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TMI Blog2022 (4) TMI 1638X X X X Extracts X X X X X X X X Extracts X X X X ..... mount received by the assessee towards data transmission charges is neither in the nature of royalty nor FTS. We hold that the amount received by the assessee towards data transmission charges, being not in the nature of royalty and FTS, is not taxable in India. Accordingly, we delete the addition. Decided in favour of assessee. - SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER For the Appellant : Ms. Anaya Kapoor, Mr. Sumit Lalchandani, Adv. For the Respondent : Shri Umesh Takyar, Sr. DR ORDER PER SAKTIJIT DEY, JUDICIAL MEMBER: Captioned appeal has been filed by the assessee assailing the final assessment order dated 15.02.2022, passed under Section 143(3) read with section 144C(13) of the Income-Tax Act, 1961, for the assessment year 2018- 19, in pursuance to directions of learned Dispute Resolution Panel (DRP). 2. At the outset, we must observe, the matter was fixed today for considering assessee s application for fixation of an early date of hearing of the appeal. However, when the application was taken up for hearing, learned counsel appearing for the assessee, submitted that the issues arising in the appeal are squarely covered by the decision of the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble High Court of Delhi in the Appellant s own case in [2016] 382 ITR 114 (Delhi) for A.Y 2006-07 and A.Y.2008-09. 2.2 Without prejudice to ground 2 above, the Ld.AO and the Panel erred in not taking cognizance of the fact that use of a secret process is a sine qua non for the payments to qualify as Royalty under the IndiaNetherlands DTAA. 3. That the Ld.AO erred in holding that the payments received by the Appellant as consideration for data transmission services would also qualify as fee for technical services as defined under section 9(1)(vi) of the Act as well as within the meaning of Article 12(5) of the IndiaNetherlands DTAA. 4. That the Ld.AO erred in not granting credit of taxes deducted at source amounting INR 62,72,654 which were deducted by the Income Tax Department itself on interest under Section 244A of the Act. 5. That the Ld.AO erred in charging interest under Section 234B of the Act. 6. That the Ld.AO erred in initiating penalty proceedings under section 270A of the Act. The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring right to use of a process. Without, prejudice, the Assessing Officer held that the amount is otherwise taxable as FTS, both under the provisions of India Neitherlands DATA as well as under Section 9(1)(vii) of the Act. Accordingly, he completed the assessment by taxing the receipts on gross basis @ 10%. Against the assessment order so passed, assessee raised objections before learned DRP, however, learned DRP did not find merit in the objections of the assessee. 8. We have heard the parties and perused the material available on record. It is a common point between the parties that the issue is squarely covered by the decision of the Tribunal and the Hon'ble jurisdictional High Court in assessee s own case in preceding assessment years. We find, the dispute relating to taxability of data transmission charges received by the assessee is a recurring issue between the parties from assessment year 2000-01 onwards. However, not only the Tribunal but the Hon'ble jurisdictional High Court under identical facts and circumstances have held that the amount received by the assessee towards data transmission charges is neither royalty nor FTS under the India Netherlands DTAA. In f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly whether the terms of the convention exempt that particular income from being taxed under the Act. 26. Section 9(1)(vi) is, aside from changes made by the Finance Act, 2012, a long and winding provision, subject to several explanations and provisos. It will therefore be prudent to undertake a systematic approach to it, whereby each stage of the section is examined. The opening words of Section 9; the following incomes shall be deemed to accrue or arise in India indicate at the outset that the provision is a deeming one whereby, income otherwise not accruing in India, will be deemed to have accrued in certain cases. Until 1922, various provisions enumerated cases under which income accruing to an assessee abroad was deemed to accrue in India. The 1961 Act collects these provisions and covers them under the ambit of Section 9. One of such deeming provisions is Section 9(1)(vi), which states that income by way of royalty, shall be deemed to have accrued in India. For income of such nature to be taxable under the Act, two aspects must be examined, first, whether the income partakes the character of royalty as defined in Explanation 2, and second, depending on who it is payable by, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k or similar property ; (...) (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB 28. The two clauses as applicable to data transmission services have been the subject of debate in courts as well as business circles. The debate was finally settled by the judgment delivered in Asia Satellite17. In Asia Satellite18this Court held that income from data transmission services would not qualify as royalty in order for it to be taxable under the Act. The Court first recognized that the definition of royalty in the section is with respect to permission granted to use the right in respect of the patent, invention, process, etc., all essentially forms of intellectual property. This permission restricts itself merely to the letting of the licensed asset. The permission does not go so far as to allow alienation of the asset itself. That being said, it is not so restricted as to qualify as a case where the licensor uses the asset himself, albeit for the purposes of his customers. The Court took note of the features of the agreements between the assessee in that case, which was a supra note 1 supra note 1 fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secrecy of the process. 29. The Revenue argues that critical aspects of this judgment, primarily that the function performed by the transponder could not be categorized as a process and that even in the event it could be, there was no use of this process since there was no control exercised by the customers, is no longer good law in light of the inclusion of Explanations 4-6 by the Finance Act, 2012. In other words the Revenue contends that a mere reading of Explanation 4-6 will go to show that they are clarificatory and are therefore automatically retrospective. By this reason, as clarificatory amendments do, these explanations relate back to the time when the main provision of Section 9(1)(vi) first came into force. By logical extension, the judgment in Asia Satellite21was based on a misinterpretation of the section and thus no longer holds the field or corresponds to the correct interpretation of the definition of royalty. 30. Undoubtedly, the legislature is competent to amend a provision that operates retrospectively or prospectively. Nonetheless, when disputes as to their applicability arise in court, it is the actual substance of the amendment supra note 1 supra note 1 that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today24recognizes that the question will have to be decided and the submission argued, Verizon25cites no reason for the extension of the amendments to the DTAA. 32. Explanations 4-6 are designed as clarificatory amendments. Unarguably they have all the apparent characteristics of one. The words for the removal of doubts, it is hereby clarified...includes and has always included qualify the interpretation in Explanation 5. In Explanation 6, the same words have been modified and they state includes and has always deemed to have always included . This is the standard language used to communicate an intended retrospective effect. 33. There is a general presumption against retrospectivity of an [2014] 361 ITR 575 (Mad) supra note 22 supra note 23 amendment. This is the principle of lex prospicit non respi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion itself. They thus dictate the interpretation of law since the time it was first drafted or brought into force. However, in order for such clarificatory amendments to be sustained as retrospective, they must answer to this description. 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 characterizes 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 first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrosp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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, this Court is disinclined to conclusively determine or record a finding as to whether the amendment to 9(1)(vi) is indeed merely clarificatory as the Revenue suggests it is, or prospective, given what its nature may truly be. The issue of taxability of the income of the assessees in this case may be resolved without redressal of the above question purely because the assessee has not pressed this line of arguments before the court and has instead stated (75 US) 330, 19 L Ed 396 (1869) 223 F2d 668 (8th Cir. 1955) 134 Cal App 3d 428 105 Ill App 3d 661 that even if it were to be assumed that the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as pari materia. This Court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations 4, 5, and 6 to the Section 9(1)(vi). The question is therefore, whether in an attempt to interpret the two definitions uniformly, i.e. the domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. In essence, will the interpretation given to the DTAAs fluctuate with successive Finance Act amendments, whether retrospective or prospective? supra note 1 The Revenue argues that it must, while the Assessees argue to the contrary. This Court is inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides. 43. The Vienna Convention on the Law of Treaties, 1969 ( VCLT ) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty? The former is the 'static' approach while the latter is called the 'ambulatory' approach. One opportunity 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement was entered into. 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic laws in force . It was in this context that the Bombay High Court held that they were unable to accept the assesse's contention that the law applicable would be the law as it existed at the time the Double Tax Avoidance Agreement was entered into. [2009] 310 ITR 320 (Bom) This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this Court however is materially different as there is in fact a definition of the word royalty under Article 12 of both DTAA, thus dispensing with the need for recourse to Article 3. 50. There are therefore two sets of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the context of the very amendments that are in question today; the Explanations to Section 9(1)(vi) vis a vis the interpretation of a Double Tax Avoidance Agreement. This Court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations: He, thus submitted that the question of copyrighted article or actual copyright does not arise in the context of software both in the DTAA 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 ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 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 ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and 2013 (358) ITR 259 the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill their obligations under a treaty in good faith. This includes the obligation to not defeat the purpose and object of the treaty. These obligations are rooted in customary international law, codified by the VCLT, especially Article 26 (binding nature of treaties and the obligation to perform them in good faith); Article 27 (Internal law and observance of treaties, i.e provisions of internal or municipal law of a nation cannot be used to j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mula or process or trade mark or similar property; (emphasis supplied) 55. The slight but apparently vital difference between the definitions under the DTAA and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various ITATs across the country, much discussion 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 provisions. Judge Caldwell once famously said The words control the punctuation marks, and not the punctuation marks the words. Holmes v. Pheonix Insurance Co.47. It has been held in CGT v. Budur 48and Hindustan Const v. CIT49 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 mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n must be that it was punctuated with a particular end in mind. The test therefore is not to see if it makes grammatical sense but to see if it takes on any legal consequences . 58. Nevertheless, whether or not punctuation plays an important part in statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for us to conclude that the process referred to in Article 12 must in fact be a secret process and was always meant to be such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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). 75. Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein: 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's DTC with Luxembourg); this would not be the case only in the event the entire direction and control over the satellite, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs. 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite59, 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 Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note 1 that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us. 10. The aforesaid observations by the co-ordinate Bench are germane to the present appeal, considering the fact that even though the decisions of the Tribunal and Hon'ble jurisdictional High Court were brought to the notice of the departmental authorities, however, they declined to follow the orders of the Tribunal and Hon'ble jurisdictional High Court on the reasoning that the department has disputed the matter before the Hon ble Apex Court. This, in our view, is against the norms of judicial discipline. Thus, respectfully following the consistent view of the co-ordinate Benches and Hon'ble jurisdictional High Court in assessee s own case in past assessment years as discussed hereinabove, we hold that the amount received by the assessee towards data transmission charges, being not in the nature of royalty and FTS, is not taxable in India. Accordingly, we delete the addition. 11. As far as ground No.4 is concerned, we direct the Assessing Officer to verify the relevant facts and materials on record and grant credit of TDS in accordance with law. 12. Ground Nos. 5 6 being consequential in nature, do not require any adjudication. 13. In the result, appeal is allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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