ORDER
Deepak R. Shah, A.M.
1. All these appeals are arising out of the order of the learned CIT(A), Bangalore-V, dt. 28th Feb., 2002.
2.1. This order involves six appeals from ITA No. 991 to 996/Bang/2002. ITA No. 991 to 993/Bang/2002 is against the order under Section 201(1) of the IT Act, 1961 (the Act), for default in deducting tax at source on payments to nonresident companies as required under Section 195 of the Act. ITA No. 994 to 996/Bang/2002 is towards levy of interest under Section 201(1A) of the Act. These appeals pertain to financial years, 1998-99, 1999-2000 and 2000-2001 relevant to asst. yrs. 1999-2000, 2000-2001 and 2001-2002. The issues involved in these appeals are common and consequently these appeals are bunched and heard together.
2.2. The Assessing Officer (AO) in this case ITO (TDS)-I, Bangalore, passed a common order dt. 21st July, 2000, for aforementioned years under Section 201(1) and 201(1A) of the Act whereby he held that the appellant-company had committed a default in not deducting tax at source in terms of Section 195 of the Act in respect of payments to companies such as AT&T, Worldcome, Singtel and BT. etc., for downlinking and transmitting the data to the appellants customers located outside India in course of appellant’s business of export of services and provision of services outside India. In this regard the payment made by the company amounting to US $ 18,52,117.45 for asst. yr. 1999-2000, US $ 8,12,071.05 for asst. yr. 2000-2001 and GBP 77,664.16 and US $ US $ 4,996.16 for asst, yr. 2001-02. On this basis the income-tax liability for TDS and interest for various years was worked out and levied as under:
Asst. yr.
1999-2000
2000-2001
2001-2002
Rs.
Rs.
Rs.
Amount paid
7,87,14,992
3,57,57,076
1,68,83,487
Grossed up under s. 195A
9,26,05,872
4,20,67,148
1,98,62,925
Tax on the same @ 15%
1,38,90,880
63,10,072
29,79,438
Add interest under s.
201(1A)
63,89,800
18,93,021
3,12,849
Total payable
2,02,80,680
82,03,093
32,92,287
Against the above orders the appellant filed an appeal before the CIT(A), who after hearing the appellant, confirmed the order of the AO. Aggrieved by these orders the appellant is in appeal before us.
3.1. The brief facts are the appellant is engaged, inter alia, in the business of development software, provision of software services and IT enabled services. These are provided though development centres located in India as well as outside India. These services are referred to in the industry jargon as on site services basically rendered at the premises of the customer of the appellant located outside India and offshore or off site services which are provided from development centres located in India and outside India. To transmit the data and software the appellant has used the telecom services provided by VSNL, AT&T, MCI, Worldcom, British Telecom, Singtel, etc. The services are availed separately for uplink from India through VSNL and downlink through telecom companies outside India. Most of the services are provided through customer based circuits (CBC), which are like hotlines between the appellant and its customers. Though the CBC is one service, it is commercially divided into two portions, India portion and international portion. The services with regard to India portion are provided by VSNL and STPI. Having regard to the then telecom regulatory law, a foreign telecom company could not provide the India portion. The -international portion is handled by companies such as AT&T, etc. mentioned supra.
3.2. Technically the data from the STPI undertaking of Wipro Ltd. gets transmitted to the earth station of VSNL/STPI, From the earth station data is either transmitted through satellite or fiber cables. VSNL has the standard infrastructure to handle the transmission through satellite as well as the fiber cables. At the end of India portion of transmission the data is taken over by international service provider and then downlinked to the appellant’s customers located outside India. The transmission through satellite is effected by allocation of transponder space. In the case of transmission through fibre cable it happens having regard to the bandwidth. From the above what is clear and undisputed is the nature of service provided by VSNL in India and foreign telecom companies outside India are all similar and are largely standard offering to any willing user. Insofar the telecom facility provided by VSNL, there is no tax dispute at all as the same is regarded as a utility service and there is no issue on this. However, the same facility provided by the foreign telecom companies outside India is treated by the AO as provision of technical services within the meaning of Section 9(1)(vii) of the IT Act.
3.3. Before dealing with the issue, we have perused certain agreements and invoices and peculiarities of the transactions. The appellant has entered into separate agreements with VSNL/STPI, AT&T, World Com, etc, for each CBC. These agencies raise separate invoice for each CBC. With service providers such as AT&T and Worldcom the agreement is standard and universal and discounted rates are offered with reference to standard tariff rates. Worldcom raises separate invoice for each CBC. AT&T raises consolidated invoice for all CBCs. British Telcom facilitates the communication links to UK customers. They have a fixed tariff table depending on the capacity.
3.4. General Electric of USA (GE) is one of the largest customer of the appellant and as per the agreement with this customer, the appellant is obliged to use the communication network of GE and the communication costs are paid to that Department of GE which operates this net work whereas the same is reimbursed to the appellant by the departments which uses the services of the appellant. Thus, net-net there is no payment at all by the appellant-company. Most of the customers specifically reimburse the telecom costs incurred by the appellant.
3.5. In this background, the AO is of the view since the payments have been made to non-residents the provisions of Section 195 are attracted and the appellant ought to have deducted tax at source. It is the view of the AO that the telecom service provided by the non-resident companies outside India were in the nature of fee for technical services liable for taxation in India under Section 9(1)(vii) of the Act. The AO held that the transmission of data involved making available a process which partook the character of fee for technical services. The AO also relied on Article 12(4)(b) of the Double Taxation Avoidance Agreement between India and USA read with the MOU in respect of the said treaty. This view of the AO was confirmed by the CIT(A) who in para 4 of his order discussed at length the technical details of the satellite and other infrastructure involved in transmission of the data or software. The learned CIT(A) was of the view that there were certain service attachments along with agreements for CBC which educated the appellant as to how to connect and transfer the data which amounted to imparting technical knowledge to the appellant. Further, the data itself undergoes change during the course of transmission from digital to analog, encapsulation and decapsulation, conversion of electrical signal to light signal, etc., all these amounts to process which would again be liable for taxation in terms of Section 9(1)(vii) of the IT Act. The learned CIT(A) also referred to Article 12(4) of the DTAA and MOU between India and USA to support his conclusion that provision of telecom service would amount to provision of technical service under the IT Act.
4. Before us both sides have advanced elaborate and intricate technical and legal arguments to buttress their respective views. The entire appeal is discussed under the following issues :
1. Whether provision of customer based circuits by the foreign companies’ amounts to provision of technical services within the scope of Section 9(1)(vii) of the Act.
2. Whether DTAA between India and USA in particular Article 12(4) would render such services taxable in India.
3. Whether the payment for above service could be regarded as royalties within the scope of Section 9(1)(vi) of the Act.
4. Having regard to the facts and circumstances can it be said that the services were utilised by the appellant-company in a business carried on outside India so as to qualify the exception provided under Clause (b) of Section 9(1)(vii) of the Act.
5. Whether any liability for tax arises in India under Section 195 of the IT Act. Each of the above issues are discussed separately and findings are recorded.
5.1. Whether provision of customer based circuits by the foreign companies’ amounts to provision of technical services within the scope of Section 9(1)(vii) of the Act.
5.2. Sri K.R. Pradeep appearing for the appellant submitted that first of all the services utilised by the appellant-company and provided by the telecom companies are standard service offered to any one who is willing to pay. While offering such utility service there is no transfer of technology or technical service nor there any requirement for such technology or in reality and such technology or technical services are made available; consequently the question of application of Section 9(1)(vii) in such a circumstance does not arise, Section 9(l)(vii) and particularly Expln. 2 which defines fee for technical services are relevant to understand the liability of appellant. For any liability under Section 9(1)(vii) it is essential that these conditions are attracted, First of all there must be consideration in the form of fees for technical services. The technical services means rendering of any managerial, technical, or consultancy services. Such services are provided to a resident in India in its business carried on in India. In the present case no service except standard telephone, services are provided to the appellant such services cannot be regarded as technical or managerial or other type of consultancy services. The authorities below are in great confusion as to what services are utilised by the appellant. It is true that today’s telephone infrastructure will involve utilisation of satellites, optical fibre cables and most sophisticated technology and technical services. But these services are rendered by the vendors of the equipment and other engineering consultancy firms to the telecom companies who utilise the same to set up sophisticated telecom infrastructure which would ultimately provide better service to every user. Such involvement of sophisticated equipment and technology does not mean this is made available to the consumer. Neither the equipment nor the technology is known to the common user nor is any right therein transferred to the consumer just because he happens to be a subscriber customer.
Sri Pradeep relied on decision of the Madras High Court in Skycell Communications Ltd. v. Dy. CIT and Ors. (2001) 251 ITR 53 (Mad) wherein at p. 54 it was held as under:
“Fees for technical service is not defined in Section 194J of the IT Act, 1961. Explanation (b) in that section provides that that expression shall have the same meaning as in Expln. 2 to Clause (v) of Sub-section (1) of Section 9. This definition shows that consideration paid for the rendering of any managerial, technical or consultancy service, as also the consideration paid for the provision of services of technical or other personnel, would be regarded as fees paid for ‘technical services’. The definition excludes from its ambit consideration paid for construction, assembly, or mining or like project undertaken by the recipient, as also consideration which would constitute income of the recipient chargeable under the head ‘Salaries’. Thus, while stating that ‘technical service’ would include managerial and consultancy services, the legislature has not set out with precision as to what would constitute ‘technical’ service to render it ‘technical service’. Having regard to the fact that the term is required to be understood in the context in which it is used. ‘Fees for technical services’ could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with technical’ is ‘involving or concerning applied and industrial science’. ‘Technical service’ referred in Section 9(1) 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. When a person decides to subscribe to cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree to is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber, does not on that score, make it provision of a technical service to the subscriber. What applies to cellular mobile telephone service is also applicable in fixed telephone service. Neither service can be regarded as ‘technical service’ for the purpose of Section 194J.”
He also referred to the decision in ITAT Delhi “C” Bench in ITA 166/Del/2001 & ITA No. 861/Del/2001 in the case of Dy. CIT v. Asia Satellite Telecommunications Co. Ltd. [reported at (2003; 78 TTJ (Del) 489–Ed.] wherein the applicability of decision in Skycell Communications (supra) under various circumstances has been discussed in para in 6.24. Hon’ble Tribunal held thus :
“6.24. The decision of Madras High Court in the case of Skycell Communications Ltd. (supra) was heavily relied upon by the learned authorised representative to bring home the point that there was no use of any process in the entire operations. The facts of that case are that the petitioners were engaged in the business of providing cellular mobile telephone facilities to the subscribers. The IT Department proceeded to treat the payments made to them by their subscribers as falling within the definition of ‘fees for technical services in Section 194J of the Act.’ In this case it was held that mere collection of a fee for use of standard facility provided to all those willing to pay for it did not amount to the fee having been received for technical services. It was further, held that the subscribers to a cellular telephone service were using the facility and had not entered into contract to receive a technical service. It was further held that the fact that the telephone service provider had installed sophisticated technical equipment in the exchange to ensure connectivity to its subscribers did not make its provision of technical service to the subscribers. When the facts of this case are analysed thoroughly it becomes patent that the subject-matter under consideration before the Hon’ble High Court was to consider the relationship between the subscribers who use the telephone facility and the provider of the service. So in the chain of entire process only two persons were involved viz., one the actual user and the other the provider. In contrast the facts in the present case under consideration operate in different field in which the operation starts by uplinking the signals from the earth stations by the TV channels to the assessee in satellite and then after undergoing various processes in the satellite, as noted above, the signals are downliked so as to be made available to the cable operators who in turn provide these to the public. In the chain before us, first is the relation between the TV channels and the assessee, second is the relation between assessee and the cable operators and the third between cable operator and public. In the light of the difference between the use of ‘facility’ and ‘process’ as noted above, we find that the relation between the cable operators and the public is that of use of ‘facility’, whereas the first relation between the TV channels and the assessee is for the use of the ‘process’ as a result of which the programme uplinked by TV channels become fit for being relayed. The decision of the Hon’ble Madras High Court is in the context of the third relation in the context of our facts namely, the cable operators and the public. It was explained at p. 58 of the Madras judgment that satellite television has become ubiquitous and when a person receives such transmission of television signals through the cable provided by the cable operators, it can’t be said that the home owner, who has such a cable connection, is receiving a technical service. No doubt the ‘public’ (analogous to the subscribers to the cellular phone in that case) use the facility provided by the cable operators (analogous to the petitioners in that case) but the payment made by the TV channels for receiving, processing and relaying the programmes is for the use of the process provided to them. In the present case, we are dealing with the payment made by the TV channels to the assessee for the use of the process and not for the payment made by the public to the cable operators. What the TV channels uplink has to undergo various processes provided by the assessee as noted above to become fit for relay in India. We, therefore, hold that the case law relied upon by the learned authorised representative is clearly distinguishable on facts and cannot be applied to the present case.”
In the light of the decision of the Tribunal Delhi ‘C’ Bench, mentioned supra, it was pointed out that the service in this case being in the nature of a third type of relation that is between telephone operator and public would be outside the scope of fee for technical service under Section 9(1)(vii) of the IT Act. Accordingly, he prayed that the order of the AO be vacated.
5.3. The learned Departmental Representative Sri Amitabh Kumar sought to rely on findings given by the authorities below, which are in favour of the Department. He further submitted that the present case was not a simple case of use of telephone as contended by the appellant. First of all there is a interface with the computer infrastructure maintained at the appellant site and the telecom companies. This interface allows uninterrupted utilization of bandwidth of nature desired by the appellant. This bandwidth is high capacity and involves huge amount of technology. First of all, the data from the customer premises are transferred or uplinked through VSNL, the data at this stage is in digital form or analog form and the same is converted into digital or analog form and it is amplified and encapsulated on a carrier wave and similarly data will also be subject to decapsulation, conversion from electrical signal to light signals and vice versa. The satellite technology is very sophisticated and all these services are utilised in proceeding the bandwidth to the appellant. Further, the appellant when offered with the bandwidth are also imparted with the knowledge in such bandwidth environment. Operating procedures are circulated to enable seamless utilisation of services. Such exposure to the technical environment would definitely mean offering of technical services, The comparison to the standard telephone is too simplistic to rely on, There are support services rendered by the telecom companies such as packet loss measurement, round trip delay measurement and measurement of service outage credits. Though these services amounts to technical services in nature, the invoices given by foreign telecom companies do not speak of rendering of technical services. These invoices and other contracts conceal the nature of services actually rendered to the appellant. The invoice and contract on the face of it are standard in nature and are given to all the users which gives a picture that it is a standard telecom facility offered to anyone willing to pay. However, the situation will be different when we see the nature of business carried on by the appellant-company. The appellant-company carries on the development of software business and hence standard facility used by the appellant becomes technical in nature. The decision of the Madras High Court in Skycell Communications Ltd. v. Dy. CIT (supra) is not applicable as that was rendered in the context of cellular services whereas the present case is that of the basic telephone service. Sri Amitabh Kumar submitted that the decision of the Tribunal Delhi ‘C’ Bench in Asia Satellite Communications Co. Ltd. (supra) would support him though there is no finding on applicability of Section 9(1)(vii) of the Act. In reply Sri Pradeep contended that the services or technology referred to by the Departmental Representative was never provided to the appellant and these are utilised by telecom companies who set up and operate communication infrastructure. Commissioning of satellite and establishing such sophisticated telecom networks involves spending of tens of billion of dollars and employs hundreds of thousands of people. The telecom companies have given facilities to the appellant in various countries around the globe. The appellant has utilised the telecom services from more than ten telecom majors in world. The charges paid to each of them in various years under appeal do not total to more than 100 to 200 thousand dollars. It is nobody’s case that with such meagre payments the assessee would have obtained highly confidential, business sensitive technical knowledge. The facts obtaining on record in the form of contract for service and invoice, etc. clearly and unequivocally establish the nature of service utilised, one that of a standard facility made available to one and all by the telecom companies. The appellant is neither aware nor is involved in any process of amplification, encapsulation of data or conversion of light signal into magnetic signal or vice versa. Consequently, it was submitted that the services utilised do not come within the purview of Section 9(1)(vii) of the IT Act.
5.4. We have considered the relevant facts, rival submissions made; decisions relied upon and also perused the documents and evidence produced before us. To appreciate the controversy, we are required to interpret Section 9(1)(vii) which at relevant time read as under :
“Section 9(1)(vii): Income by way of fees for technical services payable by :
(a) the Government; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in
India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government;
Explanation 1. : For the purposes of the foregoing proviso, an agreement
made on or after the 1st day of April, 1976, shall be deemed to have been
made before that date if the agreement is made in accordance with proposal
approved by the Central Government before that date.
Explanation 2. : For the purposes of this clause ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ‘Salaries’.”
The phrase “fees for technical services” is defined in Expln. 2 in said section. Hon’ble Madras High Court in Skycell Communications’ case (supra) held thus :
“Thus, while stating that “technical service” would include managerial and consultancy service, the legislature has not set out with precision as to what would constitute “technical” service to render it “technical service”. Having regard to the fact that the term is required to be understood in the context in which it is used, “fees for technical services” could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with “technical” is “involving or concerning applied and industrial science”. “Technical service” referred in Section 9(1) 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.”
In the present case the assessee has paid the sum for services as set out in the agreement. As per the agreement the assessee is to use the standard facility provided as described in para 3.2 above. The agreement for provision of services in the case of AT&T is titled as Master Service agreement. The standard format refers to menu of service which can be utilized by customers. These master agreements are available on internet and can be downloaded by anyone. The pricing patterns are standard with an offer for bulk discounts. The services referred to in the agreements are various types of telecom services which are offered to different types of customers depending upon the volume of traffic. The invoices by AT&T are charges for utilisation of customer based circuits. The invoices are periodical in nature and each invoice has a different amount indicating varying volume of services utilised at various point of time. Shorn of higher commercial and technical lingo in simple terms it is nothing but regular documents involved in utilisation of telecom services. We find no document which evidences that the appellant was provided with any technology or technical services for encapsulation or amplification or conversion of light signal into magnetic signal or vice versa or any evidence for hiring or utilisation of satellite by the appellant. The Department is clearly confused on the nature of services rendered by the telecom companies to the appellant. Hence, we find no evidence to support any rendering of technical services to the appellant. The fact that the telephone service provider has installed sophisticated equipment in the exchange to ensure quality connectivity to its subscriber does not on that score make it as provision of technical service to the subscriber. The Hon’ble Madras High Court in the Skycells’ decision (supra) has held that what applies to cellular mobile services is also applicable in fixed telephone service. Hence, the decision applies to the present case. Further, it is an undisputed fact that while uplinking the data from customers premises in India, VSNL offers similar services to the appellant. Such service is not regard as technical services under Section 9(1)(vii) so as to attract the TDS provisions under Section 194J of the Act. Parity of reasoning demands similar treatment even if the services are provided by a private party or a non-resident. Department has no issue on the service provided by VSNL or STPI. It is inexplicable as to how the same becomes an issue when such a service is provided by a private party or a non-resident. Going through the decision of Tribunal Delhi ‘C’ Bench mentioned supra, we find that when services are provided between the telecom operator and the customer the same would not amount to technical service or royalty. For these reasons we hold that the amount paid cannot be considered as ‘fees for technical services’ under Section 9(1)(vii) in the present’ case,
6.1. Whether DTAA between India and USA and in particular Article 12(4) of said agreement would render such services taxable in India
6.2. Shri Pradeep argued that in the present case telecom service were provided outside in India by the foreign telecom companies and these were also utilised outside India. Consequently the said income would not be liable to tax in India. Section 9(1)(vii) do not cover the situation obtaining in this case. Hence, it was contended that the Double Taxation Avoidance Agreement (DTAA) could not prescribe a liability which does not exist in the domestic law. For DTAA to be applicable first of all there must be a situation wherein an assessee is liable to tax in both the countries or the liability prescribed in domestic law is harsher than provided under DTAA. The DTAA per se does not create more onerous obligation or liability than provided under the domestic law. If domestic law is more favourable, the assessee cannot be prevented from seeking relief under domestic law. It is the argument that when Section 9(1)(vii) is not applicable then DTAA would also not be applicable. Further application of DTAA between India and USA is also misplaced in as much the appellant has availed service not only in USA but all round the globe including countries such as UK, France, Germany, Hongkong, Singapore, Japan, Canada, etc. A single DTAA between India and USA cannot cover the entire situation arising in these appeals. Further, the authorities below erroneously held that Article 12(4) would be applicable to the case on hand. Sri Pradeep contended that Article 12(4) specifically mentions the word “make available technical knowledge” whereas in this case no technology has been made available. Further, in the MOU between India and USA various examples are given explaining the scope of technical services. Example (4) therein explained as under:
Example (4) :
Facts:
A US manufacturer operates a wallboard fabrication plant outside India. An India builder hires the US company to produce wall board at that plant for a fee. The Indian company provides the raw materials and the US manufacturer fabricates the wallboard in its plant, using advanced technology. Are. the fees in this example payments for included services ?
Analysis:
The fees would not be for included services. Although the US company is clearly performing a technical service, no technical knowledge, skill, etc., are made available to the Indian company, nor is there any development and transfer of a technical plan or design. The US company is merely performing a contract manufacturing service.
Perusal of Article 12(4) clearly establishes a rule that unless the services are made available, this article would not apply. In this case factually it is clear that no technical services have been rendered to the appellant. The facts and analysis contained in the memorandum to the DTAA particularly No. 4 makes clear this point. Hence, DTAA or the memorandum associated with it does not bring any liability on the appellant in this case.
6.3 The learned Departmental Representative Sri Amitabh Kumar, argued that the Government has adequate authority to enter into treaties with other countries, such a treaty once validly entered cannot be unilaterally abrogated or cancelled. Parliamentary approval is not mandatory for entering into treaty and implementing the same, Article 73 of the Constitution of India vests power of entering into treaty on the executive and such power is not subject to Parliament approval. What is good for treaty is also good for memorandum entered into between the countries. In this regard he relied on the decision of the Supreme Court in the case of Maganbhai Iswarbhai Patel v. Union of India and Anr. AIR 1969 SC 783 on the issue of border settlement treaty consequent to ceasefire between India and Pakistan. Several portions of the decision was referred to. However, for the sake of brevity, we reproduce some portions of decision in paras 81 and 82 thereof:
Para 81
“These observations are valid in the context of our constitutional set up. By Article 73 subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which the Parliament has power to make laws. Our Constitution makes no provision making legislation a condition of the entry into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The executive is qua the state competent to represent the state in all matters international and may be agreement, convention or treaties incur obligations which in international law are binding upon the state. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with the Parliament under Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or other or modifies the laws of the state.”
Para 82
“The effect of Article 253 is that if a treaty, agreement or convention with a foreign state deals with a subject within the competence of the state legislature, the Parliament alone has, notwithstanding Article 246(3), the power to make laws to implement the treaty, agreement or convention or any decision made at any international conference, association or other body. In terms, the article deals with legislative power, thereby power is conferred upon the Parliament which it may not otherwise possess. But it does not seek to circumscribe the extent of the power conferred by Article 73. If, in consequence of the exercise of executive power, rights of the citizens, or others are restricted or infringed, or law are modified, the exercise of power must be supported by legislation; where there is no such restriction, infringement of the right or modification of laws, the executive is competent to exercise the power.”
Mr. Amitabh Kumar further made a reference to consultation paper on Treaty Making Power Under Our Constitution by National Commission to Review. The Working of the Constitution and on various aspects of Constitutional law on the executive power to enter into treaties and its binding nature on the people of the country. The learned Departmental Representative argued that the treaty and the memorandum mentioned supra are validly entered into and consequently is binding on the appellant. Insofar as the applicability of treaty is concerned, he mentioned that Article 12(4) squarely covers the situation. He submitted that data conversion from analog to digital, encapsulation and amplification explained above all amounts to provision of technical services or in the least can become making available of a process. Both these terms are covered within scope of Article 12(4). On this basis he contended that DTAA creates liability independent of the domestic law. In reply Sri Pradeep submitted that the issue of validity of DTAA is never a question. The question involved is that DTAA is not applicable to the given situation.
6.4. We have perused the records and heard the arguments. We have already given a finding supra that the amount paid is not “fees for technical services’ under Section 9(1)(vii). Consequently the liability under Indian law as per the above section does not arise. Article 12(4) of the DTAA which is said to be applicable read as under :
Article 12(4) :
For the purposes of this article ‘fees for included services’ means payment of any kind to any persons in consideration for rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which payment described in para. 3 is received ;
(b) make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.
The liability under the Act does not arise due to operation of DTAA but the charging provision of the Act. So long as the amount paid is not taxable under the Act, the clause in the DTAA cannot bring the charge. DTAA is a relief giving mechanism and operates as relief against liability in resident country and host country. In this case since there is no domestic liability, on this score itself DTAA would not be applicable and no liability will arise on account of DTAA. It is an accepted position in law that if domestic law exempts certain income or if domestic law is inapplicable in a given circumstances, DTAA would be inapplicable as there is no double taxation.
It is also correct that DTAA between India and USA would not be applicable in so far as services are rendered in other countries other than these two countries. To that extent the order suffers from incorrect application of DTAA provisions.
Insofar as applicability of Article 12(4) it is clear from facts in Example No. 4 and the analysis to it in the memorandum, unless the technical service or a process is made available the article would not apply, In this case we have already given a finding that no technical service or process has been made available to the appellant. Hence, this article does not apply to this case. Accordingly, we hold that there is no liability against the appellant under DTAA between India and USA. We are also in agreement with the authorised representative that validity of treaty is not in question. Hence, there is no need to deal with the decision of the Supreme Court in AIR 1969 (SC) 783 or other related discussion.
7.1. Whether the payment for above service could be regarded as royalties within the scope of Section 9(1)(vi) of the Act.
7.2. This question was not raised by the appellant but was raised by the learned Departmental Representative while giving a reply. The authorities below have not raised any liability against the appellant under Section 9(1)(vi) of the Act. The present order passed under Section 201(1) deals only with Section 9(1)(vii). However, while dealing with the applicability of Article 12(4) indirectly the term process, etc., found in DTAA as well as under Section 9(l)(vi) is mentioned. On this basis learned Departmental Representative argued that it was legal to raise applicability of Section 9(1)(vi) of the Act. It is the contention of Departmental Representative that there is no need to make any application or file any cross-appeal to raise this issue. According to him it is an alternative argument. The documents and material available on record would be sufficient to deal with this issue. Non-availability of views of authorities below or the opportunity to the appellant to answer liability under this section are all irrelevant, as the appellant can argue its case directly before the Tribunal and that would be not only in compliance of law but also sufficient opportunity to the appellant. On merits he contended that the facts substantiate making available a process if not technical service. The payment of telecom bills should be termed as royalty for making available a process and accordingly Section 9(1)(vi) is applicable to this case. He relied on the decision given by Tribunal, Delhi ‘C’ Bench, in Asia Satellite Communication Company Ltd. mentioned supra. Extensive reference was made to this case law arguing as if the appellant was in receipt of a certain process from the telecom companies. For the reasons given in our finding below we have chosen not to extract in detail, portions of the Tribunal decision referred to by the Departmental Representative.
7.3. Sri Pradeep submitted that unless there is a cross-appeal arising from the orders below no fresh issue can be raised by other side which can be considered by the Tribunal. He pointed out that even at the time of reply the Department could have raised the issue by making appropriate application which has not been done, hence this issue cannot be considered. He further submitted that order under Section 201(1) is passed quantifying the tax liability under Section 9(1)(vii) and DTAA and even the authorities below have not created any liability under Section 9(1)(vi) of the Act. Hence, Tribunal could not convert a liability under a given section into some other liability under a different section. On merits he submitted that the appellant has not received any process or technical service from the telecom companies. What it has received is only a standard telecom service made available to anyone willing to pay. The appellant even after the use of the standard service is not aware of any process involved in rendering of such service. On other points and applicability of the decision of Tribunal Delhi ‘C’ Bench, the arguments against the liability under Section 9(1)(vii) was reiterated.
7.4. We have gone through the arguments. On merits, factually no process has been made available to the appellant, hence, applicability of Section 9(1)(vi) does not arise. Even the decision of the Delhi Tribunal is clear on this issue as mentioned in our findings above. Departmental Representative’s extensive reference to the Tribunal decision is not extracted in detail as ex facie we find the decision of the Tribunal supports the contention of the appellant and as much as mentioned by the Tribunal in para 6.24, the case before the Delhi Bench was between the satellite company and the cable operator and whereas in this case it is between the telecom operator and the customer [third type of relation which the Tribunal says is covered by the decision of the Skycell Communications Ltd. (supra). We, therefore, hold that the appellant is not liable even under Section 9(1)(vi). The arguments of cross-objections, etc. are not dealt as on merits we have held in favour of the appellant.
8.1. Having regard to the facts and circumstances can it be said that the services were utilised by the appellant-company in a business carried on outside India so as to qualify for exception provided under Clause (b) of Section 9(1)(vii) of the Act.
8.2. Extensive argument was addressed on this issue. Since we have already granted relief on the main section itself the reading of exception is not dealt with as the same would be academic in nature at this juncture. Hence, we propose not to deal with this issue now.
9.1. Whether any liability for tax deduction arises in India under Section 195 of the IT Act.
9.2. We have already given a finding that the amount paid to non-residents are not their income accruing in India under Section 9(1)(vii) or 9(l)(vi) or DTAA. The assessee has paid the amount to the non-residents outside India for services rendered outside India. However, since we are not dealing with the appeals of the non-residents, we need not deal with this issue elaborately at this juncture. Hence, the liability for TDS under Section 195 does not arise in the hands of appellant payer. Other arguments on the chargeability of income in India, that the income was earned outside India, receipt of income by the non-resident and the payment thereof by the resident appellant outside India have been left open and not considered here, as we have on merits held in favour of the appellant.
Accordingly, the orders passed by the AO under Section 201(1) mentioned above stands cancelled and we hold that there is no liability for TDS against the appellant on the basis of the said order and the liability raised by the AO is deleted.
Elaborate arguments were made on the nature and quantum of levy of interest under Section 201(1A). We have found it not expedient to deal with those arguments as we have cancelled the tax/TDS liability against the appellant, hence, the appellant is entitled to consequential relief in respect of interest levied under Section 201(1A). We direct the AO to grant the relief accordingly.
In the result all the appeals are allowed.