TaxTMI 
TaxTMI 
2018 (12) TMI 1321
X X X X Extracts X X X X
X X X X Extracts X X X X
....7-08 is taken-up as the lead case. This appeal is directed against the order dated 14.10.2010 passed by the Assessing Officer u/s 144C(13) r.w.s. 143(3) of the Income Tax Act, 1961 (in short 'the Act') giving effect to the directions of Dispute Resolution Panel-I, Mumbai (DRP) dated 28.09.2010. 3. In this appeal, the assessee has raised the following Grounds of appeal:- "Ground number 1 On the facts and in the circumstances of the case and in law, the learned AO erred in determining the total income of the Appellant at Rs. 19,18,27,475. The Appellant prays that the AO be directed to consider the income as returned by the Appellant. Ground number 2 On the facts and in the circumstances of the case and in law, the learned AO erred in holding the amounts receivable by the Appellant from Tata Communications Limited (TCL) [earlier known as Videsh Sanchar Nigam Limited] to be 'royalty' as defined under Section 9(1)(vi) of the Act and Article 13(3) of the Double Taxation Avoidance Agreement between India and United Kingdom (India - UK Tax Treaty'). The Appellant prays that the amounts receivable from TCL are not in the n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the provisions of Section 199 of the Act. The Appellant prays that the learned AO be directed to grant credit for the balance TDS amounting to Rs. 24,89,984. Ground number 8 On the facts and in the circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under Section 271(1)(c) of the Act. The Appellant prays that the learned AO be directed to drop penalty proceedings." 4. Although the assessee has raised multiple Grounds of appeal, but the substantive dispute revolves around two issues relating to characterisation of income earned by the assessee, and the existence or otherwise of a Permanent Establishment (PE) or a fixed place of business in India. 5. In order to appreciate the controversy, the following discussion is relevant. The appellant is a company incorporated in United Kingdom and is also a tax resident of United Kingdom. The appellant is engaged in the business of providing telecommunication services and for Assessment Year 2007-08, it filed its return of income declaring NIL income, inter-alia, contending that its income was not taxable in India. So far as the income earned by the assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elecommunication services including the following : • Voice transmission services • Fax transmission service • Data transmission service • E-mail transmission - private/corporate networks, value added networks transmission • Internet access-browsing e-mail • Video conferencing-store and forward video, real time, etc. In this connection, we enclose herewith in Annexure 7, a diagrammatic representation which describes the above mentioned activities. The LESO in India is VSNL. Inmarsat has entered into a LESO Agreement with VSNL for providing satellite telecommunication services. We have enclosed herewith in Annexure 8 a copy of the LESO agreement dated 12 April 1999, entered into by Inmarsat with VSNL for provision of telecommunication services. The LES is linked on the ground to the local public telecommunication network. This system enables communication to take place between users of the MES equipment and either other users of similar equipment or users of the public telephone network. In each case, the communication passes via an Inmarsat satellite and is co-ordinated and conn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ken by the Mumbai Bench of the Tribunal. Notwithstanding the fact that at that point of time the Coordinate Bench did not have the benefit of the orders of the Hon'ble Delhi High Court in Asia Satellite Communication Co. Ltd. We also note that consistently the Mumbai Bench of the Tribunal has taken into the consideration the distinction in facts, law and the issue which was posed before different forums for consideration and find that it has been consistently held relying upon the decisions of the Hon'ble Delhi High Court in the cases of New Skies Satellite(2016) 382 ITR 1, DIT vs. Nokia Networks OY (2013) 358 ITR 259 and Asia Satellite Communications Co. Ltd. (supra) in the decisions of Alcatel-Lucent USA Inc. dated 25.04.2007 in ITA Nos. 7299 & 7300/ Mum/2010 for A.Y. 2005-06 and 2007-08, DDIT vs. Shell Information Technology International BV dated 15.03.2017 in ITA No. 5051/Mum/ 2009 & Others for A.Y. 2006-07 to 2008-09 and ADIT vs. Taj TV Ltd. dated 05.07.2016 in ITA No. 4678/Mum2007 for A.Y. 2003-04 to 2005-06. We have also noted that reliance placed by the learned CIT-DR on the decision of the Hon'ble Jurisdictional High Court in Siemens Aktiongeswellschaft (supra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....terpretation 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 DTAA, 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 DTAA 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 DTAA. 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 DTAA 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as sought to be made out by the Special Bench of the ITAT 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 Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no.1 & 2 in favour of the assessee and against the Revenue." 52. Thus, an interpretive exercise by the 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 power to amend a treaty. It is certainly true that law laid down by the Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e treaty. These obligations are rooted in customary international law, codified by the VCLT, 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." 10.1 The next decision also cited by the CIT-DR is the case of Formula One World Championship Ltd. vs. CIT (International Taxation) for the proposition that the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and New Skies Satellite is overruled. On a reading of the said decision we note that the reliance is misplaced. The issue for consideration before the Hon'ble Apex Court was on an entirely different set ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Bench in Sumitomo Mitsui Banking Corpn., wherein, the assessee was one of the party. 3. On the other hand, Ld. DR strongly relied upon the order of the Assessing Officer and submitted that, so far as Data Processing Cost is concerned, the same is in the nature of 'Royalty' and in support he has strongly relied upon the two Karnataka High Court decisions in the case of:- i) CIT vs. Wipro Ltd., reported in 355 ITR 284; ii) CIT vs. CGI Information Systems & Management Consultants (P) Ltd., 226 Taxman 319 The issue whether the amendment brought by Finance Act 2012 in Section 9(1)(vi) by way of Explanations inserted in the Income-tax Act with retrospective effect can be read into DTAA or not has to be seen in the light of the decision of Hon'ble Bombay High Court in the case of CIT v Siemens Aktiongesellschaft, reported in 310 ITR 320 (Bom HC) accordingly, he submitted that other decisions rendered by the Delhi High Court and the Tribunal may not be applicable. While appreciating the Siemens AG (supra) he submitted that, it may kind be borne in mind that: i) The question of law before the Hon'ble High Court was not that whether amendments in the Income-tax Act can be read in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itted that, expenditure including interest attributable of earning of income which does not form part of the total income has to be disallowed under section14A if it has to be held that in view of the Special Bench decision in the case of the assessee, the interest paid by the Branch Office to the Head Office is not the commission of the Head Office. In support, he relied upon the decision of Oman International Bank AG on the admissibility of the belief, he relied upon the decision of Hon'ble Supreme Court in the case of NTPC vs. CIT, reported in 229 ITR 383. 4. After considering the aforesaid submissions and on perusal of the impugned orders, we find that so far as the issue raised vide ground No.1 to 3 is concerned it is a recurring issue in the case of the assessee right from the earlier years. The Ld.CIT (A) too has followed the CIT(A)'s orders for the assessment years 2003-04 to 2004-05, 2005-06 and 2008-09. The Tribunal in the assessment year 2004-05 in ITA No.7347/Mum/2007 on the issue of disallowance of Data Processing Cost has dealt and decided this issue in the following manner:- "15. Now, coming to the main issue i.e., whether the reimbursement of data ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve definition of "royalty" thus provides that, when the payment of any kind is received as a consideration for "use" of or "the right to use" of any of the copy right of any item or for various terms used in the said Article, then only it can be held to be for the purpose of "royalty". The said definition of "royalty" is exhaustive and not inclusive and, therefore, it has to be given the meaning as contained in the Article itself and no other meaning should be looked upon. If the assessee is claiming the application of the DTAA, then the definition and scope of "royalty" given in the domestic law, in the present case, section 9(1)(vi) should not be read into or looked upon. The character of payment towards royalty depends upon the independent "use" or the "right to use" of the computer software, which is a kind of copy right. In the present case, the payment made by the Branch is not for "use" of or "right to use" of software which is being exclusively done by the Head Office only, installed in Belgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software. All that the right is for processing of data, and the use of mainframe computer is permitted only for that purpose. The Indian company can feed the raw data in the mainframe computer in Australia, with the help of the telecommunication link, and the output data, after due processing is transmitted back to the Indian company. There is no privilege or right granted to the Indian company by the Australian company. The control of the Indian company is only on the input transmission and the right is to get the output processed data back. The actual processing of data is the exclusive control of the Australian company and it is for this work that the Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company inconsideration of its processing of data belonging to the Indian company. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, pat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, we are of the considered view that provisions of article 12(3)(a)cannot be invoked on the facts of the case before us. That takes us to the question whether the provisions of article 12(3)(b), as relied upon by the revenue authorities, can be invoked on the facts of the present case. Article 12(3)(b) can apply only when the payment in question can be held to be payment for "the use of, or the right to use, any industrial, commercial or scientific equipment". This condition can only be satisfied when it is established that the impugned payment is made for the use of, or right to use of, mainframe computer. The Indian company does not have any control over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data proces....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed Commissioner (Appeals) is affirmed. 20. Since we have already held that the data processing cost paid by the assessee does not amount to royalty, consequently, there is no requirement for deducting tax at source on such payment. Therefore, the provisions of section 40(a)(i) will not apply. Accordingly, the issue arising out of ground no.1 and 2 is dismissed". This decision of the Tribunal have been followed in the subsequent years by the Tribunal, i.e., in AY2006-07 and 2007-08. In the aforesaid decision of the Tribunal, the decision of Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and Delhi High Court decision in the case of Nokia Network, reported in [2012] 253 CTR (De) 417 and DIT v Sony Ericson AB, reported in [2012] 343 ITR 470 have been taken note of. Thus, this issue has been decided in favour of the assessee after detail analysis and discussion. Moreover, we find that in the latest decision of Hon'ble Delhi High Court in the case of DIT vs. News Sky Satellite BV passed in ITA 473/2012, order dated 8.02.2016 have explained the ratio and principle of Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). The relevant observation ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sive 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 DTAA. 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 DTAA 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 because there is a domestic definition similar to the one under the DTAA, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the definition under the DTAA. In other words, the domestic law remains static for the purposes of the DTAA". 5. Thus, on the facts of the present case, we are bound to follow the judicial precedence in assessee's own case for the earlier years and in view of the finding given therein, we upheld the order of the CIT (A) and dismiss the grounds raised by the r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any change in the nature of the income being earned by the assessee from TCL than that considered by the Tribunal in its order dated 14.07.2017 (supra). Therefore, following the precedent in assessee's own case for Assessment Years 2000-01 to 2005-06, the stand of the assessee has to be approved. 9. So, however, before parting, we may make a mention of the discussion sought to be made by the DRP in the impugned order regarding the inapplicability of the ratio of the decision of the AAR in the case of ISRO Satellite Centre reported in 307 ITR 59 (AAR). In this context, we find that this aspect of the controversy has been expressly considered by our coordinate Bench while rendering its decision dated 14.07.2017 (supra). Therefore, we find no reason to uphold the stand of the Revenue in this year following the precedent in the assessee's own case. Therefore, so far as Ground of appeal nos. 2 & 3 are concerned, the same are allowed, as above. 10. So far as Ground of appeal no. 4 is concerned, the same deals with the grievance of the assessee against the income-tax authorities holding that it has a PE in India. In this context, the relevant facts are that the Assessing Officer no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Assessing Officer that there existed a PE of the assessee in India. 11. Against the aforesaid, the learned representative for the assessee vehemently pointed out that since beginning and upto the Assessment Year 2006-07, there has been no finding by the income-tax authorities that either the liaison office or the SSMS equipment constituted a PE in India although the arrangement with VSNL/TCL was the same as in the instant years. On the point of law, the learned representative for the assessee relied on the judgment of the Hon'ble Delhi High Court in the case of DIT vs Mitsui & Co. Ltd., [2017] 84 taxmann.com 3 (Delhi) to point out that the onus was on the Revenue to show that any activity in the nature of business or trading was carried out in the liaison office. It was pointed out that the liaison office of the assessee has been in existence since it was initially approved by the RBI vide its permission dated 20.10.1999, a copy of which has been placed in the Paper Book at pages 39 to 42. It has been further pointed out that the approval granted by the RBI has been renewed from time to time and so far as the captioned period is concerned, the approval of the RBI vide orde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ly permitted by the RBI under the relevant provisions of Foreign Exchange Regulation Act, 1973. In fact, initially the permission to set-up a liaison office was granted on 20.10.1999 for a period of three years, subject to certain terms and conditions. One of the specific condition was that the liaison office shall only undertake liaison activities, i.e. to act as a communication channel between the Head office and the parties in India. The condition imposed by the RBI specifically prohibited the liaison office from undertaking any other activity of trading, commercial or industrial nature. The liaison office was also, inter-alia, prohibited from entering into any business contract in its own name. It further prescribed that the liaison office will not charge any Commission or fee for its liasioning activity/services rendered by it. The standard terms and conditions also stated that the entire expense of the liaison office were to be met exclusively out of the funds received from abroad and that the liaison office could not borrow or lend any money from or to any person in India without prior approval, etc. The aforesaid permission has been further renewed and there is no dispute t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....", so however, we do not find even an iota of evidence referred to by the Assessing Officer in this regard. In fact, in the course of hearing, a question was put across to the parties as to whether during the assessment proceedings this aspect was specifically show caused to the assessee or not? The learned representative for the assessee submitted that after receipt of the draft assessment order, assessee had raised objections before the DRP in the following manner :- "4.1 The Assessee has a SSMS located in India at VSNL's Land Earth Station ('LES') at Arvi. The purpose of the SSMS is to provide a degree of surveillance capability to the Inmarsat Network Operations Centre in the UK whereby the Assessee can monitor the transmitted power levels of individual channels (both signalling and voice carriers) to and from satellites in the Indian Ocean region and the frequency deviations. SSMS is not a critical component to the services rendered by the Assessee and even without SSMS, these services can be continued to be rendered. The cost of this equipment is approximately USD 150,000. This investment is insignificant when compared with the total cost of the Assessee's a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the liaison office were such as to construe it to be a PE in India. 18. On the aspect of use of SSMS equipment also, we find that there is no reason to hold that it could be construed as a PE in India. So far as the reference to the LES made by the DRP in Assessment Years 2010-11 to 2012-13 is concerned, the same, in our view, is quite misplaced. The DRP itself notes that the LES is owned by the LESO, i.e. VSNL. It is also a feature of assessee's agreement for providing services that it is the LESO, i.e. VSNL, who has the full right and responsibility with regard to the LES. In any case, it is undeniable that the LES is not owned by the assessee, an aspect which the DRP itself has noted in its order. Therefore, considering the matter in its entirety, we find it erroneous on the part of the Assessing Officer to hold that there exists a PE of the assessee in India. Thus, assessee succeeds on this aspect also. 19. Insofar as Ground of appeal no. 5 is concerned, the same relates to income computed by the Assessing Officer, which can be attributable to the PE of the assessee in India. Since we have upheld the primary stand of the assessee that there does not exit any PE of the ass....