9911796707
TMI Blog2011 (1) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... the following substantial questions of law : "(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amounts received by the Appellant (a non-resident) from its non-resident customers for availing transponder capacity was chargeable to tax in India where the satellite was not stationed over Indian airspace and in directing how much income is to be determined? (ii) Whether on the facts and in the circumstances of the case Tribunal was right in holding that the Appellant had a business connection inIndia through or from which it earned income? (iii) Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the amount paid to the Appellant by its customers represented income by way of royalty as the said expression is defined in Explanation 2 to section 9(1)(vi) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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. Though both the parties have preferred appeals and are therefore, they are appellants in their respective appeal. For the sake of convenience, M/s. Asia Satellite would be referred to as the appellant and the Director, Income-tax is referred to as the Revenue, hereinafter. 4. A glimpse of questions of law enumerated above gives a fair idea of the contours and the nature of dispute involved. However, it would still be necessary to highlight the factual premises under which the dispute has arisen. This job can be accomplished by taking stock of the factual matrix of ITA No. 131 of 2003, as the similar scenario prevails in the other appeal as well. Re : Statement of Facts 5. The appellant/assessee, viz., Asia Satellite Telecommunications Co. Ltd., is a company incorporated in Hong Kong and carries on business of private satellite communications and broadcasting facilities. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that it has no role whatsoever to play either in the uplinking activity or in the receiving activity. Its role is confined in space where the transponder which it makes available to its customers performs a function which it is designed to perform. The only activity that is performed by the appellant on earth is the telemetry, tracking and control of the satellite . This is carried out from a control centre at Hongkong. 8. For this reason, it is claimed by the appellant that no part of the income generated by it from the customers to whom the aforesaid services are provided was chargeable to tax inIndia and for this reason no return income was filed inIndia. However, Deputy Commissioner of Income-tax (Non-resident Circle),New Delhi as Assessing Officer issued a letter notice dated 20-10-1999 under section 142(1) stating that the assessee had entered into agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 country. According to the CIT(A), it was the responsibility of the appellant to keep the equipment in good shape and to ensure the quality of the downlinked beam in the footprint area in respect of a beam uplinked by the customer. He found that the telemetry, tracking and control operations were carried out from Hong Kong and that no beam was uplinked from India. His finding was that the agreements were signed outside India and the payments were also received outside India. Only the signals could be received in India but as a matter of fact these were not received in India either by the appellant or its agent but by cable TV operators who had agreements for reception of signals with the TV channels to whom the property in the signal belonged. He accordingly held that as the performance of the contract was not in India it could not be said that any income accrued to the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)(vi) would be attracted. According to the Assessing Officer, the appellant would fall within the definition of royalty as the said term was defined in Explanation 2 below section 9(1)(vi), as it was a payment for use of "similar property". The CIT(A) held that the issue to be decided was whether the customers were merely using a physical asset or were they using the process installed in the transponder. According to him, the signals were uplinked by the customers and were received in the transponder. The complicated devices in the transponder segregated the programme from the beam, amplified them, mounted them on new beams of wavelengths different from the original wavelength of the customers and transmitted the programmes on the new beam in the footprint area of the beam. The payments that are made by the customers were for this purpose and not for the use of the physica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ought to be allowed as a deduction. He considered the question as to what portion of the income so arrived at was to be considered chargeable to tax inIndia. He noted that the Assessing Officer had not given any reason as to why 80 per cent of the revenues should be attributed toIndia. He also noted that the appellant was located inHong Kong and, therefore, a substantial part of its business was likely to come from clients of Chinese and Japanese origin. He rejected the appellant's contention that the test to be applied whilst pro-rating the income would be either the number of countries which are covered by the footprint or the Gross National Product (GDP) per capita of the countries covered by the footprint. He held that appropriate ratio to be applied would be the area of the country to the total area of the footprint with areas of large water bodies like inland lakes, seas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the question as to whether the provisions of section 9(1)(vi) would be attracted. The Tribunal noted that the only operation conducted by the appellant was confined to receiving the signals, amplifying them and after changing the frequency, relaying them back to earth. However, the Tribunal held that the word "used" in clause (iii) of Explanation 2 to section 9(1)(vi) must be given the meaning which it has in common parlance. According to the Tribunal it was not necessary that there must be a physical connection with the item to be used. It is held that as long as the user derived advantage out of the property by amplifying the signals, it would tantamount to "use" within the meaning of clause (iii). It further held that there was a physical contact of the signal of the TV channels with the process in the transponder provided by the appellant. It was only when the signals came into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (c) of section 9(1)(vi), the Tribunal held that the TV channels were using the services of the appellant for the purpose of their business, which business was being carried on in India. The Tribunal took the view that business is carried on at a place where some activity capable of producing income is carried on. The source of income of the TV channels were the Indian advertisers who made payment for advertising their products during the course of the relay of the programmes in India. The other source of revenue was the cable operators who caught the signals and distributed them to the public. According to the Tribunal, therefore, the essential activity was to make available the programmes of the TV channels in India and, therefore, they found that the TV channels would be carrying on business in India. The Tribunal also held that in any event, the source of the income of the TV channels would cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, then, only the proportionate expenses relating to India should have been deducted rather than deducting the expenses in total from the net revenue relatable to India and thereafter apportioning the net income of the South Beam and C Band to India. The Tribunal, therefore, set aside the computation and directed that it would be done de novo by the Assessing Officer. The computation to be done would involve two steps. First, the Assessing Officer would have to calculate the gross receipts relatable toIndia and thereafter deduct therefrom the expenses in relation to income attributable toIndia. 22. Having said so, the Tribunal then dealt with the question as to what was the depreciation that would be allowed to the appellant. The Tribunal held that there was a difference between income which was exempt from income-tax and income which was outside the scope of the charging provision. The Tribunal held that depreciation all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 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 income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India." 25. It is clear from the reading of the aforesaid provision that a non-resident is liable to pay tax on the income derived by him, which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India during the relevant year. Thus, a non-resident is under an obligation to pay tax in respect of income generated/earned by him in India. Section 9 of the Act lays down the various circumstances under which income would be deemed to accrue or arise in India. We are concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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)** ** ** (iii) The use of any patent, invention, model, design, secret formula or process or trade mark or similar property; ** ** ** (vi) The rendering of any servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, it was accepted at the bar that in case the finding of the Tribunal that there was no operation inIndia is affirmed, issue as to whether 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 inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act clearly demonstrated that wider possible interpretation to this deeming provision was to be given. 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations were carried out in India. No machinery or computer, etc. is installed by the appellant inIndia through which the programmes are reachingIndia. The process of amplifying and relaying the programmes is performed in the satellite which is not situated in the Indian airspace. Even the Tracking, Telemetering and Control (TTC) operations 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tandard Agreement entered into by AsiaSat with its customers, which is summarized below : Definition of 'AsiaSat 1' as per which, the appellant is the operator of the satellites. Clause 3.2(ii) and (iii), Clause 3.4 as per which, submitted the learned Senior counsel, not only the appellant is the operator of the satellite 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 ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of "sale". On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anguage which also had earlier been used in international tax treaties. In that international tax treaties, the term 'royalty' came up for discussion before the Courts in the following cases : (a) CIT v. Ahmedabad Mfg. & Calico Printing Co. [1983] 139 ITR 806 (Guj.). (b) CIT v. Vishakhapatnam Port Trust [1983] 144 ITR 146 (AP). (c) M.V. Philips v. CIT [1988] 172 ITR 521 (Cal.). (d) CIT v. Neyvali 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 nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to section 9(1)(vi) wherever required expression used is 'use or right to use'; (c) In view of the aforesaid distinction maintained deliberately by the Legislature, hence it is not the case of 'causus omissus'; (d) Thus, according to the respondent it makes no difference in what capacity the appellant allows someone to use the process. 46. His alternate submission was that even if the control is relevant, the same was with the customer (whom the services were provided). For this purpose, he referred to the definition of transponder, which makes a difference between satellite as carrier and the transponder. According to him, what is relevant is the 'control of the transponder' and not the satellite which merely is a carrier, i.e., Nuclear Warhead has two parts, Carrier or rocket and 'payload' or 'bomb'. Further to determine control, the agreement needs to be examined. The agreement states : & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e issue with the learned counsel on the applicability of the judgment in the case of ISRO (supra). He submitted that the appellant was not right in relying upon the ISRO's case (supra) because of the following reasons : (a) ISRO's case (supra) does not apply to the facts of the present case. (b) The difference lies in the type of the transponder being used. There are two types of transponder being used, i.e., Active or Passive. (c) The difference as recognized is that the process of "Amplification" takes place in the communication active satellite whereas not in the case of passive satellite . (d) Authority of Advance Rulings was well aware of the same while dealing with facts of the ISRO's case (supra) and even put a question to the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 importance of this area, the definition of royalty in the Australia-Canada Treaty (1980) has recently been broadened. The following is a comment on the new provision from the Australian tax authorities made in January, 2002 : "27. The definition of royalties has been expanded in conformity with current Australian tax treaties practice (Article 12). The definition now specifically includes payments for the reception or use of tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given to sub-clause (vi) of section 9(1) of the Act. This sub-clause makes income by way of royalty payable by certain persons as chargeable to tax. These persons pay the 'royalty' made either by the Government or a resident or a non-resident. We have to keep in mind that section 9 of the Act is a deeming provision and if the situation specified therein exists, it is to be deemed that income has accrued or 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; &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their natural, ordinary or popular sense and phrases and sentences are construed according their grammatical meaning unless that leads to some absurdity or unless there is something in the context, or in the object of the statute to suggest the contrary. In a case if the language of the statute is not clear and there is need to resort to aids of construction, such aids can be either internal or external. Internal aids of constructions are definitions, exceptions, Explanations, fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuations, saving clauses, non obstante clauses, etc. The external aids are dictionaries, earlier Acts, history of legislation, parliamentary history, parliamentary proceedings, state of law as it existed when the law was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the Act. Therefore, need for these aids would arise only if some ambiguity is found in the definition of term 'royalty' as appearing in the aforesaid provision. (4) As per section 9(1)(vi) of the Act, the income by way of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether or not, - (i) the non-resident has a residence or place of business or business connection inIndia; or (ii) the non-resident has rendered service inIndia." From plain reading of the Explanation inserted with effect from 1-6-1976 by the Finance Act, 2007 which has been again substituted by the Finance Act, 2010 with retrospective effect from 1-6-1976, it is clear that income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) irrespective of the fact whether the non-resident has a residence or a place of business or business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is received by non-resident for the transfer of all or any rights including the granting of a licence in respect of a patent, invent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of such foreign company." (7) The four clauses of sub-section (1) lay down the scope of power of Central Government to enter into an agreement with another country. Clause (a) contemplates situations where tax has already been paid on the same income in both the countries and in that case it empowers the Central Government to grant relief in respect of such double taxation. Clause (b) of section 90 which is wider than clause (a) provides that an agreement may be made for the avoidance of double taxation of income under this Act and the corresponding laws enforced in that country. Clauses (c) and (d) essentially deal with the agreements made for exchange of information, investigation of cases and recovery of Income-tax. The effect of an agreement made pursuant to the section 90 is that if no tax liability is imposed under this Act, the question of resorting to agreement would not arise. No provision of the agreement can fasten a tax liability when the liability is not imposed by this Act. If a tax liability is imposed by this Act, the agreement may be resorted to fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ownership on the property or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. 56. As noticed above, the Tribunal has held that the appellant is deriving income from lease of transponder capacity of its satellites. The appellant is deriving income from lease of transponder capacity of its satellites. The appellant is amplifying and relaying the signals in the footprint area after having been linked up by the TV channels. The essence of the agreement of the TV channels with the appellant is to relay their programmes in India. The responsibility of the appellant is to make available programmes of the TV channels in India through transponders on its satellite . The function of the satellite in the transmission chain is to receive the modulator carrier that earth stations emitted as uplinking, amplifying them and retrans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate a permanent establishment. Therefore, it was held that the payments were not in the nature of 'royalty'. In Modern Threads (I) Ltd.'s case (supra), it was held that the payments were made in instalments to Italian company for supply of technical know-how and also for supply of basic process engineering documentation for designing, construction and operation of plant subject to their liability on account of rectifying form, it was held that the amount paid for supply of technical know-how and basic engineering documentation for setting of the plant in India for manufacturing of PTA was the business profit in the hands of Italian company in the absence of permanent establishment in India. 58. In the light of our discussion explaining Explanation 2 to section 9(1) of the Act, let us proceed to apply these principles on the facts of the case. The starting point has to be the nature of services provided by the appellant to its customers as per the agreement arrived at between them. Keeping in view the aforesaid operation of the satellites, we revert back to the agreement entered into between the appellant and its customers. It is clear from various clauses of the agreement (and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome, thus, would entirely depend upon the question as to whether any "process" is used by the TV Channels and also whether a "secret process" is required to bring within the ambit of Explanation 2. 60. Once we keep in mind the aforesaid important aspects, it is not difficult to find the answer to the question posed. In fact, we can say that it is so provided by the AAR in ISRO's case (supra). A close scrutiny of the said ruling of the AAR would clearly reveal that where the operator has entered into an agreement for lease of transponder capacity and has not given any control over parts of satellite /transponder, the provisions of sub-clause (vi) would not apply. In the present case also, the appellant had merely given access to a broadband available in a transponder which can be utilized for the purpose of transmitting the signals of the customer. In that case, after taking note in depth, the operation and the functioning of transponder, theAAR emphasized on the fact that data sent by the telecast operator does not undergo any change for improvement through the media of transponder. Following discussion from the said judgment needs to be reproduced : "13. As IGL does not car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apable of accepting the challenge of an interrogator and automatically transmitting an appropriate reply". In Chamber's Dictionary of Science and Technology, 'transponder' (communication), is defined as an equipment forming part of a communications satellite , which receives signals from a ground station at one frequency and retransmits them to another ground station or to domestic satellite receivers at another frequency". 16. It is clear that the applicant in the course of carrying out its objectives and operations will not be using any equipment of IGL satellite or the transponder. What the applicant needs to do is to adjust or tune its system to access the navigation transponder space segment capacity. By earmarking a space segment capacity of the transponder for use by the applicant, the applicant does not get possession (actual or constructive) or control of the equipment of IGL. The applicant and the end-users are enabled to have the benefit of use of facility provided by Inmarsat 4th generation satellite and the navigational transponder it has. That is the objective of GAGAN Project. The applicant does not use or operate any equipment of IGL. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is with the applicant. Undoubtedly, the applicant does not operate the transponder; it gets access to the navigation transponder through the applicant's own network/apparatus. The data sent by the applicant does not undergo any change or improvements through the media of transponder. In essence, it amounts to the provision of a communication/navigational link through a facility owned by IGL and exclusively operated/controlled by it. The operation and regulation of transponder is always with IGL. It is also pertinent to notice that a navigation transponder unlike a communication transponder is not an active transponder in the sense it does not amplify. It is a passive transponder, as pointed out by the applicant. This is also a pointer that the applicant does not use the equipment (transponder) as such." [Emphasis supplied] 62. It is also clear from the above that the aspect of amplification of data by the transponder is taken only as additional factor, but the judgment is not entirely rested on that. This Ruling further categorically demonstrates that in a case like this, services are provided which is integral part of the satellite , remains under the control of the satelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; (c) Common output antenna for retransmitting signals back to the footprint area on earth, which are shared by multiple transponders. (d) Satellite positioning system, including position adjusting thrusters and the fuel storage and supply system therefor in the satellite . It is this positioning system which ensures that the location and the angle of the satellite is such that it receives input signals properly and retransmits the same to the exact desired footprint area. (e) Temperature control system in the satellite , i.e., heaters to ensure that the electronic components do not cease to operate in conditions of extreme cold, when the satellite is in the "shadow". (f) Telemetry, tracking and control system for the purpose of ensuring th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess 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 may also observe at this stage that the terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not be the determinative factors. It is the substance of 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. We may also point out that against the decision of the AAR in ISRO's case (supra) Special Leave Petition was dismissed by the Supreme Court (see Puran Singh Sahni's case (supra). 69. We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 the customer's factory for its use, at a fixed hire per day or hire per km. subject to an assured minimum, for a period of one month or one week or even one day; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit; and during the period when the lorry is with the customer, the transport o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 customs duty was reimbursed to it. The price of offshore services for design and engineering including detailed engineering in relation to the supplies, services and construction and erection and the cost of any other services to be rendered from outsideIndia, was also paid in US dollars inTokyo. On these facts the appellant applied to the Authority for Advance Rulings (Income-tax) for a ruling on the following points : (a) Whether the amounts received/receivable by the appellant from Petronet for offshore supply of equipment, materials, etc., were liable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 the applicant would not be able to claim any deduction from the amount. 71. In that case, the appellant approached the Supreme Court challenging the aforesaid j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , would arise only in the event taxable income of the assessee arose in oneContractingState 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtant fact that the money which is received from the cable operators by the telecast operators is treated as income by these telecast operators which has accrued in India and they have offered and paid tax. Thus, the income which is generated in India has been duly subjected to tax in India. It is the payment which is made by the telecast operators who are situated abroad to the appellant which is also a non-resident, i.e., sought to be brought within the 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 relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of electrical power or communities (e.g., through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g., for the transportation of gas or oil)." 75. Much reliance was placed upon the commentary written by Klaus Vogel on 'Double Taxation Conventions (3rd Edition)'. It is recorded therein : "The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's DTC with Luxembourg); this would not be 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be treated fiscally as "resident" and, consequently, is fully liable to tax in that State". The expression used is liable to tax therein, by reasons of various factors. This definition has been carried over even in Article 4 dealing with resident in the OECD Model Convention 1992. 87. In A Manual on the OECD Model Tax Convention on Income and on Capital, at paragraph 4B.05, while commenting on Article 4 of the OECD Double Tax Convention, Philip Baker points 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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