AI Drafter 
TaxTMI 
TaxTMI 
2023 (1) TMI 519
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.... Dispute Resolution Panel -1 (Hon'ble DRP) is wrong and bad in law, contrary to facts and circumstances of the case and unsustainable in law. 2. Based on the facts and circumstances of the case and in law, the Id. AO has erred in alleging that payments amounting to INR 6,26,29,403 received by the Appellant from Indian customers ('customers'/ 'service recipient'/ 'payer') for provision of disaster recovery up-linking services and various satellite based telecommunication services (Space Segment capacity services, Downlinking and Distribution services, Digital News Gathering services) as consideration for the use of or the right to use of an equipment and/ or use of a process is taxable as Royalty under section 9(l)(vi) of the Act and under Article 12(3) of the India Singapore Tax Treaty ('Tax Treaty') in contravention of the following well-established facts and legal positions: 2.1 That the Tax Treaty provisions apply in the Appellant's case and the aforesaid services do not fall in the definition of royalty contained in Article 12(3) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by var....
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....ervice recipient'/ 'payer') for provision of disaster recovery playout services is taxable as Fee for Technical Services ('FTS') under section 9(l)(vii) of the Act and under Article 12(4) of the India-Singapore Tax Treaty ('Tax Treaty') in contravention of the following well-established facts and legal positions: 3.1 That the Tax Treaty provisions apply in the Appellant's case and the aforesaid services do not fall in the definition of FTS contained in Article 12(4) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by various courts. 3.2 That the Id. AO has erred in stating that the "disaster recovery playout services" is managerial in nature for holding it to be FTS under Article 12(4) of the Tax Treaty by wrongly assuming that any disaster recovery work involves high level of management control, supervision. The Id. AO has failed to appreciate that the above service involves scheduling of content received from the customer, as per their specifications, for playout and is immediately activate only in the eventuality that the main playout equipment becomes unavailable/ non-functional. ....
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....vices, and do not result in customers becoming equipped to render these services on their own without recourse to the Appellant. That the customers are not provided any technical knowledge, experience, skill, know-how or process, as envisaged under Article 12(4) of the India-Singapore Tax Treaty. 4. On the facts and in the circumstances of the case and in law, the Id. AO has erred in computing interest u/s 234B of the Act amounting to Rs. 80,21,300 being consequential in nature and resulting on account of additions made in the assessment order 5. On the facts and in the circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant for each of the additions made in the assessment order The grounds above are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute all or any of the aforesaid grounds of appeal at any time before or at the time of hearing of the Appeal." 3. The representatives of both the sides were heard at length, the case records carefully perused and we have duly considered the relevant documentary evid....
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....s taxability of business income is concerned, it was explained that payments made by Indian customers to the assessee, though constitute business income of the assessee, but in the absence of PE of the assessee in India, income is not chargeable to tax in India in accordance with Article 7 of the DTAA. 12. in so far a Disaster recovery-Playout Service is concerned, it was explained that Playout services encompasses provision of equipment, infrastructure and manpower to manage continuous playing of channel content based on minute to minute schedule. It was explained that for providing Disaster recovery Uplinking and Playout services, the uplinking and playout equipment installed at the teleport facility of the assessee at Singapore is kept preconfigured and in readiness. In the event that the main uplink and playout equipment becomes unavailable/ non-functional, the uplink at Singapore facility immediately gets activated. 13. In support of its submissions, specific reference to Article 12(3) of DTAA where royalty has been defined and further reference was made to Article 12(4) of India Singapore DTAA where Fees for Technical Services has been defined. 14. Submissions of the....
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.... fall under the Article 12(4)(b) but rather under Article 12(4)(a) and, accordingly, treated the receipts from disaster recovery play out services amounting to Rs. 13,03,58,744/- as fees for technical services and taxed accordingly as per Article 12(2) @ 10%. 21. Objections were raised before the DRP but without any success. 22. We have given thoughtful consideration to the orders of the authorities below. The first quarrel is whether receipt from uplinking services construe royalty as per Article 12(3) of the DTAA. We find that as per Article 12(3) of DTAA, Royalty has been defined to include, inter alia, use or right to use of secret formula or process and use or right to use of industrial, commercial or scientific equipment. 23. In our understanding of facts, customers of the assessee were neither in possession of any equipment nor had any control over the equipment used by the assessee for providing uplinking and playout services to its customers. We find that while providing these services, the assessee was the sole bearer of the risks in relation to the said equipment. 24. In our considered opinion, the term process can be understood as a sequence of interdependen....
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....ur considered opinion, the amount received by the assessee from its customers in India as consideration for the provision of a service cannot be characterized as royalty for the use or right to use of a process. 30. Heavy emphasis has been made on retrospective amendment brought by the Finance Act with special reference to Explanation 6 of section 9(1)(vi) of the Act. This issue has been well settled by the Hon'ble Jurisdictional High Court of Delhi in the case of New Skies Satellite 382 ITR 114. Relevant findings of the Hon'ble High Court read as under: "54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs by supplying redundancy to any part of it. This becomes especially important in the context of Explanation 6, which states that whether the 'process' is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 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 DTAAs and the domestic d....
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....he words." Holmes v. Pheonix Insurance Co.47. It has been held in CGT v. Budur 48and Hindustan Const v. CIT49 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 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation; CIT v. Loyal Textile51; Sama Alana Abdulla vs. State of Gujarat52; Mohd Shabbir vs. State of Maharashtra53; Lewis Pugh Evans Pugh vs. Ashutosh Sen54; Ashwini Kumar Ghose v. Arbinda Bose55; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.56. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra57 where Section 27 of the Drugs and Cosmetics Act, 1940 came up for construction. By this section whoever "manufactures for sale, sells, stocks or exhibits for sale or distributes" a drug without a license is....
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....Commentary and Klaus Vogel on Double Tax 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. "74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model DTAA contains a definition of royalty which is in all material respects virtually the same as the definition 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 DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under: '9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into transponder leasing agreements under whi....
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....RIW 135 (1992), on Germany's DTC 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. were transferred to the user.' 76. Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below: 'On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand 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 clearcut 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.' 77. 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 DTAA a....
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....ent, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note 1 ITA 473/2012, 474/2012, 500/2012 & 244/2014 Page 49 that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs." 31. Similar view was taken by the Hon'ble High Court of Judicature at Bombay in the case of NEO Sports Broadcast Pvt Ltd. 264 Taxmann.com 323. The relevant findings read as under: "3. We notice that an identical issue came up for consideration before Delhi High Court in case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT, reported in (2011) 332 ITR 340. It was the case in which the assessee....
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....ion (a) to this section, lays down that in a case in which all the operations are not carried out in India, the income of the business deemed to have accrued or arisen in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. It, thus, clearly follows that carrying out of the operations in India, wholly or at least partly, is sine qua non for the application of clause () of sub-section (1) of section 9. Under the agreement with TV channels, role attributed to the assessee could be paraphrased in the following steps : Programmes were uplinked by the TV channels (admittedly, not from India). ii) After receipt of the programmes at the satellite (at the locations not situated in the Indian airspace), those (tm)A ere amplified through a complicated process. iii) The programmes so amplified were relayed in the footprint area including India where the cable operators received the waves and passed them over to the Indian population. [Para 32] Accepted position was that the first two steps were not carried out in India and the entire thrust of the reroute was limited to the third step and the argument was ....
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.... in the object of the statute to suggest to the contrary. In case the language of the statute is not clear and there is need to resort to aids of construction such aids can either be internal or external. Internal aids of constructions are definitions, exceptions, the Explanations . fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuation,.- saving clauses, non obstante clauses, etc. The external aids are dictionaries, the earlier Acts, history of legislation, the Parliamentary history, the Parliamentary proceedings, state of law as it existed when the la was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the AL.' Therefore, need for these aids would arise only if some ambiguity is found in the definition of term 'royalty appearing in the aforesaid provision. (4) As per section 9(1)(Vi), the income by way of royalty payable by the Government or a resident or a nonresident shad be deemed to accrue or arise in India. The term 'royalty' has been defined in //^Explanation 2 to section 9(1)(vi). In the case o/ Keshavji Ravji & Co. v. C1T [I990j 183 ITR I 49 Taxman 87. the Supra'-. ....
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....ed in that country. Clauses (c) and (A ) essentially deal with the agreements made fey exchange of information, investigation of cases and recovery of income-tax. The effect of an agreement man. pursuant to section 90 is that if no tax liability is imposed under the Act, the question of resorting l agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is nt imposed by the Act. If a tax liability is imposed by the Act, the agreement may be resorted to for negativing reducing it. In case of difference between the provisions of the Act and the provisions of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced ~ an appellate authority or the Court. However, as provided by sub-section (2), the provisions of the Act u apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the. agreement, it is the basic law. i.e., the Income-tax Act which will govern the taxation of income. [Para 54] Keeping in view the aforesaid principles, one should embark upon the interpretative process while defining the ambit and sc....
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....laying them after changing the frequency in the footprint area including India. [Para 56] It was clear from various clauses of the agreement that the assessee was the operator of the satellites. It also rt mained in the control of the satellites. It had not teased out the equipments to the customers. [Para 58] A close scrutiny of the ruling of the AAR in ISRO Satellite Centre (ISACT).ln re [2008] 307 1 1R 59175 Taxman 97 (New Delhi)vi- 'o»/r/ clearly reveal that where the operator has entered into an agreement for lease of the transponder capacity and has not given any control over parts of the satellite/transponder, the provisions of clause (xI) would not apply. In the instant case also, the assessee had merely given access to a broadband available in a transponder which could be utilized for the purpose of transmitting the signals of the customers. [Para 60] It needs to be emphasized that a satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. The transponder is, in fact, an inseverable part of the satellite and cannot function without the continuous support of various systems....
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....t there was no use of 'process' by the TV channels. Moreover, no such purported use had taken place, in India. The telecast companies/customers were situated outside India and so was the assessee. Even the agreements were executed abroad under which the services were provided by the assessee to its^^^^B customers. The transponder was in the orbit. Merely because it had its footprint areas on various continents, it would not mean that the process had taken place in India. [Para 70] The Tribunal had made an attempt to trace the fund flow and observed that since the end consumers, i.e.. persons watching TV in India were paying the amounts to the cable operators who, in turn, were paying the same to the TV channels, the flow of the fund was traced to India. That was a far-fetched ground to rope in the assessee in the taxation net. The Tribunal had glossed over an important fact that the money which was received from the cable operators by the telecast operators was treated as income by those telecast operators which had accrued in India and they had offered and paid tax. Thus, the income generated in India had been ■July subjected to tax in India. It M>a....
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.... any kind to any person in consideration for services of a managerial, technical or consultancy nature including provision of such services through technical or other personnel, if such services: (i) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; (ii) making available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (iii) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. 35. We find that the terms 'managerial', 'technical' and 'consultancy' appearing in the definition of 'fees for technical services' have not been specifically defined in the treaty and the Act. In our understanding, Managerial service signifies a service for management of affairs or services rendered in performing management functions. 36. It involves controlling, directing, managing or administrating the business of t....
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.... from disaster recovery playout services are not in the nature of FTS as they do not make available any technical knowledge, experience, skill, knowhow, or process or consist of the development and transfer of any technical plan or technical design. 43. The Hon'ble Karnataka High Court in the case of De Beers India Pvt Ltd 346 ITR 467 and the Hon'ble Delhi High Court in the case of Guy Carpenter & Co. 346 ITR 504 have held that mere rendition of services does not fall within the term 'make available" unless the recipient of services is enabled and empowered to make use of technical knowledge by itself in its business or for its own benefit without recourse to original service provider in future. 44. The co-ordinate bench in the case of Atos Information Technology, Singapore ITA Nos. 7144/MUM/17 and 5744/MUM/18 had the occasion to consider similar issue and held as under: "26. Having held so, now let us examine whether the payment received can be treated as FTS. Before we proceed to decide the issue, it is necessary to look at the definition of FEES FOR TECHNICAL SERVICES as per Article 12(4) of the India Singapore DTAA, which reads as under:- "4. The....