TMI Blog2012 (5) TMI 503X X X X Extracts X X X X X X X X Extracts X X X X ..... vices himself. The department’s argument that the amendments by the Finance Act, 2012 changes the position is not acceptable, since there is no change in the DTAA between India and USA and the DTAA prevails where it is favorable to the assessee; Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, section 195 will not apply to such cases as held by in the case of Vodafone International Holdings B.V.(2012 (1) TMI 52 (SC)). Further, as prior to the insertion of Section 40(a)(i) in AY 2004-05, payments to a resident did not require TDS. Under the non-discrimination clause in the DTAA, the dis-allowance u/s 40(a)(i) in the case of non-residents cannot be made. See Herbalife International (2006 (2) TMI 220 (Tri)). Aforesaid view squarely apply in respect of payments made to Advanced Satellite( UK based company) for equipment and technical fees. As there is no change in the DTAA between India and UK, we have to hold that no dis-allowance can be made u/s 40(a)(i). No dis-allowance can be made in view of the nondiscrimination clause also. Dis-allowance u/s 40(a)(i) in respect of payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esidence of PanAmSat Limited and Advanced Satellite i.e. U.S.A. and U.K. respectively. 7. On appeal, the first appellate authority observed that in the case of PanAmSat Limited, Indo-US tax treaty is applicable. He negatived the contentions of the assessee. 8. Learned counsel for the assessee contended that learned CIT(A) followed the order of the ITAT Delhi Bench in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DCIT (85 ITD 478) and that this decision has been reversed by Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (332 ITR 340) and hence learned CIT(A) s order has to be reversed. 9. The other contentions of the learned counsel can be summarised as follows:- (a) The payment by the assessee to PanAmSat Limited was in respect of facility which is provided to anyone willing to pay and not in respect of any technology which is made available and thus do not fall under Article 12 of the India USA/UK DTAA. (b) Since PanAmSat Limited does not have a PE in India, the above payments are covered under Article-7 of the DTAA and hence cannot be taxed in India. (c) The payment has been made by a non-resident to another nonreside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter the words secrete formula or process in the DTAA does not mean that different interpretation has to be given to the DTAA, as compared to the Act. Thus he contends that the payment for use of process is assessable as royalty both under the Act and DTAA. He submitted that the AR is making fresh argument that the payment is not borne by the PE. He argued that this should not be entertained. He relied on the AAR ruling in DHV Consultants B.V. in RE 227 ITR 97 (AAR) and argued that the expression borne by means deductable or liable to be deducted Alternatively he submitted that the payment to PanAmSat Limited is taxable as Fee for technical services . On discrimination clause, he submitted that the provisions of the Act have to be considered and implemented. 13. In reply learned counsel for the assessee submits that the proposed amendment to the Finance Bill, 2012 will have no bearing on the case as there is no change in the relevant DTAA and the beneficial provisions of DTAA will be applicable in terms of section 90(2) of the Act. On the argument that under provisions of Income tax Act, source rule is attracted, it was submitted that PanAmSat Limited is resident of USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mes were uplinked by the television channels (admittedly not from India) ; (ii) after receipt of the programmes at the satellite (at locations not situated in Indian airspace), these were amplified through complicated process ; and (iii) the programmes so amplified were relayed in the footprint area including India where the cable operators caught the waves and passed them over to the Indian population. The first two steps were not carried out in India. Merely because the footprint area included India and the programmers by ultimate consumers/viewers watched the programmes in India, even when they were uplinked and relayed outside India, that would not mean that the assessee was carrying out its business operations in India. The expressions "operations" and "carried out in India" occurring in Explanation 1(a) to section 9(1)(i) signify that it was necessary to establish that any part of the assessee's operations were carried out in India. No machinery or computer was installed by the assessee in India through which the programmes reached India. The process of amplifying and relaying the programmes was performed in the satellite which was not situated in Indian airspace. Even the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 59 (AAR), Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC) and Lakshmi Audio Visual Inc. v. Asst. CCT [2001] 124 STC 426 (Karn) applied. (iii) That the money received from the cable operators by the telecast operators was treated as income by these telecast operators which had accrued in India and they had offered and paid tax. Thus, the income generated in India had been duly subjected to tax in India. The payment made by the telecast operators situated abroad to the assessee which was also a non-resident did not represent income by way of royalty as defined in Explanation 2 to section 9(1)(vi) of the Act. Article 12 of the model double taxation avoidance agreement framed by the Organisation of Economic Co-operation and Development 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. The commentary issued by the OECD can be relied upon. (iv) That the Tribunal rightly admitted the additional ground on the question of applicability of section 9(1)(vii) on the ground that it was purely legal and did not require consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the purpose of section 194J of the Act . 16. Moreover a mere rendering of service cannot be considered as making available FTS. Recently Hon'ble Karnataka High Court in the case of CIT Vs. DE BEERS India Minerals Pvt. Ltd., upheld the proposition laid down by the Mumbai Bench of the Tribunal in the case of Raymonds ltd. (86 TTJ 791). Similarly Hon'ble Delhi High Court in the case of DIT Vs. Guy Carpenter Co. Ltd., held that to make available technical knowledge, mere provisions of service is not enough and payer must be enabled to perform services himself. Thus, the issue in question is covered in favour of the assessee by the above decisions. 17. Coming to the argument of learned Departmental Representative that the amendment to the Finance Act, 2012 changes the position, we find that there is no change in the DTAA between India and USA. Thus, the amendments have no affect on our decision. Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, section 195 will not apply to such cases as held by Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. (WP No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle, it became apparent that the said article protects the interests of the non residents vis-a-vis residents. The article provides that payments made to the non-resident would be deductible under the same conditions as the payments were made to a resident. The exceptions provided in the article 26(3) were not applicable to case of the assessee as paragraph 8 of the article 12 would not apply to the assessee, as there was no relationship between the assessee and the payee-concerns. As per the provisions of section 40(a)(i) applicable to the relevant year no disallowance could be made in respect of payments made to the residents on the ground of non-deduction of lax at source. Therefore, in view of the provisions of article 26(3), no disallowance could be made in case of payments to the non-residents also even if the amount was found taxable in India in their hands. Thus, the order of Commissioner (Appeals) confirming the disallowance could not be upheld. Accordingly, the order of the Commissioner (Appeals) was to be set aside and the claim of the assessee was to be allowed. The Delhi Bench of the Tribunal in Millennium Infocom Technologies Ltd. v/s ACIT, [2008] 21 SOT 152 (Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited. Referring to Article 13.7 of Indo-UK DTAA, he submitted that the payment has been made by the appellant who is a non-resident to another non-resident and accordingly royalty did not arise in India, in terms of the said Article. He reiterated his contention that the burden of the payment is not borne by PE in India. He clarified that payments to Advanced Satellite and Advanced Broadcast are two separate payments which are evidenced by two separate invoiced and hence there is no ambiguity. 24. After hearing rival contentions, we are of the considered opinion that the conclusion drawn by us in the case of PanAmSat Limited squarely cover the issue on hand. As there is no change in the DTAA between India and UK, we have to hold that no disallowance can be made u/s. 40(a)(i). No disallowance can be made in view of the nondiscrimination clause also. Thus for the very same reasons on which ground No. 3 has been allowed, we allow ground No. 4. 25. Ground No. 5 is on the disallowance u/s. 40(a)(i) on payments made to LMB(Mauritius) Ltd. which is a resident of Mauritius. The assessee submits that the payment in question is for outright purchase of programmes and hence it should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75 of assessee s paper book-2. It was stated that tax residency certificate was not available earlier and it was subsequently obtained and hence it should be admitted as additional evidence. It was reiterated that this is a case of purchase of films. 29. After hearing rival contentions, we find that the issue as to whether it is a sale of a programme as contended by the assessee or a payment for grant of broadcasting right as contended by revenue, is to be judged based on the Agreement between the parties which is at page 119 to 126 of the assessee s paper book. Perusal of this Agreement demonstrates that LMB (Mauritius) Ltd. is called the seller and B4U International is called the buyer . At page 119 the Agreement reads as follows :- (A) The Seller is the sole and exclusive owner of Indian Film and Music based programming content ( said Programmes ) details of which are set out in Schedule A to this Agreement. (B) The Buyer is desirous of obtaining broadcasting rights of the said Programmes on B4U Music for the territory of the India Sub Continent and or other Asian countries, the Middle East wherever relevant (the Territory ) for the purpose of exploiting such rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary steps (including registration of copyright where the Buyer shall deem necessary) to have the copyright in the Programme and the Delivery Material and the rights granted to the Buyer under this agreement protected throughout the Territory. 30. Hon'ble Supreme Court in the case of B. Suresh (supra) has considered a case where the assessee has bought rights of various decoders, recorded movies on beta-cam tapes and transferred them as telecasting rights to Star TV for five years and claimed for deduction u/s. 80HHC of the Income Tax Act, 1961. Hon'ble Supreme Court held that telecasting rights fell in the category of articles of trade and commerce and hence within category of merchandise and the transfer of the said rights by way of lease fell within the meaning of sale and attract 80HHC. Mumbai Bench of the Tribunal in the case of Far Video Films (P) Ltd Vs. ACIT Circle 1(6) (15 SOT 385) was considering a case where the assessee company was engaged in the business of producing TV commercials, as per specifications of clients located abroad. The assessee claimed deduction u/s. 80HHC on the basis that it was an exporter of films. The Assessing Officer disallowed the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a case of obtaining broadcasting right of films on B4U Movies on the territory of Indian sub-continent and other Asian countries and hence not sale of films. 34. Learned counsel for the assessee replied that the assessee is carrying on its broadcasting business outside India and this is a case of purchase of Cinematographic films for LMB Holdings for Television broadcasting and hence 40(a)(i) does not apply. 35. After hearing rival contentions, we hold as follows :- Explanation 2 to section 9(1)(vi) defines the term royalty . In subclause (v) reads as follows :- The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of Cinematographic films. Thus, consideration paid for sale distribution or exhibition of Cinematographic films, does not fall within term Royalty in view of Explanation 2 sub-clause (v) to section 9(1)(vi) of the Act. Perusal of the Agreement dated 1.9.2000 between LMB Holdings I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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