AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 339
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.... Dy. Commissioner of Income-tax, Circle 2(2), International Taxation, New Delhi (the DCIT) read with the directions of DRP are bad in law and on facts. 2. The DCIT erred on facts and in law, in assessing the Appellant to tax in respect of the income earned by it from providing telecasting services. The DDIT erred in following, in this regard, the Assessment Orders passed in the Appellant's case for earlier Assessment years. 3. The DCIT failed to appreciate that the Appellant was not liable to Indian Taxation at all in respect of the income earned by it from providing telecasting services. 4. The DCIT erred, on facts and in law, in holding that the income earned by the Appellant from providing telecasting 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 DCIT erred, on facts and in law, in alleging that the aforesaid Income was received by the Appellant for the use as well as right to use a process within Explanation 2(iii....
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.... (c) of the Act The assessee craves leave to add, supplement, revise and delete grounds of appeal as raised hereinabove. 3. The following grounds have been raised in ITA No. 1062/Del/2015 (AY 2006-07):- 1. That the order of the learned Deputy Commissioner of Income-tax, Circle 3(1)(2), International Taxation, New Delhi ("DCIT"), as passed under section 143(3)/148 read with the directions of Dispute Resolution Panel ("DRP") under section 144C of the Income-tax Act, 1961 ("the Act"), is bad both in law and on facts of the case. 2. That the notice under section 148 of the Act, as issued by the learned DCIT after four years from the end of subject assessment year, is illegal, without jurisdiction and barred by time and as such is void-ab-initio. 2.1 That the reassessment under section 148 is barred by time as the assessee has fully and truly disclosed all material facts necessary for the assessment. 2.2 That the reassessment framed under section 147 is illegal as the learned DCIT had no 'reasons to believe' that the impugned income has escaped assessment for the subject assessment year as: (a) the reason recorded for reopening the....
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....idents as well as non-residents was taxable in India as 'royalty' as defined under Explanation 2 to section 9(i)(vii) of the Act, without appreciating the provisions of the DT AA. 3.3 That the learned DCIT erred, on facts and in law, in holding that the income earned by the assessee from providing consultancy services was taxable in India: a) under the Act b) under the DTAA 3.4 That, without prejudice to the Ground No.4, the learned DCIT has erred in not considering the provisions of the DTAA, providing tax rate of 15% on 'royalty' receipts under Article 12 of the DTAA, while holding the receipts taxable as 'royalty' under section IISA of the Act. 3.5 That, without prejudice to the Ground No.4, the learned DCIT has erred in not applying the tax rate of 10% under section 115A, on the receipts in respect of which the agreement was made on or after 1 st June, 2005, as per the directions given by the DRP. 4. That the learned DCIT has failed to notice the decision of Hon'ble High Court of Delhi in the case of Asia satellite Telecommunications Co. Ltd v DIT 197 Taxman 263 (Delhi), and decision of Hon'bl....
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....he finding of the Assessing Officer and consequently final assessment order u/s. 143(3) read with section 144C(1) of the Act was passed on 22.12.2014. 4.2 The Ld. A.R. of the assessee submitted that identical issue in the case of the assessee from assessment years 2005-06 to 2010-11 is covered in favour of the assessee by the order of the Coordinate Bench dated 16.10.2017. The Ld. AR furnished the copy of the decision and showed various grounds in respective orders which are identical with the grounds of appeal before us. He therefore, submitted that there being no contrary decision in assessee's own case for earlier years may be followed. With reference to interest u/s. 234B of the Act, it was submitted that once the addition does not remain, there is no question of charging of any interest u/s. 234B of the Act. 4.2 Ld. CIT(DR) relied upon the order of the Assessing Officer. 5. We have carefully considered the rival contentions and also perused the decision of the Coordinate Bench in assessee's own case dated 16.10.2017 wherein, the similar issue has been decided for assessment year 2005-06 to 2010-11. The above decision has been rendered by the Coordinate Bench following....
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.... ITR 59 (AAR), the court held that it becomes clear that all the customers get through the agreement with the assessee is mere access to a broadband width available in the transponder. The control over the parts of the satellite and naturally the transponder remains with the assessee. At no point does the assessee cede control over the satellite to the customers. Logically therefore, since the transponder is a part of the satellite that cannot be severed from it, there can be no independent control of the transponder without control of the satellite itself. The Authority for Advance Rulings had specifically rejected the Revenue's contention that in substance there is use of equipment ; that being the transponder. The fact that the transponder automatically responds to the data commands sent from the ground station network and retransmits the same data over a wider footprint area does not mean that control and operation of the transponder is with the customer. Interestingly, this has not escaped the notice of the Assessing Officer, except that the assessment order conveniently employs the in-severability of the transponder from the satellite to assert that that the technology of....
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....e, the court held that as far as the domestic taxability of the said income is concerned, the Finance Act, 2012 mandates it to be as such. Interestingly however, the court did not rule out any relief that the assessees may be entitled to by virtue of the Double Taxation Avoidance Agreement between India and the United States for the simple reason that the Income-tax Appellate Tribunal had not rendered any finding in that regard. Resultantly, the court remitted the matter to the Income-tax Appellate Tribunal to decide that question : "In an appeal under section 260A of the Act, we are not required to consider the constitutional validity and vires of the said amendments but have to apply the amended provision. In view of the said statutory amendments, the reasoning given by the Tribunal cannot be sus tained and has to be reversed. Learned counsel for the respondent-assessee has however rightly drawn our attention to the assessment order in which the assessee had also pleaded and submitted that the payments made cannot be considered as royalty or fee for included services as defined in the double taxation avoidance agreement (DTAA) between India and United States of ....
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.... Township P. Ltd. [2014] 367 ITR 466 (SC) ; [2015] 1 SCC 1, the Constitution Bench, while quoting Govinddas v. ITO [1976] 103 ITR 123 (SC) ; [1976] 1 SCC 906 and CIT v. Scindia Steam Navigation Company Ltd. [1961] 42 ITR 589 (SC) ; [1962] 1 SCR 788 held as follows (page 486 of 367 ITR) : "Of the various rules guiding how a legislation has to be inter preted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a ret rospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bed rock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex pro spicit non respicit : law looks forward not backward. As was observed in Phillips v. Eyre (1870) LR 6 QB 1, a retrospective legislation is con trary to ....
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....1995] 2 SCC 630, it was held that the use of the words "it is declared" is not conclusive that the Act is declaratory because it may be used to introduce new rules of law. If the amendment changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used is "it is declared" or "for the removal of doubts". In determining, therefore, the nature of the Act, regard must be had to the substance rather than to form. While adjudging whether an amendment was clarificatory or substantive in nature, and whether it will have retrospective effect or not, it was held in CIT v. Gold Coin Health Food (P.) Ltd. [2008] 304 ITR 308 (SC) ; [2008] 9 SCC 622 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) ; [1997] 5 SCC 482 that, (i) the circumstances under which the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretati....
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....that the contention of the Revenue is correct, the ultimate taxability of this income shall rest on the interpretation of the terms of the double taxation avoidance agreements. Learned Counsel for the assessee has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the double taxation avoidance agreement. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act. 39. It is now essential to decide the second question, i.e., whether the assessees in the present case will obtain any relief from the provisions of the double taxation avoidance agreement. Under article 12 of the double taxation avoidance agreement, the general rule states that whereas the State of residence shall have the primary right to tax royalties, the source State shall concurrently have the right to tax the income, to the extent of 15 per cent. of the total income. Before the amendment brought about by the Finance Act of 2012, the definition of royalty under the Act and the double taxation avoidance agreement were treated as pari materia. The de....
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....d into the treaty as well. In essence, will the interpretation given to the double taxation avoidance agreement fluctuate with successive Finance Act amendments, whether retrospective or prospective ? The Revenue argues that it must, while the assessees argue to the contrary. This court is inclined to uphold the contention of the latter. 41. This court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short o....
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....he principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the Vienna Convention on the Law of Treaties apply to such an agreement except in so far as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. 44. We do not however rest our decision on the principles of the Vienna Convention on the Law of Treaties, but root it in the inability of Parliament to effect amendments to international instruments and directly and logically, the illegality of any executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan [2003] 263 ITR 706 (SC) these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in CIT v. VR. S.R.M. Firm [1994] 208 ITR 400....
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....the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty ? The former is the "static" approach while the latter is called the "ambulatory" approach. One opportunity for a State to ease its obligations under a tax convention comes from the ambulatory reference to domestic law. States seeking to furtively dodge the limitations that such treaties impose, sometimes, resort to amending their domestic laws, all the while under the protection of the theory of ambulatory reference. It thereby allows itself an adjustment to broaden the scope of circumstances under which it is allowed to tax under a treaty. A convenient opportunity sometimes presents itself in the form of ambiguous technical formulations in the concerned treaty. States attempting to clarify or concretise any one of these meanings, (unsurprisingly the one that benefits it) enact domestic legislation which subserves such purpose. 47. In this context, recently in Sanofi Pasteur Holding SA v. Department of Revenue [2013] 354 ITR 316 (AP), the Andhra Pradesh High Court discussed and subscribed to the ratio of the Supreme Court of Canada in R. v. Melford ....
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....Agreements. Following our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic "laws in force". It was in this context that the Bombay High Court held that they were unable to accept the assessee's contention that the law applicable would be the law as it existed at the time the double taxation avoidance agreement was entered into. This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this court however is materially different as there is in fact a definition of the word royalty under article 12 of both double taxation avoidance agreements, thus dispensing with the need for recourse to article 3. 50. There are therefore two sets of circumstances. First, where there exists no definition of a word in issue within the double taxation avoidance agreements itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. The Bombay High Court seems to accept the ambulatory approach in such a situation, ....
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....endments that are in question today ; the Explanations to section 9(1)(vi) vis a vis the interpretation of a double taxation avoidance agreement. This court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations (page 281 ITR 358 ITR) : "He, thus submitted that the question of 'copyrighted article' or actual copyright does not arise in the context of software both in the double taxation avoidance agreement and in the Income-tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the Income-tax Appellate Tribunal has dealt with this aspect in its judg ment in Gracemac Corporation v. Asst. DIT [2010] 134 TTJ (Delhi) 257; [2011] 8 ITR (Trib) 522 (Delhi) pointing out that even software bought off the shelf, does not constitute a 'copyrighted article' as sought to be made out by the Special Bench of the Income-tax Appel late Tribunal in the present case. However, the above argument misses the vital point namely the assessee ....
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....y, 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 relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalising domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfil their obligations under a treaty in good faith. This includes the obligation to not defeat the purpose and object of the treaty. These obligations are rooted in customary international law, codified by the Vienna Convention on the Law of Treaties, espe....
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....or the use of, or the right to use, any copyright of literary, artistic or scientific work including cinema tograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commer cial or scientific experience." (emphasis1 supplied) 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 ;" (emphasis1 sup plied) 55. The slight but apparently vital difference between the definitions under the double taxation avoidance agreements and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various Income-tax Appellate Tribunals across the country, much discussion took place on the implications of the presence or absence of the "comma". A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious for diametrically opposite implication....
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....de 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. The test therefore is not to see if it makes "grammatical sense" but to see if it takes on any "legal consequences". 58. Nevertheless, whether or not punctuation plays an important part in the statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for....
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....tellite 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 sim ply 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 for the use, or right to use, industrial, commercial or scientific equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite oper ator to the satellite owner could well be con....
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....dgments of other High Courts also to the same effect. (a) CIT v. Ahmedabad Manufacturing and Calico Printing Co. [1983] 139 ITR 806 (Guj) at pages 820-822. (b) CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) at pages 156-157. (c) N. V. Philips v. CIT (No. 1) [1988] 172 ITR 521 (Cal) at pages 527 and 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 assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of....