TaxTMI 
TaxTMI 
2024 (7) TMI 1340
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.... H. THE USE/RIGHT TO USE QUESTION 78-87 I. SCOPE OF THE OSS/GBSA 88-89 J. ARTICLE 3 (2) 90-95 K. SUMMATION 96-106 L. OPERATIVE DIRECTIONS 107-108 A. PROLOGUE 1. The Commissioner of Income Tax questions the correctness of the judgments rendered by the Income Tax Appellate Tribunal [Tribunal] dated 30 September 2020 [ITA 334/2022, ITA 335/2022 and ITA 597/2023], 13 September 2022 [ITA 55/2023 and ITA 61/2023], 27 September 2022 [ITA 206/2023] and 17 July 2023 [ITA 171/2024 and ITA 174/2024] and posits the following questions of law for our consideration: "2.1 Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in holding that the receipts from Indian customers for services provided outside' Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty as per section 9(l)(vi) of the Act and Article 12 of the DTAA between India and Singapore? 2.2 Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in interpreting the meaning of Royalty under Article 12 of the India Singapore DTAA without co....
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....AY 2017-18 27 September 2022 ITA No. 171/2024 AY 2018-19 17 July 2023 ITA No. 174/2024 AY 2019-20 17 July 2023 We note that the Tribunal for AYs' 2015-16, 2016-17, 2017-18, 2018-19, and 2019-20 has principally followed its decision dated 30 September 2020 and which pertained to AYs' 2011-12, 2012-13, and 2014-15. B. THE FACTS 4. The undisputed facts on which the appeals proceed are as follows. The respondent-Telstra Singapore Pte Ltd. [Telstra Singapore] is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions. Amongst the range of services with which we are concerned, are the provision of international private leased circuits, multi-protocol label switching and which are essentially used to facilitate high speed data connectivity. The data connectivity service has been described as bandwidth services. It is also admitted that Telstra Singapore holds and owns the infrastructure and equipment outside India which is utilized in connection with providing of bandwidth services to customers. 5. As per the appellants, in order to facilitate the provision of bandwidth services in India, Telstra Singapore had....
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....llowing international data communications services and each such service is an "International Service": (a) private leased circuit service between international gateways ("IPLC"); (b) global frame relay services being frame-switched data carriage services connecting intelligent end-points internationally ("Frame Relay"); (c) global ATM services being a digital transmission link for the carriage of data via asynchronous transfer mode between access ports on a permanent virtual circuit ("ATM"); (d) internet access services providing connectivity between a port located at an Administrations point of presence in a country and the global internet ("GIA"); (e) global IP VPN Service being a service providing a TCP/IP Virtual Private Network connectivity between designated access end points (being ports) ("IP VPN"), operated by each of the Administrations and the. "OSS Service" means the one-stop-shop service for International Services as more particularly described in clause 2.1." 9. The acronyms SEB and SEO, which are repeatedly used in various clauses of the OSS Agreement are defined as under: "SEB" means single end billi....
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....ns will exchange Customer Contracts, information and any promotional literature relating to their respective International Services and keep each other informed of any amendments thereto. 4.2 Where an Administration introduces the International Services of the other Administration to any Customer it shall notify the Customer that such services will be provided by the other Administration under the relevant terms and conditions of the other Administration. The Administrations will exchange instructions on the method of completion of Customer Contracts. Once the Customer has signed the Customer Contract, a copy of the signed Customer Contract must be returned to Administration B for approval. The overall provisioning interval for each International Service will be the longer of the two lead times of each of the Administrations. 4.3 The Customer may, in writing, elect SEB at any time. Administration A shall coordinate the billing when SEB is requested. Any proposed variation of this procedure will be considered by the Administrations on a case by case basis. Administration A shall be responsible for collecting payment from the Customer for the International Service w....
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.... Administration may in its discretion decline to provide SEB. Administration A will advise the Customer whether SEB will be provided. (c) Each Administration reserves the right to levy a special surcharge on its Customer for providing the SEB service. (d) Where both Administrations agree to provide SEB: (i) Administration B will advise Administration A what the total charges (including taxes and other government or regulatory charges recoverable by Administration B from the Customer under Administration B's contract with the Customer) for the International Service Provided by Administration B will be. Administration A will then invoice the Customer on that basis. Administration B may vary charges (other than taxes and other government or regulatory charges) by giving Administration A not less than 30 days notice. Taxes and other government or regulatory charges apply as varied from time to time by the relevant authorities and Administration B will advise Administration A of such changes as soon as is practicable. The parties acknowledge that this clause 5.6 (d) (i) is necessary for operational purposes to enable Administration A to invoice the Customer in....
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....) Administration A shall instruct its bank to quote the appropriate Administration B reference number on any settlement advice note. Once settlement has been made, Administration A shall complete the applicable portion of the settlement request form and send it by facsimile to Administration B's Billing Department; (ix) Each Administration shall file all returns and remit all such taxes to the applicable taxation authorities with respect to taxes applicable to its own services and will hold the other Administration harmless from and against any liability resulting from any taxes, penalties and interest relating to or arising out of the first-mentioned Administration's failure to do so; and (x) Tax reclamation will be the responsibility of the Customer. Both Administrations will make best endeavours to make available to the Customer, the requisite documentation by the fiscal authority in the appropriate jurisdiction, to enable the relevant refunds to be claimed whenever appropriate." 13. The relationship between the two Administrations is spelt out in Clause 6 and which acknowledges the understanding of parties that both administrations are independent busin....
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....the Act read along with article 12 of the DTAA. 15. For purposes of brevity, we propose to notice the salient facts as they obtain in ITA 335/2022. For Assessment Year [AY] 2012-13, the respondent-assessee had furnished Returns of Income declaring 'nil' income. Those Returns are stated to have been selected for scrutiny assessment as a consequence of which notices under Section 143 (2) came to be issued. Following the route of assessment as prescribed by Section 144C of the Act, a Draft Assessment Order is stated to have been framed with the Assessing Officer [AO] proposing that the amount received by the respondent from Indian customers for the provision of bandwidth services outside India being liable to be construed as constituting equipment/process royalty taxable under Section 9 (1) (vi) of the Act read along with Article 12 (3) of the DTAA. Assailing the proposed assessment, the respondent filed its objections before the Dispute Resolution Panel [DRP] on 16 October 2015. Consequent to the DRP upholding the proposed assessment, a final assessment order came to be framed on 16 November 2015 with the AO determining the total taxable income of the assessee at INR 26,75,15,533/....
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.... or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government: Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the exp....
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....bts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;]" 18. Mr. Chawla highlighted the fact that Explanation ....
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....espect of any right, property or information, whether or not (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the location of such right, property or information is in India. (iii) To amend section 9 (1) (vi) to clarify that the term "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret. These amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years." 19. Mr. Chawla then submitted that the concept of royalty in light of the DTAA would have to be understood bearing in mind the provisions made in Article 12. Article 12 of the DTAA reads as follows:- "ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a reside....
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....escribed in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic ; (c) for teaching in or by educational institutions ; (d) for services for the personal use of the individual or individuals making the payment; (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14 ; (f) for services rendered in connection with an installation or structure used for the exploration or exploitation of natural resources referred to in paragraph 2(j) of Article 5 ; (g) for services referred to in paragraphs 4 and 5 of Article 5. 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or perform....
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....y have to be had to Explanation 6 comprised in Section 9 (1) (vi) and which would be deemed to have existed in the statute right from 01 June 1976. In support of the aforesaid submission, Mr. Chawla placed reliance upon the following passages from the decision in Commissioner of Income Tax vs. P.V.A.L Kulandagan Chethiar (2004) 6 SCC 235: "19. The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the Treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to a different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of the Treaty wherever any expression is not defined the expression defined in the Income Tax Act would be attracted. The definition of "income" would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore Article VI would be attracted." 21. Mr. Chawla contended that when faced with a situation where the meaning of a term i....
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....with reference to use or right to use any industrial, commercial or scientific equipment, etc., was inserted with effect from April 1, 2002, under the Finance Act, 2001. The said expression came up for consideration before the Authority for Advance Rulings in the decision reported in Dell International Services India (P.) Ltd., In re (2008) 305 ITR 37 (AAR), a decision strongly relied on by the appellant in support of its contention that the payment to the assessee herein is not "royalty". The applicant-company before the Authority for Advance Rulings was Dell International Services (India) P. Ltd. engaged in the business of providing call centre, data processing and information technology support services to its group companies. It entered into an agreement with BT America-a non-resident company formed and registered in the USA under which BTA provides the applicant with two-way transmission of voice and data through telecom bandwidth. While BTA would provide the international half-circuit from the US/Ireland, the Indian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in ....
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....tellite Telecommunications Co. Ltd. v. DIT (2011) 332 ITR 340 (Delhi) and the rulings of the Authority for Advance Rulings reported in (2008) 305 ITR 37 (AAR) (Dell International Services (India) Pvt. Ltd., In re and Cable and Wireless Network India P. Ltd., In re (2009) 315 ITR 72 (AAR) on which heavy reliance was made were all rendered prior to the insertion of Explanation 5 and that the decision of the Delhi High Court rested on the facts therein. The amendments by insertion of Explanation 5 gives a very expansive meaning to the term "royalty" and this has a bearing on the issue so too the various clauses in the agreements which are to be looked at in a holistic manner. The agreement entered into between the assessee and the customer herein is for providing of seamless point-to-point private line so as to enable the customer to communicate between its office that are geographically dispersed. The service order reveals that the parties had agreed for a particular bandwidth and in entering this the assessee had provided the necessary equipment at customer premises, configured and customised to ensure that the customer gets the uninterrupted connectivity from one end to the other e....
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....rom the relevance and applicability of clause (iva) that the payment is for the use or right to use of the equipment, the Tribunal held that payment for the bandwidth amounts to royalty for the use of the process. The Tribunal also pointed out that by reason of the long distance, to maintain the required speed, boosters are kept at periodical intervals. Going by this too, in any event, the payment received by the assessee was rightly assessed as "royalty" and would constitute so for the purposes of the DTAA. xxxx xxxx xxxx 102. In the circumstances, we reject the case of the assessee holding that the receipts are liable to be treated as "royalty" for the use of IPLC under section 9 (1) (vi) read with Explanation 2 (iva) and correspondingly article 12 (3) of the DTAA between India and Singapore. We also agree with the Tribunal that even if the payment is not treated as one for the use of the equipment, the use of the process was provided by the assessee, whereby through the assured bandwidth the customer is guaranteed the transmission of the data and voice. The fact that the bandwidth is shared with others, however, has to be seen in the light of the technology gov....
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....istration shall notify the other Administration(s) of any tariff changes as soon as possible. Refer Para 70 @ Pg.81 (Pdf pg 839) of the compilation filed by appellant dated 14 January 2024 "70. Clause 4.4 states that settlement between the Administrations will be via bank wire transfer. Administration A will pay Administration B in full the amount received from the customer in the currency stated therein by the relevant Payment Due Date. Credit for service interruptions, if any, shall be given in accordance with each Administration's relevant terms and conditions of service and shall be indicated as a deduction on a subsequent invoice. Each Administration shall notify the other Administration of any rate changes through the normal billing cycle as outlined in Schedule 3 and Schedule 6. Clause 5.3: "Provisioning Phase" of OSS Agreement @ Pg. 13 of document filed by the respondent dated 3 February 2024 Refer Para 5.3 (e) @ Pg.14 (Pdf pg 508) "5.3 (e) A shall notify the Customer when the International Service has been satisfactorily established and shall notify both the Customer and Administration B via fax or email of the date when the International Service and bil....
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...."When Bharti is Administration-A" of OSS Agreement @ Pg. 28 of document filed by the respondent dated 3 February 2024 Refer Para 1.2 @ Pg.28 (Pdf pg 522) "1.2 Bharti, shall get the relevant documents filled by the Customer at their end as per the Customer Contract and terms & conditions made available to them by Telstra. This document shall be handed over to Telstra at the earliest, by courier and also intimated by facsimile/email to contacts of Telstra as provided, for expediting the order. Refer Para 1.5 @ Pg.28 (Pdf pg 522) "1.5 The charges or fees raised by Telstra through its invoices will be the total charges to be paid by Bharti under this Agreement. Refer Para 74 @ Pg.82 (Pdf pg 840) of the compilation filed by appellant dated 14 January 2024 "74. When VSNL is Administration A, VSNL shall get the relevant documents, including the MCI Warranty of Agency, filled by the customer at Indian end as per the customer order form made available to VSNL by MCI. This document has to be handed over to MCI at the earliest time possible, by courier and also communicated by facsimile/email to contacts of MCI as provided, for expediting the order. The charges or fee....
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....d which ultimately formed subject matter of an appeal before this Court. In view of the above, it was his contention that the AO had for cogent and valid reasons ultimately come to the correct conclusion that the receipts from Indian customers were liable to be taxed as royalty. 26. Mr. Chawla also sought to draw sustenance from the following extracted passages which appear in the decision of the Tribunal in New Skies Satellite N.V.:- "255. To briefly state, our findings in respect of issues raised and argued before us are as under: On facts, it is held that a process is involved in the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desired area which, inter alia, covers Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of "royalty" has not been restricted either by the domestic provisions or by the provisions contained in res....
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....s, the Tribunal has essentially relied upon various orders passed by it following New Skies Satellite, in order to articulate its view with respect to equipment royalty and has failed to independently evaluate or accord consideration to the issues which arose. While we do notice this submission, it may be only noted that the Tribunal was clearly bound by an authoritative pronouncement of the jurisdictional High Court and it cannot possibly be faulted in adopting that course. This more so when the decision in New Skies Satellite appears to have been consistently followed. We thus find no justification to hold that its decisions impugned in these appeals is liable to be interfered with on the ground as suggested. 28. Proceeding further, Mr. Chawla also placed reliance on yet another decision of the Madras High Court in Poompuhar Shipping Corporation Ltd. vs Income Tax Officer, International Taxation-II, Chennai [(2013) SCC OnLine Mad 3089] in order to explain the meaning to be ascribed to the expressions "use" or "right to use" and "royalty". The relevant extracts of that judgment are reproduced hereinbelow: "83. Both sides placed heavy reliance on the commentary on artic....
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....ty of royalty. It states that article 8-Ships and aircraft-1. Profits from the operation of ships or aircraft, including interest on funds connected with that operation, derived by a resident of one of the Contracting States shall be taxable only in that State. The definition of "royalty" as given under article 12 (3) of the DTAA with Australia is the same as in the definition in the DTAA with France in article 13, with Germany in article 12 ; with Norway in article 13 ; with Singapore in article 12 ; with Switzerland in article 12 and with U. S. A in article 12. xxxx xxxx xxxx 90. Thus, while some of the DTAAs include payment for use of or right to use of industrial, commercial and scientific experience as a heading under royalty, invariably, in all the DTAAs, payment for use of or right to use of industrial, commercial and scientific equipment, is included in the meaning of "royalty". The provision contained in section 9 (1) (vi), Explanation 2 (iva) is modelled after U. N. Model and is different from what one has in the OECD model at present. 91. Thus, while the OECD Model got amended to bring payment for use of or right to use of the industrial, comme....
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.... which is reproduced hereinbelow: - "16. Insofar as this court is concerned, either way, no substantial question of law would arise, as, according to Mr. Bhatia, the issue stands covered by the judgment rendered by the coordinate bench of this court in New Skies Satellite BV case." 32. It was submitted that the issue of bandwidth services and its taxability has also been ruled upon by the Karnataka High Court in its decision in Vodafone Idea Ltd. vs. Deputy Director of Income Tax 2023 SCC OnLine Kar 107 and where while dealing with an identical question, the issue came to be answered in favor of the Revenue. In Vodafone Idea, the Karnataka High Court was called upon to examine the following questions of law: - "1. Whether the Income-tax Appellate Tribunal (ITAT) was correct in holding that the application of the Double Taxation Avoidance Agreement (DTAA) cannot be considered in proceedings under section 201 of the Act and that it is not open to the payer to take benefit of the Double Taxation Avoidance Agreement when he is making payment to a non-resident? 2. Whether the Income-tax Appellate Tribunal was correct in holding that amendment to provisions ....
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....s stated therein vide Finance Act, 2012. 20. Explanations 5 and 6 to section 9 (1) (vi) of the Act has been inserted with effect from June 1, 1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impossibilia, i.e., the law does not demand the impossible, and impotentia excusat legem, i.e., when there is disability that makes it impossible to obey the law, the alleged disobedience of law is excused and it is held in Engineering Analysis as follows (page 558 of 432 ITR): "It is thus clear that the "person" mentioned in section 195 of the Income-tax Act cannot be expected to do the impossible, namely, to apply the expanded definition of "royalty" inserted by Explanation 4 to section 9 (1) (vi) of the Income-tax Act, for the assessment years in question, at a time when such Explanation was not actually and factually in the statute.. .. Also, any ruling on the more expansive language contained in the Explanations to section 9 (1) (vi) of the Income-tax Act would have to be ignored if it is wider and less beneficial to the assessee than the definition contained in the....
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....ission that the appeals deserve to be dismissed. 35. Seeking to explain the nature of the contract that exists between the assessee and Bharti, as well as the GBSA which it enters into with other telecom operators, Mr. Sabharwal sought to highlight the fact that the respondents themselves had understood the operations of the assessee as essentially being that of providing of a service. This, according to learned counsel, is evident from a reading of what the AO itself chose to record in the assessment order for AY 2012-13 in Para. 2.5.1 and which is extracted hereinbelow: - "2.5.1 M/s Telstra Singapore is a company incorporated in Singapore, outside of India, and is in the business of providing connectivity solutions (International Private Leased Circuits, Multiprotocol Label Switching ('MPLS'), IP /VPN etc) to facilitate high speed data connectivity (hereinafter referred to as 'bandwidth services'). Telstra Singapore holds the infrastructure and equipment, either owned or leased, outside India required to provide bandwidth services to customers." 36. This position, according to Mr. Sabharwal, is also evident from a reading of the directions of the DR....
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....y in the facts of the case, the assessee company is incorporated in Singapore. It is engaged in the business of providing digital transmission of data through international private line or multi-protocol label switching, etc. to facilitate high speed data connectivity (hereinafter referred to as 'bandwidth services') The assessee provides, bandwidth services outside India to its customers. It has entered into Global Business Service Agreement ('GBSA') with various customers. 1n case where services are provided by Indian telecom operator like Bharti Airtel in India and the services outside India are provided by the assessee, it enters into One Stop Shopping Services Agreement('OSS') with Bharti Airtel or any other Indian telecom operator, to facilitate single billing facility to the customer. Under the agreement with the customer, uninterrupted 24X7 services are available to it. In case, the services are unavailable or not available at the requisite speed the customer shall be entitled to rebate as per the rates agreed upon. The assessee for the year under consideration, had filed the return of income at Nil. The Assessing Officer was of the view that the amount received....
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....mann.com 267, order dated 23.01.2019 vide para 100 relied on decision of Hon'ble Delhi High Court in Asia Satellite Telecommunications Co. Ltd (supra) and held that there was no lease of equipment but only use of broadband facilities. Applying the said ratio to the facts of the present case, we hold that in the case of assessee, there is no question of any equipment royalty where the assessee was only using lease lines for transmitting data and it cannot be said to be a case of equipment Royalty. The Pune Bench of the Tribunal vide para 98 relied to the decision of T-3 Energy Services India Pvt.Ltd. vs JCIT, ITA No.826/PUN/2015 relating to assessment year 2010-11, order dated 02.02.2018 (supra) which in turn, had relied on the ratio laid down by the Hon'ble Delhi High Court in New Skies Satellite BV (supra) and held that consideration received for lease line charges does not constitute process Royalty. The relevant para 98 reads as under:- 98. "We find that objections raised by the learned Departmental Representative for the Revenue are not fully correct. The Assessing Officer had held it to be a case of both equipment and process royalty. As far as the issue of pr....
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....e any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article 1 (2). Considering the express language of article 1 (2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the double taxation avoidance agreement was entered into. " 22. In the facts of the case before the Hon'ble Bombay High Court the word 'royalty' was not defined in German Treaty and in that context the Hon'ble Bombay High Court held that they were unable to accept the assessee's contention that law applicable would be law which existed at the time the DTAA was entered into. In the facts of the case before us, the word 'royalty' is defined in DTAA entered into between USA and India and applying the ratio in CIT Vs. Seimens Aktiongesellschaft (supra), we hold that once a term has been defined in DTAA, then the said term is to be applied unless and until the parties to the DTAA amends the same. The Hon'ble High Court of Delhi in DIT Vs. Nokia Networks OY (supra) had applied the proposition laid down by the Hon'ble Bombay....
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....e by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended." xxxx xxxx xxxx 26. In view of the above said facts, we hold that there is no merit in the orders passed by the authorities below and the same are reversed. The assessee company is a tax resident of Singapore. which is providing band width services to the various Indian Telecom Operators like Bharti Airtel in India and the services are being provided outside India and the consideration received by the assessee company is not taxable as 'Royalty' in view of the beneficial provisions of DTAA between India and Singapore under which the definition of 'Royalty' has not been amended. Thus, Ground of appeal Nos 1 & 2 raised by the assessee are allowed." 38. Proceeding to the merits of the issues which were canvassed, Mr. Sabharwal contended that this Court in Asia Satellite Telecommunications Co. Ltd. vs. Director of Income-Tax 2011 SCC OnLine Del 507 had in unequivocal terms enunciated the test for the purposes of royalty being an effective and general control of goods being conferre....
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....#39;sale'. Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO 77 STC 182 (AP). Illustration: (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the 'use of the lorry' for the following reasons : (i) the lorry is never in the control, let alone effective control of the customer ; (ii) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; ....
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....Ispat Nigam Ltd. v. CTO [1990] 77 STC 182 which was affirmed by the Supreme Court, that mere custody or possession of equipment without effective control can only result in use of the equipment whereas a right to use the equipment implies control over the equipment. We do not think that such distinction has any legal basis. In the case of Rashtriya Ispat Nigam Ltd. (supra), what fell for consideration was the expression "transfer of right to use any goods" occurring in a sales-tax enactment. Obviously, where there is a transfer, all the possessory rights including control over the goods delivered will pass on to the transferee. It was in that context, emphasis was laid on 'control'. The Supreme Court affirmed the conclusion of the High Court that the effective control of machinery even while the machinery was in use of the contractor remained with RIN Ltd. which lent the machinery. The distinction between physical use of machinery (which was with the contractor) and control of the machinery was highlighted. The ratio of that decision cannot be pressed into service to conclude that the right of usage of equipment does not carry with it the right of control and direction wher....
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....ed by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. xxxx xxxx xxxx 13.1 There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilised by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are: Does the availment of service involve user of equipment belonging to BT or its agent by the applicant? Is the applicant required to do some positive act in relation to the equipment such as operation and control of the same in order to utilize the service or facility? ....
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....e applicant to transmit voice and data through the media of telecom bandwidth. The predominant features and underlying object of the entire agreement unerringly emphasize the concept of service. The consideration paid is relatable to the upkeep and maintenance of specific facility offered to the applicant through the BTA's network and infrastructure so that the required bandwidth is always available to the applicant. The fact that the international circuit as well as the access line is not meant to offer the facility to the applicant alone but it enures to the benefit of various other customers is another pointer that the applicant cannot be said to be the user of equipment or the grantee of any right to use it. May be, a fraction of the equipment in visible form may find its place at the applicant's premises for the purpose of establishing connectivity or otherwise. But, it cannot be inferred from this fact alone that the bulk of consideration paid is for the use of that item of equipment." 40. It becomes pertinent to note that the aforesaid view as taken was reiterated by the AAR in Cable & Wireless Networks India (P.) Ltd. [2009] 182 Taxman 76 (AAR) and where the lega....
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....makes use of or is conferred with the right to use a 'process' within the meaning of clause (iii) to Explanation (2) to section 9 (1) of the Act. That clause speaks of 'the use of any patent, invention, model, design, secret formula or process or trade mark or similar property'. It is contended, relying on the decision of ITAT in the case of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 (Delhi) that the word 'secret' only qualifies the expression 'formula' and cannot be read before the word 'process'. On such interpretation, it is submitted by the revenue in its comments that the services provided to the applicant are clearly in the nature of a process and not in the nature of standard facility and the applicant has used and has been conferred with the right to use such process. However, this contention has not been urged before us by the learned Counsel for the Department for the obvious reason that the language used in the relevant clause of the Treaty does not support any such interpretation. The expression in article 12 (3) (referred to at para 7.1 (supra) is 'for the use of or the right to use any copyright,....
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....right to use" in any equipment or process. 42. Proceeding then to Explanation 2 to Section 9 and Article 12 (3) of the DTAA, Mr. Sabharwal submitted that the word "process" appears in the company of various species of intellectual properties such as patents, invention, model, design, formula and trademark. In view of the aforesaid, according to learned counsel, the principles of noscitur a sociis would apply and consequently the word "process" being liable to be understood as relating to an item of intellectual property. It was his contention that no intellectual property right stands associated with the provision of bandwidth services provided to customers. Mr. Sabharwal contended that the argument based on equipment royalty is also liable to be negatived since the assessee neither transfers a right to use the equipment nor is the customer conferred a right to utilize that equipment on an exclusive basis. 43. Learned counsel then sought to draw support for the aforenoted submissions from the OECD Model Commentary pertaining to Article 12 and where, in the context of transponder leasing, pipelines, transmission of electrical power or communications, the following observations....
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....unications network operator to another network operator under a typical "roaming" agreement (see paragraph 9.1 of the Commentary on Article 5) will not constitute royalties under the definition of paragraph 2 since these payments are not made in consideration for the use of, or right to use, property, or for information, referred to in the definition (they cannot be viewed, for instance, as payments for the use of, or right to use, a secret process since no secret technology is used or transferred to the operator). This conclusion holds true even in the case of treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties since the operator that pays a charge under a roaming agreement is not paying for the use, or the right to use, the visited network, to which it does not have physical access, but rather for the telecommunications services provided by the foreign network operator." 44. Mr. Sabharwal also placed reliance on the following passage as appearing in the seminal work of Professor Klaus Vogel on Double Taxation Conventions (3rd Edition) vide para 44 at page 788: - "Within the range from services, viz "....
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....pears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit: law looks forward not backward. As was observed in Phillips v. Eyre [(1870) LR 6 QB 1], a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 29. The obvious basis of the principle against retrospectivity is the principle of "fairness", which must be the basis of every legal rule as was observed in L'Of....
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....ion which is onerous to the assessee. Therefore, in a case like this, we have to proceed with the normal rule of presumption against retrospective operation. Thus, the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication. Dogmatically framed, the rule is no more than a presumption, and thus could be displaced by outweighing factors. 32. Let us sharpen the discussion a little more. We may note that under certain circumstances, a particular amendment can be treated as clarificatory or declaratory in nature. Such statutory provisions are labelled as "declaratory statutes". The circumstances under which provisions can be termed as "declaratory statutes" are explained by Justice G.P. Singh [Principles of Statutory Interpretation, (13th Edn., LexisNexis Butterworths Wadhwa, Nagpur, 2012)] in the following manner: "Declaratory statutes The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies [ W.F. Craies, Cra....
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....no application to telecom services is clearly misconceived when one bears in consideration that Explanation 6 to Section 9, groups transmission by satellite, cable optic fiber or "any other similar technology" together. Even here, according to learned counsel, if the precept of ejusdem generis were to be applied, it would become apparent that telecom services would fall within the broad group spoken of in Explanation 6 and fall in the category of "any other similar technology". It was pointed out by Mr. Sabharwal that similar broad classifications appear in various other DTAAs' and which would be evident from the extracts which appear at pages 393 and 398 of our record. 50. In any case, according to Mr. Sabharwal, a payment would be liable to be categorized as royalty under the DTAA only if it entailed a "use" or a "right to use". Those two expressions, according to learned counsel, have been clearly explained by this Court in Asia Satellite and New Skies Satellite. According to learned counsel, the enunciation of the legal position as appearing in Paras 68 and 69 of Asia Satellite follows the position which was expounded by the Andhra Pradesh High Court in Rashtriya Ispat Nigam....
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....to align with the definition given in the Act." 52. Mr. Sabharwal also drew our attention specifically to the following grounds on which the appeals proceed: - "b) Because ld. ITAT has erred in holding that the receipts from Indian customers for services provided outside Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty as per section 9 (1) (vi) of the Act and Article 12 of the DTAA between India and Singapore. xxxx xxxx xxxx f) Because ld. ITAT failed to note that the receipts pertain to a transaction aimed at providing high speed data connectivity between two different countries at the request of the customer . concerned. An Indian customer, in order to complete this connection, relies on the Indian telecom service provider for the Indian leg of the transmission and further on the assessee company for the foreign leg of the same connection. Since the Indian and foreign (i.e. the assessee company) service providers are in an agreement to provide these services together, the receipts pertain to provision of the same service. The service is being rendered by the assessee co....
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....e without artificial guide." 59. What is also important are the definitions of the words "message" and "telegraph line" in the 1885 Act which read: "3. (3) 'message' means any communication sent by telegraph, or given to a telegraph officer to be sent by telegraph or to be delivered; (4) 'telegraph line' means a wire or wires used for the purpose of a telegraph, with any casing, coating, tube or pipe enclosing the same, and any appliances and apparatus connected therewith for the purpose of fixing or insulating the same;" 60. Section 4 of the 1885 Act gives exclusive privilege in respect of telecommunication and the power to grant licences to the Central Government. Pursuant to such power, licences have been granted to service providers. According to the service providers, in terms of their licence no further transfer of the rights to use the telegraph could be affected by them. Therefore, what was provided was a service by the utilisation of the telegraph licensed to the service providers for the benefit of the subscribers. 61. We will proceed on the basis that incorporeal rights may be goods for the purposes of levying sales tax. Assum....
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....a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. At the most the concept of the sale in a subscriber's mind would be limited to the handset that may have been purchased for the purposes of getting a telephone connection. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection. xxxx xxxx xxxx 95. The petitioner Bharat Sanchar Nigam Ltd. (for short "BSNL") is a licensee under the Telegraph Act, 1885. The licence of the petitioner is obtained from the Government of India which is the same as the licence given also to various private telecom operators which entitles BSNL to carry the activity of operating telegraph limited to the scope of telecommunication facilities. 96. The entire infrastructure/instruments/appliances and exchange are in the physical control and possession of the petitioner at all times and there is neither any physical transfer of such goods nor any transfer of right to use such equipment or apparatuses. 97. To constitute a ....
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....s by roadways, railways, airways and waterways. This is associated with carriage of tangible goods. Such a carrier has no right over the goods of the customer and does not effect transfer of right to use any goods used by the carrier for goods. On this analogy, the petitioners carry messages. They are only carriers and have neither property in the message nor effect any transfer to the subscriber. The advancement of technology should be so absorbed in the interpretation that this method of carriage of message should also be understood as carriage of goods and not a transfer of a right to use goods, if any. 112. The licence clearly manifests that it is one for providing telecommunication service and not for supply of any goods or transfer of right to use any goods. It expressly prohibits transfer or assignment. The integrity of the licence cannot be broken into pieces nor can the telecommunication service rendered by them be so mutilated. Not only does this position flow from the terms of contract, this also flows from Section 4 of the Telegraph Act which provides for grant of licence on such conditions and in consideration of such payments as it thinks fit, to any person "....
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....ause (f). This will also result in an anomaly of the entire payment by the subscriber to the service provider being for alleged transfer of a right to use goods and no payment at all for service. The licence granted by the Central Government fixes the tariff rates and all are for services." 54. Mr. Sabharwal also cited for our consideration the position taken by the Tribunal in the case of Bhart Airtel Ltd. vs. Income Tax Officer (TDS) 2016 SCC OnLine ITAT 5578 and where while evaluating a similar contract, the Tribunal had come to the following conclusions: - "52. The term "process" used under Explanation 2 to section 9 (1) (vi) in the definition of "royalty" does not imply any "process" which is publicly available. The term "process" occurring under clauses (i), (ii) and (iii) of Explanation 2 to section 9 (1) (vi) means a "process" which is an item of intellectual property. Clause (iii) of the said Explanation reads as follows: "(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property." Clauses (i) and (ii) of the said Explanation also use the same coinage of terms. The words which surround t....
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....vailable in the open market to all those willing to pay, cannot constitute "royalty" and is essentially in the nature of business income. The hon'ble High Court of Madras in the case of CIT v. Neyveli Lignite Corporation Ltd. [2000] 243 ITR 459 (Mad) held that (headnote) "the term 'royalty' normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as royalty". The hon'ble High Court of Calcutta in the case of N. V. Philips Gloeilampenfabrieken Eindhoven v. CIT (No. 1) [1988] 172 ITR 521 (Cal) held as under (page 538): "From the dictionary meaning of the term 'royalty', it appears that the said term connotes payments periodic or at a tim....
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....person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited use of such specialised knowledge to others in confidence against payment in which case it is termed as royalty. However, once such specialised knowledge becomes public ; such person loses the exclusivity in respect of such special knowledge and, hence, loses the right to receive any royalty in respect of the same. Thus, for a payment to be classified as royalty, "exclusivity" of the subject matter is of crucial relevance. 54. The dictionary meaning of the term "process" (as defined in the Business Dictionary.com) is as under: "Sequence of interdependent and linked procedures which, at every stage, consume one or more resources (employee time, energy, machines, money) to convert inputs (data, material, parts, etc.) into outputs. These outputs then serve as inputs for the next stage until a known goal or end result is reached." As Cambridge Dictionaries Online, defines "process" to mean a series of actions that you take in order to achieve a result. 54.1 Hence, the term "process" implies a sequence of interdependent and linked procedures o....
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....f a telecom infrastructure is the same and commonly available with all the telecom operators. The "royalty" in respect of use of a "process" would imply that the grantor of the right has an exclusive right over such "process" and allows the "use" thereof to the grantee in return for a "royalty". It is necessary that guarantee must "use" the "process" on its own and bear the risk of exploitation. The "process" of running the networks in the case of all the telecom operators is essentially the same and they do not have any exclusive right over such "process" so as to be in a position to charge a "royalty". For allowing the use of such process, the term "use" in the context of royalty connotes use by the grantee and not by the grantor. A "process" which has been in public domain for some time and is widely used by everyone in the field cannot constitute an item of intellectual property for the purpose of charge of "royalty". Any compensation or consideration, if at all received for allowing the use of any such "process" which is publically available and not exclusively owned by the grantor constitutes 55. We now consider the interpretation of the term "process" after insertio....
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....le connection will be termed to be paying royalty in the form of cable charges for indirectly using the process of running of the systems of the cable operators. (iii) A telephone subscriber using or making a call would be held as indirectly using the process of the service of telecom. 58. The hon'ble Delhi High Court in the case of CIT v. Bharti Cellular Ltd. reported in [2009] 319 ITR 139 (Delhi) has given a finding that the facility in question provided to the assessee is a "service" and in a broader sense a "communication service". The facility of interconnection is held as providing service which is "technical" in the sense that involved sophisticated technology. Thus, the factual finding of the jurisdictional High Court in this very facts and circumstances is that "technical services" is being provided by the FTOs to the assessee but that such "technical service" is not FTS as defined under section 9 (1)(vii) of the Act as there is no human intervention. This finding that it is a "service" has not been upheld by the hon'ble Supreme Court of India only the factual issue as to whether there was human intervention was set aside to the Assessing Officer.....
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....less the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies.'" The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty? The former is the "static" approach while the latter is called the "ambulatory" approach. One opportunity for a State to ease its obligations under a tax conve....
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....which otherwise was not subject to tax. Such income would not be subject to tax under the expression 'laws in force'.. . While considering the Double Tax Avoidance Agreement the expression 'laws in force' would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article 1 (2). Considering the express language of article 1 (2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the double taxation avoidance agreement was entered into." 49. It is essential to note the context in which this judgment was delivered. There, the court was confronted with a situation where the word royalty was not defined in the German Double Taxation Avoidance Agreements. Following our previous discussion on the bifurcation of terms within the treaty, in situations 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 Bomb....
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....ions in the Finance Bill, 2012, in the context of the above provisions states ([2012] 343ITR (St.) 234, 267): "Section 9 (1) (vi) provides that any income payable by way of royalty in respect of any right, property or information is deemed to be accruing or arising in India. The term 'royalty' has been defined in Explanation 2 which means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. Some judicial decisions have interpreted this definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not ; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term processed. Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent, it is further proposed to amend the Income-tax Act in the following manner: (i) To amend section 9 (1) (vi) to clarify that the consideration for ....
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....f the Income-tax Appellate Tribunal has dealt with this aspect in its judgment in Gracemac Corporation v. ADIT (2010) 134 TTJ (Delhi) 257 ; (2011) 8 ITR (Trib) 522 (Delhi) pointing out that even software bought off the shelf, does not constitute a "copyrighted article" as sought to be made out by the Special Bench of the Income-tax Appellate Tribunal in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended section 9 of the Act. It is categorically held in CIT v. Siemens Aktiongesellschaft (2009) 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 A. B. (2012) 343 ITR 470 (Delhi) that a copyrighted article does not fall within the purview of royalty. Therefore, we decide question of law Nos. 1 and 2 in favour of the assessee and against the Revenue." 57. Mr. Sabharwal submitted that the fallacy of the position as canvassed by the appellants would become further evident when one views Article 12 of the DTAA and the distinctive provisions which appear in the India Hunga....
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....ment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would ha....
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....therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 5. (a) Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-paragraph (a) royalties or fees for technical services do not arise in one of the Contracting States....
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....ite to bear in mind the indubitable position that both New Skies Satellite as well as Engineering Analysis had taken due notice of Section 9 as it came to exist in the statute book post Finance Act, 2012. The arguments on that score can thus neither be acknowledged to be novel or for that matter untested. However, before we proceed further it would be pertinent to recognize some of the grund-norms which precedents bid us to bear in mind while examining the interplay between domestic taxing statutes and taxing conventions. 61. Undoubtedly, tax treaties are the outcome of negotiations undertaken at a political level and are primarily concerned with according a degree of certainty in respect of business transactions which citizens of the contracting States may undertake and in aid of commercial relations between two nations. Tax treaties being the outcome of detailed negotiations and bargains that may be struck by sovereign nations may well contain provisions which may be at variance with domestic taxing statutes. The significance of the deliberation between nation States which precede the inking of a tax convention and the sanctity which imbues upon its terms was lucidly explained....
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....ty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no legislative measure is needed to give effect to the agreement or treaty. [See in this connection Maganbhai Ishwarbhai Patel v. Union of India, (1970) 3 SCC 400] xxxx xxxx xxxx 20. The purpose of Section 90 becomes clear by reference to its legislative history. Section 49-A of the Income Tax Act, 1922 enabled the Central Government to enter into an agreement with the Government of any country outside India for the granting of relief in respect of income on which, both income tax (including supertax) under the Act and income tax in that country, under the Income Tax Act and the corresponding law in force in that country, had been paid. The Central Government could make such provisions as necessary for implementing the agreement by notification in the Official Gazette. When the Income Tax Act, 1961 was introduced, Section 90 contained therein initially was a reproduction of Section 49-A of the 1922 Act. The Finance Act, 1972 (Act 16 of 1972) modified Section 90 and brought it into fo....
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....made "subject to the provisions of the Act" which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. Therefore, the total income specified in Sections 4 and 5 chargeable to income tax is also subject to the provisions of the agreement to the contrary, if any. 23. In CIT v. Davy Ashmore India Ltd. [(1991) 190 ITR 626 (Cal)] while dealing with the correctness of Circular No. 333 dated 2-4-1982, it was held that the conclusion is inescapable that in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. The Calcutta High Court expressly approved the correctness of CBDT Circular No. 333 dated 2-4-1982 on the question as to what the assessing officers would have to do when they found that the provision of the double taxation was not in conformity with the Income Tax Act, 1961. The said circular provided as follows (quoted at ITR p. 632): "The correct legal position is that where a specific provision is made in the Double Taxation Avoidance Agreement, ....
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....i) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the Appellate Authorities and the court." xxxx xxxx xxxx 27. In Arabian Express Line Ltd. of United Kingdom v. Union of India [(1995) 212 ITR 31 (Guj)] the Gujarat High Court, interpreting Section 90, in the light of Circular No. 333 dated 2-4-1982 issued by CBDT, held that the procedure of assessing the income of an NRI because of his occasional activities in establishing a business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under Section 90 of the Income Tax Act, 1961. In case of such an agreement, Section 90 would have an overriding effect. Interestingly, in this case a certificate issued by HM Inspector of Taxes certifying that the company was a resident of the United Kingdom for purposes of tax and that it had paid advance corporate tax in the office of the English Revenue....
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....d cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income Tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act". The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income Tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of i....
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....sident, as Head of State, declares the consent of the United States to be bound by the treaty under international law. This power is ordinarily delegated to the Secretary of State or a US Ambassador. 46. The method by which the Contracting States declare their consent is left to the Contracting Parties (Article 11 et seq. VCLT). For important treaties, however, it is generally agreed that the conclusion of the treaty shall be given effect only through an exchange of instruments, or 'ratification' (Article 14(1) VCLT); for multilateral treaties, it is by deposit of instruments at a location agreed upon in the treaty through corresponding notification (Articles 14(1), 16 VCLT). Ratification is to be distinguished from parliamentary consent (see above), which frequently, primarily in the language of the media, is incorrectly termed as 'ratification'. Article 31 of the OECD MC, Article 30 of the UN MC and Article 29 of the US MC each provide for ratification of tax treaties and treaties normally follow the MC in this respect. In the document of ratification, the authorized agent - the President in the US, the Federal President in Germany, Austria and Switzerland - delivers the....
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....an a corresponding internal legislative provision-becomes applicable within the scope of domestic law. 51. The point in time at which a treaty enters into force internationally and the point at which it becomes applicable under domestic law must be distinguished from the point in time at which the material consequences of the treaty begin to take effect, or, in other words, the taxable period or the date from which taxation shall be limited by the treaty (the effective date). Usually this 'initiation of treaty effects' is established by explicit treaty rules. Various aspects may be of importance here. Treaty rules in particular often distinguish between treaty effects on assessed taxes and those on withholding taxes. In general, the material effects of tax treaties apply retrospectively, viewed from the date of entry into force under international law; detrimental retrospectivity, however, may be prohibited. 52. Through the mandate of the legislature, treaties in most States obtain the same authority as internal law. In some States they are even considered to have priority over domestic law." 63. As would be manifest from the aforesaid discussion and the review....
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....rm of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition instead of precision drafting. The drafting of treaties is notoriously sloppy usually for a very good reason. To get agreement, politic uncertainty is called for. ... The interpretation of a treaty imported into municipal law by indirect enactment was described by Lord Wilberforce as being 'unconstrained by technical rules of English law, or by English legal precedent, but conducted on broad principles of general acceptation. This echoes the optimistic dictum of Lord Widgery, C.J. that the words 'are to be given their general meaning, general to lawyer and layman alike ... the meaning of the diplomat rather than the lawyer'." [ Francis Bennion: Statutory Interpretation, p. 461 [Butterworths, 1992 (2nd Edn.)].] 131. ....
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....ponding law in force in that country. By virtue of provisions of sub-section (2) thereof it is provided that where such agreement has been entered into for granting relief of tax, or as the case may be, avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 8. Where liability to tax arises under the local enactment provisions of Sections 4 and 5 of the Act provide that taxation of global income of an assessee chargeable to tax thereunder is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under Section 90 to the contrary, if any, and such an agreement will act as an exception to or modification of Sections 4 and 5 of the Income Tax Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by a local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any co....
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....unilaterally amend the tax treaty from time to time as their domestic needs may dictate." 33. The ratio of that judgment, in our opinion, would mean that by an unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression "laws in force". Income covered by the provisions of the Income-tax Act is subject to tax. The question which calls for consideration is article III and articles V to XII of the Double Taxation Avoidance Agreement. We have already reproduced article III(1) and article III(3). Article III(1) provides that tax shall not be levied in one of the territories on the industrial or commercial profits of an enterprise of the other territory unless profits are derived in the first mentioned territory through a permanent establishment of the said enterprise situated in the first-mentioned territory. Sub-clause (3) of article III includes only rents or royalties in respect of cinematographic films within the expression "industrial or commercial profits" but does not include income in the form of rents, royalties which are set out ....
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.... of the Act being applicable only to the extent that they may be more beneficial to the assessee in the following terms: - "31. That such transaction may be governed by a DTAA is then recognised by Section 5(2) read with Section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the Government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation of income under the Income Tax Act and under the corresponding law in force in that country. What is of importance is that once a DTAA applies, the provisions of the Income Tax Act can only apply to the extent that they are more beneficial to the assessee and not otherwise. Further, by Explanation 4 to Section 90 of the Income Tax Act, it has been clarified by Parliament that where any term is defined in a DTAA, the definition contained in the DTAA is to be looked at. It is only where there is no such definition that the definition in the Income Tax Act can then be applied. This position has been recognised by this Court in....
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....e that a treaty cannot be overridden by independent legislative amendments that a contracting nation may choose to introduce. The fact that treaty provisions supervene and the option available to the assessee to opt for the more beneficial scheme stands statutorily recognised and reiterated in Section 90 (2) of the Act. G. THE SECTION 9 ARGUMENT 70. We thus come to the firm conclusion that the Section 9 amendments cannot be read as having subsumed, eclipsed or overridden the provisions of the DTAA. If one were to accept the proposition propounded by the appellants, it would lead us to hold that a contracting State stands enabled and empowered to overcome treaty conditions by resorting to its plenary power to amend and modulate domestic legislation. The deliberative exercise which underscores the formulation of a treaty between Nations cannot be permitted to be overcome solely upon one of those parties having the legislative competence to amend a taxing provision. This since the power to legislate cannot be legally countenanced to extend to depriving a party of the benefits which the two contracting States chose to confer by virtue of a higher covenant drawn in exercise of the....
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....ich the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the Legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the court ? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the Legislature considers inaccurate, the effect is prospective. Any other result would make the Legislature a court of last resort. United States v. Gilmore 8 Wall (75 US) 330, 19 L Ed 396 (1869), Peony Park v. O'Malley 223 F.2d 668 (8th Cir. 1....
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....e or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this court, indefensible. xxxx xxxx xxxx 54. Neither can an act of Parliament supply or alter the boundaries of the definition under article 12 of the Double Taxation Avoidance Agreement 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 no....
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....ticle 13 (3) of the aforesaid Double Taxation Avoidance Agreement as carried out in the definition of royalty under section 9 (1) (vi) of the Act". The learned Income-tax Appellate Tribunal then rejected the contention of the appellant-Revenue by relying upon the judgment of this court in DIT v. New Skies Satellite BV [2016] 382 ITR 114 (Delhi) ; [2016] 285 CTR (Delhi) 1 which deals with the question of retrospective effect of the amendment. The relevant portion as quoted in para 8 of the impugned order is reproduced herein below- "8. .. The learned Departmental representative's contention was that as per the judgment in the case of Shine Satellite, the amendment has to be given retrospective effect. But when we read the judgment of the hon'ble High Court in case of New Skies Satellite BV the hon'ble Delhi High Court held in para 60 as follows (page 152 of 382 ITR) : 'Consequently, since we have held that the Finance Act, 2012 will not affect article 12 of the Double Taxation Avoidance Agreement, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite Telecommunications Co. Ltd. v. DIT [2011] 332 IT....
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....ax) 391], this Court, applying residence-based rules of taxation, held that the technical service fees received by the non-resident assessee (relatable to Assessment Year 1957-1958) could only be deemed to accrue in India if such income could be attributed to a business connection in India. In the facts of that case, since no part of the foreign assessee's operations were carried on in India, the technical services being rendered wholly in foreign territory, it was held that no part of the technical service fees received by the foreign assessee accrued in India. xxxx xxxx xxxx 84. Even if we were to consider the ambit of "royalty" only under the Income Tax Act on the footing that none of the DTAAs apply to the facts of these cases, the definition of "royalty" that is contained in Explanation 2 to Section 9 (1) (vi) of the Income Tax Act would make it clear that there has to be a transfer of "all or any rights" which includes the grant of a licence in respect of any copyright in a literary work. The expression "including the granting of a licence" in clause (v) of Explanation 2 to Section 9 (1) (vi) of the Income Tax Act, would necessarily mean a licence in whi....
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....t, expands that position to include what is stated therein, vide the Finance Act, 2012." 76. Similar arguments at the behest of the Revenue appear to have been urged before the Karnataka High Court in Vodafone Idea. Taking a cue from the legal position which had been enunciated by the Supreme Court in Engineering Analysis, the Karnataka High Court held: - "19. The second question for consideration is whether the Income-tax Appellate Tribunal was correct in holding that the amendment to provisions of section 9 (1) (vi) inserting the Explanations will result in amendment of Double Taxation Avoidance Agreement. The answer to this question must be in the negative because in Engineering Analysis, the apex court has held that Explanation 4 to section 9 (1) (vi) of the Act is not clarificatory of the position as on June 1, 1976 and in fact expands that position to include what is stated therein vide Finance Act, 2012. 20. Explanations 5 and 6 to section 9 (1) (vi) of the Act has been inserted with effect from June 1, 1976. This aspect has also been considered in Engineering Analysis holding that the question has been answered by two Latin Maxims, lex no cogit ad impos....
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....cess'. It is in the aforesaid context that Mr. Sabharwal had commended for our consideration the principle of noscitur a sociis and had submitted that the word 'process' must derive colour and meaning from the other intellectual property rights which are spoken of in Para 3 of Article 12. There appears to be significant force in that submission when one views Para 3(a) in its entirety. 79. As noted hereinabove, Article 12 (3) defines 'royalty' to mean payments received for the use or right to use copyrighted articles, patents, trademarks, designs, models, secret formulae or processes. The latter part of Para 3(a) also ropes in consideration that may be received from the alienation of any such right, property, or information. The expression "use" or "right to use" must consequently be understood in the aforesaid light and thus contemplating a positive conferral of a right to employ, possess or utilize a patent, trademark, process or equipment. In order to fall within the ambit of the royalty Article, it would be imperative for the Court discerning a right given to make use of the patent, trademark process or equipment. The key element would be effective control or dominion having....
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....ot decisive of the matter. That sum may be agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus, the definition of the term "royalty" in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with the owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. xxxx xxxx xxxx 68. We are inclined to agree with the argument of the learned senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not....
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....nment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the 'use of the lorry' for the following reasons : (i) the lorry is never in the control, let alone effective control of the customer ; (ii)the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry ; (iii)the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry ; or the carrier may unload the consignment en-route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. (ii) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use, at a f....
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....ds posed before us: - "64. The second reason is more basic. A subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. At the most the concept of the sale in a subscriber's mind would be limited to the handset that may have been purchased for the purposes of getting a telephone connection. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection. xxxx xxxx xxxx 95. The petitioner Bharat Sanchar Nigam Ltd. (for short "BSNL") is a licensee under the Telegraph Act, 1885. The licence of the petitioner is obtained from the Government of India which is the same as the licence given also to various private telecom operators which entitles BSNL to carry the activity of operating telegraph limited to the scope of telecommunication facilities. xxxx xxxx xxxx 97. To constitute a transac....
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....ch payments as it thinks fit, to any person "to establish, maintain or work a telegraph". The integrity of establishing, maintaining and working is not to be mutilated. 113. Clause 9 clearly interdicts the licensee provided that the licensee will not assign or transfer his rights in any manner whatsoever under the licence to third party. It is impossible to contend that the right to use goods, assuming without conceding that they are goods, which are essential for the rendition of service can never be a transaction or transfer of right to use goods. Nor can the contract between subscribers and licensee viz. service provider be interpreted as involving transfer of right to use goods." 83. The AAR in Dell International pertinently observed that the word "use" cannot possibly be interpreted as contemplating availing of a benefit of equipment or property. This becomes clearer from the following discussion which appears in that decision: - "12.5 It seems to us that the two expressions 'use' and 'right to use' are employed to bring within the net of taxation the consideration paid not merely for the usage of equipment in praesenti but also for the rig....
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....6 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-known test of dominant intention of the parties and the essence of the transaction. xxxx xxxx xxxx 12.8 The word 'use' in relation to equipment occurring in clause (iva) is not to be understood....
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.... a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering the facility. The applicant is not concerned with the infrastructure or the. access line installed by BTA or its agent or the components embedded in it. The operation, control and ma....
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....he transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well-settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India (P.) Ltd. (supra). In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers outside India. Dell India had an agreement with BT America for the entire service for which it made payment directly to BT America. One of the issues that arose for consideration was whether the payment made by the applicant to BT America was in the nature of royalty falling either under clause (iii) of Explanation 2 of section 9 (1) or article 12 (3) of the tax avoidance treaty between India and USA, which is materially similar to the provisions of art....
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.... process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services; through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite Telecommunication Co. Ltd.'s case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect." (p. 494)" 85. Our Court in Asia Satellite had also noticed with approval the following passages from the OECD Commentary on Article 12:- "9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into 'transponder leasing' agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical 'transponder leasing' agreements are made for the use of the transponder tr....
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....ight to use, property, or for information, referred to in the definition (they cannot be viewed, for instance, as payments for the use of, or right to use, a secret process since no secret technology is used or transferred to the operator). This conclusion holds true even in the case of treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties since the operator that pays a charge under a roaming agreement is not paying for the use, or the right to use, the visited network, to which it does not have physical access, but rather for the telecommunications services provided by the foreign network operator. 9.3 Payments for the use of, or the right to use, some or all of part of the radio frequency spectrum (e.g. pursuant to a so-called "spectrum license" that allows the holder to transmit media content over designated frequency ranges of the electromagnetic spectrum) do not constitute payments for the use of, or the right to use, property, or for information, that is referred in the definition of royalties in paragraph 2. This conclusion holds true even in the case of treaties that include the leasing of industria....
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....tainers, satellites, pipelines and cables etc. 20. A clear distinction must be made between royalties paid for the use of equipment, which fall under Article 12, and payments constituting consideration for the sale of equipment, some or all of which may, depending on the case, fall under Articles 7, 11, 13, 14 or 21. Some contracts combine the lease element and the sale element, so that it sometimes proves difficult to determine their nature and economic substance. In the case of credit sale agreements, hire purchase agreements and other forms of finance leases, it seems clear that the sale element is paramount, because the parties have from the outset agreed that the ownership of the property in question shall be transferred from one to the other, although they have made this dependent upon the payment of the last instalment. Consequently, the instalments paid by the purchaser/hirer do not, in principle, constitute royalties. In the case, however, of an operating lease, the sole, or at least the principal, purpose of the contract is normally that of lease, even if the lessee has the right thereunder to opt during its term to purchase the equipment in question outright. ....
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....on of royalties dealing with payments received as consideration for "information concerning industrial, commercial or scientific experience", it addressed the problems of distinguishing royalties from types of income properly subject to other Articles of the Convention. A member from a developed country asserted that the problem was that the "royalties" definition makes an imperfect distinction between revenues that constituted royalties in the strict sense and payments received for brain-work and technical services, such as surveys of any kind (engineering, geological research etc.). The member also mentioned the problem of distinguishing between royalties akin to income from capital and payments received for services. Given the broad definition of "information concerning industrial, commercial or scientific experience", some countries tend to regard the provision of brain-work and technical services as the provision of "information concerning industrial, commercial or scientific experience" and to regard payment for such information as royalties." I. SCOPE OF THE OSS/GBSA 88. If one were to test the OSS Agreement or the GBSA on the aforenoted precepts, it becomes apparent t....
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....o the OSS Agreement/GBSA nor do the concepts of process or equipment royalty have any application to the transactions in question. This since they were quintessentially concerned with the rendering of services as distinct from the grant of effective control over a process or equipment. The mere utilisation of a process or equipment in the course of providing a service would not qualify the test of use or right to use as contemplated under Article 12 of the DTAA. J. ARTICLE 3 (2) 90. Turning then to the argument addressed on Article 3 (2) of the DTAA we find that the submission quite apart from being fallacious is fundamentally flawed. It becomes pertinent to note that the said Article bids us to refer to the domestic law of one of the Contracting States in order to discern the meaning to be assigned to a particular term used in the Convention. However, Article 3 (2) would be triggered only if one was seeking to find a defining term for an expression appearing in the DTAA and which has not been explicated therein. This becomes evident from that Article using the phrase "any term not defined therein". Undisputedly, royalty is a term which stands duly defined by the DTAA. 91.....
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....determine the meaning of terms that are not defined in the treaty, the relevant domestic law is that in force at the time of the application of the treaty rather than at the time the treaty was signed. The second modification clarified that the reference to the domestic law is not restricted to the domestic tax laws but, in case of variations in the meaning given to a term under different domestic laws, the meaning that prevails is that given to the term for the purposes of the laws imposing the taxes to which the Convention applies. The Committee considers that the following part of the Commentary on Article 3 of the 2017 OECD Model Tax Convention, which explains these two modifications, is applicable to paragraph 2 of Article 3 of the United Nations Model Tax Convention (the modifications that appear in italics between square brackets, which are not part of the Commentary on the OECD Model Tax Convention, have been inserted in order to provide additional explanations or to reflect the differences between the provisions of the OECD Model Tax Convention and those of this Model): 11. This paragraph provides a general rule of interpretation for terms used in the Convention b....
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....t from the following observations appearing in that decision:- "45. At the very outset, it should be understood that it is not as if the double taxation avoidance agreements completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3 (2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. ..................... The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a tr....
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....nce it must be done by Parliament in an Act entitled 'An act to Amend the Act of 1956'. But neither is the converse true, that is that every tax enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do." 48. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), the Bombay High Court citing R. v. Melford Developments Inc. held that (page 333 of 310 ITR): "The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression 'laws in force'... While considering the Double Tax Avoidance Agreement the expression 'laws in force' would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement as set out in article I(2). Considering the express language of article I(2) it is not possible to accept the bro....
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....le taxation avoidance agreement provision according to the provisions of the Act, France could do so by reference to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double taxation of cross-border transactions would be frustrated." 51. Pertinently, this court in DIT v. Nokia Networks OY (2013) 358 ITR 259 (Delhi) specifically dealt with the question of the effect of amendments to domestic law and the manner of their operation on parallel treaties. The court delivered its judgment in the context of the very amendments that are in question today ; the Explanations to section 9 (1) (vi) vis a vis the interpretation of a double taxation avoidance agreement. This court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations (page 281 ITR 358 ITR): "He, thus submitted that the question of 'copyrighted article' or actual copyright does not arise in the context of software both in the double taxation avoidance agreement and in the Income-tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the softw....
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....the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by Parliament; it is an act of the executive. Logically therefore, the executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalising domestic law states that such amendments are to become au....
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....ng in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of the term "royalty" appearing in Explanation 2 to clause (vi) of section 9 (1) of the Act. Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this clause envisages is the transfer of "rights in respect of property" and not transfer of "right in the property". The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable the use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadesh Ranjan Sinha v. Hardeb Banerjee, AIR 1992 SC 1590. When rights in respect of a property are transferred and not the ri....
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.... of leasing/hiring/letting Simpliciter under which the possession of the goods, i.e., effective and general control of the goods is to be given to the customer and the customer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of 'sale'. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of 'sale'. Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO 77 STC 182 (AP). Illustration: (i) A customer engages a carrier (transport operator) to tra....
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....m "royalty" occurring in clause (iii) of Explanation 2. The learned counsel for the appellant had argued that the doctrine of noscitur a sociis would apply and the process should be treated as item of intellectual property. On this it was argued that the process employed in the transponder of a satellite, i.e., changing of frequency and amplifying the signal, is not at all an item of intellectual property. Though there appears to be some force in this argument, it is not necessary to answer it conclusively. The fact remains that there is no use of "process" by the television channels. Moreover, no such purported use has taken place in India. It is stated at the cost of repetition that the telecast companies/customers are situated outside India and so is the appellant. Even the agreements are executed abroad under which the services are provided by the appellant to its customers. The transponder is in the orbit. Merely because it has its footprint on various continents would not mean that the process has taken place in India. This aspect now stands concluded by the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408. In that case, the app....
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.... (c) Would the appellant be able to claim deduction for expenses incurred in computing the income from offshore services. The Authority ruled: (i) That though property in the goods passed to Petronet while the goods were on the high seas, and in so far as the activities of the appellant for taking delivery of the goods from the ship, payment of customs duty and transportation of the goods to the site were concerned, these facts did not militate against the property in the goods passing to the appellant. In connection with the offshore supply, certain operations were inextricably interlinked in India, such as, signing of the contract in India which imposed liability on the appellant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance. The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the appellant. Therefore, income accrued to the appellant from the offshore supply through business connection in India and some operations of the business were ....
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.... 12, which reads as under: "9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into 'transponder leasing' agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical 'transponder leasing' agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2 : these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite 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 'leas....
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....are in fact transformative substantive amendments, and incapable of being given retrospective effect. In R. Rajagopal Reddy v. Padmini Chandrasekharan (1995) 213 ITR 340 (SC) ; (1995) 2 SCC 630, it was held that the use of the words "it is declared" is not conclusive that the Act is declaratory because it may be used to introduce new rules of law. If the amendment changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used is "it is declared" or "for the removal of doubts". In determining, therefore, the nature of the Act, regard must be had to the substance rather than to form. While adjudging whether an amendment was clarificatory or substantive in nature, and whether it will have retrospective effect or not, it was held in CIT v. Gold Coin Health Food (P.) Ltd. (2008) 304 ITR 308 (SC) ; (2008) 9 SCC 622 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR625 (SC) ; (1997) 5 SCC 482 that, (i) the circumstances under which the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. ....
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....this case may be resolved without redressal of the above question purely because the assessee has not pressed this line of arguments before the court and has instead stated that even if it were to be assumed that the contention of the Revenue is correct, the ultimate taxability of this income shall rest on the interpretation of the terms of the double taxation avoidance agreements. Learned Counsel for the assessee has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the double taxation avoidance agreement. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act. xxxx xxxx xxxx 40. In Asia Satellite the court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the tax tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as parimater....
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....is taxable, none the less. 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 double taxation avoidance agreements and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both double taxation avoidance agreements and clause (iii) to Explanation 2 to 9 (1) (vi). Article 12 (3), Indo-Thai Double Taxation Avoidance Agreement: "3. The term 'royalties' as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Article....
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.... been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for us to conclude that the process referred to in article 12 must in fact be a secret process and was always meant to be such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite takes note of the OECD Commentary and Klaus Vogel on Double Taxation Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty (page 391 of 332 ITR): "Even when we look into the matter from the standpoint of double taxation avoidance agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Co-operation 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 double taxation avoidance agreement contain....
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....ties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or 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).' Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein: 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's Double Taxation Convention 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.' 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....
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....he definition in a manner so 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 taxation avoidance agreement." 102. As would be evident from the above, the Court in New Skies Satellite while expressing 'serious doubt' as to whether the amendments could either be viewed as being clarificatory, ultimately desisted from rendering a conclusive answer to that question, since it ultimately came to hold that the amendments would have no impact on the provisions of the DTAA. The Court's conclusion in this behalf was based on it having found in law that Parliament could not be said to be empowered to amend a provision of a treaty. It was significantly observed that an act of Parliament can neither supply nor alter the boundaries of the definition under Article 12. It was also found that the Explanations could not be countenanced to be clarificatory, since they were introduced principally to overcome the basis of a verdict rendered by the Court, namely Asia Satellite and which had held that both "se....
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....he assessments in these cases was based on the decision of the Madras High Court in Verizon and the Special Bench of the Tribunal in New Skies Satellite. The latter decision no longer holds the field having been set aside by our Court in appeal. Insofar as Verizon as an individual assessee is concerned, the issue came to be answered in its favour at least by this Court in Verizone Communications. Although the appellants would contend that the said decision came to be rendered on the basis of a concession made by the appellant there, as we read that order, we find that the Court appeared to be convinced that the issue in any case stood settled in light of the judgment of the Court in New Skies Satellite and which had by then been affirmed by the Supreme Court in Engineering Analysis. 105. That only leaves us to deal with the decision of the Madras High Court in Verizon and which constituted the sheet anchor for the appellants. The said decision firstly proceeds on the premise that the definition of royalty under the DTAA as well as the Act are pari materia. However, this premise clearly appears to be incorrect as is borne out from the preceding discussion. The Madras High Court t....