TaxTMI 
TaxTMI 
2006 (8) TMI 238
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....he question which arises in these matters simply is whether the payments made by some of the non-resident companies (referred to as broadcasters or television channels) to the assessee-company are subject to the tax under the IT Act, 1961. Brief facts: Assessment proceedings 2. The assessee owns and operates a global network of telecommunication satellite which is located at a height of around 35,900 kms. (22,300 miles) above the earth. Several television channels use. the satellite for purposes of transmission of the images. They videograph the events as they happen, use the uplink facilities to send the signals, after encoding them, to the satellite owned by the assessee. At the satellite, which is also referred to as transponder, the signals are decoded and they are down-linked and scattered over the area covered by the satellite, which area is referred to as the "footprint" of the satellite. The television channels enter into contracts with the assessee-company for using the satellite (actually, the transponder capacity). They make use of the facility to make the signals available to the cable operators who in turn beam the signals to the viewers at their homes. There are....
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....formed within a satellite are secret processes protected by law and that on these facts the case was completely governed by the decision of the Delhi Bench of the Tribunal in the case of Asia Satellite Telecommunication Ltd. vs. Dy. CIT (2003) 78 TTJ (Del) 489 : (2003) 85 ITD 478 (Del) in which on identical facts the revenues received by the satellite owner was held taxable as "royalty". It appears that the assessee had objected, inter alia, on the ground that the royalty does not arise in India since the payments are not made by the Contracting State (except Doordarshan) or a political sub-division or a local authority or a resident of India and, therefore, art. 12(7) is not attracted. The AO overruled the objection by saying that even under art. 12(2) the royalties may be taxed in the Contracting State in which they arise and that in the present case since the services of the assessee are being utilized in India for the benefit of Indian viewers the royalty arises in India, and therefore there is no need to rely on art. 12(7) which is a deeming provision. In his view, there are only two places (alternative) where the royalty may be said to have accrued: (1) the place where the pr....
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....rding to the Department, subject to tax deducted at source, the assessee was under no obligation to pay advance tax. This contention was rejected on the ground that the levy of interest was mandatory and cannot be relaxed. Further appeal to the Tribunal: 8. In the appeal filed by the assessee, grounds have been taken challenging the findings and decision of the CIT(A) which are against the assessee. In particular, a ground has been taken to the effect that the CIT(A) has not considered the contention that the DTAA overrides the Act (ground No. 2). The other grounds challenge the finding of the IT authorities that the income received by the assessee is "royalty", that the royalty accrued in India and also challenge the quantification of the royalty income. The assessee has also questioned the finding that the broadcasters were using the PAS-4 satellite services of the assessee only for India-specific programmes. Ground No. 9 is to the effect that the CIT(A) erred in not permitting the assessee to produce an expert witness to explain the technical working and commercial use of the satellite. In ground No. 10, objection is taken to the levy of interest under s. 234B. 9. In th....
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.....f.1st April, 1976, the nature of royalty has not been changed and the idea runs throughout. The word "process" is surrounded by words such as patent, invention, model, design, trademark etc. which denote intellectual property rights or rights which are privy to the grantor. The payments in question in the present case were not made for use of any intellectual property rights vested in the assessee. (2) There is no "process" involved in the use of the satellite or transponder. Article 12(3) of the DTAA in which the word "process" appears, must be interpreted having regard to the context and the object and purpose as pointed out by Klaus Vogel in his book on "Vienna Convention on the Law of Treaties". The ordinary meaning of the word is not to be preferred. (3) Even if a "process" is involved in the use of the transponder, it is not a "secret process,". The prefix "secret" in the section is applicable both to "formula" and "process". In art. 12(3) of the DTAA, the expression used is "secret formula or process". The comma after the word "process" shows that both "formula" and "process" are treated under the same class and therefore the prefix "secret" qualifies both....
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....bring the signals/beams to a certain stage at the request of the broadcaster (television channel). The "cycle is complete only when the assessee downlinks the signals, which means to ensure that the signals are sent down to the earth stations, and then on to the cable systems". Further, the process involved in the present case is the same as in the case of Asia Sat. The AO has rightly summarized the working of the satellite which matches with' what the assessee itself has stated in its website, which is an admission within the meaning of ss. 17 and 18 of the Evidence Act and estops the assessee from contending that no process is involved. (2) The "process" involved is also a "secret process" within the meaning of art. 12.3(a) of the treaty with USA. The treaty is part of s. 90 of the IT Act and the same words appearing in the Act as well as the treaty must be given the same meaning. Accordingly, if the word "secret" in Expln. 2 to s. 9(1)(vi) of the Act qualifies both "formula" and "process", then on parity of reasoning it must be held that the word "secret" in art. 12.3(a) of the treaty qualifies the word "process". According to the generally accepted rules of interpr....
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....e beaming of the signals can be deducted by the TV channel, which means that the assessee will receive payment only for the actual hours beamed which accords with the notion of royalty, as also opined by Klaus Vogel in his commentary. Strong reliance is placed on the order passed by the AAR in P. No. 30 of 1999, ABC, In re (1999) 154 CTR (AAR) 246 : (1999) 238 ITR 296 (AAR) and in P. No. 22 of 1996, XYZ, In re (1999) 153 CTR (AAR) 224 : (1999) 238 ITR 99 (AAR). (4) With reference to the argument that the amount, even if it is treated as royalty, must have been paid for the "use" of the secret process and that there is no physical contact between the processing of signals and the board caster from whom the payment is received, it was submitted on the strength of the judgment of the Supreme Court in State of UP vs. Union of India (2004) 190 CTR (SC) 569 that a "right to use" the goods can be given without parting with the possession of goods and therefore physical use is not the requirement under art. 12.3(a) of the treaty. (5) The payment, in any case, falls to be considered as one for the use of a "literary work". (6) The payment, in any case, is covered ....
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....n benefit. This knowledge or literacy is "process-specific" which is acquired by the broadcaster and the fields of such knowledge are mentioned in Appendix "D" to the agreement. Thus, there is transfer of technology meeting the requirements of art. 12.4(b). The judgment of the Madras High Court in the case of Skycell Communications Ltd. & Anr vs. Dy. CIT & Ors. (2001) 170 CTR (Mad) 238 : (2001) 251 ITR 53 (Mad) cited on behalf of the assessee to contend that what the assessee did was to only render services was rendered under s. 9(1)(vii) under which the definition of "fees for technical services" is different from the definition of FIS under the treaty and hence distinguishable or at any rate not helpful in understanding the treaty language. Reply on behalf of the assessee to the arguments of the Revenue: 14. In the course of a detailed reply, the learned counsel for the assessee contended as follows: (a) Characterisation of the income: The income earned by the assessee is for rendering services, which is the business of the assessee, in the field of transponders which enables the transmission of signals and ought to be normally taxed as business income. In the abse....
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....formulae or process". Factually speaking, there is nothing unique about a transponder or a satellite. The customers may choose any satellite or transponder depending upon their requirements, cost involved etc. as shown in pp. 162-180 of the paper book. All the information about the transponder is available in the public domain. Nothing is secret or undivulged. (d) There are several basic differences between s. 9(1)(vi) Expln. 2 and art. 12.3(a) of the treaty with USA. Firstly, cl. (i) of the Explanation includes an outright sale of the right in the definition of "royalty" whereas the treaty includes only certain types of an outright sale as royalty and not all. Secondly, cl. (iva) of the Explanation was introduced only w.e.f.1st April, 2002, whereas it existed in the treaty even earlier. The Act and the treaty have thus not kept pace with each other. Thirdly, cl. (vi) of the Explanation has no parallel in the treaty. For these reasons, the treaty has to be interpreted on a "stand-alone" basis without seeking any aid from the interpretation of the Act. The decision of the AAR in P. No. 30 of 1999, ABC, In re is distinguishable on facts. That was a case of a customized and s....
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....rmation is only to ensure compatibility so that the transmission is smooth. That does not mean that technology is transferred. It is similar to the user manual handed over to the purchaser of an electrical appliance, say, an air-conditioner. The handing over of such a manual which contains information as to how to effectively and efficiently use the air-conditioner can hardly be described as transfer of any technical service or skill or technology etc., though. it may be part of a service or incidental to the sale of the air-conditioner. Paragraph 4(b) in the MoU which refers to "communication through satellite or otherwise" in Item No. 4 as a field in which transfer of technology is possible applies to a different setting, where a person, for example, desires to start a business of laying under-water cables seeks technical advice or information from another person who is aware of the technology required. That may amount to "make available". In particular, p. 291 of paper book No. III-B on which reliance was placed by the Department (i) relates to the steps to be taken before commencement of the service; (ii) provides for "consultation" with the customer for compatibility and (iii)....
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....le" vis-a-vis arts. 12.2 and 12.7 and this point will be considered at the appropriate juncture if found necessary. Consideration of the issues and decision: 17. Before taking up the issues for consideration, we have to remember the fundamental principles that have been laid down recently by the Supreme Court in two judgments. In Union of India vs. Azadi Bachao Andolan (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) the Supreme Court held as under: "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that s. 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the IT Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under s. 4 and the general principle of ascertainment of total income under s. 5 of the Act, the....
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.... with the Expln. 2 below thereto, is applicable. This also involves the subsidiary question whether the issue is covered by the order of the Delhi Bench of the Tribunal in the case of Asia Sat which is also a case of a non-resident company based in Hong Kong which owned a transponder and allowed it to be used by broadcasters. Both issues are interlinked in the sense that in the above order the Tribunal has held, in the context of the provisions of cl. (iii) of Expln. 2 below s. 9(1)(vi), that a "process" is involved when the signals that are uplinked through the earth stations to the transponder get converted into different frequencies and fit for being downlinked via earth stations over the footprint area. It was therefore held that the payment was for the use of a "process" and hence royalty within the meaning of the aforesaid clause. The clause reads as follows: "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property." It was not disputed before us on behalf of the assessee that the nature of the activity carried on by it is the same as in the case of Asia Sat. If that is so, we have to hold, respectfully fo....
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.... word "process" appearing in cl. (iii) of Expln. 2, that there is no comma after the word "secret" till the end of the clause and had the intention been to qualify the word "process" also with the word "secret" there would have been a comma after the word "process" (by mistake mentioned in the order as "formula"). The Tribunal was thus prepared, with respect, to accept the argument that both the words "formula" and "process" can be said to be qualified by the word "secret" had the clause been drafted as under: "the use of any patent, invention, model, design, secret formula or process, or trade mark or similar property". What the Tribunal has pointed out stands fulfilled in art. 12.3(a) of the treaty with USA. From the article quoted above, it may be seen that there is a comma after the words "secret formula or process" which indicates that both the words "formula" and "process" are qualified by the word "secret". The requirement thus under the treaty is that both the formula and the process, for which the payment is made, should be a secret formula or a secret process in order that the consideration may be characterised as royalty. We do agree with the argument of the ....
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....made for the use of a secret process. Since there is nothing secret about the process involved in the operation of a transponder, the payment for the use of the process-assuming it to be so-does not amount to royalty. 21. The argument of the learned special counsel for the Department that the consideration has been received by the assessee for letting the broadcasters use the patent relating to the transponder/satellite goes farther than the assessment order and therefore cannot be accepted. Even on merits the argument is not acceptable since the patent relating to the transponder/satellite is not with the assessee but is with the manufacturer of the same. At our instance the learned counsel for the assessee filed a copy of the "Satellites Purchase Contract Between Hughes Aircraft Company and Panamsat, L.P.". This agreement shows that the satellite was purchased by the assessee from Hughes Aircraft Company of California. It has no relevance to the argument sought to be canvassed on behalf of the Department. The learned special counsel did not draw our attention to any clause in this agreement to show that the patent relating to the transponder/satellite was also transferred to t....
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....e primarily for the full time wide distribution of customer's television services to cable systems in India. Article 1.4 permits the customer to encrypt some or all of the signals provided the customer provides the assessee With equipment necessary to decode the encrypted signals. The agreement is to remain in force for a period of ten years and in art. 2 provisions were also made for extension of the term and for pre-launch progress reports. Article 3 provided for "customer payments". Article 3.1 is titled "service fee". The service fee is payable monthly as shown in Appendix A. Article 4 provides for customer's obligations while utilizing the service. In particular it says that the customer shall be responsible for installing the earth stations and is bound to follow the procedures laid down by the assessee for initiating or terminating the transmission from the satellite. Article 5 provides for outages and a proportionate reduction in the service fee payable through somewhat complicated calculation which is not very relevant for our purpose. Article 10 says that the agreement is a service contract and does not grant any right or interest etc. in any property or assets....
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....n the case before us is that the broadcaster has made the payment of "service fee" for the use of the transponder to transmit the signals; he is hardly interested in the technology used inside the transponder. He is only concerned with the transmission of the signals and what technology is used by the transponder or the satellite is hardly of his concern. He only means to utilise the services of the assessee, the service being the undertaking of the task of transmitting the signals produced or uplinked by the broadcaster and beaming them over the footprint area to enable the cable operators to catch the signals and beam them to the viewers. Thus, we are inclined to hold that the intention of the parties gathered on a wholesome reading of the agreement is that payment should represent consideration for the use of a service, and not for the use of any process. It is a standard facility or service provided to all those willing to pay. In this view of the matter, and on the basis of our humble understanding of the ratio of the judgment of the Madras High Court, we hold that the payment made to the assessee does not represent consideration for the use of any process. 24. We now proce....
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.... decision of the CIT(A) and also having regard to the fact that no further investigation into facts, other than the material already on record, is required to be made, we admit the additional ground of appeal. We may also add that after the position was explained as above on behalf of the assessee, the learned special counsel for the Department fairly stated that he has no objection to the additional ground being admitted. Accordingly, we admit the same for adjudication. 26. We have considered the matter carefully in the light of the arguments placed before us. Under the aforesaid article, technical knowledge etc. have to be made available to the broadcaster in consideration for the payment. It is not enough that the assessee renders any technical or consultancy services: The further requirement is that such services should make available to the broadcaster technical knowledge, etc. The import of the words "make available" has been considered by the Mumbai Bench of the Tribunal in Raymond Ltd. There it has been held that in order that technical knowledge, etc. can be said to be "made available" to the user of the services it is necessary that after the service has been rendered,....
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....time clearly acknowledging or being aware of the right of the person utilising the technical services to apply the technical knowledge, experience, etc. in future for his own benefit without recourse to the person rendering the technical services. In this view of the matter, it is not possible to accept the argument of the special counsel for the Department that the broadcaster may have acquired a working knowledge of the way the transponder functions or operates which would bring the case under Article 12.4(b). 27. The memorandum of understanding concerning fees for included services in art. 12.4 entered into on 5th May, 1989under the heading "para 4(b)" on which reliance has been placed by the special counsel is not apposite. It says that "technical and consultancy services could make technology available in a variety of settings, activities and industries. Such services may, for example, relate to any of the following areas" and gives the example of "communication through satellite or otherwise". From this, it was sought to be argued on behalf of the Department that technical knowledge etc. was made available by the assessee (Panamsat) to the broadcasters in relation to satel....
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.... entered into under s. 90 of the IT Act cannot exceed the limits laid down by the Act and in case of conflict between the Act and the treaty the Act shall prevail. Elaborate submissions were permitted to be made on this point, but the issue has been completely settled by the judgments of the Supreme Court in Azadi Bachao Andolan and P.V.A.L. Kulandagan Chettiar. In the light of the above judgments, we reject the preliminary point raised by the special counsel for the Department. 30. Since there is no dispute that the nature of the activities carried on by the assessee and the steps involved in the transmission of the signals are the same as in the case of Asiasat, the argument that the website of the assessee amounts to an admission about its activities and the assessee is estopped from disputing the same under the Evidence Act needs no further consideration. The argument as to whether the process should be a secret process or not did appear to us at one point of time to be somewhat contradictory. It was first contended by the learned special counsel for the Department that the process need not be secret as held by the Tribunal in Asia Sat with reference to cl. (iii) of Expln. 2....
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....ty for Advance Rulings (AAR) in P. No. 22 of 1996, XYZ, In re. There, there was no dispute that the amount paid was royalty within the meaning of the DTAA with USA. The dispute was whether the payer of the royalty should be a resident of India in order that it may be taxed by India. The AAR held that there is no such requirement and even if the non-resident pays the royalty, so long as it arises from property used for earning income from a source in India it is taxable as royalty under s. 9(1)(vi)(c) of the Act. This ruling is hardly relevant to the dispute which arises in the case before us. The other ruling is in P. No. 30 of 1999, ABC, In re. In this case, the charges for the use of CPU (central processing unit) and CDN (consolidated data network) of an American company, paid by an Indian company and under strict confidentiality, was involved and the question was whether it amounts to royalty under art. 12.3(a) of the Indo-US treaty. It was held that the payment was for the use of the protected software and not merely for the use of the equipment and hence royalty for the use of "design or model, plan, secret formula or process", taxable in India. The argument was that the broad....
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.... considered. 33. At some point of time during the arguments, the special counsel did faintly refer to the possibility of the payment being considered as consideration for the use of a "literary work" taxable as royalty within the opening words of art, 12.3(a) but abandoned the same later. It is therefore not considered. In any case, the argument is without any merit. 34. In the course of the arguments with reference to the applicability of art. 12.4(b)-fees for included services-the learned special counsel submitted that under the agreement it was the broadcaster's responsibility to install the earth-station which would uplink the signals and in doing so, he would get enriched with the technology which would attract the principle of "make available". The argument is not acceptable, with respect, because the technology, if any, involved in the setting up of the earth-station is not to be provided by the assessee at all. The broadcaster/TV channel may itself possess the technology and be capable of setting up the earth-station or it may engage an entity which specialises in setting up earth stations. There is no evidence to show that it was Panamsat which helped the broadca....
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....narrower than the corresponding provisions of the IT Act relating to the "source rule" embodied in s. 9(1)(vii)(c) and s. 9(1)(vi)(c). Under cl. (b) of art. 12.7 of the treaty, it seems to us that the process itself must be used in India to be taxed in India as royalty, a situation which does not obtain in the case on hand. The "process" of conversion of the uplinked signals into beamable signals that can be caught and seen in the homes on the TV screens takes place several thousands of kilometers above the earth. It cannot therefore be said that the "process" itself takes place in India as appears to be the requirement of cl. (b). Even with regard to fees for included services, it appears to us from the language of the clause that the services have to be performed in India. This situation also does not obtain in the case on hand. The order of the AAR in Steffen, Robertson and Kirsten Consulting Engineers & Scientists, In re (1998) 144 CTR (AAR) 90 : (1998) 230 ITR 206 (AAR), with respect, recognizes this position, though the decision was rendered vis-a-vis s. 9(1)(vii)(c) and s. 9(1)(vi)(c) of the IT Act. It was held that the statutory test for determining the place of the accrual....
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.... support his argument that punctuation by itself cannot control the interpretation of the statute. The learned counsel for the assessee also cited a few authorities to show that punctuation has been held to be relevant in the context and setting of the provision. However since it was not seriously disputed on behalf of the assessee that punctuation by itself cannot normally control or dictate the task of interpretation, and the argument was that punctuation coupled with the setting and context would be relevant, we have not deemed it fit to refer to the authorities cited by both sides on this point. Similarly, on the meaning of the word "process" the learned special counsel for the Department had brought to our notice the dictionary meanings of the word and other relevant authorities, but we have refrained from discussing them since we have agreed with him that there is a "process" involved, following with respect the order of the Delhi bench of the Tribunal in Asia Sat. 38. Ground No. 1 in the appeal is general and no decision is required. Ground Nos. 2 to 5 relate to the assessment of the amounts received by the assessee as "royalty". These grounds have been discussed in detai....