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TMI Blog2009 (12) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... time of hearing it is prayed that the order of the ld. CIT(A) may be set aside and that of Assessing Officer restored." 3. Short facts apropos are that assessee engaged in the business of TV broadcasting and software development, filed a return of income showing loss of Rs.24,60,840/- which was processed u/s 143(1)(a) of the Act by making prima facie adjustment through disallowance of development expenses resulting in an assessed loss of Rs.19,70,012/-. Subsequently, the case was selected for scrutiny and assessment later completed u/s 143(3) of the Act and loss determined at Rs.4,85,641/-. This order was set aside by ld. CIT(A) invoking powers u/s 263 of the Act, for, according to him, a sum of Rs.20,62,23,621/- which was allowed to assessee as 'Transponder Hire Charges' ought to have been disallowed u/s 40(a)(i) of the Act, tax having not been deducted tax at source therefrom, as per section 195 of the Act. in the re-assessment, pursuant to the order of ld. CIT u/s 263 of the Act, assessee was requested to give details regarding transponder hire charges paid. Based on such details, Assessing Officer was of the opinion that transponder hire charges paid to two companies were co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; Rs. 20,62,23,621 4. Before the ld. CIT(A), submission of the assessee was that Additional Commissioner of I.T. had given instructions u/s 144A of the Act to the Assessing Officer for completing the assessment which was set aside earlier by ld. CIT(A) invoking powers u/s 263 of the Act. Line of arguments taken by assessee were almost same as taken before Assessing Officer, and could be summarized as under: a. recipients were not residents of India. b. income of the recipients never accrued in India nor was received in India and therefore, it could not be taxed in India. c. recipients had not performed any activity in India and the transponders were located outside India ruling out any accrual of income to such recipients u/s 5(2) of the Act. d. none of the assets or services of recipients were located in India. e. payments paid by assessee would not fall within definition of royalty nor fees for technical services as given u/s 9(1)(vi) of the Act. 5. When the above submissions were put to concerned Assessing Officer, following comments were given by her to the ld. CIT(A): a. for determining the place of accrual, the statutory test is not place where services were bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee having not made deduction of tax at source, section u/s 40(a)(i) of the Act was rightly applied by Assessing Officer. In his view, the decision of Special Bench brought to 'nought' the effect of the order in Raj Television Net Works Ltd [supra] and hence reliance on the latter decision placed by ld. CIT(A) was incorrect. 8. In reply to above submissions, ld. A.R. first argued that admittedly that there were two payments one to M/s Rimsat, U.S.A. and the other to M/s Menon Ltd., U.K. According to him, even if it was presumed that the law was settled against the assessee in view of decision of Special Bench in New Skies Satellites (supra) as of now, it would apply only to hire charges paid to M/s Rimsat , U.S.A. According to him, vis-a-vis payment made to M/s Menon Ltd., U.K., that company was not having any transponder in its ownership or possession but had only agreed to hire the services of Russian Satellite for use of the assessee. Therefore, it was submitted that payments made to M/s Menon Ltd., U.K. would not be royalty or technical services and decision of Special Bench in New Skies Satellites [supra] would not apply. On the other hand, according to him, the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of service in India was essential, he relied on the decision of Hon'ble Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT 288 ITR 408. Therefore, according to him, at least vis-a-vis payments to M/s Menon Ltd., U.K., these were neither technical services nor royalty and hence question of deduction of tax therefrom was ruled out. Ld. counsel then submitted that sec. 40(a)(i) of the Act was triggered only when a payment is made to a non resident on which tax has not been deducted or paid under Chapter XVIIB of the Act and therefore, according to him, there should be a failure envisaged under Chapter XVIIB of the Act for triggering the application of section u/s 40(a)(i) of the Act. Relying on section 195 of the Act. ld. counsel submitted that sums paid to M/s Menon Ltd., U.K. was not chargeable under the provisions of the Act and therefore, assessee was not liable to make any deduction of tax at source. Placing reliance on a Special Bench decision in the case of Mahindra & Mahindra vs. DCIT [313 ITR [AT] 263], he submitted that an assessee cannot be treated as one in default, if recipient was not chargeable to tax under the Act. Again referring to section 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, it was argued that in view of Article 26(3) of the DTA, there was no obligation cast on the assessee for effecting any deduction on the tax. Further, according to him, the disallowance of payments made to M/s Rimsat, U.S.A. also was against law notwithstanding the decision of the Special Bench decision in New Skies Satellites [supra]. In support of this line of argument, ld. A.R. relied on the decisions of Delhi Bench of Tribunal in the case of Millennium Infocom Technologies Ltd Vs. ACIT 117 ITD 114 and Herbalife International India P. Ltd. Vs. ACIT (101 ITD 450) . On his submission that triggering u/s 195 of the Act was required for application of sec 40(a)(i) of the Act, ld. counsel for assessee relied on the decision of the Special Bench in the case of Mahindra and Mahindra [supra], which, according to him, clearly brought out that liability u/s 201(1A) was fastened on an assessee only on failure of applying section 195 of the Act. According to him, failure u/s 195 not only triggered the treatment of an assessee as assessee in default, but this was also the triggering point for application of section u/s 40(a)(i) of the Act. Ld. counsel also brought to the att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would fall within the terminology of technical services falling within the said clause [vii] of section 9(1). The ld. counsel then submitted that reliances placed by the assessee on the DTA with U.S.A. and U.K. was incorrect. According to him, DTA was only for advantage of non residents and could not be taken advantage by a resident for getting out of its statutory liability under the Act. Vis-a-vis reliance placed on the decision of Hon'ble Karnataka High Court in the case of Jindal Thermal Power Company Ltd. [supra]. It was submitted by the ld. D.R. that the said decision was only confined to treatment of income from technical services under the head 'business' and this could not be cited for support by assessee. Reading through sub clause (i) of clause (a) of section 40, ld. D.R. strongly urged that it was for the assessee to establish that the amounts payable by it outside India, were not taxable under the I.T. Act, if it wanted to contend that tax was not deductible thereon. 11. In his rejoinder to the above, ld. A.R. submitted that the decision of Frontier Offshore Exploration of India [supra] was only vis a vis the question whether any payments made were chargeable to tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness. Types of payment that are covered by sec. 195 are of the kind which would be chargeable to tax under the Act in the hands of the recipients. Sub-sec.(2) thereof specifies the course to be adopted if a payer feels that the whole of the payment made is not exigible to tax. Then he has to make an application to the lower authorities concerned for this. Then comes, the vexed question whether assessee itself is having the right to decide the exigibility to tax of the receipts in the hands of recipient or he has to necessarily take recourse to sec. 195(2). Before going into all these aspects, we have to see whether payment made by assessee to M/s. Menon Ltd. is royalty or not. For this the clauses in assessee's agreement with Menon Ltd. as reproduced at para 6.2 of the ACIT's order dated 26.3.2002 under sec.144A of the Act, and referred to by both the parties would be very relevant, and this reads as under : "To provide TV transponder operating in 754 MHz band on EKRAN satellite located at geostationary orbit at 99 degrees East with parameters registered for the satellite Stationar -T2 in the Main Frequency Register of the International Telecommunication Union (See Annexure 2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of "royalty" has not been restricted either by the domestic provisions or by the provisions contained in respective DTAA's. Insertion of 'comma' after the words "secret formula or process in the respective DTAA's does not give different interpretation to the provisions of DTAA as compared to the provisions of domestic law. The process, even if it is construed to be intellectual property, for falling within the ambit of royalty, it is not necessary that the process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimate owner of the satellite, makes no difference, since he had such rights which included right to use various processes in the transponder, which was in turn hired out by him. Here the possession, rights and control over the transponders were held by M/s. Menon Ltd. and this is writ large on the clauses in the agreement mentioned, supra, and in our opinion, just because Ekran satellite was owned by a Russian company, would not change the colour of payment, which would remain a 'royalty', as interpreted by the Special Bench. In our opinion the case of Raj TV (supra) on which reliance was placed by the ld. A.R. as well as CIT(A) is not appropriate since here M/"s. Menon Ltd. was not a mere intermediary, and the payments were in the nature of royalty in view of the SB decision in New Skies Satellite (supra). Since the payment is considered as 'royalty', the other limbs of the argument, whether it was technical services, or whether a PE was necessary, whether such receipts would be taxable in the hands of the recipient under Indian Income-tax Act becomes irrelevant. This is because the Spl. Bench decision has considered all these aspects and held that tax had to be deducted at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State." "Article 26 4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first- mentioned State are or may be subjected." Though these are not similarly worded, it does look that both these Articles are intended to avoid discrimination. Applicability of sec.46(a)(i) in the context of Article 26(3) of Indo-US Treaty had already come up before the Delhi Bench of this Tribunal in the case of Millennium Infocom Technologies Ltd. and Herbalife International India Pvt. Ltd. (supra). It was held by the Bench that, rigour of sec.40(a)(i) was neutralized by the operation of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 =. Hon'ble Supreme Court held as under: - "No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act, the Agreement may be restored to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court. Section 90 is specifically intended to enable and empower the Central Government to issue notification for implementation of the terms of a Double Taxation Avoidance Agreement. The provisions of such an Agreement, with respect to cases to which they apply, would operate even if inconsistence with the provisions of the Income-tax Act. If it was not the intention of the Legislature to make a departure from the general principles of chargeability to tax under section 4 and the general principle of ascertainment of taxable income under section 5, then there was no purpose in making those sections 'subject to the provisions of the Act'. Section 90 was brou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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