any difficulty. A confounding situation has been created by the assessee, itself by Indulging In unfair and unapproved accounting procedures. According to the CIT(Appeals), when adequate opportunities were provided to the assessee, during the course of assessment and appeal proceedings, it could not furnish a segregated statement of expenses together with the relevant invoices and vouchers pertaining to such reimbursements. Under these circumstances, -26- ITA 917 to 920/14 it is quite natural for the AO to resort to a permissible assumption that the assessee could have chosen to make the payments through the present company instead of making direct payments to the overseas service providers with the intention to avoid tax deduction at source. Accordingly, the CIT(Appeals) held that the AO rightly classified the reimbursement expenses to the respective heads. Aggrieved by this, the assessee is in appeal before us.
13. We have heard both the sides and perused the material on record. Similar issue came for consideration before the Tribunal in the case of Ashok Leyland Ltd. v. DCIT [313 ITR (AT) 191], wherein it was held as follows:
" In order to invoke the provisions of section 195 of the Income-tax Act, 1961, in the context of a non- resident, it is sine qua non that the amount must bear taxable character. Where the person responsible for making the payment is not sure as to which part of the amount of income referred to in section 195(2) of the Act is chargeable to tax, he can apply to the Assessing Officer to determine the proportion of the sum so chargeable and on such application the Assessing Officer is required to make an order determining the proportion of such income on which tax is to be deducted at source. It pre-supposes that the person responsible for making the payment is in no doubt that tax is payable in respect of some part of the amount to be remitted but is not sure what should be the portion -27- ITA 917 to 920/14 so taxable or the amount of the tax to be deducted. It is evident from a perusal of section 195 of the Act that it is applicable in the context of such sums which are chargeable to tax under the Act. It is therefore, necessary to enquire as to whether the amount in question could be charged to tax.
The assessee-company manufacturing motor vehicles entered into a technical assistance agreement with AVL GmbH Austria, for supply of designs, drawings and consultancy in the development of engines. Under the agreement the assessee was required to reimburse expenditure towards air fare, accommodation and subsistence cost for the personnel deputed by the Austrian firm to India in addition to fees for technical know-how. On deputing personnel for assisting the assessee-company in imparting their technical expertise, the Austrian firm raised four invoices towards reimbursement of items of expenses. The assessee applied for a certificate for non-deduction of tax at source under section 195(2) of the Income-tax Act, 1961, on such reimbursements. The Assessing Officer declined to grant the exemption and directed the assessee to deduct tax at 10 per cent on such reimbursements which was confirmed by the Commissioner (Appeals). On appeal:
Held, dismissing the appeal, that there was nothing on record to indicate as to how such reimbursement could be termed as business income of the assessee. The reimbursements were made in the process of executing the agreement. The expenditure being part and parcel of the process of advice of technical character, the payment on account of reimbursement also attracted the provisions of section 195(2) of the Act. The Commissioner (Appeals) took the correct view in the matter and his order could not be interfered with."-28- ITA 917 to 920/14
In view of the aforesaid decision of the Tribunal, wherein the present Accountant Member is a party to the order, we dismiss this ground of appeal.
14. In the result, all the appeals of the assessee are dismissed.
Order pronounced on Monday, the 15th of Feb., 2016 at Chennai.
Sd/- Sd/-
(जी. पवन कुमार) (चं( पज
ू ार )
(G. Pavan Kumar) (Chandra Poojari)
:या यक सद<य/Judicial Member लेखा सद<य/Accountant Member
चे:नई/Chennai,
Cदनांक/Dated, the Feb., 2016.
mpo*
आदे श क तEलFप अGेFषत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयुHत (अपील)/CIT(A)
4. आयकर आयुHत/CIT
5. Fवभागीय त नKध/DR
6. गाड फाईल/GF.