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TMI Blog2023 (8) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... te news gathering services as royalty income, both, under section 9(1)(vi) of the Act as well as under Article 12(3) of India- Singapore Double Taxation Avoidance Agreement (DTAA). 4. Briefly, the facts relating to this issue are, the assessee is a non-resident corporate entity and a tax resident of Republic of Singapore. As stated, principal activities of the assessee are that of satellite telecommunication network operations and wholesale of electronic and telecommunication equipments and parts. In course of assessment proceedings, the Assessing Officer noticed that the assessee had receipts from disaster recovery up-linking services, disaster recovery play-out services, down-linking and distribution services, digital satellite news gathering services etc. However, the assessee has not offered them to tax in India. Being of the view that the receipts from such services are in the nature of royalty as defined under section 9(1)(vi) of the Act and Article 12(3) of India-Singapore DTAA, the Assessing Officer issued a show cause notice to the assessee to explain as to why such receipts should not be brought to tax in India as royalty income. Though, the assessee objected to the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 customers using its equipment outside India. Various satellite based telecommunication services provided by the assessee to its customers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hment. 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 evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omer 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 transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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(1) of the Act were not merely clarificatory in nature. Respectfully agreeing with the said decisions of the Delhi High Court, this question is not considered" 32. The Hon'ble High Court of Delhi in the case of Asia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 assessee in the Indian territory. There was no contract or agreement between the assessee with the 0(able operators or with the viewers for reception of the signals in India. [Para 33] Thus, section 9(I)(i) was not attracted in the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation, 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 accrue or arise in India under clause (x) or clause (x or clause /vii ), irrespective of the fact whether the non-resident has a residence or a place of business * business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 . In that case, the transferee does not have a right which are indeterminate in duration and residuary in character Lump In the instant case, the assessee was deriving income from the lease of the transponder capacity of its satellites. It was amplifying and relaying the sign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (c) 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 mentioned systems are monitored and their operations are duly controlled and appropriate adjustments are made, as and when required. | Para 65] Each transponder requires continuous and sustained support of each of the above mentioned systems of the satellite, without which it simply cannot function. Consequently, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point 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)(x\). 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)(C\), for better understanding all these very terms, the OECD commentary can always be relied upon. The Apex Court has emphasized so in a number of judgments, clearly holding that the well- settled internationally accepted meaning and interpretation placed on identical or similar terms employed in the various DTAAs should be followed by the Courts in India when it comes to construi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the directions of learned DRP on such issue in assessee's case for assessment year 2017-18. It is observed, while deciding assessee's appeal for assessment year 2017-18, the Tribunal in the order referred to above has held as under : 34. Coming to the receipts from Disaster Recovery Playout Services being treated as FTS, we find that Article 12(4) of the DTAA defines FTS as "payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature including provision of such services through technical or other personnel, if such services: (i) 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; (ii) making available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (iii) 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. 35. We find that the terms 'managerial', 'technical' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. 42. 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, know-how, or process or consist of the development and transfer of any technical plan or technical design. 43. The Hon'ble Karnataka High Court in the case of De Beers India Pvt Ltd 346 ITR 467 and the Hon'ble Delhi High Court in the case of Guy Carpenter & Co. 346 ITR 504 have held that mere rendition of services does not fall within the term 'make available" unless the recipient of services is enabled and empowered to make use of technical knowledge by itself in its business or for its own benefit without recourse 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apply the technology contained therein independent of the service provider. In other words, the service recipient must be in a position to apply the technical knowledge, experience, skill, knowhow, etc. without requiring the permission or presence of the service provider. 28. In the facts of the present case, there is nothing on record to suggest that Atos India can use any technical knowledge, experience, skill, know-how or process, etc. independently on its own without requiring the involvement of the assessee. Therefore, in our considered opinion, the tests and conditions of Article 12(4)(b) are not satisfied. That being the case, the payment received by the assessee from various projects related services would not qualify as FTS either. That being the case, the payment received by the assessee has to be treated as business profits; hence, would not be taxable in absence of a permanent establishment in India. 45. In light of the above decisions, 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, exper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of company's or sub-contractors' personnel during the entire duration. He observed, the assessee had carried out installation activities at two different sites of Accenture Solutions Pvt. Ltd. For the first activity, installation began on 14th June, 2017 and ended on 11th November, 2017. Whereas, for the second activity, installation began on 9th November, 2018 and ended on 2nd February, 2018. Thus, cumulatively, the activities of supervisory/installation work began on 14.06.2017 and ended on 02.02.2018, which worked out to 233 days. 16. Thus, according to the Assessing Officer, the activities of the assessee in India exceeded the threshold limit of 183 days as per Article 5(3) and 5(4) of India-Singapore DTAA. Hence, the assessee had a PE in India. Justifying the aforesaid conclusion, the Assessing Officer observed that for all practical purposes, the two projects carried out for Accenture Solutions Pvt. Ltd. in India have to be considered together, as both the projects are related to each other and were carried out for the same customer at two different locations and secondly, the nature of the projects are similar. While coming to such conclusion, the Assessing Officer observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... client and transported to India. Client is responsible for all custom clearance procedures once the goods reach India. He submitted, in case any of the equipments require installation, employees of the OEM visit the respective project sites to provide the services. However, during the entire exercise, no employee of the assessee assists or supervises the installation of the equipment. Thus, he submitted, the contract with Accenture Solutions Pvt. Ltd. is one of supply of equipments only and installation services, if any, are merely incidental to the said contract. Hence, it cannot be said that the project sites at Bangalore and Gurugram are installation projects thereby constituting assessee's PE in India. He submitted, a reading of Article 5(3) of the treaty demonstrate that it can only be invoked if the building site, construction, installation or assembly project belongs to the assessee itself. Whereas, the project sites are of Accenture Solutions Pvt. Ltd.. Hence, Article 5(3) cannot apply. 19. As regards applicability of Article 5(4) of the treaty, learned counsel submitted, the conditions are, an enterprise must carry on supervisory activities in another State for a period o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment supplied under the two purchase orders are different. The nature and purpose of two projects were completely different from each other, despite commonality in customer and few sub-contractors. Therefore, the two projects must be treated separately, in which event, the threshold limit of 183 days would not be fulfilled. 22. Without prejudice, he submitted, the profits from whole operation, both supply of equipment and installation and commissioning services, cannot be attributed to the alleged PE. Rather, only such income/profit can be attributed to the PE, which has been derived if the PE had carried out such activity as a separate, distinct and independent legal entity. In other words, he submitted, only such part of income, which is derived through activities of PE can be attributed to PE. He submitted, once the title over the equipments and risk were transferred outside India, the income from supply of equipment cannot be taxed in India. In this context, he relied upon the decision of Hon'ble Supreme Court in Ishikawajma-Harima Heavy Industries Ltd vs. DIT (2007) 158 Taxman 259 (SC). Proceeding further, he submitted, even assuming that there is a installation PE, it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturer (OEM) for supplying the equipment. As per the procedure followed, the assessee obtains quotation of the specific equipment from the OEM and shares the same with Accenture Solutions Pvt. Ltd. After the equipment is approved, the assessee undertakes the supply of equipment manufactured outside India. Undisputedly, in so far as the money received for supply of equipment is concerned, the assessee has claimed that manufacture and sale of the equipment having taken place outside India and title over the goods having been passed outside India and payments, having been received outside India, such receipts cannot be taxed in India. In so far as the receipts for installation and commissioning services are concerned, the assessee has claimed that since the duration of project is less than 183 days, there is no PE of the assessee in India. Whereas, the Assessing Officer has held that the assessee has a PE both in terms of Article 5(3) and Article 5(4) of the treaty. 25. In this backdrop, we have to examine whether the conditions of Article 5(3) and 5(4) of the treaty are satisfied. For ease of reference, we reproduce Article 5(3) and 5(4) of the DTAA herein below : Article 5: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipment DDC5 Broadcast Infrabuild Unit. The second purchase order for Bangaluru project was issued on relating to supply of equipment for project system integration. It is axiomatic that once the purchase order is placed, the manufacturing process of the equipment as per specific requirement of Accenture Solutions Pvt. Ltd. would kick in. As is evident, the assessee itself is not the manufacturer of the equipment but has subcontracted the manufacturing of the required equipment to the OEM identified by Accenture Solutions Pvt. Ltd. In other words, the assessee is merely supplier of the equipment manufactured by OEM. Therefore, until the manufacturing of the specified equipments are complete and have been delivered to the customer, i.e., Accenture Solutions Pvt. Ltd., the installation/commissioning services could not have commenced. 28. It is also a fact that the work of installation and commissioning services was also sub-contracted to the OEM and the employees of the OEM visited the respective project sites of Accenture Solutions Pvt. Ltd. in India for providing installation and commissioning services. In that view of the matter, the first date of raising of invoice for supply of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India- USA DTAAs, where, treaty provisions explicitly provide that for determination of existence of PE, all projects in one contracting State have to be construed as single project unlike India-Netherlands DTAA where each site has to be seen as a separate project. The reasoning of the Assessing Officer is that in absence of such express provision like India-Netherlands DTAA in India-Singapore DTAA, all project sites have to be treated as one. 30. Unfortunately, we are unable to agree with the aforesaid reasoning of the Assessing Officer and learned DRP. A reading of Article 5(3) and 5(4) indicate that the language used refers to 'a' building site or construction, installation or assembly project continuing for a period of more than 183 days in any fiscal years. 'A' denotes singular form. On a careful reading of Article 5(3) and 5(4) of the treaty we do not find use of any words which can either implicitly or explicitly bring the provisions at par with similar provisions in India- Australia, India-Italy or India-USA treaties. Thus, in absence of any such express provision in India-Singapore treaty, words used in other treaties cannot be imported. Rather, we do not find any materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds are identical to the issue raised in ground Nos. 3 & 4 of ITA No. 1831/Del/2022 decided in the earlier part of the order. Following our decision therein, we delete the addition made by the Assessing Officer. 37. In ground Nos. 5 to 7, the assessee has challenged the taxability of receipts from provision of disaster recovery up-linking services and disaster recovery play-out services as FTS income under section 9(1)(vii) of the Act and Article 12(4) of India-Singapore DTAA. 38. The issue raised in these grounds is identical to the issue raised in ground Nos. 5 to 7 of ITA No. 1831/Del/2022 decided by us in earlier part of the order. Following our decision therein, we delete the addition made by the Assessing Officer. 39. In ground No. 8, the assessee has challenged taxability of receipts from internet bandwidth charges as royalty income. 40. Briefly, the facts are, in course of assessment proceedings, the Assessing Officer noticed that though the assessee had received an amount of Rs.15,66,888/- towards internet bandwidth charges, however, such income was not offered to tax in India. Being of the view that the receipts are in the nature of equipment royalty as scientific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew, we have found support from the ratio laid down in the decisions cited by learned Sr. Counsel for the assessee. Thus, for the aforesaid reasons, we hold that the receipts from internet bandwidth charges cannot be treated as royalty income under Article 12(3) of India-Singapore DTAA. Accordingly, we direct the Assessing Officer to delete the addition. 44. In ground Nos. 9 to 13, the assessee has challenged the addition of Rs. 18,99,624/-, being business profits of the assessee attributable to the alleged permanent establishment (PE) of the assessee in India. 45. The issue raised in these grounds are identical to the issues involved in ground Nos. 8 to 12 of ITA No. 1831/Del/2022 decided by us in earlier part of the order. Therefore, our decision therein will apply mutatis mutandis in this appeal as well. 46. Further, we must observe, the assessee has demonstrated before us that in the year under consideration, no installation and commissioning services were provided in India and the assessee has only made sale of equipments to Indian customers. It is the case of the assessee that the installation revenue received during the year was for installation and commissioning services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n therein, we delete the addition. 57. In ground No. 11, the assessee has challenged the taxability of receipts from reimbursement of licence fee as royalty income. 58. Briefly, the facts are, in course of assessment proceedings, the Assessing Officer noticed that in the year under consideration, the assessee has received an amount of Rs.15,34,662/- towards reimbursement of license fee paid to Singapore Government. When called upon to explain why the amount should not be made taxable in India, the assessee replied that the receipt is in the nature of cost to cost reimbursement and do not contain any profit element. It was further submitted that expenses are incurred on account of payment of satellite communication station license fee to a department of Singapore government. The Assessing Officer, however, did not find merits in the submissions of the assessee and ultimately concluded that the receipts are in the nature of royalty both under section 9(1)(vi) as well under India-Singapore DTAA. Accordingly, he added it to the income of the assessee. Though, the assessee contested the addition before learned DRP, however, it was upheld. 59. We have considered rival submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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