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2024 (7) TMI 1340 - HC - Income TaxTaxability of receipts in India - Income deemed to accrue or arise in India - receipts from Indian customers for services provided outside the territory of India - whether taxable u/s 9 (1) (vi) of the Income Tax Act, 1961 read along with Article 12 of the DTAA between India and Singapore - According to the appellants, the receipts become taxable under the Act since the services provided are liable to be viewed as being in connection with the use or right to use of process or equipment - Scope of amendments introduced in Section 9 - HELD THAT - Section 90 is a self-contained code which enables the Union to bring a tax treaty into force and is not predicated upon Parliamentary legislation. Convention and domestic legislation - Changes in domestic legislation cannot, principally speaking, override the treaty provisions. If a contrarian position were to be accepted, it would lead us to hold that treaty provisions could be amended or overcome based upon the will of Legislatures of independent nations to amend domestic legislation unilaterally and without being bound by the Convention. That is clearly not the position which merits acceptance from either a constitutional or statutory point of view. It is this fundamental position which appears to have weighed upon the Court in New Skies Satellite 2016 (2) TMI 415 - DELHI HIGH COURT to observe that a treaty cannot be overridden by independent legislative amendments that a contracting nation may choose to introduce. The fact that treaty provisions supervene and the option available to the assessee to opt for the more beneficial scheme stands statutorily recognised and reiterated in Section 90 (2) of the Act. Applicability of Section 9 (1) (vi) and its provisions being liable to be read as overriding provisions contained in a Treaty - The arguments raised by the appellants based on the language employed by Section 9 as well as the Explanations inserted therein are clearly misconceived. Quite apart from us having serious reservations as to whether those Explanations could legitimately be accepted as being clarificatory and designed to remove an existing ambiguity in the statutory position, we are of the firm opinion that those unilateral amendments introduced in a domestic law cannot be accorded an overriding effect over the provisions of the DTAA. Even otherwise and as would be evident from the discussion which ensues, the transaction in question would not become subject to taxation even if it were tested on the anvil of Section 9 (1) (vi). However, we defer that discussion to subsequent parts of this decision. Use/ Right to use question - Legal position in New Skies Satellite 2016 (2) TMI 415 - DELHI HIGH COURT constitutes a resounding negation of the submission that was addressed based on Article 3 (2) of the DTAA. The ancillary argument relating to the DTAA having not defined the word process must consequently and for reasons aforenoted suffer a similar fate. All that need be additionally observed is that the broad intent of the amendments comprised in Explanation 6 would not override the use and the right to use tests which form the bedrock of the royalty Article comprised in the DTAA. In any event, the essay of Explanation 6 cannot be interpreted in a manner which would essentially amount to a reintroduction of Section 9 (1) (vi) yet again through a secretive back door. Of equal significance are the doubts which were expressed in respect of the amendments which were introduced in Section 9 and which was sought to be described to be clarificatory of the statutory position. Section 9 (1) (vi) speaks of situations where income by way of royalty would be deemed to have accrued or arisen in India. Explanation 2 of Section 9 (1) (vi) while defining the word royalty in Clause (i), provides for taxation of consideration received for the transfer of all or any rights (including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or trademark for similar property). In clause (iii), the word royalty is conferred a further expansive meaning, extending its coverage to the use of any patent, invention, model, design, secret formula or process. Explanation 6 of Section 9 (1) (vi) stipulates by way of a purported clarification that the expression process would include and shall be deemed to have always included transmission by satellite, cable, optic fibre or by any other similar technology irrespective of whether or no such process was secret. We, on an overall analysis of all of the above, find no justification to either draw a different line or doubt the correctness of the decisions handed down in Asia Satellite and New Skies. even though Section 9 in its amended form had come to exist on the statute book, no corresponding amendments were introduced in Article 12. In fact the category of activities which are spoken of in Explanation 6 were also not included in the Hong Kong, Romania, Latvia, Malaysia and Sri Lanka Treaties which came to be enforced thereafter. A provision seeking to encompass subjects covered by Explanation 6 is however found in the DTAA pertaining to the United Mexican States. These facts further fortify the view that we have taken in respect of the Section 9 amendments. On an overall conspectus of the above, we have no hesitation in holding that the issues which were sought to be canvassed on these set of appeals stand conclusively answered and settled by this Court in Asia Satellite and New Skies Satellite. Any doubt that could have been possibly harboured with respect to the amendments introduced in Section 9 stand laid to rest by virtue of the binding declaration of the law by the Supreme Court in Engineering Analysis 2021 (3) TMI 138 - SUPREME COURT We are also of the firm opinion that even if one were to assume that Explanations 2 and 6 to Section 9 of the Act applied, the position would remain unaltered. This since there was no transfer or conferment of a right in respect of a patent, invention or process. Customers and those availing of the services provided by Telstra were not accorded a right over the technology possessed or infrastructure by it. The underlying technology and infrastructure remained under the direct and exclusive control of Telstra. Parties availing of Telstra s services were not provided a corresponding general or effective control over any intellectual property or equipment. The agreements merely enabled them to avail of the services offered by it. Similarly, the expressions use or right to use as they appear in clauses (iii) and (iva) of Explanation 2 would have to be understood in light of the principles that we have enunciated hereinabove. A person who is provided mobile communication services or access to the internet does not stand vested with a right over a patent, invention or process. The word process being liable to be construed ejusdem generis is lent added credence by clause (iii) employing the expression or similar property which follows. It thus clearly appears to be intended to extend to a host of intellectual properties. This we observe only as an aside since the question raised in these appeals stands conclusively answered in any case in light of our conclusions rendered in the context of the extent of the applicability of Section 9 of the Act and the scope of Article 12 of the DTAA. Thus, we would answer the question posited in the negative and against the appellants. We hold that neither the concept of process nor equipment royalty stand attracted and the consideration is thus not taxable as per Article 12 of the DTAA.
Issues Involved:
1. Taxability of receipts from Indian customers for services provided outside India under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA. 2. Interpretation of the term "royalty" under Article 12 of the DTAA and its alignment with domestic legislation. 3. Applicability of amendments introduced by Finance Act, 2012 to DTAA provisions. 4. Scope and applicability of the OSS Agreement and GBSA in relation to "use" or "right to use" of process or equipment. 5. Interpretation of Article 3(2) of the DTAA in the context of undefined terms. Detailed Analysis: 1. Taxability of Receipts from Indian Customers for Services Provided Outside India: The primary issue was whether the receipts from Indian customers for services provided outside Indian territory could be taxed as royalty under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA between India and Singapore. The Court noted that the Tribunal had held that the consideration received by Telstra Singapore from Indian customers was not taxable as royalty, considering the beneficial provisions of the DTAA, which remained unamended despite changes introduced in Section 9 of the Act. 2. Interpretation of the Term "Royalty" under Article 12 of the DTAA: The Court emphasized that the term "royalty" as defined in Article 12 of the DTAA must be interpreted independently of the domestic legislation unless the DTAA explicitly incorporates such definitions. The Court referred to the principle of noscitur a sociis, suggesting that the term "process" in the DTAA should derive its meaning from other intellectual property rights listed alongside it. The Court held that the mere benefit derived from a service does not constitute "use" or "right to use" of a process or equipment, which requires effective control or dominion over the property. 3. Applicability of Amendments Introduced by Finance Act, 2012 to DTAA Provisions: The Court reiterated that amendments to domestic law, such as those introduced by the Finance Act, 2012, cannot override or amend the provisions of an international treaty. The Court referred to the decision in New Skies Satellite, which held that domestic amendments could not alter the definitions or scope of terms in a DTAA. The Court also noted that the amendments introduced by Finance Act, 2012, were not clarificatory but substantive, expanding the scope of the term "royalty" and thus could not be retrospectively applied to the DTAA. 4. Scope and Applicability of the OSS Agreement and GBSA: The Court analyzed the OSS Agreement and GBSA, concluding that these agreements were primarily concerned with providing seamless connectivity services and did not confer any "right to use" or control over the equipment or process to the customers or partnering telecom operators. The Court emphasized that the agreements facilitated the rendering of services rather than transferring dominion or control over any intellectual property or equipment, thereby not attracting the royalty provisions of the DTAA. 5. Interpretation of Article 3(2) of the DTAA: The Court held that Article 3(2) of the DTAA, which allows reference to domestic law for undefined terms, does not permit a wholesale adoption of domestic amendments that fundamentally alter the treaty's scope. The Court emphasized that the ambulatory approach to treaty interpretation should not be used to unilaterally expand the scope of taxable income under the DTAA based on domestic legislative changes. The Court cited the UN and OECD Model Conventions, which support the view that domestic law references should be limited and contextually appropriate. Conclusion: The Court dismissed the appeals, holding that the receipts from Indian customers for services provided outside India were not taxable as royalty under Article 12 of the DTAA. The Court affirmed that the amendments introduced by the Finance Act, 2012, could not override the provisions of the DTAA, and the agreements in question did not confer any "right to use" or control over the process or equipment.
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