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TMI Blog2023 (10) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... Skies Satellite [(2016) 382 ITR 114 (Del)] and Asia Satellite Communication Co. Ltd. BV [(2011) 332 ITR 340 (Del)] held that the amounts received by the assessee company from providing satellite telecommunication services are not in the nature of royalty as per India UK DTAA. The ld. Counsel submits that the orders of the co-ordinate bench decision of the Mumbai Bench in the case of group company are placed at page Nos. 1 to 243 of the paper book. The ld. counsel for the assessee further inviting our attention to the DRP order page 68 and para 4.2.2 submits that the DRP confirmed the draft order of the Assessing Officer only for the reason that the Department did not accept the decisions of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd. (supra) and New Skies Satellite (supra) and SLPs have been filed against the said judgements in the Hon'ble Supreme Court. 3. On the other hand, the ld. DR strongly relied on the orders of the Assessing Officer/DRP. 4. Heard rival submissions perused the orders of the authorities below. On perusal of the draft assessment order it is noticed that the assessee derived income from transmitting of satellite signals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee has also placed its reliance on the favourable judgement of Mumbai ITAT in the case of its group entity Inmarsat Global Limited, UK. However, it ought to be noted here that the Department has not accepted the decision of the Hon'ble ITAT for A.Y 2000-01 to A.Y. 2005-06 and A.Y 2007-08 to 2012-13 and has filed appeal in Mumbai High Court wherever the Tax Effect is more than the prescribed monetary limit, in view of Circular No. 3 of 2018 dated 11.07.2018 read with F. No. 279/Misc142/2007 ITJ (Pt) dated 20.08.2018 and Circular 17 of 2019 dated 08/08/2019. 10. With regard to the applicability of Engineering Analysis judgement, it is pointed out that the case pertains to Royalty payment with respect to the Software services provided and not Satellite Communication In the software cases before the SC the revenue relied on reading of Explanation 2 of section 9(1)(vi) with Explanation 4 for taxability of the software provision as royalty. Since Explanation 4 of section 9(1)(vi) was retrospectively amended, therefore, the SC noted that such unilateral amendment to the Act cannot result in its automatic applicability to the reading of the treaty. The Hon'ble SC whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d solution to third-party customers, mainly in the maritime industry * Since Inmarsat does not have a PE in India, the above receipts from TCL were not offered to tax in India as per Article 7 read with Article 5 of the DTAA. * The learned AO has held that the payments received by Inmarsat are covered within the definition of 'Royalty' under of Section 9(1)(vi) of the Act under clause (c) * The learned AO has held that receipts of Inmarsat from Indian customers are 'royalty' under Explanation 2 to Section 9(1)(vi) of the Act, even without considering Explanation 6 to Section 9(1)(vi) of the Act * The learned AO has held that customers have exclusive right to use the satellite for uninterrupted services and thus, payment made by the customers to Inmarsat is for the use of, or the right to use of specific capacity of the transponder and the process * The learned AO has relied on the decision on Hon'ble Delhi ITAT in the case of Asia Satellite Telecommunication Co. Ltd. v. Deputy CIT (2003) (85 ITD 478) to contend that the issue relating to whether any process was used by the persons who have obtained transponder capacity from satellite companies is decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion as per objection no. 3, (in respect of not following the decision of jurisdictional Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (2011)(332 ITR 340) and New Skies Satellite BV (2016)(382 ITR 114) wherein it has been held that receipts from lease of transponder capacity are not in the nature of 'royalty' under the Act as well as under the Tax Treaty), is concerned, the AO has extensively discussed this issue after considering the assessee's reply at page no. 18. The AO has stated that it is pertinent to mention here that the decisions on which the assessee relied upon of Hon'ble High Court in case of Asia Satellite Telecommunications and New Skies Satellite BV were not accepted by the revenue and SLPs have been filed against the same in Hon'ble Supreme Court. It is also noteworthy that Asia Satellite withdrew from the appeal in Hon'ble Supreme court under the Direct Tax Vivad se Vishwas Scheme. Hence, it is learnt that the assessee's claim, in light of the above judicial pronouncements, was very much in the knowledge of the AO which cognizance was taken by the AO before the finalizing the draft order as per the prevail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y incorporated in United Kingdom and is also a tax resident of United Kingdom. The appellant is engaged in the business of providing telecommunication services and for Assessment Year 2007-08, it filed its return of income declaring NIL income, inter-alia, contending that its income was not taxable in India. So far as the income earned by the assessee in this year is concerned, the same stands on similar footing as in the past years, namely, from rendering of telecommunication services to Videsh Sanchar Nigam Ltd. (in short 'VSNL'), whose name has subsequently been changed to Tata Communication Ltd. (in short 'TCL'). The receipts from rendering of telecommunication services to TCL were claimed to be not taxable in India; however, the Assessing Officer has taxed the same as Royalty under the Act as well as in terms of the India- UK Double Taxation Avoidance Agreement (in short 'India-UK DTAA'). The stand of the assessee has been that its receipts from TCL are in the nature of 'business profits' covered by Article 7 of the India-UK DTAA and, in the absence of any PE in India, the same are not taxable in India. It was a common ground between the parties that the manner in which the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and either other users of similar equipment or users of the public telephone network. In each case, the communication passes via an Inmarsat satellite and is co-ordinated and connected by the LESO." 6. The Assessing Officer, however, took the stand, following the stand of the assessing authorities of the past years that the impugned receipts earned by the assessee from TCL are in the nature of 'Royalty'. We find that the DRP has also affirmed the decision of the Assessing Officer. 7. On this aspect of the controversy, it has been pointed out before us that the Tribunal vide its order in ITA Nos. 5102/Mum/2004 & others dated 14.07.2017 in the context of Assessment Years 2000-01 to 2005-06 has evaluated the rival stands and have disagreed with the stand of the Revenue that the nature of receipt was Royalty. At the time of hearing, the learned representative for the assessee has taken us through the detailed decision made by the Tribunal in its order dated 14.07.2017 (supra), whose relevant portion we are tempted to reproduce as under :- "10. We have heard the rival submissions and perused the material available on record. We find that the material facts of the present case ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 05.07.2016 in ITA No. 4678/Mum2007 for A.Y. 2003-04 to 2005-06. We have also noted that reliance placed by the learned CIT-DR on the decision of the Hon'ble Jurisdictional High Court in Siemens Aktiongeswellschaft (supra) supports its case is misplaced. Specific mention may be made to para 20 of the said decision. Reference therein has been made to a decision of the Canadian Court in the case of Her Majesty the Queen vs. Melford Development Inc. 82 DTC 6281 and the categoric observation on unilateral amendment by a nation which is party to the agreement leaves the issue in no doubt about the view favoured. Accordingly we quote here the decision of the Hon'ble Delhi High Court in DIT vs. New Skies Satellite BV cited supra to support the conclusion why the consistent orders of the ITAT on the issue are being followed: - "48. In Commissioner of Income Tax v. Seimens Aktiongessellschaft, [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that "The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is not to say that the Court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one under the DTAA, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the definition under the DTAA. In other words, the domestic law remains static for the purposes of the DTAA. The Court in Sanofi (supra), had also held similarly: "We are in agreement with the petitioners and in the light of our preceding analyses, discern no textual, grammatical or syntactic ambiguity in Article 14(5), warranting an interpretive recourse. In the circumstances, invoking provisions of Article 3(2) by an artificial insemination of ambiguity (to accommodate an expanded meaning to the DTAA provision), would be contrary to good faith interpretation. A further problematic of contriving an ambiguity to unwarrantedly invite application of domestic law of a contracting State would be that while India would interpret an undefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State's power to breach very much exists; Courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate legislation in accordance with Article 253 of the Constitution, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by the Parliament; it is an act of the Executive. Logically therefore, the Executive cannot employ an amendment within the domestic laws ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led. On a reading of the said decision we note that the reliance is misplaced. The issue for consideration before the Hon'ble Apex Court was on an entirely different set of facts and circumstances and an entirely different 14 Inmarsat Global Ltd. ITA No. 8544/M/2010 & 5 ors. issue was being considered. The said decisions were neither cited before the Court nor referred to by it nor considered in the said judgement. Accordingly on a reading of the decisions rendered on peculiar facts of the present case which we have brought out in detail in the earlier part of this order we find ourselves in agreement with the detailed finding and conclusion drawn by the Coordinate Benches and respectfully following the same conclude that the appeals of the assessee are to be allowed. For ready reference we extract from one of the decisions cited before us. We reproduce the relevant extract from the decision in the case of Alcatel Lucent USA Inc. being the most latest in point of time hereunder:- "5. We have heard the rival submissions and perused the material before us. We find that the basic issue to be decided is as to whether the payments received by the assessee from Reliance can be taxe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Siemens AG (supra) he submitted that, it may kind be borne in mind that: i) The question of law before the Hon'ble High Court was not that whether amendments in the Income-tax Act can be read into the DTAA or not; ii) In the said case, old DTAA (1960) between India and Germany was under consideration; iii) The said decision was rendered in 20008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act, 2007 doing with the requirement of PE for Royalty; iv) That amendments/Explanations in the Income tax Act are being sought to be read into DTAA by virtue of Article 3(12) of the modern treaties; v)Section 9(1)(vi) up to and including Explanation 2 are substantive provisions as inserted by Finance Act 1976 and thereafter, Explanation 3 to 6 are only clarificatory provisions inserted subsequently; and vi) It is not disputed by the revenue that the provisions of DTAA if beneficial to the assessee shall be preferred over the provisions of the Income-tax Act. He further submitted that, the Hon'ble Bombay High Court decision in the case of Siemens Aktiongesellschaft (supra) would reveal that, i) Nowhere in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue of disallowance of Data Processing Cost has dealt and decided this issue in the following manner:- "15. Now, coming to the main issue i.e., whether the reimbursement of data processing cost of Rs. 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired banking application software named as "Flexcube" from an Indian software company which is exclusively used for the banking purpose by the assessee all over the world. When the Mumbai Branch was set-up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium server from where the data gets processed as per the requirement of the banking operations. As per the terms of agreement between the Branch and the Head Office for the usage of software by the Branch, which has been incorporated above, it is evident that the Head Office only has the non-exclusive non- transferrable rights to use the computer software brought for personal use and clause 16 of the said agreement specifically provides that the Head Office doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on prorata basis. Such reimbursement of payment does not fall within the ambit of definition of "royalty" within the Article 12(3)(a). To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any copy right of software or any copyrighted article developed by the Head Office for the exclusive use of the assessee for, which the assessee is making the payment along with the mark-up exclusively for the purpose of royalty. If the payment for license for the software which is installed in the Head Office is being made by the Head Office, then any allocation of cost and reimbursement thereof by the Branch to the Head Office cannot be termed as independent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to the Indian company. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the hands of the Australian company either. It is also by now settled that the payment for software is for a copyrighted article and not copyright per se, and, therefore, is not covered by the scope of payment for copyright. The authority for this proposition is contained in Special Bench decision in the case of Motorola Inc. v. Dy. CIT (2005) 95 ITD 269 (Del)(SB), Samsung Electronics Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate apart of the impugned payment, as attributable to use of, or right to use of, mainframe computer. Accordingly, the provisions of article 12(3)(b) cannot have any application in the matter." 18. Insofar as the reliance placed by the learned Departmental Representative on the decisions of the Madras High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 8.02.2016 have explained the ratio and principle of Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). The relevant observation of the Hon'ble Delhi High Court in the said case reads as under:- "48 In Commissioner of Income Tax v. Seimens Aktiongessellschaft, [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that "The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression "laws in force". While considering the Double Tax Avoidance Agreement the expression "laws in force" would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article 1(2). Considering the express language of article 1(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier years and in view of the finding given therein, we upheld the order of the CIT (A) and dismiss the grounds raised by the revenue. Accordingly, grounds no.1, 2 & 3 are dismissed. 5.2. As far as filing of writ petition to be filed before the Hon'ble High court is concerned if would be sufficient to mention that nothing was brought on record to prove that writ had been filed and heard. Had the final hearing taken place, it would have been a different situation. So, in anticipation of filing of a writ-petition, we are not inclined to defer the decision especially when same is covered by the orders for the earlier years. Considering the above and respectfully following the orders of the Tribunal in the cases of Antwerp Diamond Bank NV Engineering Centre (supra) and Antwerp Diamond Bank NV(supra), we decide the effective ground of appeal in favour of the assessee. 10.2 In view of the above reasoning on facts and law we find that the judicial precedent as cited before us and as discussed and considered at length by the Hon'ble Delhi High Court in facts as upheld in the ruling of AAR in the case of ISRO (supra) is also found supported by the Hon'ble Jurisdictiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expression "process" and treaty interpretation in this case 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 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be given to punctuation; CIT v. Loyal Textile; Sama Alana Abdulla vs. State of Gujarat; Mohd Shabbir vs. State of Maharashtra; Lewis Pugh Evans Pugh vs. Ashutosh Sen; Ashwini Kumar Ghose v. Arbinda Bose; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra 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 comma 98 F 240 (1899) 103 ITR 189 208 ITR 291 supra note 46 231 ITR 573 AIR 1996 SC 569 AIR 1979 SC 564 AIR 1929 Privy Council 69 AIR 1952 SC 369 AIR 1929 PC 38 AIR 1979 SC 564 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 bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... del 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 definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for info ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting 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 clear-cut 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 should be followed by the Courts in India when it comes to construing similar terms occurring in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance 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." 9. In view of above, respectfully following the decision of the co-ordinate bench and the decisions of the jurisdictional High Court referred to above, we hold that the amounts received by the assessee for the use of transponder of tele-communication service charges are not royalty under section 9(1)(vi) of the Act and also under Article 12(8) of Indo Netherland DTAA. 10. Ground Nos. 1 to 9 of the assessee are allowed. 11. In ground No. 10 the assessee challenged the order of the Assessing Officer in levying interest under section 234A of the Act. This ground is restored to the file of the Assessing Officer to decide in accordance with law after providing adequate opportunity of being heard to the assessee. 12. In ground No. 11 the assessee challenged the order of the Assessing Officer in levying excess interest under section 234B of the Act. This ground is restored to the file of the Assessing Officer to decide in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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