Revenue's appeal dismissed on TDS liability for transponder charges to foreign entity under section 195

ITAT Mumbai dismissed Revenue's appeal regarding TDS liability u/s 195 on payments to foreign entity for transponder charges. CIT(A) correctly held that payments to Intelsat Global Sales and Marketing Limited did not constitute royalty under s.9(1)(vi) or relevant DTAA, following Delhi HC precedent in Intelsat Corporation case and coordinate bench decisions in assessee's own case. No contrary authority or stay orders were presented by Revenue to challenge established precedent that such payments are not liable for TDS.

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The core legal questions considered in this appeal pertain to the taxability and withholding tax obligations under the Income Tax Act, 1961 ("the Act") and relevant Double Taxation Avoidance Agreements ("DTAA") concerning payments made by the assessee to Intelsat Global Sales and Marketing Limited for transponder services. Specifically, the issues are:

1. Whether the payments made for transponder charges constitute "royalty" under section 9(1)(vi) of the Act or under the relevant DTAA, thereby attracting withholding tax obligations under section 195 of the Act.

2. Whether Explanation 6 to section 9(1)(vi) of the Act, inserted by the Finance Act, 2012, which includes transmission by satellite within the ambit of "process" constituting royalty, applies retrospectively to the payments in question.

3. Whether the term "process" as used in the DTAA, being undefined therein, must be interpreted by reference to the domestic law of India, including amendments thereto.

4. Whether the payments can alternatively be classified as fees for technical services ("FTS") or fees for included services under the Act or DTAA, thereby attracting withholding tax.

Issue-wise Detailed Analysis:

1. Nature of Payments as Royalty under Section 9(1)(vi) and DTAA

The relevant legal framework involves section 9(1)(vi) of the Act defining "royalty," the provisions of section 195 relating to withholding tax on payments to non-residents, and Article 12 of the India-UK DTAA which defines "royalties." The Finance Act, 2012 inserted Explanation 6 to section 9(1)(vi), expressly including transmission by satellite within the definition of "process" and thereby expanding the scope of royalty.

The Assessing Officer (AO) held that payments for transponder services constituted royalty under both the Act and the DTAA, requiring deduction of tax at source at 10.51%. The AO relied on the amended Explanation 6, which treats transmission by satellite as a "process" included within "royalty," irrespective of secrecy.

The assessee contended that the payments did not constitute royalty as there was no use or right to use any secret process or intellectual property, relying on judicial precedents including the Delhi High Court decision in Asia Satellite Telecommunications Ltd and ITAT decisions in Wipro Limited and Panamsat, which held that transponder charges do not amount to royalty. The assessee also argued that the DTAA does not define "process" and that the payments do not fall within the treaty's definition of royalty.

The Commissioner of Income Tax (Appeals) [CIT(A)] relied on earlier Tribunal decisions in the assessee's own case and the Delhi High Court ruling in Intelsat Corporation, which held that payments for transponder services do not constitute royalty under the DTAA and therefore no withholding tax under section 195 is warranted.

The Tribunal analyzed the issue extensively, referring to the Delhi High Court's judgment in New Skies Satellite BV v. DIT, which clarified that the Finance Act, 2012 amendment expanding the domestic definition of "royalty" does not affect the treaty definition under Article 12. The Court emphasized that where the DTAA provides an exhaustive definition of "royalty," domestic amendments cannot alter the treaty meaning.

Accordingly, the Tribunal held that the payments for transponder services do not constitute royalty under the DTAA and thus are not taxable in India, negating the requirement to deduct tax at source under section 195.

2. Retrospective Effect of Explanation 6 to Section 9(1)(vi)

The Revenue argued that Explanation 6 was inserted retrospectively from 1-6-1976 to clarify legislative intent that transmission by satellite constitutes "process" included in royalty. The contention was that this retrospective amendment should apply to the payments in question.

The Tribunal referred to the Delhi High Court's decision in New Skies Satellite BV, which held that while Explanation 6 may be clarificatory for domestic law, it does not extend to redefine the treaty terms retrospectively. The Court observed that the treaty's definition remains unaffected unless amended jointly by the contracting states.

Thus, the Tribunal concluded that Explanation 6 cannot be read into the DTAA definition of royalty and that retrospective application of Explanation 6 does not alter the taxability of transponder charges under the treaty.

3. Interpretation of "Process" in the DTAA

The Revenue contended that since "process" is undefined in the DTAA, its meaning should be derived from the domestic law, including the amended Explanation 6.

The Tribunal examined the Bombay High Court's decision in Siemens AG, which recognized an ambulatory approach to treaty interpretation where terms are undefined in the treaty, allowing reference to domestic laws in force. However, the Tribunal distinguished this situation, noting that Article 12 of the India-UK DTAA provides an exhaustive definition of "royalty," including "process."

The Delhi High Court in New Skies Satellite BV clarified that where the treaty defines a term, the domestic law amendments cannot override the treaty meaning. The Tribunal accordingly held that the term "process" in the DTAA must be interpreted as per the treaty definition, not by importing domestic law amendments.

4. Classification of Payments as Fees for Technical Services (FTS) or Fees for Included Services

The Revenue also argued that the payments could be treated as FTS under the Act or fees for included services under the DTAA, attracting withholding tax.

The Tribunal relied on its earlier decisions in B4U International Holdings and Panamsat, which held that transponder charges do not satisfy the "make available" test necessary for FTS classification under Article 12(3) of the Indo-US DTAA. The payments merely facilitate transmission and do not confer technical knowledge or services to the recipient.

Therefore, the Tribunal held that the payments do not constitute FTS or fees for included services and thus do not attract withholding tax under section 195.

5. Business Connection and Permanent Establishment (PE) Issues

The Revenue suggested that use of transponders in India creates a business connection or PE of Intelsat in India, making the income taxable.

The Tribunal referred to the Delhi High Court's ruling in Intelsat Corporation, which noted that mere use of transponder capacity in India by customers does not establish a business connection or PE of Intelsat in India. Thus, the income is not taxable on this ground.

Treatment of Competing Arguments and Evidence

The Tribunal gave due consideration to the Revenue's reliance on the Finance Act, 2012 amendment, the Bombay High Court's Siemens AG decision, and various judgments supporting a broad interpretation of "royalty." However, it consistently found these arguments inapplicable due to the binding effect of treaty definitions and precedent decisions by coordinate benches and the Delhi High Court.

The Tribunal emphasized that the Revenue failed to produce any binding contrary decision or stay on coordinate bench rulings favoring the assessee. The absence of any change in facts or circumstances further supported applying the earlier decisions mutatis mutandis.

Conclusions

The Tribunal concluded that the payments for transponder services to Intelsat Global Sales and Marketing Limited do not constitute royalty under the India-UK DTAA or the Income Tax Act, as amended, nor do they qualify as fees for technical services or fees for included services. Consequently, the assessee was not liable to deduct tax at source under section 195 of the Act. The retrospective amendment to the domestic definition of royalty does not affect the treaty interpretation or taxability. The appeal filed by the Revenue was dismissed.

Significant Holdings:

"The article gives exhaustive definition of the term 'royalties' and therefore, the definition and scope of 'royalty' is to be seen from the Article alone and no definition under the domestic Act or law is required to be considered or seen or any amendment made in such definition whether retrospective or prospective which can be read in a manner so as to extend any operation to the terms as defined or understood in the Treaty. The Legislature or Parliament while carrying out amendment to interpret or define a given provision under the domestic Law of the country cannot supersede or control the meaning of the word which has been expressly defined in a Treaty negotiated between executives of two foreign nations."

"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 Satellite ... will continue to hold the field for the purpose of assessment years preceding (pre-Finance Act, 2012) and in all cases which involve a Double Taxation Avoidance Agreement, unless the said DTAAs are amended jointly by both partners."

"Where there exists no definition of a word in issue within the DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. ... 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 DTAA and the ultimate taxability of the income under the agreement."

"Thus the contention of the Ld. DR cannot be accepted in view of clarification given by the Hon'ble Delhi High Court that where the definition has been given in the Treaty then there is no requirement to look into domestic law or any amendment made therein."

"In view of the aforesaid decisions, we hold that the payment made by the assessee to Intelsat is not taxable as royalty in India and, therefore, assessee was not required to deduct TDS or withhold any tax on such payments."

"The issues raised by the assessee in grounds No.1 to 7 are squarely covered by various decisions ... and respectfully following the same we hold that assessee is not liable to deduct TDS."

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