2023 (1) TMI 519 - AT - Income Tax

Royalty receipt - whether receipt from uplinking services construe royalty as per Article 12(3) of the DTAA? - HELD THAT - We are of the considered view that the assessee provides services to its customers using its equipment outside India. Various satellite based telecommunication services provided by the assessee to its customers are standard services, provided by various other service providers in the industry. Thus, it can be safely stated that there is no know how or intellectual property involved in the provision of such services by the assessee. Moreover, various satellite-based telecommunication services nowhere envisage granting the use of, or the right to use any technology or process to the customers. The assessee is responsible for maintaining the continuity of the service using its own equipment and facilities since the possession and control of equipment is with the assessee. It is merely making an entrepreneurial use of its own equipment to provide services and it cannot be said that customers have a right to use the process, if any, involved or applied by the assessee in its capacity as a service provider. The customers are not granted the use of or the right to use any process by the assessee during the course of providing various satellite-based telecommunication services which means that the customers are merely availing a service from the assessee and are not bearing any risk with respect to exploitation of the assessee s equipment involved in the provision of such service. Therefore, in our considered opinion, the amount received by the assessee from its customers in India as consideration for the provision of a service cannot be characterized as royalty for the use or right to use of a process. Heavy emphasis has been made on retrospective amendment brought by the Finance Act with special reference to Explanation 6 of section 9(1)(vi) of the Act.This issue has been well settled by the Hon'ble Jurisdictional High Court of Delhi in the case of New Skies Satellite 2016 (2) TMI 415 - DELHI HIGH COURT as held 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 - question of law framed is accordingly answered against the Revenue. Also in the case of Asia Satellite Telecommunications Co. Ltd 2011 (1) TMI 47 - DELHI HIGH COURT Tribunal was not justified in holding that the amount paid to the assessee by its customers , represented, income by way of royalty, as the said expression is defined in the Explanation 2 to section 9(1)(vi). Receipts from Disaster Recovery Playout Services being treated as FTS - HELD THAT - We find that the terms managerial , technical and consultancy appearing in the definition of fees for technical services have not been specifically defined in the treaty and the Act. Managerial service signifies a service for management of affairs or services rendered in performing management functions. It involves controlling, directing, managing or administrating the business of the service recipient and can be rendered only with the application of human mind and must involve human interface/ human intervention. Similarly, technical service means a service requiring expertise in technology. Services are of a technical nature when special skills or knowledge related to technical field3 are required for provision of such services. Only those services which involve application of any expert technical education or skill can be classified as technical service and routine services, which do not require application of any technical knowledge or skill cannot be classified as technical service. Playout service is nothing but the broadcasting and/ or transmission of channels by the assessee for its customers, without any involvement in decision-making with respect to the playlists and the content being broadcasted. Moreover, the assessee does not have a right to edit, mix, modify, remove or delete any content or part thereof as provided by the customer. The disaster recovery playout service merely involves provision of uninterrupted availability of the playout service at a predetermined level. Therefore, receipts from disaster recovery playout services are not in the nature of FTS as envisaged under Article 12(4)(a) of the DTAA as they are not ancillary or subsidiary to disaster recovery uplinking and allied services. We are of the considered view that service must be related to application or enjoyment of the right, property, or information for which a payment in the nature of royalty is received and predominant purpose of the arrangement under which payment of service fee is received must be application or enjoyment of the right, property, or information in respect of which the royalty is received. Thus, both conditions must be cumulatively satisfied for services to be considered as ancillary or subsidiary to the payment of royalty. Therefore, in our considered view, receipts from disaster recovery playout services are not in the nature of FTS as they do not make available any technical knowledge, experience, skill, knowhow, or process or consist of the development and transfer of any technical plan or technical design. The facts of the case in hand clearly show that the assessee has provided Disaster Recovery Playout services to its customers through its facility in Singapore and the customers are not provided with any technology knowledge, experience, skill, know-how or processes as envisaged under Article 12(4)b of the DTAA. Further, receipts are also not in the nature of FTS as per Explanation 2 of section 9(1)(vii) of the Act. In light of the decisions referred to hereinabove, payments received by the assessee as consideration for providing disaster recovery playout services are not taxable as FTS and the Assessing Officer is directed to delete the same. Ground No. 3 with its sub-grounds is allowed.

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961.
2. Taxability of payments received for disaster recovery uplinking services and various satellite-based telecommunication services as 'Royalty' under section 9(1)(vi) of the Act and Article 12(3) of the India-Singapore Tax Treaty.
3. Taxability of payments received for disaster recovery playout services as 'Fee for Technical Services' (FTS) under section 9(1)(vii) of the Act and Article 12(4) of the India-Singapore Tax Treaty.
4. Computation of interest under section 234B of the Act.
5. Initiation of penalty proceedings under section 270A of the Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed under section 143(3) read with section 144C of the Income Tax Act, 1961, claiming it was wrong, bad in law, contrary to facts and circumstances, and unsustainable in law. The Tribunal did not provide a separate analysis for this issue, indicating that the primary focus was on the substantive tax issues raised.

2. Taxability as 'Royalty':
The core dispute was whether the payments for disaster recovery uplinking services and various satellite-based telecommunication services could be classified as 'Royalty' under section 9(1)(vi) and Article 12(3) of the India-Singapore Tax Treaty.

- Article 12(3) of the DTAA:
The Tribunal noted that under Article 12(3) of the DTAA, 'Royalty' includes payments for the use or right to use industrial, commercial, or scientific equipment, or for the use of a process.

- Customer Control and Possession:
The Tribunal found that the customers were neither in possession of nor had control over the equipment used by the assessee. The assessee bore all risks related to the equipment, indicating that the customers were merely availing a service.

- Process and Intellectual Property:
The Tribunal opined that the term 'process' in the context of royalty relates to know-how and intellectual property. Since the customers did not use the process independently and the assessee bore the risk, the payments could not be classified as royalty.

- Judicial Precedents:
The Tribunal heavily relied on the Delhi High Court's decision in New Skies Satellite BV, which held that retrospective amendments to domestic law do not affect the interpretation of terms in a DTAA unless the treaty itself is amended. The Tribunal concluded that the payments did not constitute 'Royalty' and directed the deletion of the addition of INR 6,26,29,403.

3. Taxability as 'Fee for Technical Services' (FTS):
The Tribunal examined whether the payments for disaster recovery playout services could be classified as FTS under section 9(1)(vii) and Article 12(4) of the DTAA.

- Definition and Nature of Services:
The Tribunal analyzed the definitions of 'managerial', 'technical', and 'consultancy' services. It concluded that playout services did not involve controlling, directing, or managing the customer's business, nor did they require special technical skills or knowledge.

- Ancillary and Subsidiary Services:
The Tribunal found that playout services were not ancillary or subsidiary to uplinking services and did not make available any technical knowledge or skills to the customers.

- Judicial Precedents:
The Tribunal referred to the Karnataka High Court's decision in De Beers India Pvt Ltd and the Delhi High Court's decision in Guy Carpenter & Co., which emphasized that mere rendition of services does not constitute 'making available' technical knowledge. The Tribunal concluded that the payments did not qualify as FTS and directed the deletion of the addition of INR 13,03,58,744.

4. Computation of Interest under Section 234B:
The Tribunal noted that the computation of interest under section 234B was consequential to the additions made in the assessment order. Since the additions were deleted, the interest computation issue became moot.

5. Initiation of Penalty Proceedings under Section 270A:
The Tribunal noted that the initiation of penalty proceedings under section 270A was also consequential to the additions made. With the deletions of the additions, the penalty proceedings were rendered irrelevant.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the deletion of the additions related to 'Royalty' and 'FTS', and rendering the issues of interest computation and penalty proceedings moot. The order was pronounced in the open court on 19.12.2022.