2019 (2) TMI 1644 - HC - Income Tax

Court Upholds Decision on Tax Treaty Override, Emphasizes International Agreement Respect

The Commissioner of Income Tax (IT) -4 Versus M/s. Reliance Infocomm Ltd.

The Bombay High Court dismissed the appeal, upholding the decision not to interfere with the case. The court relied on the Delhi High Court's judgment in ... TDS u/ 195 - withholding of tax - payment on royalty to the payee Company failed to deduct tax at source - DTAA between India and Netherlands - scope of amendment - whether fall within the term royalty? - whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements? - HELD THAT:- As decided in NEW SKIES SATELLITE BV, SHIN SATELLITE PUBLIC CO. LTD. [2016 (2) TMI 415 - DELHI HIGH COURT] it is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. 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. 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 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 Act of 2012 where there exists no Double Tax Avoidance Agreement. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue Issues:Whether the payee's amount is taxable as royalty under the DTAA between India and Netherlands and thus liable for tax withholding u/s. 195Rs. Whether the Tribunal erred in relying on the Delhi High Court decision without considering other High Court decisionsRs. Whether the Respondent-Assessee failed to deduct tax at source while making royalty paymentsRs.Analysis:The primary issue in this case revolves around whether the Respondent-Assessee failed to deduct tax at source while making royalty payments to the payee Company as required by law. The Revenue contended that the payee's income was taxable in India, and thus, tax withholding was necessary. The Revenue relied on amendments to Section 9(1)(vi) of the Income Tax Act, 1961, introduced by the Finance Act, 2015, to support their position. These amendments aimed to clarify the taxability of foreign-based payees in India.The Delhi High Court's judgment in the case of Director of Income Tax v/s. New Skies Satellite BV played a crucial role in this matter. The High Court's observations highlighted the retrospective nature of the amendments and emphasized that mere changes in domestic law do not override provisions of Double Tax Avoidance Agreements (DTAA). The Court stressed that any alteration to tax laws must also be reflected in the DTAA to be applicable. The Delhi High Court's decision underscored that amendments to the Act do not automatically impact international treaties, and such changes must be explicitly incorporated into the agreements.Moreover, the Court emphasized that India's shift in position regarding the OECD Commentary does not influence the interpretation of royalty definitions in existing agreements. The judgment emphasized that unilateral legislative amendments cannot be imposed on treaties between sovereign states without explicit agreement modifications. The Court referenced previous decisions to support the principle that mere amendments to domestic law do not supersede DTAA provisions.Given the detailed analysis and conclusions reached by the Delhi High Court in a similar case involving the same foreign-based company, New Skies Satellite BV, the Bombay High Court found no grounds to interfere with the Appeal. The judgment highlighted the importance of respecting international agreements and the limitations of domestic legislative changes in the context of tax treaties. As a result, the Appeal was dismissed based on the considerations and precedents established by the Delhi High Court's decision.