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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 20TH DAY OF MARCH 2014
BEFORE
THE HON’BLE Dr.JUSTICE JAWAD RAHIM
W.P. Nos. 13210-14/2014 (T-IT) C/W
W.P.Nos. 13564-13568/2014 (T-IT)
W.P. Nos. 13210-14/2014 (T-IT)
BETWEEN:
VODAFONE SOUTH LIMITED
(FORMERLY KNOWN AS
VODAFONE SOUTH ESSAR LIMITED)
MARUTHI INFOTECH CENTRE
NO. 11/1, 12/1, KORAMANGALA
AMAR JYOTHI LAYOUT
BANGALORE – 560 071
REP. BY ITS POWER OF ATTORNEY
SRI. ANUJ KUMAR SINGH ..PETITIONER
(BY DR. ABHISHEK MANU SINGHVI, SR. COUNSEL FOR
SRI. H.V. SESHACHALA, ADV.,)
AND
1. THE DEPUTY DIRECTOR OF INCOME TAX
INTERNATIONAL TAXATION
CIRCLE- I(1)
NO. 14/3A, 6TH FLOOR
RASHTROTHANA BHAVAN
NRUPAATHUNGA ROAD
BANGALORE – 560 001.
®
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2. DIRECTOR OF INCOME TAX
INTERNATIONAL TAXATION
NO. 14/3A, 6TH FLOOR
RASHTROTHANA BHAVAN
NRUPAATHUNGA ROAD
BANGALORE – 560 001 ….RESPONDENTS
(BY SRI. K.V. ARAVIND, STANDING COUNSEL FOR C/R)
THESE W.Ps. ARE FILED PRAYING TO QUASH THE
ORDER PASSED BY THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH VIDE ORDER DT: 06.03.2014 VIDE
ANNX-G. DIRECT THE R1 NOT TO INITIATE RECOVERY
PROCEEDNGS OR ANY OTHER COERCIVE STEPS PURSUANT
NOTICE DT: 28.01.2013 VIDE ANNX-B OR PROCEEDINGS
PENDING DISPOSAL OF THE APPEALS BEFORE THE INCOME
TAX APPELLATE TRIBUNAL ON MERITS ETC.,
W.P.Nos. 13564-13568/2014 (T-IT)
DEPUTY DIRECTOR OF INCOME TAX
(INTERNATIONAL TAXATION)
CIRCLE-1(1)
6TH FLOOR, RASTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE – 560 001 …PETITIONER
(BY SRI. K.V. ARAVIND, STANDING COUNSEL)
AND
M/S. VODAFONE SOUTH LTD.,
(FORMELY KNOWN AS VODAFONE ESSAR SOUTH LTD.,)
MARUTHI INFOTECH CENTRE
11/1, 12/1, KORAMANGALA
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AMARJYOTHI LAYOUT
BANGALORE – 560071
REP. BY ITS AUTHORISED SIGNATORY
SRI. ANUJ KUMAR SINGH …RESPONDENT
(BY DR. ABHISHEK MANU SINGHVI, SR. COUNSEL)
THESE W.Ps. ARE FILED PRAYING TO QUASH THE
ORDER DTD: 06.03.2014 PASSED Y THE INCOME –TAX
APPELLATE TRIBUNAL, BANGALORE BENCH-B, BANGALORE
VIDE ANNEX-F. ETC.,
THESE PETITIONS COMING ON FOR PRELIMINARY
HEARING THIS DAY, THE COURT MADE THE FOLLOWING:
O R D E R
Petitioner, a company incorporated under the
provisions of the Companies Act, 1956, and a subsidiary of
M/s Vodafone Mobile Services Limited, engaged in the
business of providing telecom services to its subscribers in
India, has brought in question the order of the Income Tax
Appellate Tribunal, Bangalore Bench, (hereinafter referred
to as ITAT, for brevity) dated 6.3.2014 (vide Annexure-G)
on two interlocutory applications filed by it in No.63-
67/Bang/2013 and has sought a writ of prohibition or such
other writ to direct the respondents not to enforce the
assessment order passed by the respondent herein vide
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Annexure-A dated 28.1.2013 and the consequent demand
notice in pursuance to Annexure-A vide Annexure-B on the
same day.
2. On issuance of notice regarding Rule, Mr.K.V.Arvind
has entered appearance for the Revenue.
3. I have heard persuasive arguments of Mr.Abhishek
Manu Singhvi, learned advocate for the petitioner and also
Mr.K.V.Aravind, standing counsel for the Revenue-Income
Tax Department and perused records in supplementation
thereto from which the following factual matrix manifests
and is relevant for consideration:
a) Petitioner claims to be a company of repute
engaged in the business of providing telecom services to its
subscribers in India and has entered into agreements with
Non-resident Telecom Operators (NTOs, for short), for
providing bandwidth and interconnect capacity outside India
and those foreign companies are knit with the petitioner
under Double Taxation Avoidance Agreement (DTAA, for
short).
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b) The genesis of this writ petition is the opinion of
the tax assessing officer that the petitioner has made
payments to foreign companies for providing bandwidth and
interconnect capacity outside India. Such payments made
by the petitioner to foreign companies for providing
bandwidth and interconnect capacity is liable to tax in India
in the hands of foreign companies, attracting Section
9(1)(vi) and (vii) of the Income Tax Act, 1961, (hereinafter
referred to as the Act, for brevity), bringing such payments
within the mischief of the definition of ‘Royalty’ and ‘Fees for
Technical Services,’ consequently treating the petitioner as
an ‘assessee in default’, invoking Section 201(1) and to
impose penalty and interest under Section 201(1A) of the
Act, attracting Section 195 of the Act, ultimately resulting in
passing of the assessment order vide Annexure-A date
28.1.2013 and consequent demand notice vide Annexure-B
of the same date.
3. From the facts not in dispute, it is evident
petitioner company is engaged in the provision of
International Long Distance (ILD) services to its subscribers
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in pursuance to the licence granted by the Department of
Telecommunications under the Telegraph Act. It is not in
dispute as part of its ILD telecommunication services,
petitioner provides connectivity services in respect of calls
originating/terminating in India. To complete the provision
of ILD services, petitioner has obtained services of Non-
resident Telecom Operators (NTOs) for providing services
like carriage/connectivity services over the last leg of
communication channel.
4. Needless to record for such services petitioner
company depends on the services of NTOs. NTOs render
such services in completion of services of
telecommunication to the subscribers of the petitioner
company for ‘consideration.’ The transaction between the
petitioner and such NTOs being civil in nature, agreements
are signed by the NTOs with the petitioner company for
provision of ILD and connectivity services. These
agreements, as contended by the petitioner, are executed
outside India. That means, the agreements signify and
cover services rendered by the NTOs in the country beyond
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the territory of India. Calls originating or terminating from
India occasioned by the use of telecommunication services
provided by the petitioner company to these subscribers are
therefore directly dependant on the services rendered by
the NTOs, but for which there will be no connectivity. The
terms and conditions on which the petitioner and NTOs are
in business are spelled out in the agreement.
5. While not disputing this fact situation, petitioner
has taken the stand that the network of NTOs and related
equipments used by it for provision of the above referred
services is used exclusively by NTOs themselves to which
the petitioner company has no access. The NTOs provide
services only outside India and hence the services are
rendered not only outside India but also consumed/utilized
outside India, thereby spelling out there is no territorial
nexus insofar as India is concerned.
6. Petitioner claims it has entered into agreements
with NTOs, viz.,
a) Emirates Integrated Telecommunications Company
PJSC, Dubai – United Arab Emirates
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b) Emirates Telecommunications Corporation, Abu Dhabi – United Arab Emirates
c) Telkom South Africa Limited, South Africa d) KPN Global Carrier Services B.V., Netherlands
e) France Telecom SA, Paris – France f) Telenor Global Services AS, Fomebu – Norway
g) VSNL Telecommunications (UK) Limited, London – UK
h) Saudhi Telecom Company, Riyadh- Saudhi Arabia i) MCI International, Inc., Virginia, U.S.A.
j) Callforeigh Inc Pte Ltd., Singapore.
Petitioner’s contention is, apart from the above said
agreements for providing inter-connectivity services, it has
also entered into a capacity transfer agreement with
Belgacom International Carrier Services SA, (‘Belgacom,’ a
tax resident of Belgium for acquisition of capacity over on
the Europe-India Gateway (EIG) cable system for a price.
EIG cable system is a high bandwidth optical fiber under
undersea cable system installed between United Kingdom
and India by certain parties including Omantel (parties
collectively referred to as Consortium) by required
investments, each of the consortium members are allotted
certain capacity on the EIG cable system on ownership
basis which entitled the respective members to transfer
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their telecommunication traffic on the EIG cable system
upto the allocated capacity.
7. The Consortium members are also allowed to
transfer the whole or part of the allocated capacity to other
telecommunication entities. Accordingly Omantel (original
Consortium member) transferred certain portion of its
allocated capacity to Belgacom which is not a Consortium
member. Petitioner in turn entered into a capacity transfer
agreement with Belgacom for acquisition of cable capacity
for transmitting upto 1,66,667 MIU.km of
telecommunication traffic over the EIG cable system for an
agreed price on long term IRU basis. The transaction is for
outright transfer of capacity to the petitioner by Belgacom
for the agreed price. The capacity so acquired shall be used
by the petitioner for carrying on telecommunication
operations. On this basis, petitioner submits, Belgacom has
accordingly transferred the above capacity to the petitioner
and such transfer does not invoke the provisions of the
Income Tax Act for any services by Belgacom to the
petitioner.
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8. According to the petitioner, payments made to
Belgacom are not ‘income’ either arising or accruing in
India to Belgacom International Carrier Services SA,
Belgium. Petitioner claims, in accordance with the terms
and conditions entered into with foreign companies, it has
been making payments from time to time during the
assessment years 2008-09, 2009-10, 2010-11, 2011-12
and 2012-13.
9. From the above narration of facts, the stand taken
by the petitioner is, it is making payments in the normal
course for obtaining services for originating/terminating
calls in India in the country beyond the territory of India
and payments made by it to Belgacom on the basis of
agreement for obtaining certain capacity on the EIG cable
system on ownership basis from Belgacom who, in turn is
the acquirer of right from the Consortium member.
10. Bringing out such distinction and describing the
payments made by the petitioner company to Belgacom are
by way of purchase of rights to use EIG cable system. It
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denied such payments are ‘income’ coming within the
taxability/income under the Income Tax Act. Thus the
contention of the petitioner is, the provision of Section 201
of the Act was not attracted but the 2nd respondent has
invoked the provision to issue notices on 26.6.2011,
7.12.2012 and 17.12.2012 requiring the petitioner to show-
cause why taxes were not withheld from the amount paid to
NTOs for providing interconnectivity services and
capacity transfer agreements made by the petitioner.
Petitioner was directed to explain why it should not be
treated as an assessee in default for failing to deduct tax
from the ‘income’ under Section 5(2) of the Act and why
proceedings should not be initiated under Section 201(1)
and 202(1A) of the Act.
11. Petitioner claims to have filed detailed
reply/submission before the assessing officer which found
no favour. Petitioner’s core contention before the assessing
officer was and is, payments made by the petitioner to
NTOs in question are not chargeable for tax in India and
there was no liability on the petitioner to deduct tax at
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source under Section 195 of the Act.’ The assessing
officer, viz., Deputy Director of Income Tax (International
Taxation Circle-I) taking into consideration the
submission/reply o the petitioner, by a common order dated
28.1.2013, held petitioner was an assessee in default and
has, by the impugned order, directed petitioner to pay the
aggregate tax and interest to the extent of
Rs.2,57,57,53,136/- for the financial years 2007-08 to
o2011-12 relevant to the assessment years 2008-09 to
2012-13.
12. Learned counsel, Sri Abhishek Singhvi referring to
the opinion of the assessing officer, submits that such
conclusion is erroneous and against law and facts of the
case. He submits, a perusal of the impugned order dated
28.1.2013 would show the Deputy Director has concluded:
(i) the impugned payments made by the petitioner to the
NTOs would qualify as ‘Royalty,’ (ii) for technical services,
(iii) for included services as also for other ‘income’ under
the provisions of the Income Tax Act as well as applicable
Double Taxation Avoidance Agreement (DTAA, for short).
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13. He would submit, petitioner has been erroneously
held as an assessee in default for non-deduction of tax at
source on the impugned payments made by it and the
aggregate tax and interest demand of Rs.2,57,57,53,136/-
for the financial years 2007-08 and 2011-12. He submits,
aggrieved by the said order, of the Deputy Director/tax
assessing officer, petitioner had preferred appeals before
the Commissioner of Income Tax (Appeals-IV) inter alia
raising several grounds amongst which the following are
very material:
a) The order of the assessing officer is untenable as it
fails to give a conclusive finding with respect to
taxation of impugned payments insofar as it
contemplates to tax the petitioner such payment
under three different categories;
b) Impugned payments cannot be said to accrue or
arise in India under Section 5(2) of the Act merely
because the payer i.e. petitioner is in India;
c) Petitioner is not liable to deduct tax at source on
the impugned payments since such payments are
not chargeable to tax in the hands of the
NTOs/Belgacom in India;
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d) Impugned payments do not qualify as ‘Royalty’ or
FTS/FIS or other income either under the
provisions of the Act and/or the provisions of the
applicable DTAAs; and
e) The order of the taxing officer is barred by
limitation since the proceedings under Section 201
of the Act for the subject financial years were
initiated and completed beyond a reasonable
period of time.
14. Mr.Abhishek Singhvi would submit, raising the
above referred grounds as also several other legal
propositions against the impugned order of the tax
assessing officer, petitioner preferred an appeal before the
Commissioner of Income Tax (Appeals) who, without
considering the merit of the contentions, dismissed the
appeal by order dated 25.3.2013. He would submit, during
the pendency of the appeal, petitioner had applied to the
authority seeking stay which application also was rejected
by order dated 25.2.2013. Thus having no alternate
remedy, petitioner had approached this court against the
order of rejection of the said application in W.Ps.11494-
98/13 and this court had granted interim protection by
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order dated 7.3.2013 staying the operation of the impugned
assessment order as also demand notice and that order was
continued for a further period upto 25.3.2013.
15. He submits, the petitioner enjoyed the benefit of
stay during the pendency of its first appeal before the
Commissioner of Income Tax (Appeals) till the appeal was
dismissed on 25.3.2013. He submits, in view of dismissal of
the first appeal, the writ petitions referred to above were
also disposed of by this court by the following order:
“Learned counsel for the parties submit that the
Appellate Authority has since passed an order. According to the learned counsel for petitioner, the petitioner intends to carry the said order in
an appeal to the Tribunal along with an application for stay and that the interim order
earlier granted be continued for two weeks or until the stay application is considered and orders passed by the Tribunal. This submission
is passed by the learned Sr. Counsel for the respondent-Revenue, on the premise, that the
amount under the bank guarantee is Tax amount, an entitlement of the Union Government. According to the learned Sr.
Counsel, the total outlay for collection of tax is Rs. 5,70,257 crores, while what is in fact
collected is Rs. 5,11,683 crores and that Rs. 260 crores due by the petitioner is a portion of the deficit.
2. In the fact circumstances, it is appropriate
that the interim order earlier granted is continued until the Tribunal passes an order on
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the I.A. for stay, to be filed along with the appeal, within a period of 2 weeks from today.”
In terms of the order of this court, petitioner furnished bank
guarantee which is subsisting till 12.9.2014 and is
encashable on 19.9.2014. It is also submitted, against the
order of the Commissioner of Income Tax dated 25.3.2013,
petitioner has availed the remedy of second appeal before
the Income Tax Appellate Tribunal (ITAT) which appeals
are numbered as Appeal Nos.449-453/B/2013. Along with
the appeals, petitioner filed applications seeking interim
stay numbered as Nos.63-67/B/2013 to stay the impugned
orders of assessment and notice.
16. He would submit that the Tribunal had listed the
application for interim stay along with the two appeals filed
by the petitioner, but without appreciating the grounds
urged by the petitioner seeking stay of the operation of the
assessment order and demand notice vide Annexures-A and
B, has granted only partial relief staying only 50% of tax
liability determined by the assessing officer vide order dated
6.3.2014 (Annexure-G). He submits, consequent to such
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erroneous approach of the Tribunal, it has opined prima
facie case was not made out by the petitioner to stay in
entirety the assessment order and demand notice.
17. He would submit, the tax assessing officer as also
the first appellate authority-Commissioner of Income Tax
had failed to notice or appreciate the legal propositions
urged by the petitioner necessitating the petitioner to file
two appeals wherein the question of jurisdiction of the tax
assessing officer is raised to invoke the provisions of
Section 201(1) and 201(1A) of the Act to describe the
petitioner as an assessee in default.
18. Learned counsel drawing my attention to the
definition of ‘income’ as appearing in Section 5(2) of the Act
submits that the petitioner is not a ‘payer’ in India and the
amount paid by it in India to NTOs/Belgacom is not
‘income.’ He submits that the petitioner has raised legally
tenable grounds against such orders of the tax assessing
officer and the first appellate authority-Commissioner of
Income Tax (Appeals) before the Tribunal. The Tribunal,
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instead of considering the grounds urged with reference to
the relevant provisions of the Income Tax Act, has
unjustifiably held the petitioner had made out no prima
facie case to stay in entirety the impugned orders at
Annexures-A and B.
19. Reiterating his submission that the payments
made by the petitioner to NTOs/Belgacom did not qualify as
‘Royalty’ attracting Section 9(1)(iv) or (vi) of the Act or any
of the provisions thereof, he submits it is settled proposition
of law that whenever there is a treaty between the tax
assessee in India and NTO based on foreign policy of the
Central Government, agreements are entered into to
prevent double taxation, and they are styled as DTAAs
(Double Taxation Avoidance Agreements). Thus tax
liability of the NTO has to be determined in terms of the
DTAAs. He submits, by Finance Act of 2012, the provision
of Section 9(1)(vi) has been amended inserting
Explanations 5 and 6. Such insertion, according to him, is
only explanatory and therefore, legally unsustainable.
However, he would refer to the said provision to contend
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Explanations 2, 5 and 6 show payments made by the
petitioner was not ‘Royalty’ as defined in Section 9(1)(vi) of
the Act, nor it comes within the mischief of any of the
Explanations. He submits, the amendment is effected to
spell out that it is ‘Royalty’ and retrospective effect is given.
Such enactment, he submits, will not stand the test of law
and therefore has to be ignored.
20. His further contention is, Tribunal had failed to
notice the retrospective amendment made to Section
9(1)(vi), adding Explanations 5 and 6 is not valid. Such
invalid provision cannot be used by the assessing officer to
bring payments made by the petitioner for interconnectivity
charges and capacity transfer agreements as ‘Royalty.’ It
would not attract any of the provisions of the Income Tax
Act and therefore Section 201(1) and 201(1A) become
inapplicable.
21. He submits all these issues are subjudice before
the ITAT and the petitioner has made out a prima facie case
that payments made by it to NTOs/Belgacom was not
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‘income’ arising in India and thus there is no question of
deduction of tax at source attracting Section 195 of the Act.
He seriously questioned the jurisdiction of the tax assessing
officer to apply such provision and determine the alleged
liability of the petitioner.
22. He submits, the decision in the case of SANOFI
rendered by the Andhra Pradesh High Court is an eye-
opener and an authority on the stand that while taking
decision on the application filed by the petitioner, he was
required to consider the retrospective amendments made to
the Income Tax Act would not be applicable to DTAAs. He
submits, the term ‘Royalty’ has been defined in Explanation
2 of Section 9(1)(vi) which reads thus:
Explanation 2 – For the purposes of this clause, “royalty’’ means consideration (including any lump sum
consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for –
i) the transfer of all or any rights (including
the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar
property; ii) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design, secret
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formula or process or trade mark or similar property;
iii) the use of any patent, invention, model, design, secret formula or process or trade
mark or similar property; iv) the imparting of any information
concerning technical, industrial,
commercial or scientific knowledge, experience of skill.
On the above grounds, he seeks to question the impugned
order dated 6.3.2014 at Annexure-G passed by the Tribunal
granting limited stay to the extent of 50% and the direction
to deposit rupees hundred crores on or before 21.3.2014.
23. In negation of these grounds urged on behalf of
the petitioner, Mr.K.V.Aravind, learned counsel for the
Revenue would submit, the assessing officer noticing
payments made by the petitioner to Belgacom and other
NTOs amount to ‘income,’ issued show-cause notice and
due opportunity was given to the petitioner assessee. The
assessing officer has also examined the technical expert in
order to appreciate the nature of services utilized by the
assessee from foreign telecom operators rendering services
through the assessee to customers. The assessing
officer has noticed payment made by the petitioner is in the
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nature of ‘Income’ and ‘Royalty’ to NTOs for technical
services availed by the petitioner.
24. On facts there is no dispute petitioner has made
payments to NTOs/Belgacom for utilization of its services
and therefore it is ‘consideration,’ falling under the category
of ‘other income’ as defined in Section 5(2) of the Act and
consequently attracts Section 201 (1) of the Act, and as
tax was not deducted at source from the income so derived,
Section 201(1A) of the Act is attracted.
25. Learned counsel refers to the reasoning of the
assessing officer to determine tax liability and supports it
fully.
26. Mr.Aravind has also referred to the order passed
by the first appellate authority, i.e. Commissioner of Income
Tax (Appeals) rejecting the contention of the petitioner
assigning valid reasons. He would submit, petitioner has
now preferred further appeals which are pending
adjudication. But the petitioner except filing interlocutory
application seeking stay, did not pursue the appeal action
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for a period of over 11 months. It is only at the instance of
the revenue/Income Tax Department that the Tribunal took
up the appeals for consideration along with the application
for stay. He submits, keeping that appeal pending,
petitioner obtained interim order from this court in the writ
petitions filed.
27. Mr.Aravind submits, delay in disposal of the
appeals is at the instance of the petitioner and that shows
petitioner has, by its conduct, become disentitled for stay of
the order of assessment and demand notice at Annexures-A
and B. He further submits, the Department//Revenue is
aggrieved by the order of the Tribunal dated 6.3.2014
(Annexure-G) wherein the Tribunal has stayed 50%
recovery of tax liability determined by the assessing officer.
He submits the Revenue has filed W.Ps.13564-13568/14
against the impugned order-Annexure-G as it has deprived
of the State revenue which it has to recover by way of tax
from the petitioner.
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28. Learned counsel relies on the decision of the
Madras High Court in the case of VERIZON
COMMUNICATIONS SINGAPORE PTV LTD., VS.
INCOME TAX OFFICER (2013) 39 TAXMANN.COM 70
(MADRAS) wherein the Bench of the Madras High Court
held as follows:
‘Payments made by the Indian payer to NTO is ‘Royalty’ for services rendered by the
NTO.’
He submits the dictum in the said decision answers all
questions raised by the petitioner and therefore the Tribunal
should have declined stay in entirety. According to him,
these grounds may be taken as grounds against the relief
sought in the writ petition filed by the petitioner, and in
support of the writ petition filed by the Revenue should be
allowed, modifying the impugned order at Annexure-G
dated 6.3.2014 to direct the petitioner to deposit the entire
tax liability as determined by Annexure-A along with penalty
imposed totaling Rs.257 crores.
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29. As the Revenue/Income Tax Department has
urged similar grounds against the relief sought in the writ
petition filed by the assessee and to support the grounds
urged in W.P.13210-13214/14, the writ petitions are heard
together.
30. All contentions urged by both sides have received
my serious consideration.
31. I have already referred to in the preamble of this
order that there is no dispute on facts. Admittedly
petitioner during the course of business of providing
telecom services to its subscribers, has entered into DTAAs
with the NTOs as also interconnectivity capacity transfer
agreements with Belgacom. It is also not disputed that
petitioner has made periodical payments to NTOs/Belgacom
during the financial years 2007-08 to 2011-12 for the
relevant years 2008-09 to 2012-13. It is also not in dispute
petitioner has not deducted any amount from such
payments at source.
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32. The question raised is about taxability of such
payments. The specific defense of the petitioner throughout
is as under:
1) Payments made by the petitioner to NTOs for
provision of bandwidth and Interconnect Usage
Charges (IUC) does not fall within the definition of
‘income’ as defined in Section 5(2) of the Act;
2) Payment made by the petitioner towards IUC to
NTOs does not qualify as ‘Royalty’ under the
provisions of the Income Tax Act and in terms of
DTAAs;
3) IUC paid to NTOs is not Fees for Technical
Services (FTS) under the provisions of the Act and
DTAAs;
4) Payments made to Belgacom for provision of
bandwidth is not ‘Royalty’ under the Act and
DTAAs.
Supporting the above grounds, the petitioner has urged that
payments for transfer of IEG and IUC are in the nature of
‘business income’ in the hands of NTOs. Petitioner further
contends Section 9 of the Act is the deeming provision for
taxation on specific income received by foreign tax residents
in India. Therefore taxation of the aforesaid payments are
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to be considered under Section 9(1)(i) and not under
Section 5 of the Act. It is further urged ‘business income’
can be taxed under Section 9(1) only if it is accruing or
arising in India.
33. The specific case of the petitioner is, payments for
transfer of EIG and IUC do not accrue or arise in India and
neither do such payments arise from any business or
property or capital assets situate in India. Such payments
do not qualify as ‘income’ and is thus not taxable under
Section 9(1)(i) of the Act also. Consequently even that
provision is not applicable. It is the further case of the
petitioner that since the amount paid by the petitioner to
NTOs is not taxable under Section 9(1)(i) of the Act, it is
not open to tax the income under Section 5 of the Act.
34. The answer to these propositions is in the
admitted facts and the provisions referred to above. It is
not in dispute India follows source-based taxation system
for non-residents. This is implemented in the Act through
Section 5 which defines the scope of total income of a
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person under the Act. Section 5(2) defines the scope of
total income of a non-resident as under:
Subject to the provisions of this Act, the total
income of any previous year of a person who is a non-resident includes all income from whatever source derived which
a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
b) accrues or arises or is deemed to accrue or arise
to him in India during such year.
Sub-section (2) in its terminology reveals it covers income
of non-residents from whatever source derived which is
‘received’ in India or accrues in India or arises in India.
When such fact is proved, it is deemed to have been
‘received’ in India, or deemed to have ‘accrued’ in India
and deemed to have ‘arisen’ in India. There is no dispute
that the petitioner has made payments to NTOs as
consideration towards utilizing EIG/IUC to complete ILD
interconnect services to its subscribers.
35. The source of payment is in India. Of course for
services rendered by the NTOs abroad, and towards such
services utilized, petitioner has made payments. Section
5(2) of the Act referred to above deals with the source from
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which income is derived. The word ‘source’ means the
place from which something is obtained. This issue has
been discussed at length in judicial pronouncements
particularly in the case of SHETH SHIV PRASAD .vs.
C.I.T. in which the Allahabad High Court observed thus:
‘What is in source of income ? The
expression has been used in several places in the Act. In section 2(11)
the definition of “previous year” envisages a different previous year
in respect of each separate source
of income. Sec.4, which concerned with the application of the Act,
declares that the total income of the person includes all profits and gains,
from whatever source derived, which falls within the categories set
out there.’
The High Court further elaborated relying on the decision of
other High Courts like Madras High Court I the case of
COMMISSIONER OF INCOME TAX V. E.K.R.
SAVUMIAMURTHY.
36. There is no need to refer to other authorities
which have laid similar propositions. Thus it is easily
understandable that the source of income will be from the
payer. Payer is the person from whom income is received
30
and earned. Therefore income originates from the payer
and such payer becomes the source of income. Once you
locate the payer, the source becomes easy. In the instant
case, the payer is in India and payment undoubtedly is
made to NTOs who have received payments abroad for and
towards provision of EIG capacity and IUC from the payer in
India. Therefore such payments become ‘income’ of the
NTO arising in India which reaches the hands of the NTO.
37. With this, we can easily conclude that the term
‘accrue’ or ‘arise’ have to be understood in the context in
which it is used. In the instant case, it leaves no scope for
doubt that payments made to NTOs is payment ‘accruing’
or ‘arising’ in India. Petitioner has made such payments
towards services availed by it even though there may be no
territorial nexus between the facilities and infrastructure
available in the hands of India.
38. What we are concerned is the services rendered
by the NTOs and payments made. Under the agreements
between the petitioner and NTOs/Belgacom, it is noticed the
31
terms spell out NTO has the right to receive income. The
right to receive ‘income’ is relatable to services rendered by
it abroad for the benefit of the payer in India. Consequently
‘income’ has ‘accrued and arisen’ in India. It is distinct from
‘received.’ Receiving is the right for services rendered
which, in this case, is utilized by the petitioner.
39. It is noticed that the tax assessing officer has kept
in mind the legal propositions on this aspect and has dealt
in detail the issues with reference to several case laws
which I do not find need to elaborately refer to in this order.
It is quite evident from the facts not in dispute that
petitioner has made payments for the services utilized.
40. With reference to Section 9(1)(i) and Explanations
5 and 6 inserted therein by Finance Act of 2012, it is
noticed, Section 9 would apply where the income actually
accrues or is received in India. A plain reading of Section
9(1)(vi) would show payments made by the assessee to
NTO for provision of bandwidth and interconnect usage falls
within the definition of ‘Royalty.’ Explanation 2 reads thus:
32
Explanation 2 – For the purposes of this clause, “royalty’’ means consideration (including any lump
sum consideration but excluding any consideration which would be the income of the recipient chargeable
under the head “Capital gains”) for –
v) the transfer of all or any rights (including
the granting of a licence) in respect of a patent, invention, model, design, secret
formula or process or trade mark or similar property;
vi) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design, secret
formula or process or trade mark or similar property;
vii) the use of any patent, invention, model,
design, secret formula or process or trade mark or similar property;
viii) the imparting of any information concerning technical, industrial,
commercial or scientific knowledge, experience of skill.
Section 9(1)(vi) makes it clear that payments made for
rendering any services in connection with activities referred
to in clause (iv) and (v) attract the definition of ‘Royalty.’
41. However, the Union in its wisdom has inserted
Explanations 5 and 6 to Section 9(1)(vi) by the Finance Act
of 2012 which reads thus:
Explanation 5: For the removal of doubts, it is hereby clarified that the royalty includes and
has always included consideration in respect of any right, property or information. Whether or not-
33
a. b. the possession or control of such
right, property or information is with the payer;
c. such right property or information is used directly by the payer;
d. the location of such right, property or
information is in India.
Explanation 6 – For the removal of doubts, it is hereby clarified that the expression “process’ includes and shall be deemed to
have always included transmission by satellite (including up-linking, amplification, conversion
for down – linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;
Such insertion is for removal of doubts, it is clarified royalty
includes and it includes and has always included
consideration in respect of any right, property or
information. As Explanations 5 and 6 are in the book of
statute, unless it is declared to be ultra vires or its legality
is tested, for all intent and purposes, these Explanations are
required to be applied by the assessing officer in
determination of tax liability under the Act.
42. At this juncture, it is material to note though
learned counsel, Sri Abhishek Singhvi has commented much
on the legality of the Finance Act of 2012 by which
34
Explanations 5 and 6 have been inserted to Section 9(1)(vi)
of the Act, petitioner has not questioned the validity or
legality of the said amendment in this writ action nor in any
other proceedings the legality of this amendment is
questioned. It was open to the petitioner to question the
vires of these provisions which, on its own volition, is not
done. In the resultant position, the provision as referred to
above glares at us and the assessing officer is bound to
apply it in determining the taxability of the payments made
by the petitioner to the NTOs.
43. The third lap of the argument of Mr.Abhishek
Singhvi is, no law permits retrospective amendments. As
Explanation 5 makes the definition of ‘process’ applicable
retrospectively, he described it as legally untenable. May
be it is a good ground for the petitioner, but unless the
legality of these provisions is questioned and adjudged by
the court, the provision remains in the book of statute and
has to be applied to understand the meaning of ‘Royalty’
with which Section 9 deals.
35
44. At this juncture, I am also compelled to refer to
the fourth submission of Mr.Singhvi with regard to Section
90(2) of the Act. Learned counsel would submit, petitioner
and NTO are knit by and are governed by the provisions of
DTAA treaty and he refers to Articles 3 and 13 of the treaty
where ‘Royalty’ is defined. For our purpose, it will be
necessary to refer to Article 13 which defines ‘Royalty’ and
‘Fees for Technical Services.’ It is extracted hereunder:
Article 13- Royalties and fees for technical services – 1. Royalties and fees for technical services arising
in a contracting State and paid to a resident of the other Contracting State may be taxed in that other
State. 2…………..
3. For the purposes of this Article, the term “royalties” means
a) Payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific
work, including cinematography films or work on films, tape or other means of reproduction for use
in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information
concerning industrial, commercial or scientific experience; and
b) payments of any kind received as consideration for the use of, or the right to use, any industrial,
commercial or scientific equipment, other than income derived by an enterprise of a Contracting
36
State from the operation of ships or aircraft in international traffic.
45. At this juncture it is necessary to refer to the
provision of Section 90(2) of the Act which reads thus:
Sec.90(2): Where the Central Government has
entered into an agreement with the Government of any country outside India or specified territory
outside India, as the case may be, under sub-section (1) for granting relief to tax, or as the case
may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the
extent they are more beneficial to that assessee.
Thus it is clear that the terms of DTAA will prevail over the
provisions of the Act if it is shown that the provisions of the
amendment are not beneficial to the NTO. No doubt Section
90(2) caters to such contingency, but first of all, the
question is whether DTAA caters to all situations and all
issues that are covered by the Income Tax Act or
amendments made by the Parliament. The Sovereign
power of the Parliament extends not only to the making but
also breaking a treaty. Unilateral cancellation of tax treaty
through an amendment to the internal law subsequent to
conclusion of the treaty is a recognized sovereign power. It
after the agreement has come into force, an Act of
37
Parliament is passed which contains contrary provision, the
scope and effect of the legislation cannot be curtailed by the
reference to the agreement. The agreement is entered into
pursuant to the power conferred upon the Government by
section 90. Subsequent legislation cannot be controlled by
the agreement.
46. In view of this, a detailed discussion is required as
to whether Section 90(2) of the Act is of such nature as to
nullify all acts of Parliament which create tax liability under
the Act, may be not in terms of the rights determined
under the DTAA. However, petitioner has not raised that
issue for adjudication in these writ petitions. Therefore I do
not wish to dwell more on this aspect which would have
been possible had the petitioner questioned the legality of
the Finance Act, 2012, inserting Explanations 5 and 6 to
Section 9(1)(vi) of the Act.
47. I need to emphasize that the above discussion
with regard to what is ‘income’ as defined under Section
5(2) of the Act and ‘Royalty’ as defined in Section 9(1)(vi)
38
of the Act read with Explanations 5 and 6 inserted by
Finance Act of 2012 is necessitated because of the assertive
contention of Mr.Abhishek Singhvi that this court must refer
to these aspects to appreciate his ground that petitioner has
prima facie case in his favour of success before the first
appellate authority for the purpose of grant of stay of the
impugned order at Annexure-A and demand notice-
Annexure-B. Any observation made on the above issues
shall, therefore, not be construed as an expression on merit
on those contentions in view of the fact that all these issues
are sub judice in the two appeals filed before the Tribunal
which are pending adjudication.
48. Having observed thus, we have to now examine
whether in the facts and circumstances of the case, the
impugned order at Annexure-G needs any interference.
49. From the various aspects discussed above with
reference to the contentions of petitioner’s counsel as also
learned counsel for the Revenue/Department, I am satisfied
petitioner has not been able to make out prima facie case to
39
opine that assessment of tax liability as determined by the
assessing officer vide Annexure-A is wholly untenable or
illegal. I am satisfied that a prima facie case is made out by
the Revenue that payments made by the petitioner qualify
as having been paid by the ‘payer’ and the payment made
to NTOs/Belgacom is the amount ‘received’ and fall within
the definition of ‘income’ under Section 5(2) of the Act.
Besides, as the amounts paid are admittedly towards
services rendered by the NTOs in terms of the agreement
with the petitioner in India, it would be also ‘Royalty’ as
defined in Section 9(1)(vi) of the Act more fully elaborated
in Explanations 5 and 6 inserted by Finance Act of 2012.
50. To bring home the point that petitioner has a
prima facie case to substantiate that payments made by
petitioner to NTO do not qualify as ‘income’ or ‘royalty’, he
gained citational support from the following decisions”
a) GVK Industries Ltd., & another vs. Income
Tax Officer & another reported in (2011) 239 CTR
(SC) 113 wherein the Apex Court considering the
legislative power of the Parliament to enact the legislation
40
with respect to extra – territorial aspects or cases referred
to Clause (1) of Article 245 of the Constitution, held:
Parliament is empowered to make laws for the whole or any
part of the territory of India referring to the word ‘for’ as a
preposition would suggest that the Parliament is empowered
to enact laws in respect of extra-territorial aspects or
causes that have no nexus with India and such laws which
are bereft of any benefit of India. This proposition can well
be used by the petitioner if it questions the constitutional
validity of Finance Act, 2012 whereby the Explanation 5 and
6 inserted to Section 9(1)(vi) of the Income Tax Act. It
has not done so.
b) He also relied on the decision in the case of Jagran
Prakashan Ltd., vs Deputy Commissioner of Income-
Tax (TDS) in (2012) 345 ITR 288, where the Bench of
Andhra Pradesh held Commission or brokerage paid by an
assessee must have been received as an agent of principal
and for services rendered. It has distinguished trade
discount from the word ‘payment’. In the said decision,
while considering the allegation of failure to deduct tax at
41
source, the Bench held when the payer deemed to be in
default fails to pay tax directly, tax cannot be recovered
from the payer. The liability of payer is only for the interest
and penalty.
Sri Sanghvi, learned counsel relied on the decision to
contend that the impugned order Annexures ‘A’ and ‘B’
suffers from illegality as the assessing officer has saddled
the petitioner with tax also apart from liability and interest.
In other words, he relies on this decision to contend that
liability of any of the petitioner would be for interest and
penalty but not for the actual tax payable by the recipient.
c) He then relied on the decision in the case of Ravi
Gupta vs. Commissioner of Sales Tax, Delhi and
another reported in (2009) 5 SCC 208 where, the Apex
Court considering the case where the assessee had sought
stay of the proceedings relating to the recovery of Sales tax
without making pre-deposit held the appellate authority had
a discretion not to insist on payment as a condition
precedent to entertain the appeal, for which the reasons
had to be recorded in writing. Relying on this observation,
42
he submits in the instant case also, there is no need for
insisting that petitioner should deposit the entire tax as
determined by the assessing officer or directing petitioner to
deposit 50% of the amount determined as tax.
d) He relied on the decision in the case of Union of
India and another vs Azadi Bachao Andolan and
another reported in (2004) 10 SCC 1 to contend that
offshore companies incorporated and operating may be
liable to tax in that country, although exempt under the law
of that country. But, nevertheless entitled to benefits of
Convention of Double Tax Avoidance Convention , 1983.
Besides, he tried to distinguish the decision of the
Madras High Court in the case of Verizon Communications
Singapore Pte Ltd., vs Income Tax Officer to submit that the
said decisions does not deal with the case similar to the
petitioner and hence that decision is not helpful to the
revenue.
51. Responding to such submissions, Sri K.V.Aravind,
learned counsel has placed reliance on certain decisions to
oppose grant of stay as sought for by the petitioner.
43
52. He would submit when tax liability is assessed by
the statutory authority in exercise of statutory duty, the
Court would be inclined to hold that such an order is
sustainable unless it is interfered with any judicial
pronouncement. He would submit grant of stay is not a
Rule but is an exception. Therefore, the petitioner must
make out a strong prima facie case and also substantiate
that non grant of interim stay would cause irreparable injury
to the petitioner or his legal rights. He submits that the
petitioner has filed to make out a prima facie case against
the impugned order of assessment Annexure-A and demand
notice Annexure ‘B’.
53. I have already observed in the paragraphs supra
that the petitioner has not called in question the legality of
the order of assessment Annexure ‘A’ or demand notice
Annexure ‘B’ in these writ petitions. The petitioner has also
not questioned the validity of Finance Act, 2012 or the
amendment to Section 9(1)(vi) whereby, explanations 5
and 6 have been inserted. The petitioner’s main grievance
and the relief sought is against the limited stay granted by
44
the Income Tax Appellate Tribunal vide Annexure ‘G’.
Therefore, I restrain myself from making any observation
with regard to the grounds urged by the petitioner’s counsel
in these writ petitions against Annexures ‘A’ and ‘B’, lest, it
may be used as expression of opinion on merit. Be that as it
may. We are required to consider the sustainability of
Annexure ‘G’ dated 6.3.2014 by which the Income Tax
Appellate Tribunal has, while staying the operation of
Annexures ‘A’ and ‘B’, directed the petitioner to deposit 100
crores by way of 50% of the tax liability of 200 crores.
54. Necessarily, we need to examine whether the
petitioner has made out a case for grant of stay of
Annexures ‘A’ and ‘B’ in its entirety.
55. In the case of Union of India and others vs.
Oswal Woollen Mills Ltd., & others in (1985) 154 ITR
135 (SC), the Apex Court referring to indiscriminate grant
of stay by the High Courts in exercise of power under Article
226 of the Constitution of India opined “while one does not
see to say that a drastic interim order may never be passed
45
without hearing the opposite party, even if circumstances
justify it, a statutory order such as the one made in the
present case under Clause 8B of the Import (Control) Order
ought not to have been stayed without at least hearing
those that made the order. Such order may lead to
devastating consequences leaving no way of undoing the
mischief. Where a plenitude of power is given under a
statute, designed to meet a dire situation, it is no answer to
say that the very nature of the power and the consequences
which may ensue it itself a sufficient justification for the
grant of a stay of that order, unless, of course, there are
sufficient circumstances to justify a strong prima facie
interference that the order was made in abuse of the power
conferred by the statute.
56. In yet, another decision in the case of Assistant
Collector of Central Excise vs. Dunlop India Ltd., &
others, the Apex Court referring to stay of recovery of tax
proceedings held “where matters of public revenue are
concerned, interim orders staying recovery of tax ought not
to be granted by the High Court under Article 226 merely
46
because a prima facie case has been shown; balance of
convenience must be clearly in favour of grant of interim
order without slightest indication of likelihood of prejudice
to the public interest. In cases where denial of interim relief
may lead to public mischief, grave irreparable private injury
or shake a citizen’s faith in the impartiality of public
administration, a Court may well be justified in granting
interim relief against public authority.”
57. It must be observed that granting interim orders
which practically give the principal relief sought in the
petition for no better reason than that a prima facie case
has been made out, without being concerned about the
balance of convenience, the public interest and a host of
other relevant considerations is unwarranted.
58. In the case of Municipal Corporation of Delhi
vs. C.L.Batra in (1994) 121 CTR (SC) 92, it was
observed interim orders like stay should not be granted in
revenue matters merely because a prima facie case had
been shown. Further, grant of an interlocutory order like
47
stay of recovery of demand in the case of a municipality
would paralyse the administration and dislocate the entire
working.
59. In the case of ITA 31/2013, the Division Bench of
this Court dealing with similar applications for grant of stay
of the recovery proceedings of the tax assessing authority
observed that 50% of the tax liability determined could be
stayed while directing the assessee to deposit 50% of the
amount.
60. In the case of Vish Technical Unviersity vs.
Assistant Commissioner of Income Tax, this Court
granted staying only 50% of the tax liability determined
under the assessment orders.
61. In fact, the decision in the case of Assistant
Collector of Central Excise vs. Dunlop India Limited
(1985) 154 ITR 172 (SC), there are guidelines to be
followed in deciding the application for interim order of stay.
The Hon’ble Supreme Court has deprecated strongly the
48
practice of High Courts, granting stay in respect of revenue
to the State.
62. I have already referred to the proposition in the
said decision and I am satisfied in the instant case even if
we give a margin to the petitioner’s contention to hold that
petitioner may have a prima facie case against the
impugned orders Annexures ‘A’ and ‘B’, yet, there is no
circumstances or material placed before me to show that
petitioner will suffer irreparable hardship and injuries to his
favour nor any other circumstances made out to show
balance of convenience is in his favour. Learned members
of the Tribunal have answered the grounds urged by the
petitioner seeking grant of interim stay and in their wisdom
have reached the logical conclusion that interest of justice
will be made by directing the petitioner to deposit 50% of
the tax liability at Rs.100 crores while staying the operation
of the operation of the impugned order Annexure-A that the
balance tax liability of Rs.100 crores and the penalty and
interest of more than Rs.57 crores. The order is equitable,
just and proper and I find no reason to interfere with it.
49
63. Being of this view, I am satisfied the Tribunal has
examined the request of the petitioner for grant of stay of
Annexures-A and B in the right perspective and the reasons
assigned by the Tribunal to grant stay to a limited extent of
50% of the tax liability determined at Annexure-A and
sought to be recovered vide Annexure-B, just and proper.
64. In the result, I find no grounds in the writ
petitions filed by the petitioner, M/s Vodafone South LImited
in W.P.Nos.13210-214/2014 to quash the impugned order
Annexure ‘G’. Annexure ‘G’ is confirmed.
65. In view of this order, the writ petitions filed by the
Income Tax Department/Revenue in W.P.Nos.13564-
568/2014 are also disposed of. However, the petitioner is
directed to comply with the order at Annexure ‘G’ by
extending time by one week from 21.3.2014.
66. Writ petitions filed by the petitioner-assessee in
W.P.Nos.13210-214/2014 and the writ petition filed by the
50
Income Tax Department in W.P.No.13564-568/2014 are
disposed of in terms of this order.
Sd/- JUDGE
vgh*/nas