TMI Blog2009 (10) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 Kms. from the equator - Each satellite rotates in the same direction as earth at a velocity that matches the earth's rotation - It was pleaded that there are certain embedded processes which are carried out within the satellite through the transponder. However, the said processes are used by the assessee for the purpose of rendering service and the customer is merely getting a service and is not using such processes on its own. HELD THAT:- On facts, it is held that a process is involved in the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desired area which inter alia covers Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of royalty has not been restricted either by the domestic provisions or by the provisions contained in respective DTAA's. Insertion of 'comma' after the words secret formula or process in the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation 2 to section 9(1)(vi) and in the relevant article of the Treaties, will qualify the word 'process' also? If so, whether the services rendered through secret process only will be covered within the meaning of royalty? - The terms secret appearing in the phrase secret formula or process in Explanation 2 to section 9(1)(vi) and in the relevant Article of DTAA will not qualify the word process. Therefore, to fall within the meaning of royalty as envisaged in these provisions, it is not necessary that the services rendered must be through secret process only. Even services rendered through simple process will also be covered within the meaning of royalty. Whethe, the payment received by the assessees from their customers on account of use of their satellites for telecommunication and broadcasting, amounts to 'royalty' and if so, whether the same is liable to tax under section 9(1)(vi) of the Income-tax Act, 1961 read with relevant provisions of DTAA? - The payments received by assessee from their customers is on account of use of process involved in the transponder and it amounts to royalty within the meaning of section 9(1)(vi) of Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing three questions were recommended to be referred to the Special Bench:- 1. Whether on the facts and in the circumstances of the case, the services rendered by the assessees involved in these appeals, through their satellites for telecommunication or broadcasting, amount to 'secret process' or only 'process'? 2. Whether the term 'secret' appearing in the phrase 'secret formula or process' in Explanation 2 to section 9(1)(vi) and in the relevant article of the Treaties, will qualify the word 'process' also? If so, whether the services rendered through secret process only will be covered within the meaning of royalty? 3. Whether, on the facts and in the circumstances of the case, the payment received by the assessees from their customers on account of use of their satellites for telecommunication and broadcasting, amounts to 'royalty' and if so, whether the same is liable to tax under section 9(1)(vi) of the Income-tax Act, 1961 read with relevant provisions of DTAA? 3. Accordingly, these questions came up for consideration of this Special Bench. 4. During the course of hearing permission was given to M/s. Asia Satell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lite. Typical bandwidths of a transponder are 27, 33, 36, 54 and 72 MHz. Frequency plan and transponder layout is provided in Technical User's Guide for each satellite. Each transponder ID represents different uplinking pair of transmitting and downlinking receiving frequencies, i.e., a transponder ID will have different uplinking frequencies. The different frequencies are there to avoid the interference with other transponders as well as uplink and downlink foot-prints. The area, which is covered by satellite down linking facility, is called footprint area . Through such transponder installed at satellite, the assessees in the present cases are providing transponders capacity of data transmission to their customers, which are telecasting companies/telecom operators. In turn, the telecasting companies/telecom operators provide broad-casting/telecommunication services to their customers. The telecasting companies/telecom operators while relaying the programmes whether live or recorded to their customers uses their earth stations to uplink the data to satellite which is als9 received by their earth stations in the down linking process from where these telecasting companies/telec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iland Government viz., Thaicom I, Thaicom II and Thaicom III. Thaicom III is being used for the purpose of up-linking and downlinking the programmes. It is the case of the assessee that the amount received by it from the telecasting companies could not be taxed in India as it does not have any man, material or machinery or combination thereof, which is situated in India for the operation carried out by it in India. Therefore, it is the case of the assessee that the income has neither accrued nor has arisen to it in India, which can be considered as income deemed to accrue or arise to it under Indian Income-tax Act. It is also the case of the assessee that otherwise such receipts are not taxable, as they could not be taxed under the DTAA of India with Thailand. It is the case of the Assessing Officer that the amount received by the assessee is an income deemed to accrue or arise in India as per section 9(1)(vi) of the Act. The Assessing Officer is of the view that providing transponder's capacity for a consideration falls under the definition of 'royalty' within the meaning of Explanation l to clause (iii) to section 9(1)(vi) of the Act. The Assessing Officer is also of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 12. It was submitted that the receipt of the assessee is not royalty for the following broad propositions:- (i) because it is a payment for services and being services, as such, the character of royalty is ruled out. (ii) In the alternative, these receipts do not constitute consideration for use or right to use the process as under law it is not any and every process which leads to royalty. It was submitted that the process which could be understood to be falling under the relevant provisions should be ejusdem generis with the Intellectual Property Rights (IPR's) in the company of which it occurs can lead to royalty . (iii) In the alternative, these receipts do not constitute consideration for secret process. (iv) It is not an equipment royalty. 13. So as it relates to proposition listed at (i), it was submitted that the transponders installed at the satellite operated by the assessee have specified bandwi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-how or processes, etc. 15. Further, ld. Sr. Counsel referred to the role performed by various components utilized in the process as under:- Earth station 16. The earth station is a primary component in satellite transmission comprises the ground equipments necessary to transmit or receive the signals from the satellite and it can be located almost anywhere where there is enough power and a clear, unobstructed view in the direction in which the satellite is located. It does not require a large facility, but it needs to contain a satellite antenna and the equipment necessary to amplify, convert and send or receive signals to and from the satellite. It can be located almost anywhere in the footprint area of satellite. From the earth station signals are transmitted to the assessee s satellites. The process of transmission of signals is the process using specific radio frequency carrier transmitted from the earth station to the satellite. Satellite transponder 17. The transponder receives the signal from the uplinking earth station on the uplinking frequency, amplifies the signal, and retransmits it to downlinked earth station on the downlinked frequency. It boosts the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 to 108 of the paper book-I. Referring to the said agreement, it was pleaded that the payments received by assessee from its customers should properly be characterized as payments for performance of services and is in the nature of business profits which are not chargeable to tax in India. It was submitted that it is an admitted position that none of the business operations of the assessee are carried out in India and, thus, no part of these receipts/income can be taxed in India. The assessee is a service provider. Several telecasting companies/telecom operators enter into contract with the assessee for the purposes of signal transmissions such as data, voice programme, etc. To render these services, the assessee uses its satellites and other infrastructure (all located outside India). These satellites and infrastructure and their control and monitoring are owned, maintained and controlled by the assessee through its employees who are based outside India. 22. Referring to the title of the agreement which is Service Ordering Agreement , it was pleaded by the ld. Sr. Counsel that the title deed shows that the intention of the parties who are entering into agreement with the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed) Service Fee (Pg 100, cI 3) Customer shall make each and every Service Fee payment in advance, on or before the first business day of each month (emphasis supplied) Termination (Pg 100, cI 5) (a) This Agreement may be terminated by either Party on notice to the other; if (1) the Service suffers a Confirmed Outage and NSS does not restore Service within thirty (30) days, or (2) the Satellite is removed from commercial operation at its Authorized Orbital Location and NSS does not provide a Replacement Satellite within thirty (30) days. Replacement Satellite (Pg 100, cI 5) NSS may determine in unusual or abnormal technical situations or other unforeseen conditions, to replace the Satellite utilized to provide the Service, with a Replacement Satellite, provided that the service specifications of the Replacement Satellite are substantially comparable to (or better than) the Service Specifications. No Resale (Pg 101, cl 11) The service is provided for Customer's own use and in no event shall Customer be permitted to resell the Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorization to do so, any orbital location within 5 degree of such orbital location) as the satellite used to provide such Service. Service Transponder (pg 107) Shall mean the specific transponder utilized to provide the Service, as such transponder may be changed from time to time by NSS in its sole discretion. Suspend Service (Pg 107) Shall mean to deny Customer access to the Service Suspension (Pg 107) Shall refer to a denial of access to the Service Transponder (Pg 107) Shall mean any of the Transponders on the Satellite (or, if applicable, the Replacement Satellite), including the transponder utilized to provide the Service. Appellant's Submissions - It is submitted that transponder is mean to itself in provision of the services and not an end itself. 23. Referring to the above terms, it was pleaded that the following conclusions can be drawn:- (1) The agreement is a service contract and that the payment received by the customers is correctly referred to as 'service fee'; (2) The customers do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the following decisions:- (i) Bharat Sanchar Nigam Ltd. v. Union of India [2006] 282 ITR 273 (SC). (ii) Dell International Services India (P.) Ltd., In re [2009] 308 ITR 37 (AAR - New Delhi), observations at pages 56-57. (iii) OECD Tag Report paras 32 to 35. 27. It was submitted that causa causans of the consideration is the use or right to use which will make it fall within the purview of 'Royalty'. 28. Reference was made to the decision in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 (Mad.) (Skycell) to contend that the services provided by the assessee are in no way different from the services provided by the assessee in that case. It was submitted that the Tribunal in Pan AmSat's case has followed the said decision and distinguished the Asia Sat's case. In this regard, reference was made to the following paras from both the decisions of Asia Sat's case and Pan AmSat's case:- (i) Asia Sat's case para 64, (ii) Pan AmSat's case para 23. 29. It was submitted that ITAT in the case of Asia Sat failed to appreciate that there is no difference if the ultimate consumer received the signal directly from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot general or publicly available. Referring to the decision of Asia Sat's case in para 6.17, it was submitted that it was held that the plain construction of the word use refers to deriving advantage out of it by employing for said purpose. There should be a physical contact of the signals of the TV channels with the process in the transponder provided by the assessee. It is only when those signals come in contact with the process in the transponder that the desired results are produced. It is not necessary that process must be used by the customers and the only requirement is that process must be used. It was submitted that these findings in the case of Asia Sat are erroneous for the reasons discussed hereinafter. 33. It was submitted that payments made for the use or right to use presupposes that customers should themselves be in the control or possession of the said right, while they utilize the asset for the purpose of their business. Reference was made to the report of the Technical Advisory Group (TAG) of OECD in which the scope of payments made for the use of equipment in the context of electronic commerce related issues has been considered, as a number of tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce Ruling Authority (AAR) in the case of Dell International Services India (P.) Ltd. It was submitted that the issue before AAR was whether the amounts payable by Dell International to B.T. America under the terms of 'B.T. private line connect service schedule' is in the nature of royalty or fee for technical services (FTS) within the provisions of the Act and DTAA. Under the agreement, B.T. America was responsible for providing connectivity services to Dell International i.e., two way transmission of voice and data through telecom bandwidth. The matter was concluded in favour of the assessee by the AAR and it was held that connectivity payments are neither in the nature of royalty nor FTS. It was, submitted that the above decision of AAR is applicable to the case of the assessee as in the case of assessee the customer merely makes use of the facility and does not itself use the equipment. 35. It was further submitted that the Dell International Services India (P.) Ltd.'s case decision was later on followed in the case of ISRO Satellite Centre (ICAC), In re [2008] 307 ITR 59 (AAR-New Delhi) which also supports the case of the assessee. This decision was cited to high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the above commentary it was submitted that if the activity of the assessee is seen in the light of the agreement entered into by it with the telecommunication companies, then the consideration received by it cannot be termed to be as royalty. It was submitted that the assessee did not provide any right to use to its customer, therefore, the receipts cannot be termed of being in the nature of royalty under the provisions of DTAA. 38. Reference was made to the decision in the case of Diamond Services International (P.) Ltd. v. Union of India [2008] 304 ITR 201 (Bom.). It was submitted that Gemological Institute of America (GIA) was grading the diamonds and was issuing certificates stating the properties such as colour, carat, etc. of the diamonds worldwide. The certificate issued by GIA is regarded as evidence of the quality of diamonds. The Indian customers were required to make payments for grading and certification reports based on invoice raised by the assessee. It was the case of revenue that payments made by the Indian customers to GIA were covered by definition of royalty within the meaning of Explanation 2(iv) to section 9(1)(vi) and Article 12 of DTAA between India and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by reference to the meaning of words associated with it; such a broader doctrine is broader than the maxim Ejusdem Generis. Reference was made to the following decisions where such doctrine has been elaborated:- (i) State of Bombay v. Hospital Mazdoor Sabha AIR 1960 SC 610 (ii) Oswal Agro Mills v. Collector of Central Excise 1993 Suppl. (3) SCC 716 (iii) Asstt. Collector of Central Excise v. Ramdev Tobacco Co. [1991] 2 SCC 119 (iv) Kavalappara Kottarathi Kochuni v. State of Madras Kerala AIR 1960 SC 1080 (v) Amar Chandra Chakraborty v. Collector of Excise AIR 1972 SC 1863 (vi) Siddeshwari Colton Mills (P.)Ltd. v. Union of India AIR 1989 SC 1019 42. It was submitted that in some of the DTAA's satellite services have specifically been stated to be royalty and reference was made to the following DTAA's:- (i) Indo-Hungary DTAA .... Pgs 273-275 at pg 274 PB-III (ii) DTAA between Australia and Czech Republic.... Pgs 276-278 at pg 277 PB-III (iii) DTAA between Australia and New Zealand.... Pgs 279-281 at pg 280 PB-III 43. It was further submitted that, in any case, the consideration received by the assessee is not a consideration for secret proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. References Sama Alana Abdulla v. State of Gujarat AIR 1996 SC 569 at pg 571, paras 7 and 8 and Mohd. Shabbir v. State of Maharashtra AIR 1979 SC 564 at pg 565, para 4. (v) Punctuations do carry weight provided they do not give an absurd result. (vi) Reference may be made to Indo-Sweden DTAA were in secret formulae and process are used interchangeably. Reference Indo-Sweden DTAA dated 23-1-1959 and Indo-Sweden DTAA dated 17-12-1997. (vii) Indo-Syria DTAA comma is used between words secret formulae and process 45. Lastly, it was submitted by Ld. Sr. Counsel that the consideration received by the assessee also does not fall within the category of equipment royalty . It was submitted that equipment royalty is not included in the definition of royalty applicable to the case of assessee for the assessment years involved in these appeals. It was submitted that prior to substitution of Notification No. SO 693(E), dated 30-8-1999 with retrospective effect from 1-4-1998 the term royalty as used in Article 12(4) means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r holding so, definition of royalty provided in clause (iii) of Explanation 2 to section 9(1)(vi) of Income-tax Act has been referred. It was submitted that the Assessing Officer also took the view that amount received by the assessee fell within the Article 12.3 of the DTAA as the payment received by the assessee was a payment for the use of a secret process and for holding so reliance has been placed by the Assessing Officer on the decision of Asia Sat's case. Ld. CIT(A) has agreed with the reasoning of the Assessing Officer so as it relates to receipts from residents are concerned. However, Ld. CIT(A) reversed the order of Assessing Officer insofar as it relates to assessee's receipt from non-resident T.V. channels. Ld. AR has referred to Article 12.3 of DTAA and section 9(1)(vi) of Income-tax Act, 1961. To contend that there is no liability of the assessee to be assessed under Indian Income-tax Act, 1961, it was pleaded that the word for as existing in the definition of royalty is very important. It was submitted that the amount received by the assessee do not constitute consideration received for the use of any patent, invention, model, design, secret formula or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds provided by cellular service providers through subscribers would attract sales-tax, it was observed by their Lordships that the question depends entirely upon the intention of the parties and if the SIM card was intended by the parties to be a separate object of sale, then, sales-tax would be leviable thereon. It was found that such SIM card was merely a part of services rendered by the cellular service providers and the same was held not to be charged separately for sales-tax. 53. Further reference was made to Special Bench decision in the case of Motorola Inc. v. Dy. CIT [2005] 95 ITD 269 (Delhi). It was submitted that the assessee in that case was supplying telecommunication equipment to Indian companies who were setting up cellular telephone networks in India. The equipment so supplied consisted of two components, viz., hardware and software. Sale of equipment was completed abroad. It was the case of the Department that payments for the software component of the equipment was an income deemed to accrue or arise in India under section 9(1)(vi) of the Act as the same constituted royalty and such contention of the Department was rejected by the Special Bench for the reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of 2005, dated 31-8-2007], copy of which is filed at Item (k), in the Paper Book filed by him. Referring to the decision it was pointed out that the issue considered by the Tribunal was whether inter-connection and port/access charges paid by the assessee (here a cellular service provider) to BSNL by providing inter-connection and access facilities constitute fee for technical services so as to attract section 194J of the Act and following the decision of the Hon'ble Madras High Court in the case of Skycell it was held that payment was not for technical services. 58. Reference was also made to decision of Delhi Tribunal in the case of Dy. CIT v. Estel Communications (P) Ltd. [IT Appeal No. 3375 (Delhi) of 2007, dated 10-3-2008], copy of which is filed at item (j) of the paper book filed for case laws. In that case, the assessee was providing data routing inter-connection services which was considered to be fees for technical services to attract section 195 of the Act and the Tribunal, following the decision in the case of Skycell has held that section 194J was not applicable. For raising similar proposition, reference was also made to decision of Chandigarh Bench in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or use of a process, then also, such payment cannot fall within the definition of royalty as such payment should be for exploitation of an Intellectual Property Right (IPR). It was submitted that the word process in clause (iii) of Explanation 2 to section 9(1)(vi) of the Act J1lust necessarily refer to a proprietary process on the principle of ejusdem generis and noscitur a sociis because the word process appears along with the words patent, invention, model, design, secret formula and trade mark all of which are indisputably IPRs. Further, laying stress on the words similar property , it was submitted that it clearly indicates that all the items referred in the said clause must be IPRs. It was submitted that transmission process in the satellite is not an IPR at all and, hence, does not fall within the ambit of said clause. 63. Without prejudice to above arguments, it was submitted that the words use or right to use in the said clause require that the payer must acquire the right to commercially exploit the patent, invention, model, design, secret formula or process or trade mark or similar property. It was submitted that a person buying a patented product or goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the ambit of definition of royalty . 66. Without prejudice, it was submitted to treat such consideration as royalty, it is necessary that services should be rendered in India. To substantiate, reference was made to the decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408. In that case the assessee entered into a composite, indivisible turnkey project for setting up of a gas terminal in Gujarat. The contract consisted of both offshore and onshore services. It was not disputed that the assessee had a business connection in India under the Act and that it had a permanent establishment in India under the provisions of the relevant treaty and there was also no dispute regarding the taxability of the onshore supplies and the onshore services. The dispute relates only with regard to taxability of the offshore supply and offshore services component. According to the Department, offshore components were taxable in India under section 9(1)(vi)(c) of the Act as they were payments made by a non-resident in respect of services utilized by a business or profession carried on by such non-resident in India or for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation to section 9, such income should not be taxed in the hands of the assessee. 70. It was further submitted that having shown that income of the assessee could not be taxed under domestic law, it is also pleaded that consideration received by the assessee cannot also be taxed under the provisions of DTAA. Reference was made to Article 12 and it was submitted that the use of word for in Article 12.3, represents the use or right to use any secret process because the dominant purpose of the payment and intention of the parties in making payment is the performance by the assessee of the task of provision of a facility by way of telecasting the customer's programmes. He submitted that in other words, the payments received by the assessee are not for the use of any process as such. It was submitted that the word secret attached to formula goes with the word 'process' also and for this purpose ld. Counsel placed reliance on the decision of the Tribunal in the case of Pan AmSat. It was submitted, under the Treaty even the process should be a secret process, so that the payment, therefore, if any may be assessed in India as a royalty. Thus, it was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable teleport to uplink/downlink the signals and his client docs not play any role in uplinking/ downlinking activity. The customer provides transmission plan in writing to Asia Sat which ensures that one customer's use of services does not interfere with other customers' use of the similar services and as a part of agreement the customers are provided with the parameters which would be required to be complied with for availing the data transmission services. The assessee operates and maintains the satellite through the tracking, telemetry and control subsystem which is located in Hong Kong. No portion of the control of the satellite, control centre or any other infrastructural facility used by the assessee for providing the service lies with the customer. It was submitted that if there is an unauthorized signal which the satellite receives, the assessee will be able to jam the same, so that satellite docs not beam the signal back to the footprint. The agreement entered into by the assessee is titled as Transponder Utilization Agreement . Referring to the terms of model agreement entered into by the assessee with Satellite Television Asian Region Ltd. (STAR), Hong Kong, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lites or the satellite and in any event shall fail to rectify such defaults within twenty-eight (28) days of the receipt by it of notice from AsiaSat requiring rectification of the same. 11.6 In the event of any termination of this agreement pursuant to clause 11.3 and provided that the Customer has paid to Asia Sat the Default Payment due, AsiaSat shall use all commercially reasonable efforts to market the Transponder Capacity and in the event AsiaSat subsequently reaches an Agreement to provide service to a third party via the Transponder Capacity during the period the Transponder Capacity otherwise would have been provided to the Customer, AsiaSat shall remit to the Customer as a refund of the Default Payment any utilization fees (other than refundable amounts, including but not limited to deposits) it receives and is entitled to retain such third party with respect to such Transponder Capacity, applicable to such period, less all reasonable expenses and costs incurred by Asia Sat in obtaining Agreement with such third party, upto the amount of the Default Payment paid by the Customer for such Transponder. 12. LIMITATION ASIASAT'S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... process is one means of insuring that the customer's desired performance is achieved without creating or receiving harmful interference with other services. Note that there are other actions that the Customer must complete for the service to be activated. These actions are not AsiaSat's direct responsibility. Annexure 4 Page 97 of the Agreement 2.0 NETWORK DESIGN/TRANSMISSION PLAN SUBMISSION ... after service has been established customers may wish to add new earth stations, expand their service change capacity or otherwise modify their service. In any of these event, an updated transmission plan to reflect the existing and new service requirements should be submitted for review and approval. Annexure 4 Page 98 of the Agreement TRANSMIT EARTH STATION OF QUALIFICATION Approval of the transmission plan does not authorize a customer to begin transmission. Upon test plan approval the customer will be requested to perform earth station antenna and/or electronics qualifications tests for earth stations which are not type-approved. AsiaSat will coordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial, or third party rights or any other matter which may result in or put AsiaSat at risk of the termination, revocation, suspension or curtailment of AsiaSat's rights to operate the satellite or which may result in AsiaSat or any of its assets, officers or employees becoming subject to criminal, civil or similar proceedings. 11 TERMINATION AND THE EFFECTS OF TERMINATION 11.1 (b) The retirement by AsiaSat of the satellite from operation in order to comply with any applicable laws provided that AsiaSat shall use all reasonable assets to give the customer at least ninety (90) days notice of such retirement. 12. LIMITATION OF ASIASAT'S LIABILITY 12.1 The customer acknowledges the inherent risks in launching, operating and providing satellite services and agrees that the customer's sole relief or remedy, hereunder, whether the event of the inability of AsiaSat to provide the Transponder or Transponder Capacity or the failure of the Transponder or Transponder Capacity to operate as a Successfully Operating Transponder or otherwise howsoever unless arising out of AsiaS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement provide for technical specifications which are required to be fulfilled by the customer to ensure that Asia Sat is able to provide its transmission services. Merely because the customer is required to install earth stations or configure its facilities does not in any way change the character of the agreement from a service contract to a use/joint use of the satellite/transponder by the customer. In fact, setting up the earth station is an essential requirement for the customer to enjoy the services of the company. The company starts providing the transmission services after the earth station/ground facilities of the customer has been setup. (iv) Asia Sat provides the services by using its satellites and other assets, etc. The possession and control of the satellites (including the transponders in the satellites) are at all times with Asia Sat only. The possession/control never pass to the customer. It is clearly provided in the agreement that- (a) the telemetry, tracking and control in relation to the satellite remains with Asia Sat (page 16 of the agreement). (b) Asia Sat has the power to pre-empt the customer from using its satellite so as to protect the functionin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be said to be an agreement for providing services. It was submitted that in the said clause assessee has agreed to provide transmission services to the customers for using pre-agreed transponder capacity. In the course of availing the services, it is possible that the customer may not be able to utilize the services in full, as a result of which some portion of the transponder capacity may remain unutilized and in such a situation, the customer has been provided a right to assign/enter into special utilization agreement with other parties (as mentioned in clause 8 of the agreement), so that the entire transponder capacity can be utilized by Asia Sat to provide the complete range of services to the customer or his sub-user/assignee. It was submitted that such right of the customer cannot change the basic purpose of the agreement which is to provide the transmission services to the customer or his assignee. 78. It was submitted that it has been the case of the Department that secret information relating to setting up of earth station is being provided by the assessee to its customer and, thus, the contract entered into by the assessee with its customer is one for the right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of transmitting voice, data and programme belonging to its customer to the footprint area of the earth. For rendering such services the assessee is using his own satellite and other facilities. The agreement is not for conferring to the customer any right to use any process or equipment or any other asset. All assets including the satellite and transponders therein, process in the satellite/transponder and other equipments belonging to the assessee are used exclusively by the assessee-company to provide services to its customers. 81. Coming to the legal submissions it was submitted that the payments received by the assessee should properly be characterized as payments for performance of services and constitute business profits which are not chargeable in India. It was submitted that it is an admitted position that none of the business operations of the assessee are carried out in India and, therefore, no part of its receipts/income can be taxed in India. It was submitted that to accomplish the task of providing telecommunication services, the infrastructure including satellites are under the control of the assessee through its employees who are not based in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use or the right to use . Similarly, it was pointed out that according to UN model the consideration should be for the use or right to use . It was submitted that although payment made for the use of equipment are currently included in the scope of royalties under the UN model tax treaties, the same is currently not included in the scope of royalties under the OECD model. Earlier the OECD model tax treaties contained such a provision, however, by virtue of the amendments made to such model in 1992, payments made for the use of equipment, were excluded from the scope of royalties . Reference was made to the TAG report dated 1-2-2001 to contend that the said report considered the scope of payment made for use of equipment in the context of electronic commerce related issues and following tests were laid down to make a transaction to be treated as royalty for use of equipment:- (a) The customer is in physical possession of the property. (b) The customer controls the property. (c) The customer has a significant economic or possessory interest in the property. (d) The provider does not bear any risk of substantially diminished receipts or substantially increased expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amounts payable by the customers to Asia Sat as Royalties under the Act. The transactions are merely in the nature of provision of services. 84. It was submitted that as per principles of interpretations, reference can be made to other statutes dealing with the same subject and forming part of the same system on the basis of doctrine of pari materia as per decision of Hon'ble Supreme Court in the case of Ahmedabad Pvt. Primary Teachers' Association v. Administrative Officer [2004] 1 SCC 755. For raising similar contention reliance was also placed on the following decisions:- (1) Kalyan Municipal Council v. Usha Ranjan Bhadra [1990] 184 ITR 80 (SC). (2) CWT v. Imperial Tobacco Co. of India Ltd. [1966] 61 ITR 461 (SC). 85. Referring to these decisions it was submitted that since the Income-tax Act and OECD model tax treaties deals with the same subject, viz., the levy of income-tax, the report of TAG of the OECD on interpretation of OECD model tax treaties and commentaries of international authors should be relied upon to interpret similar provisions contained in the Act and the treaties on the basis of doctrine of pari materia. 86. To contend that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions involved transfer of right to use goods which is chargeable to tax and it was held that the transfer of the right to use the goods, which may be by way of leasing, letting or hiring involves the transferor permitting the transferee to use his goods. To constitute such transfer, there should be delivery of possession of the goods by the transferor to the transferee, that is transfer of the effective and general control of goods with the right to use the goods, as distinct from a mere custody of goods, from the transferor to the transferee. Reliance was also placed for raising similar contention on the decision in the case of Alpha Clays v. State of Kerala 135 STC 107. Referring to these decisions, it was submitted that there is no use or right to use involved and, thus, the transaction cannot be called to be in the nature of royalty. 88. Reference was made to the decision in the case of S.P. Gupta v. President of India AIR 1982 SC 149 to contend that what is binding is the ratio of the decision and the principle underlying the same and not the conclusion. Reference is also made to raise similar contention to the decision of Hon'ble Supreme Court in the case of Dalb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Signal Amplification Yes (uplink path loss - 162 dB downlink free space loss - 185 dB) Yes (uplink path loss - 162 dB downlink free space loss - 196 dB) On-Board Data Storage No No 93. Thus, it was submitted that the ratio of decision of AAR in the case of ISRO is duly applicable to the present case. 94. Referring to the decision in the case of Dell, it was submitted that in the said case the company was mainly engaged in the business of providing call-centre, data processing and information technology support services to its group companies. Dell India entered into an agreement with Connect Service Schedule (CSS) with BTA. CSS was relating to underwater sea cable facility from Ireland to India provided by BTA. Dell India used the facility and, hence, has nexus with the activities of the applicant in India and the question for consideration before AAR was that whether the amounts payable by the Dell India under CSS would be in the nature of royalty or fee for included services as per article 12 of the Treaty or section 9(1)(vi)/(vii) of the Act. It was held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. In example 2, the manufacturing company is Indian company who produces a product that must be manufactured under sterile conditions using machinery that must be kept completely from all bacterial or other harmful deposits. The US company has developed a cleaning process for removing such deposits from the type of machinery. The US company enters into an agreement with Indian company under which the former will clean the latter's machinery on regular basis. As part of arrangement the US company leased to the Indian company a piece of equipment which allows the Indian company to measure the level of bacterial deposits on its machinery in order for it to know when cleaning is required and it was analysed that the services were ancillary and subsidiary. Rental of monitoring equipment, therefore, were not fee for included services. 96. Referring to these examples it was pleaded that intangible asset (like process) can be granted on a right to use basis to another party which is like tangible asset. 97. To contend that the consideration received by the assessee cannot be taxed as royalty even under clause (vi) of Explanation 2to section 9(1)(vi), it was submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that it is also not the case of the revenue that any of these clauses arc applicable. Above arguments have been summarized in the following conclusion:- (a) Asia Sat is engaged in the business of providing telecommunication services. These services are provided outside of India. (b) Asia Sat is not engaged in letting out or leasing or imparting its telecommunication network or facility (including the satellites) to its customers. The payments received by the Company arc for performance of services only. (c) In the course of rendering the services, Asia Sat docs not allow any use of, nor does it give any right to use, its assets (whether tangible or intangible including process) to its customers. The Company uses its own assets and satellite network including the processes to provide services to the customers. It could not be considered to have received any amounts for allowing the use of, or the right to use, any process or other tangible or intangible asset or equipment by any person. 101. In the alternative, it was submitted that even if it is assumed that the assessee has granted a right to use the process to its customer, such right to use must be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty only if the same is paid for secret process, reliance is placed on article 12(3)(a) of the Treaty between India and Sweden. It was submitted that several Indian Treaties including Treaty with Greece used the phrase secret process or formula [64 ITR (St.) 86]. It was submitted that India's Treaty with Austria, Belgium and France, originally used the phrase secret process or formula , but were specifically amended to use the phrase secret formula or process and the said change was only brought to bring the statutory language in conformity to the language used in UN Model Convention. It was submitted that two phrases viz., secret process or formula and secret formula and process mean one and the same. 106. Reference was also made to the decision of Hon'ble M.P. High Court in the case of CIT v. HEG Ltd. [2003] 263 ITR 230 wherein it has been held that information which is in public domain would not fall within the ambit of royalty under the Act/Treaty. To have the status of royalty, the information must have special features where some sort of expertise or skill is required and it was submitted that the decision in the case of Dun Bradstreet Espana SA, In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process to its customers such right to use must be in relation to secret process for it to be qualified of being royalty. 109. Reference was made to the decision of Privy Council in the case of Lewis Pugh Evans Pugh v. Ashutosh Sen AIR 1929 PC 69. It was submitted that the Privy Council while interpreting the provisions of articles 48 and 49 of the Indian Limitation Act, 1908 observed that: The truth is that, if the article is read without the commas inserted in the print, as a court of law is bound to do, the meaning is reasonably clear.... 110. Reference was made to the decision of Hon'ble Supreme Court in the case of Ashwini Kumar Chose v. Arbinda Bose AIR 1952 SC 369 to contend that punctuation is only a minor element in the interpretation of the statute and it cannot control the meaning of the text. To raise similar contention, reliance was placed on the decision in the case of Pope Alliance Corpn. v. Spanish River Pulp Paper Mills Ltd. AIR 1929 PC 38. 111. Referring to these decisions it was pleaded that the 'comma' or similar punctuation mark has only minor role to play in the interpretation of the statutes and the same cannot be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some job independently or with the help of other tools. It was submitted that the Tribunal has held that transponder which is used by Asia Sat for receiving and then retransmiting the signals belonging to the customer cannot qualify as equipment in itself. A transponder is not capable of performing any activity if it is divorced from the satellite. The transponder in itself without other parts of the satellite is not capable of performing any function since satellite is not plotted at a fixed place and, thus, the Tribunal concluded that payment for leasing out the transponder to the customers cannot be equated with the leasing out of the equipment so as to qualify as giving rise to a royalty payment. 114. It was submitted that the order of the Tribunal in assessee's own case - Asia Sat does not lay down the correct law wherein the revenue earned by assessee is held to be taxable under the definition of royalty contained in section 9(1)(vi) of the Act. To contend so, the reference was made to arguments which have been recorded above. It was submitted that ITAT failed to appreciate that no use or right to use with respect to any asset (tangible or intangible) was grant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'process' on the ground that there is no 'comma' after the word 'process' in clause (iii) and detailed arguments have already been submitted in this regard to show that to constitute royalty the word 'process' must be understood to be a secret process and for that purpose reliance has been placed on various decisions. Concluding the argument, it was submitted that the decision of Division Bench given in the case of the assessee is bad in law and should be overruled by the Special Bench. Arguments by Shri Y.K. Kapoor, Ld. Special Counsel appearing for the Revenue 115. It was submitted by ld. Counsel that the controversy under adjudication by the Special Bench is mainly concerned with the interpretation of legal definition of royalty provided in Explanation 2 to section 9(1)(vi) of the Income-tax Act, 1961 (the Act) as well as in article 12 or 13 of the applicable Treaties. It was submitted that it has been the case of the revenue that payments made by the telecasting companies/broadcasters (customers) to the satellite companies for use of transponder to uplink, amplify, process and downlink content rich programmes developed by them are charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ma in the Treaty. (b) The other argument referred to by the learned counsel appearing for the assessee in this case was that the payment so made by the broadcaster to the satellite company are for the use of services and thus being its business income and the satellite company having no permanent establishment in India, its receipts are not taxable in India. (c) It was also contended by the learned counsel for the assessee that the payments are not for the use or the right to use the process. (d) It was the case of the assessee that for the payment to be qualified as royalty, it has to be payment for the use of intellectual property right which according to the assessee, is not the case here. (e) It was finally contended that the payment if any does not even constitute consideration for the use of secret process. (f) That at the outset it is most respectfully submitted by the revenue that an argument has been made by the appellant that this is not a payment within the meaning of clause (iva) of Explanation 2 of section 9(1)(vi) of the Income-tax Act. On this issue a detailed submission has been made in the later part of this submission. (g) The counsel for the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system. All of them have a transponder. All of them have an altitude control system. The ACS keeps the satellite pointed in the right direction. 121. Describing the details about transponder it was submitted that it is an electronic device used to wirelessly receive and transmit electrical signals. Describing the definition of transponder from various technical websites it was submitted as under:- (a) A satellite transponder receives signals from the earth and transmits signals back to the earth. A transponder usually receives on one frequency and transmits on another. (b) Equipment in the satellite that receives a signal unlinked from a teleport on the ground, amplifies it, converts it to a different frequency and re-transmits it to the ground so that every household with a dish within the footprint of the satellite can receive the signal. www.satellite.se/ordlistaen.html (c) The device in a communications satellite that receives signals from an uplink on earth and transmits it back to earth (downlink). It is used by cable programmers to deliver signals to local cable systems. www.factmonster.com/ipka/A0776021.html. (d) Satellite equipment that receives signals on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these information types is becoming popular as satellite transponders can deliver data rates in the range of 50 to 150 Mbps. Achieving these high data rates requires careful consideration of the design and performance of the repeater. It is submitted that most cycle impairments to digital transmission come about in the filtering, which constraints bandwidth and introduces whole distortion, and the power amplification, which produces an AM/AM and AM/PM conversion. For maximum power output with the highest efficiency (e.g., to minimize solar panel DC supply), this amplifier should be operated at its saturation point. However, many services are sensitive and susceptible to AM/AM and AM/PM conversion, for which back off is necessary. With such an operating point, inter-modulation distortion can be held to an acceptable level; however, back off also reduces downlink power. 124. The transponder takes signals from the uplink earth station on a frequency f1, amplifies it and sends it back on a second frequency f2. The guard band assures that the transponders do not interact with each other, therefore, transponder itself, which are leased are separate equipments. 125. It was submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place where it has to be telecasted and the time of telecast is of the customer and the parties have agreed for un interrupted me of the satellite against payment on 14 X 7 basis for the period mentioned in the agreement and such result of beaming the programme can be achieved only when the customer has an exclusive right to use the satellite or the process which is embedded therein. It was submitted that we are familiar with the concept of breaking news displayed on the TV screen while watching a programme. It was submitted that unless and until customer has an access to the process, the news cannot be telecasted in the manner and at a particular time for which customer wants and, therefore, keeping the exigencies of the business, the broadcaster and the satellite company have entered into an agreement whereunder the use and right to use the process is given to the customer and the background in which the use or right to use is given to the customer is only to safeguard the interest of the customer, so that tomorrow it may not come and say that programme was delayed or not telecasted. 129. Ld. Special Counsel referred to the new Telecom Policy 1999 (India) which inter alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement itself for use to the customer. Every transponder is identified with a separate name and the transponder once allotted to one customer in the agreement cannot be changed by the assessee later on; until and unless it has the permission from the customer. Even if telecaster customer require more capacity, the personnel at their station do not technically add bandwidth to a customer and do not provide the services, but rather allow ad4itional channel(s) on an existing space approved to be accessed by the customer. Channels are nothing, but the transponders which along with the process are allowed to be used for a periodic payment which is rent , can be given nomenclature by the assessee. Not only this the location of the satellite, which is fixed vis-a-vis one point on earth, if changes, the customer can terminate the agreement. 132. Also, the customer can re-sell the use of a transponder or the entire capacity of the transponder just like a right or product in possession. Thus, it was submitted that what has been held in the case of Pan AmSat is without assigning any reason. 133. It was submitted that the Tribunal in the case of Pan AmSat has wrongly understood the mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eral terms and conditions. Ld. Special Counsel contended that before discussing the other terms and conditions of the agreement it will be relevant to understand the meaning of the word utilize/utilization . It was submitted that these words have been liberally used in the agreement whereby customer is placed in a position under the agreement to utilize the process of the satellite. He contended that as per Webster's Third New International Dictionary at page 2525, the word 'utilize' has been defined as to make useful, turn to profitable account or use, make use of or convert to use. The word utilization has also been defined therein as the action of utilizing or state of being utilized . In Oxford Dictionary the word utilize has been defined verb; make practical and effective use of . He contended that having examined literal meaning of the words, the terms of agreement should be examined to gather the dominant intention of the parties as to whether the customer was given any use or right to use the process of the satellite by the assessee and the first thing which comes across in the definition section of this agreement at page 9, customer is supposed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o coordinate the satellite with other satellite operators. It was submitted that such provision in the agreement belies the claim of the assessee that customer has no role and he is using only a standard facility. It was contended that if it is a standard facility, then no prior permission or plan is required and the customer would have remained a passive recipient of the service provided by the satellite provider which is clearly not the case here. Then, Ld. Counsel has referred to clause 4 of the agreement under the head Deposit and utilization fees . Reference was made to clause 4.2 of the agreement wherein consideration has been mentioned to be for the use of transponder capacity and other services provided by Asia Sat which according to Ld. Special Counsel is not for any standard facility as is contended by the other side. It was contended that reliance is being placed by the revenue on the word for used in the said clause and it is submitted that this clause makes it clear that the consideration is for the use of transponder capacity which use has been granted to customer under the said agreement and it is not for any special facility. It was contended that clause 4 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ains handicapped being unable to process anything. Even after such processing is done after uplink by the customer, until or unless downlinked, the processed signals just get scattered and does not yield anything. It was contended that to illustrate the functioning further following illustration can be cited:- In the case of some breaking news of an event which is exclusively pertaining to Indian affairs, the Indian telecaster or broadcaster are the only entities which by virtue of their infrastructure and expertise have the capability to capture and relay the said event onward for satellite transmission. The bare exigency of such business would in the least require that a customer or telecaster is granted and assured an interrupted usage of the satellite transponder so as to enable him to telecast spontaneous news, occurrences and events which require an immediate broadcast. If the case of the assessee is to be believed that would mean that the customer or the telecaster is in some way dependent upon or handicapped by the right to use the process as alleged to be vesting in the satellite owner which argument is clearly not the spirit of the agreements or the dominant purpose f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to understand the need to have the processes in the hands of the customer/telecaster inspected and the urgency to ensure their correct and proper functioning if, as claimed by the assessee that no processes have been granted or shared by the satellite provider to the customer or the telecaster. Thus, it was contended that the entire process is not privy to the satellite companies. 139. Referring to clause 6.1 of the agreement, it was pleaded that if the customer is not using the process, then, there was no need for the clause to be written in the agreement which states interruptions which are not attributable to negligence or default of the customer which entitles the customer for refund of utilization fees. It is submitted that if customer is not using the process, then, there was no occasion for any apprehension that the process that has come in the hands for usage or operation would be not properly used or operated. In clause 6.4, it has been made clear that no refund in utilization fees will be made if the interruption is the result of or attributable in whole or in part, the failure or non-performance of the customers station or the customers other satellite facilities r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an obligation to provide reasonable ct tails to the assessee regarding the nature of the material that the customer is intending to broadcast and/or the services to be provided by the customer through the use of the transponder capacity. In sub-clause (b) it has been provided that the customer has undertaken to the assessee that he will use all commercial reasonable efforts to ensure that the material which is intended to be broadcast is to provide design and will not cause assessee to violate any applicable law and/or third party rights, In sub-clause (c) Asia Sat has been provided with a right, in addition to desist the customer from broadcasting the material, to suspend customer's use of transponder capacity. 141. Ld. Special Counsel referred to clause 11.3 (a) of the agreement which talks of utilization fee by the customer and it was submitted that it is a pointer to the fact that it is the customer who I is utilizing the process for telecasting. It was submitted that though clause 11 of the agreement talks of termination and effects of termination, clause 11.3(c) also demonstrates that the process is initiated by the customer and used by the customer and ends with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dead piece of matter suspended in the high skies. 144. Similarly, with respect to agreement in the case of Shine Satellite Company, Ld. Special Counsel referred to the clauses 7, 9 and 10 of the agreement and clauses B.3, BA(i), BA (ii), B.6, B-7, B-3, B-9A, B.10, B-11.2 of the Appendix-B to raise the similar contentions and it was submitted that the dominant intention of the parties when they signed the agreement was the use and right to use the process of the satellite or transponder vested in the customer and, therefore, the consideration will fall within the domain of royalty liable to be taxed in India. Further reference was made to the advertisement given by New Skies on their website in which it was mentioned that in order to preserve the high level of service quality and integrity of the SES NEW SKIES space segment we have developed a process by which earth stations are granted access to the satellite. It was submitted that advertisement itself indicated that the customer entered into contract has got access to the transponder and process therein and uses the same for the benefit of achieving satellite communication or messages, information or images that is uplinke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined words corresponding the wider. It is only where the intention of the Legislature in associating wider words and words of narrower significance is doubtful or otherwise is not clear that the rule of noscitur a sociis would be applied usefully. It could be applied where meaning of words of wider import are doubtful, but where the object of the Legislature in using wider words is clear and free from ambiguity, the said rule cannot be pressed into service. Reference was also made to the decision of Hon'ble Supreme Court in the case of Godfrey Philips India Ltd. v. State of UP AIR 2005 SC 1103 and reference was made to the following observations:- We are aware that the maxim of noscitur a sociis may be a treacherous one unless the societas to which the socii belong, are known. The risk may be present when there is no other factor except contiguity to suggest societas. 147. For this purpose, reliance was also placed on the decision of Hon'ble Supreme Court in Rohit Pulp Paper Mills Ltd. v. Collector of Central Excise [1990] 3 SCC 447 to cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facility will be correct only in a situation where the customer who has the telecasting rights of say, a cricket match being held at Gurgaon and wants the same to be screened at Bangalore and for that contact the assessee and issues a limited instructions to this effect and the customer has no earth station, then, in that situation, the process can be said to have been used by the assessee only and it can be said that the assessee is providing only the facility. 149. It was submitted that the revenue is placing reliance on the decision of the Authority for Advance Ruling (AAR) - P. No. 30 of 1999's case where, according to the Ld. Special Counsel, on almost identical facts, it was held that the payments made for such an arrangement will be a royalty. It was submitted that this decision has not been distinguished by any of the counsels appearing on behalf of the assessees. Therefore, it means that they have accepted the reasoning of the AAR. 150. Addressing his arguments on the issue that whether the word secret can be extended to the process also, it was submitted that the view point adopted by the decision of Division Bench in the case of Pan AmSat is erroneous and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an illustrative venture not to be accorded the status of a precedent, more so when the Ld. Tribunal's Obiter have no sanctity in law and such remarks do not form part of the doctrine of Stare decises. (d) That it is further submitted that while the Ld. Bench in the decision of Pan AmSat has mandated departing form the interpretation of the Ld. Bench in Asia Sat citing the onus of the same to lie upon the 'surrounding words' as appearing in the definition of Royalty under the treaty, but the said decision (Pan AmSat) does not offer any elaboration upon the said assertion other that simply mentioning that the 'surrounding words' as occurring in the definition of Royalty under the treaty necessitate departing from the conclusion of Asia Sat. That it is respectfully submitted that since the Ld. Tribunal in the said decision has riot done anything more than just simply mentioning the mystery of surrounding words and has not thought it fit to discuss or dispel the 'mystery of such surrounding words', the conclusion thus arrived at is wholly, non-speaking and devoid of any reason and entirely Un-authoritative. (e) That the Ld. Tribunal in the case of Pan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal are in direct contrast to the decision of the Apex Court reported in AIR 1960 SC 610 AIR 2005 SC 1103 to which decisions the attention of this Hon'ble Bench was also drawn during the hearing and thus the subsequent Division Bench has fallen in grave error in not appreciating that in the definition of Royalty as occurring in the treaty, all classes of intellectual property being copyright, trademark and patent have been indicated and the treaty framers in their wisdom have further travelled great distances to include other properties/categories, such as mode, design, similar property or imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill or use or right to use any industrial, commercial, or scientific equipment or rendering of services in relation to the above, which within themselves are not intellectual properties, because had the same been intellectual properties then there was no need for their separate mention as the same section or article as they already stood covered in one of the three broad classifications of intellectual properties namely, trademark, copyright and patent. The very fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the customer are commercial agreements. The terms, conditions, clauses, schedules and annexures to these agreements are pointer to the use of the process in the transponder by the customer. The customer is assigned a particular band width frequency on which it can uplink and such uplink is only possible after the customer uses the assigned codes and keys to have an access to the protected process contained in the assigned transponder. It was submitted that it is not as if anyone and everyone at his own can access any transponder. There has to be synchronization and matching of the frequencies and codes of the uplinked signal with the recipient transponder. 153. Thus, it was submitted that the consideration received by the assessee in respect of transponder's capacity is taxable under clause (iii) of Explanation 2 to section 9(1)(vi) and without prejudice to the same it was submitted that it can also be taxed under Clause (iva) on the ground that the consideration paid by the customer is for the use or right to use the transponder which is an equipment. 154. It was submitted that part of the bandwidth of each signal satellite transponder can be used independently for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. (ii) Secondly, the expression 'the use of, or the right to use industrial equipment' within Article 11 of the China-US Tax Treaty should be understood to mean the equipment is actively and effectively used by the user. However, during the whole process of signal transmission, all facilities were wholly operated and used by the plaintiff exclusively. The third party was not authorized to and did not, in any way, effectively use any facilities of the plaintiff. The plaintiff's income was not a royalty. (iii) Thirdly, the plaintiff's income was active income which had been acquired through constant work and belonged to the category of business profits. Since the plaintiff did not have a permanent establishment in China, its income should be exempt from China taxes. The defendant contended that:- (a) Firstly, the term 'use' in the China-US Tax Treaty refers to use of both tangible property and intangible property. Use is not necessarily limited to effective operation of the object, which is merely one form of use. The term 'use' should be correctly understood to mean availing of the functions of a certain object to achieve one's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans the third party solely owns the right to use the designated part of the bandwidth. Since the bandwidth is provided by the satellite system, the third party s right to use the bandwidth shall be viewed as the right to use the satellite system. Therefore, payments that the third party made to the plaintiff in consideration for this shall be classified as payment received as a consideration for the right to use industrial, commercial or scientific equipment within the meaning of royalties as provided in Article 11 of the China-US Tax Treaty. Paragraph 2 and para 5(a) of the same article also provides that royalties will be deemed to arise in a contracting State when the payer is a resident of that contracting State. Such royalties may also be taxed in the contracting State in which they arise and according to the laws of that contracting State, but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties. Since the plaintiff's royalty income was sourced in China, the defendant was lawful in rendering fell within the scope of Article 11 of the China-US Tax Treaty and Article 19 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion carried on in India and for the purpose of making or earning income from source in India i.e., business of TV channels in India. It was submitted that source of income lies in the subscription income as well as advertisement income which accrues or arise in India. Reference was also made to the decision in the case of Star Television Asia Region Ltd. v. Dy. CIT [2006] 99 ITD 91 (Mum.) to raise similar contention. 158. It was submitted that to consider the source rule relating to royalty or fee for technical services, neither the location of the property used nor the place for performing the services is relevant. It was submitted that neither the Act nor the Tax Treaty contains such requirement. The source rules are based on payers. It was submitted that observations of the Bench in the case of Pan AmSat that the performance of the services is not in India and is several thousand kilometers above the earth is not relevant when the source rule is applied. It was submitted that para 6.27 and para 6.28 of the decision in the case of Asia Sat it has categorically been held that the source lies in India. 159. It was further submitted that the decisions relied upon by the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;ble Madras High Court in the case of Skycell could not be applied to the cases of satellite companies. Reference was also made to para 6.25 of the Asia Sat's decision to contend that the process was used by the customer and the services were provided in connection with the process and the same falls within the definition of royalty. 161. Referring to the decision of Hon'ble Delhi High Court in the case of Bharti Cellular Ltd., it was submitted that the said case also relates to applicability or otherwise of section 194J of Income-tax Act, 1961 and it was held that the services so provided do not fall within the meaning of the expression technical services . It was submitted that while repelling to contention of the revenue, one of the tests laid down by the Hon'ble High Court was that there should be an element of human interface before a service can be held to be technical service. In the absence of such element of human interface, the contention of the revenue was negatived with the following observations:- It is independently provided by the use of technology and that too, sophisticated technology, but that does not mean that MTNL/other companies which pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rima Heavy Industries Ltd. as relied upon by the other side to contend that the income received by the assessee is not sourced in India and has no business connection in India because of the fact that the signals are received outside India and released out of India and, thus, the receipts, if any, cannot be said to be sourced in India. Reference in this regard was made to the insertion of Explanation in section 9 by the Finance Act, 2007 with retrospective effect from 1-6-1976 which is clarificatory in nature and it was pleaded that in view of that Explanation the reliance on the said decision cannot be placed now by the assessee. 166. Further reference was made to the decision of Hon'ble Bombay High Court in the case Clifford Chance. It was submitted that this judgment also has no application for two reasons:- (1) Issue of royalty was not involved. (2) In view of the amendment carried out in section 9(1)(vii). 167. It was submitted that insertion of Explanation below section 9(2) with effect from 1-6-1976 has made it clear that for the purpose of section 9, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of reasons, the courts cannot perform their appellate function or exercise the power of judicial review in adjudging the validity of the decision. With regard to other decisions relied upon by Ld. AR appearing on behalf of Shin Satellite, it was submitted that those decisions are in respect of 9(1)(vii) and they are distinguishable as per the submissions already made and, thus, they do not have any application on the facts of the present case. 169. Distinguishing the decision of Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. it was submitted that the issue before Hon'ble Supreme Court was service tax as well as sales-tax. Referring to the decision of Apex Court in Jagatram Ahuja v. CGT AIR 2000 SC 3195, it was submitted that words and expressions judicially defined in one statute as judicially interpreted do not afford a guide to construction of the same words or expression in other statute unless both the statutes are pari materia legislations or it is specifically so provided in one statute to give the same meaning to words as defined in other statute. It was submitted that since two statutes i.e., sales tax and income-tax are absolutely differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment received for parting with technical knowledge are royalties which are not IPRs, do qualify for royalty, but in the peculiar facts of the case, since no technical knowledge was imparted, the payments were held to be royalty, but not otherwise. 173. Referring to the commentary written by Klaus Vogal relied upon by the other side, it was submitted that learned author referred to the secret formula or process and proceeded to observe that this covers know-how in a narrower sense of the term viz., of business secrets or commercial or industrial nature. In most countries they enjoy a relative protection or capable of being protected. It was further observed by learned author that as a rule, the right to use already comes into existence in these instances by authorized information. Thus, the observations of learned author supports the case of the revenue because at the time of setting up the earth station, the complete technology of the satellite for cohesive working with the earth station in the setting up of which full know-how is imparted or shared is parted with the customer. Thus, it was submitted that in the words of Klaus Vogal the business secrets of commercial natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ld, Counsels of the assessee adjudge the question which are materially different from ones involved in the controversy at hand and the same cannot be pressed into service to advance the case of assessees as the principles or propositions that they duly discussed and settled is far fetched from the questions or issues involved in the present case pending determination by the Special Bench. It was submitted that the essence of the judgment or the ratio dicidendi is the binding principle which a ruling lays for all future references. In examining the applicability of the judgment to a particular set of facts, it is well-settled that it is the ratio of a decision that determines the force of applicability of a judgment to a particular set of facts. For this purpose, reliance was placed on the decision of Hon'ble Supreme Court in the case of Jagdish Lal v. State of Haryana [1997] 6 SCC 538 and CIT v. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297. 178. We have carefully considered the rival contentions in the light of the material placed before us. The assessee (satellite companies) operates geostationary satellites either owned by them or obtained on lease. Several transponder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the instruments installed by telecasting companies at their earth station are compatible enough to uplink the data and to downlink the same in a way that best results are obtained. If the uplinked signals have poor quality, then probably the down linked signals will not have any quality better than the quality of signals which have been unlinked. In other words, the job of satellite companies is highly scientific job and it requires high scientific skill to produce the desired results. The activities of the satellite companies as well as telecasting companies are commercial activities so as to earn maximum profit out of it. 180. Proceeding further, for proper appreciation of the issue, it will be relevant to discuss certain provisions of Income-tax Act, 1961 relating to taxation of income of non-residents. Section 5(2) defines the scope of income relating to non-residents. Section 5(2) reads as under:- (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 183. So as it relates to question No. 1, as proposed to be answered by the Special Bench, it may be mentioned that the process whether it is secret or otherwise is involved in the transponders installed on the satellite. Satellite is only a space vehicle, which is a necessary equipment to enable satellite companies to place the transponders at a particular height necessary to receive and relay the signals in a particular footprint area . The process to uplink and downlink the data/signal is involved only in transponders. However, transponders in themselves are not able to do the task of uplinking and downlinking the data transmitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. The telecasting companies are paying revenue to the satellite companies. Both of them are carrying on these activities in commercial manner. Under these facts, we have to consider that whether or not such revenue is taxable in the hands of satellite companies under domestic law as well as under the provisions of DTAA as applicable in respective cases. 185. While examining the taxability of such receipts in the hands of satellite companies, the Division Bench of this Tribunal in the case of Asia Sat has held that such receipts are taxable as per Clause (iii) of Explanation 2 to section 9(1)(vi). Thereafter, this issue was again examined by the Division Bench of this Tribunal in the case of Pan AmSat wherein the Division Bench agreed with the conclusion drawn in the case of Asia Sat, but on the basis of difference between definition of royalty given under domestic law as compared to definition provided in Double Taxation Avoidance Agreement (DTAA), it was held that there being comma after the word secret formula or process , the definition of royalty as interpreted by the Tribunal in Asia Sat's case could not be applied in a case where provisions of DTAA are a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies themselves use the said process. According to their arguments, as per various views given in commentaries and decisions, the use of process should be by the person who is availing the benefit for the consideration. In other words, the main contention in this regard of satellite companies is that user of the process by satellite companies themselves does not fall within the ambit of word 'use', therefore, the consideration is not in the shape of 'royalty' which could be taxed either under domestic law or under the provisions of DTAA. Whether the use or right to use the process is vested with satellite company or with telecasting company 187. For contending that the consideration received by satellite companies from their customers in respect of transponders capacity cannot be regarded as royalty within the meaning of either section 9(1)(vi) of Income-tax Act, 1961 or Article 12.3 of the respective DTAA, it has been the contention of the ld. Representatives of the assessees that neither user is provided to the customer nor any right to use has been provided. Therefore, consideration does not fall within the term royalty . On the other hand, it has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasoning: 191. Therefore, a meaning interpreted for one word in the statute under one context mayor may not be relevant for another context. As mentioned earlier, a transponder installed in a geostationery satellite is scientific equipment. A process has been embedded therein by which it is receiving the uplinked signal and after providing the required strength to the uplinked signals, it retransmits those processed signals to the footprint area of satellite. It is mentioned earlier that the existence of process in the satellite is not even denied by the ld. Representatives of the respective assessees. It has also been mentioned earlier that a transponder is designed to act in a predetermined and predefined manner as per re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the process is embedded in the transponder, which is used by the customers and not by the satellite companies as they do not have any control either on the data to be uplinked/downlinked or on the time of uplinking/downlinking. The only obligation of the satellite companies is to observe that transponder is working properly or not. In other words the obligation of the satellite companies is limited only to keep the health of transponders and satellite in a good working condition so as to ensure the uninterrupted use of transponders by the telecasting companies. Therefore, it cannot be said that the process is used by the satellite companies to uplink/downlink the data of telecasting companies. The process is used by the telecasting companies according to their requirements. 192. It will also be important to mention that practical aspect has also to be kept in mind. It is neither practical nor possible to have the physical control over the transponder either by the satellite companies or by their customers. The control or user if any of the transponder is through the sophisticated instruments either installed in the ground stations owned by the satellite companies or on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transponder capacity (popularly known as segment capacity) by the satellite companies to the telecasting companies. For this purpose, reference can be made to the agreements entered into by the assessees with their customers, a copy of which has been placed on our record and relevant terms contained in the agreements have been referred to show on behalf of the revenue that user of the process is by the telecasting companies and, on the other hand, it has been the case of the ld. Representatives of the assessees that if the substance of the agreement is seen, no user is provided to the telecasting companies, but the assessee is merely providing the services to the telecasting companies. 195. First, we shall refer to the copy of agreement placed on our record on behalf of the Asia Sat. The agreement has been titled as transponder utilization agreement. The agreement entered into by Asia Sat is with Satellite Television Asian Region Ltd. (STAR). At the first page, it is written that Asia Sat is a provider of transponder capacity in Asia. The customer wishes to utilize the services provided by Asia Sat and transponder utilization agreement comprises of various components descri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Capacity does not or will not cause interference to other customers on the Satellite or other satellites and does not or will not adversely affect Asia Sat's ability to co-ordinate the Satellite with other satellite operators. Asia Sat shall promptly following receipt of such details, and in any event prior to the Commencement Date, notify the Customer in writing whether the transmission plans are acceptable to Asia Sat and, if not, shall notify the Customer insufficient detail to enable the Customer to amend the transmission plans and submit such amendments until final acceptance by Asia Sat. Provided, however, the foregoing shall not apply if: (a) the Transponder Capacity had been, and continues to be, utilized by the Customer up to the day before the Commencement Date pursuant to any other agreement; and (b) there is no change in the Customer's transmission plans for its utilization of the Transponder Capacity hereunder from that immediately prior to the Commencement Date. Thereafter, the Customer shall not amend, modify or alter its transmission plans without Asia Sat's prior approval, such approval not to be unreasonably withheld or delayed and Asia Sat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hedule of outages due to effects of the sun expected to occur during the Utilisation Term shall be provided as soon as practicable after the Customer has provided to Asia Sat details of its proposed services and uplink and downlink facilities and shall be revised from time to time as appropriate). 197. Clause 7 prescribes regarding contingencies of transponder degradation and protection and clause 7.3 read as under:- 7.3(a) If all Redundant Units on the satellite have been utilized to provide protection for other transponders on the Satellite, Asia Sat shall use reasonable endeavours to provide protection to the Customer's failed Transponder Capacity through transponders on the Satellite which are operational, freely available to Asia Sat and not being used by other persons or otherwise encumbered and which meet the Performance Specifications (e.g., a C-Band transponder will be replaced by another C-Band transponder, and not by a Ku-Band transponder). Provided that such protection is available, it will be made available as soon as it is technically feasible to do so. The provisions of Clause 7.2(b) shall apply to determine, if necessary, the order by which such transpon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. Thus, it is the satellite company who is making available the transponder capacity to the customer who has agreed to use the same in accordance with the agreement upon making the payment mutually decided consideration. It is only in a case where Satellite Company wants to protect the overall health and performance of the satellite in unusual, abnormal or other emergency situations, it can preempt and interrupt the customer's use of the transponder capacity. Clause 2.4 has granted the right to use the transponder capacity to the customer for preempted services. Clause 4.2 provides that the consideration stated in the agreement is for use of transponders capacity and the other services provided by the Asia Sat. To ensure the proper use of transponder's capacity it has been prescribed in clause 5.1(b) that satellite company will maintain telemetry, tracking and control in relation to the satellite in order to enable it to comply with its obligation under the agreement. This clause shows that the use of transponders capacity by the telecasting company is ensured by the satellite company by keeping and maintaining the satellite in a required particular position. In clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which was proposed to be answered by the court was as under: (a) Secondly, under the agreement, the third party availed itself of the plaintiff's satellite equipment to transmit its television signals. This demonstrated of the plaintiff. Hence, the so called season-based service fees and equipment fees that the third party paid to the plaintiff should be classified as a royalty under the China-US Tax Treaty. The court has held as under:- Article 11(3) of the China-US Tax Treaty defines royalties as 'payments of any kind received as a consideration for the use of, or the right to use, any copyright or literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, technical know-how, trademark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.' The satellite transponder has a function of transmitting signals, or which the third party has to avail itself in order to expand its television reach to regions such as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aning, then only weight should be given to punctuation. Reference in this regard can be made to the following decisions which have been relied upon by the learned representatives of the assessee:- (1) Lewis Pugh Evans Pugh's case (2) Ashwini Kumar Ghose's case (3) Pope Alliance Corpn.'s case. 204. In the case of Lewis Pugh Evans Pugh while construing Article 48 of the Indian Limitation Act, 1908, which read as for specific movable property lost or acquired by theft, or dishonest misappropriation or conversion, or for compensation for wrongfully taking or detaining the same . Lord Warrington rejected the contention that the word 'dishonest' qualified not only 'misappropriation' but also 'conversion' bringing only dishonest conversion within the Article, and observed: The truth is that, if the article is read without the commas inserted in the print, as a court of law is bound to do, the meaning is reasonably clear. 205. In the case of Ashwini Kumar Chose, Justice B.K. Mukherjee observed: Punctuation is after all a minor element in the construction of a statute, and very little attention is paid to it by English Courts - It seems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght of its objects and purpose. Literal meanings of these items are not really conclusive factors in the context of interpreting a tax treaty which ought to be interpreted in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundant. This position of law has been explained by this Tribunal in the case of Hindalco Industries Ltd. v. Asstt. CIT [2005] 94 ITD 242 (Mum.) and the relevant observations are reproduced below:- 9. Before we address ourselves to the aforesaid questions, it is necessary to bear in mind the principles governing the interpretation of tax treaties. It will be useful to briefly touch upon the principles governing interpretation of treaties. Are these principles any different from the principles of interpretation of statutes, and, if so, to what extent and in what manner? 10. Double Taxation Avoidance Agreements are international agreements entered into between states. The conclusion and interpretation of such conventions is governed by public international law, and particularly, by the Vienna Convention on the Law of Treaties of 23rd May, 1969. The rules of interpretation contained in the Vienna Convention, being custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in which the Courts should also approach the construction of any agreement'. We are in considered agreement with this school of thought which lays down the proposition that, strictly speaking the principles of literal interpretation do not apply to the interpretation of tax treaties. To find the meaning of words employed in the tax treaties, we have to primarily look at the ordinary meanings given to those words in that context and in the light of its objects and purpose. Literal meanings of these terms are not really conclusive factors in the context of interpretating a tax treaty which ought to be interpreted in good faith and ut res magis valeat quam pereat, i.e., to make it workable rather than redundant. 208. It can be seen from the above observations that DTAA are not to be interpreted as statute despite the fact that it is an agreement about how taxes should be imposed. DTAA should be interpreted like an agreement. To find the meaning of words employed in tax treaties, one has to primarily look at the ordinary meanings given to those words in that context and in the light of its object and purpose. It has already been pointed out that no material has been brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 9(1)(vi). It will be seen that the definition is wide enough to cover both industrial royalties as well as copyright royalties. Further, the definition specifically excludes income which would be chargeable to tax under the head Capital gains and, accordingly, such income will be charged to tax as capital gains on a net basis under the relevant provisions of the law. 211. Therefore, it can be seen that there is no legislative intent to restrict the scope of royalty rather the intention of Legislature is to make the scope wider. The word royalty has been explained by Hon'ble Madras High Court in the case of Neyveli Lignite Corpn. Ltd. in the following words:- 10. The term 'royalty' normally connotes the payment made to a person who has exclusively right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gory is not exhausted by the enumeration; (4) the general terms follow the enumeration; and (5) there is no indication of a different legislative intent. Reference in this connection may be made to Amar Chandra v. Collector of Central Excise AIR 1972 SC 1863 and Housing Board of Haryana v. Haryana Housing Board Employees' Union AIR 1996 SC 434. 214. Rule of noscitur a sociis has been explained by Hon'ble Supreme Court in the case of Hospital Mazdoor Sabha at pages 613 and 614: Associated words take their meaning from one another under the doctrine of noscitur a sociis, the philosophy of which is that the meaning of the doubtful word may be ascertained by reference to the meaning of words, associated with it; such doctrine is broader than the maxim ejusdem generis. In fact the latter maxim 'is only an illustration or specific application of the broader maxim noscitur a sociis. 'It must be borne in mind that noscitur a sociis, is merely a rule of construction and it cannot prevail in cases where it is clear that the wider words have been deliberately used in order to make the scope of the defined word correspondingly wider. It is only where the intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the definition of royalty as nowhere in the provisions it is stated that the process also should be protected one. Therefore, the process as described in clause (iii) of Explanation 2 to section 9(1)(vi) cannot be construed to be a protected process as argued by ld. representatives of the assessees. The process in transponder is an invention which is quite like intellectual property. However, its position, dimension and physical appearance is such that it cannot be protected like a patent invention, model, design, secret formula or trademark although it is a similar property having all the attributes of such property. It has already been pointed out that scope of royalty cannot be restricted even according to legislative intent. Thus, the consideration received by these assessees for giving the right of user to their customers of the process in the transponder will be a consideration received as royalty to fall within the ambit of clause (iii) of Explanation 2 to section 9(1)(vi). 218. Before dealing with the case law and commentaries, etc. relied upon by ld. AR for construction of word use , it may be mentioned that we have already pointed out that while construing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein. The facts in that case were entirely different from the facts of the present case. The provisions considered therein were also different as they relates to consideration received for information concerning industrial, commercial or scientific experience which are contained in Article 12(3)(a) and clause (iv) of Explanation 2 to section 9(1)(vi) which also deals with the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill. However, in the present case what is considered by the authorities is clause (iii), Explanation 2 to section 9(1)(vi). The word 'use' was considered for the purposes of those clauses only for which there is no relevance in the present case. It has already been elaborately discussed that the word use for the purpose of pres en t appeal is to be cons trued as understood in the trade circle of that particular business activity. 220. It has already been pointed out that existence of comma in the provisions of DTAA after the word secret formula or process does not make any difference and, thus, simply on the basis that there is comma after the word secret formula or process in DT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve difference in this connection is degree of change in the attraction of the asset from licensor to licensee. On the other hand, another definition 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 , via letting to alienation outright alienation is one clear-cut extreme, viz., outright transfer of the asset in favour of the payer of the royalty. The other distinction as clear-cut extreme is the exercise by the payee of the activities in the services 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 and neither extreme comes under article 12, all that does is central category viz., letting. In this regard it may be stated that all these observations are in respect of leasing the property or right. However, in the present case the consideration is paid by the assessee for using the process as described in clause (iii) of Explanation 2 to section 9(1)(vi). It is not even the case of the revenue that it is a case of leasing either of prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; is a wholly-owned subsidiary company of 'Y' and 'XT' is an Indian company wholly-owned subsidiary of 'Z'. 'XT' has set up a 100 per cent EOU for performing activities of 'Data management information analysis and control/for its customers. 'XT' has its own infrastructure in terms of processors/related computer equipment, microwave towers, etc. The applicant-company 'Y' having a world-wide Information Processing Telecommunication Centre in USA, allows its customers such as 'XT' to have access to, and to use, its Central Processing Unit (CPU) in USA against payment. 'XT' uses Y's CPU set up to meet part of its processing needs. The CPU of 'Y' is accessed and used through a Consolidated Data Network (CDN) maintained at Hong Kong. 'XT' has its microwave/worldwide link up to CDN at Hong Kong through VSNL. 'XT' receives information about use of credit cards and travellers cheque by travellers all over the country. The information is then passed on to the Hong Kong Computer Centre of the applicant and 'XT' pays amount of invoices raised by 'Y' after making necessary withhold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment is made to the person who owns the right. (3) The consideration payable is determined on the basis of the amount of use. The answer to the questions was given as under:- 33. The answer to the above question has to be determined with reference to the facts and circumstances of this case mentioned above. We are moving increasingly towards a digital age. With increasing globalization, both labour and capital have become more mobile and markets more integrated and business being conducted across borders on a day-to-day basis. It is well-known that globally, enterprises are becoming completely networked, more so in the field of software, 'Y', in the present case, is a service-provider which, inter alia, allows the 'XT' to use its bandwidth as also its networking-infrastructure for the consideration spelt out in the agreement. In the instant case, though workers are less mobile than the capital and technology, the access to it has been made possible through the CPU CDN. From the facilities provided by the applicant to the Indian company, which are in the nature of online, analytical data processing, it would be quite clear that the payment has been rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s being used by a customer so as to allow the relevant payment to be characterized as payments for use of, or right to use, industrial commercial or scientific equipment and in para 28 it has been observed that various factors have been examined to distinguish rental from service contracts for the purposes of section 7701(e) of US Internal Revenue Code and it was found that those factors are useful for purpose of determining that whether the payments are for the use of or, the right to use, industrial, commercial or scientific equipment and once adopted to the transactions examined by the group, these factors which indicate a lease rather than the provision of services, can be formulated as follows. The test given are as under:- (a) The customer is in physical possession of the property; (b) The customer controls the property; (c) The customer has a significant economic or possessory interest in the property; (d) The provider does not bear any risk of substantially diminished receipts or substantially increased expenditures if there is non-performance under the contract; (e) The provider does not use the property concurrently to provide significant services to enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uipment or apparatuses. To constitute a transaction for the transfer of the right to use the goods the transaction must have the following attributes: (a) there must be goods available for delivery; (b) there must be a consensus ad idem as to the identity of the goods; (c) the transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licenses required therefor should be available to the transferee; (d) for the period during which the transferee has such legal right, has to be the exclusion to the transferor-this is the necessary concomitant of the plain language of the statute-viz., a transfer of the right to use and not merely a licence to use the goods; (e) having transferred the right to use the goods during the period of which it is to be transferred, the owner cannot again transfer the same rights to others. In my opinion, none of these attributes are present in the relationship between a telecom service provider and a consumer of such services. On the contrary, the transaction is a transaction of rendition of service. 230. As it can be seen from the above decision that the principa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied to the present case as in the present case we are not considering the transactions which are considered to be for the transfer of right to use the goods for which it is very much necessary that there must be goods available for delivery. Therefore, these observations of Hon'ble Supreme Court are not relevant for deciding the present case. 231. It is observed that the similar proposition on the basis of BSNL's case was considered in the case of Dell International Service India Pvt. Ltd. [AAR decision] and it was observed as under:- The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI [2006] 3 STT 245 (SC). Even that case turned on the interpretation of the words transfer of right to use the goods in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by them to satellite companies as a part of their business activity to enable themselves to telecast the desired programmes. Thus, even applying the dominant intention of the parties and essence of the transactions, a conclusion can be arrived at that the payment of consideration is for use of the process in the transponder. 233. Here, it will be relevant to discuss the decision of AAR in the case of ISRO which has been vehemently relied upon by the learned representatives of the assessees to contend that on similar facts and circumstances AAR has held that utilizing the transponder's segment capacity cannot be termed to be royalty to be taxable either under the provisions of domestic law or under the provisions of DTAA. We have carefully gone through the said decision of AAR. At the cost of repetition, it may be stated that the decision of any authority has to be seen in the context in which it has been rendered. The decision in the case of ISRO is distinguishable on the facts of present case. No doubt, that the said case relates to provision of segment capacity in the transponder, but it can be seen from the said decision that while examining whether such payment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aircraft in international traffic. (6) The provisions of paras 1 and 2 of this article shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a PE situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such PE or fixed base. In such case, the provisions of article 7 (business profits) or article 15 (independent personal services) of this convention, as the case may be shall apply.' 6.2 We are more concerned herewith para 3(b) of article 13.-The definition of 'royalty' under the domestic law i.e. Income-tax Act, 1961 is almost similarly worded. Clause (iva) of the Explanation 2 to section 9(1)(vi) of Income-tax Act speaks of consideration for the use or right to use any industrial, commercial or scientific equipment . 6.3 It may be noticed that sub-article (6) provides for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the navigation transponder which uplinks and downlinks the data is a passive transponder unlike the communication transponder. 234. From the above observations, it is clear that AAR while considering the consideration in the nature of royalty has dealt with only to Article 13.3(b) whereas what we are considering in the present case is Article 13.3(a) as it is not even the case of the revenue that the payment has been made by the telecasting company to the satellite companies as consideration for 'use' of or 'right to use' of any industrial, commercial or scientific equipment and it is the case of the revenue that it is a payment made for using the process. Similarly, while construing the domestic provisions the reference has been made to clause (iv)(a) whereas in the pres en t case we are concerned with clause (iii). So, the said decision shall have no application to the facts of the present case as the provisions considered therein are different. 235. It may further be seen that the transponder segment capacity which was given in the case of ISRO was a navigational transponder. Though it has been the case of learned representatives of the assessees that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear that what was considered by ISRO was either the Article 13.3(b) of the DTAA or clause (iva) of Explanation 2 to section 9(1)(vi). Moreover, considering the facts involved in the present cases, we have given detailed reasons showing how the use of a process is involved in these cases, which has not been discussed in the case of ISRO. Therefore, on facts also the present cases are different than the facts involved in the case of ISRO. Hence, the ratio of decision in the case of ISRO cannot be applied to the present case. 238. Further, the reference is made to paras 11.1 to 11.3 of the OECD commentary. It is seen that in para 11.1 what is considered in OECD commentary deals with the royalty payments received as consideration for information concerning industrial, commercial or scientific experience and referred to para 2 which refers to know-how . Para 11.1 deals with the know-how contract where one of the parties agrees to impart to the other, so that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It was recognized that granter is not required to play any part himself in the application of the formulae gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved in the transponder. For the purpose of considering the said amount received by the satellite companies as 'royalty', it is not necessary that the payment of such consideration should be only for a 'secret process'. The decision of this Tribunal in the case of Asia Sat has rightly held that such consideration is liable to be taxed as 'royalty'. The decision in the case of Pan AmSat has not properly appreciated the position of law as the existence of comma after the words secret formula or process cannot alter the interpretation of a provision of the statute as of like in present case. In other words, simple existence of comma in the provisions relating to DT AA relating to definition of 'royalty' after the words secret formula or process does not change the meaning of this expression. Even after considering the commentary of OECD, TAG report and that of Klaus Vogel, it cannot be held that the consideration received by the satellite companies does not fall within the ambit of royalty. Moreover, the language of domestic law as well as the provisions of DTAA are clear and not ambiguous. Therefore, it is not necessary even to refer to the OECD m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess is being used by the telecasting companies according to their needs. There is no control whatsoever of satellite companies over the time or programmes being telecasted by the telecasting companies. Unless the process in the transponder is not compatible enough to deliver the desired result it will be of no use to the telecasting companies. Therefore, it will be incorrect to say that telecasting companies are not interested in the process. 245. So as it relates to applicability of decision of Hon'ble Madras High Court in the case of Skycell to the present case, it may be mentioned that the provisions considered by their Lordships of Madras High Court were in relation to 194J of Income-tax Act i.e., tax deduction in respect of fee for technical services. Fee for technical services has been defined in Explanation (b) which provides that the said expression shall have some meaning as is provided in Explanation 2 to Clause (vii) of sub-section (1) of section 9. The definition shows that the consideration paid for the rendering of any managerial, technical or consultancy service, as also the consideration paid for the provisions of services of technical or other personnel, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) contemplates rendering or a service to the payer of the fee. Mere collection of a 'fee' for use of a standard facility does not amount to a receipt for technical service. We are not concerned herewith the clause relating to the fees for technical service. The ratio of that decision cannot be applied here. The case of Wipro, though closer to the facts of the present case did not consider the applicability of clause (iva) of Explanation 2 to section 9(1)(vi). 246. It is also the contention of Shri F.V. Irani that the consideration received by his client could not be assessed in India for the reason that income neither has accrued nor has arisen in India as no part of the activity of the assessee can be considered to be carried on in India. In this regard, reference was made to the decision of Hon'ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. It was submitted that it is necessary that the consideration in respect of which tax is sought to be levied must be for the services which are rendered in India. It was also submitted that Explanation inserted to section 9 with retrospective effect has not changed the position as according to the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case is regarding taxability of amount received by the assessee as royalty under section 9(1)(vi)(C). The consideration has been received by the satellite company from non-residents and it is in respect of services utilised for the purposes of a business or profession which is carried on by telecasting companies in India for the purposes of making or earning any income from any source in India. The doubt, if any, has been clarified by the insertion of Explanation inserted at the end of section 9 by Finance Act, 2007 with retrospective effect from 1-6-1976. The Explanation read as under:- Explanation-For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1), such income shall be included into income of the non-resident, whether or not the non-resident has a residence or place of business or business connection in India. 248. It has been clarified by the aforementioned Explanation that where the income is deemed to accrue or arise in India inter alia under clause (vi) of sub-section (1), then, such income shall be included in the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f services rendered in India to the clients and services rendered to these clients from abroad were excluded from that income. However, the Assessing Officer assessed the entire income of all the above-mentioned four projects. So far as it relates to income for services rendered in India, there was no dispute and dispute was only with respect to global income relating to four projects. Applying the test of 90 days, as laid down in Article 15 of DTAA between India and UK, it was observed that it virtually took the assessee out of the treaty and taxability of income was to be determined only under section 9(1). Analysing section 9(1)(vii)(c) it was observed that two conditions have been envisaged to be fulfilled: services, which are source of income sought to be taxed in India must be; (i) utilised in India; and (ii) rendered in India, and it was held that income of the assessee for services rendered in India and utilised in India as disclosed by the assessee in its return was only income chargeable to tax in India and no income could be assessed in respect of services rendered out of India. The question before us is entirely different. Therefore, the scope of explanation was not und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in connection with the 'activities referred to in sub-clauses (i) to (iv), (iva) and (v). 251. Clause (iii) to Explanation 2 to section 9(1)(vi) is covered by Clause (vi) reproduced above. The process being one of the activities referred to in clause (iii), the services rendered in connection therewith shall also fall within clause (vi) of Explanation 2 to section 9(1)(vi) de horse the applicability of clause (iii) of Explanation 2 to section 9(1)(vi). Therefore, even if the claim of ld. representatives of the satellite companies is accepted that the satellite companies are only rendering the services by making available the process of transponder to the telecasting companies, then also, these are services rendered by satellite companies to the telecasting companies with respect to the user of process in the transponder. Thus, the clause (vi) of Explanation 2 to section 9(1)(vi) is also applicable to the present case. Summary of the findings 252. To briefly state, our findings in respect of issues raised and argued before us are as under:- On facts, it is held that a process is involved in the transponder through which the telecasting companies are able t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 9(1)(vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to section 9(1)(vi). 253. In the light of the above discussion, our answer to the proposed three questions are as under:- Question No. 1 Whether on the facts and in the circumstances of the case, the services rendered by the assessees involved in these appeals, through their satellites for telecommunication or broadcasting, amount to 'secret process' or only 'process'? Answer On the facts and in the circumstances of the case, the services rendered by the assessees involved in these appeals through their satellites for telecommunication or broadcasting amounts to process. Question No. 2 Whether the term 'secret' appearing in the phrase 'secret formula or process' in Explanation 2 to section 9(1)(vi) and in the relevant article of the Treaties, will qualify the word 'process' also? If so, whether the services rendered through secret process only will be covered within the meaning of royalty? Answer The terms secret appearing in the phrase secret formula or process in Explanation 2 to section 9(1)(vi) and in the relevant Article o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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