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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 ..... nd bad in law, contrary to facts and circumstances of the case and unsustainable in law. 2. Based on the facts and circumstances of the case and in law, the Id. AO has erred in alleging that payments amounting to INR 6,26,29,403 received by the Appellant from Indian customers ('customers'/ 'service recipient'/ 'payer') for provision of disaster recovery up-linking services and various satellite based telecommunication services (Space Segment capacity services, Downlinking and Distribution services, Digital News Gathering services) as consideration for the use of or the right to use of an equipment and/ or use of a process is taxable as Royalty under section 9(l)(vi) of the Act and under Article 12(3) of the India Singapore Tax Treaty ('Tax Treaty') in contravention of the following well-established facts and legal positions: 2.1 That the Tax Treaty provisions apply in the Appellant's 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technical Services ('FTS') under section 9(l)(vii) of the Act and under Article 12(4) of the India-Singapore Tax Treaty ('Tax Treaty') in contravention of the following well-established facts and legal positions: 3.1 That the Tax Treaty provisions apply in the Appellant's case and the aforesaid services do not fall in the definition of FTS contained in Article 12(4) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by various courts. 3.2 That the Id. AO has erred in stating that the "disaster recovery playout services" is managerial in nature for holding it to be FTS under Article 12(4) of the Tax Treaty by wrongly assuming that any disaster recovery work involves high level of management control, supervision. The Id. AO has failed to appreciate that the above service involves scheduling 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers are not provided any technical knowledge, experience, skill, know-how or process, as envisaged under Article 12(4) of the India-Singapore Tax Treaty. 4. On the facts and in the circumstances of the case and in law, the Id. AO has erred in computing interest u/s 234B of the Act amounting to Rs. 80,21,300 being consequential in nature and resulting on account of additions made in the assessment order 5. On the facts and in the circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant for each of the additions made in the assessment order The grounds above are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute all or any of the aforesaid grounds of appeal at any time before or at the time of 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee in India, income is not chargeable to tax in India in accordance with Article 7 of the DTAA. 12. in so far a Disaster recovery-Playout Service is concerned, it was explained that Playout services encompasses provision of equipment, infrastructure and manpower to manage continuous playing of channel content based on minute to minute schedule. It was explained that for providing Disaster recovery Uplinking and Playout services, the uplinking and playout equipment installed at the teleport facility of the assessee at Singapore is kept preconfigured and in readiness. In the event that the main uplink and playout equipment becomes unavailable/ non-functional, the uplink at Singapore facility immediately gets activated. 13. In support of its submissions, specific reference to Article 12(3) of DTAA where 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. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly as per Article 12(2) @ 10%. 21. Objections were raised before the DRP but without any success. 22. We have given thoughtful consideration to the orders of the authorities below. The first quarrel is whether receipt from uplinking services construe royalty as per Article 12(3) of the DTAA. We find that as per Article 12(3) of DTAA, Royalty has been defined to include, inter alia, use or right to use of secret formula or process and use or right to use of industrial, commercial or scientific equipment. 23. In our understanding of facts, customers of the assessee were neither in possession of any equipment nor had any control over the equipment used by the assessee for providing uplinking and playout services to its customers. We find that while providing these services, the assessee 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 382 ITR 114. Relevant findings of the Hon'ble High Court read as under: "54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs 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, nonetheless. 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 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 te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction of a statute, Hindustan Construction Co 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 Textile51; Sama Alana Abdulla vs. State of Gujarat52; Mohd Shabbir vs. State of Maharashtra53; Lewis Pugh Evans Pugh vs. Ashutosh Sen54; Ashwini Kumar Ghose v. Arbinda Bose55; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.56. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra57 where Section 27 of the Drugs and Cosmetics Act, 1940 came 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 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA), the case of the appellant gets boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. 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(1) (vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under: '9.1 Satellite operators and their 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, etc.) to the payer of the royalty. The other, just as clearcut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer.' 77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground 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 shou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs." 31. Similar view was taken by the Hon'ble High Court of Judicature at Bombay in the case of NEO Sports Broadcast Pvt Ltd. 264 Taxmann.com 323. The relevant findings read as under: "3. We notice that an identical issue came up for consideration before Delhi High Court in case of Asia Satellite Telecommunications 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 therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of sub-section (1) of section 9. Under the agreement with TV channels, role attributed to the assessee could be paraphrased in the following steps : Programmes were uplinked by the TV channels (admittedly, not from India). ii) After receipt of the programmes at the satellite (at the locations not situated in the Indian airspace), those (tm)A ere amplified through a complicated process. iii) The programmes so amplified were relayed in the footprint area including India where the cable operators received the waves and passed them over to the Indian population. [Para 32] Accepted position was that the first two steps were not carried out in India and the entire thrust 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 &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, the Parliamentary history, the Parliamentary proceedings, state of law as it existed when the la was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the AL.' Therefore, need for these aids would arise only if some ambiguity is found in the definition of term 'royalty appearing in the aforesaid provision. (4) As per section 9(1)(Vi), the income by way of royalty payable by the Government or a resident or a nonresident shad be deemed to accrue or arise in India. The term 'royalty' has been defined in //^Explanation 2 to section 9(1)(vi). In the case o/ Keshavji Ravji & Co. v. C1T [I990j 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 cau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gativing reducing it. In case of difference between the provisions of the Act and the provisions of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced ~ an appellate authority or the Court. However, as provided by sub-section (2), the provisions of the Act u apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the. agreement, it is the basic law. i.e., the Income-tax Act which will govern the taxation of income. [Para 54] Keeping in view the aforesaid principles, one should embark upon the interpretative process 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement for lease of the transponder capacity and has not given any control over parts of the satellite/transponder, the provisions of clause (xI) would not apply. In the instant case also, the assessee had merely given access to a broadband available in a transponder which could be utilized for the purpose of transmitting the signals of the customers. [Para 60] It needs to be emphasized that a satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. The transponder is, in fact, an inseverable part of the satellite and cannot function without the continuous support 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 syst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, i.e.. persons watching TV in India were paying the amounts to the cable operators who, in turn, were paying the same to the TV channels, the flow of the fund was traced to India. That was a far-fetched ground to rope in the assessee in the taxation net. The Tribunal had glossed over an important fact that the money which was received from the cable operators by the telecast operators was treated as income by those telecast operators which had accrued in India and they had offered and paid tax. Thus, the income generated in India had been ■July subjected to tax in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udes any service that does not enable the person acquiring the service to apply the technology contained therein. 35. We find that the terms 'managerial', 'technical' and 'consultancy' appearing in the definition of 'fees for technical services' have not been specifically defined in the treaty and the Act. In our understanding, Managerial service signifies a service for management of affairs or services rendered in performing management functions. 36. It involves controlling, directing, managing or administrating the business 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to original service provider in future. 44. The co-ordinate bench in the case of Atos Information Technology, Singapore ITA Nos. 7144/MUM/17 and 5744/MUM/18 had the occasion to consider similar issue and held as under: "26. Having held so, now let us examine whether the payment received can be treated as FTS. Before we proceed to decide the issue, it is necessary to look at the definition of FEES FOR TECHNICAL SERVICES as per Article 12(4) of the India Singapore DTAA, which reads as under:- "4. 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 technica ..... X X X X Extracts X X X X X X X X Extracts X X X X
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