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TMI Blog2017 (10) TMI 827X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. ITA No. 3593/Del/2011 is filed by the revenue against the order of the ld CIT(A)-XXII, New Delhi dated 10.05.2011 for the Assessment Year 2005-06 raising following grounds of appeal:- 1. On the facts and circumstances of the case, the ld CIT(A) has erred in holding that the receipts of the assessee are in nature of Business Income. 2. On the facts and circumstances of the case, ld CIT(A) erred in inferring that the receipts of the assessee are not in nature of royalties. 3. On the facts and circumstances of the case, the ld CIT(A) erred in inferring that the receipts of the assessee are not taxable in India. 4. On the facts and circumstances of the case ld CIT(A) erred in deleting the interest charged u/s 234B and 234D of the Act. 2. The revenue has also filed appeal for AY 2006-07 against the order of the ld CIT(A)-XXII, New Delhi dated 11.05.2011 raising following grounds of appeal:- 1. On the facts and circumstances of the case, the ld CIT(A) has erred in holding that the receipts of the assessee are in nature of Business Income. 2. On the facts and circumstances of the case, ld CIT(A) erred in inferring that the receipts of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DIT, in any event, acted contrary to the principles of natural justice and erred on facts and in law, in holding that the receipts of the Appellant from non-residents were taxable in India. 6.2 The DDIT ought to have held that the receipts of the Appellant from non residents were not liable to taxation in India. (i) under the provisions of the Act (ii) under the provisions of the DTA 6.2 The DDIT acted contrary to the principles of the natural justice and on the basis of conjectures, suspicion and surmises in alleging that the non-resident channels had a Permanent Establishment ( PE ) or a fixed base in India. 7.1 The quantum of Income held by the DDIT to be taxable in India in any event, erroneous and based upon conjectures, suspicion and surmises. 7.2 The DDIT erred in attributing the entire amount received by the Appellant from non resident channels to the Appellant‟s alleged Indian operations. 8. The DDIT erred in holding that the revenues earned by the Appellant from consultancy services were taxable in India: (i) under the Act (ii) under the DTA 5. The DDIT erred, on facts and in law, in holding that the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng penalty proceedings under section 271 (1) (c) of the Act, 4. The assessee filed this appeal against the order of the ld Assessing Officer passed u/s 143(3) read with section 144C of the Act dated 30.10.2013 on directions of the ld Dispute Resolution Panel-II, New Delhi dated 09.10.2013 raising following grounds of appeal in ITA No. 309/Del/2014 for the Assessment Year 2010-11:- 1. The order of the learned Dy. Director of Income-tax, Circle 2(2), International Taxation, New Delhi ( DDIT ) read with the directions of DRP under section 144C, are bad in law and on facts. 2. The Id. DDIT erred, on facts and in law, in assessing the Assessee to tax in respect of the income earned by it from providing transponder services. The Id. DDIT erred in following, in this regard, the Assessment Orders passed in the Assessee‟s case for earlier Assessment years. 3. The Id. DDIT failed to appreciate that the Assessee was not liable to Indian Taxation at all in respect of the income earned by it from providing transponder services. 4. The Id. DDIT erred, on facts and in law, in holding that the income earned by the Assessee from providing transponder services ( the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee including those passed in its own case. 9. The Id. DDIT erred in directing the levy of interest under section 234B of the Act. The Assessee submits that the levy of such interest is illegal and without jurisdiction and denies its liability to such interest. 10. The levy of interest under section 234D of the Act is illegal and without jurisdiction. 11. The Id. DDIT erred in initiating penalty proceedings under section 271(1 )(c) of the Act. 5. Brief facts of the case are that assessee is a company incorporated under the laws of Thailand engaged in the business of providing digital broadcast services through its transponder as well as consultancy services to its customers, both resident in India as well as non-resident. The assessment in the case of the assessee for earlier years were passed by the Assessing Officer and confirmed by the ld CIT(A) holding that receipts accruing and arising in India to the assessee is royalty income. Consequently, after issuing show cause notice the ld Assessing Officer held that above income is chargeable to tax as royalty as per article 12 of the DTAA between India and Thailand as well as under the Indian Income Tax Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deserve to be dismissed and appeal of the for AY 2008-09 and 2010-11 deserves to be allowed accordingly. 9. The ld Departmental Representative relied upon the orders of the lower authorities however, could not controvert that the issue involved in these four appeals are covered in favour of the assessee. 10. We have carefully considered the rival contentions and also perused the orders of the lower authorities. Admittedly, the Hon'ble Delhi High Court vide order dated 80.02.2016 has considered the above issue in ITA No. 500/2012 AY 2007-08 and ITa No. 244/2014 for AY 2009-10 on the identical facts and circumstances deciding that the amendment made by the Finance Act 2012 will not affect Article 12 of the DTAA and therefore, the income earned by the assessee cannot be held to be royalty and consequently to chargeable to tax in India. The Hon'ble Delhi High Court held in 382 ITR 114 as under:- 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. In Asia Satellite this court held that income from data transmis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transponder from the satellite to assert that that the technology of the satellite would qualify as the secret process but conveniently divorces the transponder from the satellite while trying to prove that there is use of the transponder as an equipment. However, equipment as envisaged in the section must be capable of functioning independently, or in other words, must be able to perform an activity by itself without material reliance on another. Essentially therefore, Asia Satellite, 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 categorised 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idance agreement (DTAA) between India and United States of America. It is submitted that the payments were business profit and accordingly not taxable or chargeable to tax under the Act . . . The Tribunal in the impugned order has not referred to and examined the effect of the Double Taxation Avoidance Agree ments between India and the USA and whether the assessee is enti tled to benefit or advantage under the said agreement and therefore, payments made were not taxable in India in the hands of the recipi ent. Accordingly while answering the question of law in favour of the Revenue we pass an order of remit and ask the Tribunal to decide the other contention raised by the respondent assessee ; whether the payments made nevertheless remain untaxable in view of the provi sions of the double taxation avoidance agreement. 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a retrospective legislation is con trary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 35. This presumption against retrospectivity stems from an indispensable need for each rule of law to answer to the principle of fairness. L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Company Ltd. [1994] 1 AC 486 (HL). This presumption can be displaced in either of two situations, (i) where the words of the amendment specifically indicate the retroactivity of the law or (ii) in the case of declaratory or clarificatory 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 sinc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the Legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the court ? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the Legislature considers inaccurate, the effect is prospective. Any other result would make the Legislature a court of last resort. United States v. Gilmore 8 Wall (75 US) 330, 19 L Ed 396 (1869), Peony Park v. O'Malley 223 F.2d 668 (8th Cir. 1955). It does not mean that the Legislature does not have the power to override the judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a Legislature a court of last resort, the amendments can be made prospective only (Ref. County of Sacramento v. State of California 134 Cal. App. 3d 428, In re, Marriage of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as pari materia. The definitions are reproduced below : Article 12(3), Indo-Thai Double Taxation Avoidance Agreement : 3. The term 'royalties' as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Article 12(4), Indo-Netherlands Double Taxation Avoidance Agreement : 4. The term 'royalties' as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinemat ograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, com mercial or scientific experience. Section 9(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt of a breach, but is nevertheless, in the opinion of this court, indefensible. 42. It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers. In Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), where the Indo-Mauritius Double Taxation Avoidance Convention was before the Supreme Court, the court said the following of the essential nature of these treaties (page 751) : An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, (see David R. Davis, Principles of International Double Taxation Relief, Pg.4 (Lon don Sweet and Maxwell, 1985)) points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x treaties are . . . considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries . 45. At the very outset, it should be understood that it is not as if the double taxation avoidance agreements completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3(2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. Indo-Thailand Double Taxation Avoidance Agreements ([1986] 161 ITR (St.) 82, 83) : 'Article 3 : General definitions 2. In the application on the provisions of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has for the purposes of the laws in force in that State relating to the taxes which are the subject of this Convention.' I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the applicability of domestic amendments to international instruments. In R. v. Melford Developments Inc. 82 DTC 6281 (1982), the Canadian Supreme Court held that the ambulatory approach is antithetical to treaty obligations : There are 26 concluded and 10 proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission of the appellant is correct, these agreements are all put in peril by any legislative action taken by Parliament with reference to the revision of the Income-tax Act. For this practical reason one finds it difficult to conclude that Parliament has left its own handiwork of 1956 in such inadvertent jeopardy. That is not to say that before the 1956 Act can be amended in substance it must be done by Parliament in an Act entitled 'An act to Amend the Act of 1956'. But neither is the converse true, that is that every tax enactment adopted for what ever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or inten tion so to do. 48. In CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom), the Bombay High Court citing R. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orce . We express no opinion in this regard since it is not in issue before this court. This court's finding is in the context of the second situation, where there does exist a definition of a term within the double taxation avoidance agreements. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the double taxation avoidance agreements and the ultimate taxability of the income under the agreement. That is not to say that the court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one under the double taxation avoidance agreement, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the definition under the Double Taxation Avoidance Agreement. In other words, the domestic law remains static for the purposes of the double taxation avoidance agreement. The court in Sanofi (supra) had also held similarly (page 442 of 354 ITR) : We are in agreement with the petitioners and in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffers from the amended section 9 of the Act. It is categorically held in CIT v. Sie mens Aktiongesellschaft [2009] 310 ITR 320 (Bom) that the amend ments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson A. B. [2012] 343 ITR 470 (Delhi) that a copyrighted article does not fall within the purview of royalty. Therefore, we decide question of law Nos. 1 and 2 in favour of the assessee and against the Revenue. 52. Thus, an interpretive exercise by Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to ; but where the State unilaterally seeks to amend a treaty through its Legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State's power to breach very much exists ; courts in India have no jurisdiction in the matter, because in the absence of enactment throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... good faith) ; article 27 (Internal law and observance of treaties, i.e., provisions of internal or municipal law of a nation cannot be used to justify omission to perform a treaty) ; General rule of interpretation under article 31(1) (i.e., that it shall be interpreted in good faith, in accordance with ordinary meaning to be given to the terms of a treaty) and article 31(4) (A special meaning shall be given to a term if it is established that the parties so intended). The expression process and treaty interpretation in this case 54. Neither can an act of Parliament supply or alter the boundaries of the definition under article 12 of the Double Taxation Avoidance Agreement by supplying redundancy to any part of it. This becomes especially important in the context of Explanation 6, which states that whether the 'process' is secret or not is immaterial, the income from the use of such process is taxable, none the less. Explanation 6 precipitated from confusion on the question of whether it was vital that the process used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the double taxation avoidanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of the provisions. Judge Caldwell once famously said The words control the punctuation marks, and not the punctuation marks the words. Holmes v. Pheonix Insurance Co. 98 F 240 (1899). It has been held in CGT v. Budur Thippaiah [1976] 103 ITR 189 (AP) and Hindustan Construction Co. Ltd. v. CIT [1994] 208 ITR 291 (Bom) that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Construction Co. Ltd. 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation ; CIT v. Loyal Textile Ltd. [1998] 231 ITR 573 (Mad) ; Sama Alana Abdulla v. State of Gujarat, AIR 1996 SC 569 ; Mohd. Shabbir v. State of Maharashtra, AIR 1979 SC 564 ; Lewis Pugh Evans Pugh v. Ashutosh Sen, AIR 1929 PC 69 ; Aswini Kumar Ghose v. Arbinda Bose, AIR 1952 SC 369 ; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd., AIR 1929 PC 38. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite takes note of the OECD Commentary and Klaus Vogel on Double Taxation Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty (page 391 of 332 ITR) : Even when we look into the matter from the standpoint of double taxation avoidance agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Co-operation and Development (OECD) has framed a model of Double Taxation Avoidance Agree ment (DTAA) entered into by India are based. Article 12 of the said model double taxation avoidance agreement contains a definition of royalty which is in all material respects virtually the same as the defi nition of 'royalty' contained in clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. This fact is also not in dispute. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made to lease or purchase the capacity of cables for the transmission of electrical power or commu nities (e.g., through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil).' Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein : 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's Double Taxation Con vention with Luxembourg) ; this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. were transferred to the user.' Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below : 'On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. outright transfer of the asset involved (right, et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable to the double taxation avoidance agreement. 60. Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the double taxation avoidance agreement, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a double taxation avoidance agreement, unless the said double taxation avoidance agreement 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 taxation avoidance agreement. 11. In view of the above decision of the Hon'ble Delhi High Court in case of the assessee, respectfully following, we also hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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