| SooperKanoon Citation | sooperkanoon.com/1143950 |
| Court | Karnataka High Court |
| Decided On | Mar-20-2014 |
| Case Number | W.P. Nos. 13210-14 of 2014 (T-IT) C/W & W.P. Nos. 13564-13568 of 2014 (T-IT) |
| Judge | THE HONOURABLE DR. JUSTICE JAWAD RAHIM |
| Appellant | Vodafone South Limited and Another |
| Respondent | The Deputy Director of Income Tax International Taxation and Others |
(Prayer: 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.,)
(Prayer: 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.,)
1. 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 Drought 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) or. 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 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 Rulr;, 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).
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(l)(vi) and (vi.i) 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 in pursuance to the licence granted by the Department of Telecommunications under the Telegraph Ac:, 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"considerationThe 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 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
b) Emirates Telecommunications Corporation,, Abu Dhabi - United Arab Emirates
c) Telkom South Africa Limited, South Africa
d) KPN Global Carrier Services 3 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 lnc Pte Ltd., Singapore.
Petitioner's contention is, apart from the above said agreements for providing inter-connectivity services, it has also entered in^o a capacity transfer agreement with Belgacom International Carrier Services SA, ('Belgacom,' a tax resident of Belgium Tor 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 their telecommunication traffic on the EIG cable system upto the allocated capacity.
7. The Consortium members are also a Mowed 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 riot 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 MlU.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.
8. According to the petitioner, payments made to Belgacom are not Income' either arising or accruing in India to Belgacom International Garner 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 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 interconnectiviiy 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 source under Section 195 of the Act.' The assessing officer, viz., Deputy Director of Income Tax (International Taxation Circle-I) taking into consideration tiie submission/reply o the petitioner, by o 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 2011-12 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. Me 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).
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;
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 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 Tc'x (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 nas 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 granled 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 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.449-453/3/2013. 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 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(2) and 201(1A) of the Act to describe the petitioner as an assesses ir. 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, 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/Beigacom 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(l)(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 Explanations 2, 5 and 6 show payments made by the petitioner was not 'Royalty' as defined in Section 9(l)(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 furtner contention is. Tribunal had failed to notice the retrospective amendment made to Section 9(l)(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 '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 arid determine the alieged 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 cons'der 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(l)(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 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 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 che Act, and as tax was not deducted at source from the income so derived, Section 203 (1A) of tne Act is attracted.
25. Learned counsei refers to the reasoning of the assessing officer to determine tax liability and supports it fuliy.
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 for a period of over 11 months. It is only at the instance of the revenue/Income Tax Department that the Tribunal cook 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 (Armexure-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.
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' fcr 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.
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 w'th 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.
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 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)(0 of the Act also. Consequently even that provision is not app'icable. It is the further case of the petitioner that since the amount paid by the petitioner to NTOs is not taxable under Section 9(l)(i) of the Act, it is riot 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 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-residants 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 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 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 fhe 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 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 iegal 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(l)(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(l)(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:
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, modei, 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(l)(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(l)(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-
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 ai! 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 Explanations 5 and 6 have been inserted to Section 9(l)(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.
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 arid 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 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 sucn agreement applies, the provisions of th!s 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 ceneficial 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 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(l)(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(l)(vi) 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 couri 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 ori 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 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 l!TOs 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., and another vs. Income Tax Officer and another reported in (2011) 239 CTR (SC) 113 wherein the Apex Court considering the legislative power of the Parliament to enact the legislation 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(l)(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 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, 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 (7.004) 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.
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 har 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(l)(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 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., and 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 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., and 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 because a prima facie case has been shown; balance of convenience must be clearly in favour of giant 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 baiance 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 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 31/2012, 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 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 c prima facie case against the impugned orders Annexures W 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.
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 v?de Annexure-B, just and proper.
64. In the result, 1 find no grounds in the writ petitions fiied by the petitioner, M/s Vodafone South Limited in W.P.NOS.13210-21-V2014 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 Income Tax Department in W.P.No.13564-568/2014 are disposed of in terms of this order.