2006 (8) TMI 432 - AT - Income Tax

Summary

Issues Involved:
1. Tax exemption on receipts from providing services to VSNL.
2. Applicability of Protocol on Privileges, Exemptions, and Immunities to Inmarsat.
3. Interpretation of "official activities" and "specific services" under the Protocol.
4. Impact of subsequent tax payments by the assessee on the case.

Detailed Analysis:

1. Tax Exemption on Receipts from Providing Services to VSNL:
The primary issue revolves around whether the receipts from providing services to VSNL are exempt from tax in India under the Protocol signed by the President of India. The facts reveal that Inmarsat Ltd. was constituted by 83 governments, including India, and was granted privileges and immunities similar to those of the United Nations. The Assessing Officer argued that the receipts were taxable, citing that the services provided were specific and thus not exempt under Article 4(5) of the Protocol. However, the CIT(A) and ITAT found that the services rendered by Inmarsat to VSNL fell within the scope of "official activities" and were therefore exempt from tax.

2. Applicability of Protocol on Privileges, Exemptions, and Immunities to Inmarsat:
The Protocol on Privileges, Exemptions, and Immunities of Inmarsat, effective from 30th July 1983, was ratified by the President of India on 18th August 1987. The Protocol exempts Inmarsat and its property and income from all national direct and other taxes within the scope of its official activities. The CIT(A) and ITAT upheld that Inmarsat's activities in providing telecommunication services to VSNL were within the scope of its official activities and thus exempt from taxation.

3. Interpretation of "Official Activities" and "Specific Services" under the Protocol:
The CIT(A) and ITAT distinguished between "official activities" and "specific services." The official activities of Inmarsat include improving maritime and aeronautical communications, which align with the services provided to VSNL. The term "specific services" refers to public services like electricity, water, and telecommunication provided by the government, which are not applicable in this context. The ITAT emphasized that the burden was on the department to prove that the services were specific and not official, which the department failed to do.

4. Impact of Subsequent Tax Payments by the Assessee on the Case:
The department argued that the assessee started paying taxes in subsequent years, indicating acceptance of tax liability. However, the ITAT noted that the reasons for such payments were not detailed and could have been made to avoid risks or under protest. Therefore, these subsequent payments did not influence the judgment for the assessment years in question.

Conclusion:
The ITAT upheld the CIT(A)'s decision that the receipts from providing services to VSNL are exempt from tax under the Protocol on Privileges, Exemptions, and Immunities of Inmarsat. The ITAT confirmed that the services provided were within the scope of Inmarsat's official activities and thus qualified for tax exemption. The appeals for both assessment years 1997-98 and 1998-99 were dismissed, affirming the non-taxability of Inmarsat's income in India.