TaxTMI 
TaxTMI 
2026 (8) TMI 190
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....ining in Assessment Year 2009-10 are being taken as the lead facts and, unless any material distinction is specifically noticed, our findings shall apply mutatis mutandis to the remaining assessment years. 2. The central issue arising in these appeals is whether the payments made by the assessee to Intelsat Corporation, USA, for availing satellite transponder services constitute "royalty" either under section 9(1)(vi) of the Act or under Article 12 of the Double Taxation Avoidance Agreement between India and the United States of America and, consequently, whether the assessee was under an obligation to deduct tax at source under section 195 of the Act. The controversy has had a prolonged and chequered history. It has travelled through proceedings under section 195(2), the first appellate authority, this Tribunal and thereafter the Hon'ble Bombay High Court, which restored the matter to the learned CIT(A) for an independent factual examination of the governing agreements and for determination of the true legal character of the payments in the light of the domestic law as well as the Treaty. 3. The assessee, during the relevant assessment years, was engaged in the business of b....
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....n that no tax was liable to be deducted from the payments proposed to be made to Intelsat. The Assessing Officer, however, by the original order dated 11.12.2008, held that the payments constituted royalty both under section 9(1)(vi) of the Act and under Article 12 of the India-USA DTAA. The Assessing Officer principally relied upon the decision of the Delhi Bench of the Tribunal in Asia Satellite Telecommunications Co. Ltd. v. DCIT, reported in 85 ITD 478, and proceeded on the premise that the transponder facilitated the use of a process involving reception, amplification and retransmission of signals and that the consideration paid for such facility was, therefore, in the nature of royalty. The Assessing Officer did not rest his conclusion upon the existence of any business connection or permanent establishment of Intelsat in India, nor did he seek to characterise the amount as fees for technical services. The entire case, in substance, was founded upon the characterisation of the payment as consideration for the use of a process. The contractual arrangement itself was not independently analysed in any considerable detail and the conclusion was substantially drawn by applying the....
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....ideration constituted royalty under the domestic law or under the Treaty. The Hon'ble High Court also made it explicit that if the payment did not answer the description of royalty after giving effect to the more beneficial Treaty provisions under section 90(2), no withholding obligation would arise. 9. Pursuant to the aforesaid remand, the assessee furnished before the learned CIT(A) the complete contractual record, including the original Transponder Service Agreement dated 23.12.1993, the tripartite Assignment Agreement dated 02.04.2008, the direct agreement dated 19.08.2011, the service order dated 03.04.2008, the technical appendices, tax residency certificates and the confirmations concerning absence of a permanent establishment of Intelsat in India. The assessee also relied upon the subsequent judicial developments rendered after the earlier orders, including the decisions in Asia Satellite Telecommunications Co. Ltd., New Skies Satellite BV, Neo Sports Broadcast Pvt. Ltd., Intelsat Corporation and other authorities dealing with satellite and transponder receipts. 10. The learned CIT(A), having regard to the specific mandate of the Hon'ble High Court, called for a reman....
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....peration and technical control of Intelsat. The assessee had no physical access to the equipment, no right to operate it, no authority to alter its technical configuration, no right to exclude Intelsat or any other customer from the satellite infrastructure and no right to deal with the transponder as an economic possessor thereof. The designation of specified transponder capacity for transmission of the assessee's signals was held to be merely part of the service-delivery mechanism and not a transfer of any right to use the equipment itself. 13. The learned CIT(A) also took note of the fact that Intelsat did not have any permanent establishment in India and that the Revenue had not made out a case of taxability of the receipts as business profits under Article 7 read with Article 5 of the Treaty. Once the payment was held not to be royalty, and there being no permanent establishment of the recipient in India, the amount was not chargeable to tax in India as business income. Consequently, the very foundation for invoking section 195 ceased to exist. On the effect of the amendment brought by the Finance Act, 2012, the learned CIT(A) held that the amendment to section 9(1)(vi) cou....
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....s and whether any such process was made available to the assessee; what is the effect of the more beneficial Treaty provisions in view of section 90(2) of the Act; whether a retrospective amendment in domestic law can fasten a withholding liability in respect of payments made before the amendment was enacted; what is the effect of the determination in the hands of Intelsat that the corresponding transponder receipts were not taxable in India; and whether, on cumulative consideration of the contractual terms, the domestic provisions and the Treaty, any obligation to deduct tax at source under section 195 could at all arise. 16. Before dealing with the aforesaid issues, it would be apposite to first notice the rival submissions advanced before us, the exact contours of the contractual arrangement and the legal principles governing the distinction between availing a satellite transmission service, using a process and acquiring a right to use equipment. These aspects assume particular significance because the Hon'ble Bombay High Court has specifically required an independent factual determination based upon the agreements rather than a conclusion resting merely upon the nomenclature....
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....ment. The agreement, it was submitted, demonstrated that the services were specifically tailored to the assessee's broadcasting requirements and the mere fact that physical operation of the satellite continued with Intelsat could not dilute the commercial reality that the assessee was exploiting a part of the satellite infrastructure for its own business. 19. The learned Senior Departmental Representative also assailed the reliance placed upon the decision of the Hon'ble Bombay High Court in Reliance Industries Ltd. while considering the retrospective amendment introduced by the Finance Act, 2012. According to him, once Parliament has expressly clarified the scope of section 9(1)(vi), the amended provision necessarily governs all pending proceedings and the withholding obligation has to be determined in accordance with the law so declared. It was thus submitted that the learned CIT(A) had erred in concluding that no withholding liability could arise merely because the payments preceded enactment of the Finance Act, 2012. 20. Per contra, the learned counsel appearing on behalf of the assessee strongly supported the order passed by the learned CIT(A). At the outset, he submitte....
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....a highly specialised technological process. According to him, the assessee continuously utilised this process for commercial exploitation of its broadcasting business and the consideration paid cannot be divorced from such utilisation merely because the process remained embedded within the satellite infrastructure. What is material, according to the Revenue, is that without the employment of this process the assessee could not have transmitted its television signals over the designated footprint and, therefore, the payment was intrinsically linked to the use of the technological process employed by the transponder. 22. The learned Senior Departmental Representative further submitted that the learned CIT(A) committed another error in overlooking the independent limb contained in Article 12(3)(b) of the India-USA Double Taxation Avoidance Agreement concerning consideration paid for the use of, or the right to use, industrial, commercial or scientific equipment. According to him, the assessee had secured identified and dedicated transponder capacity for transmission of its television channels throughout the contractual tenure. Such earmarked capacity, coupled with its continuous co....
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....he satellite. According to him, in the context of modern technological infrastructure, "use" of equipment need not necessarily involve physical custody or manual operation. The assessee had commercially employed the transponder capacity for transmitting its own television signals, enjoyed uninterrupted access to such capacity and derived substantial commercial benefit from the satellite infrastructure. These features, according to the Revenue, were sufficient to bring the payments within the ambit of equipment royalty under the Treaty. He, therefore, submitted that the impugned orders of the learned CIT(A) deserve to be set aside and the original determinations made by the Assessing Officer under section 195(2) restored. 24. Per contra, the learned counsel appearing on behalf of the assessee strongly supported the orders passed by the learned CIT(A). At the very outset, he submitted that the controversy before us cannot be examined divorced from the remit of the Hon'ble Bombay High Court in the remand proceedings. It was submitted that the Hon'ble High Court had specifically noticed that neither the Tribunal nor the authorities below had undertaken any independent examination of....
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....confined to the terrestrial facilities at its own end and to compliance with the operational protocols prescribed by Intelsat. These features, according to the learned counsel, completely negate the Revenue's allegation that the assessee had acquired any right to use either the satellite, the transponder or the process embedded therein. The learned counsel also drew our attention to the service-level obligations contained in the agreements. It was submitted that the agreements specifically provide for outage credits and corresponding reduction of service charges wherever the stipulated transmission specifications are not achieved. According to him, this is a significant commercial feature of a service arrangement because the performance risk attaching to the underlying satellite infrastructure continues to remain with Intelsat. If the contracted transmission service fails or falls below the agreed standards, Intelsat bears the commercial consequence by way of reduction in the agreed consideration. In a true lease or transfer of equipment, on the other hand, the economic risks associated with the asset ordinarily stand transferred to the person obtaining the right to use it. The out....
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....ntly under consideration. According to the learned counsel, once the receipts themselves have been held to be not chargeable to tax in India in the hands of Intelsat, the inevitable consequence is that the payer cannot be fastened with an obligation to deduct tax at source under section 195 in respect of the very same payments. Particular emphasis was also placed upon the decisions rendered in the case of Intelsat Corporation itself. According to the learned counsel, these decisions directly answer the first issue formulated by the Hon'ble Bombay High Court while remanding the matter, namely, whether the receipts in question were at all taxable in the hands of the non-resident recipient. Once that question stands concluded in favour of Intelsat on substantially identical facts, it was submitted that the very substratum of the impugned orders passed under section 195(2) disappears. 28. The learned counsel further submitted that the Revenue's attempt to characterise the payments as equipment royalty is not only untenable on merits but also travels beyond the original foundation of the proceedings. From the original proceedings under section 195(2) until the first round before the ....
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....T(A) and the judicial authorities cited before us. In our considered opinion, the controversy cannot be resolved merely by reference to the sophisticated technology employed in satellite communication or the nomenclature employed in the agreements. Its true legal character has necessarily to be ascertained from the rights and obligations actually created between the parties, the extent of ownership and control retained by Intelsat, the nature of the services actually rendered and the legal incidents flowing from the contractual arrangement. We shall, therefore, first examine the scope of the remand directed by the Hon'ble Bombay High Court and thereafter independently analyse the contractual framework before considering the applicability of the provisions of the Act and the Treaty. 30. We have heard the rival submissions at considerable length and have carefully perused the entire material placed before us. We have also examined the complete set of agreements governing the transaction, including the Full-Time Transponder Service Agreement dated 23.12.1993, the Assignment Agreement dated 02.04.2008, the Direct Agreement dated 19.08.2011, the Service Orders and the technical appen....
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....satellite, transponder or identifiable equipment in favour of the assessee. The relationship created under the agreements is essentially one whereby Intelsat undertakes to provide uninterrupted satellite transmission services through its own satellite infrastructure upon the terms and conditions mutually agreed between the parties. The commercial substance of the transaction, therefore, has to be gathered not from isolated expressions occurring in the agreements but from the cumulative rights and obligations assumed by each contracting party. 33. We find that throughout the contractual documentation, ownership of the satellite, the transponders and every constituent part of the satellite infrastructure unequivocally remains vested in Intelsat. Equally, complete operational control over the satellite continues to remain exclusively with Intelsat. The agreements confer no proprietary interest, possessory right or right of management upon the assessee. The satellite remains under the exclusive command of Intelsat, which alone is responsible for telemetry, tracking, station-keeping, orbital positioning, frequency management, power allocation, technical monitoring, maintenance and al....
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....sidered view, these outage-credit provisions assume considerable significance while determining the true legal character of the transaction. Where equipment itself is leased or the right to use equipment is transferred, the commercial risks associated with its utilisation ordinarily stand shifted, wholly or substantially, to the person obtaining such right. The present agreements proceed on an entirely different commercial premise. The assessee pays only for the availability of uninterrupted transmission services. If those services are not rendered in accordance with the stipulated standards, Intelsat itself bears the financial consequences by way of proportionate reduction of the agreed consideration. This allocation of commercial risk is wholly consistent with a service arrangement and not with a transfer of any right to use equipment. We also find that none of the agreements transfers to the assessee any proprietary technology, confidential engineering information, software, technical know-how or secret process capable of independent commercial exploitation. The confidentiality clauses merely regulate the manner in which commercial information exchanged between the parties is to....
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....ial or scientific equipment under the provisions of the Act and the applicable Treaty. It is in this context that the judicial authorities relied upon by both sides assume relevance, for they serve to test the legal conclusions emerging from the contractual analysis already undertaken, rather than substitute such analysis itself. 38. The conclusions emerging from the contractual analysis undertaken hereinabove also stand consistently reinforced by the judicial authorities which have examined substantially similar satellite transponder arrangements. We hasten to clarify that our conclusions are not founded merely because judicial precedents exist on the subject. Rather, having independently examined the agreements in the manner directed by the Hon'ble Bombay High Court and having arrived at the conclusion that no proprietary interest, possessory right, operational control or right to employ the technological process ever stood transferred to the assessee, we find that the principles laid down in the decided cases lend complete support to the legal consequences flowing from the contractual arrangement before us. 39. The earliest authoritative pronouncement dealing with the true....
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....n have subsequently been reaffirmed and elaborated in later decisions, including those rendered after considering the retrospective amendments introduced by the Finance Act, 2012. The pendency of further proceedings, therefore, does not persuade us to depart from the settled judicial position. The effect of the retrospective amendments introduced by the Finance Act, 2012 came to be exhaustively considered by the Hon'ble Delhi High Court in DIT v. New Skies Satellite BV (2016) 382 ITR 114 (Delhi). The Hon'ble High Court held that while Parliament may amend the provisions of the domestic law retrospectively, such amendments cannot ipso facto alter the meaning of expressions employed in an international treaty. The provisions of the DTAA continue to be governed by internationally accepted principles of treaty interpretation and cannot be unilaterally expanded by subsequent amendments to domestic legislation. The Court further observed that the expression "process" occurring in the Treaty must receive its ordinary and contextual meaning and that merely because the service provider utilises sophisticated technology while rendering services does not mean that the customer has acquired th....
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....nce of the transaction lies in the rendition of services through sophisticated equipment and not in the transfer of any rights in such equipment itself. The ratio laid down therein, in our considered opinion, fortifies the conclusion emerging from our own independent examination of the agreements. 42. We are, therefore, unable to accept the Revenue's submission that the mere reservation of dedicated transponder capacity or continuous utilisation of such capacity necessarily results in the transfer of the right to use industrial, commercial or scientific equipment. The agreements unmistakably demonstrate that the identified capacity merely defines the quality, continuity and availability of the communication service contracted between the parties. It does not confer upon the assessee any dominion over the satellite, any authority to operate or manage the transponder, any right to exclude others from the satellite infrastructure except to the limited extent necessary for ensuring contracted service levels, or any ability to commercially exploit the equipment independently of Intelsat. Reservation of capacity is, therefore, only an incident of the service arrangement and cannot, by....
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....e. Consequently, even assuming that the domestic definition of royalty has undergone expansion by virtue of the retrospective amendments, it still becomes necessary to examine whether such unilateral amendment can correspondingly enlarge the scope of Article 12 of the Treaty. 44. In our considered opinion, this question is no longer open to debate. The Hon'ble Delhi High Court in New Skies has authoritatively held that while Parliament undoubtedly possesses legislative competence to amend the provisions of the domestic statute, such amendment cannot, by unilateral legislative action, alter the scope, meaning or content of an international treaty. A Double Taxation Avoidance Agreement represents reciprocal obligations voluntarily assumed by two sovereign States and continues to operate according to internationally accepted principles governing treaty interpretation. Unless the Treaty itself is correspondingly amended by mutual agreement between the Contracting States, the expressions employed therein continue to retain the meaning which they ordinarily bear in international fiscal jurisprudence. This principle has acquired even greater significance after the judgment of the Hon'b....
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....ent or any right therein. 46. Once the contractual arrangement is viewed in its entirety, it becomes abundantly clear that the Revenue's attempt to characterise the payments simultaneously as royalty for the use of a process and as royalty for the use of equipment proceeds on a misconception of the true nature of the transaction. The sophisticated technological processes embedded within the satellite are undoubtedly employed, but they are employed exclusively by Intelsat while rendering its communication services. Likewise, the satellite and the transponder undoubtedly constitute highly sophisticated scientific equipment, but such equipment at all material times remains under the ownership, possession, management and operational control of Intelsat. The assessee merely receives the benefit of the services rendered through such equipment and technology. The distinction between the provider's use of technology for rendering services and the customer's acquisition of the right to use such technology is fundamental and cannot be obliterated by adopting an unduly expansive interpretation of the expression "royalty." Once this distinction is kept in view, the consequence under section....
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.... the Revenue, namely, that the sophisticated nature of the satellite technology itself is sufficient to characterise the payments as royalty. In our considered opinion, the submission overlooks the essential distinction between the technology employed by a service provider for rendering services and the legal rights acquired by the customer under the governing contract. The complexity or sophistication of the technology has never been the determinative test for deciding whether a payment constitutes royalty. The decisive test has always been whether the payer has acquired any proprietary interest, possessory right or legally enforceable entitlement to use the equipment or the process itself. As discussed in the preceding paragraphs, no such right can be culled out from any of the agreements executed between the parties. Equally, we are unable to accept the proposition that because identified transponder capacity stood reserved in favour of the assessee, the transaction necessarily assumes the character of equipment royalty. Reservation of capacity merely ensures that the service provider remains contractually obliged to make available the agreed bandwidth and transmission capabilit....