2019 (12) TMI 964 - AT - Income Tax

Withholding liability u/s 195 - payment made by the assessee to Reliance JioInfocomm Pte Limited, Singapore (RJIPL) for availing bandwidth services - India-Singapore DTAA - HELD THAT - As decided in ow case 2019 (11) TMI 1110 - ITAT MUMBAI when the expression royalty is a defined expression under the applicable tax treaty, there cannot be any occasion to invoke article 3(2) for further dissecting the issue and explore the domestic law meaning of each expression used in this definition for coming at the conclusions about connotations of royalty. It cannot, therefore, be open to invoke article 3(2) to import domestic law meaning, even partly, when the treaty term has received a definition under the treaty. It is for this reason that Explanation 6 to Section 9(1)(vi), in our humble understanding, has no role, under article 3(2) of the treaty, in explaining the expression process , in the context of defining royalty under the Indo Singaporean tax treaty. This statutory provision, under the domestic law, is relevant only when the definition of royalty under section 9(1)(vi) of the Income Tax Act, 1961, is subject matter of consideration, as it specifically states that said definition is for the purpose of for the purpose of this clause i.e. Section 9(i)(v) . Additional test that is required to be put, while adopting the ambulatory interpretation in such a situation, is whether the amendment is domestic law ends up unsettling a conclusion arrived at under the pre domestic law amendment position i.e. reversing the judicial rulings in favour of the residence jurisdiction, and, if the answer is in the positive, the ambulatory interpretation is to be discarded because that approach would patronise, and legitimise, a unilateral treaty override, and the outcome of ambulatory interpretation in such a case will be incompatible with the fundamental principles of treaty interpretation under the Vienna Convention. The approach is justified on the first principles on the ground that when two approaches are possible for incorporation of domestic law provisions in the tax treaties and one of these approaches is compatible with Article 26 of the VCLT while the other is incompatible with the same, the approach compatible with the VCLT provisions is to be adopted. In view of these discussions, and bearing in mind entirety of the case, we find no legally sustainable merits in the grievances raised before us. The arguments raised before us do not lead us to a different conclusion either. Concurring with the coordinate bench decisions, therefore, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As we hold so, we may add that these observations regarding ambulatory or dynamic approach being inappropriate in the context of article 3(2) is confined to the peculiar facts discussed above, and, are not, therefore, of general application. Payments made to RJIPL Singapore for providing Operations and Maintenance (O M) services - Whether is not in the nature of fees for technical services under section 9(1)(vii) of the Act read with Article 12 of the India- Singapore DTAA? - HELD THAT - As decided in ow case 2019 (11) TMI 1110 - ITAT MUMBAI The services were simply maintenance services which did not involve any transfer of technology. In response to our specific question, learned DR could not enlighten us about what was the nature of technology transferred under these arrangements. The amounts received by RJ-S could not, therefore, be taxed as 'fees for technical services' either. - Revenue appeal dismissed.

Summary

Issues Involved:
1. Tax withholding obligation on payments for bandwidth services under Section 195 of the Income Tax Act, 1961.
2. Interpretation of the term 'royalty' under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-Singapore DTAA.
3. Applicability of Explanation 5 and 6 to Section 9(1)(vi) in the context of the India-Singapore DTAA.
4. Taxability of payments for Operations and Maintenance (O&M) services as fees for technical services under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-Singapore DTAA.

Detailed Analysis:

1. Tax Withholding Obligation on Payments for Bandwidth Services:
The Assessing Officer challenged the CIT(A)'s decision that tax was not required to be deducted at source on payments made by the assessee to Reliance JioInfocomm Pte Limited, Singapore (RJIPL) for bandwidth services. The CIT(A) held that these payments did not constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961, or Article 12 of the India-Singapore DTAA. The Tribunal found that this issue was already covered in the assessee's favor by a coordinate bench decision in ITA Nos. 6331 to 6334/Mum/2018, dated 15th November 2019.

2. Interpretation of the Term 'Royalty':
The Tribunal examined whether the payments for bandwidth services could be considered 'royalty' under the India-Singapore DTAA. The CIT(A) concluded that the payments did not amount to royalty because the assessee only received access to services and not to any equipment or process. The Tribunal upheld this view, noting that the term 'royalty' under the India-Singapore DTAA is narrower than under the Income Tax Act. The Tribunal also emphasized that amendments in the Act cannot be read into the treaty provisions without amending the treaty itself.

3. Applicability of Explanation 5 and 6 to Section 9(1)(vi):
The Tribunal addressed the Departmental Representative's argument that Explanation 5 and 6 to Section 9(1)(vi) should be applied to interpret the term 'process' in the India-Singapore DTAA. The Tribunal rejected this argument, stating that the term 'process' is not a treaty term per se but a word used in defining 'royalty'. The Tribunal held that the domestic law definition of 'process' cannot be imported into the treaty under Article 3(2) of the DTAA. The Tribunal also discussed the concept of static vs. ambulatory interpretation and concluded that the retrospective amendments in domestic law could not override the treaty provisions.

4. Taxability of Payments for Operations and Maintenance (O&M) Services:
The Tribunal examined whether payments for O&M services could be considered fees for technical services under Section 9(1)(vii) of the Income Tax Act and Article 12 of the India-Singapore DTAA. The CIT(A) had held that these payments did not make available technical knowledge, experience, skill, know-how, or processes to the assessee, and thus could not be classified as fees for technical services. The Tribunal upheld this view, noting that the services were routine maintenance and did not involve any transfer of technology. The Tribunal also pointed out that in the absence of a Permanent Establishment (PE) in India, the business profits of RJIPL could not be taxed in India under Article 7 of the DTAA.

Conclusion:
The Tribunal dismissed the appeal, upholding the CIT(A)'s decision on all grounds. The payments made by the assessee to RJIPL for bandwidth services and O&M services were not subject to tax withholding under Section 195, as they did not constitute 'royalty' or 'fees for technical services' under the India-Singapore DTAA. The Tribunal emphasized the importance of treaty provisions and rejected the application of domestic law amendments to override the treaty.