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TMI Blog2024 (7) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... treaty provisions. If a contrarian position were to be accepted, it would lead us to hold that treaty provisions could be amended or overcome based upon the will of Legislatures of independent nations to amend domestic legislation unilaterally and without being bound by the Convention. That is clearly not the position which merits acceptance from either a constitutional or statutory point of view. It is this fundamental position which appears to have weighed upon the Court in New Skies Satellite [ 2016 (2) TMI 415 - DELHI HIGH COURT] to observe that a treaty cannot be overridden by independent legislative amendments that a contracting nation may choose to introduce. The fact that treaty provisions supervene and the option available to the assessee to opt for the more beneficial scheme stands statutorily recognised and reiterated in Section 90 (2) of the Act. Applicability of Section 9 (1) (vi) and its provisions being liable to be read as overriding provisions contained in a Treaty - The arguments raised by the appellants based on the language employed by Section 9 as well as the Explanations inserted therein are clearly misconceived. Quite apart from us having serious reservations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... optic fibre or by any other similar technology irrespective of whether or no such process was secret. We, on an overall analysis of all of the above, find no justification to either draw a different line or doubt the correctness of the decisions handed down in Asia Satellite and New Skies. even though Section 9 in its amended form had come to exist on the statute book, no corresponding amendments were introduced in Article 12. In fact the category of activities which are spoken of in Explanation 6 were also not included in the Hong Kong, Romania, Latvia, Malaysia and Sri Lanka Treaties which came to be enforced thereafter. A provision seeking to encompass subjects covered by Explanation 6 is however found in the DTAA pertaining to the United Mexican States. These facts further fortify the view that we have taken in respect of the Section 9 amendments. On an overall conspectus of the above, we have no hesitation in holding that the issues which were sought to be canvassed on these set of appeals stand conclusively answered and settled by this Court in Asia Satellite and New Skies Satellite. Any doubt that could have been possibly harboured with respect to the amendments introduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NT VARMA, J. S. No. Particulars Paragraph Nos. A. PROLOGUE 1-3 B. THE FACTS 4-16 C. CHALLENGE IN THE APPEAL 17-28 D. SUBMISSIONS OF TELSTRA 29-58 E. TREATIES BASIC POSTULATES 59-63 F. THE CONVENTION AND DOMESTIC LEGISLATION 64-69 G. THE SECTION 9 ARGUMENT 70-77 H. THE USE/RIGHT TO USE QUESTION 78-87 I. SCOPE OF THE OSS/GBSA 88-89 J. ARTICLE 3 (2) 90-95 K. SUMMATION 96-106 L. OPERATIVE DIRECTIONS 107-108 A. PROLOGUE 1. The Commissioner of Income Tax questions the correctness of the judgments rendered by the Income Tax Appellate Tribunal [Tribunal] dated 30 September 2020 [ITA 334/2022, ITA 335/2022 and ITA 597/2023], 13 September 2022 [ITA 55/2023 and ITA 61/2023], 27 September 2022 [ITA 206/2023] and 17 July 2023 [ITA 171/2024 and ITA 174/2024] and posits the following questions of law for our consideration: 2.1 Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in holding that the receipts from Indian customers for services provided outside' Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty as per section 9(l)(vi) of the Act and Article 12 of the DTAA between India a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 2020 ITA No. 55/2023 AY 2015-16 13 July 2022 ITA No. 61/2023 AY 2016-17 13 July 2022 ITA No. 206/2023 AY 2017-18 27 September 2022 ITA No. 171/2024 AY 2018-19 17 July 2023 ITA No. 174/2024 AY 2019-20 17 July 2023 We note that the Tribunal for AYs 2015-16, 2016-17, 2017-18, 2018-19, and 2019-20 has principally followed its decision dated 30 September 2020 and which pertained to AYs 2011-12, 2012-13, and 2014-15. B. THE FACTS 4. The undisputed facts on which the appeals proceed are as follows. The respondent- Telstra Singapore Pte Ltd. [Telstra Singapore] is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions. Amongst the range of services with which we are concerned, are the provision of international private leased circuits, multi-protocol label switching and which are essentially used to facilitate high speed data connectivity. The data connectivity service has been described as bandwidth services. It is also admitted that Telstra Singapore holds and owns the infrastructure and equipment outside India which is utilized in connection with providing of bandwidth services to customers. 5. As per the appellants, in order to facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata communications services and each such service is an International Service : (a) private leased circuit service between international gateways ( IPLC ); (b) global frame relay services being frame-switched data carriage services connecting intelligent end-points internationally ( Frame Relay ); (c) global ATM services being a digital transmission link for the carriage of data via asynchronous transfer mode between access ports on a permanent virtual circuit ( ATM ); (d) internet access services providing connectivity between a port located at an Administrations point of presence in a country and the global internet ( GIA ); (e) global IP VPN Service being a service providing a TCP/IP Virtual Private Network connectivity between designated access end points (being ports) ( IP VPN ), operated by each of the Administrations and the. OSS Service means the one-stop-shop service for International Services as more particularly described in clause 2.1. 9. The acronyms SEB and SEO, which are repeatedly used in various clauses of the OSS Agreement are defined as under: SEB means single end billing, whereby the Customer in one country can pay to an Administration in a single currency the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the International Services of the other Administration to any Customer it shall notify the Customer that such services will be provided by the other Administration under the relevant terms and conditions of the other Administration. The Administrations will exchange instructions on the method of completion of Customer Contracts. Once the Customer has signed the Customer Contract, a copy of the signed Customer Contract must be returned to Administration B for approval. The overall provisioning interval for each International Service will be the longer of the two lead times of each of the Administrations. 4.3 The Customer may, in writing, elect SEB at any time. Administration A shall coordinate the billing when SEB is requested. Any proposed variation of this procedure will be considered by the Administrations on a case by case basis. Administration A shall be responsible for collecting payment from the Customer for the International Service within the billing period as set out in this agreement. Each Administration s billing period will be respected and Administration A will ensure that Administration B is paid according to Administration B's billing cycle and payment due dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EB: (i) Administration B will advise Administration A what the total charges (including taxes and other government or regulatory charges recoverable by Administration B from the Customer under Administration B s contract with the Customer) for the International Service Provided by Administration B will be. Administration A will then invoice the Customer on that basis. Administration B may vary charges (other than taxes and other government or regulatory charges) by giving Administration A not less than 30 days notice. Taxes and other government or regulatory charges apply as varied from time to time by the relevant authorities and Administration B will advise Administration A of such changes as soon as is practicable. The parties acknowledge that this clause 5.6 (d) (i) is necessary for operational purposes to enable Administration A to invoice the Customer in accordance with Administration A s normal billing cycle without having to first receive the corresponding invoice issued each month by Administration B under clause 5.6 (d) (ii); (ii) Administration B will send its invoice in its local currency (indicating therein the equivalent amount in USD which amount is payable under 5.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to the applicable taxation authorities with respect to taxes applicable to its own services and will hold the other Administration harmless from and against any liability resulting from any taxes, penalties and interest relating to or arising out of the first-mentioned Administration s failure to do so; and (x) Tax reclamation will be the responsibility of the Customer. Both Administrations will make best endeavours to make available to the Customer, the requisite documentation by the fiscal authority in the appropriate jurisdiction, to enable the relevant refunds to be claimed whenever appropriate. 13. The relationship between the two Administrations is spelt out in Clause 6 and which acknowledges the understanding of parties that both administrations are independent business entities and the agreement not being liable to be construed as resulting in the creation of a principal and agent relationship. The arrangement between the two parties was on a non-exclusive basis with it being further specified that neither Administration would have the right to represent or hold itself out to be a contracting agent of the other or having the authority to bind the other party in any way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Section 144C of the Act, a Draft Assessment Order is stated to have been framed with the Assessing Officer [AO] proposing that the amount received by the respondent from Indian customers for the provision of bandwidth services outside India being liable to be construed as constituting equipment/process royalty taxable under Section 9 (1) (vi) of the Act read along with Article 12 (3) of the DTAA. Assailing the proposed assessment, the respondent filed its objections before the Dispute Resolution Panel [DRP] on 16 October 2015. Consequent to the DRP upholding the proposed assessment, a final assessment order came to be framed on 16 November 2015 with the AO determining the total taxable income of the assessee at INR 26,75,15,533/-. It is this final order of assessment which was assailed before the Tribunal. 16. In terms of the judgment impugned before us the Tribunal has held in favour of the respondent-assessee and has come to conclude that the consideration received by Telstra Singapore from Indian customers would not be taxable as royalty bearing in mind the beneficial provisions of the DTAA and which had remained unamended notwithstanding the changes which had come to be intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1. For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly by the payer; (c) the location of such right, property or information is in India. Explanation 6. 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 up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;] 18. Mr. Chawla highlighted the fact that Explanation 6 had come to be introduced with retrospective effect from 01 June 1976 by virtue of Finance Act, 2012. It was contended by Mr. Chawla that Explanation 6 to Section 9 (1) (vi) is clearly clarificatory in character and stipulates that the expression process would be deemed to have always included transmission by satellite, cable, optical fibre or any other similar technology, including the provision of services, such as, up-linking, amplification, conversion for down-linking irrespective of whether or not such process were a secret. In order to discern the intent of the Legislature while introducing Explanation 6, Mr. Chawla also placed reliance upon the relevant parts of the Memorandum which had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1977-78 and subsequent assessment years. 19. Mr. Chawla then submitted that the concept of royalty in light of the DTAA would have to be understood bearing in mind the provisions made in Article 12. Article 12 of the DTAA reads as follows:- ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent. 3. 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 : (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital gains derived from immovable property is income and therefore Article VI would be attracted. 21. Mr. Chawla contended that when faced with a situation where the meaning of a term is not defined under a tax treaty, Courts would have to necessarily follow the ambulatory approach, as enunciated, as opposed to a static approach. Mr. Chawla submitted that the private line services which are provide by the respondent are supported by an exclusive range of bandwidth options dedicated for exclusive use and which is suggestive of use as well as a right to use of industrial, commercial or scientific equipment and consequently clearly falling within the ambit of royalty as defined not only under the DTAA but the Act itself. 22. The sheet anchor of the challenge raised by the appellants however rested on the judgment rendered by the Madras High Court in Verizon Communications Singapore Lte Ltd. vs. Income Tax officer, International Taxation-I [2013 SCC OnLine Mad 3316] and to the following observations as appearing therein: 25. Keeping these principles in the background as far as the present case is concerned, we are concerned about the treatment of income under the head royalty . As pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e., USA and India. The fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. xxxx xxxx xxxx 77. In the background of the service agreement with the customer, service agreement with VSNL and the one between customer and VSNL, it is clear that these are part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim, however, being to give the customer a point-to-point private line to communicate between offices that are geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. As is evident from the reading of the terms of all these agreements, parties have agreed to go for one stop shopping, which allows an organisation, namely, customer to place a single order with a sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igured and customised to ensure that the customer gets the uninterrupted connectivity from one end to the other end in different geographical point. 88. A reading of the agreement with VSNL also shows that the configuration at the customer's end and at the VSNL end and in the other half managed by the assessee match with each other and compatible for ensuring the integrated service to the customer. The arrangement between the assessee and the VSNL has to be necessarily integrated and technically and financially viable having regard to the close functional relationship between the two. For this, the Indian customer pays through the single billing system called OSS for the integrated services. Thus, the service agreement assuring the service is possible and workable only when the assessee and VSNL are considered as rendering the service jointly in their respective leg. Thus, the two half being the mirror image of each other and going by the terms of the agreements, the assessee renders service in India and the consideration received attracts the incidence of taxation in India. xxxx xxxx xxxx 97. Thus, even going by the above decision, we hold that providing of service is not poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus, the consideration being for the use and the right to use of the process, it is royalty within the meaning of clause (iii) of Explanation 2 to section 9 (1) (vi) of the Income-tax Act. xxxx xxxx xxxx 106. In the circumstances, we affirm the order of the Tribunal holding that the consideration paid by the customer to the assessee is royalty within the meaning of Explanation 2(iva) or in the alternative under Explanation 2(iii) of section 9 (1) (vi) of the Income-tax Act and article 12 (3) of the DTAA between India and Singapore. With regard to the levy of interest under sections 234A, 234B and 234D of the Income-tax Act, as the case may be, we remand this issue alone to the Income-tax Appellate Tribunal for its consideration on the merits and in accordance with law. Accordingly, the above tax case (appeals) are disposed of. No costs. Consequently, the connected miscellaneous petitions are closed. 23. Mr. Chawla submitted that if the provisions of the OSS Agreement were contrasted with the agreement which formed the subject matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Para 72 @ Pg.81 (Pdf pg 839) of the compilation filed by appellant dated 14 January 2024 72. Upon satisfactory completion of the end-to-end testing, Administration A will advise the customer that the service has been satisfactorily established. Billing will commence after the satisfactory completion of the end-to-end testing. Clause 6: Relationships of the Administrators of OSS Agreement @ Pg.18 of document filed by the respondent dated 3 February 2024 Refer Para 6.1 @ Pg.18 (Pdf pg 512) 6.1. Notwithstanding anything in this Agreement, the Administrations are independent business entities, and nothing herein shall be construed so as to constitute the parties as principal and agent, partners, joint venture participants, or employer and employee. Refer Para 6.2 @ Pg.18 (Pdf pg 512) 6.2. Each Administration hereby appoints the other, on a non-exclusive basis, as its representative in the other Administration's country, to market and co-ordinate the provision of the International Services. The activities of each Administration in the course of such representation shall be by way of introduction only to a prospective Customer. Neither Administration shall be obliged or required to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule 2: When Bharti is Administration-B of OSS Agreement @ Pg. 29 of document filed by the respondent dated 3 February 2022 Refer Para 1.2 @ Pg.29 (Pdf pg 523) 1.2 Telstra, shall get the relevant documents filled by the Customer at their end as per the Customer Contract and terms conditions made available to them by Bharti. This document shall be handed over to Bharti at the earliest, by courier and also intimated by facsimile/email to contacts of Bharti as provided, for expediting the order. Refer Para 1.5 @ Pg.29 (Pdf pg 523) 1.5. The charges or fees raised by Bharti through its invoices will be the total charges to be paid by Telstra under this Agreement. Refer Para 74 @ Pg.82 (Pdf pg 840) of the compilation filed by appellant dated 14 January 2024 74. When VSNL is Administration B, under SEO, MCI shall get the relevant documents filled by the customer at their end as per the customer order form made available to them by VSNL. This document shall be handed over to VSNL at the earliest time possible, by courier and also communicated by facsimile/email to contacts of VSNL as provided, for expediting the order. The charges or fees raised by VSNL through its invoices will be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding out that whether a process was actually used by the payer. In the case of satellites, physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process. Avoidance Agreement's. Insertion of comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 8.2, taking the view that where a payment is for consideration for transfer of full ownership of an element of property referred to in the definition, the payment is not in consideration for the use of, or the right to use that property and cannot, therefore, represent a royalty. It further pointed out to the changes brought to the model convention that the expression for the use of, or right to use industrial, commercial or scientific equipment was subsequently deleted by using the expression for the use of, or right to use industrial, commercial and scientific experience. It was observed that given the nature of income from leasing of industrial, commercial, scientific equipment including the leasing of containers, the Committee on Fiscal Affairs decided to exclude the income from such leasing from the definition of royalty and to consequently remove it from the application of article 12, in order to make sure that it would fall under the Rules for the taxation of business profits, as defined in articles 5 and 7. The decision and the background of the decision leading to the removal of the equipment to be replaced by experience in the OECD model, cannot be pressed into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to use the ship for an economic benefit is given to the assessee, the consideration for the use of the industrial, commercial and scientific equipment is royalty , assessable under Explanation 2(iva) to section 9 (1) (vi) of the Income-tax Act. Thus, for the purposes of Income-tax Act, under the time charter, the payment made being for the use of the ship, the same comes within the meaning of the word royalty . D. SUBMISSIONS OF TELSTRA 29. Appearing for the respondents, Mr. Sabharwal submitted that undisputedly, the assessee is a foreign telecom operator engaged in the business of providing data transmission/ bandwidth services from outside India facilitating high speed data connectivity. It was submitted that in pursuance of the above, it enters into contracts for transmission of voice and data to customers. Mr. Sabharwal pointed out that for rendering telecom services in India, it is incumbent upon an operator to obtain a telecom license and which the assessee, admittedly, does not hold since it does not render any service in India. It was asserted that the entire infrastructure and equipment with the aid of which the assessee provides transmission/bandwidth services is situ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms 'right' and 'process' in the clarificatory Explanations 2, 5 and 6 of section 9 (1) (vi) of the Act, and consequently, the appellant was bound to deduct tax at source thereon under section 195 of the Act? 4. Whether the Income-tax authorities in India have jurisdiction to bring to tax income arising from extra-territorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Treaties and law declared by the apex court? 5. Whether the first respondent was correct in holding that for the current assessment year the withholding tax liability should be levied at a higher rate at 20 per cent. in accordance with section 206AA of the Act ? 6. Whether the hon'ble Tribunal was right in repelling the contention of the appellant to the effect that, as a deductor, it cannot be held liable for non-de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent years in the assessee's own case, the Income-tax Appellate Tribunal has held that tax is not deductible when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom, etc., W. P. No. 36 of 2018, rendered by the Income-tax Appellate Tribunal. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income-tax authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. The assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute that the facilities are situated outside India and the agreement is with a Belgium entity which does not have any presence in India. Therefore, the tax authorities in India shall have no jurisdiction to bring to tax the income arising from ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh speed data connectivity (hereinafter referred to as 'bandwidth services'). Telstra Singapore holds the infrastructure and equipment, either owned or leased, outside India required to provide bandwidth services to customers. Under the Indian telecom regulations, only a licensed service provider can provide Bandwidth Services in India. To facilitate provision of bandwidth services in India, it entered into an agreement with Bharti Airtel Limited ('Bharti'), an unrelated telecom company (referred as One Stop Shop ('OSS') Agreement). xxxx xxxx xxxx 5.1 The assessee submitted that after considering the following relevant clauses of the various agreements, contracts and service schedules, it is indisputably clear that the transaction is a mere rendition of bandwidth services wherein the customer enjoys an uninterrupted 24x7 service to receive and send voice and data at a standard rate of reliability. The fact that a failure to render service at such a level results in non-payment or loss of consideration for the payee (except on agreed excusable service outages), proves that the transaction under question is a pure service transaction, and is not a transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), The DRP upheld the findings of the Assessing Officer in view of the ratio laid down by the Hon'ble Madras High Court in the case of Verizon Singapore Pte Ltd. vs ITO (supra). The Assessing Officer passed the final assessment order against which the assessee is in appeal before us. xxxx xxxx xxxx 13. We have heard the rival contentions and perused the record. The issue which arises in the present appeal filed by the assessee for different Assessment Years is against the chargeability of amount received from Indian customers for providing bandwidth services outside India as equipment/process royalty u/s 9 (1) (vi) of the Act and/or Article 12 (3) of the India Singapore Tax Treaty. The assessee is a tax resident of Singapore and the bandwidth services are provided as standard services wherein the customer enjoys an uninterrupted 24x7 service to transmit voice and data at standard rate of reliability. Delivery of Bandwidth service at a particular speed (say 2 mbps) is nothing but a contract to deliver voice and data at a particular volume and speed, is the claim of the assessee. In case no service is provided or there is default of regular supply, then there is non-payment of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between India and USA was not amended, then the assessee was not liable to withhold tax on payments made to its associated enterprises on account of lease line charges and in tum, relying on the decision of Hon'ble Bombay High Court in the Hon'ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman: 317 (Bam), held as under:- 21. In the present case also, though definition of 'Royalty' under the Act had been amended, but the term 'Royalty' under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of 'royalty' under DTAA, the assessee is not liable to withhold tax on the payments made to its associated enterprise on account of lease line charges. We are not going into different decisions of the Tribunal on this aspect, in view of the ratio laid down by the Hon ble High Court of Delhi, which though is not the jurisdictional High Court but the issue raised in the said appeal is similar to the issue raised before us in the present appeal. We may also point that the Hon ble High Court of Delhi had also taken note of the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Siemens Aktein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions (I) (P) Ltd. Vs. Delhi (supra) are not to be applied in view of the issue being settled by the Hon ble High Court of Delhi. 23. The assessee on the other hand, has relied on the decision in WNS North America Inc. Vs. ADIT (supra) i.e. decision of Mumbai Bench of Tribunal, which has been approved by the Hon'ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman 317 (Bom). The issue before the Hon'ble High Court of Delhi was in the hands of recipient of lease line charges. The assessee therein had recovered internal telecommunication charges from WNS charges and the Tribunal held the amount in question was received by the said assessee as reimbursement of lease line charges and would not qualify either as 'royalty' or as income attributable to PE in India and hence, it was held that there was no income earned by the assessee. The question before the Hon'ble High Court was whether the amount received on account of reimbursement of lease line charges would qualify as royalty' under Article 12 of India-UK Treaty and the second question was in respect of charges being attributable to PE in India. The Hon'ble High Court vide para 5 had noted the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. We may also point out that against the decision of the Authority for Advance Rulings in ISRO case (2008) 307 ITR 59, special leave petition was dismissed by the Supreme Court (see Puran Singh Sahni v. Sundari Bhagwandas Kripalani (1991) 2 SCC 180). 69. We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asst. CCT 124 STC 426 (Karn) in the following terms (page 433): 9. Thus if the transaction is one of leasing/hiring/letting Simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit ; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale. 39. According to learned counsel, a more detailed enunciation on the meaning liable to be ascribed to the expression right to use is found in the decision of the Authority for Advance Rulings [AAR] in Dell International Services India (P.) Ltd. [2009] 305 ITR 37 (AAR) and where the following pertinent observations were rendered: - 12.5 It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. xxxx xxxx xxxx 12.8 The word 'use' in relation to equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the. access line installed by BTA or its agent or the components embedded in it. The operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial has been placed before us to show that C W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well-settled that telecom services are standard services. The arrangement between the applicant and C W UK is for rendition of service and the applicant pays for the same. It is for C W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India (P.) Ltd. (supra). In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers outside India. Dell India had an agreement with BT America for the entire service for which it made payment directly to BT America. One of the issues that arose for consideration was whether the payment made by the applicant to BT America was in the nature of royalty falling either under clause (iii) of Explanation 2 of section 9 (1) or article 12 (3) of the tax avoidance trea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rocess. In fact it is nobody's case that any secret process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services; through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite Telecommunication Co. Ltd.'s case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect. (p. 494) 41. In view of the above, it was Mr. Sabharwal s submission that dominion and control over infrastructure and equipment constitute the primary test in order to ascertain whether a right to use had been transferred. Juxtaposing those submissions with the facts of the present batch, Mr. Sabharwal highlighted the fact that none of the authorities had even remotely come to conclude that the service extended by the respondent assessee entailed a grant of control or a right to use any process or equipment. This, according to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustomer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterisation 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, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 as inserted by Finance Act, 2012, are liable to be read into the DTAA. Mr. Sabharwal submitted that this contention stands specifically negated by not only this Court in New Skies Satellite but also by the Supreme Court in Engineering Analysis. 46. Learned counsel submitted that the various Explanations which came to be introduced in Section 9 of the Act and are claimed by the appellants to be declaratory, clearly attempt to expand the meaning to be assigned to the expression royalty with retrospective effect. This, according to learned counsel, are transformative and substantive amendments and would thus clearly be hit by the principles laid down by the Supreme Court in Commissioner of Income Tax (Central)-1,New Delhi vs. Vatika Township Private Limited (2015) 1 SCC 1. 47. Learned counsel submitted that an amendment would be deemed to be clarificatory only if it attempts to explain and expand the text of a provision which may be either obscure, ambiguous or where a statutory provision either suffers from an obvious omission or is capable of being understood to have more than one meaning. According to learned counsel, the Explanations inserted in Section 9 clearly fail to meet t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators' object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Govt. of India v. Indian Tobacco Assn. [(2005) 7 SCC 396], the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in Vijay v. State of Maharashtra [(2006) 6 SCC 289]. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. However, we are (sic not) confronted with any such situation here. 31. In such cases, retrospectivity is attached to benefit the persons in cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is to explain an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language shall be deemed always to have meant is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law which the Constitution came into force, the amending Act also will be part of the existing law. The above summing up is factually based on the judgments of this Court as well as English decisions. 49. Refuting some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee provides bandwidth services outside India to its customers. It has entered into Global Business Service Agreement ('GBSA') with various customers. In case where services are provided by Indian telecom operator like Bharti Airtel in India and the services outside India are provided by the assessee, it enters into One Stop Shopping Services Agreement('OSS') with Bharti Airtel or any other Indian telecom operator, to facilitate single billing facility to the customer. Under the agreement with the customer, uninterrupted 24X7 services are available to it. In case the services are unavailable or not available at the requisite speed, the customer shall be entitled to rebate as per the rates agreed upon. xxxx xxxx xxxx 3.7 That being aggrieved, Assessee filed an appeal before the Ld. ITAT. The Ld. ITAT allowed the appeal of Assessee by holding that the Assessee company is a tax resident of Singapore and is engaged in providing band width services to various Indian Telecom Operators like Bharati Airtel In India and such services are being provided outside India. Hence, in view of the ld. ITAT, the consideration received by the Assessee is not taxable as Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the meaning of the expression right to use , Mr. Sabharwal also placed reliance upon the following paragraphs of the judgment rendered by the Constitution Bench in Bharat Sanchar Nigam Ltd and Another vs. Union of India and Ors (2006) 3 SCC 1 .:- 58. The State respondents in their submissions had initially differed as to what constituted goods in telecommunication. Ultimately, the consensus among the respondents appeared to be that the goods element in telecommunication were the electromagnetic waves by which data generated by the subscriber was transmitted to the desired destination. The inspiration for the argument has been derived from the provisions of the Telegraph Act, 1885 which defines telegraph [Amended in 2004 by Act 8 of 2004 with effect from 1-4-2002.] as meaning: 3. (1-AA) telegraph means any appliance, instrument, material or apparatus used or capable of use for transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature by wire, visual or other electromagnetic emissions, radio waves or hertzian waves, galvanic, electric or magnetic means; Explanation. Radio waves or Hertzian waves means electro-magnetic waves of frequencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. There are still plenty of analog signals around, however, and they will probably never become totally extinct. Except for DC signals such as telegraph and baseband, all signal carriers have a definable frequency or frequencies. Signals also have a property called wavelength, which is inversely proportional to the frequency . (Encyclopedia of Technology Terms of Techmedia) 63. It is clear, electromagnetic waves are neither abstracted nor are they consumed in the sense that they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication. What is transmitted is not an electromagnetic wave but the signal through such means. The signals are generated by the subscribers themselves. In telecommunication what is transmitted is the message by means of the telegraph. No part of the telegraph itself is transferable or deliverable to the subscribers. 64. The second reason is more basic. A subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough a complex system of fibre optics, satellite and cables. 109. Briefly, the subscriber originates/generates his voice message through the handset. The transmitter in the handset converts the voice into radio waves within the frequency band allotted to the petitioners. The radio waves are transmitted to the switching apparatus in the local exchange and thereafter after verifying the authenticity of the subscriber, the message is transmitted to the telephone exchange of the called party and then to the nearest Base Transceiver Station (BTS). BTS transmits the signal to the receiver apparatus of the called subscriber, which converts the signals into voice, which the subscriber can hear. 110. The modern legislature makes laws to govern a society, which is fast moving. It is aware of the changing concepts of the emerging times. The law adapts itself to social, economic, political, scientific and other revolutionary changes. 111. Traditionally, a contract for carriage of goods or passengers is by roadways, railways, airways and waterways. This is associated with carriage of tangible goods. Such a carrier has no right over the goods of the customer and does not effect transfer of right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty in any goods is deemed to be sale in each one of the other sub-clauses the transaction is consensual. The contrast between sub-clause (a) and all other sub-clauses clearly manifests that the transactions involved in the present dispute are contractual. The fiction operates to deem what is not otherwise a sale of goods as a sale of goods i.e. even the transfer of a right to use goods is deemed to be a sale of the goods. 116. It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a transfer of right to use goods and rendering service. Such a mutilation is not possible except in the case of deemed sale falling under sub-clause (b). Nor can the service element be disregarded and the entirety of the transaction be treated as a sale of goods (even when it is assumed that there are any goods at all involved) except when it falls under sub-clause (f). This will also result in an anomaly of the entire payment by the subscriber to the service provider being for alleged transfer of a right to use goods and no payment at all for service. The licence granted by the Central Government fix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l value and not widely available in public domain. It is, therefore, an intangible asset, the exclusive right over which normally rests with its developer/ creator or with the person to whom such asset has been exclusively transferred. In order to receive a royalty in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. As far as intellectual properties (IPs) are concerned, these have significance for the purpose of royalty only till the time the ownership (as differentiated from the right to use) of such property vests exclusively with a single person and such person by virtue of its exclusive ownership allows the usage or right to use such IP to another person/persons for a consideration in the form of royalty . Payment made for anything which is widely available in the open market to all those willing to pay, cannot constitute royalty and is essentially in the nature of business income. The hon'ble High Court of Madras in the case of CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 (Mad) held that (headnote) the term 'royalty' normally connotes the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty connotes exclusivity and the exclusive right in relation to the thing (be it physical or intellectual property) for which royalty is paid should be with the grantor of that right. In case an intellectual property, it is generally associated with some discovery, invention, creation, specialised knowledge, etc., emanating from human mind and is payable to the inventor/creator for allowing the usage of his invention or creation and having an exclusive right over it. The hon'ble Calcutta High Court in the case of N. V. Philips Gloeilampenfabrieken Eindhoven v. CIT (supra) held that a person having some specialised knowledge can claim exclusive right to the same as long as he chooses not to make such specialised knowledge public. Such a person can exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited use of such specialised knowledge to others in confidence against payment in which case it is termed as royalty. However, once such specialised knowledge becomes public ; such person loses the exclusivity in respect of such special knowledge and, hence, los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use of the intellectual property the income would fall under the scope of business income and not royalty . A process which is widely known and deployed by everyone in the field and for which the owner does not have exclusive rights cannot be a process contemplated in this section 9 (1) (vi) (iii). 54.2 In the case of telecom industry, all the telecom operators have similar infrastructure and telecom networks in place, for rendition of telecommunication services. The process embedded in the networks of all telecom operators is the same. The equipment, resources, etc., employed in the execution of the process may be different in physical terms, i.e., in terms of ownership and physical presence but the process embedded in the execution of a telecom infrastructure is the same and commonly available with all the telecom operators. The royalty in respect of use of a process would imply that the grantor of the right has an exclusive right over such process and allows the use thereof to the grantee in return for a royalty . It is necessary that guarantee must use the process on its own and bear the risk of exploitation. The process of running the networks in the case of all the telecom op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect use, etc., as explained by Explanation 5 has no effect in the case in hand. 57. The arguments of the learned Departmental representative that Explanation 5 is attracted since the assessee-company is indirectly using such equipment and process through the services provided by the FTO, in our view, is devoid of merits. There is difference between the services rendering agreements and royalty agreements. If the arguments of the Departmental representative is accepted it would result in absurdity. For example : (i) A person hiring a taxi will be paying a royalty for indirectly using the process of running of the engines of the taxi. (ii) A person using a cable connection will be termed to be paying royalty in the form of cable charges for indirectly using the process of running of the systems of the cable operators. (iii) A telephone subscriber using or making a call would be held as indirectly using the process of the service of telecom. 58. The hon'ble Delhi High Court in the case of CIT v. Bharti Cellular Ltd. reported in [2009] 319 ITR 139 (Delhi) has given a finding that the facility in question provided to the assessee is a service and in a broader sense a communication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral definitions 2. In the application on the provisions of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has for the purposes of the laws in force in that State relating to the taxes which are the subject of this Convention.' Indo-Netherlands Double Taxation Avoidance Agreement (see (1989) 177 ITR (St.) 72, 74): 'Article 3: General definitions 2. As regards the application of the Convention by one of the States any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.' The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do. 48. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), the Bombay High Court citing R. v. Melford Developments Inc. held that (page 333 of 310 ITR): 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 taxation avoidance agreement was entered into. 49. It is es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 'process' includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret ; 24. The above Explanations have been inserted with retrospective effect from June 1, 1976. The Memorandum Explaining the Provisions in the Finance Bill, 2012, in the context of the above provisions states ([2012] 343ITR (St.) 234, 267): Section 9 (1) (vi) provides that any income payable by way of royalty in respect of any right, property or information is deemed to be accruing or arising in India. The term 'royalty' has been defined in Explanation 2 which means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. Some judicial decisions have interpreted this definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not ; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Double Taxation Avoidance Agreement and in the Income-tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the Income-tax Appellate Tribunal has dealt with this aspect in its judgment in Gracemac Corporation v. ADIT (2010) 134 TTJ (Delhi) 257 ; (2011) 8 ITR (Trib) 522 (Delhi) pointing out that even software bought off the shelf, does not constitute a copyrighted article as sought to be made out by the Special Bench of the Income-tax Appellate Tribunal in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson A. B. (2012) 343 ITR 470 (Delhi) that a copyrighted article does not fall within the purview of royalty. Therefore, we decide question of law Nos. 1 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. (a) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o analyze the various contentions, which were advanced by Mr. Chawla, it would be apposite to bear in mind the indubitable position that both New Skies Satellite as well as Engineering Analysis had taken due notice of Section 9 as it came to exist in the statute book post Finance Act, 2012. The arguments on that score can thus neither be acknowledged to be novel or for that matter untested. However, before we proceed further it would be pertinent to recognize some of the grund-norms which precedents bid us to bear in mind while examining the interplay between domestic taxing statutes and taxing conventions. 61. Undoubtedly, tax treaties are the outcome of negotiations undertaken at a political level and are primarily concerned with according a degree of certainty in respect of business transactions which citizens of the contracting States may undertake and in aid of commercial relations between two nations. Tax treaties being the outcome of detailed negotiations and bargains that may be struck by sovereign nations may well contain provisions which may be at variance with domestic taxing statutes. The significance of the deliberation between nation States which precede the inking of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty. [See in this connection Maganbhai Ishwarbhai Patel v. Union of India, (1970) 3 SCC 400] xxxx xxxx xxxx 20. The purpose of Section 90 becomes clear by reference to its legislative history. Section 49-A of the Income Tax Act, 1922 enabled the Central Government to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income on which, both income tax (including supertax) under the Act and income tax in that country, under the Income Tax Act and the corresponding law in force in that country, had been paid. The Central Government could make such provisions as necessary for implementing the agreement by notification in the Official Gazette. When the Income Tax Act, 1961 was introduced, Section 90 contained therein initially was a reproduction of Section 49-A of the 1922 Act. The Finance Act, 1972 (Act 16 of 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made subject to the provisions of the Act which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any. 23. In CIT v. Davy Ashmore India Ltd. [(1991) 190 ITR 626 (Cal)] while dealing with the correctness of Circular No. 333 dated 2-4-1982, it was held that the conclusion is inescapable that in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. The Calcutta High Court expressly approved the correctness of CBDT Circular No. 333 dated 2-4-1982 on the question as to what the assessing officers would have to do when they found that the provision of the double taxation was not in conformity with the Income Tax Act, 1961. The said circular provided as follows (quoted at ITR p. 632): The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, that provision will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate Authorities and the court. xxxx xxxx xxxx 27. In Arabian Express Line Ltd. of United Kingdom v. Union of India [(1995) 212 ITR 31 (Guj)] the Gujarat High Court, interpreting Section 90, in the light of Circular No. 333 dated 2-4-1982 issued by CBDT, held that the procedure of assessing the income of an NRI because of his occasional activities in establishing a business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under Section 90 of the Income Tax Act, 1961. In case of such an agreement, Section 90 would have an overriding effect. Interestingly, in this case a certificate issued by HM Inspector of Taxes certifying that the company was a resident of the United Kingdom for purposes of tax and that it had paid advance corporate tax in the office of the English Revenue Accounts Office, was held to be sufficient to take away the jurisdiction of the income tax officer. 28. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act . The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. 27. The contention of the respondents, which weighed with the High Court viz. that the impugned circular No. 789 is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e method by which the Contracting States declare their consent is left to the Contracting Parties (Article 11 et seq. VCLT). For important treaties, however, it is generally agreed that the conclusion of the treaty shall be given effect only through an exchange of instruments, or ratification (Article 14(1) VCLT); for multilateral treaties, it is by deposit of instruments at a location agreed upon in the treaty through corresponding notification (Articles 14(1), 16 VCLT). Ratification is to be distinguished from parliamentary consent (see above), which frequently, primarily in the language of the media, is incorrectly termed as ratification . Article 31 of the OECD MC, Article 30 of the UN MC and Article 29 of the US MC each provide for ratification of tax treaties and treaties normally follow the MC in this respect. In the document of ratification, the authorized agent - the President in the US, the Federal President in Germany, Austria and Switzerland - delivers the formal declaration that the constitutional requirements necessary for internal application of the treaty have been fulfilled (see infra Article 31 at m. no. 11 et seq.). ********* 47. Upon declaration of intent to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t which the material consequences of the treaty begin to take effect, or, in other words, the taxable period or the date from which taxation shall be limited by the treaty (the effective date). Usually this initiation of treaty effects is established by explicit treaty rules. Various aspects may be of importance here. Treaty rules in particular often distinguish between treaty effects on assessed taxes and those on withholding taxes. In general, the material effects of tax treaties apply retrospectively, viewed from the date of entry into force under international law; detrimental retrospectivity, however, may be prohibited. 52. Through the mandate of the legislature, treaties in most States obtain the same authority as internal law. In some States they are even considered to have priority over domestic law. 63. As would be manifest from the aforesaid discussion and the review of the precedents rendered on the subject, the power of nations to enter into an arrangement pertaining to taxation though principally being sourced to the political power of a State now stands accorded statutory recognition by virtue of Section 90 (2) of the Act. It is pertinent to observe that the said stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words are to be given their general meaning, general to lawyer and layman alike the meaning of the diplomat rather than the lawyer . [ Francis Bennion: Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd Edn.)].] 131. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of Internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the local enactment provisions of Sections 4 and 5 of the Act provide that taxation of global income of an assessee chargeable to tax thereunder is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under Section 90 to the contrary, if any, and such an agreement will act as an exception to or modification of Sections 4 and 5 of the Income Tax Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of Section 90 (2) of the Act. Section 90 (2) makes it clear that where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then, in relation to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calls for consideration is article III and articles V to XII of the Double Taxation Avoidance Agreement. We have already reproduced article III(1) and article III(3). Article III(1) provides that tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. Sub-clause (3) of article III includes only rents or royalties in respect of cinematographic films within the expression industrial or commercial profits but does not include income in the form of rents, royalties which are set out therein. 67. This position was succinctly explained by the Andhra Pradesh High Court in Sanofi Pasteur Holding SA vs. Department of Revenue and others 2013 SCC OnLine AP 422, as would be evident from the following passages of that decision: - 149. The Act (section 90) authorizes, effectuation of a tax treaty (to which India is a signatory) and for the prevalence of the duly notified treaty provisions over the provisions of the Act, as well. 150. Strained construction of the tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country. What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by Explanation 4 to Section 90 of the Income Tax Act, it has been clarified by Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. This position has been recognised by this Court in Azadi Bachao Andolan [Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1] , which held : (SCC pp. 25 27, paras 21 28) 21. The provisions of Sections 4 and 5 of the Act are expressly made subject to the provisions of this Act , which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued under Section 90, is no longer res integra. *** 28. A survey of the aforesaid cases makes it clear that the judicial conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellants, it would lead us to hold that a contracting State stands enabled and empowered to overcome treaty conditions by resorting to its plenary power to amend and modulate domestic legislation. The deliberative exercise which underscores the formulation of a treaty between Nations cannot be permitted to be overcome solely upon one of those parties having the legislative competence to amend a taxing provision. This since the power to legislate cannot be legally countenanced to extend to depriving a party of the benefits which the two contracting States chose to confer by virtue of a higher covenant drawn in exercise of their political and sovereign authority. 71. It was the aforesaid precepts which appear to have guided the Court in New Skies Satellite and where the amendments introduced in Section 9 were sought to be pressed into aid by the Department. In New Skies Satellite, the Court firstly doubted the characterization of those amendments as being clarificatory or for that matter being liable to be viewed as an explanation of existing terms of the statute. This becomes apparent from the following discussion which appears in that decision: - 36. A clarificatory amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en judicially interpreted and the Legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the court ? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the Legislature considers inaccurate, the effect is prospective. Any other result would make the Legislature a court of last resort. United States v. Gilmore 8 Wall (75 US) 330, 19 L Ed 396 (1869), Peony Park v. O'Malley 223 F.2d 668 (8th Cir. 1955). It does not mean that the Legislature does not have the power to override the judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a Legislature a court of last resort, the amendments can be made prospective only ( Ref. County of Sacramento v. State of California 134 Cal. App. 3d 428, In re, Marriage of Davies, In re 105 Ill App 3d 661 [1982]). 38. The circumstances in this case could very well go to show that the amendment was no more than an exercise in undoing an interpretation of the court which removed income from data t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible. xxxx xxxx xxxx 54. Neither can an act of Parliament supply or alter the boundaries of the definition under article 12 of the Double Taxation Avoidance Agreement 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, none the less. 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 double taxation avoidance agreements and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both double taxation avoidance agreements and clause (iii) to Explanation 2 to 9 (1) (vi) 73. It, however, desisted from rendering a definitive opinion on the scope of those provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be given retrospective effect. But when we read the judgment of the hon'ble High Court in case of New Skies Satellite BV the hon'ble Delhi High Court held in para 60 as follows (page 152 of 382 ITR) : 'Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the Double Taxation Avoidance Agreement, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 ITR 340 (Delhi), when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Taxation Avoidance Agreement, unless the said Double Taxation Avoidance Agreement 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 income automatically becomes royalty. It is reiterated that the court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition of royalty that is contained in Explanation 2 to Section 9 (1) (vi) of the Income Tax Act would make it clear that there has to be a transfer of all or any rights which includes the grant of a licence in respect of any copyright in a literary work. The expression including the granting of a licence in clause (v) of Explanation 2 to Section 9 (1) (vi) of the Income Tax Act, would necessarily mean a licence in which transfer is made of an interest in rights in respect of copyright, namely, that there is a parting with an interest in any of the rights mentioned in Section 14(b) read with Section 14(a) of the Copyright Act. To this extent, there will be no difference between the position under the DTAA and Explanation 2 to Section 9 (1) (vi) of the Income Tax Act. 85. However, the learned Additional Solicitor General presses the application of the amendment made vide the Finance Act, 2012 with retrospective effect from 1-6-1976, which added Explanation 4 to Section 9 (1) (vi) of the Income Tax Act. xxxx xxxx xxxx 88. It is equally difficult to accept the learned Additional Solicitor General's submission that Explanation 4 to Section 9 (1) (vi) of the Income Tax Act is cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... une 1, 1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. Explanations 5 and 6 to section 9 (1) (vi) of the Act has been inserted with effect from June 1, 1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia, i. e., the law does not demand the impossible, and impotentia excusat legem, i. e., when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows (page 558 of 432 ITR): It is thus clear that the person mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of royalty inserted by Explanation 4 to section 9 (1) (vi) of the Income-tax Act, for the assessment years in question, at a time when such Explanation was not actually and factually in the statute.. .. Also, any ruling on the more expansive language contained in the Explanations to section 9 (1) (vi) of the Income-tax Act would have to be ignored if it is wider and less beneficial to the assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ploy, possess or utilize a patent, trademark, process or equipment. In order to fall within the ambit of the royalty Article, it would be imperative for the Court discerning a right given to make use of the patent, trademark process or equipment. The key element would be effective control or dominion having been conferred upon an individual or entity for consideration. Use or right to use would necessarily entail the grant of a right to exploit or bring into effective use. A mere advantage or benefit derived from a service provided cannot possibly be countenanced to fall within the meaning of the expression s use or right to use as they appear in Article 12. What we seek to emphasise is that the use of a service while equipment or process remains with and in the control of the provider cannot attract process or equipment royalty provisions. Similarly, merely because an equipment or process comes to be deployed or used in the course of providing a service would not attract Article 12. This since no dominion or control came to be granted or transferred. 80. While dealing with the issue of use and right to use , our Court in Asia Satellite had made the following pertinent observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. We may also point out that against the decision of the Authority for Advance Rulings in ISRO case (2008) 307 ITR 59 , special leave petition was dismissed by the Supreme Court (see Puran Singh Sahni v. Sundari Bhagwandas Kripalani (1991) 2 SCC 180). 69. We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asst. CCT 124 STC 426 (Karn) in the following terms (page 433): 9. Thus if the transaction is one of leasing/hiring/letting Simplicit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km subject to an assured minimum, for a period of one month or one week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit ; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale. 81. As we go through that decision, it appears that one of the submissions which was addressed before the Court in Asia Satellite was that use should be understood as conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... L to carry the activity of operating telegraph limited to the scope of telecommunication facilities. xxxx xxxx xxxx 97. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goods consequently all legal consequences of such use including any permissions or licences required therefor should be available to the transferee; (d) for the period during which the transferee has such legal right, it has to be the exclusion to the transferor this is the necessary concomitant of the plain language of the statute viz. a transfer of the right to use and not merely a licence to use the goods; (e) having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others. xxxx xxxx xxxx 108. The contract between the telecom service provider and the subscriber is merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nti but also for the right given to make use of the equipment at future point of time. There may not be actual use of equipment in praesenti but under a contract the right is derived to use the equipment in future. In both the situations, the royalty clause is invokable. The learned senior counsel for the applicant sought to contend, relying on the decision of Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression transfer of right to use any goods occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions 'use' and 'right to use' followed by the words equipment suggests that there must be some positive act of utilization, application or employment of equip-ment for the desired purpose. If an advantage is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. xxxx xxxx xxxx 13.1 There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , solely rests with BTA or its agent being the domestic service provider. The applicant does not in any sense possess nor does it have access to the equipment belonging to BTA. No right to modify or deal with the equipment vests with the applicant. In sum and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authority held 14. Whether the payment made by the applicant to BTA is in the nature of royalty falling under clause (iii) of Explanation 2 and/or article 12 (3) of the Treaty ? 14.1 It is one of the contentions of the Revenue that the applicant makes use of or is conferred with the right to use a 'process' within the meaning of clause (iii) to Explanation (2) to section 9 (1) of the Act. That clause speaks of 'the use of any patent, invention, model, design, secret formula or process or trade mark or similar property'. It is contended, relying on the decision of ITAT in the case of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 (Delhi) that the word 'secret' only qualifies the expression 'formula' and cannot be read before the word 'process'. On such interpretation, it is submitted by the revenue in its comments that the services provided to the applicant are clearly in the nature of a process and not in the nature of standard facility and the applicant has used and has been conferred with the right to use such process. However, this contention has not been urged before us by the learned Counsel for the Department fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 : these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred 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, the payments made by the customers would therefore be in the nature of payments for services, to which article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to use, any equipment 87. A similar explanation appears in the Commentary pertaining to the UN Model Convention and relevant parts whereof are reproduced hereinbelow: - 17. The definition of royalties in paragraph 2 of Article 12 of the OECD Model Tax Convention (which corresponds to the definition in paragraph 3 of Article 12 of the United Nations Model Tax Convention) was amended in 1992 by deleting the words for the use of, or the right to use, industrial, commercial or scientific equipment as a result of the OECD report entitled The Revision of the Model Convention adopted by the Council of the OECD on 23 July 1992. However, a number of OECD member countries have entered reservations on this point. 18. The reference, in paragraph 3 of Article 12 of this Model, to payments received as consideration for the use of, or the right to use, industrial, commercial or scientific equipment addresses circumstances in which the owner of the equipment earns profits from letting another person use that equipment, without having the owner establish any presence in the State where it is used, or where the user resides, which would satisfy the requirements of Article 5 for the existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Indications for a finance lease rather than an operating lease might include, for example: the lease is long term and non-cancellable; the term of the lease is likely to cover a substantial part (or all) of the equipment s useful life; there is no other likely user of the equipment, or it is not feasible for the equipment to be leased to another lessee; the lessee of the equipment behaves as owner; the lessee carries positive and / or negative residual value risk or utility in respect of the equipment; the lease payments to use the equipment are high particularly at the beginning such that they constitute an inordinately large proportion of the amount needed to secure the acquisition; the lease payments materially exceed the current fair rental value and thus compensate for more than just the use of property; and some portion of the lease payments is specifically designated as interest or is otherwise readily recognizable as the equivalent of interest. 21. With regard to satellite operators and their customers, the characterization of a payment by the customer to the satellite operator as a royalty will depend to a large extent on the specific contractual arrangements. If the ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... primary objective of the OSS Agreement was to provide seamless and uninterrupted connectivity to the customers of Telstra and Bharti when present in the respective regions where the two entities operated. This becomes evident when one views the bouquet of services which were covered under the definition of International Services and which extended to internet access, global ATM services, global IP VPN and others. Similar is the position which emerges when we bear in mind the definition of expressions such as OSS Services, SEB [Single End Billing], SEO [enabling a customer in Administration A obtaining International Service from Administration B] or for that matter SPFR [Single Point Fault Reporting]. 89. It thus becomes apparent that the agreements were essentially representative of a reciprocal arrangement between Telstra, Bharti and others to facilitate their customers being enabled to avail of communication services while they moved between territories. We find ourselves unable to discern or acknowledge any right to use which could be said to have been transferred to either the Telecom Operator or the customer. The equipment remained under the effective control of the concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edged by the Article stipulating that such a course could be adopted provided the context does not dictate otherwise. In our considered opinion, while it is now universally acknowledged that the theory of ambulatory reference would apply to treaty interpretation, the same cannot be countenanced as empowering a Contracting State to undertake a wholesome amendment to basic and fundamental concepts which stand embodied in the Treaty and constitute the foundational understanding of the two Contracting States. If the aforesaid fetter were to be totally disregarded, it would go against the very grain of the principles of reciprocity and permanency of commitment. While the ambulatory approach bids us to bear in consideration contemporary developments to sustain relevancy of Treaty provisions, it is not intended to fundamentally alter the essential bargain struck by parties. We find ourselves unable to acknowledge the precept of ambulatory reference as sanctioning an expansion of the subject matters of taxation and that too based solely upon amendments introduced in domestic legislation. Unilateral amendments which travel beyond explaining an obscure or doubtful expression appearing in a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [It was] concluded that the latter interpretation should prevail, and in 1995 [the OECD Model Tax Convention was] amended [ ] to make this point explicitly. 12. However, paragraph 2 specifies that the domestic law meaning of an undefined term applies only if the context does not require an alternative interpretation [ ] The context is determined in particular by the intention of the Contracting States when signing the Convention as well as the meaning given to the term in question in the legislation of the other Contracting State (an implicit reference to the principle of reciprocity on which the Convention is based). The wording of the Article therefore allows the competent authorities some leeway. 13. Consequently, the wording of paragraph 2 provides a satisfactory balance between, on the one hand, the need to ensure the permanency of commitments entered into by States when signing a convention (since a State should not be allowed to make a convention partially inoperative by amending afterwards in its domestic law the scope of terms not defined in the Convention) and, on the other hand, the need to be able to apply the Convention in a convenient and practical way over time (the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a State to ease its obligations under a tax convention comes from the ambulatory reference to domestic law. States seeking to furtively dodge the limitations that such treaties impose, sometimes, resort to amending their domestic laws, all the while under the protection of the theory of ambulatory reference. It thereby allows itself an adjustment to broaden the scope of circumstances under which it is allowed to tax under a treaty. A convenient opportunity sometimes presents itself in the form of ambiguous technical formulations in the concerned treaty. States attempting to clarify or concretise any one of these meanings, (unsurprisingly the one that benefits it) enact domestic legislation which subserves such purpose. 94. The Court in New Skies Satellite then approvingly referred to the decisions handed down by the Supreme Court of Canada as would be evident from the following passages of that decision:- 47. In this context, recently in Sanofi Pasteur Holding SA v. Department of Revenue (2013) 354 ITR 316 (AP), the Andhra Pradesh High Court discussed and subscribed to the ratio of the Supreme Court of Canada in R. v. Melford Developments Inc. 82 DTC 6281 (1982) with respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bay High Court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of laws in force . We express no opinion in this regard since it is not in issue before this court. This court's finding is in the context of the second situation, where there does exist a definition of a term within the double taxation avoidance agreements. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the double taxation avoidance agreements 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 double taxation avoidance agreement, 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 Double Taxation Avoidance Agreement. In other words, the domestic law remains static for the purposes of the double taxation avoidance agreement. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson A. B. (2012) 343 ITR 470 (Delhi) that a copyrighted article does not fall within the purview of royalty. Therefore, we decide question of law Nos. 1 and 2 in favour of the assessee and against the Revenue. 52. Thus, an interpretive exercise by Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by Parliament in our domestic context, even if it were in violation of 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 ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t defined the word process must consequently and for reasons aforenoted suffer a similar fate. All that need be additionally observed is that the broad intent of the amendments comprised in Explanation 6 would not override the use and the right to use tests which form the bedrock of the royalty Article comprised in the DTAA. In any event, the essay of Explanation 6 cannot be interpreted in a manner which would essentially amount to a reintroduction of Section 9 (1) (vi) yet again through a secretive back door. 97. Of equal significance are the doubts which were expressed in respect of the amendments which were introduced in Section 9 and which was sought to be described to be clarificatory of the statutory position. Section 9 (1) (vi) speaks of situations where income by way of royalty would be deemed to have accrued or arisen in India. Explanation 2 of Section 9 (1) (vi) while defining the word royalty in Clause (i), provides for taxation of consideration received for the transfer of all or any rights (including the granting of a licence in respect of a patent, invention, model, design, secret formula or process or trademark for similar property). In clause (iii), the word royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with the owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. xxxx xxxx xxxx 68. We are inclined to agree with the argument of the learned senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms lease of transponder capacity , lessor , lessee and rental used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s : (i) the lorry is never in the control, let alone effective control of the customer; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; (iii) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry ; or the carrier may unload the consignment en-route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km subject to an assured minimum, for a period of one month or one week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion the facilities, etc. The contract involved : (i) offshore supply, (ii) offshore services, (iii) onshore supply, (iv) onshore services and (v) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outside India was received by the appellant by credit to a bank account in Tokyo and the property in the goods passed to Petronet on the high seas outside India. Though the appellant unloaded the goods, cleared them from customs and transported them to the site, it was for and on behalf of Petronet and the expenditure including the customs duty was reimbursed to it. The price of offshore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost of any other services to be rendered from outside India, was also paid in US dollars in Tokyo. On these facts the appellant applied to the Authority for Advance Rulings (Income-tax) for a ruling on the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to the permanent establishment as postulated in paragraph 6 of the Protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise under section 9 (1) (vii) of the Income-tax Act, 1961. And inasmuch as fees for technical services were specifically provided in article 12 of the Convention, they would not fall under article 7. Therefore, the price of the offshore services was taxable in India under the Act as well as the Convention. (iii) That, however, in view of section 115A (1) (b) (B) of the Act and article 12(2) of the Convention, tax was payable at the fixed rate of 20 per cent of the gross amount of fees for technical services and the applicant would not be able to claim any deduction from the gross amount. xxxx xxxx xxxx 74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets a boost. The Organisation of Economic Co-operation 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 virtual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communities (e.g. through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil). 99. It appears that an identical argument, namely, of Explanations 2 and 6 of Section 9 (1) (vi) eclipsing or at least being liable to be read as influencing the concept of royalty under the DTAA came to be raised yet again in New Skies Satellite. While dealing with the aforesaid, the Court had observed as follows:- 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the Legislature characterises an amendment as retrospective that the court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 US) 330, 19 L Ed 396 (1869), Peony Park v. O'Malley 223 F.2d 668 (8th Cir. 1955). It does not mean that the Legislature does not have the power to override the judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a Legislature a court of last resort, the amendments can be made prospective only (Ref. County of Sacramento v. State of California 134 Cal. App. 3d 428, In re, Marriage of Davies, In re 105 Ill App 3d 661 [1982]). 38. The circumstances in this case could very well go to show that the amendment was no more than an exercise in undoing an interpretation of the court which removed income from data transmission services from taxability under section 9 (1) (vi). It would also be difficult, if not impossible to argue, that inclusion of a certain specific category of services or payments within the ambit of a definition alludes not to an attempt to illuminate or clarify a perceived ambiguity or obscurity as to interpretation of the definition itself, but towards enlarging its scope. Predicated upon this, the retrospectivity of the amendment could well be a contentious issue. Be that as it may, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the latter. 41. This court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible. 100. Proceeding then to deal with the expression process specifically, the Court rendered the following pertinent observations:- 54. Neither can an act of Parliament supply or alter the boundaries of the definition under article 12 of the Double Taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cussion took place on the implications of the presence or absence of the comma . A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious for diametrically opposite implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of the provisions. Judge Caldwell once famously said The words control the punctuation marks, and not the punctuation marks the words. Holmes v. Pheonix Insurance Co. 98 F 240 (1899). It has been held in CGT v. BudurThippaiah (1976) 103 ITR 189 (AP) and Hindustan Construction Co. Ltd. v. CIT (1994) 208 ITR 291 (Bom) that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Construction Co. Ltd. xxxx xxxx xxxx 58. Nevertheless, whether or not punctuation plays an important part in the statute interpretation, the construction Parliament gives to such punctuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation for the use of, or right to use, property, or for information, that is referred 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, the payments made by the customers would therefore be in the nature of payments for services, to which article 7 applies, rather than payments for the use, or right to use, industrial, commercial or scientific equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... double taxation avoidance agreement should be followed by the courts in India when it comes to construing similar terms occurring in the Indian Income-tax Act. .. There are judgments of other High Courts also to the same effect. (a) CIT v. Ahmedabad Manufacturing and Calico Printing Co. (1983) 139 ITR 806 (Guj) at pages 820-822. (b) CIT v. Visakhapatnam Port Trust (1983) 144 ITR 146 (AP) at pages 156-157. (c) N. V. Philips v. CIT (No. 1) (1988) 172 ITR 521 (Cal) at pages 527 and 538-539. 101. The Court ultimately held as under:- 60. Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the double taxation avoidance agreement, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a double taxation avoidance agreement, unless the said double taxation avoidance agreement are amended jointly by both parties to incorporate income from data transmission services as partaking of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exist on the statute book, no corresponding amendments were introduced in Article 12. In fact the category of activities which are spoken of in Explanation 6 were also not included in the Hong Kong, Romania, Latvia, Malaysia and Sri Lanka Treaties which came to be enforced thereafter. A provision seeking to encompass subjects covered by Explanation 6 is however found in the DTAA pertaining to the United Mexican States. These facts further fortify the view that we have taken in respect of the Section 9 amendments. 104. On an overall conspectus of the above, we have no hesitation in holding that the issues which were sought to be canvassed on these set of appeals stand conclusively answered and settled by this Court in Asia Satellite and New Skies Satellite. Any doubt that could have been possibly harboured with respect to the amendments introduced in Section 9 stand laid to rest by virtue of the binding declaration of the law by the Supreme Court in Engineering Analysis. We also find ourselves unable to either discern a distinction that could be legitimately acknowledged to exist or draw a wedge between satellite and telecom cases as was suggested at the behest of the appellants. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver any intellectual property or equipment. The agreements merely enabled them to avail of the services offered by it. Similarly, the expressions use or right to use as they appear in clauses (iii) and (iva) of Explanation 2 would have to be understood in light of the principles that we have enunciated hereinabove. A person who is provided mobile communication services or access to the internet does not stand vested with a right over a patent, invention or process. The consideration that the service recipient pays also cannot possibly be recognised as being intended to acquire a right in respect of a patent, invention, process or equipment. The word process being liable to be construed ejusdem generis is lent added credence by clause (iii) employing the expression or similar property which follows. It thus clearly appears to be intended to extend to a host of intellectual properties. This we observe only as an aside since the question raised in these appeals stands conclusively answered in any case in light of our conclusions rendered in the context of the extent of the applicability of Section 9 of the Act and the scope of Article 12 of the DTAA as explained in the preceding parts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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