TaxTMI 
TaxTMI 
TaxTMI 
2018 (5) TMI 339
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....national 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) to Section 9(l)(vi) of the Act, and for the right to use any industrial, commercial or scie....
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.... 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 assessment that "the receipts of the assessee were earned through PE", is factually incorrect, contrary. to records and remained unsubstantiated and as such, assessment framed on this basis as per section 115A is vitiated in law. (b) no ta....
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....ing 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'ble ITAT, Delhi passed in its own case, squarely covering the issue of taxability of receipts in favour of the assessee. 5. That the learned DCIT has erred in placing reliance on the decisions distinguishable on facts. 6. That the learned DCIT has erred in ignoring the decisions as relied upon by the assessee. 7. That the learned DCIT erred ....
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....ious 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 the decision of the Hon'ble Delhi High Court in the case of DIT vs. New Skies Satellite BV & Ors. in ITA NO. 473/2012 dated 8.12.20016. The Coordinate Bench decided the above issue vide para no. 10 & 11 of the order as under:- 10. We have carefully considered the rival contentions and also perused the orders of the lower authorities. Admittedly, the Hon'ble Delhi High Court vide order dated 80.02.2016 has considered the above issue ....
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....ed 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 the satellite 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, held that the presence of contr....
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.... 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 America. It is submitted that the payments were business profit and accordingly not taxable or chargeable to tax under the Act . . . The Tribunal in the impugned order has not referred to and examined the effect of the Double Taxation Avoidance Agree ments between India and the USA and whether the assessee is enti tled to benefit or advantage under the said agreement and therefore, payments made were not taxable in India in the hands of the recipi ent. Accordingly while answe....
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....ation. 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 the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law." 35. This presumption against retrospectivity stems from an indispensable 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 (HL). Thi....
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....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 interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the Legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the court ? 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 t....
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..... 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 definitions are reproduced below : 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....
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....mendment, 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 of a breach, but is nevertheless, in the opinion of this court, indefensible. 42. It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers. In Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), where the Indo-Mauritius Double Taxation Avoidance Convention was before the Supreme Court, the court said the following of the essential nature of these treaties (page 751) : "An important principle which needs to be kept in mind in the int....
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....es 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 (Mad) held that "tax treaties are . . . considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". 45. At the very outset, it should be understood that it is not as if the double taxation avoidance agreements completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3(2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the ....
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....venient 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 Developments Inc. 82 DTC 6281 (1982) with respect to the applicability of domestic amendments to international instruments. In R. v. Melford Developments Inc. 82 DTC 6281 (1982), the Canadian Supreme Court held that the ambulatory approach is antithetical to treaty obligations : "There are 26 concluded and 10 proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission of the appellant is correct, these agreements are all put in peril by any legislative action taken by Parliament with reference to the revision of the Income-tax Act. For this practical reason one finds it difficult to conclude that Parliament has left its....
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....nder 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, thus allowing for successive amendments into the realm of "laws in force". We express no opinion in this regard since it is not in issue before this court. This court's finding is in the context of the second situation, where there does exist a definition of a term within the double taxation avoidance agreements. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the double taxation avoidance agreements and the ultimate taxability of the income under the agreement. That is not to say that the court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just ....
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....h 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 has opted to be governed by the treaty and the language of the said treaty differs from the amended section 9 of the Act. It is categorically held in CIT v. Sie mens Aktiongesellschaft [2009] 310 ITR 320 (Bom) that the amend ments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson A. B. [2012] 343 ITR 470 (Delhi) that a copyrighted article does not fall within the purview of royalty. Therefore, we decide question of law Nos. 1 and 2 in favour of the assessee and against the Revenue." 52. Thus, an interpretive exercise by Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the pow....
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....inal 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, especially article 26 (binding nature of treaties and the obligation to perform them in good faith) ; article 27 (Internal law and observance of treaties, i.e., provisions of internal or municipal law of a nation cannot be used to justify omission to perform a treaty) ; General rule of interpretation under article 31(1) (i.e., that it shall be interpreted in good faith, in accordance with ordinary meaning to be given to the terms of a treaty) and article 31(4) (A special meaning shall be given to a term if it is established that the parties so intended). The expression "process" and treaty interpretation in this case 54. Neither can an act of Parliament supply or alter the boundaries of the definition under article 12 of the Double Taxati....
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....ribunals 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 implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of the provisions. Judge Caldwell once famously said "The words control the punctuation marks, and not the punctuation marks the words." Holmes v. Pheonix Insurance Co. 98 F 240 (1899). It has been held in CGT v. Budur Thippaiah [1976] 103 ITR 189 (AP) and Hindustan Construction Co. Ltd. v. CIT [1994] 208 ITR 291 (Bom) that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Construction Co. Ltd. 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain m....
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....tuation 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 us to conclude that the process referred to in article 12 must in fact be a secret process and was always meant to be such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite takes note of the OECD Commentary and Klaus Vogel on Double Taxation Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty (page 391 of 332 ITR) : "Even when we look into the matter from the standpoint of double taxation avoidance agreement (DTAA), the case of th....
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....tific 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 considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or commu nities (e.g., through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil).' Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein : 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's Double Taxation Con vention with Luxembourg) ; this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. we....
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....ituation 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 the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this court to hold that such amendments are applicable to the double taxation avoidance agreement. 60. Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the double taxation avoidance agreement, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a double taxation avoidance agreement, unless the said double taxation avoidance agreement are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty....