AI Drafter 
TaxTMI 
TaxTMI 
2025 (12) TMI 199
X X X X Extracts X X X X
X X X X Extracts X X X X
....come Tax Appellate Tribunal was right in holding that amounts paid by the appellant to M/s.Sprint USA, for International Private Leased Circuits (IPLC) is to be disallowed under Section 40(a)(i) of the Act? (iii) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in holding that amounts paid by the appellant to M/s.Sprint USA, for International Private Leased Circuits (IPLC) is 'royalty' under Section 9 of the Act read with the Double Taxation Avoidance Agreement between India and United States of America? (iv) Whether under the facts and circumstances of the case, the amounts paid by the appellant to M/s.Sprint USA towards IPLC should be subject to deduction of tax at source considering the non discrimination Article of the Double Taxation Avoidance Agreement between India and United States of America? and (v) Whether under the facts and circumstances of the case, the Income Tax Appellate Tribunal has erred in not adjudicating the ground of appeal raised by the appellant with respect to claim of tax holiday deduction under Section 10A/10B on miscellaneous income?; TCA No.278 of 2016: (i)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d units claiming exemption under Section 10A/10B of the Act. 2.2. Apropos of assessment year 2003-2004, the Assessing Officer finding that the amount paid by the assessee to Sprint USA, for International Private Leased Circuits (IPLC), was without deduction of tax at source, disallowed it under Section 40(a)(i) of the Act. For the said assessment year, the Assessing Officer also denied claim of tax holiday deduction under Section 10A/10B of the Act on miscellaneous income. 2.3. In view of the rejection of the aforesaid claims for set off of loss, tax holiday deduction on miscellaneous income and deduction of expenditure, the Assessing Officer raised demand on the assessee, including interest under Sections 234B and 234D of the Act for both the years. 2.4. Assailing the assessment orders, the assessee approached the Commissioner of Income Tax (Appeals) [CIT(A)] by filing appeals. The CIT(A) rejected the appeal in so far as the claim for set off of losses of the Pune, Chennai I and Kolkatta II units of the assessee for the assessment year 2003-2004 and that of Bangalore unit for the assessment-year 2004-2005. The disallowance of the claim of the assessee qua payments made to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....10B provide a deduction. To fortify the said submission, he placed reliance on a decision of the Supreme Court in the case of CIT v. Yokogawa India Limited [(2017) 2 SCC 1]. 5.2. Learned counsel for the assessee, referring to the Circular No.7/DV/2013, dated 16.7.2013, which was also referred to in CIT v. Yokogawa India Limited (supra), submitted that the circular makes it abundantly clear that losses incurred by units eligible for tax holiday deduction can be set off against other taxable income/ income of units not eligible for tax holiday deduction. 5.3. It is further submitted that, in assessee's own case, a Coordinate Bench of this Court, vide judgment dated 20.10.2021 passed in T.C.A Nos.1234 to 1236 of 2015, following the decision of the Supreme Court in CIT v. Yokogawa India Limited (supra), answered the issue in favour of the assessee. 6.1. Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing on behalf of the revenue, while distinguishing the applicability of the decision of the Supreme Court in CIT v. Yokogawa India Limited (supra), submitted that the Supreme Court did not deal with a case of loss making 10A unit against the profits of non-10A un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....#39;s own case for the assessment years 2005-2006, 2007-2008 and 2008-2009 and answered the issue in favour of the assessee. 7.2. The submission made by learned counsel for the Revenue that losses of 10A units cannot be adjusted against the profits of non-10A units; that the decision of the Supreme Court in CIT v. Yokogawa India Limited (supra) is distinguishable; and that as per Section 10A(6) of the Act, after the amendment in 2003, all the losses that have been incurred by a 10A unit have to be carried forward until the 10 years tax holiday period is over and thereafter it can be adjusted/offset against the profits earned by the assessee, is required to be tested in the light of the Supreme Court decision in the case of CIT v. Yokogawa India Limited (supra), on which heavy reliance is placed by learned counsel for the assessee. Not only this, the assessee has also relied upon the Circular dated 16.7.2013, which also clarifies the issue. 7.3. It is relevant to note that the claim of the assessee was allowed on the basis of the order passed by the Karnataka High Court in CIT and another v. Yokogawa India Ltd and others (supra). The appeal preferred by the Revenue before the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t would be applicable on all fours. 7.7. On analyzing the provisions contained in Section 10A of the Act, their Lordships in the Supreme Court noted that the amendment of Section 10A by the Finance Act, 2000 with effect from 1.4.2001 specifically uses the words "deduction of profits and gains derived by an eligible unit ... from the total income of the assessee". They further noted that, after amendment, though Section 10A of the Act had changed its colour from being an exemption section to a provision providing for deduction, yet it continued to remain in Chapter III of the Act, which deals with incomes which do not form part of the total income. 7.8. Their Lordships also referred to Circular No.7, dated 16.7.2013 as also another Circular No.1 of 2013, dated 17.1.2013 and noted certain discrepancies. 7.9. After referring to the provisions contained in Section 10A of the Act, as it stood prior to amendment and after amendment, as also various circulars, the Hon'ble Supreme Court held as below: "14. ... The true and correct purport and effect of the amended section will have to be construed from the language used and not merely from the fact that it has been re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the deductions contemplated therein are qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than clear from the contemporaneous Circular No. 794 dated 9-8-2000 which states in para 15.6 that, 'The export turnover and the total turnover for the purposes of Sections 10-A and 10-B shall be of the undertaking located in specified zones or 100% export-oriented undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision'. 18. If the specific provisions of the Act provide [first proviso to Sections 10-A(1); 10-A(1-A) and 10-A(4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous circular of the department (No. 794 dated 9-8-2000) understood the situation, it is only logical and natural that the stage of deductio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n accordance with the provisions of Chapter VI-A or sections 10A, 10B etc. of the Act, the same shall be allowed in computing the total income of the assessee.; 7.15. In respect of the previous assessment years, in assessee's own case, referred to herein above, the ITAT decided the issue in favour of the assessee and learned counsel for the Revenue could not satisfy the court that the aforesaid orders were taken to higher courts and reversed. 8. In conclusion, the first substantial question of law in T.C.A.No.277 of 2016 and the sole substantial question of law in T.C.A.No.280 of 2016 is decided in favour of the assessee and against the revenue. SECOND & THIRD SUBSTANTIAL QUESTIONS OF LAW IN TCA No.277 OF 2016 AND FIRST & SECOND SUBSTANTIAL QUESTIONS OF LAW IN TCA No.278 of 2016 9. These issues challenge the finding rendered by the ITAT that the amount paid by the assessee to Sprint USA, for International Private Leased Circuits (IPLC), is to be disallowed under section 40(a)(i) of the Act, and the said amount constitutes 'Royalty' under Section 9 of the Act read with the Double Taxation Avoidance Agreement (DTAA) between India and United States of America. 10.1.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich runs counter to the decision of the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra). 10.4. Learned counsel for the assessee argued that the Delhi High Court in DIT v. New Skies Satellite BV [(2016) 68 Taxmann.com 9 (Del) : (2016) 285 CTR 1 (Del)], held that payment for transponder leaser is only a payment towards service and, therefore, would not fall within the ambit of royalty, particularly when the payer did not have control or possession of the transponder. He added that the Supreme Court in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra), held that the view expressed in DIT v. New Skies Satellite BV (supra) is correct. He submits that, in effect, the decision of this court in Verizon Communications Singapore PTE Ltd v. ITO (supra) is overruled by the Supreme Court. 10.5. It is argued by learned counsel for the assessee that, in sooth, the unilateral amendment to the Act cannot be construed to be a modification of the DTAA entered into between India and USA. He submitted that in the case of Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra), the Supreme Court has emphatically held that persons who pay....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ic equipment" will be treated as royalty. The said decision holds the field, in as much as no stay was granted, nor it was overruled by the Supreme Court. 11.3. It is further submitted that the decision in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra) is not directly on the issue involved in this case, but was qua copyright of computer software and payments made for use of a copyright cannot be compared with the definition for use of equipment. He submitted that, forsooth, the said decision is not applicable to the case on hand. 11.4. Nextly, it is submitted that in the Poompuhar Shipping Corporation Limited v. ITO [(2013) 38 taxmann.com 150 (Madras)], it has been held that mere use of an equipment (ship) would amount to royalty. By the same token, the use of the IPLC, which is an undersea cable, should be treated as a payment for use of an equipment and, therefore, would fall within the definition of royalty. 11.5. Learned Standing Counsel relied on a decision of the Delhi High Court in the case of HCL Ltd v CIT [(2015) 54 taxmann.com 231 (Delhi)], wherein it was held that payments can be of two types. One, may be either for 'use' or 'right to use'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....model tax treaty, which gives a wider meaning to the word "use of and right to use of" which does not require any possession or control requirement to fall within the definition of royalty. 12.1. The facts which are not in dispute are that the assessee has made payments to a foreign based company, namely, Sprint USA, for availing services of international private leased circuits, as it is engaged in the business of software development and export, and is also rendering related services. 12.2. The assessee claimed deduction under Section 40(a)(i) of the Act. The Assessing Officer found that the assessee was not entitled to any such deduction claimed by it and concluded that the amounts paid by the assessee to Sprint USA was without making deduction of tax at source. In the appeal before the CIT(A), the assessee challenged the order in so far as the assessee's claim with regard to payments made to Sprint USA were concerned. On this issue of disallowance of payments made to Sprint USA, the appeal was dismissed. The ITAT also dismissed the claim on the issue of disallowance of payments made to Sprint USA, following the judgment of this Court in the case of Verizon Communicati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rue or arise in India. The relevant provision with reference to which the issue has been considered by the ITAT, CIT(A) and the Assessing Officer is reproduced as below: "9. Income deemed to accrue or arise in India.- (1) The following incomes shall be deemed to accrue or arise in India:- ... (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: Provided 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 consideration for t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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.; 12.4.3. As the issue involved in the case is whether the assessee is entitled to claim deduction under Section 40(a)(i) of the Act, in respect of payment made to foreign based company, and the liability is to be ascertained by taking into consideration not only the provisions contained in Section 9 of the Act, but also the provisions contained in DTAA as between India and USA, Section 90 of the Act is also relevant, which provides as below: "90. Agreement with foreign countries or specified territories.- (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he aforesaid decision has been made a basis to disallow the claim of the assessee by holding that what has been paid by the assessee to Sprint USA constitutes royalty. 12.5.3. The factual premise and the issue which arose for consideration in the said case, and as set out in the order, are that the assessee company therein, namely Verizon Communications Singapore PTE Ltd, originally called as MCI Worldcom Asia Pte Ltd, and part of the global telecommunication conglomerate of MCI, USA, was a non-resident company engaged in the business of providing international connectivity services. Being a point-topoint private line used by an organisation to communicate between offices that are geographically dispersed throughout the world, the assessee therein provided a private link that would transport voice data and video traffic between the offices in different countries. Thus, IPLC is an end-to-end managed dedicated bandwidth service that provided internet service to customers for various applications. The international leg of the telecom services provided outside India was provided by the assessee therein. Since in India, under the Indian Telecom Regulations, only the licensed service ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s as a whole and that the agreement between the assessee and the customers being one for rendering of service by the assessee, the payment could not be treated as 'royalty'. The view taken by the Assessing Officer, CIT(A) and the ITAT in that case is as under: "... the receipt of consideration for rendering of services to the end user is workable only when the assessee and the VSNL are considered to be rendering the service jointly to the end user in India. The agreements between the assessee and the end user and the VSNL are part of one transaction, but executed through several agreements/arrangements. The payments made by the customers for the offshore services rendered by the non-resident assessee are part of one single agreement to provide IPLC and, hence, the receipts are taxable as 'royalty' under section 9(1)(vi) read with Explanation 2 to the Income-tax Act. ... Thus, payments received for providing communication bandwidth in the form of IPLC to customers came to be treated as 'royalty'. The transmission cables and hightech instruments providing a seamless circuit are 'equipment' and the income earned by permitting the use of or righ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re equipment provided for seamless connection are one whole indivisible equipment towards exploitation of the connectivity offered to the end. Thus, the payment is not for pro rata basis, but towards the entire service offered. 12.5.8. Further submissions made on behalf of the revenue were with specific reference to Explanation 6 to Section 9(1)(vi) of the Act to buttress the revenue's stand that the payment is also qua the process as falling under Explanation 2(iii) to Section 9(1)(vi) of the Act, and that cable is also treated as a commercial equipment and, thus, for the equipment usage and the services utilised, the payment falls within the meaning of 'royalty' and Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act includes licence and lease. 12.5.9. Relying upon various judgments, it was submitted on behalf of the revenue that a right to access and exploit a part of segment of a larger system to use the capacity of the system and the consideration paid therefor clearly falls under Clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act and, hence, 'royalty'. It was also submitted therein that it is a right to use a process and a right to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder 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 governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus, the consideration being for the use and the right to use of the process, it is 'royalty' within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Income-tax Act.; 12.5.14. The decision of the Delhi High Court in the case of Asia Satellite Telecommunications Private Limited v. DIT [(2011) 332 ITR 340 (Delhi)], was also sought to be relied upon by the assessee in Verizon Communications Singapore PTE Ltd v. ITO (supra) in support of its contention that the agreement between the assessee and customer contemplated rendering of services only and, h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the parts of the satellites and, naturally, the transponder remains with the assessee. At no point does the assessee cede control over the satellite. Logically, since the transponder is a part of the satellite that cannot be severed from it, the process carried on in the transponder in receiving signals and retransmitting the same, is an inseparable part of the process of the satellite and that process is utilized only by the assessee who is in control. It was noted that the Authority for Advance Rulings had specifically rejected the contention of the revenue that, in substance, there is use of transponder by the assessee. The fact that the transponder automatically responds to the data commands sent from the ground station network and retransmits the same data over a wider footprint area does not mean that the control and operation of the transponder is with the customer. 12.5.15.3. Therefore, what was held in Asia Satellite Telecommunications Private Limited v. DIT (supra) was that the presence of control was a critical factor in adjudging whether there was use of a particular process. However, in Verizon Communications Singapore PTE Ltd v. ITO (supra), this court did not a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....een its offices that are geographically dispersed and further that 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 end in different geographical point. 12.5.16. At this stage, it is pertinent to note that the decisions of the Authority for Advance Ruling, New Delhi, in the cases of Dell International Services India (P) Ltd, in re [(2009) 308 ITR 37 (AAR - New Delhi)] and Cable and Wireless Networks India (P) Ltd, in re [(2009) 315 ITR 72 (AAR - New Delhi)], on which reliance was placed by the assessee therein, were held to be not applicable by this Court in Verizon Communications Singapore PTE Ltd v. ITO (supra), considering the amendment brought in under the Finance Act, 2012, by the insertion of Explanations 5 and 6. 12.5.17. It is, thus, discernible from a close reading of the decision in Verizon Communications Singapore PTE Ltd v. ITO (supra), that the said decision turned on its own distinguishing facts and on separate agreements -....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... uplink to the satellite. The satellite then receives the contents, amplifies it, changes its frequency by undertaking certain processes, and then downlinks it, scattering the signal over the area of its footprint. The cable operators who ultimately relay it to the viewers in their homes then receive the downlinked signal. 12.6.3. Though the Assessing Officer in that case held the receipts as taxable under Section 9(1)(vi) of the Act, it being royalty both under the Act as well as Indo-Netherlands DTAA, the ITAT set aside the assessment order mainly based on the decision in Asia Satellite Telecommunications Private Limited v. DIT (supra). 12.6.4. Assailing the correctness and validity of the order passed by the ITAT, the Revenue's case before the court was that with the insertion of the three Explanations to Section 9(1)(vi) of the Act, the matter has been settled beyond controversy and reliance could no longer be based on the decision the case of Asia Satellite Telecommunications Private Limited v. DIT (supra), because the basis of that ruling has been undone by insertion of Explanations 4, 5 and 6 to Section 9(1)(vi) of the Act vide Finance Act, 2012. It was argued that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the Legislature characterises an amendment as retrospective that the court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. ... 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficatory, the same were applied to assessment years predating the amendment and that no reasons were assigned for the extension of the amendments to the double taxation avoidance agreement. It was noted thus: "31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte. Ltd. v. ITO (International Taxation) (2014) 361 ITR 575 (Mad), the court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the double taxation avoidance agreement. While TV Today (supra) recognises that the question will have to be decided and the submission argued, Verizon cites no reason for the extension of the amendments to the double taxation avoidance agreement.; 12.6.10. It would, thus, be clear that diverse opinions were recorded in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra) on the one hand an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....st. The appeal before the CIT(A) was dismissed, however, the ITAT, on appeal, allowed the claim of the assessee therein. On further appeal before the High Court, it was held that though no application under Section 195(2) of the Act had been made, the resident Indian importer is liable to deduct tax at source, without more, under Section 195(1) of the Income Tax Act. 12.7.3. In that case, the amounts paid by the persons concerned, resident in India, to non-resident, foreign software suppliers, were held to constitute royalty, thereby constituting taxable income deemed to accrue in India under Section 9(1)(vi) of the Act and making it incumbent upon all such persons to deduct tax at source and pay tax deductible at source under Section 195 of the Act. 12.7.4. We would, thus, find that in that case the issue essentially related to use of copyright. Though that was a case relating to copyright, the Supreme Court had an occasion to examine the statutory scheme of Section 9 of the Act, as also the effect of DTAA on taxability in such cases. Section 9(1)(vi) of the Act, including Explanations 4, 5 and 6 thereof, added by way of the Finance Act, 2012, also fell for consideration. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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. 68. This position of law was altered by the Finance Act, 1976, which introduced a 'source-rule' to tax income by way of royalty in the hands of a non-resident, noted in the Memorandum explaining the provisions of the Finance Bill, 1976, as follows: '38. "Source rule" regarding place of accrual of income by way of interest, royalty and fees for technical services.-A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise to him in India. The existing provisions in the Income Tax Act which provide that certain incomes will be deemed to accrue or arise in India are couched in general language. The absence of a clear-cut source rule sometimes creates uncertainty about the chargeability of certain types of incomes in the case of non-residents. In order to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....trospective effect from 1.6.1976, which added Explanation 4 to Section 9(1)(vi) of the Act. Having noted the memorandum explaining the provisions in the Finance Bill, 2012 and upon consideration of the submissions made before it, broadly with regard to it being clarificatory of the position as it always stood since 1.6.1976, their Lordships in the Supreme Court examined the legal issue as below: "77. It is equally difficult to accept the learned Additional Solicitor General's submission that Explanation 4 to Section 9(1)(vi) of the Income Tax Act is clarificatory of the position as it always stood, since 1-6-1976, for which he strongly relied upon CBDT Circular No. 152 dated 27- 11-1974. Quite obviously, such a circular cannot apply as it would then be explanatory of a position that existed even before Section 9(1)(vi) was actually inserted in the Income Tax Act vide the Finance Act, 1976. Secondly, insofar as Section 9(1)(vi) of the Income Tax Act relates to computer software, Explanation 3 thereof, refers to "computer software" for the first time with effect from 1- 4-1991, when it was introduced, which was then amended vide the Finance Act, 2000. Quite clearly, Expl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing taken all possible steps to obtain the certificate and yet being unable to obtain it for reasons beyond his control, the respondent in the facts of the case, was relieved of the mandatory obligation to furnish a certificate. In so holding, this Court referred to previous judgments dealing with the doctrine of impossibility and concluded as follows: "47. However, a caveat must be entered here. The facts of the present case show that despite all efforts made by the respondents, both through the High Court and otherwise, to get the requisite certificate under Section 65-B(4) of the Evidence Act from the authorities concerned, yet the authorities concerned wilfully refused, on some pretext or the other, to give such certificate. In a fact-circumstance where the requisite certificate has been applied for from the person or the authority concerned, and the person or authority either refuses to give such certificate, or does not reply to such demand, the party asking for such certificate can apply to the court for its production under the provisions aforementioned of the Evidence Act, CPC or CrPC. Once such application is made to the court, and the court then orders or direct....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the statutory provision is not denuded of its mandatory character because of supervening impossibility caused by the act of God. (See Broom's Legal Maxims, 10th Edn. at pp. 162-63 and Craies on Statute Law, 6th Edn. at p. 268.)' It is important to note that the provision in question in Presidential Poll, In re [Presidential Poll, In re, (1974) 2 SCC 33] was also mandatory, which could not be satisfied owing to an act of God, in the facts of that case. These maxims have been applied by this Court in different situations in other election cases - See Chandra Kishore Jha v. Mahavir Prasad, (1999) 8 SCC 266, at paras 17 and 21; Special Reference No. 1 of 2002, In re (Gujarat Assembly Election matter) [Special Reference No. 1 of 2002, In re (Gujarat Assembly Election matter), (2002) 8 SCC 237], at paras 130 and 151 and Raj Kumar Yadav v. Samir Kumar Mahaseth [Raj Kumar Yadav v. Samir Kumar Mahaseth, (2005) 3 SCC 601], at paras 13 and 14. 48. These Latin maxims have also been applied in several other contexts by this Court. In Cochin State Power & Light Corpn. Ltd. v. State of Kerala [Cochin State Power & Light Corpn. Ltd. v. State of Kerala, (1965) 3 SCR 187 : AI....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mpossible from the very commencement of Section 6. The performance of this impossible duty must be excused in accordance with the maxim, lex non cogit ad impossibilia (the law does not compel the doing of impossibilities), and sub-section (4) of Section 6 must be construed as not being applicable to a case where compliance with it is impossible. We must, therefore, hold that the State Electricity Board was not required to give the notice under subsection (4) of Section 6 in respect of its option of purchase on the expiry of 25 years. It must follow that the Board cannot be deemed to have elected not to purchase the undertaking under sub-section (4) of Section 6. By the notice served upon the appellant, the Board duly elected to purchase the undertaking on the expiry of 25 years. Consequently, the State Government never became vested with the option of purchasing the undertaking under subsection (2) of Section 6. The State Government must, therefore, be restrained from taking further action under its notice, Ext. G, dated 20- 11-1959.' 49. In Raj Kumar Dey v. Tarapada Dey [Raj Kumar Dey v. Tarapada Dey, (1987) 4 SCC 398], the maxim lex non cogit ad impossibilia was applied ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sibly perform and an act of the court shall prejudice no man would, apply with full vigour in the facts of this case and if that is the position then the award as we have noted before was presented before the Sub- Registrar, Arambagh on 25-11-1983 the very next one day of getting possession of the award from the court. The Sub-Registrar pursuant to the order of the High Court on 24-6-1985 found that the award was presented within time as the period during which the judicial proceedings were pending that is to say, from 28-1-1978 to 24-11-1983 should be excluded in view of the principle laid down in Section 15 of the Limitation Act, 1963. The High Court [Tarapada Dey v. District Registrar, Hooghly, 1986 SCC OnLine Cal 101 : AIR 1987 Cal 107], therefore, in our opinion, was wrong in holding that the only period which should be excluded was from 26-7-1978 till 20-12-1982. We are unable to accept this position. 26-7-1978 was the date of the order of the learned Munsif directing maintenance of status quo and 20-12-1982 was the date when the interim injunction was vacated, but still the award was in the custody of the court and there is ample evidence as it would appear from the narratio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ior to introduction of Finance Act, 2012. 12.8.1. The view taken in the case of Verizon Communications Singapore PTE Ltd v. ITO (supra) is that even if the assessee does not have an effective control over the equipment, the use of process will render payment liable to be treated as royalty was based on application of Explanations 4, 5 and 6 added by way of Finance Act, 2012 and we see from a reading of the said judgment, that the assessee's case based on decision in the case Asia Satellite Telecommunications Private Limited v. DIT (supra) and various rulings of the Authority on Advance Rulings was rejected by holding that such decisions are of no assistance in view of the amendment which was introduced by Finance Act, 2012 by insertion of Explanations 5 and 6. 12.8.2. In Verizon Communications Singapore PTE Ltd v. ITO (supra), the decision in the case of Poompuhar Shipping Corporation Limited v. ITO (supra), was relied upon, wherein for the purposes of determining whether the payments made constituted royalty, recourse was had to the meaning assigned to it by taking into consideration newly inserted Explanations 4 and 5 under the Finance Act, 2012. 12.8.3. It was preci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....allowance of expenses, i.e., Section 40(a)(ia) and Section 40(a)(i), by submitting that, if the assessee had made a payment in the nature of royalty and had failed to deduct applicable tax on the same, then there is a lack of parity since: (a) the payment made to non-resident would be liable to disallowance, since Section 40(a)(i) provides for disallowance of payments in the nature of royalty; and (b) the payment made to Indian resident would not be liable to disallowance, since Section 40(a)(ia) does not cover payments in the nature of royalty. This, according to the assessee, is tantamount to gross discrimination that is sought to be nullified under Article 26 of the India-USA DTAA. 15.3. Referring to Article 26(3) of the India-USA DTAA, it is submitted that the language in which it is couched makes it clear that the deduction in the hands of Resident payer on payment to a US Resident shall be under the same conditions as that of a payment made to an Indian Resident. In the present case, the disallowance is made only in respect of payment to a non-resident. He added that the mere fact that there was no provision under the Act mandating deduction of tax at source in respect of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n for invoking Section 40(a)(i) of the Act on the assessee for the relevant assessment years, that too, when it need not shell its money as taxes, as it only has to withhold from the payments made to a non-resident, it cannot be complained that even if it does not deduct tax, it should not come within the ambit of Section 40(a)(i) of the Act. 17.1. Though we have held that payment made by the assessee to Sprint USA for use of undersea cables does not constitute royalty, this question of law being equally important as it involves the issue of taxability with reference to the provisions of the Act and DTAA and its interpretation, we shall proceed to decide the same. 17.2. The provisions of Section 90(2) of the Act have already been referred to herein above to highlight that where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) 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 beneficia....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reement being that in the absence of such agreement, the income in question is taxable in both jurisdictions as under their domestic laws, whenever courts are confronted with taxability of an income in the context of such an agreement, they must as a matter of course, first decide whether the income in issue is taxable under domestic legislation, specifically the Act. It is only when that issue is answered in the affirmative that the court turns its attention to the tax convention in issue, to ascertain primarily whether the terms of the convention exempt that particular income from being taxed under the Act. ... 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 ob....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.'; 17.6. In the context of a situation, where there does exist a definition of the term within the DTAA, the legal position was explained by the Delhi High Court in DIT v. New Skies Satellite BV (supra) as under: "50. ... This court's finding is in the context of the second situation, where there does exist a definition of a term within the double taxation avoidance agreements. 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 double taxation avoidance agreements 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. Parliament is simply not equipped with 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 Stat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mend the definition in a manner so that such income automatically becomes royalty. 17.11. The aforesaid principles with regard to application of DTAAs when the same term is used both in the Act and DTAAs was examined by the Apex Court in Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra). The appeals before the Supreme Court concerned the DTAAs between India and several countries/ parties, including USA, as clearly stated in paragraph 40 of the said judgment. It was then observed that each of these DTAAs (including agreement with USA) is based on the OECD Model Tax Convention on Income and on Capital, and are, therefore, substantially similar, if not identical, in respect of the provisions concerning "business profits" and "royalties". 17.12. The Supreme Court considered various provisions of India-Singapore DTAA, including Article 12 captioned "Royalties and Fees for Technical Services". It considered the provisions contained in DTAAs and Explanation 4 to Section 90 of the Act to hold that the definition of the term "royalties" shall have the meaning assigned to it by the DTAA, meaning thereby that the expression "royalty", when occurring in Section 9 of the A....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any copyright" of a literary work, which includes a computer program or software.; 17.13. At this stage, we may note that the provisions contained in Article 3(2) and Article 12 of the DTAA under consideration before the Supreme Court (India-Singapore DTAA) are similar, if not identical, particularly with regard to general definitions of Article 3(2) and Article 12(3) as regards the meaning of the term "royalities", except with the difference that that case related to use of a copyright. There Lordships proceeded to consider in detail the applicability of the provisions of the DTAA, particularly with reference to India-USA DTAA. The definition of royalty in the DTAA vis-a-vis the Act was gone into in detail and then the following legal principle was enunciated: "100. 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 DTAA, as per Section 90(2) of the Income Tax Act read with Explanation 4 thereof, and Article 3(2) of the DTAA. Further, the expression "copyright" has to be understood in the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, 2nd Edn. (Butterworths, 1992) p. 461.] .' 131. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief [David R. Davis, Principles of International Double Taxation Relief (Sweet & Maxwell, London 1985) p.4.], points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndustrial profits" and "permanent establishment" have no exact counterpart in the taxing code of the United Kingdom.; 147. All the DTAAs with which we are concerned, have, as their starting point, either the OECD Model Tax Convention on Income and Capital ["OECD Model Tax Convention"] and/or the United Nations Model Double Taxation Convention between Developed and Developing Countries ["UN Model Convention"] insofar as the taxation of royalty for parting with copyright is concerned.; 17.15. In Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT (supra), the Supreme Court examined the OECD Model Tax Convention and held thus: "148. The OECD Model Tax Convention speaks of the importance of the OECD Commentary, as follows: "2. It has long been recognised among the member countries of the Organisation for Economic Cooperation and Development that it is desirable to clarify, standardise, and confirm the fiscal situation of taxpayers who are engaged in commercial, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation. These countries have also ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....relied upon in several earlier judgments. See: (i) Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1, at pp. 42-43; (ii) Formula One World Championship Ltd. v. CIT, (2017) 15 SCC 602, at pp. 629-30; and (iii) CIT v. E-Funds IT Solution Inc., (2018) 13 SCC 294], at pp. 322-23.; 17.16. The position taken by India (in the capacity of an OECD non-member) with regard to Article 12 of the OECD Model Tax Convention and the OECD Commentary, as relied upon by the revenue, was not accepted as the determinative factor and, in this regard, the legal position explained by the Delhi High Court in the case of DIT v. New Skies Satellite BV (supra) was affirmed holding that mere positions taken with respect to the OECD Commentary do not alter the DTAA's provisions, unless it is actually amended by way of bilateral re-negotiation. The following are the pertinent observations in this regard: "155. In DIT v. New Skies Satellite BV [2016] 68 taxmann.com 8 ["New Skies Satellite"], a Division Bench of the High Court of Delhi correctly observed that mere positions taken with respect to the OECD Commentary do not alter the DTAA's provisions, unless it is....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mputer software program, secret formula or process, or for information concerning industrial, commercial or scientific experience; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment; (Article 12.3) 157. Similarly, though the India-Singapore DTAA came into force on 8-8-1994, it has been amended several times, including on 1-9-2011 [Notification No. S.O. 2031(E).] and 23-3-2017 [Notification No. S.O. 935(E).] However, the definition of "royalties" has been retained without any changes. Likewise, the Convention between the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains and for the Encouragement of Mutual Trade and Investment, [Notification No. GSR 920(E).] ["India-Mauritius DTAA"] was entered into on 6-12-1983, and was amended subsequently on 10-8-2016, [ Notification No. S.O. 2680(E) (No. 68/2016 (F.No.500/3/2012-FTD-II).] without making any change to the definition of "royalties". 158. It is thus clear that the OECD Comm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lity aspect can be looked into. Learned counsel for the assessee has rightly relied upon non-discrimination clause in Article 26(3) of the DTAA between India and USA, which reads as below: "Article 26: Non-discrimination ... 3. Except where the provisions of paragraph 1 of article 9 (Associated Enterprises), paragraph 7 of article 11 (Interest), or paragraph 8 of article 12 (Royalties and Fees for Included Services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.; 17.20. If we look into the provisions contained in Section 40 of the Act along with Article 26(3) of the India-USA DTAA, it is clear that deduction in the hands of the resident on payment to a USA resident shall be on the same conditions as that of a payment made to Indian resident. In the present case, the disallowance was only in respect of payment made to non-resident. On this score, the assessee has co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....crimination brought about qua nonresident by requiring the tax to be deducted while making payment of fees for technical services in terms of section 40(a)(i) of the Act.; 17.22. Similar is the decision in the case of Commissioner of Income-tax v. Mitsubishi Corporation India (P) Ltd (supra). 17.23. The submission of the revenue that until 13.07.2006 there was no requirement to deduct tax on royalty payments made to a resident in India and only by way of amendment under Section 194J Act with effect from 13.07.2006 royalty was also included, does not alter the legal position in the light of the above decision. 18. This question of law is answered in favour of the assessee and against the revenue. FIFTH SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.277 of 2016 19. For the impugned AY 2003-04, the assessee earned miscellaneous income in the nature of interest on loan given to employees and sale of scrap and claimed deduction under Section 10A/10B of the Act, since the same is derived from the eligible undertaking of the assessee. The Assessing Officer has denied the claim of the assessee by stating that the miscellaneous income does not have a direct nexus with the business o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her the assessee, who earned miscellaneous income in the nature of interest on loan given to employees and sale of scrap, is entitled to claim deduction under Section 10A/10B of the Act, the Assessing Officer denied the claim by stating that miscellaneous income does not have direct nexus with the business of the eligible undertaking. It is the case of the assessee that though the issue was upheld by the CIT(A), it was not adjudicated by the ITAT in the impugned order, though a specific ground was raised. 22.2. On this issue, we may profitably refer to two decisions in Commissioner of Income-tax v. Sankhya Technologies (P) Ltd (supra) and Commissioner of Income Tax v. Hewlett Packard Global Soft Ltd (supra), which, in our view, conclude the issue in favour of the assessee. 22.3. In the case of Commissioner of Income-tax v. Sankhya Technologies (P) Ltd (supra), it was held by this court as below: "5. It has been brought to the notice of this Court that there is a judgment of the Full Bench of the Karnataka High Court, to which one of us (Dr. Vineet Kothari, J.) was a party, in which the Full Bench has held that the interest on bank deposits is also eligible to be incl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A/10-B of the Act and for the object of granting such incentive to the special class of assessee's selected by the Parliament, the play-in-the-joints is allowed to the Legislature and the liberal interpretation of the exemption provisions to make a purposive interpretation, was also propounded by Hon'ble Supreme Court in the following cases:- "I] In Bajaj Tempo Ltd., Bombay v. Commissioner of Income Tax, Bombay, [(1992) 3 SCC 78], the Hon'ble Supreme Court held that:- "5. ... ..Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it, too, has to be construed so as to advance the objective of the section and not to frustrate it. But that turned out to be the, unintended, consequence of construing the clause literally, as was done by the High Court for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective it sought to achieve and the mischief it intended to control is lost sight of. One way of reading it is that the clause excludes any undertaking formed by transfer to it of any building, plant or machinery used previously in a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rgely a prophecy based on meagre and uninterpreted experience". Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid.; 37. On the above legal position discussed by us, we are of the opinion that the Respondent assessee was entitled to 100% exemption or deduction under Section 10-A of the Act in respect of the interest income earned by it on the deposits made by it with the Banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'Income from other Sources' under Section 56 of the Act. The incidental activity of parking of Surplus Funds with the Banks or advancing of staff loans by such special category of assessee's covered under Section 10-A or 10-B of the Act is integral part of their export business activity and a business decision taken in view....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under section 10A or section 10B of the Act and cannot be taxed separately under section 56 of the Act.; 22.6. Reliance on the decisions in the cases of India Comnet International v. ITO (supra); CIT v. Menon Impex (P) Ltd (supra); and CIT v. Sterling Foods (supra) by the revenue is misplaced on facts. 22.7. In India Comnet International v. ITO (supra), the Supreme Court considered the decision of the Madras High Court in CIT v. Menon Impex (P) Ltd (supra), where the nature of interest income derived by the assessee was from funds in connection with Letter of Credit. The Supreme Court decision turned more in respect of the claim of deduction on the interest income on foreign currency deposit account. Therefore, the said decisions do not come to the aid of the revenue, as the nature of deposits were not in the nature of interest earned on loans advanced to the employees and sale of scrap, which were in the ordinary course of business of the undertaking. 23. Accordingly, this question of law is also decided in favour of the assessee and against the revenue. SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.279 of 2016: 24. This issue is with respect to the finding of the ITAT th....