TaxTMI 
TaxTMI 
2016 (2) TMI 415
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....ce Agreements ("DTAA"). The ITAT however, in the light of the judgment in Asia Satellite Communications Co. Ltd. V. Director of Income Tax [2011] 332 ITR 340 (Del), interpreting Section 9(1)(vi) in the context of such services, reversed the said orders. During the pendency of these appeals, the Finance Act of 2012 amended Section 9(1)(vi) and inserted Explanations 4, 5, and 6. 2. The substantial question framed by this Court is two-fold; (1) whether the receipts of the assessees earned from providing data transmission services, fall within the term royalty under the Income Tax Act, 1961, and (2) if the answer to the first is in the affirmative, whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements. 3. In the interest of both brevity and clarity, below is a table of details with respect to the assessment orders and the orders of the ITAT: ITA No. Parties Assessment Year Date of Assessment Order Applicable Treaty ITA 500/2012 DIT v. Shin Satellite 2007-08 30.09.2010 Indo Thai DTAA ITA 244/2014 DIT v. Shin Satellite 2009-10 09.04.2012 Indo Thai DTAA ITA 473/2012 DIT v. N....
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....laced in an orbit 22240 miles above the surface of the Earth. The repeater section of the satellites contains antenna systems and microwave electronics that receive, amplify, modify (in frequency and in polarization) and retransmit the signals received by it. This antenna section has two reflectors, one for receiving and the other, for transmitting. The path of each channel between the receiving antennae to transmitting antennae is called the transponder. The transponder is used to amplify and shift the frequency of each signal. The uplinked signal emanates from the uplink earth station and enters the repeater through the receiving antenna. This antenna on the satellite transforms the wireless (electromagnetic) signals into an electrical form suitable for amplification in the Low Noise Receiver (LNR). The signals are modified within the LNR in frequency to correspond to the relay range and then amplified again before the individual filters. A microwave type boosts the power of the signal within each transponder to a high power level such as 100 Watts before applying it to the transmitting antenna. The latter transforms the electrical signal from all the transponders into an equival....
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....6 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purposes of this clause, "royalt....
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....ision of the ITAT in M/s. Pan AmSat International Systems Inc. v. DCIT, NR Circle, New Delhi ITA No. 1796/(Del)/2001 where in the context of similar facts it was held that income of such nature is not liable to tax in India. The assessee also cited the ruling of the Advance Ruling Authority in the case of ISRO Satellite Centre V. DIT [2008] 307 ITR 59 where it was held that payment by an Indian resident to a foreign company, for utilization of transponder centered on a satellite, is not in the nature of royalty in terms of the provisions of the Act or the DTAA (in that case with the UK); and in the absence of a permanent establishment in the territory of India not taxable as business profits either. 10. The AO recognised that the operative words in the definition would be "use" and "process". First, as regards the word "process", the AO held that the series of acts undertaken within the transponder are done to achieve a particular result, i.e. to make the signals viewable, and this clearly qualifies as a "process", the consideration for the "use" of which would amount to royalty. Noting the nature of the services provided by the assessee, (as recounted above), the AO observed th....
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....rred by the assessee for the transponder. This according to the AO lead to an inference that the customers are compensating the assessee for not only the transponder cost but also the cost of the satellite. The AO did this in an attempt to establish that the secret process therefore being used is the secret process of the satellite itself. He stated that while it may be argued that the theoretical aspects of satellite technology may be available to the interested off the shelves, the finer practical aspects and critical technologies are kept a secret. It is important to note that the AO in fact does quote the commentary of Klaus Vogel where secret formula or process has been defined as one which enjoys "at least a relative protection or is capable of being protected". It was also held that similar to sub clause (iva) of Explanation 2, the receipt would also be royalty under Article 12 for the "use of, or right to use industrial, commercial or scientific equipment". 12. Second, on the question of whether the royalty received by a non-resident Telecasting Company is taxable, the AO held that the same would be taxable only if it had been paid in respect of services utilized for the....
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....mpany Ltd. supra note 1. The ITAT held that the facts of the case were now squarely covered by the said judgment. The Court in that case held that the receipts earned from providing data transmission services through the provision of space segment capacity on satellites do not constitute royalty within the meaning of Section 9(1)(vi) of the Act. The Court held that while providing transmission services to its customers, the control of the satellite always remains with the satellite operator and the customers are only given access to the transponder capacity. The customer does not therefore use the satellite or the process of the satellite itself. Since that is the case, the payment cannot then be termed as royalty for the use of a process or equipment. Resultantly, the ITAT allowed the appeal of the assessee. It would be wise to remember that the judgment in Asia Satellite Supra note 1 was solely in the context of Section 9(1)(vi) of the Act, there being no Double Tax avoidance Agreement in that factual matrix. 16. ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite supra note 1 . Her....
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....uoting the Oxford Dictionary, the AO held that secret means kept or meant to be kept private, unknown or hidden from all but a few. It was held that the process was within the exclusive knowledge of the assessee. The customer is neither in the know nor is it empowered to use the process in its own way. Post Finance Act 2012 18. It can be seen, therefore, that while the assessment orders consistently held that the income from data transmission services shall be taxable under Section 9(1)(vi) as royalty, the Tribunal equally consistently, set aside these orders applying, as it is bound to do so, on the basis of Asia Satellite supra note 1 .However, as it has been noted, the Finance Act of 2012 amended Section 9(1)(vi) inserted Explanation 4, 5, and 6. The inclusion of these Explanations, clarificatory as they claim they are, have attempted to undo the implications of Asia Satellite. supra note 1 Explanations 4, 5, and 6 are reproduced below: "Explanation 4.-For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or righ....
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....pre-amended Act being similar, the subsequent amendment rendered the reasoning in Asia Satellite academic. Therefore, the assessees could not take shelter under the DTAA, which was cast in identical terms with the pre-amended statute. Since the same has subsequently been amended, the Courts are bound to give effect to it. 21. Learned counsel for the assessees contended that the matter is no longer res integra. It was submitted that having regard to the structure of Section 92 of the Act, there is little elbow room for the Revenue; it cannot be contended that any change in the substantive law would automatically result in a like change in respect of taxability of a transaction or service, which is otherwise tax exempt in terms of a DTAA or which is subject to a lower rate of taxation mandated by a treaty. Counsel relied on the judgment of the Bombay High Court in Commissioner of Income Tax v. Seimens Aktiongessellschaft [2009] 310 ITR 320 and the Andhra Pradesh High Court in M/s Sanofi Pasteur Holding SA v. Department of Revenue. (2013) 354 ITR 316 (AP) 22. Learned counsel, most importantly stressed upon the decision of this Court, in Director of Income Tax v Nokia Networks 20....
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....ho is contemplated by such agreement, the provisions of the Act shall apply to the extent that they are more beneficial to the assessee. 25. The underlying presumption of a DTAA being that in the absence of such agreement, the income in question is taxable in both jurisdictions as under their domestic laws, whenever Courts are confronted with taxability of an income in the context of such an agreement, they must as a matter of course, first decide whether the income in issue is taxable under domestic legislation, specifically the Act. It is only when that issue is answered in the affirmative that the Court turns its attention to the tax convention in issue, to ascertain primarily whether the terms of the convention exempt that particular income from being taxed under the Act. 26. Section 9(1)(vi) is, aside from changes made by the Finance Act, 2012, a long and winding provision, subject to several explanations and provisos. It will therefore be prudent to undertake a systematic approach to it, whereby each stage of the section is examined. The opening words of Section 9; "the following incomes shall be deemed to accrue or arise in India" indicate at the outset that the provis....
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....dia or for the purposes of making or earning any income from any source in India. In other words, for both residents as well as non-residents, either of two situations must occur; (i) the business or profession for the purpose of which the royalty is paid must be carried on by such person in India or (ii) the royalty must be paid for the purposes of making or earning any income from any source situated in India. 27. Since the underlying premise is that the payment is "royalty", the Court must first deal with Explanation 2, most pertinently to sub-clause (iii) and (iva) under which the income in the present case is sought to be taxed. "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (...) (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB" 28. The two clauses as applicable to data transmission services have been the subject of debate in courts as well as business circles. The debate was finally settled by the judgment delivered in Asia Satellite supra note 1 . In Asia Satellite supra note 1 this ....
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....llite would qualify as the "secret process" but conveniently divorces the transponder from the satellite while trying to prove that there is use of the transponder as an equipment. However, equipment as envisaged in the section must be capable of functioning independently, or in other words, must be able to perform an activity by itself without material reliance on another. Essentially therefore, Asia Satellite supra note 1 , held that the presence of control was a critical factor in adjudging whether there was "use" of a particular process. On the question of whether the "process" so used must be a secret process or not, the judgment did not return any finding specifically, other than quoting with approval the OECD Commentary which alludes to the indispensability of the secrecy of the process. 29. The Revenue argues that critical aspects of this judgment, primarily that the function performed by the transponder could not be categorized as a "process" and that even in the event it could be, there was no "use" of this process since there was no control exercised by the customers, is no longer good law in light of the inclusion of Explanations 4-6 by the Finance Act, 2012. In othe....
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....y not taxable or chargeable to tax under the Act. The tribunal has not referred to and examined the effect of the DTAA between India and the USA and whether the assessee is entitled to benefit or advantage under the said agreement and therefore, payments made were not taxable in India in the hands of the recipient. Accordingly while answering the question of law in favour of the Revenue we pass an order of remit and ask the tribunal to decide the other contention raised by the respondent assessee; whether the payments made nevertheless remain untaxable in view of the provisions of the DTAA." 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I [2014] 361 ITR 575 (Mad) , the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA....
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.... 35. This presumption against retrospectivity stems from an indispensible need for each rule of law to answer to the principle of fairness. L'Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Company Ltd. [1994] 1 AC 486 . This presumption can be displaced in either of two situations, (i) where the words of the amendment specifically indicate the retroactivity of the law or (ii) in the case of declaratory or clarificatory amendments. Clarificatory amendments are a special class of amendments the object of which is self-evident, that is to say, it purports to "clarify" law that has already been legislated, essentially an Act to remove doubts existing as to the meaning or effect of a statute. Naturally therefore, they must be read as intrinsic and implicit, but overlooked elements of the original section itself. They thus dictate the interpretation of law since the time it was first drafted or brought into force. However, in order for such clarificatory amendments to be sustained as retrospective, they must answer to this description. 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an o....
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....t? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the legislature considers inaccurate, the effect is prospective. Any other result would make the legislature a court of last resort. United States v. Gilmore 8 Wall (75 US) 330, 19 L Ed 396 (1869) , Peony Park v. O'Malley 223 F2d 668 (8th Cir. 1955) . It does not mean that the legislature does not have the power to override judicial decisions which in its opinion it deems as incorrect, however to respect the seperation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only (Ref. County of Sacremento v. State 134 Cal App 3d 428 , In re Marriage of Davies 105 Ill App 3d 661 ). 38. The circumstances in this case could very well go to show that the amendment was no more than an exercise in undoing an interpretation of the court which removed income from data transmission services from taxability under Section 9(1)(vi). It would also be difficult, if not impossible to argue, that inclusion of a certain specific category of services or payments within the ....
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....trial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." Article 12(4), Indo Netherlands Double Tax Avoidance Agreement "4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." Section 9(1)(vi), Explanation 2, Income Tax Act, 1961 "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property" 40. In Asia Satellite supra note 1 the Court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two defi....
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....n international treaty, including one for double taxation relief is that treaties are negotiated and entered into at a political level go ahead and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief , David R. Davis, Principles of International Double Taxation Relief , Pg.4 (London Sweet & Maxwell, 1985)points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06): "The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring ....
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....A: "ARTICLE 3: GENERAL DEFINITIONS 2. In the application on the provisions of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has for the purposes of the laws in force in that State relating to the taxes which are the subject of this Convention. Indo Netherlands DTAA: ARTICLE 3: GENERAL DEFINITIONS 2. As regards the application of the Convention by one of the States any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also....
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....for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do." 48. In Commissioner of Income Tax v. Seimens Aktiongessellschaft [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that "The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression "laws in force". ********** ********* ********* While considering the Double Tax Avoidance Agreement the expression "laws in force" would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article I(2). Considering the express language of article I(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement was entered....
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....e light of our preceding analyses, discern no textual, grammatical or syntactic ambiguity in Article 14(5), warranting an interpretive recourse. In the circumstances, invoking provisions of Article 3(2) by an artificial insemination of ambiguity (to accommodate an expanded meaning to the DTAA provision), would be contrary to good faith interpretation. A further problematic of contriving an ambiguity to unwarrantedly invite application of domestic law of a contracting State would be that while India would interpret an undefined DTAA provision according to the provisions of the Act, France could do so by reference to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double-taxation of cross-border transactions would be frustrated." 51. Pertinently, this Court in Director of Income Tax v Nokia Networks 2013 (358) ITR 259 specifically dealt with the question of the effect of amendments to domestic law and the manner of their operation on parallel treaties. The Court delivered its judgment in the context of the very amendments that are in question today; the Explanations to Section 9(1)(vi) vis a vis the interpretation of a Double Tax Avoid....
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....y strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by the Parliament; it is an act of the Executive. Logically therefore, the Executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the re....
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....eration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Article 12(4), Indo Netherlands Double Tax Avoidance Agreement "4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Section 9(1)(vi), Explanation 2, Income Tax Act, 1961 (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied) 55. The slight....
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....lls" and the absence of any comma after "stocks" was indicative of the fact "stocks" was to be read along with "for sale" and not in a manner so as to be divorced from it, an interpretation which would have been sound had there been a comma after the word "stocks". It was therefore held that only stocking for the purpose of sale would amount to an offence but not mere stocking. 57. However, the question, which then arises, is as follows. How is the court to decide whether a provision is carefully punctuated or not? The test- to decide whether a statute is carefully (read consciously) punctuated or not- would be to see what the consequence would be had the section been punctuated otherwise. Would there be any substantial difference in the import of the section if it were not punctuated the way it actually is? While this may not be conclusive evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically opposite consequences or large variations in taxing powers, as is in the present case, then the assumption must be that it was punctuated with a particular end in mind. Th....
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.... leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments....
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....y holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income Tax Act.... ***** ********** ***** 78. There are judgments of other High Courts also to the same effect. (a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co., [139 ITR 806 (Guj.)] at Pages 820-822. (b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] at pages 156-157. (c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521] at pages 527 & 538-539." 59. On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to....