2025 (5) TMI 629 - HC - Income Tax

Payment constituted a royalty under the Treaty s domestic law - consideration paid for transponder services - Whether assessable as royalty u/s 9 (1) (vi) of the Act and/or Article 12 of the India-USA DTAA? - Whether the payment made was not for secret process - HELD THAT - Appellant relying upon the Tribunal s order in the Appellant-Assessee s own case for AY 2015-2016 submitted that since the Tribunal for that year has concluded that Intelsat Corporation was not liable to pay tax there is no question of the Appellant-Assessee being fastened with withholding tax liability. Mr. Agrawal fairly stated that this was not the reasoning given by the Tribunal in the present appeals. He attempted to tender the orders passed in the case of Intelsat Corporation for the years under consideration after the Respondent-Revenue had started their arguments. This Court refused to take the same on record since it would not be proper for this Court to verify this factual position whether in the years before this Court there is a final determination in the case of Intelsat Corporation that they are not liable to pay tax. This would require verification before the lower authorities. However in the interest of justice if the orders passed in the case of Intelsat Corporation holds that they are not liable for tax in India for the years which are subject matter of the present appeals and the payments made by the Appellant-Assessee has been considered before giving such a finding then there cannot be any withholding tax liability on the Appellant-Assessee. However such an order in the case of Intelsat Corporation should have attained finality. Therefore we remand the matter back to the CIT (A) file for verifying this aspect. Nature of services specified in the agreement and its applicability to the definition of royalty under the Act and Article 12 (3) of the Treaty - The present appeal is under Section 260A of the Act on substantial questions of law. It was incumbent upon the three authorities i.e. the original authority and the appellate authorities to have examined and analysed the nature of services as agreed upon by the parties in the agreement. It was also incumbent upon these authorities to thereafter give a finding of fact on this issue and then apply the definition of royalty under the Act or under Article 12 (3) of the Treaty. How these services are covered by the Act or the Article 12 (3) is not discussed. There is an absence of foundational facts in the orders of all the three authorities on this issue. The orders are non-speaking orders. The authorities should have independently analysed and examined how the services rendered under the agreement would fall within the phrase process or secret process as per the Act or Article 12 (3). The authorities have not analysed what is process or secret process and how it applies to the services rendered under the agreement. The questions raised by the Appellant-Assessee and admitted by this Court cannot be answered without there being the findings of the lower authorities on the nature of the services rendered under the agreement by Intelsat Corporation to the Appellant-Assessee and the analysis of the phrase secret process/process used in the Act and the Treaty. The Co-ordinate Bench of this Court in Reliance Industries Limited 2024 (8) TMI 432 - BOMBAY HIGH COURT has held that retrospective amendment cannot fasten withholding tax liability if payments were made prior to the amendment. Therefore for those assessment years where the payments have been made prior to the insertion of Explanation 6 to Section 9 (1) (vi) of the Act same would not be exigible to withholding tax liability. This aspect should be examined by the CIT(A) and an appropriate relief be given after verifying the facts for those assessment years prior to the enactment of Finance Act. 2012. The above direction is given as per Section 90 (2) of the Act which states that between the Act and the DTAA what is beneficial is to be made applicable to the Assessee. For the payments made post the Finance Act 2012 the CIT(A) is directed to examine the agreements and give a factual finding on the nature of services rendered under the agreements and how the phrase secret process is to be interpreted to ascertain whether the payments constitute royalty under Treaty. This exercise has not been done in the instant case by the authorities. Therefore we direct them to do the same in the remand proceedings. CIT(A) is requested to dispose of the appeals as expeditiously as possible and in any case on or before 31 December 2025. We remand the appeals back to the file of the CIT(A) with the following directions - (i) If the Appellant-Assessee is able to show that there is a final determination of no taxability in the hands of Intelsat Corporation on payments made by the Appellant-Assessee then there would be no withholding tax liability ; (ii) If the payments are made prior to the Finance Act 2012 then then following decision of this Court in the case of Reliance Industries Limited 2024 (8) TMI 432 - BOMBAY HIGH COURT no withholding tax liability can be imposed based on retrospective amendment ; (iii) For payments made after the enactment of Finance Act 2012 the CIT(A) to examine the nature of agreements for each assessment year and determine whether same constitutes royalty under the domestic law or the Treaty and if same does not constitute royalty then there would be no withholding tax liability after considering provisions of Section 90 (2) of the Act.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Court admitted the appeal on the following substantial questions of law:

(i) Whether the consideration paid for transponder services constitutes "royalty" under Section 9(1)(vi) of the Income-tax Act, 1961 (the Act) and/or Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA)?

(ii) Whether the retrospective amendments made by the Finance Act, 2012 (specifically Explanations 5 and 6 to Section 9(1)(vi) of the Act) can be read into the DTAA for the purpose of taxation?

(iii) Whether the Appellant (payer) is obligated to deduct tax at source (TDS) under Section 195 of the Act on payments made to Intelsat Corporation, even if such payments are held not taxable in the hands of the payee?

Additional related issues considered during the proceedings include:

- The applicability of Section 90(2) of the Act, which mandates that the more beneficial provision between the Act and the DTAA applies to the taxpayer.

- The nature and interpretation of the term "process" or "secret process" as used in the definition of "royalty" under both the Act and the DTAA.

- The existence or otherwise of a permanent establishment (PE) of Intelsat Corporation in India and its tax implications.

- The relevance and applicability of various agreements executed between the parties for different assessment years, including the 2011 agreement and earlier transponder service agreements.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether the payments for transponder services constitute "royalty" under Section 9(1)(vi) of the Act and/or Article 12 of the India-USA DTAA

Legal Framework and Precedents: Section 9(1)(vi) of the Act defines income deemed to accrue or arise in India by way of royalty. Explanations 2 to 6 elaborate the scope of "royalty," including the inclusion of consideration for use or right to use patents, inventions, secret processes, and transmission by satellite (Explanation 6). Article 12(3) of the India-USA DTAA defines "royalties" as payments for use of copyrights, patents, trade marks, secret formula or process, or information concerning industrial, commercial or scientific experience.

Key precedents cited include Azadi Bachao Andolan (SC), Engineering Analysis Centre of Excellence Pvt. Ltd. (SC), and various High Court decisions interpreting the scope of "royalty" and the applicability of treaties vis-`a-vis domestic law.

Court's Interpretation and Reasoning: The Court observed that none of the authorities below (Assessing Officer, Commissioner of Income Tax (Appeals), or the Tribunal) adequately examined or analyzed the nature of the services rendered under the agreements, particularly the 2011 agreement and earlier transponder service agreements. There was a lack of factual determination regarding whether the services fall within the definition of "royalty" under the Act or the Treaty.

The Court emphasized that the phrase "process" or "secret process" used in the Act and the Treaty requires detailed examination in light of the actual services provided under the agreements. The authorities below had relied on the retrospective Explanation 6 to Section 9(1)(vi) and interpreted the term "process" broadly without analyzing the contractual terms or the nature of service.

Application of Law to Facts: The Court noted that the agreement provides for satellite transponder services which include signal reception and re-transmission, coordination with other satellites, and transmission plans. However, the Court found no detailed analysis by the authorities on whether these services amount to a "secret process" or "process" as contemplated under the Act or the Treaty.

Treatment of Competing Arguments: The Appellant argued that the payments do not constitute royalty under the Treaty, relying on the principle under Section 90(2) that the more beneficial provision applies, and on various judicial pronouncements distinguishing the nature of transponder services from royalty. The Respondent contended that the term "process" is undefined in the Treaty and should be interpreted by importing the Explanation 6 of the Act, thus including satellite transmission services as royalty.

Conclusion: The Court held that the issue requires remand for factual determination by the CIT(A) with a detailed examination of the agreements and the nature of services vis-`a-vis the definitions under the Act and the Treaty. The Court refrained from expressing any opinion on the merits of whether the payments constitute royalty.

Issue 2: Whether retrospective amendments by Finance Act, 2012 (Explanations 5 and 6 to Section 9(1)(vi)) can be read into the DTAA

Legal Framework and Precedents: Explanation 6 to Section 9(1)(vi) was inserted by the Finance Act, 2012, clarifying that "process" includes transmission by satellite. The question arises whether such retrospective domestic amendments can be read into the DTAA, which is a treaty between sovereign nations.

Precedents such as Reliance Industries Ltd. and Sedco Forex International Drilling Inc. were cited regarding the non-applicability of retrospective amendments for withholding tax liability.

Court's Interpretation and Reasoning: The Court acknowledged that retrospective amendments cannot impose withholding tax liability on payments made prior to the amendment's insertion. The Court also noted that the DTAA has a specific definition of "royalty," and domestic amendments cannot alter the treaty's scope retrospectively.

Application of Law to Facts: For assessment years prior to AY 2012-13 (i.e., payments made before the Finance Act, 2012), the Court directed that no withholding tax liability should be imposed based on retrospective application of Explanation 6.

Treatment of Competing Arguments: The Appellant relied on the principle of non-retrospectivity and beneficial provisions under Section 90(2). The Respondent argued for an ambulatory approach to interpret "process" under the Treaty by importing domestic law definitions.

Conclusion: The Court held that retrospective amendments cannot be applied to payments made before their insertion, and the CIT(A) must consider this while adjudicating withholding tax liability for earlier years.

Issue 3: Whether the Appellant is liable to deduct TDS under Section 195 on payments to Intelsat Corporation even if the payments are not taxable in the hands of the payee

Legal Framework and Precedents: Section 195 mandates withholding tax on payments to non-residents chargeable to tax in India. The question is whether withholding is required if the payee is not liable to tax in India.

Court's Interpretation and Reasoning: The Court noted that the Tribunal in the Appellant's own case for AY 2015-16 held that Intelsat Corporation was not liable to tax in India. The Court, however, refused to verify this factual position at the appellate stage and remanded the matter to the CIT(A) to verify whether a final determination of no taxability exists for the relevant years.

Application of Law to Facts: If the Appellant can demonstrate that Intelsat Corporation is not liable to tax for the relevant years after considering payments made by the Appellant, then there would be no withholding tax liability on the Appellant.

Treatment of Competing Arguments: The Appellant contended that absence of tax liability on the payee negates withholding obligations. The Respondent sought remand for factual determination.

Conclusion: The Court remanded the issue to the CIT(A) for verification of the taxability status of Intelsat Corporation and directed that if no tax liability exists, withholding tax liability on the Appellant would not arise.

Additional Issues: Examination of Agreements for Relevant Assessment Years and Applicability of Section 90(2)

The Court observed that the 2011 agreement annexed to the appeal is relevant only for AY 2012-13 onwards and not for earlier years. The Appellant admitted that earlier transponder service agreements were not annexed, which is necessary for factual examination.

The Court directed that the CIT(A) must examine the agreements applicable to each assessment year to determine the nature of services and their tax implications.

Regarding Section 90(2), the Court reiterated the settled principle that the more beneficial provision between the Act and the DTAA applies to the taxpayer. This principle must guide the CIT(A) in adjudicating the appeals.

3. SIGNIFICANT HOLDINGS

"It was incumbent upon the three authorities, i.e., the original authority and the appellate authorities, to have examined and analysed the nature of services as agreed upon by the parties in the agreement... The orders are non-speaking orders."

"The questions raised... cannot be answered without there being the findings of the lower authorities on the nature of the services rendered under the agreement... and the analysis of the phrase 'secret process/process' used in the Act and the Treaty."

"If the Appellant-Assessee is able to show that in the case of Intelsat Corporation for the years for which the present appeals are filed, there is a final determination by the tax authorities that the Intelsat Corporation is not liable to pay tax... then there cannot be any withholding tax liability on the Appellant-Assessee."

"For the payments made prior to the insertion of Explanation 6 by the Finance Act, 2012 it cannot be subjected to withholding tax, since at the time when the payments were made such an explanation was not in existence."

"Where the Central Government has entered into an agreement with a foreign country for granting relief of tax or for avoidance of double taxation, then in relation to the Assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that Assessee."

The Court remanded the appeals to the CIT(A) with directions:

(i) To verify if there is a final determination of no taxability in the hands of Intelsat Corporation for the relevant years, negating withholding tax liability;

(ii) To consider non-applicability of retrospective Explanation 6 for payments made before Finance Act, 2012;

(iii) To examine the nature of services under the agreements for each year and determine if payments constitute "royalty" under domestic law or the DTAA, applying Section 90(2) principles.