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TMI Blog2019 (12) TMI 964X X X X Extracts X X X X X X X X Extracts X X X X ..... of royalty under section 9(1)(vi) of the Income Tax Act, 1961, is subject matter of consideration, as it specifically states that said definition is for the purpose of for the purpose of this clause [i.e. Section 9(i)(v)] . Additional test that is required to be put, while adopting the ambulatory interpretation in such a situation, is whether the amendment is domestic law ends up unsettling a conclusion arrived at under the pre domestic law amendment position i.e. reversing the judicial rulings in favour of the residence jurisdiction, and, if the answer is in the positive, the ambulatory interpretation is to be discarded because that approach would patronise, and legitimise, a unilateral treaty override, and the outcome of ambulatory interpretation in such a case will be incompatible with the fundamental principles of treaty interpretation under the Vienna Convention. The approach is justified on the first principles on the ground that when two approaches are possible for incorporation of domestic law provisions in the tax treaties and one of these approaches is compatible with Article 26 of the VCLT while the other is incompatible with the same, the approach compatible with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that tax was not required to be deducted at source on the payment made by the assessee to Reliance JioInfocomm Pte Limited, Singapore (RJIPL) for availing bandwidth services as it did not amount to income of the payee by way of royalty u/s 9(1)(vi) of the IT Act, 1961 read with Article 12 of India-Singapore DTAA? 2. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that in absence of a definition of the terms 'use of or right to use' and 'process' in Article 12 of the India-Singapore DTAA in relation to royalty, Article 3(2) of the said DTAA allows for taking recourse to the meaning contained in the domestic law of the State applying the Treaty (that is, India)? 3. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not considering Explanation 5 and 6 to section 9(1)(vi) of the Act in relation to payment made by the assessee to RJIPL Singapore for bandwidth services in light of direct mandate provided by Article 3(2) of the India-Singapore DTAA? 4. Whether on the facts and circumstances of the case and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Inland Revenue Service of Singapore, a declaration to the effect that RJ-S does not have a permanent establishment (PE) in India, a copy of the agreement entered into by the assessee with RJ-S, and made elaborate submissions to the effect that these payments cannot be brought to tax in India, either in terms of the provisions of the Income Tax Act, 1961 or even in terms of the provisions of Indo Singapore tax treaty. Upholding the plea of the assessee, learned CIT(A) observed, inter alia, as follows: The Appellant has also made submissions that the payments to RJIPL for Bandwidth Services should not be considered as Royalty under the Act as well as under the India -Singapore DTAA. It is noted that based on the terms of the Agreements pointed out by the Appellant and as confirmed in the detailed submissions filed before me, the Appellant has only received an access to service and not any access to any equipment of RJIPL deployed by it for provision of such services nor any access to any process which help in providing such Bandwidth Services. All infrastructure and process required for provision of Bandwidth Services was always used and und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Fees for Technical Services or Royalty either under the Act or the India- Singapore DTAA. Further, in absence of RJPL s business connection or a PE in India, the business profits will not be taxable in India. 5. The Assessing Officer is aggrieved by the relief so granted by the learned CIT(A) and is in appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. A coordinate bench of this Tribunal, while dealing with the same issue in assessee s own case for the assessment year 2016-17 and in the judgment reported as DCIT Vs Reliance Jio Infocomm Ltd [(2019) 73 ITR (T) 194 (Mum)] , has, speaking through one of us (i.e. the Judicial Member), observed, inter alia, as follows: .We find that our indulgence in the present appeal has been sought by the revenue to adjudicate as to whether the CIT(A) is correct in concluding that the amount paid by the assessee for availing bandwidth services to RJIPL did not constitute royalty and was its business profits . Admittedly, as the revenue has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as always used and under the control of RJIPL, and the same was never given either to the assessee or to any other person availing the said services. We are persuaded to subscribe to the observations of the CIT(A) that as the process involved to provide the bandwidth services was not a secret i.e IPR in the process was not owned/registered in the name of RJIPL, but was a standard commercial process that was followed by the industry players, therefore, the same could not be classified as a secret process which would have been required for charactering the aforesaid payment made by the assessee to RJIPL as royalty under the India-Singapore DTAA. We are further in agreement with the view taken by the CIT(A) that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) Industrial, commercial or scientific equipment, nor towards use of (or for obtaining right to use) any secret formula or process, therefore, the same could not be classified as payment of royalty by the assessee. Insofar the ld. D.R had tried to press into service Explanation 6 to Sec. 9(1)(vi), in order to drive home his contention that the payment made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a secret i.e IPR in the process was not owned/registered in the name of RJIPL, but was a standard commercial process that was followed by the industry players, therefore, the same could not be classified as a secret process which would have been required for charactering the aforesaid payment made by the assessee to RJIPL as royalty under the India- Singapore DTAA. We are further in agreement with the view taken by the CIT(A) that as the amount paid by the assessee to RJIPL was neither towards use of (or for obtaining right to use) Industrial, commercial or scientific equipment, nor towards use of (or for obtaining right to use) any secret formula or process, therefore, the same could not be classified as payment of royalty by the assessee. Insofar the ld. D.R had tried to press into service Explanation 6 to Sec. 9(1)(vi), in order to drive home his contention that the payment made by the assessee to RJIPL for availing the bandwidth services would fall within the sweep of royalty is concerned, we are unable to persuade ourselves to accept the same. In our considered view, the amendment in Sec. 9(1)(vi) will not have any bearing on the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o to the root of matter and conclusively uphold the stand of the Assessing Officer, are not dealt with in the judicial precedents relied upon. As we have noted earlier as well, and as evident from the specific grounds of appeal, the specific plea taken in this appeal is that the Explanation 5 and 6 to Section 9(1)(vi) must hold the field, in the context of interpretation of Article 12 of the Indo Singapore tax treaty so far connotations of undefined expressions therein are concerned, in view of the specific provisions of article 3(2) of Indo Singapore tax treaty itself and in the light of, as the grounds of appeal point out, Hon ble Supreme Court s judgment in the case of Vatika Township Pvt Ltd (supra). 10. It is only in exceptional cases that there is an occasion to deviate from the decisions of the coordinate benches, but that does not mean that in the covered cases all doors are shut on the parties. When a coordinate bench judgment does not appeal to another coordinate bench, or when the coordinate bench discovers that the judicial precedent is rendered per incurium, it could indeed be open to the coordinate bench to refer the matter for the consideration of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to which the Agreement applies , the domestic law meaning of the expression process , which is set out in Explanation 6 to Section 9(1)(vii), must hold the filed. Explanation 6 to Section 9(1)(vii), which was inserted vide the Finance Act 2012 with retrospective effect from 1st June 1976, provides that (f)or the removal of doubts, it is hereby clarified that the expression process includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret . In plain words, going by the complex web of this line of argument, thus, in the absence of any specific definition of process in the Indo Singapore tax treaty, the domestic law meaning of this expression must law prevail under article 3(2), and, going by the domestic law meaning under Explanation 6 to Section 9(1)(vii), any transmission by satellite (including (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret, is covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of context requiring that the domestic law meaning is to be discarded. 12. It s important to note that the provisions of Article 3(2) come into play for domestic law meaning of any term not defined (emphasis, by underlining, supplied by us) in the tax treaty. To invoke the provisions of Article 3(2), the first thing to be seen is whether the undefined expression can be said to be a treaty term. The expression term is defined as a word or phrase used to describe a thing or to express a concept, especially in a particular kind of language or branch of study . A term is thus a word that has meaning and refers to objects, ideas, events or a state of affair. A term is thus, in addition to being a word, some kind of a point of reference, whereas a word is only a constituent of language. As a corollary to these discussions, Article 3(2) will come into play only in respect of the undefined treaty terms, which are in the nature of reference points and which have some peculiar significance as a term employed in the treaty, and not all the undefined words and expressions used in a treaty. To put a question to ourselves, does the expression process , in its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process is thus not a standalone definition which can be imported in treaty under article 3(2). 13. The domestic law meaning under article 3(2) is relevant only when the treaty term itself is undefined, as noted by Hon ble Delhi High Court in the case of DIT Vs New Skies Satellite BV [(2016) 328 ITR 114 (Del)] . When the expression royalty is a defined expression under the applicable tax treaty, there cannot be any occasion to invoke article 3(2) for further dissecting the issue and explore the domestic law meaning of each expression used in this definition for coming at the conclusions about connotations of royalty. It cannot, therefore, be open to invoke article 3(2) to import domestic law meaning, even partly, when the treaty term has received a definition under the treaty. It is for this reason that Explanation 6 to Section 9(1)(vi), in our humble understanding, has no role, under article 3(2) of the treaty, in explaining the expression process , in the context of defining royalty under the Indo Singaporean tax treaty. This statutory provision, under the domestic law, is relevant only when the definition of royalty under section 9(1)(vi) of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ens Aktiongesellschaft [(2009) 310 ITR 320 (Bom)] had an occasion to consider the question whether the domestic law meaning to be supplied to a treaty provision should be the meaning as prevailing at the point of time when agreement was entered into or as prevailing at the point of time when taxes are levied, i.e. whether such an interpretation should be static interpretation or ambulatory interpretation. Rejecting the plea of the assessee seeking static interpretation, Hon ble High Court, having noted the argument against the assessee that considering article II(2), the expression laws in force [emphasis, by underlining, supplied by us now] as contained in DTAA, the ambulatory interpretation will have to be accepted has held that Considering the express language of article II(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as was applicable or as defined when the DTAA was entered into . Interestingly, the words employed in Article II(2) of the old Indo German tax treaty, which is what Their Lordships were dealing with, were to the effect that In the application of the provisions of this agreement in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from time to time in force (Emphasis, by underlining, supplied by us) relating to the taxes to which this Agreement applies . We are not really concerned with this tax treaty at present and we must not, therefore, get into the academic delights of taking a call on what the legal position will be in such a case, in case one is to proceed on the basis that the expression process is a treaty term and the article 3(2) can be invoked in respect of the same. 17. So far as our purposes are concerned, it is sufficient to take note of the fact that the provisions of Article 3(2) of Indo Singaporean tax treaty are differently worded vis- vis the old Indo German tax treaty that Hon ble jurisdictional High Court were dealing with in Siemens Aktiongesellschaft s case (supra) and the crucial words laws in force o n which so much emphasis was placed in judicial analysis by Hon ble jurisdictional High Court do not find place in this treaty. Strictly speaking, therefore, the judicial sanction for the theory of ambulatory interpretation, for the purpose of article 3(2), does not, therefore, necessarily extend to Indo Singaporean tax treaty that we are concerned with. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 9(1)(vi) to clarify that the term process includes and shall be deemed to have always included transmission by satellite (including uplinking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret . 21. Let us appreciate the nature of development, from the treaty perspective, in case one is to hold that the retrospective amendments defining the expression process would be equally applicable for definition of royalties under the tax treaty. Thus viewed, situation could be like this. There are judicial rulings which decide something in favour of the residence jurisdiction, and the source jurisdiction is not happy with that outcome, and it s a coincidence, coincidence if it is, that the source jurisdiction changes the domestic law in a way that, once that amended domestic law is applied in the context of article 3(2), a different outcome to the same treaty provision, which favours the source jurisdiction, is possible. In effect, thus, what was not taxable in the source jurisdiction in pre domestic law amendment situation becomes taxable in source jurisdictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vention on the Law of Treaties, 1969 ( VCLT ) is universally accepted as authoritatively laying down the principles governing the law of treaties . Even though India is not a signatory to the Vienna Convention, Hon ble Supreme Court has referred to the same time and again and, in the case of Ram Jethmalani Vs Union of India [(2011) 339 ITR 107 (SC)] , observed that it contains many principles of customary international law and the rules set out therein provides a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also . In our humble understanding, therefore, the additional test that is required to be put, while adopting the ambulatory interpretation in such a situation, is whether the amendment is domestic law ends up unsettling a conclusion arrived at under the pre domestic law amendment position i.e. reversing the judicial rulings in favour of the residence jurisdiction, and, if the answer is in the positive, the ambulatory interpretation is to be discarded because that approach would patronise, and legitimise, a unilateral treaty override, and the outcome of ambulatory interpretation in such a case will be incompati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has, speaking through one of us (i.e., the Vice President), inter alia , observed as follows: 25. As far as this grievance of the appellant Assessing Officer is concerned, it is sufficient to take note of the fact that the assessee tax made payments for operations and maintenance services in respect of bandwidth services infrastructure, such as cable landing stations and equipment used to avail the bandwidth services. These payments are made by the assessee to its Singapore affiliate RJ-S. The short case of the assessee is that under Indo Singapore tax treaty, an amount paid as fees for technical services can be taxed in the source jurisdiction only when it satisfies the make available condition i.e. when the recipient of services was enabled to apply technology contained therein, and that since it s a case of repairs and maintenance simplictor, there cannot be any occasion of transfer of technology in the course of rendition of these maintenance services. Learned CIT(A) has upheld this plea, and observed as follows: B) Non-taxability of payments for O M services The O M services includes routine and regular upkeep of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose a transaction of the technical knowledge, experience, skills, etc.. from the service provider to the service recipient is necessary. Some sort of durability or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the service recipient. In other words, the technical knowledge experience, skill, etc.. must remain with the service recipient even after the rendering of the services has come to an end. In contrast to Article- 12(4)(b) of the India-U.S. tax treaty, Article-12(4)(b) of India-Singapore tax treaty has made it more specific by providing that technical knowledge, experience, skill, knowhow or process, would not amount to fees for technical service unless it enables the person acquiring the service to apply the technology therein. I also agree with all the other decisions relied on by the Appellant which explains the concept of make available . Further, I also agree with the below decisions relied on by the Appellant, wherein the Courts have held that repairs and maintenance services do not make available technical knowledge, skills etc and therefore are not FTS under the DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her find that so far as taxability under Article 12, i.e. with respect to 'Royalties and fees for technical services' is concerned, we find that Article 12(4) provides that, The term fees for technical services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. So far as 12(4)(a) is concerned, that comes into play only when the services are incidental to enjoyment of right, property or information held to b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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