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TMI Blog2016 (2) TMI 415X X X X Extracts X X X X X X X X Extracts X X X X ..... a 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, reversed the said orders. During the pendency of these appeals, the Finance Act of 2012 amended Section 9(1)(vi) and inserted Explanations 4, 5, and 6. 2. The substantial question framed by this Court is two-fold; (1) whether the receipts of the assessees earned from providing data transmission services, fall within the term royalty under the Income Tax Act, 1961, and (2) if the answer to the first is in the affirmative, whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements. 3. In the interest of both brevity and clarity, below is a table of details with respect to the assessment orders and the orders of the ITAT: ITA No. Parties Assessment Year Date of Assessment Order Applicable Treaty ITA 500/2012 DIT v. Shin Satellite 2007-08 30.09.2010 Indo Thai DTAA ITA 244/2014 DIT v. Shin Satellite 2009-10 09.04.2012 Indo Thai DTAA ITA 473/2012 DIT v. New Skies 2008-09 17.08.2011 Indo Netherlands DTAA ITA 474/2012 DIT v. New Skies 2006-07 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystems and microwave electronics that receive, amplify, modify (in frequency and in polarization) and retransmit the signals received by it. This antenna section has two reflectors, one for receiving and the other, for transmitting. The path of each channel between the receiving antennae to transmitting antennae is called the transponder. The transponder is used to amplify and shift the frequency of each signal. The uplinked signal emanates from the uplink earth station and enters the repeater through the receiving antenna. This antenna on the satellite transforms the wireless (electromagnetic) signals into an electrical form suitable for amplification in the Low Noise Receiver (LNR). The signals are modified within the LNR in frequency to correspond to the relay range and then amplified again before the individual filters. A microwave type boosts the power of the signal within each transponder to a high power level such as 100 Watts before applying it to the transmitting antenna. The latter transforms the electrical signal from all the transponders into an equivalent electromagnetic form for radiation into the footprint where the receiving terminals are located. 8. This is the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (i) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cited the ruling of the Advance Ruling Authority in the case of ISRO Satellite Centre V. DIT [2008] 307 ITR 59 where it was held that payment by an Indian resident to a foreign company, for utilization of transponder centered on a satellite, is not in the nature of royalty in terms of the provisions of the Act or the DTAA (in that case with the UK); and in the absence of a permanent establishment in the territory of India not taxable as business profits either. 10. The AO recognised that the operative words in the definition would be "use" and "process". First, as regards the word "process", the AO held that the series of acts undertaken within the transponder are done to achieve a particular result, i.e. to make the signals viewable, and this clearly qualifies as a "process", the consideration for the "use" of which would amount to royalty. Noting the nature of the services provided by the assessee, (as recounted above), the AO observed that the agreements signed by it with its various customers showed that the agreements were not for the purpose of satellite hiring, but for the purpose of providing digital channel services. After enumerating certain clauses of the agreement, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the secret process therefore being used is the secret process of the satellite itself. He stated that while it may be argued that the theoretical aspects of satellite technology may be available to the interested off the shelves, the finer practical aspects and critical technologies are kept a secret. It is important to note that the AO in fact does quote the commentary of Klaus Vogel where secret formula or process has been defined as one which enjoys "at least a relative protection or is capable of being protected". It was also held that similar to sub clause (iva) of Explanation 2, the receipt would also be royalty under Article 12 for the "use of, or right to use industrial, commercial or scientific equipment". 12. Second, on the question of whether the royalty received by a non-resident Telecasting Company is taxable, the AO held that the same would be taxable only if it had been paid in respect of services utilized for the purposes of making or earning any income from any source in India. The source, the AO argues, are the Indian audience, for whom the programs are created, and thus India becomes the territory of commercial exploitation by these non-resident Telecasting Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not constitute royalty within the meaning of Section 9(1)(vi) of the Act. The Court held that while providing transmission services to its customers, the control of the satellite always remains with the satellite operator and the customers are only given access to the transponder capacity. The customer does not therefore use the satellite or the process of the satellite itself. Since that is the case, the payment cannot then be termed as royalty for the use of a process or equipment. Resultantly, the ITAT allowed the appeal of the assessee. It would be wise to remember that the judgment in Asia Satellite Supra note 1 was solely in the context of Section 9(1)(vi) of the Act, there being no Double Tax avoidance Agreement in that factual matrix. 16. ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite supra note 1 . Here too the ITAT had overturned the Assessment Order dated 09.04.2012. The order was similar if not wholly identical to the one passed in ITA 500/2012. 17. ITA 473/2012 and 474/2012 are filed by the Revenue against the order of the ITAT overturning common assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess in its own way. Post Finance Act 2012 18. It can be seen, therefore, that while the assessment orders consistently held that the income from data transmission services shall be taxable under Section 9(1)(vi) as royalty, the Tribunal equally consistently, set aside these orders applying, as it is bound to do so, on the basis of Asia Satellite supra note 1 .However, as it has been noted, the Finance Act of 2012 amended Section 9(1)(vi) inserted Explanation 4, 5, and 6. The inclusion of these Explanations, clarificatory as they claim they are, have attempted to undo the implications of Asia Satellite. supra note 1 Explanations 4, 5, and 6 are reproduced below: "Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d counsel for the assessees contended that the matter is no longer res integra. It was submitted that having regard to the structure of Section 92 of the Act, there is little elbow room for the Revenue; it cannot be contended that any change in the substantive law would automatically result in a like change in respect of taxability of a transaction or service, which is otherwise tax exempt in terms of a DTAA or which is subject to a lower rate of taxation mandated by a treaty. Counsel relied on the judgment of the Bombay High Court in Commissioner of Income Tax v. Seimens Aktiongessellschaft [2009] 310 ITR 320 and the Andhra Pradesh High Court in M/s Sanofi Pasteur Holding SA v. Department of Revenue. (2013) 354 ITR 316 (AP) 22. Learned counsel, most importantly stressed upon the decision of this Court, in Director of Income Tax v Nokia Networks 2013 (358) ITR 259 which had dealt with a similar issue, with respect to applicability of the amended Section 9 (1) (vi) in the light of insertion of the Explanations, the context being the efficacy of the interpretation given to the statute vis-à-vis a double taxation avoidance treaty. In that case, this Court had rejected that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxability of an income in the context of such an agreement, they must as a matter of course, first decide whether the income in issue is taxable under domestic legislation, specifically the Act. It is only when that issue is answered in the affirmative that the Court turns its attention to the tax convention in issue, to ascertain primarily whether the terms of the convention exempt that particular income from being taxed under the Act. 26. Section 9(1)(vi) is, aside from changes made by the Finance Act, 2012, a long and winding provision, subject to several explanations and provisos. It will therefore be prudent to undertake a systematic approach to it, whereby each stage of the section is examined. The opening words of Section 9; "the following incomes shall be deemed to accrue or arise in India" indicate at the outset that the provision is a deeming one whereby, income otherwise not accruing in India, will be deemed to have accrued in certain cases. Until 1922, various provisions enumerated cases under which income accruing to an assessee abroad was deemed to accrue in India. The 1961 Act collects these provisions and covers them under the ambit of Section 9. One of such deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from any source situated in India. 27. Since the underlying premise is that the payment is "royalty", the Court must first deal with Explanation 2, most pertinently to sub-clause (iii) and (iva) under which the income in the present case is sought to be taxed. "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (...) (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB" 28. The two clauses as applicable to data transmission services have been the subject of debate in courts as well as business circles. The debate was finally settled by the judgment delivered in Asia Satellite supra note 1 . In Asia Satellite supra note 1 this Court held that income from data transmission services would not qualify as royalty in order for it to be taxable under the Act. The Court first recognized that the definition of royalty in the section is with respect to permission granted to use the right in respect of the patent, invention, process, etc., all essentially forms of intellectual property. This permission restricts itself merely to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Satellite supra note 1 , held that the presence of control was a critical factor in adjudging whether there was "use" of a particular process. On the question of whether the "process" so used must be a secret process or not, the judgment did not return any finding specifically, other than quoting with approval the OECD Commentary which alludes to the indispensability of the secrecy of the process. 29. The Revenue argues that critical aspects of this judgment, primarily that the function performed by the transponder could not be categorized as a "process" and that even in the event it could be, there was no "use" of this process since there was no control exercised by the customers, is no longer good law in light of the inclusion of Explanations 4-6 by the Finance Act, 2012. In other words the Revenue contends that a mere reading of Explanation 4-6 will go to show that they are clarificatory and are therefore automatically retrospective. By this reason, as clarificatory amendments do, these explanations relate back to the time when the main provision of Section 9(1)(vi) first came into force. By logical extension, the judgment in Asia Satellite supra note 1 was based on a misinter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k the tribunal to decide the other contention raised by the respondent assessee; whether the payments made nevertheless remain untaxable in view of the provisions of the DTAA." 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I [2014] 361 ITR 575 (Mad) , the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon supra note 23 cites no reason for the extension of the amendments to the DTAA. 32. Explanations 4-6 are designed as clarificatory amendments. Unarguably they have all the apparent characteristics of one. The words "for the removal of doubts, it is hereby clarified...includes and has always included" qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory amendments. Clarificatory amendments are a special class of amendments the object of which is self-evident, that is to say, it purports to "clarify" law that has already been legislated, essentially an Act to remove doubts existing as to the meaning or effect of a statute. Naturally therefore, they must be read as intrinsic and implicit, but overlooked elements of the original section itself. They thus dictate the interpretation of law since the time it was first drafted or brought into force. However, in order for such clarificatory amendments to be sustained as retrospective, they must answer to this description. 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legislature does not have the power to override judicial decisions which in its opinion it deems as incorrect, however to respect the seperation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only (Ref. County of Sacremento v. State 134 Cal App 3d 428 , In re Marriage of Davies 105 Ill App 3d 661 ). 38. The circumstances in this case could very well go to show that the amendment was no more than an exercise in undoing an interpretation of the court which removed income from data transmission services from taxability under Section 9(1)(vi). It would also be difficult, if not impossible to argue, that inclusion of a certain specific category of services or payments within the ambit of a definition alludes not to an attempt to illuminate or clarify a perceived ambiguity or obscurity as to interpretation of the definition itself, but towards enlarging its scope. Predicated upon this, the retrospectivity of the amendment could well be a contentious issue. Be that as it may, this Court is disinclined to conclusively determine or record a finding as to whether the amendment to 9(1)(vi) is indeed merely clarificatory a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, secret formula or process, or for information concerning industrial, commercial or scientific experience." Section 9(1)(vi), Explanation 2, Income Tax Act, 1961 "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" 40. In Asia Satellite supra note 1 the Court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as pari materia. This Court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations 4, 5, and 6 to the Section 9(1)(vi). The question is therefore, whether in an attempt to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06): "The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides." 43. The Vienna Convention on the Law of Treaties, 1969 ("VCLT") is universally accepted as autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntext otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty? The former is the 'static' approach while the latter is called the 'ambulatory' approach. One opportunity for a State to ease its obligations under a tax convention comes from the ambulatory r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expression "laws in force". ********** ********* ********* While considering the Double Tax Avoidance Agreement the expression "laws in force" would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article I(2). Considering the express language of article I(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement was entered into." 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic "laws in force". It was in this context that the Bombay High Court held that they were unable to accept the assesse's contention that the law applicable would be the law as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double-taxation of cross-border transactions would be frustrated." 51. Pertinently, this Court in Director of Income Tax v Nokia Networks 2013 (358) ITR 259 specifically dealt with the question of the effect of amendments to domestic law and the manner of their operation on parallel treaties. The Court delivered its judgment in the context of the very amendments that are in question today; the Explanations to Section 9(1)(vi) vis a vis the interpretation of a Double Tax Avoidance Agreement. This Court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations: "He, thus submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill their obligations u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Section 9(1)(vi), Explanation 2, Income Tax Act, 1961 (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied) 55. The slight but apparently vital difference between the definitions under the DTAA and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various ITATs across the country, much discussion took place on the implications of the presence or absence of the "comma". A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious for diametrically opposite implications. However in the realm of statutory interpretation, courts are cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n punctuated otherwise. Would there be any substantial difference in the import of the section if it were not punctuated the way it actually is? While this may not be conclusive evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically opposite consequences or large variations in taxing powers, as is in the present case, then the assumption must be that it was punctuated with a particular end in mind. The test therefore is not to see if it makes "grammatical sense" but to see if it takes on any "legal consequences". 58. Nevertheless, whether or not punctuation plays an important part in statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for us to conclude that the process referred to in Article 12 must in fact be a secret process and was always meant to be such. In any event, the precinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communities (e.g. through a contract granting an indefeasible right of use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 60. 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 , ..... X X X X Extracts X X X X X X X X Extracts X X X X
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