TaxTMI 
TaxTMI 
2009 (10) TMI 69
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....hands of above mentioned foreign companies in accordance with provisions of the Income-tax Act read with relevant provisions of Tax treaties with respective countries." 2. In the application it was submitted that reference to Special Bench is sought because there are conflicting decisions of ITAT in the case of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 (Delhi) (for short "Asia Sat") and in the case of Dy. CIT v. Pan AmSat International Systems Inc. [2006] 9 SOT 100 (Delhi) (for short "Pan AmSat"). It was further submitted in the application that the decision of the Tribunal in their two cases are inherently inconsistent and contrary to each other and the transactions involve huge revenue implications. The issue being of all India importance affecting all the satellite and telecommunication cases, Special Bench should be constituted to decide the substantial question of law involved. Hon'ble President on the said application of the revenue has passed order dated 18th December, 2006, according to which the matter was to be placed before the regular Bench to consider the various contentions raised in the said application filed by the revenue. The B....
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....;ble Delhi High Court dated 20-4-2009. In this regard, we may mention here that a separate order dated 12-10-2009 has been passed and it has been held that there is no need for remodulation of questions as sought for by the revenue. 5. Before proceeding further, it will be relevant to mention the common facts involving in these appeals. The assessees are non-residents and are earning income from telecasting companies for providing them transponder capacity. These assessees are engaged in operating telecommunication satellites which are called geostationary satellites and are placed at the distance of around 36000 Kms. from the equator. Each satellite rotates in the same direction as earth at a velocity that matches the earth's rotation. Under these conditions the satellite appears to be stationary directly above a place on the equator. The special orbit which exists as a circular line around the earth is called geostationary. Satellite has the solar panels which contains solar cells to convert sunlight into electrical power, a battery system to store energy and power in the satellite during periods when sunlight is blocked by the earth or moon, gyros to stabilize satellite t....
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....Satellite Corporation (NSSC) 6. In this case, the assessee is a company incorporated under the laws of Netherlands and the said company is a tax resident of the Netherlands. It provides transponder's capacity (segment capacity) from the satellite operated by it in the orbit, to enable its customers for transmission of voice/data and programmes to the customers around the world under various contracts. According to this company, all the equipments, i.e., satellites as well as the operating facilities (to control, monitor and operate the satellites) are owned and maintained and controlled by it from outside India. For assessment years 2000-01, 2001-02 and 2002-03, the Assessing Officer has taxed such receipts in India by taking a view that the receipts of the assessee are in the nature or royalty under section 9(1)(vi) of the Income-tax Act as well as under Article 12.4 of DTAA with Netherlands for the reason that there is a "process" involved in the satellite which has been used by the customers of the assessee. The Ld. CIT(A) by way of consolidated order in respect of three years has upheld the contention of the Assessing Officer. It is the case of the assessee that these re....
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....tion Company Ltd. (Interveners) 8. It is a company incorporated in Hong Kong. It also operates satellites through which transponder's capacity is provided to the telecasting companies. Consideration received in lieu of providing such transponder's capacity has been taxed as income from royalty as in assessee's own case for earlier years similar consideration has been held taxable. This company has joined as intervener to argue that such consideration could not be taxed as 'royalty' under the provisions of Income-tax Act, 1961. 9. All the parties have submitted before us their arguments in detail. They have also submitted synopsis of arguments advanced by them during the course of hearing. Arguments of Shri M.S. Syali, Senior Advocate Representing New Skies Satellites N.V. 10. Referring to the three questions proposed to be answered by this Bench, it was submitted by the ld. Counsel that the question No. 1 pre-supposes that "services" have been rendered and similarly it was pointed out that question No. 3 pre-supposes that use of satellites were provided. It was submitted that both these issues are under dispute either by the Department or by the assesse....
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.... only an activity of providing service. The assessee is only a link in the chain. 14. It was submitted that transaction flow will reveal that the activity of the assessee is only an activity of providing service. The viewers pay to the cable operator who provide them with the programmes. Telecasting companies receive revenue from the cable operators in the shape of subscription charges. They also receive payments from the advertisers and these telecasting companies pay to foreign satellite operators outside India. Describing this chain it was submitted that the role of the assessee is limited to receive the signals and to relay those signals in the footprint area. In the entire transmission chain, the telecasting companies who are the customers of the assessee are interested in merely transmitting their signals in a wider geographical area. The customers are neither interested in knowing the technology used by the assessee nor do they intend to do the processes, if any, involved in relaying such signals. To enable the customer to use the standard service, there is an agreed "Transmission Plan" (TP). TP is a set of data that provides sufficient information to activate service and....
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....der:- - Step 1 - The telecasting company with authorization for the subject event (cricket match in the instant case) has small VSAT/SNG station (VSAT=Very Small Aperture Terminal; SNG=Satellite New Gathering). The telecasting company will usually have several TV cameras deployed on stadium which would be connected to the small transportable studio where TV signal is selected and transmitted by SNG station via satellite to the TV Broad-caster HUB station or large studio. According to satellite configuration and transmit beam coverage more than one broadcaster can receive this signal. Thus firstly, in a live event, the use of satellite first could be to pick the live feed and to send the same to the HUB station or studio through the satellite. - Step 2 - In the studio signal could be modified (if necessary or required) i.e., transformed to other video format - Standard, High Definition Television; accompanied by more sound channels with several language comments, Encrypted etc. - Step 3 - Then modified TV signals are broadcasted via standard distribution channels/network, i.e., either through satellite, fibre optic cable other TV broadcasters, cable operat....
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....m set forth in the individual service order, and in accordance with the terms and conditions set forth herein and therein (each such lease agreement is hereinafter referred to as a "Lease"). Each service order shall also include a description of the technical characteristics of the Service, which shall be set forth in an attachment to the Service Order, to be provided by NSS. Appellant's Submissions - The term lease has been used merely to show that certain transponder capacity has been contracted for with the customer. The Agreement is its entirety shows that it is for rendition of services. Third Party Providers (Pg 97, Cl.3) Customer acknowledges that NSS may contract with one or more third parties for the provision of certain services to be provided as part of the Service under individual lease pursuant to this Appendix B: APPELLANT Standard Terms and Conditions for Satellite Services Service Order (Pg 100, cl.1) By executing an NSS service order, NSS agrees to provide, and Customer agrees to accept, Service in accordance with the terms and conditions set forth below... Use Restrictions (Pg 100, cI 2) . ..The service may be used b....
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....rol over the Satellites and its related equipment! processes remain with the Appellant at all times. Testing in the event of Transponder Failure (Pg 104, cl.11 If a transponder that is used to provide the Service is not meeting Service Specifications, but Customer elects to continue to use (and pay for it) such Services, as degraded, NSS may interrupt Customer's use as necessary to perform testing or take any other action that may be appropriate to attempt to restore the affected Transponder to the Service Specification. Appellant's Submissions - complete control over the Satellites and its related equipment! processes remain with the Appellant at all times. Any testing etc is performed by the Appellant. Transponder is used by appellant to provide services to its customers. Appendix E : Definitions Replacement Satellite (Pg 107) Shall mean any satellite, other than a follow on satellite, which NSS places in the same orbital location (or to the extent NSS receives authorization to do so, any orbital location within 5 degree of such orbital location) as the satellite used to provide such Service. Service Transponder (pg 107) Shall mean the sp....
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....mmentary (2005) on Article 12 wherein a distinction has been drawn between a contract for know-how and a contract for services. In a contract for know-how one of the parties agrees to impart to the other, so that he can use them for his own account, is special knowledge and experience which remain revealed to the public. It is recognized that the granter is not required to play any part himself in the application of the formulae granted to the licensee and that he does not guarantee the result thereof. However, in case of contract for services one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. 26. It was submitted that as per Article 12.4 the dominant intention has to be seen. If the dominant intention is to receive services, then consideration paid is not for "use" or "right to use" a property to receive services. Reliance was placed on the following decisions:- (i) Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC). (ii) Dell International Services India (P.) Ltd., In re [2009] 308 ITR 37 (AAR - New Delhi), observations at pages 56-57. (iii) OECD Tag Report paras 32 t....
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....ision of Asia Sat's case in paras 6.27 and 6.25 and Pan AmSat's case in paras 22 and 23. To support the contention that what is provided by the assessee is a service, reference was made to section 80-IA(4)(ii) which recognize the factum of satellite services. 32. To support the broad proposition that the receipts of the assessee does not constitute consideration for use or right to use the process, it was submitted that the assessee is a tax resident of Netherlands, therefore, entitled to invoke the provisions of DTAA to the extent they are beneficial to the assessee. Referring to Article 12.4 of Indo-Netherlands DTAA which defines "royalty", it was submitted that the consideration should be towards use of or right to use of any of the rights mentioned therein. It was submitted that the definition requires IPR's to be in the nature of exclusive rights vested in the granter and be privy to the person who owns it and not general or publicly available. Referring to the decision of Asia Sat's case in para 6.17, it was submitted that it was held that the plain construction of the word "use" refers to deriving advantage out of it by employing for said purpose. There sh....
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....case of Bharat Sanchar Nigam Ltd. at page 311. Referring to the observations of their Lordships it was pointed out that there will be no "right to use" involved while providing a tele-communication service. It was submitted that a telecommunication service provider does not give any right to use to the subscriber of the said service. It was submitted that the Hon'ble Supreme Court has made it clear that it is important to see whether there was any intention to transfer the right to use or not. It was submitted that in the case of the assessee the customer do not have any control or physical possession over the equipment and the satellite/network facilities are owned, maintained and controlled by the assessee. The customers of the assessee merely avails a service and are neither interested in the fact that how the services are rendered nor intent to use the assessee's infrastructure or the processes involved therein. Reference was made to the decision of Advance Ruling Authority (AAR) in the case of Dell International Services India (P.) Ltd. It was submitted that the issue before AAR was whether the amounts payable by Dell International to B.T. America under the terms of &#....
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...., outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer (for more details regarding the distinction between licensing and the provision of services, see infra m. nos. 54ff, in connection with the various subjects of licences). Neither extreme comes under Article 12, all that does is the central category, viz. 'letting' ** Industrial, commercial, or scientific equipment: 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 that the entire direction and control over the satellite, such as its piloting or steering, etc., were transferred to the user." 37. Referring to the above commentary it was submitted that if the activity of the assessee is seen in the light of the agreement entered into by it with the telecommunication companies, then the consideration ....
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....nly provision of service where customer only avails the service and pays for it. Reference was made to the following decisions:- (i) CIT v. Neyveli Lignite Corpn. Ltd. [2000] 243 ITR 459 (Mad.) (ii) CIT v. Ahmedabad Mfg. & Calico Printing Co. [1983] 139 ITR 806 (Guj.) 40. It was submitted that the word "process" cannot be defined in a generic sense. Rather, it should be something whereby a result or effect is produced. The assessee is receiving signals from the customer and downlinks the same without any change in the form and content of the signal. It was submitted that there is no process involved in the use of satellite or transponder as is required in Article 12.4 of DTAA. 41. Reference was made to the rule of construction known as noscitur a sociis to contend that associated words take their colour from one another and they should be construed in the like manner. It was submitted that the philosophy of such doctrine is that the meaning of a doubtful word may be ascertained by reference to the meaning of words associated with it; such a broader doctrine is broader than the maxim Ejusdem Generis. Reference was made to the following decisions where such do....
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....sing under the domestic law. It was submitted that the use of comma after the word process under the treaty signifies that it is qualified by the word "secret". It was submitted that on interpretation of the treaty there is no dispute between Asia Sat's case and Pan AmSat's case. To further elaborate this proposition it was submitted as under:- (i) The reasoning given in Asia Sat's case that since trademark can never be secret, therefore, secret before formula only qualifies formulae gets satisfied under the treaty inasmuch as trademark is used before "secret formula or process" under Article 12(4). (ii) Definition of royalty under Indo-US DTAA in Pan AmSat's case is identical to the definition in Indolands treaty. (iii) This interpretation stands accepted in Dell International Services India (P.) Ltd.'s case pg 62-63, para 56 of ITR citation (iv) Where a statute is carefully punctuated "comma" does play an important role in interpretation. References Sama Alana Abdulla v. State of Gujarat AIR 1996 SC 569 at pg 571, paras 7 and 8 and Mohd. Shabbir v. State of Maharashtra AIR 1979 SC 564 at pg 565, para 4. (v) Punctuat....
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....ion companies for uplinking and downlinking services through satellites operated by it. Arguments of Shri F.V. Irani arguing the case for Shin Satellite 48. It was submitted by Ld. Counsel that the amount received by the assessee for providing telecasting facilities is not taxable under the Income-tax Act, 1961 (Act) as no income could be regarded as either accruing or arising to it or deemed to accrue or arise to it under the Income-tax Act, 1961. He submitted that it is nobody's case that any payment was received by the assessee in India. In the alternative, it was submitted that in any event, the amount received by the assessee was saved from Indian tax by virtue of the agreement for the avoidance of Double Taxation Agreement between India and Thailand (DTAA). 49. It was submitted that according to the Assessing Officer, the amount received by the assessee is for providing telecasting facilities is an income deemed to accrue or arise in India as the same fell within the scope of section 9(1)(vi) of the Act. For holding so, definition of royalty provided in clause (iii) of Explanation 2 to section 9(1)(vi) of Income-tax Act has been referred. It was submitted that th....
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....e that what the assessee is being paid "for". It was submitted that the intention of the parties and the purpose of payment is for the provision of telecasting facilities and not for the use of any process. Therefore, amount received by the assessee cannot be regarded as falling within the clause (iii) of Explanation 2tosection 9(1)(vi). Insisting on the word "for" it was submitted that the dictionary meaning of word "for" as described in Mitra's Legal & Commercial Dictionary, 2nd Edition is as under:- "FOR: The word is used as a function word to indicate, purpose or an intended destination or the object toward which one's desire or activity is directed." 51. Referring to Oxford Dictionary, Thesaurus and Wordpower Guide, the definition of word "for" is as under:- "FOR: having as a purpose or function; having as a reason or cause." 52. Ld. AR referred to the decision of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. It was submitted that while considering the question that whether SIM cards provided by cellular service providers through subscribers would attract sales-tax, it was observed by their Lordships that the question depend....
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....ot for the use of secret process, but the intention of the parties was simple that the broadcasters used the services of the assessee for the purposes of transmitting their programmes. 56. Further, the reference was made to the decision of Delhi ITAT in the case of Expeditors International (India) (P.) Ltd. v. Addl. CIT [2008] 118 TTJ (Delhi) 652. It was pointed out that the issue before the Tribunal in that case was that whether VSAT uplinking charges were in the nature of fees for technical services so as to attract section 194J of the Act or whether they were merely amounts paid for availing of communication facility, so that section 194J of the Act was not attracted and it was held by the Tribunal that payment was merely "for" availing of communication facility for transmitting data and was not "for" rendering technical services and, hence, not covered by section 194J of the Act. 57. Further reference was made to Delhi ITAT decision in the case of Dy. CIT v. Escotel Mobile Communications Ltd. [IT Appeal Nos. 2154 to 2156 (Delhi) of 2005, dated 31-8-2007], copy of which is filed at Item (k), in the Paper Book filed by him. Referring to the decision it was pointed out that ....
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....garded as payments "for" the use of a process so as to fall within the definition of "royalty" under Explanation 2(iii) to section 9(1)(vi) of the Act. 60. It was submitted that the decision in the case of Asia Sat is contrary to the principles of law enunciated in the above-mentioned decisions. It was submitted that while deciding the issue in the case of Asia Sat, the example given for 'glass of juice' has been misinterpreted as the payment made by the customer is for a glass of juice and not for use of the process in the juicer. The intention of the parties was to provide the purchaser with a glass of juice and not to give him the use of the process in the mixer. 61. It was submitted that the payment must be made by the payer for using of right, property or information or process and since there is no use of process by the payer, the payment cannot be considered or said to be made for "royalty." 62. In the alternative and without prejudice to above submissions, it was submitted that if the payment is held to be made for use of a process, then also, such payment cannot fall within the definition of royalty as such payment should be for exploitation of an Intellec....
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....ssee had merely purchased software without having any right to commercially exploit/duplicate it and, therefore, it was not a payment for "royalty." 65. It was submitted that some tax treaties have made a specific provision to treat such consideration received by the satellite companies to be paid as "royalty" and absence of such specific provision in the tax treaty of India with Netherlands, the consideration received by the assessee cannot be considered to be as "royalty." To substantiate, reference was made to the treaties between New Zealand and Australia and Australia and Czech Republic. It was submitted that in both these treaties there is a separate provision with regard to payments made for transmission of images or sounds by satellite or for the transmission of TV broadcast by satellite. It was submitted that if such payments are to be considered as royalty within the simple meaning of the existing clause, then, there was no need to bring a specific provision in the above mentioned treaties to bring such payments to fall within the ambit of definition of "royalty". 66. Without prejudice, it was submitted to treat such consideration as royalty, it is necessary that se....
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....d fees for technical services can be taxed in India. Thus, it was pleaded that decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. will have full application to the case of the assessee. 68. It was submitted that the scope of Explanation to section 9 was considered in the case of Clifford Chance v. Dy. CIT [2009] 176 Taxman 458 wherein Hon'ble Bombay High Court following the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. has held that to apply section 9(1)(vi)(c) to tax any income in India, following two conditions have to be fulfilled: (i) Services from which income is earned must be utilized in India; and (ii) These services should be rendered in India. 69. It was submitted that specific reference to Explanation to section 9 was made and despite that it was held that for taxing the income earned from services, the service must be utilized in India and they should be rendered in India. Thus, it was pleaded that even on application of Explanation to section 9, such income should not be taxed in the hands of the assessee. 70. It was further submitted that having sh....
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....essee is a "bent pipe satellite" which is a simple repeater, i.e., that it receives a signal from the ground, changes its frequency to one suitable by the downlinking path, amplifies it to provide it with required power, and retransmits it to the ground. The information/programmes contained in the signals are not processed by the satellite. The signals are received by the satellite in outer space above the Indian ocean at the earth's equator (which is not above India). It was submitted that the assessee does not provide any ground based uplink, downlink or terrestrial transmission services to its customers and its only responsibility is to re-transmit the signals which are received from earth to send them back to the earth. The customers of the assessee own, operate and manage the uplinked and downlinked earth's stations and other equipments necessary to transmit the signals to and receive signals from satellites. The customers may either contract with system integrator to build its own uplinked/downlinked facility or it may contract with suitable teleport to uplink/downlink the signals and his client docs not play any role in uplinking/ downlinking activity. The customer p....
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....le to the negligence or default of the Customer or to the matters described in Clauses 6.3 or 6.4 will result in a refund of the Utilisation Fee 11. TERMINATION AND THE EFFECTS OF TERMINATION 11.3 In the event that the customer - (c) fails to maintain its ground facilities in accordance with the clause 5 such that in the reasonable opinion of AsiaSat such failure may interfere with or cause damage to the services provided by AsiaSat to other customers of, or users of any of, AsiaSat satellites, including the satellite, or the transponders on any of AsiaSat's satellites (including the satellite) or other services provided by Asia Sat through any of its satellites (including the satellite) or may interfere with or cause damage to Asia Sat's other satellites or the satellite and in any event shall fail to rectify such defaults within twenty-eight (28) days of the receipt by it of notice from AsiaSat requiring rectification of the same. 11.6 In the event of any termination of this agreement pursuant to clause 11.3 and provided that the Customer has paid to Asia Sat the Default Payment due, AsiaSat shall use all commercially reasonable efforts to market the Transpond....
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....mer's satellite network direct responsibility of the Customer. However, in order to use the AsiaSat space segment services, the Customer must demonstrate that the design and operation of the transmit earth stations of the network are in compliance to the Transmit Earth Station Mandatory Requirements provided in Annex1. The process of demonstrating compliance begins with the submissions of a Network Design/Transmission Plan to AsiaSat and ends with service activation. The AsiaSat system provides customers with the highest quality of service and the earth station qualification process is one means of insuring that the customer's desired performance is achieved without creating or receiving harmful interference with other services. Note that there are other actions that the Customer must complete for the service to be activated. These actions are not AsiaSat's direct responsibility." Annexure 4 Page 97 of the Agreement 2.0 NETWORK DESIGN/TRANSMISSION PLAN SUBMISSION ... after service has been established customers may wish to add new earth stations, expand their service change capacity or otherwise modify their service. In any of these event, an updated t....
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....ansponder which in the reasonable and bona fide opinion of AsiaSat is unlawful under applicable laws, including, but no limited to, any use of the Transponder Capacity or Transponder which anyways breaches applicable laws, including limitation laws relating to defamatory, obscene or pornographic material, or third party rights or any other matter which may result in or put AsiaSat at risk of the termination, revocation, suspension or curtailment of AsiaSat's rights to operate the satellite or which may result in AsiaSat or any of its assets, officers or employees becoming subject to criminal, civil or similar proceedings. 11 TERMINATION AND THE EFFECTS OF TERMINATION 11.1 (b) The retirement by AsiaSat of the satellite from operation in order to comply with any applicable laws provided that AsiaSat shall use all reasonable assets to give the customer at least ninety (90) days notice of such retirement. 12. LIMITATION OF ASIASAT'S LIABILITY 12.1 The customer acknowledges the inherent risks in launching, operating and providing satellite services and agrees that the customer's sole relief or remedy, hereunder, whether the event of the inability of AsiaSat....
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....und facilities is only a condition which is required to be fulfilled by the customer prior to availing the company's services. (iii) The annexures to the agreement provide for technical specifications which are required to be fulfilled by the customer to ensure that Asia Sat is able to provide its transmission services. Merely because the customer is required to install earth stations or configure its facilities does not in any way change the character of the agreement from a service contract to a use/joint use of the satellite/transponder by the customer. In fact, setting up the earth station is an essential requirement for the customer to enjoy the services of the company. The company starts providing the transmission services after the earth station/ground facilities of the customer has been setup. (iv) Asia Sat provides the services by using its satellites and other assets, etc. The possession and control of the satellites (including the transponders in the satellites) are at all times with Asia Sat only. The possession/control never pass to the customer. It is clearly provided in the agreement that- (a) the telemetry, tracking and control in rela....
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.... 8.1 of the agreement should not be understood in the manner suggested by the revenue. Ld. Counsel submitted that as per arguments of revenue this clause assign rights/obligation, therefore, the agreement cannot be said to be an agreement for providing services. It was submitted that in the said clause assessee has agreed to provide transmission services to the customers for using pre-agreed transponder capacity. In the course of availing the services, it is possible that the customer may not be able to utilize the services in full, as a result of which some portion of the transponder capacity may remain unutilized and in such a situation, the customer has been provided a right to assign/enter into special utilization agreement with other parties (as mentioned in clause 8 of the agreement), so that the entire transponder capacity can be utilized by Asia Sat to provide the complete range of services to the customer or his sub-user/assignee. It was submitted that such right of the customer cannot change the basic purpose of the agreement which is to provide the transmission services to the customer or his assignee. 78. It was submitted that it has been the case of the Department t....
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.... AIR 1991 (Delhi) 315. - Delta International Ltd. v. Shyam Sunder Ganeriqalia [1999] 4 SCC 545. 80. It was submitted that essence of agreement is for providing telecommunication service to customer. The assessee is engaged in the business of transmitting voice, data and programme belonging to its customer to the footprint area of the earth. For rendering such services the assessee is using his own satellite and other facilities. The agreement is not for conferring to the customer any right to use any process or equipment or any other asset. All assets including the satellite and transponders therein, process in the satellite/transponder and other equipments belonging to the assessee are used exclusively by the assessee-company to provide services to its customers. 81. Coming to the legal submissions it was submitted that the payments received by the assessee should properly be characterized as payments for performance of services and constitute business profits which are not chargeable in India. It was submitted that it is an admitted position that none of the business operations of the assessee are carried out in India and, therefore, no part of its receipts/income ....
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....ited Nations (UN) and such model is popularly known as UN model. Referring to the commentary provided under OECD model, it was submitted that to constitute "royalty" within the meaning of Article 12, the consideration should be for the "use" or the "right to use". Similarly, it was pointed out that according to UN model the consideration should be for the "use" or "right to use". It was submitted that although payment made for the use of equipment are currently included in the scope of "royalties" under the UN model tax treaties, the same is currently not included in the scope of royalties under the OECD model. Earlier the OECD model tax treaties contained such a provision, however, by virtue of the amendments made to such model in 1992, payments made for the use of equipment, were excluded from the scope of "royalties". Reference was made to the TAG report dated 1-2-2001 to contend that the said report considered the scope of payment made for use of equipment in the context of electronic commerce related issues and following tests were laid down to make a transaction to be treated as royalty for use of equipment:- (a) The customer is in physical possession of the property....
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....es of use of a data, as elucidated by the Technical Advisory Group, the provision of services to transmit voice and other traffic for the customers cannot be said to be transactions for "use" or "right to use" either any "process" or equipment by the customers so as to render the amounts payable by the customers to Asia Sat as "Royalties" under the Act. The transactions are merely in the nature of provision of services. 84. It was submitted that as per principles of interpretations, reference can be made to other statutes dealing with the same subject and forming part of the same system on the basis of doctrine of "pari materia" as per decision of Hon'ble Supreme Court in the case of Ahmedabad Pvt. Primary Teachers' Association v. Administrative Officer [2004] 1 SCC 755. For raising similar contention reliance was also placed on the following decisions:- (1) Kalyan Municipal Council v. Usha Ranjan Bhadra [1990] 184 ITR 80 (SC). (2) CWT v. Imperial Tobacco Co. of India Ltd. [1966] 61 ITR 461 (SC). 85. Referring to these decisions it was submitted that since the Income-tax Act and OECD model tax treaties deals with the same subject, viz., the levy of i....
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....perated by the petitioners, technicians/operators to meet the requirement of the programme/event. At no time the equipments were given to the possession and control of the customers, nor were they operated by the customers. On these facts, it was to be examined by Hon'ble High Court that whether the transactions involved transfer of "right to use goods" which is chargeable to tax and it was held that the transfer of the right to use the goods, which may be by way of leasing, letting or hiring involves the transferor permitting the transferee to use his goods. To constitute such transfer, there should be delivery of possession of the goods by the transferor to the transferee, that is transfer of the effective and general control of goods with the right to use the goods, as distinct from a mere custody of goods, from the transferor to the transferee. Reliance was also placed for raising similar contention on the decision in the case of Alpha Clays v. State of Kerala 135 STC 107. Referring to these decisions, it was submitted that there is no use or right to use involved and, thus, the transaction cannot be called to be in the nature of royalty. 88. Reference was made to the de....
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....4200 L5 : 1166.45 - 1186 H-Pol: 3620 - 4180 Signal Amplification Yes (uplink path loss - 162 dB & downlink free space loss - 185 dB) Yes (uplink path loss - 162 dB & downlink free space loss - 196 dB) On-Board Data Storage No No 93. Thus, it was submitted that the ratio of decision of AAR in the case of ISRO is duly applicable to the present case. 94. Referring to the decision in the case of Dell, it was submitted that in the said case the company was mainly engaged in the business of providing call-centre, data processing and information technology support services to its group companies. Dell India entered into an agreement with Connect Service Schedule (CSS) with BTA. CSS was relating to underwater sea cable facility from Ireland to India provided by BTA. Dell India used the facility and, hence, has nexus with the activities of the applicant in India and the question for consideration before AAR was that whether the amounts payable by the Dell India under CSS would be in the nature of royalty or fee for included services as per article 12 of the Treaty or section 9(1)(vi)/(vii) of the Act. It was held by AAR that the emphasis in the agreem....
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.... company is Indian company who produces a product that must be manufactured under sterile conditions using machinery that must be kept completely from all bacterial or other harmful deposits. The US company has developed a cleaning process for removing such deposits from the type of machinery. The US company enters into an agreement with Indian company under which the former will clean the latter's machinery on regular basis. As part of arrangement the US company leased to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to know when cleaning is required and it was analysed that the services were ancillary and subsidiary. Rental of monitoring equipment, therefore, were not fee for included services. 96. Referring to these examples it was pleaded that intangible asset (like process) can be granted on a "right to use basis" to another party which is like tangible asset. 97. To contend that the consideration received by the assessee cannot be taxed as "royalty" even under clause (vi) of Explanation 2to section 9(1)(vi), it was submitted that unless the consideration received by....
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.... also not the case of the revenue that any of these clauses arc applicable. Above arguments have been summarized in the following conclusion:- (a) Asia Sat is engaged in the business of providing telecommunication services. These services are provided outside of India. (b) Asia Sat is not engaged in letting out or leasing or imparting its telecommunication network or facility (including the satellites) to its customers. The payments received by the Company arc for performance of services only. (c) In the course of rendering the services, Asia Sat docs not allow any use of, nor does it give any right to use, its assets (whether tangible or intangible including process) to its customers. The Company uses its own assets and satellite network including the processes to provide services to the customers. It could not be considered to have received any amounts for allowing the use of, or the right to use, any process or other tangible or intangible asset or equipment by any person. 101. In the alternative, it was submitted that even if it is assumed that the assessee has granted a right to use the process to its customer, such right to use must be in relatio....
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....nly if the same is paid for secret process, reliance is placed on article 12(3)(a) of the Treaty between India and Sweden. It was submitted that several Indian Treaties including Treaty with Greece used the phrase "secret process or formula" [64 ITR (St.) 86]. It was submitted that India's Treaty with Austria, Belgium and France, originally used the phrase "secret process or formula", but were specifically amended to use the phrase "secret formula or process" and the said change was only brought to bring the statutory language in conformity to the language used in UN Model Convention. It was submitted that two phrases viz., "secret process or formula" and "secret formula and process" mean one and the same. 106. Reference was also made to the decision of Hon'ble M.P. High Court in the case of CIT v. HEG Ltd. [2003] 263 ITR 230 wherein it has been held that information which is in public domain would not fall within the ambit of royalty under the Act/Treaty. To have the status of royalty, the information must have special features where some sort of expertise or skill is required and it was submitted that the decision in the case of Dun & Bradstreet Espana SA, In re [2005]....
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....a right to use the "process" to its customers such right to use must be in relation to "secret process" for it to be qualified of being "royalty." 109. Reference was made to the decision of Privy Council in the case of Lewis Pugh Evans Pugh v. Ashutosh Sen AIR 1929 PC 69. It was submitted that the Privy Council while interpreting the provisions of articles 48 and 49 of the Indian Limitation Act, 1908 observed that: "The truth is that, if the article is read without the commas inserted in the print, as a court of law is bound to do, the meaning is reasonably clear...." 110. Reference was made to the decision of Hon'ble Supreme Court in the case of Ashwini Kumar Chose v. Arbinda Bose AIR 1952 SC 369 to contend that punctuation is only a minor element in the interpretation of the statute and it cannot control the meaning of the text. To raise similar contention, reliance was placed on the decision in the case of Pope Alliance Corpn. v. Spanish River Pulp & Paper Mills Ltd. AIR 1929 PC 38. 111. Referring to these decisions it was pleaded that the 'comma' or similar punctuation mark has only minor role to play in the interpretation of the statutes and the s....
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.... is capable of doing some job independently or with the help of other tools. It was submitted that the Tribunal has held that transponder which is used by Asia Sat for receiving and then retransmiting the signals belonging to the customer cannot qualify as "equipment" in itself. A transponder is not capable of performing any activity if it is divorced from the satellite. The transponder in itself without other parts of the satellite is not capable of performing any function since satellite is not plotted at a fixed place and, thus, the Tribunal concluded that payment for leasing out the transponder to the customers cannot be equated with the leasing out of the equipment so as to qualify as giving rise to a royalty payment. 114. It was submitted that the order of the Tribunal in assessee's own case - Asia Sat does not lay down the correct law wherein the revenue earned by assessee is held to be taxable under the definition of "royalty" contained in section 9(1)(vi) of the Act. To contend so, the reference was made to arguments which have been recorded above. It was submitted that ITAT failed to appreciate that no "use" or "right to use" with respect to any asset (tangible or ....
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....e construing the word 'process' on the ground that there is no 'comma' after the word 'process' in clause (iii) and detailed arguments have already been submitted in this regard to show that to constitute royalty the word 'process' must be understood to be a secret process and for that purpose reliance has been placed on various decisions. Concluding the argument, it was submitted that the decision of Division Bench given in the case of the assessee is bad in law and should be overruled by the Special Bench. Arguments by Shri Y.K. Kapoor, Ld. Special Counsel appearing for the Revenue 115. It was submitted by ld. Counsel that the controversy under adjudication by the Special Bench is mainly concerned with the interpretation of legal definition of "royalty" provided in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961 (the Act) as well as in article 12 or 13 of the applicable Treaties. It was submitted that it has been the case of the revenue that payments made by the telecasting companies/broadcasters (customers) to the satellite companies for use of transponder to uplink, amplify, process and downlink content rich programmes develop....
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....ed on the presence of a comma in the Treaty. (b) The other argument referred to by the learned counsel appearing for the assessee in this case was that the payment so made by the broadcaster to the satellite company are for the use of services and thus being its business income and the satellite company having no permanent establishment in India, its receipts are not taxable in India. (c) It was also contended by the learned counsel for the assessee that the payments are not for the use or the right to use the process. (d) It was the case of the assessee that for the payment to be qualified as royalty, it has to be payment for the use of intellectual property right which according to the assessee, is not the case here. (e) It was finally contended that the payment if any does not even constitute consideration for the use of secret process. (f) That at the outset it is most respectfully submitted by the revenue that an argument has been made by the appellant that this is not a payment within the meaning of clause (iva) of Explanation 2 of section 9(1)(vi) of the Income-tax Act. On this issue a detailed submission has been made in the late....
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.... the ground to do anything from change the orbit to reprogram the computer system. All of them have a transponder. All of them have an altitude control system. The ACS keeps the satellite pointed in the right direction." 121. Describing the details about transponder it was submitted that it is an electronic device used to wirelessly receive and transmit electrical signals. Describing the definition of transponder from various technical websites it was submitted as under:- (a) A satellite transponder receives signals from the earth and transmits signals back to the earth. A transponder usually receives on one frequency and transmits on another. (b) Equipment in the satellite that receives a signal unlinked from a teleport on the ground, amplifies it, converts it to a different frequency and re-transmits it to the ground so that every household with a dish within the footprint of the satellite can receive the signal. www.satellite.se/ordlistaen.html (c) The device in a communications satellite that receives signals from an uplink on earth and transmits it back to earth (downlink). It is used by cable programmers to deliver signals to local cable systems.....
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....e Very Small Aperture Terminal (VSAT) data communication networks, international high bit rate pipes, and rural telephony. Integration of these information types is becoming popular as satellite transponders can deliver data rates in the range of 50 to 150 Mbps. Achieving these high data rates requires careful consideration of the design and performance of the repeater. It is submitted that most cycle impairments to digital transmission come about in the filtering, which constraints bandwidth and introduces whole distortion, and the power amplification, which produces an AM/AM and AM/PM conversion. For maximum power output with the highest efficiency (e.g., to minimize solar panel DC supply), this amplifier should be operated at its saturation point. However, many services are sensitive and susceptible to AM/AM and AM/PM conversion, for which back off is necessary. With such an operating point, inter-modulation distortion can be held to an acceptable level; however, back off also reduces downlink power. 124. The transponder takes signals from the uplink earth station on a frequency f1, amplifies it and sends it back on a second frequency f2. The guard band assures that the trans....
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....nsponders to relay their programmes in India. 128. Referring to the agreements, it was submitted that the choice of programme, the place where it has to be telecasted and the time of telecast is of the customer and the parties have agreed for un interrupted me of the satellite against payment on 14 X 7 basis for the period mentioned in the agreement and such result of beaming the programme can be achieved only when the customer has an exclusive right to use the satellite or the process which is embedded therein. It was submitted that we are familiar with the concept of breaking news displayed on the TV screen while watching a programme. It was submitted that unless and until customer has an access to the process, the news cannot be telecasted in the manner and at a particular time for which customer wants and, therefore, keeping the exigencies of the business, the broadcaster and the satellite company have entered into an agreement whereunder the "use" and "right to use" the process is given to the customer and the background in which the use or right to use is given to the customer is only to safeguard the interest of the customer, so that tomorrow it may not come and say that ....
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....d. Uplink and downlink are the established links between the satellites and the telecasters earth station. Broad frequency and transponder is fixed in the agreement itself for use to the customer. Every transponder is identified with a separate name and the transponder once allotted to one customer in the agreement cannot be changed by the assessee later on; until and unless it has the permission from the customer. Even if telecaster customer require more capacity, the personnel at their station do not technically add bandwidth to a customer and do not provide the services, but rather allow ad4itional channel(s) on an existing space approved to be accessed by the customer. Channels are nothing, but the transponders which along with the process are allowed to be used for a periodic payment which is "rent", can be given nomenclature by the assessee. Not only this the location of the satellite, which is fixed vis-a-vis one point on earth, if changes, the customer can terminate the agreement. 132. Also, the customer can re-sell the use of a transponder or the entire capacity of the transponder just like a right or product in possession. Thus, it was submitted that what has been held....
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....e 2 of the agreement in item No. 2 consideration has been termed as utilization fees. Page 3 of the agreement talks of transponder utilization agreement - general terms and conditions. Ld. Special Counsel contended that before discussing the other terms and conditions of the agreement it will be relevant to understand the meaning of the word "utilize/utilization". It was submitted that these words have been liberally used in the agreement whereby customer is placed in a position under the agreement to utilize the process of the satellite. He contended that as per Webster's Third New International Dictionary at page 2525, the word 'utilize' has been defined as "to make useful, turn to profitable account or use, make use of or convert to use." The word "utilization" has also been defined therein as "the action of utilizing or state of being utilized". In Oxford Dictionary the word "utilize" has been defined "verb; make practical and effective use of". He contended that having examined literal meaning of the words, the terms of agreement should be examined to gather the dominant intention of the parties as to whether the customer was given any "use" or "right to use" the p....
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....acity does not or will not cause interference to other customers of satellite or other satellites and does not or will not adversely affect Asia Sat's ability to coordinate the satellite with other satellite operators. It was submitted that such provision in the agreement belies the claim of the assessee that customer has no role and he is using only a standard facility. It was contended that if it is a standard facility, then no prior permission or plan is required and the customer would have remained a passive recipient of the service provided by the satellite provider which is clearly not the case here. Then, Ld. Counsel has referred to clause 4 of the agreement under the head "Deposit and utilization fees". Reference was made to clause 4.2 of the agreement wherein consideration has been mentioned to be for the use of transponder capacity and other services provided by Asia Sat which according to Ld. Special Counsel is not for any standard facility as is contended by the other side. It was contended that reliance is being placed by the revenue on the word "for" used in the said clause and it is submitted that this clause makes it clear that the consideration is for the use o....
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....gnals to the satellite and until or unless the signals reaches and enters transponders, the transponder mounted on the satellite does not even get activated and remains handicapped being unable to process anything. Even after such processing is done after uplink by the customer, until or unless downlinked, the processed signals just get scattered and does not yield anything. It was contended that to illustrate the functioning further following illustration can be cited:- "In the case of some breaking news of an event which is exclusively pertaining to Indian affairs, the Indian telecaster or broadcaster are the only entities which by virtue of their infrastructure and expertise have the capability to capture and relay the said event onward for satellite transmission. The bare exigency of such business would in the least require that a customer or telecaster is granted and assured an interrupted usage of the satellite transponder so as to enable him to telecast spontaneous news, occurrences and events which require an immediate broadcast. If the case of the assessee is to be believed that would mean that the customer or the telecaster is in some way dependent upon or handic....
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.... assessee can send its engineer for an on site inspection to assist the customer for qualifying a ground station. If it is so, Ld. Special Counsel pleaded that one fails to understand the need to have the processes in the hands of the customer/telecaster inspected and the urgency to ensure their correct and proper functioning if, as claimed by the assessee that no processes have been granted or shared by the satellite provider to the customer or the telecaster. Thus, it was contended that the entire process is not privy to the satellite companies. 139. Referring to clause 6.1 of the agreement, it was pleaded that if the customer is not using the process, then, there was no need for the clause to be written in the agreement which states "interruptions which are not attributable to negligence or default of the customer" which entitles the customer for refund of utilization fees. It is submitted that if customer is not using the process, then, there was no occasion for any apprehension that the process that has come in the hands for usage or operation would be not properly used or operated. In clause 6.4, it has been made clear that "no refund in utilization fees will be made if th....
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....fide opinion of the assessee is unlawful under applicable laws find similarly was the effect of clause 9.3(a) and (b) wherein as per clause 9.3(a) the customer was under an obligation to provide reasonable ct tails to the assessee regarding the nature of the material that the customer is intending to broadcast and/or the services to be provided by the customer through the use of the transponder capacity. In sub-clause (b) it has been provided that the customer has undertaken to the assessee that he will use all commercial reasonable efforts to ensure that the material which is intended to be broadcast is to provide design and will not cause assessee to violate any applicable law and/or third party rights, In sub-clause (c) Asia Sat has been provided with a right, in addition to desist the customer from broadcasting the material, to suspend customer's use of transponder capacity. 141. Ld. Special Counsel referred to clause 11.3 (a) of the agreement which talks of "utilization fee" by the customer and it was submitted that it is a pointer to the fact that it is the customer who I is utilizing the process for telecasting. It was submitted that though clause 11 of the agreement ....
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....p the earth station, in conformity with the requirement of the satellite, uplinks and downlinks the beams without which the satellite or transponder would be nothing, but dead piece of matter suspended in the high skies. 144. Similarly, with respect to agreement in the case of Shine Satellite Company, Ld. Special Counsel referred to the clauses 7, 9 and 10 of the agreement and clauses B.3, BA(i), BA (ii), B.6, B-7, B-3, B-9A, B.10, B-11.2 of the Appendix-B to raise the similar contentions and it was submitted that the dominant intention of the parties when they signed the agreement was the use and right to use the process of the satellite or transponder vested in the customer and, therefore, the consideration will fall within the domain of "royalty" liable to be taxed in India. Further reference was made to the advertisement given by New Skies on their website in which it was mentioned that "in order to preserve the high level of service quality and integrity of the SES NEW SKIES space segment we have developed a process by which earth stations are granted access to the satellite." It was submitted that advertisement itself indicated that the customer entered into contract has g....
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.... Lordships of Hon'ble Supreme Court referring to the rule of interpretation noscitur a sociis observed that such rule is merely a rule of construction and the same cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined words corresponding the wider. It is only where the intention of the Legislature in associating wider words and words of narrower significance is doubtful or otherwise is not clear that the rule of noscitur a sociis would be applied usefully. It could be applied where meaning of words of wider import are doubtful, but where the object of the Legislature in using wider words is clear and free from ambiguity, the said rule cannot be pressed into service. Reference was also made to the decision of Hon'ble Supreme Court in the case of Godfrey Philips India Ltd. v. State of UP AIR 2005 SC 1103 and reference was made to the following observations:- "We are aware that the maxim of noscitur a sociis may be a treacherous one unless the societas to which the socii belong, are known. The risk may be present when there is no other factor except contiguity to suggest societas." 147. ....
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....ranted the customer the "use" and "right to use" the process. It was submitted that the contention of the assessee that it is the person who is using the process for providing facility will be correct only in a situation where the customer who has the telecasting rights of say, a cricket match being held at Gurgaon and wants the same to be screened at Bangalore and for that contact the assessee and issues a limited instructions to this effect and the customer has no earth station, then, in that situation, the process can be said to have been used by the assessee only and it can be said that the assessee is providing only the facility. 149. It was submitted that the revenue is placing reliance on the decision of the Authority for Advance Ruling (AAR) - P. No. 30 of 1999's case where, according to the Ld. Special Counsel, on almost identical facts, it was held that the payments made for such an arrangement will be a royalty. It was submitted that this decision has not been distinguished by any of the counsels appearing on behalf of the assessees. Therefore, it means that they have accepted the reasoning of the AAR. 150. Addressing his arguments on the issue that whether the....
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....nt in the domestic definition, and the same in the circumstances never crystallized for debate in the said proceedings, no arguments on the said issue were addressed and the said remark remained an illustrative venture not to be accorded the status of a precedent, more so when the Ld. Tribunal's Obiter have no sanctity in law and such remarks do not form part of the doctrine of Stare decises. (d) That it is further submitted that while the Ld. Bench in the decision of Pan AmSat has mandated departing form the interpretation of the Ld. Bench in Asia Sat citing the onus of the same to lie upon the 'surrounding words' as appearing in the definition of Royalty under the treaty, but the said decision (Pan AmSat) does not offer any elaboration upon the said assertion other that simply mentioning that the 'surrounding words' as occurring in the definition of Royalty under the treaty necessitate departing from the conclusion of Asia Sat. That it is respectfully submitted that since the Ld. Tribunal in the said decision has riot done anything more than just simply mentioning the mystery of surrounding words and has not thought it fit to discuss or dispel the ....
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....al in Pan AmSat. (h) That the Ld. Tribunal in the case of Pan AmSat has fallen in grave error in holding that the word 'secret process' is also a specie of intellectual property, which observation of the Ld. Tribunal are in direct contrast to the decision of the Apex Court reported in AIR 1960 SC 610 & AIR 2005 SC 1103 to which decisions the attention of this Hon'ble Bench was also drawn during the hearing and thus the subsequent Division Bench has fallen in grave error in not appreciating that in the definition of Royalty as occurring in the treaty, all classes of intellectual property being copyright, trademark and patent have been indicated and the treaty framers in their wisdom have further travelled great distances to include other properties/categories, such as mode, design, similar property or imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill or use or right to use any industrial, commercial, or scientific equipment or rendering of services in relation to the above, which within themselves are not intellectual properties, because had the same been intellectual properties then there was ....
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.... and it was submitted that the findings in both the paras are self-contradictory and, thus, also the decision in the case of Pan AmSat cannot be accepted or applied. 152. It was submitted that the agreement between the assessee and the customer are commercial agreements. The terms, conditions, clauses, schedules and annexures to these agreements are pointer to the use of the process in the transponder by the customer. The customer is assigned a particular band width frequency on which it can uplink and such uplink is only possible after the customer uses the assigned codes and keys to have an access to the protected process contained in the assigned transponder. It was submitted that it is not as if anyone and everyone at his own can access any transponder. There has to be synchronization and matching of the frequencies and codes of the uplinked signal with the recipient transponder. 153. Thus, it was submitted that the consideration received by the assessee in respect of transponder's capacity is taxable under clause (iii) of Explanation 2 to section 9(1)(vi) and without prejudice to the same it was submitted that it can also be taxed under Clause (iva) on the ground tha....
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....ed in the US to provide transmission services to the third party. There was no transfer of possession and right to use of any of the above facilities and therefore, no lease agreement existed. Consequently, the plaintiff's income was not rental income. (ii) Secondly, the expression 'the use of, or the right to use industrial equipment' within Article 11 of the China-US Tax Treaty should be understood to mean the equipment is actively and effectively used by the user. However, during the whole process of signal transmission, all facilities were wholly operated and used by the plaintiff exclusively. The third party was not authorized to and did not, in any way, effectively use any facilities of the plaintiff. The plaintiff's income was not a royalty. (iii) Thirdly, the plaintiff's income was active income which had been acquired through constant work and belonged to the category of business profits. Since the plaintiff did not have a permanent establishment in China, its income should be exempt from China taxes. The defendant contended that:- (a) Firstly, the term 'use' in the China-US Tax Treaty refers to use of both ta....
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....t of the bandwidth of each single satellite, transponder can be used independently for signal transmission. Under the Agreement, in normal situations, the designated part of the bandwidth of the satellite transponder shall be used to transmit the third party's television signal only, which means the third party solely owns the right to use the designated part of the bandwidth. Since the bandwidth is provided by the satellite system, the third party s right to use the bandwidth shall be viewed as the right to use the satellite system. Therefore, payments that the third party made to the plaintiff in consideration for this shall be classified as payment received as a consideration for the right to use industrial, commercial or scientific equipment within the meaning of royalties as provided in Article 11 of the China-US Tax Treaty. Paragraph 2 and para 5(a) of the same article also provides that royalties will be deemed to arise in a contracting State when the payer is a resident of that contracting State. Such royalties may also be taxed in the contracting State in which they arise and according to the laws of that contracting State, but if the recipient is the beneficial owner ....
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....x Act, 1961, the source rule is based on the payer of payment which covers the case of resident as well as non-resident. Thus, it was submitted that even if payments are made by the non-residents, the same are sourced in India because such payments are made for the purpose of business or profession carried on in India and for the purpose of making or earning income from source in India i.e., business of TV channels in India. It was submitted that source of income lies in the subscription income as well as advertisement income which accrues or arise in India. Reference was also made to the decision in the case of Star Television Asia Region Ltd. v. Dy. CIT [2006] 99 ITD 91 (Mum.) to raise similar contention. 158. It was submitted that to consider the source rule relating to royalty or fee for technical services, neither the location of the property used nor the place for performing the services is relevant. It was submitted that neither the Act nor the Tax Treaty contains such requirement. The source rules are based on payers. It was submitted that observations of the Bench in the case of Pan AmSat that the performance of the services is not in India and is several thousand kilom....
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....Skycell the customer is not a part of process. It was submitted that Hon'ble Madras High Court did not touch the issue in hand which pertains to "royalty" and royalty alone. Reference was made to para 6.24 of the decision in the case of Asia Sat and it was submitted that the decision of Hon'ble Madras High Court in the case of Skycell could not be applied to the cases of satellite companies. Reference was also made to para 6.25 of the Asia Sat's decision to contend that the process was used by the customer and the services were provided in connection with the process and the same falls within the definition of royalty. 161. Referring to the decision of Hon'ble Delhi High Court in the case of Bharti Cellular Ltd., it was submitted that the said case also relates to applicability or otherwise of section 194J of Income-tax Act, 1961 and it was held that the services so provided do not fall within the meaning of the expression "technical services". It was submitted that while repelling to contention of the revenue, one of the tests laid down by the Hon'ble High Court was that there should be an element of human interface before a service can be held to be technic....
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....7 of Motorola decision, it was submitted that in that case the payment was not considered as royalty because it was not made for a copyright, but for a copyrighted article. 165. It was submitted that so far as the applicability of decision of Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. as relied upon by the other side to contend that the income received by the assessee is not sourced in India and has no business connection in India because of the fact that the signals are received outside India and released out of India and, thus, the receipts, if any, cannot be said to be sourced in India. Reference in this regard was made to the insertion of Explanation in section 9 by the Finance Act, 2007 with retrospective effect from 1-6-1976 which is clarificatory in nature and it was pleaded that in view of that Explanation the reliance on the said decision cannot be placed now by the assessee. 166. Further reference was made to the decision of Hon'ble Bombay High Court in the case Clifford Chance. It was submitted that this judgment also has no application for two reasons:- (1) Issue of royalty was not involved. (2) In view....
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....re, do not have any persuasive value. Reference in this regard was made to the decision of Hon'ble Supreme Court in the case of Chairman & Managing Director, United Commercial Bank v. P.C. Kakkar [2003] 4 SCC 364 to contend that right to reason is an indispensable part of the sound judicial system and in the absence of reasons, the courts cannot perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. With regard to other decisions relied upon by Ld. AR appearing on behalf of Shin Satellite, it was submitted that those decisions are in respect of 9(1)(vii) and they are distinguishable as per the submissions already made and, thus, they do not have any application on the facts of the present case. 169. Distinguishing the decision of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. it was submitted that the issue before Hon'ble Supreme Court was service tax as well as sales-tax. Referring to the decision of Apex Court in Jagatram Ahuja v. CGT AIR 2000 SC 3195, it was submitted that "words and expressions judicially defined in one statute as judicially interpreted do not afford a guide to construc....
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....Court that there was no imparting of experience by the Institute in favour of the client and thus no TDS was required to be deducted. It was submitted that the said decision also does not advance the case of the assessee rather it advance the case of the revenue as it has never been held by Bombay High Court that payment received for parting with technical knowledge are royalties which are not IPRs, do qualify for royalty, but in the peculiar facts of the case, since no technical knowledge was imparted, the payments were held to be royalty, but not otherwise. 173. Referring to the commentary written by Klaus Vogal relied upon by the other side, it was submitted that learned author referred to the secret formula or process and proceeded to observe that "this covers know-how in a narrower sense of the term viz., of business secrets or commercial or industrial nature. In most countries they enjoy a relative protection or capable of being protected." It was further observed by learned author that as a rule, the right to use already comes into existence in these instances by authorized information. Thus, the observations of learned author supports the case of the revenue because at t....
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.... 6.25, the services should be held in connection with the use of the process as contemplated by clause (vi) of Explanation 2 to section 9(1)(vi) of the Act and, similarly, this would also constitute royalty within the meaning of tax treaty also. 177. Finally, it was submitted that the decisions relied upon by the ld, Counsels of the assessee adjudge the question which are materially different from ones involved in the controversy at hand and the same cannot be pressed into service to advance the case of assessees as the principles or propositions that they duly discussed and settled is far fetched from the questions or issues involved in the present case pending determination by the Special Bench. It was submitted that the essence of the judgment or the ratio dicidendi is the binding principle which a ruling lays for all future references. In examining the applicability of the judgment to a particular set of facts, it is well-settled that it is the ratio of a decision that determines the force of applicability of a judgment to a particular set of facts. For this purpose, reliance was placed on the decision of Hon'ble Supreme Court in the case of Jagdish Lal v. State of Harya....
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....gnals by the telecasting companies. The specifications of uplinking and downlinking instruments are generally prescribed by the operating companies of satellite to the telecasting companies so as to obtain optimized results. The satellite companies offer their services to the telecasting companies to ensure that the instruments installed by telecasting companies at their earth station are compatible enough to uplink the data and to downlink the same in a way that best results are obtained. If the uplinked signals have poor quality, then probably the down linked signals will not have any quality better than the quality of signals which have been unlinked. In other words, the job of satellite companies is highly scientific job and it requires high scientific skill to produce the desired results. The activities of the satellite companies as well as telecasting companies are commercial activities so as to earn maximum profit out of it. 180. Proceeding further, for proper appreciation of the issue, it will be relevant to discuss certain provisions of Income-tax Act, 1961 relating to taxation of income of non-residents. Section 5(2) defines the scope of income relating to non-resident....
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.... (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)." 183. So as it relates to question No. 1, as proposed to be answered by the Special Bench, it may be mentioned that the "process" whether it is "secret" or otherwise is involved in the "transponders" installed on the satellite. Satellite is only a space vehicle, which is ....
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....g companies source their income from two sources i.e., amount received from cable operators and amount received from advertisers. Similarly, users of data, which is uplinked/downlinked, may have directly made payment to the satellite companies as per agreement entered into by them. However, in the present case, we are concerned with the satellite companies vis-a-vis telecasting companies. The telecasting companies are paying revenue to the satellite companies. Both of them are carrying on these activities in commercial manner. Under these facts, we have to consider that whether or not such revenue is taxable in the hands of satellite companies under domestic law as well as under the provisions of DTAA as applicable in respective cases. 185. While examining the taxability of such receipts in the hands of satellite companies, the Division Bench of this Tribunal in the case of Asia Sat has held that such receipts are taxable as per Clause (iii) of Explanation 2 to section 9(1)(vi). Thereafter, this issue was again examined by the Division Bench of this Tribunal in the case of Pan AmSat wherein the Division Bench agreed with the conclusion drawn in the case of Asia Sat, but on the b....
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....he productivity, use or disposition thereof; and" 186. Both the sides have submitted elaborate arguments on the issue that for consideration being taxable as royalty whether it is necessary that the consideration should be for using secret process. It was admitted by the learned representatives of the parties that while uplinking and downlinking the signals, there is a process involved. Their contention is that satellite companies themselves use the said process. According to their arguments, as per various views given in commentaries and decisions, the use of process should be by the person who is availing the benefit for the consideration. In other words, the main contention in this regard of satellite companies is that user of the process by satellite companies themselves does not fall within the ambit of word 'use', therefore, the consideration is not in the shape of 'royalty' which could be taxed either under domestic law or under the provisions of DTAA. Whether the "use" or "right to use" the process is vested with satellite company or with telecasting company 187. For contending that the consideration received by satellite companies from their customers....
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....ding that judgment totally out of context in which the questions arose for decision in that case. It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete "law" declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning: 191. Therefore, a meaning interpreted for one word in the statute under one context mayor may not be relevant for another context. As mentioned earlier, a transponder installed in a geostationery satellite is scientific equipment. A process has been embedded therein by which it is receivi....
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....t process. It is the claim of the satellite companies that they are using the process at their own. It has been pointed out that the process is predetermined and preguided according to the requirements of the customers. The satellite companies have no control over data to be uplinked/downlinked by the customers. The customer is authorized to uplink and downlink the data at any particular point of time according to agreement. Thus, the "process" is embedded in the transponder, which is used by the customers and not by the satellite companies as they do not have any control either on the data to be uplinked/downlinked or on the time of uplinking/downlinking. The only obligation of the satellite companies is to observe that transponder is working properly or not. In other words the obligation of the satellite companies is limited only to keep the health of transponders and satellite in a good working condition so as to ensure the uninterrupted use of transponders by the telecasting companies. Therefore, it cannot be said that the process is used by the satellite companies to uplink/downlink the data of telecasting companies. The process is used by the telecasting companies according t....
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....ation. In the case of Madras Rubber Factory Ltd & Dunlop India Ltd. v. Union of India AIR 1997 SC 597 it has been held that if a word has acquired a particular meaning in the trade or commercial circles, that meaning becomes the popular meaning in the context and should normally be accepted. Therefore, it will be relevant if we examine the word "use" which has acquired a particular meaning in the trade and commercial circle relating to provision of transponder capacity (popularly known as segment capacity) by the satellite companies to the telecasting companies. For this purpose, reference can be made to the agreements entered into by the assessees with their customers, a copy of which has been placed on our record and relevant terms contained in the agreements have been referred to show on behalf of the revenue that "user" of the process is by the telecasting companies and, on the other hand, it has been the case of the ld. Representatives of the assessees that if the substance of the agreement is seen, no user is provided to the telecasting companies, but the assessee is merely providing the services to the telecasting companies. 195. First, we shall refer to the copy of agree....
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....is hereby granted the right to use the Transponder Capacity for the Permitted Service only. The Customer may change the Permitted Service upon the written consent from Asia Sat, which consent shall not be unreasonably withheld or delayed. 2.5 The Customer shall prior to taking up use of the Transponder Capacity provide Asia Sat with the Customer's written transmission plans in sufficient detail to enable Asia Sat to ensure that the Customer's use of the Transponder Capacity does not or will not cause interference to other customers on the Satellite or other satellites and does not or will not adversely affect Asia Sat's ability to co-ordinate the Satellite with other satellite operators. Asia Sat shall promptly following receipt of such details, and in any event prior to the Commencement Date, notify the Customer in writing whether the transmission plans are acceptable to Asia Sat and, if not, shall notify the Customer insufficient detail to enable the Customer to amend the transmission plans and submit such amendments until final acceptance by Asia Sat. Provided, however, the foregoing shall not apply if: (a) the Transponder Capacity had been, and con....
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....atellites whether or not owned and/or operated by Asia Sat (including the Customer's own use of other transponders or transponder capacity); and/or (c) flood, typhoon, earthquake, natural disaster, war, civil war, Government action, insurrections or other military actions, civil unrest, strikes, slow downs, lock outs, other labour actions or other events beyond the reasonable control of Asia Sat; (collectively, "Force Majeure") shall not be considered Interruptions for the purposes of Clause 6.1 or Clause 6.6 (A schedule of outages due to effects of the sun expected to occur during the Utilisation Term shall be provided as soon as practicable after the Customer has provided to Asia Sat details of its proposed services and uplink and downlink facilities and shall be revised from time to time as appropriate)." 197. Clause 7 prescribes regarding contingencies of transponder degradation and protection and clause 7.3 read as under:- "7.3(a) If all Redundant Units on the satellite have been utilized to provide protection for other transponders on the Satellite, Asia Sat shall use reasonable endeavours to provide protection to the Customer's failed Tr....
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....and in any event shall fail to rectify such default within twenty eight (28) days of the receipt by it of notice from Asia Sat requiring rectification of the same; or" 199. A conjoint reading of all these clauses will show that the user in the present case of segment capacity of transponder is vested with telecasting company. Clause 2.1 clearly states that Asia Sat hereby agrees to make available transponder capacity to the customer during the utilization term and the customer hereby agrees to use the transponder capacity in accordance with the terms of this agreement. Thus, it is the satellite company who is making available the transponder capacity to the customer who has agreed to use the same in accordance with the agreement upon making the payment mutually decided consideration. It is only in a case where Satellite Company wants to protect the overall health and performance of the satellite in unusual, abnormal or other emergency situations, it can preempt and interrupt the customer's use of the transponder capacity. Clause 2.4 has granted the right to use the transponder capacity to the customer for preempted services. Clause 4.2 provides that the consideration stated ....
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.... ante and described at page 101 of above mentioned book of Justice G.P. Singh. So, the contention of Ld. Representatives of the assessees that using of the process is only by the satellite company cannot be accepted and it is held that the telecasting companies and using the process in the transponder. Now, it will be relevant to deal with the case law and other contentions of learned representatives of the assessees in this regard. 200. It may also be mentioned here that similar issue was raised by PanamSat before Chinese court in the case of Pan AmSat. The issue which was proposed to be answered by the court was as under: "(a) Secondly, under the agreement, the third party availed itself of the plaintiff's satellite equipment to transmit its television signals. This demonstrated of the plaintiff. Hence, the so called season-based service fees and equipment fees that the third party paid to the plaintiff should be classified as a royalty under the China-US Tax Treaty." The court has held as under:- "Article 11(3) of the China-US Tax Treaty defines royalties as 'payments of any kind received as a consideration for the use of, or the right to use, any....
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....t it will be necessary to deal with this aspect as certain arguments were submitted before us that the word "secret" preceding "formulae" should also be read with the word "process" while construing domestic provisions as well as DTAA provisions. Both the provisions have already been reproduced above. The law is well settled that punctuations are not relevant while interpreting a statute. Punctuation plays only a marginal role in the interpretation of the statute. The only exception under this rule is that when a statute is carefully punctuated and there is a doubt about its meaning, then only weight should be given to punctuation. Reference in this regard can be made to the following decisions which have been relied upon by the learned representatives of the assessee:- (1) Lewis Pugh Evans Pugh's case (2) Ashwini Kumar Ghose's case (3) Pope Alliance Corpn.'s case. 204. In the case of Lewis Pugh Evans Pugh while construing Article 48 of the Indian Limitation Act, 1908, which read as "for specific movable property lost or acquired by theft, or dishonest misappropriation or conversion, or for compensation for wrongfully taking or detaining th....
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....red to the Legislature while drafting the provisions of section 9(1)(vi). Therefore, there is no force in the claim of Ld. Representatives of the respective assessees that simply as comma is placed after the word secret formula or process, the process should also be construed to be "secret" to bring the consideration within the ambit of royalty. Moreover, principles of literal interpretation do not apply to interpretation of tax treaties. To find the meaning of words employed in the tax treaties we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these items are not really conclusive factors in the context of interpreting a tax treaty which ought to be interpreted in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundant. This position of law has been explained by this Tribunal in the case of Hindalco Industries Ltd. v. Asstt. CIT [2005] 94 ITD 242 (Mum.) and the relevant observations are reproduced below:- "9. Before we address ourselves to the aforesaid questions, it is necessary to bear in mind the principles governing the interpr....
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....ar words mean different things in the two sentences: 13. In a later judgment, Harman J. in Union Texas Petroleum Corpn. v. Critchley [1988] STC 69, affirmed the above observations of Goulding, J. and added: 'I consider that I should bear in mind that this double tax agreement is an agreement. It is not a taxing statute, although it is an agreement about how taxes should be imposed. On that basis, in my judgment, this agreement should be construed as ut res magis valeat quam pereat, as should all agreements. The fact that the parties are 'high contracting parties', to use an old description, does not change the way in which the Courts should also approach the construction of any agreement'. We are in considered agreement with this school of thought which lays down the proposition that, strictly speaking the principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these terms are not really conclusive ....
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.... not qualify the word "process". 210. There is one more aspect of this issue. If such contention of ld. representatives of the assessee is accepted than it will tantamount to restrict the scope of word royalty, which may not be the intention of the Legislature. For ascertaining this aspect, it will be helpful to go through explanatory notes on the provisions of Explanation 2 to section 9(1)(vi) when they were introduced. Reference can be made to Circular No. 202 dated 5th July, 1976 and relevant para 15.5 is reproduced [source: 105 ITR 27 (St.)]:- "15.5 For the purposes of the aforesaid source rule, "royalty" has been defined in Explanation 2 to section 9(1)(vi). It will be seen that the definition is wide enough to cover both industrial royalties as well as copyright royalties. Further, the definition specifically excludes income which would be chargeable to tax under the head "Capital gains" and, accordingly, such income will be charged to tax as capital gains on a net basis under the relevant provisions of the law." 211. Therefore, it can be seen that there is no legislative intent to restrict the scope of royalty rather the intention of Legislature is to make the....
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.... described by Hon'ble Supreme Court in the case of CIT v. McDowell & Co. Ltd. [2009] 314 ITR 167. The observations of their Lordships at page 172 in this regard are as under:- "The principle of statutory interpretation is well known and well-settled that when particular words pertaining to a class, category or genus are followed by general words, the general words are construed as limited to things of the same kind as those specified. This rule is known as the rule of ejusdem generis. It applies when: (1) the statute contains an enumeration of specific words; (2) the subjects of enumeration constitute a class or category; (3) that class or category is not exhausted by the enumeration; (4) the general terms follow the enumeration; and (5) there is no indication of a different legislative intent. Reference in this connection may be made to Amar Chandra v. Collector of Central Excise AIR 1972 SC 1863 and Housing Board of Haryana v. Haryana Housing Board Employees' Union AIR 1996 SC 434." 214. Rule of noscitur a sociis has been explained by Hon'ble Supreme Court in the case of Hospital Mazdoor Sabha at pages ....
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.... interpretation shall be against the provisions of DTAA/Act. The provision covers protected as well as unprotected Intellectual Properties. For example, 'patent' in itself is a protected item. Invention itself can be protected or not protected. Similar is the position with the model, design and secret formula or process. Trademark can also be registered or unregistered. Thus, clause (iii) to Explanation 2 to section 9(1)(vi) describes the things, which may constitute intellectual property but at the same time it is not necessary that intellectual property must also be a protected one. Therefore, the consideration for use of the "process" in transponder, even if it is not protected, will fall within the definition of "royalty" as nowhere in the provisions it is stated that the process also should be protected one. Therefore, the process as described in clause (iii) of Explanation 2 to section 9(1)(vi) cannot be construed to be a "protected process" as argued by ld. representatives of the assessees. The process in transponder is an invention which is quite like intellectual property. However, its position, dimension and physical appearance is such that it cannot be protected ....
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....Bombay High Court was whether by issuing certificate of gradation of diamond, the assessee had imparted any information concerning industrial, commercial or scientific experience. It was observed that the assessee did not part with information concerning industrial, commercial or scientific experience when it issued the grading certificate. It also was not a payment received by them in consideration for services of managerial, technical or consultancy nature which could include to the application or enjoyment of the right, property or information. It also does not make available technical knowledge, experience, skill, etc. to enable the person acquiring the service to apply the technology contained therein. The facts in that case were entirely different from the facts of the present case. The provisions considered therein were also different as they relates to consideration received for information concerning industrial, commercial or scientific experience which are contained in Article 12(3)(a) and clause (iv) of Explanation 2 to section 9(1)(vi) which also deals with the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience ....
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..... Thus, the consideration paid by the telecasting company is a consideration for user of the process. 221. Further reliance has been placed on the views given in the book written by well-known author Klaus Vogel. While defining the word 'use' for the purpose of letting in article 12, it has been stated that whenever the term royalty relates to payment in respect of proprietary rights, processes, or equipments, application of Article 12 requires the payments to be made for use or right to use, the asset in question. It has further been stated that a distinction must be made between letting the licensed asset for use on the one hand and transferring its substance on the other hand. The decisive difference in this connection is degree of change in the attraction of the asset from licensor to licensee. On the other hand, another definition to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from "services", via "letting" to "alienation" outright alienation is one clear-cut extreme, viz., outright transfer of the asset in favour of the payer o....
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....mpanies as they use that transponder as a medium to uplink and to receive back their data/images at any desired point of time covered by the agreement in the footprint area. Thus, effective user of the transponder is vested in the telecasting companies and not with the satellite companies. 223. Here it will also be relevant to mention that considering the commentary written by Klaus Vogel, AAR in its decision P. No. 30 of 1999's case, has held that the consideration received by the applicant was 'royalty'. The facts in that case are as under:- "The applicant, one American company 'Y' belongs to 'ABC group which operates in the worldwide credit and travel business. 'Z' is a wholly-owned subsidiary company of 'Y' and 'XT' is an Indian company wholly-owned subsidiary of 'Z'. 'XT' has set up a 100 per cent EOU for performing activities of 'Data management information analysis and control/for its customers. 'XT' has its own infrastructure in terms of processors/related computer equipment, microwave towers, etc. The applicant-company 'Y' having a world-wide Information Processing Telecommunica....
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....ntingent on the productivity, use, or disposition thereof; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph (1) of article 8 (Shipping and Air Transport) from activities described in paragraph (2)(c) or (3) of article 8." 224. After considering the various observations from the said commentary of Klaus Vogel, the term royalty was analyzed as under:- "31. It would appear that there are three main ingredients which partake of the character of royalty payment: (1) It is a payment made in return for a right to exercise a beneficial privilege or right. (2) The payment is made to the person who owns the right. (3) The consideration payable is determined on the basis of the amount of use. The answer to the questions was given as under:- 33. The answer to the above question has to be determined with reference to the facts and circumstances of this case mentioned above. We are moving increasingly towards a digital age. With increasing globalization, both labour and....
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....omplete control by the user or the person who is entitled to use; (iii) it is an exclusive use by such person and excludes multi-user or its very connotation; (iv) the provider of use does not bear any risk of either diminished receipts or increased expenditure if there is non-performance under the contract; and (v) a concern for confidentiality exists. For raising such contentions reference is made to para 28 of tag report and on the decision of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. and OECD Commentary paras 11.1 to 11.3 227. Para 28 of tag report is under the head "computer equipment." It has been described in para 27 that the group has examined a few transactions where it could be argued that tangible computer equipments (hardware) was being used by a customer so as to allow the relevant payment to be characterized as "payments for use of, or right to use, industrial commercial or scientific equipment" and in para 28 it has been observed that various factors have been examined to distinguish rental from service contracts for the purposes of section 7701(e) of US Internal Revenue Code and it was found that those factors a....
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....phs: The principal issue that arises in this batch of cases relate to the imposition of sales tax in the light of article 366(29A) clause (d) on different activities carried on by telecommunication service providers. The petitioner, Bharat Sanchar Nigam Ltd. (for short "BSNL"), is a licensee under the Indian Telegraph Act, 1885. The licence of the petitioner is obtained from the Government of India which is the same as the licence given also to various private telecom operators which entitles the BSNL to carry the activity of operating telegraph limited to the scope of telecommunication facilities. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right t....
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....age of the statute viz., a "transfer of the right to use and not merely a licence to use the goods"; having transferred the right to use the goods during the period for which it is to be transferred the owner cannot again transfer the same right to others and it was observed that none of these attributes were present in the relations between telecom service provider and the consumer of such service and, on the contrary, the transaction was a transaction of rendition of service. It can be seen that what has been considered by their Lordships of Hon'ble Supreme Court was the transaction whether the same can be held to be transaction of sale. Transfer of right to use the goods is to be considered to be transaction of sale when the above conditions laid down are fulfilled. The test laid down by Hon'ble Supreme Court in Bharat Sanchar Nigam Ltd.'s case cannot be applied to the present case as in the present case we are not considering the transactions which are considered to be for the transfer of right to use the goods for which it is very much necessary that there must be goods available for delivery. Therefore, these observations of Hon'ble Supreme Court are not relev....
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....es to carryon their business of telecasting the programmes through which they are earning profit. Without using the process in the transponder they cannot relay their programmes to the end user out of which they are earning income. It has already been pointed out that use of transponder capacity is one of the necessary elements in the business activity of the telecasting companies and providing the segment capacity by installing transponder on satellites is the business activity of the satellite companies. Therefore, the dominant intention and essence of transaction is that the satellite companies are providing segment capacity through transponders installed on their satellites to the telecasting companies for a consideration as a part of their business activity. Similarly, telecasting companies are using the segment capacity (the process in the transponder) for a consideration paid by them to satellite companies as a part of their business activity to enable themselves to telecast the desired programmes. Thus, even applying the dominant intention of the parties and essence of the transactions, a conclusion can be arrived at that the payment of consideration is for use of the proce....
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....of this article and fees for technical services defined in para 4( b) of this article, 10 per cent of the gross amount of such royalties and fees for technical services. (3) For the purposes of this Article, the term "royalties" means:- (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific' work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic. (6) The provisions of paras 1 and 2 of this article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in t....
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....n Land Uplink Station) which is set up and operated by the applicant. The capacity is meant to be used for the purpose of providing an augmentation to global satellite navigation system. The capacity will be utilized through data commands issued from the ground station (INLUS). Undeniably, the applicant will not be able to operate the transponder in the space but it will be transmitting/uplinking the augmented data to the navigation transponder. Access to the transponder's space capacity is established through the applicant's operations at the ground station (INLUS) pursuant to which the transponder transmits signals/data received from INLUS from the geo-stationary orbits. The Inmarsat satellite carries many transponders out of which the transponder for navigation purposes will provide the SBAS signals in space at two frequencies i.e. 1575.42 MHz (L1) and 1176.45 MHz (L5) which are accessed for the GAGAN project undertaken by the applicant. It is also seen that the navigation transponder which uplinks and downlinks the data is a passive transponder unlike the communication transponder." 234. From the above observations, it is clear that AAR while considering the consider....
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.... undergo any change or improvements through the media of transponder. In essence, it amounts to the provision of a communication navigational link through a facility owned by IGL and exclusively operated/controlled by it. The operation and regulation of transponder is always with IGL. It is also pertinent to notice that a navigation transponder unlike a communication transponder is not an active transponder in the sense it does not amplify. It is a passive transponder, as pointed out by the applicant. This is also a pointer that the applicant does not use the equipment (transponder) as such". 236. In the present case, it has been admitted that the signal uplinked by the telecasting company to the transponder are amplified and are given required strength so as they are received in a good condition in the footprint area. Thus, there is a difference between the transponder as considered in the case of ISRO and as being considered in the present case. 237. Therefore, it is clear that what was considered by ISRO was either the Article 13.3(b) of the DTAA or clause (iva) of Explanation 2 to section 9(1)(vi). Moreover, considering the facts involved in the present cases, we have giv....
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....needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a very much greater level of expenditure by the supplier in order to perform his contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services. 242. It can be seen that all these paras deals with the consideration relating to know-how and they do not deal with the payments relating to space segment provided in transponder capacity. 243. From the above discussion it is clear that the consideration paid by the telecasting companies to the satellite companies is for the 'use' and 'right to use' the process involved in the transponder. For the purpose of considering the said amount received by the satellite companies as 'royalty', it is not necessary that the payment of such consider....
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.... a particular point of time. Thus, the payment of consideration is for the purpose of business which is being carried on by the telecasting companies in India. Without availing the said process, it is not possible for telecasting companies to telecast their programmes in India. It has been discussed above that the main intent and purpose of paying the consideration by the telecasting company is for the purpose of their business. Availing transponders capacity is one of the main ingredients of the business of the telecasting companies. To provide transponder capacity by the satellite company is the main part of the business activity of satellite companies. Thus, it cannot be said that telecasting companies are not interested in the process involved in the transponder as without availing the same they are unable to conduct their business in India. After entering into contract, satellite companies have no right to interfere in the process involved in the transponder except as provided in the agreement. The process is being used by the telecasting companies according to their needs. There is no control whatsoever of satellite companies over the time or programmes being telecasted by th....
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.... before Hon'ble Madras High Court in that case was much different than the context involved in the present appeals. Therefore, decision in the case of Skycell cannot be applied to the present case. It can be seen that similar view has been taken by AAR in the case of Dell. The decision in the case of Skycell was distinguished by the AAR on the ground that the said decision could not be applied because the same was rendered in respect of "fee for technical services", which falls within the ambit of clause 9(1)(vii). The relevant observations are reproduced below:- "Counsel for the applicant has drawn our attention to the decision of Madras High Court in Skycell Communication Ltd v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 and the decision of ITAT (Bangalore Bench) in Wipro Ltd v. ITO [2003] 86 ITD 407 and sought to derive support from these decisions. The first one relates to mobile telephone facility provided to the subscribers. The High Court held that technical service referred to in section 9(1)(vii) contemplates rendering or a service to the payer of the fee. Mere collection of a 'fee' for use of a standard facility does not amount to a receipt for technica....
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....ding taxability of offshore supply and offshore service component under the provisions of section 9(1)(vi)(c) it was observed that to attract the tax liability the services should be utilised in India and they should also be rendered in India. Thus, the question before their Lordships were regarding taxability of the global receipts. So far as it relates to onshore supplies and on shore services, there was no dispute regarding the taxability of the income. This case was relied upon by Shri F.V. Irani to show that the consideration received by the assessee cannot be taxed as the services rendered by the assessee and the process employed by the assessee were all outside India i.e., in outer space which is not even above the territory of India as the satellites are not positioned over Indian territory. In our considered opinion, no help can be drawn by Shri F.V. Irani from the said decision of Hon'ble Supreme Court as the issue considered therein was in respect of global income of the assessee. The issue in the present case is regarding taxability of amount received by the assessee as royalty under section 9(1)(vi)(C). The consideration has been received by the satellite company f....
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....India. The purpose of establishing geostationary satellite in the orbit which inter alia covers the footprint in India by the satellite company is only for the purpose of carrying on business. Similarly, obtaining transponder capacity to telecast desired programmes in India by the telecasting companies is also a business activity for earning profits. Therefore, the ratio of aforementioned decision of Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. is not applicable. 249. Now, coming to the contention of Shri F.V. Irani regarding the decision of Hon'ble Bombay High Court in the case of Clifford Chance. We have carefully gone through the said decision. The assessee in that case was appointed as English Law Legal Advisor for four infrastructure projects in India. Partners of the assessee in that case had visited India for rendering services from time to time aggregating to more than 90 days in the relevant financial year. The return of income filed by the assessee was in respect of services rendered in India to the clients and services rendered to these clients from abroad were excluded from that income. However, the Assessing Officer assessed....
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....ata/images by obtaining segment capacity from satellite companies for which purpose the consideration is being paid by telecasting companies to satellite companies. Satellite companies and telecasting companies both of them are carrying on these activities to earn income. The source of income of satellite companies originate from India as the telecasting companies are making payment to satellite companies out of income received by them either from viewers in India or from advertisers who telecast their advertisements in India, etc. It is also held that to fall within the ambit of word "royalty", it is not necessary that the consideration should be for secret process. Payment made for process as involved in the transponder shall also be considered as royalty which falls within the ambit of clause (iii) of Explanation 2 to section 9(1)(vi). Having held so, the amounts received by satellite companies shall also fall within clause (vi) of Explanation 2 to section 9(1)(vi) which read as under:- "(vi) the rendering of any services in connection with the 'activities referred to in sub-clauses (i) to (iv), (iva) and (v)." 251. Clause (iii) to Explanation 2 to section 9(1)(v....
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....the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing use and right to use of the process and, thus, it is royalty within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to section 9(1)(vi). 253. In the light of the above discussion, our answe....