TaxTMI 
TaxTMI 
2012 (9) TMI 95
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....ome for the year under consideration was filed by it on 31.10.2002 declaring a loss of Rs. 1,62,08,366/-. In the said year, the video channel started by the assessee had become functional. No receipt / income from the said activity however was shown by the assessee by stating that the revenue from the said activity in the form of Advertisement was not generated in the year under consideration and such income was generated only in the subsequent year. In the course of video channel business, the assessee had entered into an agreement with M/s. Shan Satellite Public Co. Ltd. (in short SSA) for facility of satellite up-linking and Telecasting programmes and a sum of Rs. 83,03,368/- charged by the said party for such facility was claimed by the assessee as expenditure on account of broadcasting and telecasting. In addition to the said amount, a sum of Rs. 9,34,100/- was also paid by the assessee company to M/s. SSA as consultancy charges. During the course of assessment proceedings, it was noted by the AO that both these amounts were paid by the assessee to M/s. SSA in foreign exchange without deducting tax at source. In this regard, a certificate issued by the Chartered Accountant was....
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....ese services is the responsibility of SSA and not of ours. Thus, what SSA is providing is a service for a fee using its own equipments. It is not a case of letting out of equipment. Therefore, it is submitted that payments for digital channel service's are not in the nature of payment for use of or right to use any industrial, scientific or commercial equipment and as such does not qualify as 'Royalty'." Nor the said payment can be construed as payment for provision of any industrial, commercial or scientific experience. The service for which said payment is being made does not involve imparting of any technical know-how by SSA to us. On the contrary, SSA itself would carry out the services. The phrase 'for provision c' any industrial, commercial or scientific experience' alludes to concept of technical know-how, in the cases of imparting of know-how, one of the parties agrees to impart to other his special knowledge and experience which remains un-revealed to public. In a contract for supply of know how, the know-how supplier is right required to play any part himself In application of formulae granted to licensee and the he does not guarantee the results thereof. Thus, know-how c....
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....ct) such profits accrues / arise in India or not. The term Permanent Establishment is defined under Article 5 of the Indo-Thailand DTAA. It is submitted that SSA does not have any Establishment or office in India under any of the criteria, envisaged in Article 5 which constitutes its fixed place of business through which its business is wholly / partly carried on. Further, SSA also does not have any agent in India (whether dependent or independent) who is authorised to conclude contracts on its behalf. In the present case, we have negotiated with and executed the said digital channel agreement with SSA, Thailand only. Thus, SSA does not have any P.E. in India and accordingly, it is submitted that, its business profits are not liable to tax in India in the absence of any P.E. in India as provided in Article 7 of Indo-Thailand 4, DTAA." 5. The submissions made on behalf of the assessee on this issue as above were not found acceptable by the AO. According to him, the payment made by the assessee to M/s. SSA was in the nature of fees for consultancy charges and therefore the submissions made by the assessee to make out a case that the same was not in the nature of royalty were....
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....rticle 7 read with Article 5 of the Indo-Thailand DTAA. Since SSA does not have any permanent establishment in India to which aforesaid payments are attributable, these payments are not chargeable to tax in India; Since these payments made by the appellant to SSA are chargeable to tax in India in the hands of SSA as per the Indo-Thailand DTAA, the appellant is not under the obligation to deduct tax at source u/s. 195 of ITA; Accordingly, there is no failure / default of appellant in deduction of tax at source on payments made outside India to a foreign company. Consequently, S. 40(a)(i) does not apply and no disallowance of, foresaid payments / expenses is warranted under section40(a)(i) of ITA." 7. The Ld. CIT (A) did not find merit in the submission made on behalf of the assessee. According to him, the absence of any provision in the Indo Thailand DTAA dealing with feasibility of fees for technical services would not necessarily push the payment in the nature of fees for technical services within article 7 dealing with the taxation of business income as claimed by the assessee. He held that there could be several types of payments which need not come into the parameters ....
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....t the Ld. CIT (A) while confirming the disallowance made u/s.40(a)(i) upheld the decision of the AO in treating impugned payment as fees and consultancy charges and also held the same to be in the nature of royalty alternatively. He submitted that the issue relating to the nature of payment made to the assessee to M/s. SSA has already examined by the Tribunal in the case of recipient and on such examination, it has been held by the Tribunal vide its order dated 11th March, 2011 passed in ITA Nos. 2598, 2599, 2600 & 2601/Del/2004 that the same was not in the nature of the royalty. He placed on record a copy of the said order of the Tribunal and invited our attention to the observations recorded by the Tribunal on page no.14 to contend that the amount in question was also held to be not in the nature for fees for technical services by the Tribunal by implication. He contended that the Indo Thailand Treaty which is applicable did not contain any provision dealing with fees for technical services and in the absence of such specific provision, the amount in question, even if it is to be held as fees for technical services, would be governed by Article 7 which deals with business profit.....
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....SSA under which the impugned amount was paid by the assessee to M/s. SSA. He took us through the relevant clauses of the said agreement and submitted that going by the nature of services or benefit availed by the assessee under the said agreement, it is sufficient to show that the assessee was in control of the equipment of M/s. SSA used i.e. Transponder. He specifically emphasised the general procedure prescribed for monitoring the performance of up-linking and down-linking and submitted that the benefit or services availed by the assessee in this respect was not possible without the control of 'Transponder' being with the assessee. 12. As regards the decision of Hon'ble Delhi High Court in the case of Asia Satellite (supra) relied upon by the Ld. Counsel for the assessee, the Ld. DR submitted that the facts involved in the said case were entirely different from the facts involved in the present case inasmuch as the assessee in the present case has been found to be in control of the equipment. As regards the amendments made by the Finance Act, 2012, he submitted that the expression 'process' used in sec.9(1)(vi) was not defined in the Income-tax Act, 1961 and therefore the defi....
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....al in the case of B4U (supra) relied upon by the Ld. Counsel for the assessee, the Ld. DR submitted that the elaborate submissions now being made from the side of revenue were not made before the Tribunal in that case. 15. As regards the absence of FTS Clause in Indo Thailand DTAA, the Ld. DR submitted that the amount of FTS in such case gets covered under Article 22 of the Treaty as other income. In support of this contention, he relied on the decision of Authority for Advance Ruling in the case of XYZ(AAR Nos.886 to 911, 913 to 924, 927, 929 & 930 of 2010 dt. 19.03.2012). 16. In the rejoinder, the Ld. Counsel for the assessee submitted that in the case of Asia Satellite (supra), it was held by the Tribunal that transponder is not an equipment and although the Department disputed this finding by way of question no.4 raised in the appeal before the Hon'ble Delhi High Court, the said appeal of the department has been dismissed by the Hon'ble Delhi High Court. He submitted that what is to be decided first is whether the payment in question is royalty or not keeping in view the nature of amount paid and whether the payee is resident or non-resident is not relevant in this contex....
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....ance made u/s.40(a)(i) which in any case cannot be sustained on the basis of retrospective amendment. 17. We have considered the rival submissions and also perused the relevant material on record including the relevant provisions of law and decisions citied by both the sides at par. It is observed that the amount in question paid by the assessee to SSA was disallowed by the AO u/s.40(a)(i) for non-deduction of tax by the assessee holding that the same was in the nature of fees for consultancy services chargeable to tax in India on which TDS was liable to be deducted. The Ld. CIT (A) upheld this action of the AO relying mainly on Explanation 2 to sec.9(1)(vii). Alternatively, he also held the said amount to be royalty within the meaning of Article 12(3) of the Indo-Thailand Treaty holding that it was paid for use or right to use industrial, commercial or scientific equipment. For this conclusion, he also relied on clause (iva) of Explanation 2 to sec.9(1)(vi). 18. In so far as the nature of the amount in question being royalty is concerned, it is observed that this aspect has been examined by the Tribunal in the case of SSA vide its order dated 11th March, 2011 and it has been....
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....Tribunal in its decision rendered in the case of SSA (supra), has specifically noted that the revenue authorities themselves had taken a stand in the case of SSA that the facts involved therein were similar to that of Asia Satellite and accordingly followed the decision of the Tribunal in the case of Asia Satellite which was in favour of the revenue. Further the Tribunal in the case of SSA also perused the facts narrated by the Hon'ble Delhi High Court in the case of Asia Satellite, relevant clauses of the agreement and process involved in the rendering of services and held in paragraph No.7 of its order that the facts involved in the case of Asia Satellite were identical to the case of SSA. Keeping in view these findings recorded by the revenue authorities as well as by the Tribunal in the case of SSA, we find it difficult to agree with the contention of the Ld. DR that the facts involved in the said case are different from the facts involved in the case of Asia Satellite. 20. The Ld. DR has also submitted that in the case of Asia Satellite (supra) payment was made by a non-resident to a non-resident whereas payee in the present case is a Indian resident. However, as rightly co....
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....e to the exact desired footprint area. (e) Temperature control system in the satellite, i.e., heaters to ensure that the electronic components do not cease to operate in conditions of extreme cold, when the satellite is in the "shadow". (f) Telemetry, tracking and control system for the purpose of ensuring that all the above mentioned systems are monitored and their operations duly controlled and appropriate adjustments made, as and when required. 66. It was also not disputed that each transponder requires continuous and sustained support of each of the above-mentioned systems of the satellite without which it simply cannot function. Consequently, it is entirely wrong to assume that a transponder is a self-contained operating unit, the control and constructive possession of which is or can be handed over by the satellite operator to its customers. On the contrary, the transponder is incapable of functioning on its own. In fact, the Tribunal has itself demonstrated so in the order as is clear from the following: A bare perusal of this meaning reveals that equipment is an instrument or tool which is capable of doing some job independently or with the help of o....
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....ded by the Hon'ble Delhi High Court in the case of Asia Satellite involving similar facts and circumstances, it cannot be said that the amount paid by the assessee to SSA is for the use or right to use any industrial, commercial or scientific equipment as envisaged in clause (iva) of Explanation 2 to sec.9(1((vi) inserted w.e.f. 1.4.2002 in the absence of control & possession of the of the user over the equipment. The Ld. DR in this regard has relied on Explanation 5 to sec.9(1)(vi) inserted by the Finance Act, 2012 with retrospective effect from 1.6.1976 widening / clarifying the scope of clause (iva) of Explanation 2 to sec.9(1)(vi). We shall deal with this aspect later on at the appropriate stage while dealing with other amendments made by the Finance Act, 2012 with retrospective effect from 1.6.1976 that have also been relied upon by the Ld. DR. 23. At the time of hearing before us, the Ld. DR has raised an altogether new contention that there being no clause in the Indo-Thailand Treaty dealing with fees for technical services, the amount in question paid by the assessee to SSA is covered by the residuary Article 22 of the Treaty and the same is chargeable to tax in India as....
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....d by the Ld. Counsel for the assessee, the assessee cannot be held to be liable to deduct tax at source relying on the subsequent amendments made in the Act with retrospective effect. In the said case, Explanation to sec.9(2) was inserted by the Finance Act, 2007 with retrospective effect from 1.6.1976 and it was held by the Tribunal that it was impossible for the assessee to deduct tax in the financial year 2003-04 when as per the relevant legal position prevalent in the financial year 2003-04, the obligation to deduct tax was not on the assessee. The Tribunal based its decision on a legal Maxim lex non cogit ad impossiblia meaning thereby that the law cannot possibly compel a person to do something which is impossible to perform and relied on the decision of Hon'ble Supreme Court in the case of Krishna Swamy S. PD and Another v. Union of India and others 281 ITR 305 wherein the said legal Maxim was accepted by the Hon'ble apex court. 26. In view of the above discussion, we are of the view that the amount in question paid by the assessee to SSA was not taxable in India in the hands of SSA either u/s.9(1)(vi) or 9(1)(vii) as per the legal position prevalent at the relevant time ....
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....of the AO with a direction to decide the same afresh after affording the assessee an opportunity to produce the relevant evidence to support and substantiate its case and after taking into consideration the decision of Hon'ble Bombay High Court in the case of Kotak Mahindra Finance Ltd. (supra). Ground no.2 of the assessee's appeal and solitary ground raised in the revenue's appeal are accordingly allowed for statistical purpose. 30. The issue raised in ground no.3 of the assessee's appeal relates to disallowance of Rs. 9,14,920/- made by the AO and confirmed by the Ld. CIT (A) on account of bad debts written off. 31. In the assessment, the assessee's claim for bad debts written off was disallowed by the AO on the ground that the assessee had failed to prove that the relevant debts had actually become bad and that the amounts of such debts had been taken into account as credit in the books of account. On appeal, the Ld. CIT (A) confirmed the said disallowance holding that any claim of bad debt could be considered only when it was established by the assessee that the said debts had become bad in the relevant year. 32. We have heard the arguments of both the sides and also p....