2025 (11) TMI 1832 - AT - Income Tax

Satellite transponder income not royalty under s. 9(1)(vi) and Article 12(8) Indo-Netherlands DTAA; additions deleted

ITAT Delhi held that income earned by the assessee from transmitting satellite signals from ship to customers and vice versa, through use of transponders, ... Income deemed to accrue or arise in India - income earned from transmitting of satellite signals from ship to the customers and vice versa - whether brought to tax in India as royalty in the hands of the assessee? - HELD THAT:- We find that the issue in dispute is squarely covered by the decision of this Tribunal in assessment year 2021-22 [2025 (4) TMI 1172 - ITAT DELHI] hold that the amounts received by the assessee for the use of transponder of tele-communication service charges are not royalty u/s 9(1)(vi) of the Act and also under Article 128) of Indo Netherland DTAA. Appeal of the assessee is allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether consideration received for transmitting satellite signals between ship-borne equipment and customers, using satellite capacity purchased from a group entity, is taxable in India as 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961. 1.2 Whether such consideration constitutes 'royalties' under Article 12 of the India-Netherlands Double Taxation Avoidance Agreement, so as to be taxable in India notwithstanding the absence of a Permanent Establishment. 1.3 Whether amendments made to section 9(1)(vi) by the Finance Act, 2012 (including Explanations expanding the definition of 'royalty') can be read into and alter the definition of 'royalties' contained in Article 12 of the India-Netherlands DTAA. 1.4 Whether, in light of earlier decisions of the Tribunal and the jurisdictional High Court in the assessee's own cases and in related satellite-communication cases, the receipts in question are to be treated as business income not chargeable to tax in India. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 & 2: Characterisation of receipts as 'royalty' under section 9(1)(vi) and Article 12 of the India-Netherlands DTAA Legal framework (as discussed) 2.1 The Tribunal referred to prior coordinate bench decisions and jurisdictional High Court rulings dealing with characterisation of income from telecommunication and satellite transponder services, including: - Section 9(1)(vi) of the Act and Explanations thereto (including post-Finance Act, 2012 amendments concerning 'process' and equipment use). - Article 12 of the relevant DTAAs, including the Indo-Netherlands DTAA, defining 'royalties' as consideration for the use of, or right to use, copyright, patent, trade mark, design or model, plan, secret formula or process, or information concerning industrial, commercial or scientific experience, and, in certain treaties, equipment leasing. 2.2 The Tribunal noted reliance placed, in earlier years, on rulings and judgments analysing satellite and telecommunication services, including the AAR ruling in ISRO Satellite Centre and High Court decisions (Asia Satellite, New Skies Satellite, Nokia Networks, Ericsson, Siemens Aktiongesellschaft), together with OECD Commentary and Klaus Vogel on Double Tax Conventions, to distinguish between: - payments for services using sophisticated technology; and - payments for the use of, or right to use, a 'secret process', 'equipment', or other intellectual property rights. Interpretation and reasoning 2.3 The Tribunal recorded that the assessee is a tax resident of the Netherlands, holds a Tax Residency Certificate, and claims treaty protection. Its activity is providing telecommunication/satellite connectivity between mobile earth stations (on ships) and land-based stations, by purchasing satellite airtime from another group entity and reselling connectivity to customers. 2.4 In the extracted prior orders in the assessee's group cases, the Tribunal had held, on substantially identical facts, that: - The satellite operator uses its own satellites, network coordinating stations, control centres and related infrastructure to furnish telecommunication links; customers merely obtain a transmission facility or capacity, not any possessory or controlling rights over the satellite, transponder or other equipment. - The customers neither acquire physical possession of, nor control over, the transponder or satellite; they are only entitled to have their signals transmitted, i.e., to a service output. - Such receipts are therefore payments for telecommunication/data transmission services and not for the 'use of, or right to use' a patent, secret process, equipment, or similar property. 2.5 The Tribunal, following earlier coordinate bench analysis, adopted the following interpretative principles: - The DTAA definition of 'royalties' is exhaustive, and once an assessee opts for DTAA benefit, the domestic law definition in section 9(1)(vi) cannot enlarge or modify the treaty meaning. - Payments for use of a facility or service (such as data processing or satellite transmission), where the payer has no proprietary or possessory rights in the underlying equipment or technology, do not qualify as royalties either for 'use of equipment' or for 'use of a process'. - OECD Commentary and international tax commentary (e.g., Klaus Vogel) support the view that typical transponder leasing or satellite transmission payments are service income, not royalties, where there is no transfer of satellite technology, control, or a secret process. 2.6 The Tribunal further relied on the jurisdictional High Court's affirmation in satellite cases that: - income from satellite transponder services is not 'royalty' under section 9(1)(vi) or under the relevant DTAA royalty articles; and - where the income is business profits of a non-resident without a Permanent Establishment in India, it is not chargeable to tax in India. 2.7 In the present year, the Tribunal noted that: - The Assessing Officer and DRP had merely followed earlier years' orders taxing similar receipts as royalty. - In subsequent years, the Tribunal and the jurisdictional High Court, in the assessee's own case, have held that identical receipts from satellite/telecommunication services are not taxable as royalty, under either domestic law or the Indo-Netherlands DTAA. - The Departmental Representative did not seriously contest that the matter was covered in favour of the assessee by these binding precedents. Conclusions 2.8 The Tribunal held that the amounts received by the assessee for transmitting satellite signals/telecommunication services do not constitute 'royalty' under section 9(1)(vi) of the Act. 2.9 The Tribunal further held that such receipts are not 'royalties' within the meaning of Article 12 of the India-Netherlands DTAA and are in the nature of business income; in the absence of a Permanent Establishment in India, they are not chargeable to tax in India. 2.10 Accordingly, the addition made by treating the receipts as royalty income taxable in India was deleted, and the grounds raised by the assessee on this issue were allowed. Issue 3: Effect of Finance Act, 2012 amendments to section 9(1)(vi) on DTAA interpretation Legal framework (as discussed) 2.11 The Tribunal, by extensively reproducing prior orders and High Court decisions, noted the following legal propositions regarding the interplay between domestic law amendments and DTAAs: - Section 90(2) provides that where a DTAA applies, its provisions prevail over the Act to the extent they are more beneficial to the assessee. - The definition of 'royalty' in Article 12 of relevant DTAAs is self-contained; where such a definition exists, recourse to domestic law via 'laws in force' or Article 3(2) is impermissible for expanding the meaning. - Amendments to section 9(1)(vi), including Explanations introduced by the Finance Act, 2012 (for instance, clarifying that secrecy of a process is immaterial), cannot by themselves amend, or be read into, the DTAA's definition of royalty. Interpretation and reasoning 2.12 Relying on the jurisdictional High Court's analysis (particularly New Skies Satellite), as set out in the extracted passages, the Tribunal adopted the following reasoning: - Domestic law amendments are unilateral; a DTAA is a bilateral negotiated instrument. Parliament cannot, through unilateral amendment of domestic law, modify the terms of an existing treaty. - Where a term (e.g., 'royalties') is expressly defined in the DTAA, domestic definitional changes, however worded, do not alter that treaty meaning unless the treaty itself is amended jointly by the contracting States. - The principle that 'laws in force' may update undefined terms in a treaty (ambulatory approach) does not apply where the treaty term is already defined. - Changes in India's executive 'position' on OECD Commentary or domestic discomfort with earlier judicial interpretation cannot themselves alter treaty obligations; any change must be reflected in an amended DTAA. 2.13 The Tribunal also noted that higher judicial forums have held that the amendments made by Finance Act, 2012 to section 9(1)(vi) do not affect the interpretation of 'royalties' in Article 12 of DTAAs, including in satellite/data transmission cases; earlier decisions such as Asia Satellite and New Skies Satellite continue to govern treaty cases. Conclusions 2.14 The Tribunal concluded that the Finance Act, 2012 amendments to section 9(1)(vi) (including Explanations concerning 'process' and equipment) cannot be imported into, or used to expand, the meaning of 'royalties' under Article 12 of the India-Netherlands DTAA. 2.15 Consequently, the domestic law amendments do not alter the tax characterisation of the assessee's satellite communication receipts under the DTAA, and such receipts remain non-royalty, non-taxable business income in India in the absence of a Permanent Establishment. Issue 4: Applicability and binding effect of earlier Tribunal and High Court decisions Interpretation and reasoning 2.16 The Tribunal observed that: - The factual pattern and nature of income in the year under appeal are identical to those considered in the assessee's own earlier assessment years and in its group entities' cases. - Earlier coordinate benches, on substantially the same facts, have consistently held that receipts for satellite transponder/telecommunication services are not royalties under either the Act or the applicable DTAAs. - The jurisdictional High Court has dismissed the Revenue's appeals in the assessee's own cases, expressly following Asia Satellite and New Skies Satellite, thereby affirming the Tribunal's conclusions. 2.17 The Tribunal considered that no material change in facts or law had been shown, and no contrary binding authority had been produced that would justify a departure from the existing line of decisions. Conclusions 2.18 The Tribunal held that, in the absence of any distinguishing facts or change in law, it was bound to follow the coordinate bench and jurisdictional High Court decisions in the assessee's own case and related satellite communication matters. 2.19 On that basis, the Tribunal allowed the assessee's grounds against the royalty characterisation and deleted the corresponding addition, resulting in the appeal being allowed in full.