2025 (4) TMI 1172 - AT - Income Tax

Accrual of income in India - Income derived from transmitting of satellite signals from ship to the customers and vice versa - assessee is a tax resident of Netherland and it is eligible to claim the treaty benefits as per Indian-Netherland DTAA - AO held that the assessee has received the revenue from the customers by leasing transponders in India and held that the receipts are in the nature of royalty u/s 9(1) (vi) of the Act as well as under 12 of India Netherlands tax treaty as they are towards use or right to use of equipment/processes etc.- assessee stated that in absence of a Permanent Establishment in India the income of Inmarsat is not chargeable to tax in India. HELD THAT - Considering the rival submission and material placed on record we observed that similar issues were considered and adjudicated by the Coordinate Bench in assessee s own case for A.Y. 2019-20 2020-21 2023 (10) TMI 1520 - ITAT DELHI decided the issue in favour of the assessee as held Finance Act 2012 will not affect Article 12 of the DTAAs it would follow that the first determinative interpretation given to the word royalty in Asia Satellite 2011 (1) TMI 47 - DELHI HIGH COURT which held that receipts from lease of transponder capacity are not royalty and when the definitions were in fact parimateria (in the absence of any contouring explanations) will continue to hold the field for the purpose of assessment years preceding the Finance Act 2012 and in all cases which involve a Double Tax Avoidance Agreement unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty or amend the definition in a manner so supra note 1 that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. For the above reasons it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue.

Summary

The core legal questions considered by the Tribunal in this appeal pertain primarily to the characterization and taxation of income earned by the appellant under the Income Tax Act, 1961 and the India-Netherlands Double Taxation Avoidance Agreement (DTAA). Specifically, the issues involve:

1. Whether the total income determined by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) at Rs. 66,85,72,650 is correct as opposed to the declared income of Rs. 7,07,387 by the appellant.

2. Whether receipts of Rs. 30,65,07,933 from Station Satcom Pte Limited and Aban Singapore Pte Ltd should be included in the income, considering the appellant's claim that these were inadvertently disclosed and not India-related revenue.

3. Whether the income earned by the appellant from Indian customers constitutes 'royalty' under Article 12 of the India-Netherlands DTAA and Section 9(1)(vi) of the Income Tax Act.

4. Whether the Tribunal and courts should follow the precedent set by the Delhi High Court in Asia Satellite Telecommunications Co. Ltd. and New Skies Satellite BV, which held that receipts from lease of transponder capacity are not 'royalty'.

5. Whether the Tribunal should follow the Mumbai ITAT orders in the case of Inmarsat Global Limited (IGL), a group entity, which held similar receipts not to be 'royalty' under the India-UK DTAA.

6. Whether the Supreme Court judgment in Engineering Analysis Centre of Excellence Private Limited is applicable to the characterization of receipts as 'royalty'.

7. Whether the 'process' involved in the appellant's receipts is 'secret' or not, and its impact on the definition of 'royalty' under the treaty.

8. Whether the DRP erred in relying on past years' directions without appreciating the specific grounds of objection for the current year.

9. Whether the DRP and AO erred in not reconsidering the appellant's claim based on the jurisdictional Delhi ITAT decision in PanAmsat International Systems, Inc.

10. Whether the AO erred in levying surcharge, health and education cess, and interest under Sections 234A and 234B of the Act.

11. Whether penalty proceedings under Section 270A were rightly initiated.

Issue-wise Detailed Analysis

Characterization of Income as Royalty (Issues 3, 4, 5, 6, 7)

Relevant Legal Framework and Precedents: The principal legal provisions considered were Section 9(1)(vi) of the Income Tax Act, 1961 and Article 12 of the India-Netherlands DTAA, which define 'royalty' and govern the taxation of such income. The appellant relied heavily on the Delhi High Court decisions in Asia Satellite Telecommunications Co. Ltd. and New Skies Satellite BV, which held that receipts from leasing transponder capacity do not constitute 'royalty'. The appellant also cited multiple ITAT orders in the case of Inmarsat Global Limited (IGL) for various assessment years, which similarly held that such receipts are business income and not royalty under the India-UK DTAA. The Supreme Court judgment in Engineering Analysis Centre of Excellence Private Limited was also cited to support the argument that the receipts should not be characterized as royalty.

Court's Interpretation and Reasoning: The Tribunal extensively reviewed the factual matrix and judicial precedents. It noted that the appellant provides telecommunication services by transmitting satellite signals to customers in India without having a Permanent Establishment (PE) in India. The income arises from the provision of services rather than from the use or right to use any copyright, patent, trademark, secret formula, or process as defined under Article 12 of the DTAA.

The Tribunal relied on the detailed findings of the Mumbai ITAT in the IGL cases, which elaborated that payments for transponder capacity are payments for services and not for the use or right to use equipment or processes. The Tribunal also discussed the OECD Commentary and Klaus Vogel's commentary on Double Tax Conventions, which support the view that satellite transponder leasing payments are not royalties but service income.

The Tribunal further examined the punctuation and wording differences between the DTAA and the domestic law, particularly the presence of a comma after the word "process" in the treaty definition of royalty, which indicates that the 'process' must be secret to qualify as royalty. The Tribunal held that the income in question is not from a secret process but from service provision.

It was also emphasized that amendments to the domestic law (such as Explanation 6 to Section 9(1)(vi) introduced by the Finance Act, 2012) cannot be unilaterally read into the DTAA. The Tribunal cited the Bombay High Court decision in Siemens Aktiongesellschaft and the Delhi High Court in Nokia Networks, which held that treaty provisions prevail over domestic law unless the treaty itself is amended by mutual consent.

Key Evidence and Findings: The appellant submitted detailed factual descriptions of the telecommunication services, including the use of satellites, Network Coordinating Station, Network Operation Centre, and the role of Land Earth Service Operators (LESO) in India. The appellant demonstrated that it does not have control or possession of the transponder equipment but merely provides transmission capacity as a service.

Application of Law to Facts: Applying the legal principles to the facts, the Tribunal concluded that the receipts from Indian customers for satellite communication services are business income and not royalty. The absence of a PE in India further supports that the income is not taxable under the treaty as royalty.

Treatment of Competing Arguments: The Revenue argued that the receipts constitute royalty under both the Act and the DTAA. However, the Tribunal rejected the reliance on domestic amendments and lower court decisions that did not consider the binding precedents of the Delhi High Court and Mumbai ITAT. The Tribunal also rejected the Revenue's contention that the 'process' need not be secret for the income to be royalty, emphasizing the treaty language and international interpretations.

Conclusions: The Tribunal held that the income earned by the appellant from Indian customers does not constitute royalty under the India-Netherlands DTAA or Section 9(1)(vi) of the Income Tax Act. This conclusion is consistent with the appellant's own prior years' cases and the decisions in the group company's cases.

Inclusion of Receipts from Station Satcom and Aban Singapore (Issue 2)

The appellant claimed that receipts of Rs. 30,65,07,933 from Station Satcom Pte Limited and Aban Singapore Pte Ltd were inadvertently disclosed and do not pertain to India-related revenue. The appellant did not press this ground during the hearing, and the Tribunal observed that this issue does not require adjudication at this stage, keeping it open for future consideration.

Determination of Total Income and Tax Computation (Issues 1, 10, 11, 12, 13, 14, 15)

The appellant challenged the determination of total income at Rs. 66,85,72,650 instead of the declared Rs. 7,07,387, the levy of surcharge and health and education cess beyond the treaty rate, interest under Sections 234A and 234B, and initiation of penalty proceedings under Section 270A.

The Tribunal, following the conclusion that the income is not royalty and hence not taxable in India under the DTAA, allowed the appeal on these grounds. The levy of additional charges and penalties was found to be consequentially unsustainable. The Tribunal did not delve into detailed interest and penalty analysis as the primary taxability issue was resolved in favor of the appellant.

Permanent Establishment (PE) and Business Income (Related to Issues 3 and 4)

The appellant contended that it does not have a PE in India, and hence its business income is not taxable in India. The Tribunal accepted this contention, noting that the appellant's activities do not constitute a fixed place of business or PE under the DTAA. This finding aligns with the characterization of income as business profits rather than royalties.

Reliance on Judicial Precedents and Consistency of Decisions

The Tribunal extensively relied on its own coordinate bench decisions in the appellant's earlier assessment years and those of the group company. It also accorded significant weight to the Delhi High Court decisions in Asia Satellite Telecommunications Co. Ltd. and New Skies Satellite BV, as well as the Mumbai ITAT decisions in IGL cases, which consistently held that payments for satellite transponder capacity are not royalties.

The Tribunal underscored the principle that amendments to domestic law cannot override treaty provisions unless the treaty itself is amended by mutual consent. It also emphasized the importance of interpreting treaty terms in good faith and in accordance with their ordinary meaning, supported by international commentaries such as OECD and Klaus Vogel.

Final Determinations

1. The income declared by the appellant at Rs. 7,07,387 is accepted as the correct total income. The addition of Rs. 66,85,72,650 by the AO and DRP is rejected.

2. Receipts from Station Satcom and Aban Singapore are held to be inadvertently disclosed and the issue is kept open.

3. The income earned from Indian customers for satellite communication services is held not to be royalty under Section 9(1)(vi) of the Act or Article 12 of the India-Netherlands DTAA.

4. The appellant does not have a PE in India; thus, the income is not taxable as business profits under the treaty.

5. The Tribunal follows the binding precedents of the Delhi High Court and coordinate benches of the ITAT, rejecting the Revenue's arguments based on domestic amendments or contrary lower court decisions.

6. Levy of surcharge, health and education cess, interest, and penalty proceedings are set aside as consequential to the primary finding.

7. Grounds 1 to 9 of the appellant's appeal are allowed; ground 2 is kept open; other grounds relating to interest, surcharge, and penalty are allowed in favor of the appellant.

Crucial Legal Reasoning Extracts

"The Tribunal held that the payments made by customers under typical transponder leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information... the customer does not acquire the physical possession of the transponder but simply its transmission capacity."

"Amendments to the domestic law cannot be read into the treaty and will not influence the definition of 'royalty' as given in Article 12(3). The domestic law remains static for the purposes of the DTAA."

"A treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain."

"The expression 'process' in Article 12 must in fact be a secret process and was always meant to be such. Income from data transmission services do not partake of the nature of royalty."

"The Tribunal is bound to follow the judicial precedence in assessee's own case for the earlier years and in view of the finding given therein, the stand of the assessee has to be approved."