TaxTMI 
TaxTMI 
2017 (10) TMI 827
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....f the assessee are not taxable in India. 4. On the facts and circumstances of the case ld CIT(A) erred in deleting the interest charged u/s 234B and 234D of the Act." 2. The revenue has also filed appeal for AY 2006-07 against the order of the ld CIT(A)-XXII, New Delhi dated 11.05.2011 raising following grounds of appeal:- "1. On the facts and circumstances of the case, the ld CIT(A) has erred in holding that the receipts of the assessee are in nature of Business Income. 2. On the facts and circumstances of the case, ld CIT(A) erred in inferring that the receipts of the assessee are not in nature of royalties. 3. On the facts and circumstances of the case, the ld CIT(A) erred in inferring that the receipts of the assessee are not taxable in India. 4. On the facts and circumstances of the case ld CIT(A) erred in deleting the interest charged u/s 234B and 234D of the Act." 3. The assessee filed appeal in ITA No. 5827/Del/2011 for the Assessment Year 2008-07 against the order of the ld Assessing Officer dated 29.09.2011 passed u/s 143(3) of the Act read with Section 144C(1) of the Act on direction of ld Dispute Resolution Panel-II, New Delhi dated 26.09.2011, raising....
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....tum of Income held by the DDIT to be taxable in India in any event, erroneous and based upon conjectures, suspicion and surmises. 7.2 The DDIT erred in attributing the entire amount received by the Appellant from non resident channels to the Appellant‟s alleged Indian operations. 8. The DDIT erred in holding that the revenues earned by the Appellant from consultancy services were taxable in India: (i) under the Act (ii) under the DTA 5. The DDIT erred, on facts and in law, in holding that the aforesaid income was taxable in India under Article 12 of the DTA. 6.1 The DDIT, in any event, acted contrary to the principles of natural justice and erred on facts and in law, in holding that the receipts of the Appellant from non-residents were taxable in India. 6.2 The DDIT ought to have held that the receipts of the Appellant from non residents were not liable to taxation in India. (i) under the provisions of the Act (ii) under the provisions of the DTA 6.2 The DDIT acted contrary to the principles of the natural justice and on the basis of conjectures, suspicion and surmises in alleging that the non resident channels had a Permanent Establishment ("PE"....
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.... The Id. DDIT erred in following, in this regard, the Assessment Orders passed in the Assessee‟s case for earlier Assessment years. 3. The Id. DDIT failed to appreciate that the Assessee was not liable to Indian Taxation at all in respect of the income earned by it from providing transponder services. 4. The Id. DDIT erred, on facts and in law, in holding that the income earned by the Assessee from providing transponder services ("the aforesaid income") was taxable in India: (i) under the provisions of the Indian Income-tax Act, 1961 ("the Act"), and (ii) under the provisions of the Agreement for the Avoidance of Double Taxation between India and Thailand ("the DTA") 5.1. The Id. DDIT erred, on facts and in law, in alleging that the aforesaid income was received by the Assessee for the use as well as right to use a process within Explanation 2(iii) to Section 9(l)(vi) of the Act, and for the right to use any industrial, commercial or scientific equipment within Explanation 2 (iva) to section 9(l)(vi) of the Act. 5.2. The Id. DDIT erred, on facts and in law, in holding that the aforesaid income was taxable in India by virtue of Explanation 2 (iii) and (iva) to S....
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....the assessee for earlier years were passed by the Assessing Officer and confirmed by the ld CIT(A) holding that receipts accruing and arising in India to the assessee is royalty income. Consequently, after issuing show cause notice the ld Assessing Officer held that above income is chargeable to tax as royalty as per article 12 of the DTAA between India and Thailand as well as under the Indian Income Tax Act u/s 9(1)(vi) of the Act. The ld Assessing Officer based on the finding of the earlier years also held that the assessee have office in India thereby a permanent establishment in India on account of which payments received by the assessee are liable to tax in India. Consequently, on these facts for Assessment Year 2005-06 the total receipts of the assessee of Rs. 155020870/- were held to be chargeable to tax in India and taxed at rates prescribed under Article 12 of the DTAA between India and Thailand. 6. Similarly, for Assessment Year 2006-07 the total receipts of the assessee of Rs. 131880086/- were also taxed on similar lines. However, because of the some of the amount receipt in respect of the agreement were entered into before 01.06.2005 they were held to be chargeable to ....
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....sequently to chargeable to tax in India. The Hon'ble Delhi High Court held in 382 ITR 114 as under:- "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. In Asia Satellite this court held that income from data transmission services would not qualify as royalty in order for it to be taxable under the Act. The court first recognized that the definition of royalty in the section is with respect to permission granted to use the right in respect of the patent, invention, process, etc., all essentially forms of intellectual property. This permission restricts itself merely to the letting of the licenced asset. The permission does not go so far as to allow alienation of the asset itself. That being said, it is not so restricted as to qualify as a case where the licensor uses the asset himself, albeit for the purposes of his customers. The court took note of the features of the agreements between the assessee in that case, which was a foreign company, incorporated in Hong Kong, and its customers, which were television channels.....
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....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 categorised 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 other words the Revenue contends that a mere reading of Explanations 4-6 will go to show that they are clarificatory and are therefore automatically retrospective. By this reason, as clarificatory amendments do, these explanations relate back to the time when the main provision of section 9(1)(vi) first came into force. By logical extension, the judgment in Asia Satellite was based on a misinterpretation of the section and thus no longer holds the field or corresponds to the correct interpretation of the definition of royalty. 30. Undoubtedly, the Legislature is competent to amend a provision that operates retrospectively or prospectively. None the less, when disputes as to their applicability arise in court, it is the actual substance of the....
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...." 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) [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 double taxation avoidance agreement. While TV Today (supra) recognises that the question will have to be decided and the submission argued, Verizon cites no reason for the extension of the amendments to the double taxation avoidance agreement. 32. Explanations 4-6 are designed as clarificatory amendments. Unarguably they have all the apparent characteristics of one. The words "for the removal of doubts, it is hereby clarified . . . includes and has always included" qualify the interpretation in Explanation 5. In Explanation 6, the same words have been modified and they state "includes and has always deemed to h....
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....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 obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the Legislature characterises an amendment as retrospective that the court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is ....
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.... does not have the power to override the judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a Legislature a court of last resort, the amendments can be made prospective only (Ref. County of Sacramento v. State of California 134 Cal. App. 3d 428, In re, Marriage of Davies, In re 105 Ill App 3d 661 [1982]). 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 ambit of a definition alludes not to an attempt to illuminate or clarify a perceived ambiguity or obscurity as to interpretation of the definition itself, but towards enlarging its scope. Predicated upon this, the retrospectivity of the amendment could well be a contentious issue. Be that as it may, this court is disinclined to conclusively determine or record a finding as to whether the amendment to section 9(1)(vi) is in....
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....kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinemat ograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, com mercial or scientific experience." Section 9(1)(vi), Explanation 2, Income-tax Act, 1961 : "(iii) the use of any patent, invention, model, design, secret for mula or process or trade mark or similar property." 40. In Asia Satellite 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 definitions as pari materia. This court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that ....
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....nternational Double Taxation Relief, (see David R. Davis, Principles of International Double Taxation Relief, Pg.4 (Lon don Sweet and 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 taxation treaty will pro bably 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 occur ring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the fina....
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....ions 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 Double Taxation Avoidance Agreement (see [1989] 177 ITR (St.) 72, 74) : '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 man datorily 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 taken place on whethe....
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....r what ever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or inten tion so to do." 48. In CIT v. Siemens Aktiongesellschaft [2009] 310 ITR 320 (Bom), the Bombay High Court citing R. v. Melford Developments Inc. held that (page 333 of 310 ITR) : "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 agree ment 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 taxation avoidance agreement was entered into." 49. It is esse....
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.... In other words, the domestic law remains static for the purposes of the double taxation avoidance agreement. The court in Sanofi (supra) had also held similarly (page 442 of 354 ITR) : "We are in agreement with the petitioners and in the light of our preceding analyses, discern no textual, grammatical or syntactic ambi guity in article 14(5), warranting an interpretive recourse. In the cir cumstances, invoking the provisions of article 3(2) by an artificial insemination of ambiguity (to accommodate an expanded meaning to the double tax avoidance agreement 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 unde fined double taxation avoidance agreement 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 frus trated." 51. Pertinently, this court in DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi) specifically dealt with t....
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....ifferent from when it breaches the treaty. In the latter case, while internationally condemnable, the State's power to breach very much exists ; courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate legislation in accordance with article 253 of the Constitution, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally 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. 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 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 t....
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....precipitated from confusion on the question of whether it was vital that the "process" used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the double taxation avoidance agreements and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both double taxation avoidance agreements and clause (iii) to Explanation 2 to 9(1)(vi). Article 12(3), Indo-Thai Double Taxation Avoidance Agreement : "3. The term 'royalties' as used in this article means payments of any kind received as a consideration 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 experi ence." (emphasis supplied) Article 12(4), Indo-Netherlands Double Taxation Avoidance Agree men....
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....79 SC 564 ; Lewis Pugh Evans Pugh v. Ashutosh Sen, AIR 1929 PC 69 ; Aswini Kumar Ghose v. Arbinda Bose, AIR 1952 SC 369 ; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd., AIR 1929 PC 38. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra, AIR 1979 SC 564 where section 27 of the Drugs and Cosmetics Act, 1940 came up for consideration. By this section whoever "manufactures for sale, sells, stocks or exhibits for sale or distributes" a drug without a licence is liable for punishment. In holding that mere stocking shall not amount to an offence under the section, the Supreme Court pointed out the presence of comma after "manufactures for sale" and "sells" 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....
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.... in all material respects virtually the same as the defi nition of 'royalty' contained in clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model double taxation avoidance agreements and particularly, referred to the following amendment proposed by the OECD to its commentary on article 12, which reads as under : '9.1 Satellite operators and their customers (including broadcast ing and telecommunication enterprises) frequently enter into trans ponder leasing agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to trans mit over large geographical areas. Payments made by customers under typical transponder 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 infor mation, that is referred to in the definition (they cannot be viewed, for instance, as payments for info....
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....d and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. 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.' The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the double tax avoidance agreements are the same which appear in section 9(1)(vi), for better understanding all these very terms, OECD commentary can always be relied upon. The apex court has emphasized so in number of judgments clearly holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in various double tax ation avoidance agreement should be followed by the courts in India when it comes to construing similar terms occurring in the Indian....