TaxTMI 
TaxTMI 
2023 (10) TMI 618
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.... Delhi High Court in the case of DIT Vs. New Skies Satellite [(2016) 382 ITR 114 (Del)] and Asia Satellite Communication Co. Ltd. BV [(2011) 332 ITR 340 (Del)] held that the amounts received by the assessee company from providing satellite telecommunication services are not in the nature of royalty as per India UK DTAA. The ld. Counsel submits that the orders of the co-ordinate bench decision of the Mumbai Bench in the case of group company are placed at page Nos. 1 to 243 of the paper book. The ld. counsel for the assessee further inviting our attention to the DRP order page 68 and para 4.2.2 submits that the DRP confirmed the draft order of the Assessing Officer only for the reason that the Department did not accept the decisions of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd. (supra) and New Skies Satellite (supra) and SLPs have been filed against the said judgements in the Hon'ble Supreme Court. 3. On the other hand, the ld. DR strongly relied on the orders of the Assessing Officer/DRP. 4. Heard rival submissions perused the orders of the authorities below. On perusal of the draft assessment order it is noticed that the assessee derive....
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....appeal in Hon'ble Supreme court under the Direct Tax Vivad se Vishwas Scheme. 9. The assessee has also placed its reliance on the favourable judgement of Mumbai ITAT in the case of its group entity Inmarsat Global Limited, UK. However, it ought to be noted here that the Department has not accepted the decision of the Hon'ble ITAT for A.Y 2000-01 to A.Y. 2005-06 and A.Y 2007-08 to 2012-13 and has filed appeal in Mumbai High Court wherever the Tax Effect is more than the prescribed monetary limit, in view of Circular No. 3 of 2018 dated 11.07.2018 read with F. No. 279/Misc142/2007 ITJ (Pt) dated 20.08.2018 and Circular 17 of 2019 dated 08/08/2019. 10. With regard to the applicability of Engineering Analysis judgement, it is pointed out that the case pertains to Royalty payment with respect to the Software services provided and not Satellite Communication In the software cases before the SC the revenue relied on reading of Explanation 2 of section 9(1)(vi) with Explanation 4 for taxability of the software provision as royalty. Since Explanation 4 of section 9(1)(vi) was retrospectively amended, therefore, the SC noted that such unilateral amendment to the Act....
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.... distribution partner of IGL in this respect, Inmarsat's primary activity is purchase of airtime from IGL for resale as a packaged solution to third-party customers, mainly in the maritime industry • Since Inmarsat does not have a PE in India, the above receipts from TCL were not offered to tax in India as per Article 7 read with Article 5 of the DTAA. • The learned AO has held that the payments received by Inmarsat are covered within the definition of 'Royalty' under of Section 9(1)(vi) of the Act under clause (c) • The learned AO has held that receipts of Inmarsat from Indian customers are 'royalty' under Explanation 2 to Section 9(1)(vi) of the Act, even without considering Explanation 6 to Section 9(1)(vi) of the Act • The learned AO has held that customers have exclusive right to use the satellite for uninterrupted services and thus, payment made by the customers to Inmarsat is for the use of, or the right to use of specific capacity of the transponder and the process • The learned AO has relied on the decision on Hon'ble Delhi ITAT in the case of Asia Satellite Telecommunication Co. Ltd. ....
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....bilateral tax treaties including India-Hungry tax treaty- at pages 9 to 11 iv. Judicial pronouncements- at pages 11 to 14. v. DTAA between India and Netherland at pages 15 to 16 vi Observation from international judgement- at pages 8 to 9. 4.2.2 So far assessee's submission as per objection no. 3, (in respect of not following the decision of jurisdictional Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (2011)(332 ITR 340) and New Skies Satellite BV (2016)(382 ITR 114) wherein it has been held that receipts from lease of transponder capacity are not in the nature of 'royalty' under the Act as well as under the Tax Treaty), is concerned, the AO has extensively discussed this issue after considering the assessee's reply at page no. 18. The AO has stated that it is pertinent to mention here that the decisions on which the assessee relied upon of Hon'ble High Court in case of Asia Satellite Telecommunications and New Skies Satellite BV were not accepted by the revenue and SLPs have been filed against the same in Hon'ble Supreme Court. It is also noteworthy that Asia Satellite withdrew from the appeal....
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....iple 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 in this year is concerned, the same stands on similar footing as in the past years, namely, from rendering of telecommunication services to Videsh Sanchar Nigam Ltd. (in short 'VSNL'), whose name has subsequently been changed to Tata Communication Ltd. (in short 'TCL'). The receipts from rendering of telecommunication services to TCL were claimed to be not taxable in India; however, the Assessing Officer has taxed the same as Royalty under the Act as well as in terms of the India-....
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....h 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 connected by the LESO." 6. The Assessing Officer, however, took the stand, following the stand of the assessing authorities of the past years that the impugned receipts earned by the assessee from TCL are in the nature of 'Royalty'. We find that the DRP has also affirmed the decision of the Assessing Officer. 7. On this aspect of the controversy, it has been pointed out before us that the Tribunal vide its order in ITA Nos. 5102/Mum/2004 & others dated 14.07.2017 in the contex....
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.... 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 9 Inmarsat Global Ltd. ITA No. 8544/M/2010 & 5 ors. 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) supports its case is misplaced. Specific mention may be made to para 20 of the said decision. Reference therein has been made to a decision of the Canadian Court in the case of Her Majesty the Queen vs. Melford Development Inc. 82 DTC 6281 and the categoric observation on unilateral amendment by a nation which is party to the agreement leaves the issue in no doubt about the view favoured. Accordingly we quote here the deci....
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....rd 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 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. The Court in Sanofi (supra), had also held simila....
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.... 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. 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....
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....etation 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 of facts and circumstances and an entirely different 14 Inmarsat Global Ltd. ITA No. 8544/M/2010 & 5 ors. issue was being considered. The said decisions were neither cited before the Court nor referred to by it nor considered in the said judgement. Accordingly on a reading of the decisions rendered on peculiar facts of the present case which we have brought out in detail in the ea....
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....he 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 into the DTAA or not; ii) In the said case, old DTAA (1960) between India and Germany was under consideration; iii) The said decision was rendered in 20008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S.9(2) inserted by the Finance Act, 2007 doing with the requirement of PE for....
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....on 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 processing cost of Rs. 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired banking application software named as "Flexcube" from an Indian software company which is exclusively used for the banking purp....
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.... 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 for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on prorata basis. Such reimbursement of payment does not fall within the ambit of definition of "royalty" within the Article 12(3)(a). To fall within its....
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....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, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this ca....
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....y 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 processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activit....
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....rising 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 of the Hon'ble Delhi High Court in the said case reads as under:- "48 In Commissioner of Income Tax v. Seimens Aktiongessellschaft, [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that "The ratio of the judgment, in our opinion, would mean that by a unilateral amend....
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....ws 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 revenue. Accordingly, grounds no.1, 2 & 3 are dismissed. 5.2. As far as filing of writ petition to be filed before the Hon'ble High court is concerned if would be sufficient to mention that nothing was brought on record to prove that writ had been filed and heard. Had the final hearing taken place, it would ....
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....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." 8. We further observe that in the case of DIT Vs. New Skies Satellite BV (supra) the Hon'ble Delhi High Court held as under:- "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 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 su....
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....cally opposite implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of provisions. Judge Caldwell once famously said "The words control the punctuation marks, and not the punctuation marks the words." Holmes v. Pheonix Insurance Co.. It has been held in CGT v. Budur and Hindustan Const v. CIT 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 Const50. 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 Textile; Sama Alana Abdulla vs. State of Gujarat; Mohd Shabbir vs. State of Maharashtra; Lewis Pugh Evans Pugh vs. Ashutosh Sen; Ashwini Kumar Ghose v. Arbinda Bose; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.. An illustration of the aid derived from punctuation may be furnished from the....
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....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 Satellite58 takes note of the OECD 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 als....
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....se the capacity of cables for the transmission of electrical power or communities (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). 75. 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 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....
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.... are applicable to the DTAAs. 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite59, 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 Tax Avoidance Agreement, 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 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 dism....
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....rtistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark. design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, and ction with radio or (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic." B. Basic principles governing the definition of royalty' 3.3.2 A plain reading of the above definition clearly suggests that only the payments made for the transfer/ use or right to use/ licensing of certain intellectual property rights or payments made for imparting of any information concerning technical, industrial, commercial or scientific knowledge or experience are regarded as'royalty'. 3.3.3 In deciding whether or not payments arising in any transaction constitute 'royalty', the paymentsmustbeinconsiderationforthe 'useofo....
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.... assets vis-a-vis the granting of the right to use the assets to the payer, Dr Klaus Vogel in his commentary on Double Taxation Conventions has the following key observation. "On the other hand, another distinction to be made is between letling the proprietary right, experience etc on the one hand and use of it by the licensor himself,e.g. withinthe framework of an advisory activity. Within the range from 'services', via 'letting' to 'alienation', outright alienation is the one clear- cut extreme, 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 ownproprietary rights, know-how etc. while not letting or transferring them to payer. Neitherextreme comes under Article 12, all that does is the central category viz 'letting'" Intheaboveparagraph,DrVogelhashighlightedtheprinciplethatroyaltypayments essentiallydealwithtransactionsinvolvingthelettingofanassetbythelicensor(ie the payee/owner of the asset) to the licensee (ie payer/user of the asset) and a distinction must be....
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....vs. DCIT (78 TTJ 418) (Cal), the ITAT drawing inspiration from judgement of Visakhapatnam Port Trust (supra) made the following observations: The OECDModelConventionandCommentaryplaysa'keyrole' ininterpreting a taxtreaty. . They constitute 'international taxlanguage'. . The meanings assigned by such literature should be given 'dueweightage'. âš« The OECD has made immense contribution towards development of standardization of tax treaties between various countries and constitute "contemporanea exposito" in as much as the meanings indicated by various expressions in tax treaties can be inferred as the meanings normally understood in OECD and UN Model/Commentary The last three principles were also upheld in the case of DCIT vs. ITC (85 ITD 162) (Cal). Further, India is a signatory to the UN Model and has actively participated in the process of revision of the UN Model Commentary in 1999. Hence, the UN Commentary would play a 'key role' in interpreting tax treaties entered into by India. Further, in the case of Azadi Bachao Andolan (supra), the Hon'ble Supreme Court, while dealing with Artcle 4 of the India Mauritius Tax Treaty has dra....
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....o execute workhimself for the other party. Such payments generally fall under Article 7 or Article14." Similar observations have also been made in paragraphs 11.1 and 11.2 of the OECD Commentary on Article 12 (royalties). Thus, the above observations of the UN and OECD Model Commentaries lay down the principle that in a 'royalty' transaction, the owner of the rights is not required to play any part himself in the application of the rights granted to the payer. On the other hand, in a transaction for rendering of services, the payee undertakes to execute the work himself for the payer. In the present case, Inmarsat undertakes to provide telecommunication servicestocustomersandinordertorenderthesaidservices Inmarsatby itself uses the satellites and other Document 5 infrastructure. Accordingly, the revenues of Inmarsat are not in the nature of 'royalties' covered by Article 13ofthelNTTbut'businessprofits'ascoveredunderArticle 7 oftheINTT. (iii) The OECD Model Commentary further lays down inter-al1a, the following key criteria for distinguishing between a contract for the supply of know-how and a contract for the provision ofservices: .Contra....
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....lite 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 simply 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 rightto use, ICS 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 thirdparties. In such a case, the payment made by the satellite operator to the satellite owner could wellbe conside....
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....to its customers, consideration for provision of the telecommunication services should not be regarded as royalty for the use of equipment. The above discussion would clearly prove that the present agreement entered into by Inmarsat with its customers is that of services and not for providing any equipment by Inmarsat to customers. The payments made by customers represent consideration for the telecommunication services and not for use of or right to use any asset. The TAG report has also set out certain principles which characterize a contract as a contract for the rendering of services. In this connection, the following observation has been made in the TAG report: ".in a contract involving the performance of services. Document 7 (e) in the course of developing a product, the contractor would apply existing knowledge, skillandexpertise-thereisnotatransfer (iesupply)ofknow-howfromthecontractor to the buyer as such but a use by the contractor of his knowledge for his own purposes,"..." We submit that in the present case also, Inmarsat itself applies the satellite, infrastructure, its existing knowledge, skill and expertise in providing services ....
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....ontract for instance 'use of a transponder', 'customer transponder', 'right to use the transponder' was not contrary to this result. The German Tax Court held that the revenues earned by the Luxemburg company were not to be subsumed under Article 15 (royalties, licenses) of the DTAA between Germany and Luxemburg and therefore are not subject to German withholding tax. Instead, the satellite operator earned income from trade and business, which is not subject to taxation in Germany because the satellite operator does not have a permanent establishment in Germany. It is submitted that in Inmarsat's case also, as explained earlier, the essence is the provision of services to its customers and not allowing any use or right to use any asset etc. The above observations bring about a clear distinction between the use of asset/ intellectual property rights by owner in its own business and granting the right of use to the licensor for exploiting the Document 8 asset/intellectual property right. Whereas the latter could be regarded as royalty, the former would clearly be regarded as business profits. In the present case, Inmarsat is using its infrastruct....
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....ike property or right:or (e) the reception of, or the right to receive, visual images, or sounds, or both, transmitted to the publicby.- (i) satellite, or Document 9 (ii) cable. optic fibre or similar technology,or (f) theuseinconnectionwithtelevisionorradiobroadcasting, ortherighttousein connectionwithtelevisionbroadcastingorradiobroadcasting, visualimages,or sounds. or both transmittedby: (i) satellite.or () cable, optic fibre or similar technology.or . India-Hungary taxtreaty "3. (a) The term royalties" as used in this Article means payments of any kind received as aconsideration for the use of, or the right to use, any copyright of literary, artistic or scientific...transmissionbysatellite,cable,opticfibreorsimilartechnology. orfortheuse of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience." 3.3.15 Ascanbeobservedfromthedefinitionofroyaltyprovidedintheabove-mentionedtax treaties, the consideration for use of satellites has been specifically included in the definition of royalty. Accordingly, in absence of the specific i....
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....s defined in Explanation 2 to Section 9(1)(vi) of the Act. The definition is not an independent standalone definition applicable in all cases where the word occurs. The Explanatory Memorandum makes it abundantly clear that these provisions are relevant solely in the context of "royalty" within Section 9(1)(vi) of the Act when it states: "Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent..", the amendment has beenmade. 3.3.21 The INTT has its own independent definition of "royalties" in Article 13(3). It is well settled thatthe definition of royalty in Explanation2to Section 9(1)(vi)ofthe Acthasnorelevance when construing "royalties" in Article 13 of INTT. The meaning of that expression in Article 13(3) of the INTT cannot have the meaning in Explanation 2 to Section 9(1)(vi) of theAct. Reliance in this connection is placed on the decision of Karnataka High Court in the case of Citizen Watch Company (148 ITR 774) wherein it has been observed as follows: "The ITO has relied on the definition of the term "royalty" occurring in Expin. 2 to s. 9(1)(vi)(c) of the....
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....to taxability of income received by Non-residents from lease of transponder capacity, and has held that the such income does not constitute "royalty' under the DTAA nor under the amended provisions of Section Document 11 9(1)(vi) of the Act. The major findings of the High Court are as under: TheunilateralamendmentundertheActcannotaffectthemeaningofthetreaty isdefinedinthetaxtreaty. TheHigh Courtholdthatatax specially whenaterm treaty is a carefully negotiated economic bargain between two states and any amendment in the domestic law cannot be read into the tax treaty without amending the provisions of the tax treaty itself. âš« The amendment introduced by the Finance Act, 2012 will not affect the provisions of the tax treaty with regard to taxability of payments as "royalty". The relevant extract of the decision is enclosed asunder: "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 o....
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....a, who would pass them on to the customers. The question was whether the payments made to the non-resident were in the nature of royalty and therefore come within the scope of section 9(1) of the Income Tax Act, 1961 ('the Act' for short). The Court by a detailed judgment held that the payments were not in the nature of royalty charges. The Court made a distinction between transfer of rights in respect of property and transfer of rights in theproperty. 4. Later on similar issue once again came before Delhi High Court in the case of Directorate of Document 12 Income-tax vs New Skies Satellite BV. sported in (2016) 382 ITR I 14. The Court followed the earlier decision in case of Asia Satellite Telecommunication (supra) and dismissed the revenue's Appeal. It was held that the explanations added below section 9(1) of the Act were not merely clarificatory in nature. Respectfully agreeing with the said decisions of the Delhi High Court, this question is not considered." (emphasis supplied) (iii) M/s Tat TV Ltd., (ITA No. 4678/Mum/2007, ITA No. 412/Mum/2008& ITA No. 4176/Mum/2009) (Mumbai ITAT) TheMumbailTAThasheldthatthetransponderchargespaidfo....
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....x treaty. To invoke the provisions of Article 3(2), the first thing to be seen is whether the undefined expression can be said to be a treaty term. The expression "term" is defined as "a word or phrase used to describe a thing or to express a concept, especially in a particular kind of language or branch of study". A "term"is thus a word that has meaning and refers to objects, ideas, events or a state affairs. A term is thus, in addition to being a word, some kind of a point of reference, whereas a word is only a constituent of language. As a corollary to these discussions, Article 3(2) will come into play only in respect of the undefined treaty terms, which are in the nature of reference points and which have some peculiar significance as Document 13 a term employed in the treaty, and not all the undefined words and expressions used in a treaty. To put a question to ourselves, does the expression "process", in its own right, has any relevance for the tax treaties or can "process" to be said to be a term employed in tax treaties?' The answer is in negative. If at all the expression "process" has any relevance, it is in defining a treaty term i.e. ....
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....he retrospective amendment to the Act. the amendment will not apply to the treaty per se. It was further observed that if there is some provision in the treat which is contrary to the provision of the domestic law, then it is the contrary provision of the treaty which shall override the provision in the domestic law in the computation of income as per the treaty. Further, the Hon'ble ITAT held that since the explanation inserted vide retrospective amendment to the Act, making the definition of Royalty inclusive in nature, was not a part of Royalty definition under the relevant DTAA. such retrospective amendment should not be read in the DTAA also. The relevant extract of the said decision is reproduced hereunder: "3.7... Any amendment carried out to the provisions of rise Act with retrospective effect shall no doubt name the effect of altering the provisions of the Act but will not per se have the effect of automatically altering the analogous provision of the Treaty. 3.9...Article 3(2) in most of the treaties including the India-USA DTAA provides that any term not defined in the Convention shall unless the context otherwise requires, have the me....
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....ible to claim treaty benefit. A copy of the judgement has been submitted along with our submission dated 15 April 2021. Relevant extract of the decision of Supreme Court is reproduced below for your goodselfs ease ofreference: "40. These appeals concern the DTAAS between India and the following countries/parties. 13. Kingdom of Netherlands 42. The subject matter of each of the DTAAS with which we are concerned is income tax payableinIndiaandaforeign country. Importantly, asis now reflectedbyexplanation4to section 90 of the Income Tax Act and under Article 3(2) of the DTAA, the definition of the term "royalties" shall have the meaning assigned to itby the DTAA, meaning thereby that the expression "royalty", when occurring in section 9 of the Income tax Act, has to be construed with reference to Article 12 of the DTAA. This position is also clarified by CBDT Circular No. 333 dated 02.04.1982, 31.. 150.Whenthedefinition of royalties "isseeninalltheDTAASthatweareconcernedwith,"it isfoundthat"royalties "is definedinamannereitheridenticalwithorsimilartothedefinition containedin Article 12 ofthe OECD ModelTaxConvention. Thisbeingthecase, the OE....
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....efactsat hand as the effect of section 90(2) of the Income Tax Act, read with explanation 4 thereof, is to treat the DTAA provisions as the law that must be followed by Indian courts, notwithstanding what may be contained in the income Tax Act to the contrary, unless more beneficial to the assessee. For all these reasons therefore, these submissions of the learned Additional Solicitor General arerejected. CONCLUSION 168. Given the definition of royalties contained in Article 12 of the DTAAS mentioned in paragraph 41 of this judgment, it is clear that there is no obligation on the persons mentioned in section 195 of the Income Tax Act to deduct tax at source, as the distribution agreements/EULAS in the facts of these cases do not create any interest or right in such distributors/end-users, which would amount to the use of or right to use any copyright. The provisions contained in the Income Tax Act (section 9(1)(vi), along with explanations 2 and 4 thereof), which deal with royalty, not being more beneficial to the assessees, have no application in the facts of thesecases... Document 16 (emphasis supplied) 3.3.26 Without prejudice to the abov....
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....ceedings with ISRO which has been followed after detailed discussion andin fact extracted by the Hon'ble Delhi High Court in the Asia Satellite Telecommunications Co. Ltd. (2011) 332 ITR 340 (Del). We note that no argument have been advanced by the Revenue to rebut the assessee's argument that facts as considered in ISRO Satellite Centre are identical in the present proceedings also." 10.2. In view of the above reasoning on facts and law we find that the judicial precedent as cited before us and as discussed and considered at length by the Hon'ble Delhi High Court in facts as upheld in the ruling of AAR in the case of ISRO (supra) is also found supported by the Hon'ble Jurisdictional High Courtsupportstheviewtakenandthedecisionofthe Hon'ble Madras HighCourtstandsconsideredandthedecisionoftheHon'bleKarnataka High Court itisnoted havingbeenrenderedon9th June2014didnothavethebenefitoftheviewtaken bytheHon'ble Delhi High CourtintheorderoftheCoordinate Benchin Viacom18thebenefit ofthesaiddecisionwasnotavailableandinthesaiddecisionsrelied uponbytheRevenue, thesimilarityofthepeculiarfactsofAAR'srulinginISROasconsideredbythe Hon'ble Delhi HighCourt....