AI Drafter 
TaxTMI 
TaxTMI 
2022 (5) TMI 1589
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....Royalty as defined under Article 13(3)(a) of the Double Taxation Avoidance Agreement between India and United Kingdom ('India-UK Tax Treaty'); Ground number 3 erred in not following the decision of the jurisdictional Mumbai Tribunal in the Appellant's own case for previous Assessment Years ('AY') 2000-01 to AY 2005-06 and AY 2007-08 to AY 2012-13 wherein it has been held that receipts of the Appellant from TCL are not in the nature of 'royalty' under the Act as well as under the India-UK Tax Treaty; Ground number 4 erred in holding that a unilateral amendment of the term 'process' under the Act would get imported into the definition of 'royalty' given under Article 13 of India-UK tax treaty; 3. The short grievance articulated in the above grounds of appeal is that the authorities below holding that the amount of Rs. 5,82,70,600/- received by the assessee from Tata Communication Ltd. is taxable in its hands as royalty under the provisions of the India-UK Tax Treaty or under the provisions of the Income Tax Act. Learned representative fairly agree that this issue is squarely covered by a series of orde....
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....the Tribunal in the assessee's own case for A.Y. 2007-08 to A.Y. 2012-13, wherein after exhaustive deliberations and relying on its earlier order, the Tribunal had concluded that the same was not to be treated as royalty. 9. Per contra, the ld. Departmental Representative (for short "D.R") relied on the orders of the lower authorities. However, the ld. D.R could not controvert the claim of the assessee's counsel that the issue was squarely covered by the orders passed by the Tribunal in the assessee's own case for the preceding years. 10. We have given a thoughtful consideration to the aforesaid issue, and find, that the Tribunal while disposing off the assessee's appeals for A.Y. 2007-08 to A.Y. 2012-13, vide its consolidated order dated 12.12.2018, had held, that the amount received by the assessee company from providing Satellite Telecommunication Services to TCL was not to be treated as royalty. The Tribunal while dealing with the aforesaid issue had followed its earlier view that was taken while disposing off the assessee's appeals for A.Y. 2000-01 to A.Y. 2005-06, and vide its order dated 14.07.2017 had observed as under : "5. In order to appreciate....
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....ion ("MES") and Land Earth Station ("LES"). MES is an equipment located on a ship, aircraft or vehicle or carried in hand held case. The users of the equipment are third parties who are not connected with Inmarsat. The LES is a fixed site (with large satellite dishes and related equipment), which is operated by a third party i.e a Land Earth Service Operator ("LESO"). • Inmarsat is engaged in rendering various telecommunication 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, en....
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.... case of CIT vs. CGI Information Systems and Management Consultants (P) Ltd. and the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Siemens Aktionges wells chaft (2009) 310 ITR 320 (Bom). Reliance has been placed on the order of the Mumbai Bench of the Tribunal in the case of Viacom 18 Media P. Ltd. vs. ADIT (International Taxation)-2(2), Mumbai(2014) 44 taxmann.com 1 (Mum-Trib) in support of the argument that this is the view taken 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....
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....uations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic "laws in force". It was in this context that the Bombay High Court held that they were unable to accept the assesses's contention that the law applicable would be the law as it existed at This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this Court however is materially different as there is in fact a definition of the word royalty under Article 12 of both 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....
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....o use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 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 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. Parliam....
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.... by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill 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 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 Champion....
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....under: "2. At the outset, the Ld. Counsel, Mr. K. K. Ved submitted that similar issue has been decided by the Tribunal in favour of the assessee in assessee's own case right from the assessment years 2004-05, 2005-06 and 2008-09. The second issue relating to disallowance of interest paid to the Head Office also has been decided in favour of the assessee by the Special 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 Incometax 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 Aktiongesellsc....
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....order while rejecting the assessee's argument that the HC has held that amendments in the Act cannot be read into DTAAs; and v) The Bombay High Court has approved ambulatory approach (para 22)to interpretation of treaties against Static approach adopted by the Delhi High Court. So far as the interest paid by the Branch Office to the Head Office income of Headquarter, he submitted that, expenditure including interest attributable of earning of income which does not form part of the total income has to be disallowed under section 14A 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 ....
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....m "royalties" as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 16. The above 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....
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....ribunal, is directly applicable to the facts of the assessee's case also, which is evident from the following observations and conclusions drawn by the Tribunal:- "11. The consideration of payment is only this data process work. No part of this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because 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 a....
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....owing the principles of ejusdem generis meaning of the general words following the specific words have to take colour from the specific words preceding it. When that property or right, even if it so exists, is not of the nature of any of the specific categories set out in article 12(3)(a), it cannot be covered by the general words following those categories either. For all these reasons, 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....
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....dication. Hence, the said decisions are not applicable. 19. Thus, in view of the aforesaid reasons, we hold that the impugned payment made by the Branch to the H.O. towards reimbursement of cost of data processing cannot be held to be covered within the scope of expression "royalty" under Article 12(3)(a) of the India Belgium DTAA. Accordingly, the conclusion drawn by the learned 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 AY 2006-07 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 ....
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....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 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 statu....
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....the consistent views of Coordinate Benches the appeals of the assessee are allowed. " 8. Since the facts and circumstances in this year remain the same as in the past years, which has been considered by the Tribunal, we find no reason to distract from the earlier decision of the Tribunal dated 14.07.2017 (supra). Pertinently, it is also not the case of the Revenue that there is 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....
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....ppeal Nos. 2 to 5 are allowed in terms of our aforesaid observations. 12. We shall now deal with the issue as to whether or not the assessee had a PE in India during the year under consideration. As observed by us hereinabove, the A.O/DRP had concluded that the Land Earth Station (LES) constituted a PE of the assessee in India. It has been the claim of the assessee before the lower authorities that as the LES was owned and operated by TCL and not by the assessee, therefore, on the said count it could not have been held to have constituted a PE of the assessee in India. Also, as is discernible from the orders of the lower authorities, the A.O/DRP had observed that the Liaison Office (LO) constituted a PE of the assessee in India. As observed by us hereinabove, it was the claim of the assessee that as the LO had not carried out any activities in India, it could therefore not be treated as the assessee's PE in India. The ld. A.R submitted that the factual position qua the issue as to whether the assessee had a PE in India on both of the aforesaid counts had been looked into by the Tribunal while disposing off the appeals of the assessee for the preceding years i.e A.Y. 2007-0....
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....ies holding that it has a PE in India. In this context, the relevant facts are that the Assessing Officer noted that assessee owned Space Segment Monitoring System (SSMS), which was equipment installed/located at Arvi, Maharashtra. The Assessing Officer further notes that the Land Earth Station (LES) of VSNL/TCL is also located at this place and that the SSMS equipment plays a critical role in providing telecommunication services to the Land Earth Service Operator (LESO), which is VSNL. The Assessing Officer noted that the said equipment is installed and maintained by the assessee and that assessee also has a liaison office in India. The Assessing Officer notes that the activities of the liaison office cannot be "said to be just a mere liaisoning work in India". The Assessing Officer further notes that the employees/staff of the liaison office provide various services to the assessee-company in connection with the contract with VSNL. Therefore, the Assessing Officer concluded that the location of SSMS equipment in India and the presence of the liaison office in India constituted a PE of the assessee in India and, therefore, the payment received by the assessee from VSNL was attribu....
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.... been renewed from time to time and so far as the captioned period is concerned, the approval of the RBI vide order dated 10.10.2008 subsists. It is pointed out that the very fact that the RBI continues to accord approval for the liaison office shows that there is no activity of trading, commercial or industrial nature which is carried out so as to treat such liaison office as a PE. 12. So far as the reference made by the lower authorities to SSMS equipment is concerned, the learned representative for the assessee pointed out that in the past years also such equipment was existing, but no adverse view has been taken and, in any case, so far as the instant period is concerned, the assessee has foregone the use of such equipment for providing services. In this context, our attention has been drawn to page 64 of the Paper Book wherein a communication dated 28.04.2005 is placed which is addressed to VSNL whereby it is informed that the facility of SSMS equipment would not be used for providing services w.e.f. 17.06.2005. It has been pointed out that such change was on account of an operational requirement as assessee has launched its 4th generation satellite which was thereaft....
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....y from or to any person in India without prior approval, etc. The aforesaid permission has been further renewed and there is no dispute that for the period under consideration also the requisite approval of the RBI exists for the liaison office of the assessee. We are only highlighting the aforesaid features of the permission granted by the RBI to point out that the liaison office is prohibited from carrying out any business or trading activity. At the time of hearing, it was also stated by the learned representative for the assessee at Bar that till now there is no infringement or any other adverse view taken by the RBI qua the activities which are being carried out by the liaison office in India. This singular aspect is quite pertinent to establish that if the Assessing Officer is to hold to the contrary, i.e. to say that the liaison office was undertaking activities in the nature of business or commerce, then, the onus was on him to establish so. Another notable feature is that the liaison office of the assessee has been in existence since 1999 and, even in the past assessment years when the Assessing Officer disagreed with the assessee on the nature of the receipts from VSNL/TC....
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....s equipment is approximately USD 150,000. This investment is insignificant when compared with the total cost of the Assessee's assets worldwide (including satellites) which is USD 2,230,839,000 as per the audited accounts for the year 1998. Thus, SSMS is not contributing to the revenues and hence, no part of the amounts receivable is attributable to SSMS. 4.2 The Assessee has a LO in India, which has been set-up with the approval of the Reserve Bank of India ("RBI"). All the activities of the LO are in accordance with the RBI's approval. The LO undertakes liaison and coordination activities on behalf of the Assessee. There are no income generating activities carried out by the LO in India. The LO was engaged in coordinating a pilot project to assist VSNL and Department of Telecommunications to provide satellite based village public telephone in rural areas. Presently, the LO interacts with the Indian Government to get information and coordinates with the regulatory authorities in connection with the use of Inmarsat's services in India. The LO's activities do not play any role in the rendering of telecommunication services to VSNL. 4.3 Based on the above, Inmarsat ....