2015 (9) TMI 1586 - AT - Income Tax

TDS u/s 195 - deducting tax at source on the payments made to a Netherland Entity, M/s New Skies Satellites N.V. - royalty payment - Held that - In view of the conclusion of fact and law in case of payee, we cannot reckon the payment as royalty in the hands of payee. Further it is also an admitted fact that the M/s New Skies Satellites NV does not have any PE in India and, therefore, even if it constitutes a business income in its hand, the same is not taxable in India under Article 7 of DTAA. Now that when this issue as of now has been settled in the case of the payee from the stage of the High Court that it does not constitute income in the hands of the payee, we accordingly, hold that assessee is not in default and was not liable to deduct TDS on such a payment u/s 195 and therefore, there is no liability of the assessee to deduct TDS on the payment made on account of purchase of satellite bandwidth capacity. So far as arguments raised by the Special Counsel of the revenue on the issue that subsequent amendment brought in statute with retrospective effect should be considered for deciding the issue that such a payment now amounts to royalty and same is to be viewed afresh despite the finality of the issue in the case of the payee from the stage of the High Court, we are of the considered opinion that, it will be purely an academic exercise only. The reason being that, the assessee has liability to deduct TDS u/s 195, only when the payment of the sum in the hands of the non-resident is chargeable to tax under the relevant provisions of the Income Tax Act. Here in this case, it has already been upheld that such a sum is not chargeable to tax in India in the hands of the non-resident, that is, M/s New Skies Satellites NV by the High Court, therefore, it wholly undesirable for us, to decide that payment made by the assessee constitutes income in the hands of the payee. Accordingly, the order of the CIT(A) that assessee is not required to deduct TDS on payment made to M/s New Skies Satellites NV is upheld and consequently grounds raised by the revenue are dismissed.

Summary

Issues Involved:
1. Whether the payment made to M/s New Skies Satellites N.V. for satellite bandwidth capacity constitutes 'royalty' under section 9(1)(vi) of the Income Tax Act.
2. Whether the payment is taxable in India in the absence of a Permanent Establishment (PE) of M/s New Skies Satellites N.V. in India.
3. Whether the assessee was liable to deduct tax at source (TDS) under section 195 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Payment Constituting 'Royalty':
The primary issue was whether the payment made by the assessee to M/s New Skies Satellites N.V. for satellite bandwidth capacity constitutes 'royalty' under section 9(1)(vi) of the Income Tax Act. The Assessing Officer held that such a payment constitutes 'royalty' as defined in Explanation 2 to section 9(1)(vi), relying on the decision of ITAT Delhi Bench in the case of Asia Satellite Tele-communications Co. Ltd. vs DCIT. However, the CIT(A) concluded that the payment does not constitute 'royalty' but is a 'business profit' of M/s New Skies Satellites N.V., which is not taxable in India as it does not have a PE in India. The Tribunal upheld the CIT(A)'s decision, noting that the Tribunal and the Delhi High Court had consistently held that such payments do not amount to 'royalty' in the hands of M/s New Skies Satellites N.V.

2. Taxability in India in Absence of PE:
The second issue was whether the payment is taxable in India in the absence of a PE of M/s New Skies Satellites N.V. in India. The CIT(A) held that the payment constitutes 'business income' under Article 7 of the DTAA between India and the Netherlands and, since M/s New Skies Satellites N.V. does not have a PE in India, the payment is not taxable in India. The Tribunal agreed with this conclusion, emphasizing that the issue had been settled in favor of the payee by the Tribunal and the Delhi High Court.

3. Liability to Deduct TDS under Section 195:
The third issue was whether the assessee was liable to deduct TDS under section 195 of the Income Tax Act. The Tribunal noted that the liability to deduct TDS under section 195 arises only if the payment is chargeable to tax in India. Since it had been conclusively held that the payment to M/s New Skies Satellites N.V. is not taxable in India, the assessee was not liable to deduct TDS. The Tribunal also addressed the revenue's argument regarding the retrospective amendment to section 9(1)(vi) by the Finance Act, 2012, stating that this amendment does not affect the interpretation of 'royalty' under the DTAA.

Conclusion:
The Tribunal dismissed both appeals filed by the revenue, upholding the CIT(A)'s decision that the assessee was not required to deduct TDS on the payments made to M/s New Skies Satellites N.V. The Tribunal concluded that the payments do not constitute 'royalty' and are not taxable in India in the absence of a PE. The order was pronounced in the open court on 7th September, 2015.