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TMI Blog2023 (1) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... applied by the assessee in its capacity as a service provider. The customers are not granted the use of or the right to use any process by the assessee during the course of providing various satellite-based telecommunication services which means that the customers are merely availing a service from the assessee and are not bearing any risk with respect to exploitation of the assessee s equipment involved in the provision of such service. Therefore, in our considered opinion, the amount received by the assessee from its customers in India as consideration for the provision of a service cannot be characterized as royalty for the use or right to use of a process. Heavy emphasis has been made on retrospective amendment brought by the Finance Act with special reference to Explanation 6 of section 9(1)(vi) of the Act.This issue has been well settled by the Hon'ble Jurisdictional High Court of Delhi in the case of New Skies Satellite 2016 (2) TMI 415 - DELHI HIGH COURT as held unless the said DTAAs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AA as they are not ancillary or subsidiary to disaster recovery uplinking and allied services. We are of the considered view that service must be related to application or enjoyment of the right, property, or information for which a payment in the nature of royalty is received and predominant purpose of the arrangement under which payment of service fee is received must be application or enjoyment of the right, property, or information in respect of which the royalty is received. Thus, both conditions must be cumulatively satisfied for services to be considered as ancillary or subsidiary to the payment of royalty. Therefore, in our considered view, receipts from disaster recovery playout services are not in the nature of FTS as they do not make available any technical knowledge, experience, skill, knowhow, or process or consist of the development and transfer of any technical plan or technical design. The facts of the case in hand clearly show that the assessee has provided Disaster Recovery Playout services to its customers through its facility in Singapore and the customers are not provided with any technology knowledge, experience, skill, know-how or processes as envisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case and the aforesaid services do not fall in the definition of royalty contained in Article 12(3) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by various courts including the jurisdictional High Court of Delhi. 2.2 That the insertion of Explanations 5 and 6 vide Finance Act 2012 (with retrospective effect from 1 June 1976) to section 9(l)(vi) of the Act does not override the definition of royalty contained in Article 12(3) of the Tax Treaty and hence, not applicable in interpreting the nature of above services under the provisions of the Tax Treaty. 2.3 That the Id. AO erred in facts and in law in relying on the commentary of Dr. Klaus Vogel to interpret the definition of Royalty under the Tax Treaty by invoking the provisions of Article 3(2) of the Tax Treaty without applying the decisions of the Hon ble Delhi High Court in the case of Director of Income Tax v New Skies Satellite BV (ITA 473,474,500/ 2012 and 244/2014, CM Apppl.9724/2014), and Hon ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA v Department of Revenue [2013] [354 ITR 316] which correctly holds tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of content received from the customer, as per their specifications, for playout and is immediately activate only in the eventuality that the main playout equipment becomes unavailable/ non-functional. 3.3 That the Id. AO has erred in holding that the provision of disaster recovery playout service is technical in nature as contained within Article 12(4) of India-Singapore Tax Treaty without appreciating the facts that such services are routine in nature, provided by various other services providers in the industry, and do not involve application of any specialized technical knowledge or skill. 3.4 That the Id. AO has erred in holding that the provision of disaster recovery playout service is consultancy / technical in nature as contained within Article 12(4) of India-Singapore Tax Treaty without appreciating the fact that no human intervention is involved in the actual rendition of playout service. The Id. AO has failed to appreciate that the Appellant does not have any right to mix, modify, edit, remove or delete the content or part thereof thereby, demonstrating that the Appellant is not involved in decision making in the rendition of disaster recovery playout serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hearing of the Appeal. 3. The representatives of both the sides were heard at length, the case records carefully perused and we have duly considered the relevant documentary evidences and judicial decisions relied upon in light of Rule 18(6) of ITAT Rules. 4. Briefly stated, the facts of the case are that the appellant is a Singapore based company and a tax resident of Singapore within the meaning of Article 4 of India-Singapore Double Taxation Avoidance Agreement (DTAA). The assessee holds a Tax Residency Certificate issued by Government of Singapore for the period 01.04.2016 to 31.03.2017. 5. The primary business of the assessee is to provide broadcasters with state-of-art media technology solutions. The assessee offers a wide spectrum of satellite based telecommunication services to media and entertainment businesses under the license from Info- Communications Development Authority of Singapore. 6. The assessee does not have a Permanent Establishment (PE) and/or Business connection in India in the year under consideration and is eligible for beneficial provisions of India-Singapore DTAA. 7. During the course of scrutiny assessment proceedings, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty has been defined and further reference was made to Article 12(4) of India Singapore DTAA where Fees for Technical Services has been defined. 14. Submissions of the assessee were dismissed by the Assessing Officer who was of the firm belief that the assessee has received considerations from India for its activities relating to uplinking services and playout services. Referring to Explanation 2 to section 9(1)(vi) of the Act, the Assessing Officer was confident that the impugned transaction fall within the four walls of Royalty. 15. The Assessing Officer further observed that with retrospective amendment vide Finance Act, 2012, more clarity was provided in relation to certain terms which were not defined under the DTAA, and in particular, referring to Explanation 6 to section 9(1)(vi) of the Act, it was emphasized by the Assessing Officer that for 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was the sole bearer of the risks in relation to the said equipment. 24. In our considered opinion, the term process can be understood as a sequence of interdependent and linked procedures or actions consuming resources to convert inputs into outputs. Various tangible equipment and resources may be employed in executing a process but 'process' per se, just like a formula or design, is intangible. 25. In our understanding, the term 'process' as contemplated under the definition of royalty has been rather been used in the context of' know-how' and intellectual property. We are of the considered view that Royalty in relation to use of a process envisages that the payer must use the process on its own and bear the risk of its exploitation. However, in the case in hand, If the process is used by the service provider himself and he bears the risk of exploitation or liabilities for the use, then as the service provider makes own entrepreneurial use of the process, therefore, income cannot be characterized as royalty. 26. Considering the facts of the case in totality, we are of the considered view that the assessee provides services to its cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital 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 DTAAs and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both DTAAs and sub clause (iii) to Explanation 2 to 9(1)(vi). Article 12(3), Indo Thai Double Tax 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. (emphasis supplied) Article 12(4), Indo Netherlands Double Tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up for construction. By this section whoever manufactures for sale, sells, stocks or exhibits for sale or distributes a drug without a license is liable for punishment. In holding that mere stocking shall not amount to an offence under the section, the Supreme Court pointed out the presence of after manufactures for sale and sells and the absence of any comma after stocks was indicative of the fact stocks was to be read along with for sale and not in a manner so as to be divorced from it, an interpretation which would have been sound had there been a comma after the word stocks . It was therefore held that only stocking for the purpose of sale would amount to an offence but not mere stocking. 57. However, the question, which then arises, is as follows. How is the court to decide whether a provision is carefully punctuated or not? The test- to decide whether a statute is carefully (read consciously) punctuated or not- would be to see what the consequence would be had the section been 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 eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir customers (including broadcasting and telecommunication enterprises) frequently enter into transponder leasing agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical transponder leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information, that is to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant 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 transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in Section 9(1)(vi), for better understanding all these very terms, OECD commentary can always be relied upon. The Apex Court has emphasized so in number of judgments clearly holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income Tax Act.... 78. There are judgments of other High Courts also to the same effect. (a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co., [139 ITR 806 (Guj.)] at Pages 820-822. (b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] at pages 156-157. (c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521] at pages 527 538-539. 59. On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nications Co. Ltd. Vs. DIT, reported in (2011) 332 ITR 340. It was the case in which the assessee a non-resident was engaged in satellite communication, having control of satellites. The assessee would provide use of transponder facility on satellite to the television companies outside India, which in turn would be routed to the operators in India, who would pass them on to the customers. The question was whether the payments made to the non-resident were in the nature of royalty and therefore come within the scope of section 9(1) of the Income Tax Act, 1961 ('the Act' for short). The Court by a detailed judgment held that the payments were not in the nature of royalty charges. The Court made a distinction between transfer of rights in respect of property and transfer of rights in the property. 4. Later on similar issue once again came before Delhi High Court in the case of Directorate of Income-tax Vs. New 4/7 06-ITXA- 1487-18.odt Skies Satellite BV, reported in (2016) 382 ITR 114. The Court followed the earlier decision in case of Asia Satellite Telecommunication (supra) and dismissed the revenue's Appeal. It was held that the explanations added below section 9( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust of the reroute was limited to the third step and the argument was that the relaying of the programmes in India amounted to the operations carried out in India. That argument was not sustainable. Merely because the footprint area included India and the ultimate consumers/viewers were watching the programmes in India, even when they were uplinked and relayed outside India, would not mean that the assessee was carrying out its business operations in India. The Tribunal had rightly emphasized on the expressions 'operations' and 'carried out in India' occurring in the Explanation (a ) to hold that these expressions signify that it was necessary to establish that any part of the assessee's operations was being carried out in India. No machinery or computer, etc., was installed by the assessee in India through which the programmes were reaching India. The process of amplifying and relaying the programmes was performed within the satellite which was not situated in the Indian airspace and even the Tracking, Telemetering and Control (TTCj operations were also performed outside India in Hongkong. No man, material or machinery or any combination thereof was used by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 183 ITR I 49 Taxman 87. the Supra'-. Court held that an Explanation, generally speaking, is intended to explain the meaning of certain phrases an, expressions contained in the statutory provisions. There is no general theory as to the effect and intendment of an Explanation, except that the purpose and intendment are determined by its own words. An Explanation depending upon its own language, might supply or take away something from the contents of a provision It also true that an Explanation may be introduced by way of an abundant caution in order to clear any menu cobwebs surrounding the meaning of the statutory provision spun by interpretative errors and to place who the Legislature considers to be true meaning, beyond any controversy or doubt. In view of the decision of Supreme Court in Keshavji Ravji Co.'s case /supra), the Explanation 2 has to be read as part and parcel section 9(1)(Vi). From a joint reading of the Explanation to section 9 inserted with effect from 1-6-1976 by the Finance A c 2007 which has been again substituted by the Finance Act, 2010 with retrospective effect from 1-6-1976, it . clear that income of a non-resident shall be deemed to accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess while defining the ambit and scope of the term royalty appearing in the Explanation 2 to clause (vi) of section 9(1). Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, rtc. Thus, what this clause envisages is the transfer of rights in respect of property and not transfer of right : the property . The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved: o : the right to use has been granted. Ownership denotes the relationship between a person and an obp. forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in re~ being good against the entire world and not merely against a specific person and such rights a . indeterminate in duration and residuary in character When the rights in respect of a property are transfer. and not the rights in respect of property are transferred and not the rights in the property there is no transfer of the rights in rem which may be good against the world but not against the transferor . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport of various systems and components of the satellite, including in particular the following : (a) Electrical Power Generation by solar arrays and storage battery of the satellite, which is common to and supports multiple transponders on board the satellite. (b) Common input antenna for receiving signals from the customers' ground stations, which are shared by multiple transponders. (c) Common output antenna for re-transmitting signals to the footprint area on earth, which are shared by multiple transponders. (A) Satellite positioning system, including position adjusting thrusters and the fuel storage and supply system therefore in the satellite. It is this positioning system which ensures that the location and the angh of the satellite is such that it receives input signals properly and re-transmits the same to the exact desired footprint area. Temperature control system in the satellite, i.e., heaters to ensure that the electronic component- do cease to operate in conditions of extreme cold, when the satellite is in the 'shadow' (f)Telemetry (racking and control system for the purpose of ensuring that all the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. It M as the payment made by the telecast operators situated abroad to the ' set also a non-resident, that was sought to be brought within the tax net. [Para 72] For the aforesaid reasons, it was difficult to accept such a farfetched reasoning with no causal connection. [Para 73] Even when one looked into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the assessee got a boost. The Organization of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India Article 12 of the said model DTAA contains a definition of 'royalty' which is in all material respects virtually the same as the definition of' royalty' contained in clause (iii) of (Explanation 2 to section 9(l)(xi). The assessee had relied upon the commentary issued by the OECD on the aforesaid model DTAA. [Para 74] The Tribunal had discarded the aforesaid commentary of the OECD only on the ground that it was not safe to rely upon the same. However, what was ignored was that when the technical terms used in the DTAA are the same as in section 9(1)(CI), for better und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of the service recipient and can be rendered only with the application of human mind and must involve human interface/ human intervention. 37. Similarly, technical service means a service requiring expertise in technology. Services are of a technical nature when special skills or knowledge related to technical field3 are required for provision of such services. 38. In our understanding, only those services which involve application of any expert technical education or skill can be classified as technical service and routine services, which do not require application of any technical knowledge or skill cannot be classified as technical service. Further, the term consultancy services involves giving of an advice or advisory services by a professional. With such understanding, we are of the considered view that disaster recovery playout services cannot be considered as being managerial in nature as such services do not involve any element of controlling, directing or administering the business of customers. 39. In our understanding of the facts, Playout service is nothing but the broadcasting and/ or transmission of channels by the assessee for its customers, wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person 27. On a careful reading of Article 12(4) of the tax treaty, it becomes very much clear that Article 12(4)(a) and 12(4)(c) are not applicable to the present case. Insofar as Article 12(4)(b) is concerned, it clearly de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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