TMI Blog2006 (8) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... n relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. This is made clear if reference is made to the, sentence found earlier in the paragraph that The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of para 4(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available We thus hold that the payment does not also fall within art. 12.4(b) as fees for included services . Since the transponder-technology is available off the shelf in the form of published literature, it is no longer a secret process and hence the payment, even if it is assumed to be in consideration for the use of a technological process, does not amount to royalty under the treaty. The argument that the payment in the present case is linked to the productivity is found to be irrelevant in terms of the agreement. We have already referred to the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... performed and rendered . A service could be performed or rendered in a place which is different from the place where it is utilised . Whereas the Act uses the word utilised the treaty uses the word performed . Our views on the interpretation of art. 12.7 are only prima facie views, though the debate before us was quite interesting as well as illuminating. There was reference to the various treaties which USA had entered into with other countries such as Thailand, China and Australia and also to the internal documents of the US to show how the US Government have understood the provisions of art. 12.7 of the treaty. These arguments were presented before us with ability and learning, but we have refrained from giving our final views on the same as we consider it to be unnecessary in the light of our basic finding that the payments made to the assessee before us are not royalties within the meaning of art. 12.3(a) or fees for included services within the meaning of art. 12.4(b). The source rule embodied in art. 12.7 would come into play only when we find that the payment is royalty or fees for included services. Thus, we have held that the amounts cannot be assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annels as shown at p. 13 of the assessment order, the Indian rupee equivalent of which was Rs. 77,35,21,577/-. According to the AO, cl. (iii) of Expln. 2 below cl. (vi) of sub-s. (1) of s. 9 of the IT Act, 1961 Was' applicable and the revenues were liable to be assessed as royalty . Under these provisions, royalty meant consideration for the use of any patent, invention, model, design, secret formula or process or trade mark or similar property . He further held that the amounts would be considered as royalty even though they are received from non-resident television channels. In support of this decision, he held that the foreign television channels are utilizing the services provided by the assessee for their business that is being carried out in India. He referred to the fact that the television channels have a large section of Indian viewers and the programmes are so produced as to cater to the tastes and preferences of the Indian viewers. The income, according to the AO, accrued in India because of the fact that the services of the assessee were utilized by the television channels in India. 4. Having held as above, the AO proceeded to consider whether the revenues fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ternative is more relevant or appropriate and hence even under art. 12(2) itself the royalty can be said to have accrued in India. 5. The AO also held, in the alternative, that even if art. 12(3) is not applicable, the revenues are taxable as fees for included services as defined in protocol 4(b) of the Indo-US treaty which specifically states that receipts in view of communication through satellite is in the nature of fees for included services . 6. For the above reasons, which are elaborated in the assessment order, the AO brought the amount of Rs. 77,35,21,577/- to tax in India under art. 12(3) of the DTAA and taxed the same at 15 per cent. He also assessed a sum of Rs. 75,00,00,000/- as estimated revenue from Radio Broadcasting and Communication services and other T.V. Channels, details of which have not been furnished by the assessee , also at the rate of 15 per cent. First appellate proceedings: 7. Before the CIT(A) the assessee took up several objections. The first objection was that the reassessment proceedings were without jurisdiction. This objection was rejected. The second objection was to the assessment of the revenues as royalty both under s. 9(1)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d further that the CIT(A) erred in holding that the amounts received by the assessee are not to be treated as royalty. 10. The assessee has also filed cross-objections on 17th Dec., 2004 in the appeal filed by the Department in ITA No. 1796/Del/2001 and has taken grounds (4 in all) to the effect that the IT authorities were not right in law in holding that the revenues received by the assessee from both Indian and non-resident broadcasters (television channels) were on account of use of secret process in the satellite/transponder and constituted royalty under the Act as well as the DTAA. The quantification of the income is also challenged, without prejudice. 11. Here, some clarification is necessary. The IT Department originally assessed the income in the hands of Panamsat International Systems Inc. which was cancelled by the CIT(A) by order dt.22nd Feb., 2001. Thereafter proceedings were taken for assessing the revenues in the hands of the successor-company, Panamsat International Systems LLC by issue of notice under s. 148. The same income which was earlier assessed in the hands of Pan Am Sat International Systems Inc. was assessed in the hands of Panamsat International S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements. A perusal of the various terms of the agreements shows that there is no process or secret process involved. The intention of the parties is that the assessee shall provide a service of receiving and re-transmitting the signals to the broadcasters. (5) The appreciation and understanding of the word process appearing in the relevant section of the Act in the case of Asia Satellite is erroneous. (6) The reliance placed on the decision of the Tribunal in Asia Satellite can at best be only to a limited extent, that is, to the extent that it covers s. 9(1)(vi) r/w Expln. 2(iii) thereto, but the decision cannot govern the present case entirely for the simple reason that the decision was not concerned with the interpretation of any DTAA (India has no DTAA with Hong Kong) where the phraseology and the punctuation is different. (7) The payment cannot also be considered as fees for included services within the meaning of art. 12(4) of the DTAA (this contention was taken by means of an additional ground filed before us). (8) The computation of the income is arbitrary and excessive. This argument was taken without prejudice. Principal contentions/arguments of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpretation shall be placed on art. 12.3(a) of the treaty. It was further contended that all the six sub-clauses of Expln. 2 to s. 9(1)(vi) have been put in a single article in the treaty, that is, in art. 12.3(a). There is a disjunctive, that is, the word or between the words formula and process in the said article which cannot be read as and as the assessee wants to, which would be contrary to the intention expressed by the legislature. As regards the argument of the assessee that the information about the functioning of the transponder is available off the shelf and hence not secret , and the reliance placed by the assessee on the order of the AAR in Dun Broadstreet Espanna, S.A., In re (2005) 193 CTR (AAR) 9 : (2005) 272 ITR 99 (AAR), it was contended that the judgment was rendered without reference to the full facts of the case and that the relevant provisions of the statute and the law on the point was not before the AAR and that the spheres of the AAR ruling and the Tribunal's order in Asia Sat are different and hence the judgment does not even enjoy a persuasive authority. It was further pointed out that only some of the clauses of Expln. 2 below s. 9(1)(vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis of the MoU that satellite technology has been made available by the assessee (to the broadcaster/TV channel) in consideration for the payment, which enables the broadcaster/TV channel to apply the same in future for the purpose of its business without recourse to the assessee and therefore the payment is taxable as FIS. Strong reliance has been placed on the order of the Mumbai Bench of the Tribunal in the case of Raymond Ltd. vs. Dy. CIT (2003) 80 TTJ (Mumbai) 120 : (2003) 86 ITD 791 (Mumbai) where the words make available have been interpreted. Our attention was drawn to paras 1.4, 1.5, 2.1, 2.2, 4.1, 4.2 and 4.3 of the agreement and it was contended that these clauses show that the technical knowledge/skill (relating to satellite technology) has already been imparted to the broadcasters and the broadcaster's responsibilities under the agreement cannot be discharged unless something has been made available to him by the assessee, that they also show that the entire gamut of technical knowledge was made available by the assessee to the broadcaster and that the words in consultation with customers appearing in para 2.1 mean that the know-how is being passed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the assessee has entered into with the broadcasters/TV channels refer only to service . These agreements were entered into even before the IT authorities took any action to assess the assessee and hence they were not got up for the occasion or tailor-made for the situation. There is no reference to any process in any of the agreements. The payment is therefore not as consideration for the use of any process; it is consideration only for the rendering of the service of transmitting the signals from one place to another with the help of a transponder. The normal meaning of royalty is that it is a payment for undivulged information not generally in the public domain, which is not the case here. The various terms used in art. 12.3(a) are all species of intellectual property. A detailed synopsis on this aspect was filed. (b) Is there a process involved? There is no process involved. The word process , judged by the context and setting in which it is used in the article, is seen to be surrounded by words denoting intellectual property rights which are either protected or capable of being protected in law and therefore, the word process should fit in with them. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, the number and the exchange in such a manner that it amounted to transfer of the right to use the goods, whereas in the present case, the assessee (Panamsat) does not own any equipment other than the transponder. To our query, the learned counsel replied that the decision cited cannot in the very nature of things apply to intellectual property rights since the right to use such rights cannot be enjoyed without a transfer of the right itself. Therefore, he submitted, that the judgment has to be confined to tangible property and cannot be extended to IPRs. (f) The reference to the website of the assessee and the alleged admissions therein is irrelevant. Particularly, the reference to data files at p. 69A is irrelevant because it is nobody's case that the data files are being transferred by the assessee to the broadcasters. Similarly, the reference to the report of a high-power committee is also irrelevant to the decision in the present case. (g) It was clarified that the payment to the assessee was not dependent on the productivity of the transponder, as claimed by the Department. It is a fixed monthly fee, subject to reduction for outages . (h) Arguments re-appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... space and do not amount to any process . (d) A process is no doubt used by the assessee in providing the services but the use of or right to use the process has not been granted to the broadcasters. (e) In order to constitute royalty the process must have the attributes of IPRs, i.e., it must be undivulged, undisclosed and not available in the public domain. (f) The word process has to be interpreted not according to any dictionary, but according to the context and on the basis of the rule of ejusdem generic or noscitur a sociis. (g) The process must be secret in order that the consideration, if any, paid therefore is assessed as royalty. In the present case, the satellite technology is available as published literature. There is no exclusivity or uniqueness about the satellite owned by the assessee. It is a mere standard facility providing a standard service to those who need the service and are willing to pay for it. (h) The agreements with the broadcasters show that they are service agreements and cannot be re-written as something else. Many such agreements were entered into even before any issue was raised about the taxability of the receipts. They ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms of the DTAC . Again, in CIT vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs (2004) 189 CTR (SC) 193 : (2004) 267 ITR 654 (SC) the Supreme Court summed up the position as under: Where liability to tax arises under the local enactment the provisions of ss. 4 and 5 of the Act provide for taxation of global income of an assessee chargeable to tax thereunder. It is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation as envisaged under s. 90 to the contrary, if any, and such an agreement will act as an exception to or modification of ss. 4 and 5 of the IT Act. The provisions of such agreement cannot fasten a tax liability where the liability is not imposed by the local Act. Where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would. prevail over the provisions of the Act, as is clear from the provisions of s. 90(2) of the Act. Sec. 90(2) made it clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reason or logic given in para 6.18 of the order by the Tribunal to hold that the word secret does not qualify the word process is that there is no comma after the use of the word 'secret' till the end of cl. (iii) and if the intention has been to apply the word 'secret' before the word 'process' also, then a comma would have been used after the word formula and further that the word secret cannot also be applied to the word trade mark because once registered there is nothing secret about the trade mark and the impossibility of reading the word secret before the word trade mark further strengthens the view that the word secret cannot be read before the word process also. This naturally takes us to the question whether there is anything in art. 12.3(a) of the DTAA between India and USA which militates against such a view. It must be remembered that India had no DTAA with Hong Kong and hence the view taken by the Tribunal with regard to the cl. (iii) of Expln. 2 below s. 9(1)(vi) would apply if we were to also interpret the same provision. But art. 12.3(a) is worded as below: The term royalties as used in this article means: (a) p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yment therefor, if any, may be assessed in India as royalty. The Tribunal in Asia Sat have recognized that all the items referred to in cl. (iii) of Expln. 2 such as patent, invention, model, formula and process etc. are intellectual properties. Similarly, the words which surround the words secret formula or process , in art. 12.3(a) of the treaty refer to various species of intellectual properties such as patent, trade mark, design or model, plan, etc. Thus the words secret formula or process must also refer to a specie of intellectual property applying the rule of ejusdem generis or noscitur a sociis. 20. That takes us to a consideration of the question whether the process carried on by the assessee is a secret process. On this question, we have weighed the elaborate arguments advanced by both the sides carefully and hold that so far as the transponder technology is concerned there appears to be no secret technology , known only to a few. There is evidence adduced before us to show that the technology is even available in the form of published literature/book from which a person interested in it can obtain knowledge relating thereto. There is no evidence led from the side ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the security agreement relates to the national defence security of the USA since a satellite or transponder contains equipment sensitive to the defence and security requirements of a country. We are satisfied with the clarification and see no point in pursuing the issue further. In any case, there is not on iota of evidence to show that the assessee had any patent to the satellite or transponder which it allowed the broadcasters to use for, a consideration. 22. That takes us to the next question whether the payment is for the use of the secret process . Though we have already held that there is no secret process involved and hence the payment cannot be considered to be royalty under the treaty, the question is being considered on the footing that we are wrong in holding that the process is not secret. We have to first look into the agreement between the assessee and the broadcasters to gather the intention of the parties. Both sides agreed that the agreement between the assessee and Turner Broadcasting System, Inc., of USA can be adverted to as representative of all the agreements. This agreement is at pp. 249 to 300 of the paper book No. II filed by the assessee. It is tit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide, and the customer (the TV broadcaster) should utilise. the services of the transponder for the purpose of transmitting the signals over the footprint area of the satellite through various cable operators. The question that arises for consideration is whether on the terms of the agreement it is possible to hold that the payment of the service fee is for using or for the right of using the secret process. There was much debate before us on the applicability of the judgment of the Madras High Court in the case of Skycell on this question. This judgment has been considered by the Tribunal in Asia sat and has been distinguished on facts. That judgment actually related to the interpretation of s. 194J of the Act which required tax to be deducted at source by the person paying any fees for technical services . This term was to have the same meaning as in Expln. 3 below s. 9(1)(vii) of the Act. The case was that of a company whose business it was to provide cellular mobile phone facility to its subscribers. The subscribers were directed to deduct tax from the payments made to the company under s. 194J on the footing that the amount paid was fees for technical services. The Madras H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 25. In the course of the hearing, the assessee filed an additional ground of appeal which reads as follows: That the CIT(A) erred on facts and in law in not holding that the revenues received by the appellant from its customers were not in the nature of fee for included services in terms of art. 12.4(b) of the treaty . In the application for admission of the additional ground it has been explained that the AO while taxing the amounts has invoked art. 12.3 (royalty) and in the alternative, art. 12.4(b) (fees for included services) that though the assessee raised grounds before the CIT(A) both with regard to art. 12.3(a) and art. 12.4, the CIT(A) did not consider the ground relating to fees for included services under art. 12.4(b) presumably because he had held that the amounts are taxable as royalty under art. 12.3(a) and that therefore in the appeal before the Tribunal the assessee had only challenged the decision of the CIT(A) with regard to royalty under art. 12.3(a), that it was only in the course of the arguments when the special c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wrong in our view that the assessee does not provide any technical service to the broadcasters, still it has to be proved (by the Revenue) that some technical knowledge, experience, etc. was made available to the broadcasters in regard to the, working of the transponder/satellite which they (the broadcasters) may apply by themselves, without reference to the assessee, in future for the purpose of their business. We do not see how this is possible. For example, once Turner Broadcasting Inc., of the USA has made use of the services provided by the assessee for a period. of ten years and terminates the agreement, still it has to approach some other company owning a transponder/satellite for beaming the signals over the required area or it has to renew the contract with the assessee. A third option is to purchase a transponder/satellite and use it for transmitting and beaming the signals. During the period of working of the agreement, no technology relating to transponder/satellite can be said to have been made available to the broadcaster just because he has been using the services of the assessee for a number of years. The mere possibility that the broadcaster may have acquired so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of communicating information through satellites/transponders to agree to transfer technology relating to communication through satellite to B and if this is coupled with the rendering of technical services the case would fall under art. 12.4(b). In the case before us, though Panamsat is engaged in the business of transmitting TV signals from one place to another; it has not agreed to transfer any technology relating to this activity to the broadcasters. It has merely undertaken to transmit the signals sent by the broadcaster for a price. That essentially is a service contract. The example given in the MoU cannot be understood, in our view, to mean that wherever a satellite is used in relation to the rendering of a service, it must be assumed that there is a transfer of technology relating to the area of communication through satellite. This is made clear if reference is made to the, sentence found earlier in the paragraph that The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc. are made available to the person purchasing the service, within the meaning of para 4(b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, is only to cover the counter-point that the word secret appearing in the art. 12.3(a) of the treaty qualified both formula and process . Faced with this situation, it was contended by the learned special counsel that the transponder-technology was a secret process protected or capable of being protected by law and hence the payment was taxable as royalty under the aforesaid article. We have not accepted this argument also and have held that since the transponder-technology is available off the shelf in the form of published literature, it is no longer a secret process and hence the payment, even if it is assumed to be in consideration for the use of a technological process, does not amount to royalty under the treaty. The argument that the payment in the present case is linked to the productivity is found to be irrelevant in terms of the agreement. We have already referred to the agreement between the assessee and Turner Broadcasting Inc. of USA, which is representative of all the agreements, in which the service fee is payable monthly. Even if it is assumed that the payment of the fee is linked to the productivity, meaning thereby that it is linked to the number of hours ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian company to gain access to the software. The payment was therefore in truth held to be for the use of the software and hence royalty. When we look at the facts of the case before us, as we have already noted, it seems to us that the broadcaster was in truth paying for the service of transmission of the signals and not for any protected process. There is no evidence to show that the broadcaster had access to any protected software inside the transponder which was indispensable to him for the purpose of transmitting the signals. We cannot, in the absence of any evidence, first make an assumption that there existed a protected software inside the transponder and make a further assumption that the broadcasters were allowed access to the same and a still further assumption that the software was protected by means of a patent enuring to the assessee. The broadcaster was not interested in the process or the intricacies of the working of the transponder. In fact, even the assessee is not interested in them. He is only as much interested in the technology or intricacies of the transponder as a cinema theatre owner would be interested in the technology involved in the working of the film- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This article is however controlled by art. 12.7. Article 12.7 reads as follows: 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, or a resident of that State. Where, however, the person paying the royalties or fees for included services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for included services was incurred, and such royalties or fees for included services are borne by such permanent establishment or fixed base, then such royalties or fees for included services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. (b) Where under sub-para (a) royalties or fees for included services do not arise in one of the Contracting States, and the royalties relate to the use of, or the right to use, the right or property, or the fees for included services relate to services performed, in one of the Contracting States, the royalties or fees for incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in India and it is several thousand kilometers above the earth. The word performed is equivalent to rendered . The word utilised connotes an idea in total contrast with the idea conveyed by the words performed and rendered . A service could be performed or rendered in a place which is different from the place where it is utilised . Whereas the Act uses the word utilised the treaty uses the word performed . 36. Our views on the interpretation of art. 12.7 are only prima facie views, though the debate before us was quite interesting as well as illuminating. There was reference to the various treaties which USA had entered into with other countries such as Thailand, China and Australia and also to the internal documents of the US to show how the US Government have understood the provisions of art. 12.7 of the treaty. These arguments were presented before us with ability and learning, but we have refrained from giving our final views on the same as we consider it to be unnecessary in the light of our basic finding that the payments made to the assessee before us are not royalties within the meaning of art. 12.3(a) or fees for included services within the meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould arise for consideration only if the amounts paid to the assessee are held liable to tax as royalty. Ground No. 9 does not seek any specific relief and hence not adjudicated upon. 39. The levy of interest under s. 234B has been questioned in Ground No. 10. This issue is consequential to our decision that the amounts received by the assessee from the broadcasters (except doordarshan) cannot be considered to be royalty. Even otherwise, the issue stands covered by the order of the Delhi Bench of the Tribunal in the case of Sedco Forex International drilling Inc. vs. Dy. CIT (2000) 67 TTJ (Del) 670 : (2000) 72 ITD 415 (Del). The decision of the Special Bench of the Tribunal in the case of Motorola Inc. vs. Dy. CIT (2005) 96 TTJ (Del)(SB) 1 : (2005) 95 ITD 269 (Del)(SB) as also the decision of the Delhi Bench of the Tribunal in the case of Asiasat also support the assessee's grounds against the levy of interest. In these decisions, it has been held that if the tax was deductible at source from the payments made to the assessee, though not deducted, the assessee would be entitled to take credit for the tax so deductible and pay only the balance as advance-tax. The entire r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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