2016 (2) TMI 415 - HC - Income Tax

Receipts from providing data transmission services - ITAT upset Assessment Orders that ruled that the income derived by the assessees through data transmission services was taxable as royalty under Section 9(1)(vi) of the Act as well as Article 12 of the relevant Double Tax Avoidance Agreements - whether fall within the term royalty? - whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements? - Held that - India s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs. Consequently, since we have held that the 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 supra note 1, when the definitions were in fact pari materia (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 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

Issues Involved:
1. Whether the receipts of the assessees earned from providing data transmission services fall within the term "royalty" under the Income Tax Act, 1961.
2. If the answer to the first issue is affirmative, whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements (DTAA).

Detailed Analysis:

Issue 1: Taxability of Receipts as Royalty under the Income Tax Act, 1961:

The appeals by the Revenue under Section 260A of the Income Tax Act, 1961 challenge the Income Tax Appellate Tribunal (ITAT) orders, which overturned the Assessment Orders that had categorized the income derived by the assessees through data transmission services as taxable royalty under Section 9(1)(vi) of the Act and Article 12 of the relevant DTAAs. The ITAT based its decision on the judgment in Asia Satellite Communications Co. Ltd. v. Director of Income Tax [2011] 332 ITR 340 (Del), interpreting Section 9(1)(vi) in the context of such services.

The assessees, Shin Satellite Public Co. Ltd. and New Skies Satellite B.V., are foreign companies providing digital broadcasting services through leased transponders on their satellites. The Assessing Officer (AO) had taxed their income as royalty under Explanation 2(iii) and (iva) of Section 9(1)(vi) of the Act, arguing that the use of the transponders constituted a "process" and "use of industrial, commercial or scientific equipment."

However, the ITAT reversed these orders, aligning with the Asia Satellite judgment, which held that providing transmission services does not constitute royalty since the control of the satellite remains with the operator, and the customers only access the transponder capacity without using the satellite or its process.

The Finance Act, 2012, subsequently amended Section 9(1)(vi) by inserting Explanations 4, 5, and 6, clarifying that royalty includes consideration for the use of any process, whether secret or not, and for transmission by satellite, cable, optic fiber, or similar technology.

Issue 2: Applicability of DTAA Benefits:

The Revenue contended that the amendments to Section 9(1)(vi) settled the matter, rendering the ITAT's reliance on Asia Satellite obsolete. They argued that the amendments applied retrospectively, and thus, the income should be taxable as royalty under the Act. Additionally, the Revenue claimed that the DTAAs, being similar to the pre-amended Act, should be interpreted in light of the amendments, making the income taxable under the treaties as well.

Conversely, the assessees argued that amendments to domestic law could not unilaterally alter the terms of an international treaty. They relied on the principle that a DTAA, once negotiated, cannot be amended by one party's domestic legislation without mutual agreement. They cited judgments supporting the view that amendments to domestic law do not automatically apply to treaties unless explicitly incorporated.

Analysis and Conclusions:

The court emphasized that DTAAs are negotiated agreements between sovereign states, intended to prevent double taxation and promote cross-border trade. These treaties take precedence over domestic laws to the extent they are more beneficial to the assessee. The court noted that amendments to domestic law, whether retrospective or prospective, cannot unilaterally alter the terms of a treaty.

The court referred to the Vienna Convention on the Law of Treaties, which mandates that amendments to treaties must be mutually agreed upon by the contracting states. Unilateral amendments to domestic law cannot affect the obligations under a treaty.

The court concluded that the amendments to Section 9(1)(vi) by the Finance Act, 2012, do not affect the interpretation of the term "royalty" under the DTAAs. The definitions of royalty in the DTAAs remain static and are not influenced by subsequent domestic amendments. Therefore, the income from data transmission services does not constitute royalty under the DTAAs, and the assessees are entitled to the treaty benefits.

Final Judgment:

The court held that the interpretation advanced by the Revenue could not be accepted. The amendments to Section 9(1)(vi) do not affect the definitions under the DTAAs. The appeals were dismissed, and the assessees were granted the benefits under the relevant DTAAs. The court did not return a finding on whether the amendment is retrospective for cases without a DTAA.

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