TaxTMI 
TaxTMI 
2022 (4) TMI 1638
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.... she submitted, the appeal itself can be disposed of. 3. Learned Departmental Representative fairly agreed with the aforesaid submission of the learned counsel for the assessee. Therefore, with the consent of both the parties, the appeal is taken up for hearing. 4. The grounds raised by the assessee are as under: 1. That on the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel ('the Panel') erred in not directing the Learned Assessing Officer ('Ld. AO') to pass appropriate orders holding that the Appellant is not liable to be assessed to tax in India. 1.1. That on the facts and in the circumstances of the case and in law, the Panel and the Ld. AO erred in not following the orders passed by the Hon'ble High Court of Delhi for the assessment years 2000-01 to 2014-15 and the Hon'ble Income-Tax Appellate Tribunal for A.Y 2016-17 and AY 2017-18 in the Appellant's own case since there was no change in facts recorded for the present year. 1.2 That on the facts and in the circumstances of the case and in law, the Ld.AO erred in not holding that the payments received by the Appellant from providing data transmission services via Sp....
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....e before or at the time of hearing of the appeal. 5. As could be seen from the grounds raised, the core issue arising for consideration is, whether the payments received by the assessee from providing data transmission services can be treated either as royalty or fee for technical services (FTS) either under the provisions of the Domestic Law or the relevant tax treaty. 6. Briefly, the facts are, the assessee is a non-resident company incorporated under the Laws of Neitherlands and is a tax-resident of that country. The basic business model of the assessee is to derive income from the lease of transponders of the satellite. The assessee operates satellites which is used by various T.V. channels and Internet service providers for various purposes including telecommunication, broadcasting, transfer of data, image or voice etc. The data transmission process involves, a T.V. channel uplinks the particular program to be broadcasted to the satellite of the assessee from an uplinking facility. The satellite of the assessee amplifies the uplinked beam, changes its frequency by undertaking certain process and downlinks it scattering over the area of its footprint in the region for recept....
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....ned order, the Hon'ble jurisdictional High Court upheld the decision of the Tribunal in assessee's own case in assessment years 2006-07 and 2008-09 vide judgment dated 08.02.2016 delivered in ITA No. 473/2021 & Ors. holding as under: "24. International double taxation typically occurs when two jurisdictions claim the right to tax the same tax entity or subject with respect to the same income for the same period. Indisputably, taxation of income twice over by two different jurisdictions has an adverse impact on the movement of goods and services across international borders. For this purpose, jurisdictions with concurrent taxing rights enter into Double Tax Avoidance Agreements, which set rules that attempt, at the very least, theoretically, to eliminate a double incidence of tax. The States therefore limit their legitimate taxing powers in favour of the other State, by either agreeing not to tax a certain income, which has been reserved for the other Contracting State, or taxing that income to a limited extent. These treaties therefore have the effect of restraining the operation of the domestic taxing laws of a Contracting State. Justifiably, the balance between the domestic....
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....onditions governing payment by such person have been met. As to the second aspect, Section 9(1)(vi) begins with the following words: "(vi) income by way of royalty payable by-- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India" Three categories are intended here, namely, (i) the Government, (ii) residents of India and (iii) non-residents. Once it is established that the income accruing to the assessee is in fact, royalty under the second Explanation, the individual conditions annexed to each of the three above must be met. In the present case, both residents as well as non-residents have paid....
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....e 1 supra note 1 foreign company, incorporated in Hong Kong, and its customers, which were TV channels. The agreement was essentially one of allocation of the transponder capacity available on the satellite to enable the channels to relay their signals. The customers had their own relaying facilities. No different from the case at hand, the transponder receives the signal, amplifies it, and downlinks it to facilitate transmission of the signals. Quoting the judgment of the AAR in ISRO19, the Court held that it becomes clear that all the customer gets through the agreement with the assessee is mere access to a broadband width available in the transponder. The control over the parts of the satellite and naturally the transponder remains with the assessee. At no point does the assessee cede control over the satellite to the customers. Logically therefore, since the transponder is a part of the satellite that cannot be severed from it, there can be no independent control of the transponder without control of the satellite itself. The AAR had specifically rejected the revenue's contention that in substance there is use of equipment; that being the transponder. The fact that the tran....
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....dment supra note 1 supra note 1 that determines its ultimate operation and not the bare language in which such amendment is couched. Two judgments of note have succeeded the Finance Act, 2012 in this context. In Director of Income Tax v. TV Today Network Limited22 , a Division Bench of this Court was confronted with the question of taxability of income from data transmission services. Answering the question in favour of the Revenue, the Court held that as far as the domestic taxability of the said income is concerned, the Finance Act 2012 mandates it to be as such. Interestingly however, the Court did not rule out any relief that the assessees may be entitled to by virtue of the DTAA between India and the United States for the simple reason that the ITAT had not rendered any finding in that regard. Resultantly, the Court remitted the matter to the ITAT to decide that question. "In an appeal under Section 260A of the Act, we are not required to consider the constitutional validity and vires of the said amendments but have to apply the amended provision. In view of the said statutory amendments, the reasoning given by the Tribunal cannot be sustained is has to be reversed. Lear....
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....endment. This is the principle of lex prospicit non respicit which implies that unless explicitly stated, a piece of legislation is presumed not be intended to have retrospective operation. 34. Most recently in Commissioner of Income tax (Central)-1, New Delhi v. Vatika Township Private Limited26, the Constitution Bench, while quoting Govind Das v. Income Tax Officer27and CIT Bombay Scindia Steam Navigation Company Ltd. 28held as follows: "31. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, 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 bed rock 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 pro....
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....ansformative substantive amendments, and incapable of being given retrospective effect. 1994] 1 AC 486 In R. Rajagopal Reddy and Ors. v. Padmini Chandrasekharan30, 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.31 and CIT v. Podar Cement (P) Ltd.32that, (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. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, ....
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.... App 3d 428 105 Ill App 3d 661 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 DTAAs. 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 DTAA. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act. 39. It is now essential to decide the second question i.e. whether the assessees in the present case will obtain any relief from the provisions of the DTAAs. Under Article 12 of the Double Tax Avoidance Agreements, the general rule states that whereas the State of Residence shall have the primary right to tax royalties, the Source State shall concurrently have the right to tax the income, to the extent of 15% of the total income. Before the amendment brought about by the Finance Act of 2012, the definition of royalty under the Act and the DTAAs were treated as pari materia. The definitions are reproduced below: Article 12(3), Indo Thai Double Tax Avoida....
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....ctive? supra note 1 The Revenue argues that it must, while the Assessees argue to the contrary. This Court is inclined to uphold the contention of the latter. 41. This Court is of the view that no amendment to the Act, whether retrospective 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. 42. It takes little imagination to comprehend the extent and length of negotiations that take place when tw....
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....to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. 44. We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan39these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in Commissioner of Income Tax v VR. S.RM. Firms Ors40 held that "tax treaties are...... considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries". 45. At the very outset, it should be understood that it is not as if the DTAAs completely prohibit reliance on domestic la....
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....llows itself an adjustment to broaden the scope of circumstances under which it is allowed to tax under a treaty. A convenient opportunity sometimes presents itself in the form of ambiguous technical formulations in the concerned treaty. States attempting to clarify or concretize any one of these meanings, (unsurprisingly the one that benefits it) enact domestic legislation which subserves such purpose. 47. In this context, recently in M/s Sanofi Pasteur Holding SA v. Department of Revenue41, the Andhra Pradesh High Court discussed and subscribed to the ratio of the Supreme Court of Canada in R. v. Melford Developments Inc.42 with respect to the applicability of domestic amendments to international instruments. In R v. Melford43, the Canadian Supreme Court in a first, held that the ambulatory approach is antithetical to treaty obligations: "There are 26 concluded and 10 proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission of the appellant is correct, these agreements are all put in peril by any legislative action taken by Parliament with reference to the revision of the Income Tax Act. For this practical reason o....
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....rially different as there is in fact a definition of the word royalty under Article 12 of both DTAA, thus dispensing with the need for recourse to Article 3. 50. There are therefore two sets of circumstances. First, where there exists no definition of a word in issue within the DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. The Bombay High Court seems to accept the ambulatory approach in such a situation, thus allowing for successive amendments into the realm of "laws in force". We express no opinion in this regard since it is not in issue before this Court. This Court's finding is in the context of the second situation, where there does exist a definition of a term within the DTAA. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the agreement. That is not to say that the Court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one....
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....ument misses the vital point namely the assessee has opted to be governed by the treaty and 2013 (358) ITR 259 the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no.1 & 2 in favour of the assessee and against the Revenue." 52. Thus, an interpretive exercise by the Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by the Parliament in our domestic context, even if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State's power to breach....
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....ecially Article 26 (binding nature of treaties and the obligation to perform them in good faith); Article 27 (Internal law and observance of treaties, i.e provisions of internal or municipal law of a nation cannot be used to justify omission to perform a treaty); General rule of interpretation under Article 31 (1) ( i.e that it shall be interpreted in good faith, in accordance with ordinary meaning to be given to the terms of a treaty) and Article 31 (4) (A special meaning shall be given to a term if it is established that the parties so intended). The expression "process" and treaty interpretation in this case 54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs by supplying redundancy to any part of it. This becomes especially important in the context of Explanation 6, which states that whether the 'process' is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 precipitated from confusion on the question of whether it was vital that the "process" used must be secret or not. This confusion was brought about by a difference in the punctuation of t....
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....rds." Holmes v. Pheonix Insurance Co.47. It has been held in CGT v. Budur 48and Hindustan Const v. CIT49 that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Const50. 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation; CIT v. Loyal Textile51; Sama Alana Abdulla vs. State of Gujarat52; Mohd Shabbir vs. State of Maharashtra53; Lewis Pugh Evans Pugh vs. Ashutosh Sen54; Ashwini Kumar Ghose v. Arbinda Bose55; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.56. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra57 where Section 27 of the Drugs and Cosmetics Act, 1940 came up for construction. By this section whoever "manufactures for sale, sells, stocks or exhibits for sale or distributes" a drug without a license is liable for pun....
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....ions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty. "74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model DTAA contains a definition of royalty which is in all material respects virtually the same as the definition of royalty contained in clause (iii) of Explanation 2 to Section 9(1) (vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under: '9.1 Satellite operators ....
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....ation Conventions (3rd Edition)'. It is recorded therein: 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's DTC with Luxembourg); this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. were transferred to the user.' 76. Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below: 'On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear-cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer.' 77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only ....
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....e purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note 1 that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs." 9. It is a matter of record that in all the past assessment years till 2017-18, the Tribunal has held that the amount received by the assessee towards data transmission charges is neither in the nature of royalty nor FTS. In fact, the view expressed by the Tribunal till assessment year 2016-17 has been upheld by the Hon'ble jurisdictional High ....