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2023 (10) TMI 1520 - AT - Income TaxTaxability of certain receipts from Indian customers as royalty under Article 12 of India Netherlands Double Taxation Avoidance Agreement (DTAA) - assessee is a non-resident corporate entity incorporated under the laws of Netherlands - whether the receipts from Indian customers for providing telecommunication services through satellite is in the nature of royalty or not? - HELD THAT - As decided in own case in assessment year 2018-19 2023 (10) TMI 618 - ITAT DELHI held that the amounts received by the assessee for the use of transponder of tele-communication service charges are not royalty under section 9(1)(vi) of the Act and also under Article 12(8) of Indo Netherland DTAA - Decided in favour of assessee.
The primary legal issue considered in these appeals concerns the taxability of certain receipts from Indian customers as "royalty" under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA) and section 9(1)(vi) of the Income-tax Act, 1961 (the Act). The assessee, a non-resident entity incorporated and resident in the Netherlands, received payments for providing telecommunication services through satellite to Indian customers. The Assessing Officer (AO) contended that these receipts constituted royalty income taxable in India, while the assessee claimed the receipts were business income not taxable in India due to the absence of a Permanent Establishment (PE). Additional issues relate to the levy of interest under sections 234A and 234B of the Act and penalty proceedings under section 270A.
The Tribunal examined the following core legal questions:
Issue-wise Detailed Analysis 1. Taxability of Receipts as Royalty under Article 12 of the DTAA and Section 9(1)(vi) of the Act Relevant Legal Framework and Precedents: Article 12 of the India-Netherlands DTAA defines "royalties" as payments received as consideration for the use of, or the right to use, copyrights, patents, trademarks, designs, secret formulas or processes, or for information concerning industrial, commercial, or scientific experience. Section 9(1)(vi) of the Act contains a domestic definition of royalty, which has been amended over time, including explanations inserted by the Finance Act, 2012. Several precedents were extensively considered. The Tribunal's own earlier decision for assessment year 2018-19 involving the same assessee was pivotal. This decision relied on a series of orders in the case of Inmarsat Global Ltd. (IGL), a UK-based group company owning the satellite, which consistently held that receipts from telecommunication services through satellite do not constitute royalty. The Tribunal also referred to authoritative judicial pronouncements, including decisions of the Bombay High Court, Delhi High Court, and other coordinate benches of the Tribunal, which have interpreted the term "royalty" in the context of satellite telecommunication services and data processing costs. Court's Interpretation and Reasoning: The Tribunal observed that the receipts in question are payments for the provision of telecommunication services using satellite capacity, not payments for the use or right to use any equipment or process as defined under Article 12. The Tribunal emphasized that the satellite remains under the control of the owner (IGL), and the Indian customers merely receive telecommunication services without any transfer of proprietary rights or control over the satellite or related equipment. The Tribunal extensively analyzed the distinction between payments for services and payments for royalties. It relied on the OECD Commentary on Article 12, which clarifies that payments for satellite transponder capacity typically constitute service income under Article 7 (business profits), not royalties under Article 12. The Tribunal also highlighted that the satellite technology is not transferred to the customer, and the customer does not acquire physical possession or control over the satellite equipment. The Tribunal further discussed the principle that amendments to domestic law (such as the Finance Act, 2012 amendments to section 9(1)(vi)) cannot be unilaterally read into or alter the scope of DTAA provisions unless the treaty itself is amended by mutual consent. Reliance was placed on the Bombay High Court decision in Siemens Aktiongesellschaft and Delhi High Court decisions in Nokia Networks and others, which held that domestic amendments cannot override treaty provisions. Key Evidence and Findings: The factual matrix was that the assessee purchased airtime from IGL and resold packaged satellite telecommunication services to Indian customers. The satellite remained under the control of IGL, and the Indian customers did not acquire any right or control over the satellite or related equipment. The nature of the payments was for services rendered, not for use or right to use any intellectual property or equipment. Application of Law to Facts: Applying the legal principles and precedents to the facts, the Tribunal concluded that the receipts cannot be characterized as royalty. The absence of a PE in India further supports the non-taxability of business profits under Article 7 of the DTAA. Treatment of Competing Arguments: The Departmental Representative (DR) relied on the AO and DRP observations and certain High Court decisions (e.g., Madras and Karnataka High Courts) that had taken a contrary view on similar issues. However, the Tribunal found these decisions distinguishable on facts and law, especially since they did not have the benefit of the more recent and authoritative decisions of the Delhi and Bombay High Courts and coordinate benches of the Tribunal. The Tribunal also rejected the DR's reliance on the domestic amendments to section 9(1)(vi) as not applicable to DTAA interpretation. Conclusions: The Tribunal held that the receipts from Indian customers for satellite telecommunication services are not taxable as royalty under section 9(1)(vi) of the Act or Article 12 of the India-Netherlands DTAA. The earlier decisions of the Tribunal and High Courts were followed, and the additions made by the AO were deleted. 2. Levy of Interest under Sections 234A and 234B of the Act The assessee challenged the levy of interest under sections 234A (interest for delay in filing return) and 234B (interest for default in payment of advance tax). The Tribunal, following the coordinate bench's approach in the assessment year 2018-19, restored these issues to the AO for fresh verification and decision. No final determination was made by the Tribunal on these points. 3. Penalty Proceedings under Section 270A The grounds related to initiation of penalty proceedings were dismissed as premature since the assessment and related issues were not finally adjudicated. Significant Holdings "The Tribunal followed the decision rendered by it in case of IGL and held as under: 'The receipts are payments for the provision of telecommunication services through satellite and do not constitute royalty under Article 12 of the India-Netherlands DTAA or section 9(1)(vi) of the Act. The satellite remains under the control of the owner, and the Indian customers do not acquire any right or control over the satellite or related equipment.'" "The Tribunal emphasized that domestic amendments to section 9(1)(vi) cannot be read into or alter the scope of DTAA provisions unless the treaty itself is amended by mutual consent, relying on the Bombay High Court decision in Siemens Aktiongesellschaft and Delhi High Court decisions in Nokia Networks and others." "The Tribunal held that 'payments made by customers under typical transponder leasing agreements are for the use of transmission capacity and are payments for services under Article 7, not royalties under Article 12.'" "The Tribunal noted that the expression 'process' in Article 12 must be a secret process and that income from data transmission services does not partake the nature of royalty." "The Tribunal concluded that the receipts from Indian customers for satellite telecommunication services are not taxable as royalty either under the Act or the DTAA, and directed deletion of the additions made by the AO." "Issues relating to levy of interest under sections 234A and 234B were restored to the AO for fresh consideration." "Penalty proceedings under section 270A were dismissed as premature."p> The core principles established include the supremacy of DTAA provisions over domestic law amendments in matters of treaty interpretation, the distinction between payments for services and royalties, and the need for mutual amendment of treaties to alter their scope. The Tribunal reinforced the principle that unilateral domestic legislative changes cannot modify treaty obligations or definitions.
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