2011 (3) TMI 1707 - AT - Income Tax

Appeal partly allowed due to non-taxability findings under Income-tax Act.

M/s Intelsat Corporation, C/o S.R. Batliboi & Co. Versus Asstt. Director of Income-tax, Circle-1 (2), New Delhi

The appeal was partly allowed for statistical purposes. Grounds 1 to 5 were allowed as payments were not considered royalty under the Income-tax Act or ... Tax treaty between India and USA (DTAA) - Payment of receipts taxed u/s 09(1)(vii) - HELD THAT:- We have considered the facts of the case and submissions made before us. that the assessee has received payments from persons residents in India. However, the receipts have been taxed u/s 9(1)(vii), Explanation 2, Clause (vi) thereunder. The decision in the case of Asia Satellite Telecommunications Company Limited [2011 (1) TMI 47 - DELHI HIGH COURT] is to the contrary and in favour of the assessee. It is also a matter of fact on record that the assessee is a tax resident of USA and, therefore, the provisions contained in the DTAA are applicable. However, we are of the view that we need not go into the provisions of the DTAA because of the provision contained in Section 90(2). This provision provides that where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall applied to the extent they are more beneficial to that assessee. The assessee is found to have incurred no liability to tax . Therefore, even if the provisions of the treaty go against the assessee, it has to be granted the benefit under which no liability to tax can be fastened on the assessee. Issues Involved:1. Legality of the Assessing Officer's order.2. Classification of payments as 'royalty' under the Income-tax Act and DTAA.3. Nature of receipts as royalty for the use of equipment.4. Nature of receipts as royalty for the use of process.5. Taxability of payments by non-resident customers under the Act and DTAA.6. Categorization and taxation of payments from non-resident customers.7. Application of Mutual Agreement Procedure (MAP) rationale.8. Consideration of correct revenue from non-resident customers.9. Application of tax rates and confirmation by the Dispute Resolution Panel (DRP).10. Levy of surcharge and educational cess on royalty payments.11. Levy of interest under section 234B.12. Granting credit for taxes deducted at source.Issue-wise Detailed Analysis:1. Legality of the Assessing Officer's Order:The appellant contended that the Assessing Officer's order was erroneous and bad in law. The Tribunal considered the historical context of the assessments, including the application of the Mutual Agreement Procedure (MAP) for previous years, and found that the Assessing Officer's approach in the current assessment year was consistent with past practices.2. Classification of Payments as 'Royalty':The Assessing Officer held that payments received by the appellant from its customers represented income by way of 'royalty' as defined in Explanation 2 to Section 9(1)(vi) of the Income-tax Act and Article 12(3) of the DTAA between India and the USA. The Tribunal referred to the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Company Ltd., which concluded that such payments did not constitute royalty under the Act or the DTAA.3. Nature of Receipts as Royalty for the Use of Equipment:The Assessing Officer categorized the receipts as royalty for the right to use industrial, commercial, or scientific equipment under Explanation 2, Clause (iva) to Section 9(1)(vi) of the Act and Article 12(3)(b) of the DTAA. The Tribunal, following the High Court's decision, held that the transponders leased by the appellant did not qualify as equipment under the said provisions.4. Nature of Receipts as Royalty for the Use of Process:The Assessing Officer also considered the receipts as royalty for the use of process under Explanation 2, Clause (iii) to Section 9(1)(vi) of the Act and Article 12(3)(a) of the DTAA. The Tribunal, relying on the High Court's interpretation, found that the payments did not constitute royalty for the use of process.5. Taxability of Payments by Non-resident Customers:The Assessing Officer held that payments by non-resident customers were chargeable to tax in India under Section 9(1)(vi)(c) of the Act and Article 12(7) of the DTAA. The Tribunal, referencing the High Court's ruling, determined that such payments were not taxable in India, as the appellant did not have a business connection or permanent establishment in India.6. Categorization and Taxation of Payments from Non-resident Customers:The Assessing Officer categorized payments from non-resident customers into three categories and taxed them at varying rates. The Tribunal found this approach to be without reasonable basis and inconsistent with the High Court's decision, which negated the taxability of such receipts.7. Application of Mutual Agreement Procedure (MAP) Rationale:The appellant argued that the Assessing Officer failed to apply the MAP rationale accepted for earlier years. The Tribunal noted that the MAP resolution for previous years involved taxing 5% of revenue from non-resident customers, but since the current assessment was based on non-taxability, this ground became infructuous.8. Consideration of Correct Revenue from Non-resident Customers:The appellant contended that the Assessing Officer incorrectly considered global revenue instead of revenue related to the Indian Ocean beam. The Tribunal's finding of non-taxability rendered this ground infructuous.9. Application of Tax Rates and Confirmation by the DRP:The appellant challenged the tax rate of 40% applied by the Assessing Officer and confirmed by the DRP. The Tribunal's decision on non-taxability made this ground infructuous.10. Levy of Surcharge and Educational Cess on Royalty Payments:The appellant argued against the levy of surcharge and educational cess on royalty payments. The Tribunal's finding that the payments were not taxable as royalty rendered this ground infructuous.11. Levy of Interest under Section 234B:The appellant contended that interest under Section 234B was not chargeable as the payments were subject to withholding tax. The Tribunal's decision on non-taxability meant that no interest was chargeable under Section 234B.12. Granting Credit for Taxes Deducted at Source:The appellant claimed credit for taxes deducted at source amounting to Rs. 32,874,228/-. The Tribunal directed the Assessing Officer to verify and grant credit as per verification, allowing this ground for statistical purposes.Conclusion:The appeal was partly allowed for statistical purposes. Ground Nos. 1 to 5 were allowed based on the High Court's decision in the case of Asia Satellite Communication Company Ltd., which found that the payments did not constitute royalty under the Act or the DTAA. Ground Nos. 6 to 11 were rendered infructuous due to the finding of non-taxability. Ground No. 12 was allowed for statistical purposes, directing verification of the tax credit claimed by the appellant.