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TMI Blog2018 (12) TMI 1321X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order regarding the inapplicability of the ratio of the decision of the AAR in the case of ISRO Satellite Centre [2008 (10) TMI 15 - AUTHORITY FOR ADVANCE RULINGS]. In this context, we find that this aspect of the controversy has been expressly considered by our coordinate Bench while rendering its decision earlier. Therefore, we find no reason to uphold the stand of the Revenue in this year following the precedent in the assessee’s own case We find that the assertions of the assessee qua the activity of the assessee and liaison office as well as the significance of the use of SSMS equipment located in India qua the services provided to VSNL clearly establishes that the same could not be construed to constitute a PE in India. The DRP, in our view, has also not referred to any specific instances in the functioning of the liaison office to point out that it was rendering services which could be construed as being a PE in India. Considering the orders of the authorities below as well as the material led by the assessee before the lower authorities, in the present case, it is safe to deduce that the Revenue has failed to discharge its burden of proving that the activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -I, Mumbai (DRP) dated 28.09.2010. 3. In this appeal, the assessee has raised the following Grounds of appeal:- Ground number 1 On the facts and in the circumstances of the case and in law, the learned AO erred in determining the total income of the Appellant at ₹ 19,18,27,475. The Appellant prays that the AO be directed to consider the income as returned by the Appellant. Ground number 2 On the facts and in the circumstances of the case and in law, the learned AO erred in holding the amounts receivable by the Appellant from Tata Communications Limited (TCL) [earlier known as Videsh Sanchar Nigam Limited] to be 'royalty' as defined under Section 9(1)(vi) of the Act and Article 13(3) of the Double Taxation Avoidance Agreement between India and United Kingdom (India - UK Tax Treaty'). The Appellant prays that the amounts receivable from TCL are not in the nature of royalty either under the Act or under the India - UK Tax Treaty and hence not taxable and accordingly, the learned AO be directed not to tax the amounts receivable from TCL. Ground number 3 On the facts and in the circumstances of the case and in law, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt prays that the learned AO be directed to drop penalty proceedings. 4. Although the assessee has raised multiple Grounds of appeal, but the substantive dispute revolves around two issues relating to characterisation of income earned by the assessee, and the existence or otherwise of a Permanent Establishment (PE) or a fixed place of business in India. 5. In order to appreciate the controversy, the following discussion is relevant. The appellant is a company incorporated in United Kingdom and is also a tax resident of United Kingdom. The appellant is engaged in the business of providing telecommunication services and for Assessment Year 2007-08, it filed its return of income declaring NIL income, inter-alia, contending that its income was not taxable in India. So far as the income earned by the assessee in this year is concerned, the same stands on similar footing as in the past years, namely, from rendering of telecommunication services to Videsh Sanchar Nigam Ltd. (in short VSNL ), whose name has subsequently been changed to Tata Communication Ltd. (in short TCL ). The receipts from rendering of telecommunication services to TCL were claimed to be not taxable in India; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation which describes the above mentioned activities. The LESO in India is VSNL. Inmarsat has entered into a LESO Agreement with VSNL for providing satellite telecommunication services. We have enclosed herewith in Annexure 8 a copy of the LESO agreement dated 12 April 1999, entered into by Inmarsat with VSNL for provision of telecommunication services. The LES is linked on the ground to the local public telecommunication network. This system enables communication to take place between users of the MES equipment and either other users of similar equipment or users of the public telephone network. In each case, the communication passes via an Inmarsat satellite and is co-ordinated and connected by the LESO. 6. The Assessing Officer, however, took the stand, following the stand of the assessing authorities of the past years that the impugned receipts earned by the assessee from TCL are in the nature of Royalty . We find that the DRP has also affirmed the decision of the Assessing Officer. 7. On this aspect of the controversy, it has been pointed out before us that the Tribunal vide its order in ITA Nos. 5102/Mum/2004 others dated 14.07.2017 in the context of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of the Hon'ble Delhi High Court in the cases of New Skies Satellite(2016) 382 ITR 1, DIT vs. Nokia Networks OY (2013) 358 ITR 259 and Asia Satellite Communications Co. Ltd. (supra) in the decisions of Alcatel-Lucent USA Inc. dated 25.04.2007 in ITA Nos. 7299 7300/ Mum/2010 for A.Y. 2005-06 and 2007-08, DDIT vs. Shell Information Technology International BV dated 15.03.2017 in ITA No. 5051/Mum/ 2009 Others for A.Y. 2006-07 to 2008-09 and ADIT vs. Taj TV Ltd. dated 05.07.2016 in ITA No. 4678/Mum2007 for A.Y. 2003-04 to 2005-06. We have also noted that reliance placed by the learned CIT-DR on the decision of the Hon'ble Jurisdictional High Court in Siemens Aktiongeswellschaft (supra) supports its case is misplaced. Specific mention may be made to para 20 of the said decision. Reference therein has been made to a decision of the Canadian Court in the case of Her Majesty the Queen vs. Melford Development Inc. 82 DTC 6281 and the categoric observation on unilateral amendment by a nation which is party to the agreement leaves the issue in no doubt about the view favoured. Accordingly we quote here the decision of the Hon'ble Delhi High Court in DIT vs. New Skies Sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of laws in force . 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 DTAA. 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 DTAA 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 DTAA, 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 DTAA. In other words, the domestic law remains static for the purposes of the DTAA. The Court in Sanofi (supra), had also held similarly: We are in agreement with the petitioners and in the light of our preceding analyses, discern no textual, grammatical or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the purview of Royalty. Therefore, we decide question of law no.1 2 in favour of the assessee and against the Revenue. 52. Thus, an interpretive exercise by the 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 the 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 through appropriate legislation in accordance with Article 253 of the Constitution, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y) 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. 10.1 The next decision also cited by the CIT-DR is the case of Formula One World Championship Ltd. vs. CIT (International Taxation) for the proposition that the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and New Skies Satellite is overruled. On a reading of the said decision we note that the reliance is misplaced. The issue for consideration before the Hon'ble Apex Court was on an entirely different set of facts and circumstances and an entirely different issue was being considered. The said decisions were neither cited before the Court nor referred to by it nor considered in the said judgement. Accordingly on a reading of the decisions rendered on peculiar facts of the present case which we have brought out in detail in the earlier part of this order we find ourselves in agreement with the detailed finding and conclusion drawn by the Coordinate Benches and respectfully following the same conclude that the appeals of the assessee ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... brought by Finance Act 2012 in Section 9(1)(vi) by way of Explanations inserted in the Income-tax Act with retrospective effect can be read into DTAA or not has to be seen in the light of the decision of Hon ble Bombay High Court in the case of CIT v Siemens Aktiongesellschaft, reported in 310 ITR 320 (Bom HC) accordingly, he submitted that other decisions rendered by the Delhi High Court and the Tribunal may not be applicable. While appreciating the Siemens AG (supra) he submitted that, it may kind be borne in mind that: i) The question of law before the Hon ble High Court was not that whether amendments in the Income-tax Act can be read into the DTAA or not; ii) In the said case, old DTAA (1960) between India and Germany was under consideration; iii) The said decision was rendered in 20008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act, 2007 doing with the requirement of PE for Royalty; iv) That amendments/Explanations in the Income-tax Act are being sought to be read into DTAA by virtue of Article 3(12) of the modern treaties; v)Section 9(1)(vi) up to and including Explanation 2 are substantiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 229 ITR 383. 4. After considering the aforesaid submissions and on perusal of the impugned orders, we find that so far as the issue raised vide ground No.1 to 3 is concerned it is a recurring issue in the case of the assessee right from the earlier years. The Ld.CIT (A) too has followed the CIT(A) s orders for the assessment years 2003-04 to 2004-05, 2005-06 and 2008-09. The Tribunal in the assessment year 2004-05 in ITA No.7347/Mum/2007 on the issue of disallowance of Data Processing Cost has dealt and decided this issue in the following manner:- 15. Now, coming to the main issue i.e., whether the reimbursement of data processing cost of ₹ 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired banking application software named as Flexcube from an Indian software company which is exclusively used for the banking purpose by the assessee all over the world. When the Mumbai Branch was set up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and scope of royalty given in the domestic law, in the present case, section 9(1)(vi) should not be read into or looked upon. The character of payment towards royalty depends upon the independent use or the right to use of the computer software, which is a kind of copy right. In the present case, the payment made by the Branch is not for use of or right to use of software which is being exclusively done by the Head Office only, installed in Belgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on prorata basis. Such reimbursement of payment does not fall within the ambit of definition of royalty within the Article 12(3)(a). To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Indian company by the Australian company. The control of the Indian company is only on the input transmission and the right is to get the output processed data back. The actual processing of data is the exclusive control of the Australian company and it is for this work that the Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company inconsideration of its processing of data belonging to the Indian company. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the use of, or right to use of, mainframe computer. The Indian company does not have any control over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Siemens Aktiongesellschaft (supra) and Delhi High Court decision in the case of Nokia Network, reported in [2012] 253 CTR (De) 417 and DIT v Sony Ericson AB, reported in [2012] 343 ITR 470 have been taken note of. Thus, this issue has been decided in favour of the assessee after detail analysis and discussion. Moreover, we find that in the latest decision of Hon ble Delhi High Court in the case of DIT vs. News Sky Satellite BV passed in ITA 473/2012, order dated 8.02.2016 have explained the ratio and principle of Hon ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). The relevant observation of the Hon ble Delhi High Court in the said case reads as under:- 48 In Commissioner of Income Tax v. Seimens Aktiongessellschaft, [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression laws in force . While considering the Double Tax Avoidance Agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finitions. What that does imply however, is that just because there is a domestic definition similar to the one under the DTAA, 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 DTAA. In other words, the domestic law remains static for the purposes of the DTAA . 5. Thus, on the facts of the present case, we are bound to follow the judicial precedence in assessee s own case for the earlier years and in view of the finding given therein, we upheld the order of the CIT (A) and dismiss the grounds raised by the revenue. Accordingly, grounds no.1, 2 3 are dismissed. 5.2. As far as filing of writ petition to be filed before the Hon ble High court is concerned if would be sufficient to mention that nothing was brought on record to prove that writ had been filed and heard. Had the final hearing taken place, it would have been a different situation. So, in anticipation of filing of a writ-petition, we are not inclined to defer the decision especially when same is covered by the orders for the earlier years. Considering the above and respectfully following the orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that this aspect of the controversy has been expressly considered by our coordinate Bench while rendering its decision dated 14.07.2017 (supra). Therefore, we find no reason to uphold the stand of the Revenue in this year following the precedent in the assessee s own case. Therefore, so far as Ground of appeal nos. 2 3 are concerned, the same are allowed, as above. 10. So far as Ground of appeal no. 4 is concerned, the same deals with the grievance of the assessee against the income-tax authorities holding that it has a PE in India. In this context, the relevant facts are that the Assessing Officer noted that assessee owned Space Segment Monitoring System (SSMS), which was equipment installed/located at Arvi, Maharashtra. The Assessing Officer further notes that the Land Earth Station (LES) of VSNL/TCL is also located at this place and that the SSMS equipment plays a critical role in providing telecommunication services to the Land Earth Service Operator (LESO), which is VSNL. The Assessing Officer noted that the said equipment is installed and maintained by the assessee and that assessee also has a liaison office in India. The Assessing Officer notes that the activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mitsui Co. Ltd., [2017] 84 taxmann.com 3 (Delhi) to point out that the onus was on the Revenue to show that any activity in the nature of business or trading was carried out in the liaison office. It was pointed out that the liaison office of the assessee has been in existence since it was initially approved by the RBI vide its permission dated 20.10.1999, a copy of which has been placed in the Paper Book at pages 39 to 42. It has been further pointed out that the approval granted by the RBI has been renewed from time to time and so far as the captioned period is concerned, the approval of the RBI vide order dated 10.10.2008 subsists. It is pointed out that the very fact that the RBI continues to accord approval for the liaison office shows that there is no activity of trading, commercial or industrial nature which is carried out so as to treat such liaison office as a PE. 12. So far as the reference made by the lower authorities to SSMS equipment is concerned, the learned representative for the assessee pointed out that in the past years also such equipment was existing, but no adverse view has been taken and, in any case, so far as the instant period is concerned, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial nature. The liaison office was also, inter-alia, prohibited from entering into any business contract in its own name. It further prescribed that the liaison office will not charge any Commission or fee for its liasioning activity/services rendered by it. The standard terms and conditions also stated that the entire expense of the liaison office were to be met exclusively out of the funds received from abroad and that the liaison office could not borrow or lend any money from or to any person in India without prior approval, etc. The aforesaid permission has been further renewed and there is no dispute that for the period under consideration also the requisite approval of the RBI exists for the liaison office of the assessee. We are only highlighting the aforesaid features of the permission granted by the RBI to point out that the liaison office is prohibited from carrying out any business or trading activity. At the time of hearing, it was also stated by the learned representative for the assessee at Bar that till now there is no infringement or any other adverse view taken by the RBI qua the activities which are being carried out by the liaison office in India. This singular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SSMS is to provide a degree of surveillance capability to the Inmarsat Network Operations Centre in the UK whereby the Assessee can monitor the transmitted power levels of individual channels (both signalling and voice carriers) to and from satellites in the Indian Ocean region and the frequency deviations. SSMS is not a critical component to the services rendered by the Assessee and even without SSMS, these services can be continued to be rendered. The cost of this equipment is approximately USD 150,000. This investment is insignificant when compared with the total cost of the Assessee s assets worldwide (including satellites) which is USD 2,230,839,000 as per the audited accounts for the year 1998. Thus, SSMS is not contributing to the revenues and hence, no part of the amounts receivable is attributable to SSMS. 4.2 The Assessee has a LO in India, which has been set-up with the approval of the Reserve Bank of India ( RBI ). All the activities of the LO are in accordance with the RBI s approval. The LO undertakes liaison and coordination activities on behalf of the Assessee. There are no income generating activities carried out by the LO in India. The LO was enga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is undeniable that the LES is not owned by the assessee, an aspect which the DRP itself has noted in its order. Therefore, considering the matter in its entirety, we find it erroneous on the part of the Assessing Officer to hold that there exists a PE of the assessee in India. Thus, assessee succeeds on this aspect also. 19. Insofar as Ground of appeal no. 5 is concerned, the same relates to income computed by the Assessing Officer, which can be attributable to the PE of the assessee in India. Since we have upheld the primary stand of the assessee that there does not exit any PE of the assessee in India, the dispute in Ground of appeal no. 5 is rendered academic and is dismissed as infructuous. 20. Ground of appeal no. 6 relates to charging of interest under Section 234B of the Act, which is consequential in nature and does not require any specific adjudication. 21. By way of Ground of appeal no. 7, assessee has sought credit for the tax deducted at source of ₹ 24,89,984/- as per the provisions of Sec. 199 of the Act. On this aspect, the matter is restored to the file of the Assessing Officer to allow credit of the TDS as per law. 22. Ground of appeal no. 8 r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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