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TMI Blog2009 (12) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... an take advantage of such articles in relevant DTTs it is necessary to see whether application thereof can be made use of by the assessee after considering all related articles in such treaties as also the meaning of 'royalty' as per the DTTs - Since these aspects have never been examined by the lower authorities - Held that - the payment were royalty in nature - matter remanded back to AO to examine that it was saved from the rigour of sec.40(a)(i) on account of relevant articles in the respective DTTs. - ITA No. 1657/Mds./2002 - - - Dated:- 11-12-2009 - ORDER Per : Abraham P George : These are cross appeals filed by the assessee and revenue respectively for Assessment Year 1995-96. 2. Revenue's appeal is taken up first. Grounds taken by revenue read as under: 1. The ld. CIT(A) has erred in deleting the addition made viz. Rs. 20,62,32,621/- u/s 40(a)(i) of the Income-tax Act, 1961 [for short, the Act]. 2. The ld. CIT(A) has erred in holding that the payment of transponder hire charges made by the assessee on which no tax has been deducted does not come within the purview of royalty fee in which case tax is required to be deducted. 3. The ld. CIT(A) failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pressed. According to him, such payments were nothing but royalty in view of Explanation 2 to section 9(1)(vi) of the Act. Assessing Officer was of the opinion that foreign companies were providing scientific knowledge, experience or skill in the field of satellite communication to the assessee company and hence fully covered by the definition of 'royalty' as given in Explanation 2 to section 9(1)(vi) of the Act. Vis-a-vis assessee's argument that foreign companies were not having a PE in India, Assessing Officer noted that the utilization of transponder and up linking services were integral part of assessee's business, and services of the foreign companies were utilized in Indian soil. According to him, the payments made to the foreign companies, were income accruing to such companies in India only. Vis-a-vis assessee's submission that services rendered by foreign companies were entirely outside India, Assessing Officer's opinion was that there was exploitation of services in India and therefore, a vicarious liability cast on assessee, for deducting of tax at source. Again, according to Assessing Officer, fees for technical services paid by an Indian resident for services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons was of the opinion that the case of assessee was similar in facts to that in the decision of this Bench in the case of ITO Vs. Raj Television Net Works Ltd in ITA Nos. 1827 and 1828/Mds/1998 . According to him, decision in the case of Raj Television Net Works Ltd. clearly brought out that payment for transponder hire would not fall within the definition of royalty or fees for technical services as provided u/s 9(1) of the Act. Hence, according to him, assessee was not liable to deduct tax at source on such payments. In this view of the matter, he was of the opinion that the rigor of section 40(a)(i) of the Act was not attracted and disallowances made were not warranted. 7. Now when the matter came up before us, ld. D.R. submitted that the issue is now covered in favour of the revenue by the decision of the Special Bench in the case of New Skies Satellite Others vs. ACIT [121 ITD 1] According to him as per this decision where telecasting companies uplink the desired images/data and down link the same in desired areas, which, inter alia , covers Indian territory also, there is a 'process' involved and such process fell within the scope of the term "royalty", since the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty or technical services. According to him, sec. 40(a)(i) of the Act would not be applicable, since payment made by assessee to M/s Menon Ltd., UK, was, one on which tax was not deductible under Chapter XVIIB of the Act. According to him, to be brought within the rigor of the said section, not only sums should be payable outside India, amounts covered in such payments should be one on which tax was statutorily required to be deducted under Chapter XVIIB of the Act. Ld. counsel further submitted that payments made by the assessee to M/s Menon Ltd., U.K. being neither technical services nor royalty nor any other sum chargeable under the Act, assessee was not obliged to deduct tax at source. Ld. counsel, then relying on the decision of the Karnataka High Court in the case of Jindal Thermal Power Company Pvt. Ltd. Vs. DCIT 182 Taxman 252 argued that, even if the services rendered were considered to be technical in nature, to fall within the realm of Explanation to section 9(1)(vi) of the Act, such services or at least a part thereof had to be rendered in India. According to him, if such services were rendered outside India, remuneration paid thereof would not attract any tax liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. as taxable receipts According to him, when eventual recipients had no liability for paying tax under the Indian Income-tax, the payer was not under any obligation to deduct tax. Reliance was also placed on Hon'ble Apex Court decision in Transmission Corporation of A.P. Ltd. Vs. CIT 239 ITR 587 for contending that obligation of assessee to deduct tax u/s 195 was limited only to appropriate proportion of sum which was chargeable to tax. 9. While admitting that payments made to M/s Rimsat, U.S.A. was covered by the decision of the Special Bench in the case of New Skies Satellite [supra], ld. counsel called the attention of the Bench to the Double Taxation Agreement between India and USA [DTA for short]. According to him, Article 26(3) of the DTA clearly prohibited discrimination. Further, according to him, section u/s 40(a)(i) of the Act, before it was amended w.e.f. 1.4.2005 Finance (No. 2) Act, 2004 by substituting sub-clause (i), (ia ) and (ib) in place of said clause (i), was clearly discriminatory since it applied only to non residents. According to him, vide Article 26(3) of the India - USA Tax Treaty, interest, royalties and other disbursements paid by a resident of a C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim that income of M/s Menon Ltd., U.K. was not at all taxable, this being neither royalty nor fee for technical service, ld. D.R. submitted that this was never substantiated by the assessee before any of the lower authorities According to him, intimation u/s 143(1)(a) of the Act, produced by assessee relating to M/s Menon Ltd., U.K. for Assessment Year 2000-01 would not have any relevance vis a vis impugned assessment year. Further, according to the ld. D.R, decision in Raj Television Net Works Ltd [supra] was not applicable in view of the fact that such decision was considered by the Special Bench in New Skies Satellites (supra) and only thereafter they had come to a conclusion that hiring of transponder was hiring of a process coming within the definition of "royalty". Ld. D.R. was of the opinion that it was not for the assessee to decide whether income was taxable in the hands of the recipient. According to him, he ought to have taken recourse to subsection (2) of section 195 of the Act if he was of the opinion that such amount was not wholly taxable in the hands of the recipient. Specific reliance was placed on the decision of a coordinate Bench in the case of Frontier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the payments were not made to a company which was owning any transponder, whereas all the assessees who were parties or interveners before the Special Bench, had effected payments to persons who owned the transponder and satellites. Second line of defence is that if it is considered as payment for technical services, there was no services whatsoever rendered in India, the transponders being placed about 30000 ft. into the space, and without any citus of service or PE for M/s. Menon Ltd. in India, no income accrues or arises or can be deemed to accrue or arise in India to M/s. Menon Ltd. Consequently, M/s. Menon Ltd. being not exigible to Indian Income-tax, assessee is not under any legal obligation to deduct tax. As aforesaid the second line of defence has different limbs in it, all of which are crucial. These are : (i) It is not royalty as envisaged in Spl. Bench decision. (ii) If it is technical services the citus of service is not in india. (iii) There is no PE for M/s. Menon Ltd. in India (iv) Income of M/s. Menon Ltd. is not taxable in India (v) Assessee is not obliged to deduct tax under sec. 195. In the words of ld. A.R. to trigger the application o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied by the customer. At the customer's request and according to a separate contract, to send technical experts to India for assistance in assembly of the first receiving stations made in Russia and training of Indian operators on the said receiving stations. To prepare an offer for transmission of both TV and radio signals together, as well as broadcasting of ITN, CNN and other TV programmers to India through the channel provided by the Executor. The above mentioned offer should be submitted by November 30th, 1992. Work shall be carried out under a special contract. To provide personnel to ensure effective operation of the equipment located in Russia required for broadcasting of signals to India. To assist the customer at his request to source ground receiving stations for EKRAN and cable networking systems for distribution of the EKRAN and other TV signals." Assessee is banking on the last clause, to say that M/s. Menon Ltd. was not the owner of the satellite 'Ekran' and hence it would not be covered by the decision of SB in New Skies Satellites (supra). Let us see how far it is true. A look at the SB decision clearly brings out that, this was not the clinchi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the same with the help of that process. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing use and right to use of the process and, thus, it is royalty within the meaning of clause (iii) of Explanation 2 to Section 9(1)(vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to Section 9(1)(vi)." Further, if we look at the agreement between assessee and M/s Menon Ltd. closely, there can be no doubt whatsoever that the latter was having possession and control of transponders and also right to hire it out for long periods. In our opinion, therefore treating M/s. Menon Ltd. only as an intermediary would not be correct. Assessee did not bring on record anything to show that M/s. Menon Ltd. was just passing on the money to the owner of satellite Ekran. That a satellite might have a number of transponders and such transponders could be given for long term use to different parties by its owners and who in turn might give time slots or independent use thereof to various others, all sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "Amounts not deductible Notwithstanding anything to the contrary in Sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",- (a) in the case of any assessee- (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, outside India, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted under Chapter XVII-B: Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted." Clearly it was applicable only to payments made to non-residents or persons outside India, till such time legislature deemed it fit to make wholesale amendments thereto, through Finance (No.2) Act, w.e.f. 1.4.2005, rendering its rigour equal vis-a-vis Indian residents as well. Hence there was a different treatment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xisted prior to its amendment by the Finance (No.2) Act, 2004, with effect from 1-4-2005 and subsequent amendment by the Taxation Laws (Amendment) Act. 2006 with retrospective effect from 1-4-2006, provided for disallowance of payments made to a non-resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in disallowance in the event of non-deduction of tax at source. Thus, a non-resident left with a choice of dealing with a resident or a non-resident left with a choice of dealing with a resident or a non-resident in business would opt to deal with a resident owing to the provisions of section 40(a)(i) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus, this clause in DTAA neutralizes the rigour of the provisions of section 40(a)(i) of the Act. in this regard it would be relevant to refer to the provisions of section 90(2) of the IT Act, 1961. It reads thus :- "90(2) Where the Central Government has en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the Double Taxation Avoidance Agreement is entitled to seek the benefits thereunder, even if the provisions of the Double Taxation Avoidance Agreement are inconsistent with those of the Act." But at the same time this line of defence taken by the assessee was never there before the Assessing Officer or the ld. CIT(A). Before ruling that assessee can take advantage of such articles in relevant DTTs it is necessary to see whether application thereof can be made use of by the assessee after considering all related articles in such treaties as also the meaning of 'royalty' as per the DTTs. Since these aspects have never been examined by the lower authorities, we are of the opinion that the claim has to be verified by the Assessing Officer. Therefore, while holding that the payments were only 'royalty' we set aside the orders of Assessing Officer and CIT(A), and remit the issue back to the Assessing Officer for the limited aspect of examining it's claim that it was saved from the rigour of sec.40(a)(i) on account of relevant articles in the respective DTTs. 14. In result, appeal of the revenue is allowed for statistical purposes. 15. When assessee's appeal was take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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