2006 (8) TMI 238 - AT - Income Tax

Interpretation of statutes - Applicability of art. 12.3(a) and art. 12.4(b) of the treaty - Income taxable in India - payments to non-resident companies - broadcasters or television channels - DTAA between India and USA - whether the payment is for the use of the secret process - Whether the payment can be considered and taxed as fees for included services under art. 12.4(b) Or Royalty receipt - secret process - HELD THAT - In the case before us, though PanAmSat is engaged in the business of transmitting TV signals from one place to another; it has not agreed to transfer any technology relating to this activity to the broadcasters. It has merely undertaken to transmit the signals sent by the broadcaster for a price. That essentially is a service contract. The example given in the MoU cannot be understood, in our view, to mean that wherever a satellite is used in relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. This is made clear if reference is made to the, sentence found earlier in the paragraph that The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of para 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available We thus hold that the payment does not also fall within art. 12.4(b) as fees for included services . Since the transponder-technology is available off the shelf in the form of published literature, it is no longer a secret process and hence the payment, even if it is assumed to be in consideration for the use of a technological process, does not amount to royalty under the treaty. The argument that the payment in the present case is linked to the productivity is found to be irrelevant in terms of the agreement. We have already referred to the agreement between the assessee and Turner Broadcasting Inc. of USA, which is representative of all the agreements, in which the service fee is payable monthly. Even if it is assumed that the payment of the fee is linked to the productivity, meaning thereby that it is linked to the number of hours the transponder is utilized by the broadcaster, art. 12.3(a) requires that the consideration should amount to gains derived from the alienation of any such right or property which are contingent on the productivity. The right referred to is the right to use the secret process. Since we have held that there is no right conferred to the broadcaster to use any secret process developed by the assessee, the payment of the service fee, even if it is assumed to be contingent on the productivity (number of hours of transmission) cannot be considered to be royalty. There is no evidence to show that it was Pan Am Sat which helped the broadcasters in setting up the earth-stations; in fact, and on the contrary, the responsibility was that of the broadcasters. Even assuming that the broadcasters did get enriched with the knowledge of the technology involved in setting up the earth stations, such technology, knowledge, skill, etc. did not get transmitted from the assessee. The argument fails. The order of the AARin Steffen, Robertson and Kirsten Consulting Engineers Scientists, In re 1997 (10) TMI 393 - ADVANCE RULING AUTHORITY , with respect, recognizes this position, though the decision was rendered vis-a-vis s. 9(1)(vii)(c) and s. 9(1)(vi)(c) of the IT Act. It was held that the statutory test for determining the place of the accrual of the royalty or fees for technical services is not the place where the services, for which the payments are being made, are rendered but the place where those services are utilized . If this test is applied, the payments may be taxable as royalties in India under the Act on the footing that the services are utilized in India. But then when we come to cl. (b) of art. 12.7 of the Indo-US treaty, we find that the payment should relate to services performed in India in order to be taxed in India. The performance of the services is not in India and it is several thousand kilometers above the earth. The word performed is equivalent to rendered . The word utilised connotes an idea in total contrast with the idea conveyed by the words performed and rendered . A service could be performed or rendered in a place which is different from the place where it is utilised . Whereas the Act uses the word utilised the treaty uses the word performed . Our views on the interpretation of art. 12.7 are only prima facie views, though the debate before us was quite interesting as well as illuminating. There was reference to the various treaties which USA had entered into with other countries such as Thailand, China and Australia and also to the internal documents of the US to show how the US Government have understood the provisions of art. 12.7 of the treaty. These arguments were presented before us with ability and learning, but we have refrained from giving our final views on the same as we consider it to be unnecessary in the light of our basic finding that the payments made to the assessee before us are not royalties within the meaning of art. 12.3(a) or fees for included services within the meaning of art. 12.4(b). The source rule embodied in art. 12.7 would come into play only when we find that the payment is royalty or fees for included services. Thus, we have held that the amounts cannot be assessed as royalty under art. 12.3(a). In the result, ITA is allowed in part.

Summary

Issues Involved:
1. Whether the payments made by non-resident companies (broadcasters or television channels) to the assessee-company are subject to tax under the IT Act, 1961.
2. Whether the payments can be characterized as "royalty" under s. 9(1)(vi) of the IT Act and art. 12.3(a) of the DTAA between India and USA.
3. Whether the payments can be considered as "fees for included services" under art. 12.4(b) of the DTAA.
4. Whether the reassessment proceedings were valid.
5. The computation and quantification of the income.
6. The applicability of interest under ss. 234A and 234B.

Issue-wise Detailed Analysis:

1. Taxability of Payments Under IT Act, 1961:
The primary question was whether the payments made by non-resident companies to the assessee-company for using its telecommunication satellite services are taxable under the IT Act, 1961. The Assessing Officer (AO) held that the payments were liable to be assessed as "royalty" under s. 9(1)(vi) of the IT Act, 1961, and art. 12 of the Double Tax Avoidance Agreement (DTAA) between India and USA.

2. Characterization as "Royalty":
- Under IT Act, 1961:
The AO considered the payments as "royalty" under Explanation 2 to s. 9(1)(vi) of the IT Act, 1961, which defines royalty as consideration for the use of any patent, invention, model, design, secret formula or process, or trade mark or similar property. The AO held that the transponder technology involved a "process" and hence the payments constituted royalty.

- Under DTAA:
The AO also held that the payments were taxable as "royalty" under art. 12.3(a) of the DTAA, which defines royalty as payments for the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. The Tribunal noted that art. 12.3(a) requires the process to be a "secret process" for the payments to be considered as royalty. It was held that the transponder technology was not a secret process, and hence the payments could not be characterized as royalty under the DTAA.

3. "Fees for Included Services":
The AO alternatively held that the payments were taxable as "fees for included services" under art. 12.4(b) of the DTAA, which includes payments for rendering technical or consultancy services that make available technical knowledge, experience, skill, know-how, or processes. The Tribunal held that the payments did not make available any technical knowledge, experience, skill, or processes to the broadcasters, and hence could not be considered as "fees for included services."

4. Validity of Reassessment Proceedings:
The assessee challenged the reassessment proceedings as being without jurisdiction. The CIT(A) rejected this objection, and the Tribunal upheld the reassessment proceedings as valid.

5. Computation and Quantification of Income:
The CIT(A) directed the AO to assess only US $197,80,322 as against US $213,97,554 assessed by the AO. The addition of the estimated amount of Rs. 75 crores as revenues from radio broadcasting and communication services was deleted as being without basis. The Tribunal upheld the CIT(A)'s decision on the quantification of income.

6. Applicability of Interest Under ss. 234A and 234B:
The assessee contended that since the entire revenues received were subject to tax deducted at source, it was under no obligation to pay advance tax. The Tribunal held that the levy of interest under ss. 234A and 234B was not applicable as the entire receipts were subject to tax deduction at source.

Conclusion:
The Tribunal held that the payments received by the assessee from non-resident broadcasters could not be characterized as "royalty" or "fees for included services" under the DTAA between India and USA. Consequently, the payments were not taxable in India. The reassessment proceedings were upheld as valid, and the quantification of income by the CIT(A) was confirmed. The levy of interest under ss. 234A and 234B was held to be not applicable. The appeal by the assessee was allowed in part, and the appeal by the Department and the cross-objections by the assessee were dismissed as academic.