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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 ..... ocomm 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 law, Ld. CIT(A) has erred in not considering Explanation 5 and 6 to section 9( 1 )(vi) of the Act as being declaratory and clarificatory amendments explaining the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect 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 under the control of RJIPL and same was never given by RJIPL to the Appellant or to any person who are availing the Bandwidth Services from RJIPL. Further, relying on the various decisions of the Indian courts as cited by the Appellant, I am of the view that if the process i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 not assailed the observations of the CIT(A) that the payments made by the assessee to RJIPL cannot be held as FTS, therefore, we confine ourselves to the issue to the extent the same has been assailed by the revenue before us. As is discernible from the record, the assessee pursuant to the terms of the 'agreement' had only received standard facilities i.e bandwidth services from RJIPL. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess 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 of "royalty" as contemplated in the India-Singapore DTAA. Our aforesaid view is fortified by the order of the Hon'ble High Court of Bom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew 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 of "royalty" as contemplated in the India-Singapore DTAA. Our aforesaid view is fortified by the order of the Hon'ble High Court of Bombay in the case of The CIT v. Reliance Infocomm Ltd. (IT Appeal No. 1395 of 2016, dated 05.02.2019). The Hon'ble High Court in its aforesaid judgment had after referring to the judgments of the Hon'ble High Court of Delhi in the case of DIT v. New Skies Satellite BV [2016] 382 ITR 114/238 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic 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 a larger bench, or, in a fit case, hold that the judicial precedent, for the specific reasons set out, is not a binding judicial precedent. Let us also not lose sight of the fact that, as pointed out by the learned Departmental Representative, there is a direct decision of Hon'ble jurisdictional High Court in the case of CIT Vs Siemens Aktiongesellschaft [(2009) 310 ITR 320 (Bom)], upholding ambulatory approach to domestic law meaning of undefined terms under article 3(2), and, if the same approach is adopted in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the definition of "royalty' under article 13(3)(a) of the Indo Singapore tax treaty, and since the bandwidth services, on the facts of this case, are transmitted by satellite, cable, optic fibre or other similar technology, the bandwidth services constitutes 'royalty' for the purpose of article 13(3)(a). As for the reference to Vatika Township decision (supra), it is contended, as stated in so many words in the fourth ground of appeal, the insertion of Explanation 5 and 6, though by the virtue of Finance Act 2012, is only a "decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anch 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 right, has any relevance for the tax treaties or can "process" to be said to be a term employed in tax treaties? The answer is in negative. If at all the expression "process" has any relevance, it is in defining a treaty term i.e. "royalty". To look for statutory definitions of each word employed in a definition of the treaty term, and then construct the definition of treaty term as an assembly of the statutory definitions of all these words taken together will be too hyper technical an approach, and, in any case, beyond the mandate of article 3(2). That does not appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 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)]". 14. Even if we proceed on the basis that "process" can be treated as an undefined treaty term, which, in our humble understanding, it is not, and that Explanation 6 to Section 9(1)(vi) can have a role in assigning domestic law meaning to the expression "process", the next fundamental question, however, that we must consider is whether, on the facts and in the circumstances of this case, assignment of the domestic law meaning under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 one of the territories any term not otherwise defined in this agreement shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that territory (emphasis, by underlining, supplied by us now) relating to the taxes which are the subject matter of this agreement", and these words were slightly different than the words employed in the Indo Singapore tax treaty, that we are dealing with, which are as follows: "As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Hon'ble jurisdictional High Court were dealing with in Siemens Aktiongesellschaft's case (supra) and the crucial words "laws in force" on 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. 18. Of course, even without the words "meaning which it has under the laws of that State from time to time in force", one could still justify the ambulatory interpretation in the normal course of interpretation- though without the binding force of judicial precedents, but then, for the reasons we will set out now, there is a strong conceptual basis for not adopting the ambulatory interpretation on peculiar facts of this case. 19. While it is indeed true, as held by Hon'ble jurisdictional High Court in the case of Siemens Aktiongesellschaft's, that "the rule of referential incorporation or incorporation cannot be applied when we are dealing with a treaty (DTAA) between two sovereign nations" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idence, 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 jurisdiction post domestic law amendment. Undoubtedly, legislation is a sovereign function and it is indeed open to any jurisdiction to amend, even retrospectively, its domestic laws to bring new incomes to taxability in the source jurisdiction, but so far as the source jurisdiction taxability under the treaty provisions is concerned, legal amendments so as to influence the taxability even under the treaty situation, by the source jurisdictions unilaterally, are impermissible. That is a classic case of a subtle unilateral treaty override. While, in India, the expression 'treaty override' is often loosely used for the situations where the provisions of tax treaty prevails over any inconsistent provisions of domestic law, this approach seems to be at variance with the international pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 the VCLT provisions is to be adopted. 22. In view of these discussions, and bearing in mind entirety of the case, we find no legally sustainable merits in the grievances raised before us. The arguments raised before us do not lead us to a different conclusion either. Concurring with the coordinate bench decisions, therefore, we approve the conclusions arrived at by the learned CIT(A) and decline to inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 infrastructure such as maintenance of the Cable Landing Station, equipment used by RJIPL to provide the bandwidth services. These kind of routine O&M is required to ensure smooth and uninterrupted provision of the bandwidth services by RJIPL to the Appellant. In note ii to sl. no.l ("Bandwidth Services requirements, activation timelines and payment obligations) in Schedule I of the Agreement, it is mentioned that: "It is hereby clarified that Service Charges are remuneration for provision of Bandwidth Services by RJIPL. The obligation and liability for operation and maintenance is that of RJIPL." The O&M services being routine services, the payment made for the same will not constitute FTS as per Explanation 2 to section 9(l)(vii) of the Act. I also agree with the Appellant's contention that the payments / credits under the Agreement by the Appellant to RJIPL for the O&M services also cannot be regarded as FTS under Article 12 of the India - Singapore DTAA since the O&M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCIT v VSNL Broad Band Ltd [2013] 38 taxmann.com 287 (Mumbai ITAT) * Sandvik Australia Pty. Ltd. [2013] 31 taxmann.com 256 (Pune ITAT) * ACIT v M/s HCL Comnet Ltd (ITA no. 321/Dei/2012) (Delhi ITAT) * Solar Turbines International Company, In re [2012] 21 taxmann.com 548 (AAR) * ADIT v Rolls Royce Industrial Power (India) Ltd [2013] 33 taxmann.com 423 (Delhi ITAT) No technology is made available by RJIPL to the Appellant in the course of providing the O&M services. As mentioned in the Agreement, the obligation and liability for operation and maintenance is that of RJIPL. The Appellant is only interested in availing the bandwidth services and is not concerned or obliged in any manner with the infrastructure deployed by RJIPL. Thus, in view of the facts of the case and relying on the above decisions, I am of the view that the provision of O&M services by RJIPL to the Appellant cannot be regarded as Fees for Technical Services under the Indie - Singapore DTAA as there is no transfer of technical knowledge, experience, skill, know-how, or processes from RJIPL to the Appellant. In light of the above discussion. I hold that the payments made by the Appellant to RJIPL for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led out, article 12(4)(a) ceases to be applicable for this short reason alone. As regards the scope of article 12(4)(b) is concerned, it can indeed be invoked for the payments for fees of technical services but, even it is a condition precedent that the services should enable the person acquiring the services to apply technology contained therein, but then it is nobody's case that services rendered by RJ-S were such that the assessee was enabled to apply technology contained therein. The services were simply maintenance services which did not involve any transfer of technology. In response to our specific question, learned DR could not enlighten us about what was the nature of technology transferred under these arrangements. The amounts received by RJ-S could not, therefore, be taxed as 'fees for technical services either. There are at least two non-jurisdictional High Court decisions, namely Hon'ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd [(2012) 346 ITR 504 (Del)] and Hon'ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd [(2012) 346 ITR 467 (Kar)], in favour of the assessee, and there is no contrary decision by Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X
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