TMI Blog2011 (1) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. - The Tribunal has made an attempt to trace the fund flow and observed that since the end consumers, i.e., persons watching TV in India are paying the amounts to the cable operators who in turn are paying the same to the TV channels, the flow of fund is traced to India. That is a far-fetched ground to rope in the appellant in the taxation net. - it is difficult to accept such far-fetched reasoning with no causal connection. – Not liable to pay tax as royalty - Decided in favor of assesse. - 131 and 134 of 2003 AND CM NO. 2865 OF 2009 - - - Dated:- 31-1-2011 - A.K. SIKRI AND MS. REVA KHETRAPAL, JJ. S. Ganesh, Ms. Anuradha Dutta, Ms. Vijayalakshim Menon, Ms. Ekta Kapil, Anish Kapur, Kuber Dewan and Ms. Vrinda Tulshan for the Appellant. Sanjeev Sabharwal for the Respondent. Judgment A.K. Sikri, J. - Both these appeals, one preferred by the revenue and other by the assessee, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting the income chargeable to tax in India? ( vii ) Whether on the facts and in the circumstances of the case the Tribunal erred in holding that depreciation was admissible to the appellant only on a proportionate basis? 2. Likewise, in ITA 134 of 2003, the following substantial questions of law were framed for determination : ( i ) Whether the ITAT is right in law in holding that the interest under section 234B of the Income-tax Act, 1961 should be calculated by giving benefit to the assessee of tax deductible under section 195 by the payer though no such deduction in fact was made? ( ii ) Whether ld. ITAT is right in law in holding that section 9(1)( i ) of the Income-tax Act, 1961 is not applicable in the case of the assessee? ( iii ) Whether the ld. ITAT has erred in not deciding the issue whether income of the assessee is taxable under section 9(1)( vii ) of the Income-tax Act, 1961? ( iv ) Whether ITAT is right in holding that transponders cannot be regarded as equipment under Explanation 2 clause ( iva ) to section 9(1)( vi ) of the Income-tax Act, 1961? 3. Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llite to relay their signals. The customers have their own relaying facilities, which are not situated inIndia. From these facilities, the signals are beamed in space where they are received by a transponder located in the appellant s satellite . The transponder receives the signals and on account of the distance the signals have travelled, they are required to be amplified. The amplification is a simple electrical operation. Thereafter, the frequency on which the signals are to be downlinked is changed only in order to facilitate the transmission of signals so that there is no distortion between the signals that are being received and the signals that are being relayed from the transponder. The transponder operations are commonly known, which are carried out not only in satellite transmission but also in the case of terrestrial transmission. There is no change in the content of the signals whatsoever that is carried out by the appellant in the transponder. Thereafter, the signals leave the transponder and are relayed over the entire footprint area where they can be received by the facilities of the appellant s customers or their customers. 7. It is the case of the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0. Being aggrieved by the order of the Assessing Officer, the appellant preferred an appeal to the CIT(A). Various grounds were urged challenging the liability to pay tax inIndia as well as the manner in which the Assessing Officer had computed the appellant s income chargeable to tax. 11. The CIT(A) disposed of the appeal by an order dated 4-12-2000. He noted that there was no dispute that the appellant had not received any income in India. The only dispute, according to the CIT(A), was as to whether any income could be deemed to have accrued to the appellant in India within the meaning of section 9 of the Act. He held that although it could be said that there was some kind of territorial nexus of the beam which was downlinked from the appellant s satellite with India, the proprietary rights in the nature of copyright, etc. in the downlinked beam did not belong to the appellant but belonged to the T.V. channels. He held that there was no evidence on record to hold that the appellant had any India specific beaming facility. He found that on the basis of the facts brought on record it could not be said that the downlinked beam could be restricted to any particular region or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the satellite which was located outside India. The mere fact that the appellant had put in place a satellite in a manner that downlinked signals could be received in Indian territory also did not result in an inference that any part of the appellant s business operations were carried out in India. As per him, the position may have been different if it had been shown that the satellite company, the TV channels and the cable operators were interconnected or that the transactions among them were not carried out at arm s length. But as there was no evidence or mention of any of these factors, he held that no income could be said to be deemed to accrue or arise in India in terms of section 9(1)( i ). 13. CIT(A) thereafter proceeded to deal with the issue as to whether the amounts received by the appellant were liable to be taxed in India in terms of section 9(1)( vi ) of the Act. Argument of the revenue in this behalf was that the appellant received payments from some companies located outside India which companies in turn received payments from Indian companies or companies operating in India in respect of signals received in India and, therefore, the provisions of section 9(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was not necessary to consider the question of deductibility of the expenses. Nevertheless, he thought it fit to dispose of all the grounds that were raised and were filed before him. Insofar as the claim for lease rentals is concerned, he held that 50 per cent of the lease rentals payable for AsiaSat 1 ought to be allowed as a deduction. Similarly, the expenditure on maintenance and satellite operations was also allowed to the extent of 50 per cent insofar as AsiaSat 1 was concerned and 75 per cent insofar as AsisSat 2 was concerned. As regards the claim for depreciation, he accepted the contention of the appellant that depreciation would have to be allowed on the actual cost of the satellite and not on a notional written down value which was computed as if depreciation had been allowed in the earlier years. However, he rejected the contention of the appellant that it was entitled to a deduction by way of depreciation on the entire cost of the asset by relying on section 38 of the Act. He held that the C Band of AsiaSat 2 generated only 75 per cent of the total revenues of AsiaSat 2, and therefore, 75 per cent of the depreciation that was calculated on the actual cost ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a through the transponder on its satellite . The appellant could acquire the right to receive its income only if the programmes were made available inIndia, and therefore, the Tribunal held that the appellant would have a business connection inIndia. 16. The Tribunal further held that no part of the appellant s income was chargeable to tax in India in terms of section 9(1)( i ) as no operations to earn the income were carried on in India. The Tribunal held that in order to establish that the business operations were carried out in India, it was necessary to point out that some part of the appellant s operations were carried out in the territory of India. The Tribunal found that the appellant had no office or agent or subsidiary in India which acted between it and the cable operators in facilitating the receipt of the signals. No machinery was installed by the appellant in India through which the programmes were reaching India. The Tribunal further found that the Department had not brought to its notice any operation which was done by the appellant in India and hence it held that the provisions of section 9(1)( i ) would have no application. 17. The Tribunal next dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r amplification were relayed to the area covered by the footprint. The Tribunal held that judgment of the Madras High Court in Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 relied upon by the appellant was distinguishable on facts and would not apply. The Tribunal thereafter considered the applicability of the decision of the Madras Bench in the case of Raj Television Network Ltd. It held that the said decision need not be followed inasmuch as the Madras Bench did not have the advantage of considering various arguments regarding process and other aspects of royalty as were urged before it. The Tribunal found that the transponder was not equipment and hence the payment made by the TV channels to the appellant could not be regarded as one for use of equipment. The Tribunal held that the appellant had not leased out any equipment but had only made available the process that was carried out in the transponder to its customers. 19. As regards the contention that even if the payment was to be regarded as one falling within the definition of royalty, nevertheless, as the TV channels were non-residents, the income could not be brought to tax by virtue of sub-clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties but the duty of the Tribunal to admit the ground. According to the Tribunal, all the facts necessary for adjudication of the issues as to whether the amount received was chargeable to tax under section 9(1)( vii ) were available on record and hence they considered it appropriate to admit the additional ground. However, having admitted the additional ground, the Tribunal felt that it was not necessary to deal with the same inasmuch as it had already upheld the contention that the amount was chargeable to tax in terms of section 9(1)( vi ). 21. The Tribunal, thereafter, proceeded to consider the manner of computation of the income. The Tribunal held that the provisions of section 44D would be inapplicable and hence the appellant would be entitled to a deduction of the expenditure incurred by it. The Tribunal held that the income received by the appellant would be chargeable to tax under the head Profits and gains of business or profession . Therefore, the Tribunal held that the computation would have to be made in accordance with Chapter IV-D. The Tribunal stated that if the starting point of the computation of the total income was only the revenue relatable to India, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e caption Basis of Charge enumerates various provisions on the basis on which income of a person is exigible to tax inIndia. Section 4 is the charging section. Section 5 delineates the scope of total income . Sub-section (1) thereof deals with total income earned by a resident with which we are not concerned in the instant case, as the appellant is admittedly a non-resident. It is the sub-section (2), which is relevant for a non-resident, which reads as under : Section 5(2) (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 inIndia in such year by or on behalf of such person; or ( b ) Accrues or arises or is deemed to accrue or arise to him inIndia during such year. Explanation 1. Income accruing or arising outsideIndia shall not be deemed to be received inIndia within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared inIndia. Explanation 2. For the removal of doubts, it is hereby declared that incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing or earning any income from any source inIndia : Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government : Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Explanation (2) ** ** ** ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant had business connection inIndia would be of academic interest. 27. Insofar as income earned by the appellant from its customers in India is concerned, the Tribunal has held that this would qualify as royalty as defined in Explanation 2 to section 9(1)( vi ) of the Act. 28. As far as applicability of clause ( vii ) of section 9(1) of the Act is concerned, though this was an issue raised by the revenue for the first time before the Tribunal, the Tribunal admitted the additional ground as purely legal, at the same time the Tribunal also refused to answer this issue. Basically, therefore, issues which arise for consideration in this appeal concern clauses ( i ), ( vi ) and ( vii ) of sub-section (1) of the section 9 of the Act and we proceed to deal with these issues in that order. Re : Applicability of section 9(1)(i) 29. The Tribunal has held that even when the appellant has business connection in India, no part of the appellant s income was chargeable to tax in India in terms of section 9(1)( i ) as no operations to earn the income were carried on in India. The revenue in its appeal has challenged this finding of the Tribunal. On the other hand, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en. It was the endeavour of the learned counsel to demonstrate that a causal link was established to attract the deeming provision inasmuch as the appellant by providing its services to the TV channels was making it possible for those TV channels to relay their programmes in India and the viewers watching those programmes as well as cable operator located in India were making payments to the TV channels and these TV channels were in turn out of those earnings were making payments to the appellant with whom these TV channels were directly connected. 31. On the other hand, Mr. S. Ganesh, learned Senior counsel appearing for the appellant, submitted that the Tribunal with well supported reasoning had arrived at the conclusion that income did not accrue or arise in India under clause ( i ) of sub-section (1) of section 9 of the Act and heavily relied upon the same. 32. After considering the respective submissions, we are of the view that the findings of the learned Tribunal on the non-applicability of section 9(1)( i ) of the Act are proper, justified and legally sustainable. We have already taken note of the Explanation ( a ) to this sub-clause, which lays down that in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are also performed outsideIndia inHong Kong. No man, material or machinery or any combination thereof is used by the appellant in theIndian territory. There is no contract or agreement between the appellant either with cable operators or viewers for reception of signals inIndia. 34. We, thus, hold that section 9(1)( i ) is not attracted in the present case. Re : Applicability of section 9(1)( vi ) 35. The Tribunal has covered the case of the assessee under this provision and therefore, it is the subject-matter of challenge in the appeal filed by the appellant. To recapitulate briefly the process of transmission of TV programmes, it starts with TV channels (customers of the appellant) uplinking the signals containing the TV programmes; thereafter the satellite receives the signals and after amplifying and changing their frequency relays it down in India and other countries where the cable operators catch the signals and thereafter distribute them to the public. If any person has got dish antenna, he can also catch the signals relayed from these satellites. The role of the assessee in this cycle is that of receiving the signals, amplifying them and after changing fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lite and to obtain the requisite licenses to operate the satellite and maintain the same, the appellant remains in the control of this satellite and is in fact prohibited from giving control of operation of satellite or any part thereof to its customers. 39. He also referred to the ruling of the Authority for Advance Rulings in the case of ISRO Satellite Centre [ISACT] (ISRO) In re [2008] 307 ITR 59 (New Delhi) pointing out that the process of operation of a satellite and the role played by the transponder therein and the control and operation of the transponder have been discussed in detail in the Ruling in the said judgment. It was argued that this judgment gives the definition and explains the working of the transponder. Every transponder receives a signal at a particular frequency and retransmits it at a different frequency over the footprint area of the satellite . This is the process employed in the transponder. Further, the transponder may also amplify the signal before retransmitting it. In the ISRO s case ( supra ), there was no amplification of the signal, but the ruling of theAAR is not based or founded on this fact as such. The learned counsel emphasized t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of sale . Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. Commercial Tax Officer . Illustration : ( i ) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer s depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer s consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... li Lignite Corpn. Ltd. [2000] 243 ITR 459 (Mad.). 43. It was, thus, urged that the same meaning to the term royalty should be assigned while interpreting section 9(1)( vi ) as well. He emphasized that one has to keep in mind that every item in clause ( iii ) of Explanation 2 to section 9(1)( vi ) refers to an item of intellectual property. The doctrine of noscitur a sociis, therefore, applies squarely to the interpretation of clause ( iii ) of Explanation 2 to section 9(1)( vi ). This doctrine has been applied by this Court in the case of CIT v. Bharti Cellular Ltd. [2008] 175 Taxman 573 for the interpretation of Explanation 2 to section 9(1)( vii ). Therefore, the term process occurring in clause ( iii ) of Explanation 2 to section 9(1)( vi ) means a process which is an item of intellectual property. The process employed in the transponder of a satellite , i.e., of changing the frequency and amplifying the signal is not at all an item of intellectual property because that process has been in the public domain for more than half a century. The payment received by AsiaSat from its customers is, therefore, not a payment for the use of the process employed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t states : 1. Transponder No. 7H is identified and earmarked for the assessee. 2. Page 284/285 gives the appellant not only exclusive lease right but also right to sublease in clause 10 of course safeguarding appellant s commercial interests from competitions. 3. Page 189/290 gives exclusive right of enjoyment to broadcaster. It even is entitled to damages in case the broadcaster curtails its form of agreement of 12 years, determining damages of unutilized period of lease . 4. Decision of this Court in the case of Antrix Satellite has held it to be a case of control vested in the earth station users. 5. Exhibit at 2/5 of the paper book provides : ( a ) Exclusive frequency to broadcaster. ( b ) Bandwidth for broadcaster including encryption code. ( c ) Broadcaster to define the uplinking programmes and time. ( d ) Broadcaster to use the process embedded in the transponder. ( e ) Broadcaster to define in which area/footprint the satellite is to relay. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot IPR proper are included. In connection with - which would include any service related to or in connection with would also be included. In this regard, reference be made to HOME Solution s case. Activities stand in Sub-clause ( iii ) - Thus reiterating the difference further and extending it to include more than mere IPR. 49. He also referred to Article 12-Royalties in the book Interpretation and Application of Tax Treaties by Ned Shelton. This article with captioned Royalties makes reference to satellite services and states that : ( i ) They were always included; and ( ii ) In fact for removal of doubts/to clarify Australian-Canadian DTAA has been even amended. Following passage from the book was relied for this purpose : An increasingly important issue is the treatment of payments made for satellite services. There has been a view in one particular country, for example, at least by tax officials there, that payments by customers for satellite TV services is a royalty. Separately, as an illustration of the importanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be protected but process if not registered will be widely used and hence, there is no question of same being secret also. ( d ) Alternatively, even assuming for the argument that the process is IPR, the same merely gives right to control the use. In present context it will mean that Access to process is restricted/checked or made secure and thus process kept for intended user . However, the same has been used it being unknown process or unknown mysterious entity . ( e ) IPR even otherwise, has to do with commercial exploitation after recognition of right in process, which is not same thing as it being secret . The exclusive right has been recognized of assessee and broadcaster is being given use of process right through restrictive access. Thus, it was submitted that process need not be secret but should protect the commercial interest of the appellant, which is protected in the agreement. 51. His next submission was that the payment of interest, royalty and Fee for Technical Services (FTS) need not have territorial nexus as the same is governed by Source Rule . He explained Source Rule to mean that the country from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arisen in India. The term royalty is assigned a specific meaning in Explanation 2 to sub-clause ( vi ) of section 9(1) of the Act. We have already pointed out above that in this case, we are concerned with sub-clauses ( i ), ( iii ) and ( vi ) of the said Explanation . Though these sub-clauses have already been reproduced above, for the sake of continuity in our discussion, we take note of these sub-clauses once again, which are as follows : ( i ) The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; ** ** ** ( iii ) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property; ** ** ** ( vi ) The rendering of any services in connection with the activities referred to in sub-clauses ( i ) to ( v ); 53. Sub-clause ( i ) deals with the situation when the rights in the intellectual property of the nature specified therein are transferred. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 9(1)( vi ) of the Act, the income by way of royalty payable by the Government or a resident; or a non-resident shall be deemed to accrue or arise in India. The term royalty has been defined in Explanation 2 to section 9(1)( vi ) of the Act. In the case of Keshavji Ravji Co. v. CIT [1990] 183 ITR 1, the Supreme Court said that an Explanation generally speaking, is intended to explain the meaning of certain phrases and expressions contained in the statutory provisions. There is no general theory as to the effect and intendment of an Explanation except that the purpose and intendment are determined by its own words. An Explanation depending upon its own language might supply or take away something from the contents of a provision. It is also true that an Explanation may be introduced by way of abundant caution in order to clear any mental cobwebs surrounding the meaning of the statutory provision spun by interpretative errors and to place what Legislature considers to be true meaning beyond any controversy or doubt. In view of decision of the Supreme Court in Keshavji Ravji Co. s case ( supra ), Explanation 2 has to be read as part and parcel of section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the Government of any country outside India. ( a ) For the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or ( b ) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or ( c ) For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or ( d ) For recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 55. Keeping in view the aforesaid principles, we now embark upon the interpretative process in defining the ambit and scope of term royalty appearing in Explanation 2 to sub-clause ( vi ) of section 9(1) of the Act. Sub-clause ( i ) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this sub-clause envisages is the transfer of rights in respect of property and not transfer of right in the property . The two transfers are distinct and have different legal effects. In first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadeshi Ranjan Sinha v. Hardev Banerjee AIR 1992 SC 1590. When rights in respect of a property are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding India. This is held that the TV channels in entire cycle of relaying the programmes inIndia were using the process provided by the assessee and, therefore, it is liable to be taxed as royalty income. 57. We have to test the rationality of the aforesaid reasoning and consider the attack thereupon by the appellants in their arguments recorded above. Before that, we may take note of few judgments relevant to the context. In the case of CIT v. Datacons (P.) Ltd. [1985] 155 ITR 66 (Kar.), the company was engaged in processing the data supplied by its customers by using IBM unit record machine computer. The assessee received vouchers and statements of accounts from its customers and converted them into balance sheets, stock accounts, sales analyses etc. They were printed as per the requirement of the customers. The Karnataka High Court held that in all these activities, the assessee had to play an active role by coordinating the activities and collecting the information. Such activities amounted to processing of goods. In the case of M.V. Philips ( supra ), the assessee received the amount for providing specialized knowledge of manufacturing particular commodity which in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transponder therein. 59. Following features of the agreement entered into by the appellant with its clients need to be highlighted at this stage : ( a ) The appellant is a foreign company incorporated inHong Kong and carries business of providing satellite business and broadcasting facilities. ( b ) The clients with whom the appellant has entered into agreement are not the residents ofIndia. ( c ) The appellant has launched its satellites in the orbit footprint on which it is extended over four continents including Asia and, thus, coversIndia. ( d ) The agreement signed with the customers which are TV channels, the appellant provides facility of transponder capacity available on its satellite to enable these TV channels to relay their signals. These customers have their own relaying facilities, which are situated outsideIndia. From this facility, the signals are beamed in space where they are received by a transponder located in the appellant satellite . The transponder receives the signal and on account of the distance these signals have to travel, they are required to be amplified. After a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llite , this capacity at a particular frequency is made available to the applicant through INLUS (Navigation Land Uplink Station) which is set up and operated by the applicant. The capacity is meant to be used for the purpose of providing an augmentation to global satellite navigation system. The capacity will be utilized through data commands issued from the ground station (INLUS). Undeniably, the applicant will not be able to operate the transponder in the space but it will be transmitting/uplinking the augmented data to the navigation transponder. Access to the transponder s space capacity is established through the applicant s operations at the ground station (INLUS) pursuant to which the transponder transmits signals/data received from INLUS from the geo-stationary orbits. The Inmarsat satellite carries many transponders out of which the transponder for navigation purposes will provide the satellite based augmentation system signals in space at two frequencies i.e., 1575.42 MHz (L1) and 1176.45 MHz (L5) which are accessed for the GAGAN project undertaken by the applicant. It is also seen that the navigation transponder which uplinks and downlinks the data is a passive tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transponder. The use or operation of transponder as such is not at all contemplated under the Contract. What really happens is that the augmented data sent by INLUS reaches the transponder and it is transmitted back to the Earth and the same is accessed by SBAS user receivers in the coverage area. In response to a query, the applicant specifically clarified that the transponder does not perform any operation with reference to the data uplinked and downlinked and there is no on-board data storage . [Emphasis supplied] 61. It is worthwhile to note that the contention of the Department that there was use of transponder by the applicant was specifically rejected in the following terms : 17. It is contended by the revenue that in substance, there is use of equipment i.e., transponder by the applicant. The exclusive capacity of specific transponder is kept entirely at the disposal of the applicant. The use of transponder is ensured when it responds to the directions sent through the ground station. Such directions, it is stated, are akin to the operation of TV by remote control apparatus. We find it difficult to accept this contention. The fact that the transponder automa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern the substance and essence of the contract as revealed from the terms of the contract document, the technical report and other facts furnished by the applicant. 64. On the aforesaid poser, the AAR discussed the issue and held that the transponder and the process therein are actually utilized for the satellite user for rendering the services to the customer and further that it cannot be said that the transponder or process employed therein are used by the customer. 65. It needs to be emphasized that a satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. It was explained that the transponder is in fact an inseverable part of the satellite and cannot function without the continuous support of various systems and components of the satellite , including in particular : ( a ) Electrical Power Generation by solar arrays and Storage Battery of the satellite , which is common to and supports multiple transponders on board the satellite . ( b ) Common input antenna for receiving signals from the customers ground stations, which are shared by multiple transponder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erforming any function. Rightly so because satellite is not plotted at a fixed place. It rotates in the same direction and speed as the earth. If it had been fixed at a particular place or the speed or direction had been different from that of earth, it could not have produced the desired results. Transponder is part of satellite , which is fixed in the satellite and is neither moving in itself nor assisting the satellite to and the transponder, namely, a part of it, playing howsoever important role, cannot be termed as equipment. 67. Even after stating so, the Tribunal did not take the aforesaid view to its logical conclusion, viz., the process carried on in the transponder in receiving signals and retransmitting the same, is an inseparable part of the process of the satellite and that process is utilized only by the appellant who is in control thereof. Whether it is done with or without amplification of the signal would not make any difference, in such a scenario. 68. We are inclined to agree with the argument of the learned Senior counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... destination for delivery of the consignment. The lorry is used exclusively for the customer s consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the use of the lorry for the following reasons : ( i ) the lorry is never in the control, let alone effective control of the customer; ( ii ) the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry; ( iii ) the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry; or the carrier may unload the consignment en route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for further transportation and delivery at destination. ( ii ) On the other hand, let us consider the case of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct specified the role and responsibility of each member of the consortium and the consideration to be paid separately for the respective work of each member. The appellant was to develop, design, engineer, procure equipment, materials and supplies to erect and construct storage tanks including marine facility (jetty and island breakwater) for transmission and supply of LNG to purchasers, to test and commission the facilities, etc. The contract involved : ( i ) offshore supply, ( ii ) offshore services, ( iii ) onshore supply, ( iv ) onshore services and ( v ) construction and erection. The price for offshore supply and offshore services was payable in US dollars, that for onshore supply and onshore services and construction and erection partly in US dollars and partly in Indian rupees. The payment for offshore supply of equipment and materials supplied from outsideIndia was received by the appellant by credit to a bank account inTokyo and the property in the goods passed to Petronet on the high seas outsideIndia. Though the appellant unloaded the goods, cleared them from Customs and transported them to the site, it was for and on behalf of Petronet and the expenditure including the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Fiscal Evasion with respect to Taxes on Income between India and Japan read with paragraph 6 of the Protocol supply of equipment or machinery (sale of which was completed around, the order having been placed directly by the overseas office of the enterprise) would be within the meaning of the phrase directly or indirectly attributable to that permanent establishment and, therefore, so much of the amount received or receivable by the appellant as was directly or indirectly attributable to the permanent establishment as postulated in paragraph 6 of the Protocol would be taxable in India. The price of the offshore services would be deemed to accrue or arise under section 9(1)( vii ) of the Income-tax Act, 1961. And inasmuch as fees for technical services were specifically provided in Article 12 of the Convention, they would not fall under Article 7. Therefore, the price of the offshore services was taxable inIndia under the Act as well as the Convention. ( iii ) That, however, in view of section 115A(1)( b )(B) of the Act and Article 12(2) of the Convention, tax was payable at the fixed rate of 20 per cent of the gross amount of fees for technical services and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actingState on the basis of accrual of income in anotherContractingState on the basis of resident. So far as accrual of income inIndia was concerned, taxability must be read in terms of section 4(2) read with section 9, whereupon the question of seeking assessment of such income inIndia on the basis of the Double Taxation Treaty would arise. Paragraph 6 of the Protocol to the Convention was not applicable, because, for the profits to be attributable directly or indirectly , the permanent establishment must be involved in the activity giving rise to the profits. ( iv ) That where different severable parts of a composite contract were performed in different places, as in this case, the principle of apportionment could be applied to determine which fiscal jurisdiction could tax that particular part of the transaction. This principle helped to determine where the territorial jurisdiction of a particular State lay and to determine its capacity to tax on event. Applying it to composite transactions which had some operations in one territory and some in the other, was essential to determine the taxability of various operations. The concepts of profits of business con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax net. 73. For the aforesaid reasons, it is difficult to accept such far-fetched reasoning with no causal connection. 74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA) , the case of the appellant gets boost. The Organisation of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model DTAA contains a definition of royalty which is in all material respects virtually the same as the definition of royalty contained in clause ( iii ) of Explanation 2 to section 9(1)( vi ) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under : 9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into transponder leasing agreements under which the satellite operator allows the customer to utilize the capacity of a sate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the case only in the event the entire direction and control over the satellite , such as its piloting or steering, etc. were transferred to the user. 76. Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below : On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g ., within the framework of an advisory activity. Within the range from services , viz., outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear-cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer. 77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in section 9(1)( vi ), for better understanding all these very ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out that the phrase liable to tax used in the first sentence of Article 4.1 of the Model Convention has raised a number of issues, and observes : It seems clear that a person does not have to be actually paying tax to be liable to tax otherwise a person who had deductible losses or allowances, which reduced his tax bill to zero would find himself unable to enjoy the benefits of the convention. It also seems clear that a person who would otherwise be subject to comprehensive taxing but who enjoys a specific exemption from tax is nevertheless liable to tax, if the exemption were repealed, or the person no longer qualified for the exemption, the person would be liable to comprehensive taxation. 78. There are judgments of other High Courts also to the same effect. These are as under : ( a ) Ahmedabad Mfg. Calico Printing Co. s case ( supra ) at Pages 820-822. ( b ) Vishakhapatnam Port Trust s case ( supra ) at pages 156-157. ( c ) M.V. Philips s case ( supra ) at pages 527 538-539. 79. For the aforesaid reasons, we are unable to subscribe to the view taken by the Tribunal in the impugned judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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