2025 (6) TMI 1534 - AT - Income Tax

Royalty receipts - receipts from providing data transmission services - DTAA with Netherlands - HELD THAT - It is undisputed fact that the issue is recurring issue and the AO following its earlier orders has been holding that the receipts from providing data transmission services was held to be royalty u/s 9(1)(vi) of the Act and Article 12(4) of the DTAA with Netherlands. We find that the issue is squarely covered by the various decisions of the Tribunal and also the High Court in assessee s own case for the assessment years 2006-07 to 2020-21. The latest order of the Tribunal for the AY 2021-22 2024 (6) TMI 1475 - ITAT DELHI the Tribunal following earlier years order and also the decision of the Hon ble High Court deleted the addition as held the Finance Act 2012 will not affect Article 12 of the DTAAs it would follow that the first determinative interpretation given to the word royalty in Asia Satellite 59 when the definitions were in fact pari materia (in the absence of any contouring explanations) will continue to hold the field for the purpose of assessment years preceding the Finance Act 2012 and in all cases which involve a Double Tax Avoidance Agreement unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty or amend the definition in a manner so that such income automatically becomes royalty. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

(a) Whether the receipts earned by the assessee from providing data transmission services via space segment capacity on satellites constitute "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961 ("the Act") and Article 12(4) of the India-Netherlands Double Taxation Avoidance Agreement ("DTAA").

(b) Whether the payments received by the assessee for such data transmission services qualify as "fees for technical services" under Section 9(1)(vii) of the Act and Article 12(5) of the DTAA.

(c) Whether the assessee is liable to be assessed to tax in India in the absence of a Permanent Establishment under Article 5 of the DTAA.

(d) Whether the Assessing Officer ("AO") and the Dispute Resolution Panel ("DRP") erred in not following the binding precedents of the Hon'ble Delhi High Court and the Income Tax Appellate Tribunal ("ITAT") in the assessee's own case for earlier assessment years where similar issues were decided in favour of the assessee.

(e) Whether the AO erred in levying interest under Section 234B and in initiating penalty proceedings under Section 270A of the Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Characterization of Receipts as 'Royalty'

Relevant legal framework and precedents: Section 9(1)(vi) of the Act defines "royalty" and was amended retrospectively by the Finance Act, 2012 to expand its scope. Article 12(4) of the India-Netherlands DTAA defines "royalty" for treaty purposes. The Hon'ble Delhi High Court in the assessee's own case (Director of Income Tax vs. New Skies Satellite BV) held that receipts from data transmission services do not constitute royalty under the DTAA. The Court emphasized that amendments to domestic law cannot unilaterally alter treaty interpretation unless incorporated by mutual agreement of contracting states.

Court's interpretation and reasoning: The Tribunal and the DRP noted that the issue has been litigated extensively with consistent findings in favour of the assessee by the Delhi High Court and ITAT for AYs 2000-01 to 2014-15 and AYs 2016-17 to 2018-19. The Court reiterated that the expanded definition of "royalty" in the Act post-2012 does not affect the DTAA's definition, which remains binding unless amended bilaterally. The use of a "secret process" is a sine qua non for qualifying payments as royalty under the DTAA, which was not established in the assessee's case.

Key evidence and findings: The assessee is a Netherlands-incorporated company providing satellite data transmission services globally. The facts for the current AY are identical to earlier years where the Court found no royalty element. The Revenue had filed Special Leave Petitions ("SLPs") against some High Court decisions, but the Supreme Court has not yet pronounced final rulings. The DRP and AO relied on pending appeals to keep the issue alive but did not point to any change in facts.

Application of law to facts: Given the absence of a Permanent Establishment and the nature of services, the receipts are business profits and not royalty. The retrospective amendment to the domestic definition of royalty cannot override the DTAA definition. The Court's prior rulings bind the current assessment unless facts differ or the Supreme Court decides otherwise.

Treatment of competing arguments: The Revenue argued for applying the amended Section 9(1)(vi) definition to the DTAA interpretation, relying on OECD commentary and recent legislative changes. The assessee countered that treaty interpretation is a matter of international law and cannot be altered unilaterally by domestic amendments. The Court sided with the assessee, emphasizing treaty sanctity and the need for mutual agreement for changes.

Conclusions: The receipts from data transmission services do not constitute royalty under the India-Netherlands DTAA. The AO's and DRP's assessment treating such receipts as royalty is set aside.

Issue (b): Characterization of Receipts as 'Fees for Technical Services'

Relevant legal framework and precedents: Section 9(1)(vii) of the Act and Article 12(5) of the DTAA define fees for technical services ("FTS"). The Revenue had alternatively assessed the receipts as FTS. However, in earlier years, the Revenue had restricted appeals to the royalty issue, effectively abandoning the FTS claim.

Court's interpretation and reasoning: The Tribunal noted that the Revenue's abandonment of the FTS issue in appeals before the High Court and ITAT and the consistent findings in favour of the assessee on this point preclude the Revenue from reopening the issue. The nature of the services rendered does not fall within the scope of FTS as per the DTAA and judicial precedents.

Key evidence and findings: The contracts and service nature were examined, showing no transfer of technical knowledge or skill constituting FTS. Earlier decisions for AY 2018-19, 2020-21, and 2021-22 confirmed this position.

Application of law to facts: The receipts cannot be taxed as FTS under the DTAA or the Act. The AO's alternative finding on FTS is rejected.

Treatment of competing arguments: The Revenue's initial contention was that the payments were FTS, but having abandoned this ground in appeals, the Court did not entertain it further.

Conclusions: The receipts do not constitute fees for technical services under the DTAA or the Act.

Issue (c): Taxability in India in Absence of Permanent Establishment

Relevant legal framework and precedents: Article 5 of the India-Netherlands DTAA defines Permanent Establishment ("PE"). Business profits are taxable in India only if attributable to a PE. The assessee contended there is no PE in India.

Court's interpretation and reasoning: The Tribunal and the High Court have repeatedly held that the assessee's activities do not create a PE in India. The receipts are business profits of a non-resident without a PE and thus not taxable in India.

Key evidence and findings: The assessee's contracts and operations were examined, and no fixed place or dependent agent PE was found in India.

Application of law to facts: The absence of PE means no tax liability on business profits in India.

Treatment of competing arguments: The Revenue did not demonstrate existence of PE or attribute income to any PE.

Conclusions: The receipts are not taxable in India as business profits in absence of PE under the DTAA.

Issue (d): Following Binding Precedents and Consistency

Relevant legal framework and precedents: The principle of judicial precedent requires authorities to follow binding decisions of higher courts and their own prior decisions on identical facts.

Court's interpretation and reasoning: The Tribunal emphasized that the AO and DRP erred in not following the binding decisions of the Delhi High Court and ITAT in the assessee's own case for earlier years where the same issues were adjudicated in favour of the assessee. The Court noted that the Revenue's appeals against these decisions are pending before the Supreme Court, but until final adjudication, the lower authorities must follow existing precedents.

Key evidence and findings: The Court reviewed multiple judgments and orders from the High Court and ITAT spanning AY 2000-01 to AY 2021-22 consistently favouring the assessee.

Application of law to facts: Since facts remain unchanged and no binding Supreme Court ruling has overturned these precedents, the AO and DRP must apply the existing law as interpreted by the High Court and ITAT.

Treatment of competing arguments: The Revenue argued for keeping the issue alive due to pending Supreme Court appeals. The Court held that pending appeals do not justify ignoring binding precedents.

Conclusions: The AO and DRP are directed to follow the binding precedents and delete the impugned additions.

Issue (e): Levy of Interest and Penalty

Relevant legal framework and precedents: Sections 234B and 270A of the Act govern levy of interest for default in advance tax payment and penalty for under-reporting or misreporting of income respectively.

Court's interpretation and reasoning: The Tribunal observed that the issues of interest and penalty are consequential or premature given the deletion of the additions on merits. Without establishing tax liability, interest and penalty cannot be sustained.

Key evidence and findings: No independent justification for interest or penalty was demonstrated beyond the disputed additions.

Application of law to facts: Since the additions are deleted, the consequential interest and penalty cannot stand.

Treatment of competing arguments: The Revenue supported the interest and penalty; the assessee opposed.

Conclusions: Interest under Section 234B and penalty under Section 270A are not sustained.

3. SIGNIFICANT HOLDINGS

The Tribunal crystallized the following key legal principles and determinations:

"On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs."

The Tribunal held that the receipts from data transmission services do not constitute royalty or fees for technical services under the India-Netherlands DTAA and hence are not taxable in India in absence of a Permanent Establishment.

The Tribunal further held that the Assessing Officer and the Dispute Resolution Panel erred in not following binding judicial precedents of the Delhi High Court and ITAT in the assessee's own case, and accordingly directed deletion of the impugned additions.

The Tribunal also held that consequential interest and penalty are not sustainable in light of the deletion of the additions.

Accordingly, Grounds Nos. 1 to 3 were allowed, Grounds Nos. 4 and 5 were held consequential, and Ground No. 6 was held premature, resulting in partial allowance of the appeal.