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2016 (2) TMI 415 - DELHI HIGH COURT

2016 (2) TMI 415 - DELHI HIGH COURT - [2016] 382 ITR 114 - Receipts from providing data transmission services - ITAT upset Assessment Orders that ruled that the income derived by the assessees through data transmission services was taxable as royalty under Section 9(1)(vi) of the Act as well as Article 12 of the relevant Double Tax Avoidance Agreements - whether fall within the term royalty? - whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreeme .....

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de to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State’s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to th .....

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, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement.

For the above reasons, it is .....

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eyas and Sh. N. Sai Vinod, Advocates, Sh. F.V. Irani, Sh. Nikhil Nayyar, Sh. Arun. H. Mehta and Ms. Akansha, Advocates ORDER Mr. Justice S. Ravindra Bhat 1. The present appeals, by the Revenue, under Section 260A of the Income Tax Act 1961 ( the Act ) are preferred against orders of the Income Tax Appellate Tribunal ( ITAT ), which upset Assessment Orders that ruled that the income derived by the assessees through data transmission services was taxable as royalty under Section 9(1)(vi) of the Ac .....

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(1) whether the receipts of the assessees earned from providing data transmission services, fall within the term royalty under the Income Tax Act, 1961, and (2) if the answer to the first is in the affirmative, whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements. 3. In the interest of both brevity and clarity, below is a table of details with respect to the assessment orders and the orders of the ITAT: ITA No. Parties Assessment Year Date of .....

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business of providing digital broadcasting services as well as consultancy services to its customers who consist of both residents of India and non-residents. Shin provides these services through its satellite Thaicom 3, whose footprint covers a large geographical area, including India. In AY 2007-08 and 2009-10, the assessee filed NIL returns. The AO reviewed the return under Section 143(3) read with Section 144C of the Act and held that the income was taxable under Explanation 2(iii) and (iva) .....

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the present cases both derive income from the lease of transponders of their respective satellites. This lease is for the object of relaying signals of their customers; both resident and non-resident TV channels that wish to broadcast their programs for a particular audience situated in a particular part of the world. In the present cases, the assessees were chosen for the simple reason that the footprint of their satellites, i.e. the area over which the satellite can transmit its signal, includ .....

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. 7. These satellites are geostationary satellites placed in an orbit 22240 miles above the surface of the Earth. The repeater section of the satellites contains antenna systems and microwave electronics that receive, amplify, modify (in frequency and in polarization) and retransmit the signals received by it. This antenna section has two reflectors, one for receiving and the other, for transmitting. The path of each channel between the receiving antennae to transmitting antennae is called the t .....

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lters. A microwave type boosts the power of the signal within each transponder to a high power level such as 100 Watts before applying it to the transmitting antenna. The latter transforms the electrical signal from all the transponders into an equivalent electromagnetic form for radiation into the footprint where the receiving terminals are located. 8. This is the service the assessees provide to their customers, the income from which is sought to be taxed under Section 9(1)(vi) of the Act. Thi .....

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ty or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any sou .....

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ay 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 th .....

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ed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to th .....

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(including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning techni .....

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consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 9. In ITA 500/2012 the assessee, Shin had on 30.10.2007 filed a NIL return of income, which was processed under Section 143(1) on 26.03.2009. In the previous year, the receipts accrued and arising in India to the assessee had been treated as royalty . Consequently, the assessee was asked t .....

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itted, that the relevant receipts did not partake the character of royalty. The assessee further quoted the decision of the ITAT in M/s. Pan AmSat International Systems Inc. v. DCIT, NR Circle, New Delhi ITA No. 1796/(Del)/2001 where in the context of similar facts it was held that income of such nature is not liable to tax in India. The assessee also cited the ruling of the Advance Ruling Authority in the case of ISRO Satellite Centre V. DIT [2008] 307 ITR 59 where it was held that payment by a .....

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in the transponder are done to achieve a particular result, i.e. to make the signals viewable, and this clearly qualifies as a process , the consideration for the use of which would amount to royalty. Noting the nature of the services provided by the assessee, (as recounted above), the AO observed that the agreements signed by it with its various customers showed that the agreements were not for the purpose of satellite hiring, but for the purpose of providing digital channel services. After enu .....

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Sat supra note 2 . In that case, the only activity carried out was the processing of the telecasting signal, whereas here, the assessee carried out a number of critical processes required for satellite television broadcast and satellite internet service. Thus, the AO held, that the assessee is receiving payments from its customers for the use as well as the right to use a process and not for hiring the transponder. Consequently it was held that the assessee s receipts were squarely covered by su .....

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ss and not a secret process. In any case, the AO also held that the process utilized in the present case would qualify as a secret process. The AO, in doing so, was referring to the transponder as an in-severable part of the satellite itself. Though the agreement states that the lease is that of the transponder capacity, in essence, the required roles cannot be performed without the other essential components of the satellite. In other words, the use of the transponder necessarily means use of t .....

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atellite itself. He stated that while it may be argued that the theoretical aspects of satellite technology may be available to the interested off the shelves, the finer practical aspects and critical technologies are kept a secret. It is important to note that the AO in fact does quote the commentary of Klaus Vogel where secret formula or process has been defined as one which enjoys at least a relative protection or is capable of being protected . It was also held that similar to sub clause (iv .....

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he programs are created, and thus India becomes the territory of commercial exploitation by these non-resident Telecasting Companies. Placing reliance on an AAR Ruling in Steffen, Robertson and Kirsten Consulting Engineers and Scientists v. CIT [1998] 230 ITR 206 AAR, the AO stated that it had been held that for determining the place of accrual the important consideration is not the place where the services for which the payment are being made, but the place where the services are actually utili .....

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e taxed in that other State. In other words, the general rule is that the Resident State has the right to tax royalties irrespective of the fact that they arise in the Source State. However, the Source State may also choose to tax to a ceratin limit, that limit not exceeding 15 percent of the gross amount of royalties. Royalties as used in Article 12 is defined as: The term royalties as used in this article means payments of any kind received as a consideration for the alienation or the use of, .....

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extended his interpretation of royalty under Section 9(1)(vi) to Article 12 under the DTAA. 15. By order-dated 22.07.2011, the ITAT set aside the Assessment Order. By this time the judgment of this Court in Asia Satellite Telecommunication Company Ltd. supra note 1. The ITAT held that the facts of the case were now squarely covered by the said judgment. The Court in that case held that the receipts earned from providing data transmission services through the provision of space segment capacity .....

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ment. Resultantly, the ITAT allowed the appeal of the assessee. It would be wise to remember that the judgment in Asia Satellite Supra note 1 was solely in the context of Section 9(1)(vi) of the Act, there being no Double Tax avoidance Agreement in that factual matrix. 16. ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite supra note 1 . Here too the ITAT had overturned the Assessment Order dated 09. .....

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ference between the definition of royalty under Section 9(1)(vi) and the treaty, in that case, the Indo-Netherlands DTAA. Here, the definition of royalty under Article 12(4) is as follows: The terms royalties as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for informatio .....

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ess in Article 12(4), and that its absence under domestic law would mean that it did not. In other words, if the comma was allowed to influence the interpretation of Article 12(4), it would mean that for the purposes of consideration to be termed as royalty under the DTAA, the process utilized would necessarily have to be a secret process , whereas the position under domestic law is that the secrecy or not of the process utilized is irrelevant. After delving into a list of case law which lay dow .....

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e knowledge of the assessee. The customer is neither in the know nor is it empowered to use the process in its own way. Post Finance Act 2012 18. It can be seen, therefore, that while the assessment orders consistently held that the income from data transmission services shall be taxable under Section 9(1)(vi) as royalty, the Tribunal equally consistently, set aside these orders applying, as it is bound to do so, on the basis of Asia Satellite supra note 1 .However, as it has been noted, the Fin .....

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t to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) the possession or control of such right, property or information is with the payer; (b) such right, property or information is used directly by the payer; (c) the locatio .....

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n of the three explanations to Section 9 (1)(vi) of the Act, the matter has been settled beyond controversy. Consequently, the impugned orders, based as they are, on the reasoning in Asia Satellite supra note 1 ., cannot stand, because the basis of that ruling has been undone. It was argued that it matters little as to whether the amendment is held to be declaratory or clarificatory, because it imperatively suggests that if there were any doubts as to whether the activity was taxable, those stoo .....

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uestion should not arise. Here, learned counsel stated that the DTAA predated the amendment. Consequently, the interpretation placed in Asia Satellite supra note 1 , which was in relation to Section 9, could not be said to be an authority on treaty interpretation. Furthermore, argued counsel for the Revenue, the terms of the treaty and the terms of the pre-amended Act being similar, the subsequent amendment rendered the reasoning in Asia Satellite academic. Therefore, the assessees could not tak .....

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respect of taxability of a transaction or service, which is otherwise tax exempt in terms of a DTAA or which is subject to a lower rate of taxation mandated by a treaty. Counsel relied on the judgment of the Bombay High Court in Commissioner of Income Tax v. Seimens Aktiongessellschaft [2009] 310 ITR 320 and the Andhra Pradesh High Court in M/s Sanofi Pasteur Holding SA v. Department of Revenue. (2013) 354 ITR 316 (AP) 22. Learned counsel, most importantly stressed upon the decision of this Cou .....

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logical end, counsel further argued that it is not possible for one nation to, by way of a unilateral amendment to tax income which otherwise was not subject to tax under the treaty. In other words, argued counsel, the rule of referential incorporation cannot be applied in dealing with a DTAA between two Sovereign Nations. Though it is open to a Sovereign Legislature to amend its Laws, a DTAA entered into by the Government has to be reasonably construed. Analysis and Conclusions: 24. Internatio .....

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, to eliminate a double incidence of tax. The States therefore limit their legitimate taxing powers in favour of the other State, by either agreeing not to tax a certain income, which has been reserved for the other Contracting State, or taxing that income to a limited extent. These treaties therefore have the effect of restraining the operation of the domestic taxing laws of a Contracting State. Justifiably, the balance between the domestic law of the Contracting State and its obligations under .....

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Act shall apply to the extent that they are more beneficial to the assessee. 25. The underlying presumption of a DTAA being that in the absence of such agreement, the income in question is taxable in both jurisdictions as under their domestic laws, whenever Courts are confronted with taxability of an income in the context of such an agreement, they must as a matter of course, first decide whether the income in issue is taxable under domestic legislation, specifically the Act. It is only when tha .....

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opening words of Section 9; the following incomes shall be deemed to accrue or arise in India indicate at the outset that the provision is a deeming one whereby, income otherwise not accruing in India, will be deemed to have accrued in certain cases. Until 1922, various provisions enumerated cases under which income accruing to an assessee abroad was deemed to accrue in India. The 1961 Act collects these provisions and covers them under the ambit of Section 9. One of such deeming provisions is S .....

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payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the p .....

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residents have paid the income purported to be taxed by the Revenue, which argues that the conditions for both have been satisfied. Briefly, royalty paid by a resident is taxable as long as it is not paid for the purpose of a business or profession carried on outside India or for the purposes of making or earning income from any source outside India. In the case of a non-resident, royalty paid shall be taxable when it is paid for the purposes of a business or profession carried on in India or fo .....

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ith Explanation 2, most pertinently to sub-clause (iii) and (iva) under which the income in the present case is sought to be taxed. (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (…) (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB 28. The two clauses as applicable to data transmission services have been the subject of debate in co .....

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ectual property. This permission restricts itself merely to the letting of the licensed asset. The permission does not go so far as to allow alienation of the asset itself. That being said, it is not so restricted as to qualify as a case where the licensor uses the asset himself, albeit for the purposes of his customers. The Court took note of the features of the agreements between the assessee in that case, which was a foreign company, incorporated in Hong Kong, and its customers, which were TV .....

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th the assessee is mere access to a broadband width available in the transponder. The control over the parts of the satellite and naturally the transponder remains with the assessee. At no point does the assessee cede control over the satellite to the customers. Logically therefore, since the transponder is a part of the satellite that cannot be severed from it, there can be no independent control of the transponder without control of the satellite itself. The AAR had specifically rejected the r .....

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the satellite to assert that that the technology of the satellite would qualify as the secret process but conveniently divorces the transponder from the satellite while trying to prove that there is use of the transponder as an equipment. However, equipment as envisaged in the section must be capable of functioning independently, or in other words, must be able to perform an activity by itself without material reliance on another. Essentially therefore, Asia Satellite supra note 1 , held that th .....

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ized as a process and that even in the event it could be, there was no use of this process since there was no control exercised by the customers, is no longer good law in light of the inclusion of Explanations 4-6 by the Finance Act, 2012. In other words the Revenue contends that a mere reading of Explanation 4-6 will go to show that they are clarificatory and are therefore automatically retrospective. By this reason, as clarificatory amendments do, these explanations relate back to the time whe .....

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f the amendment that determines its ultimate operation and not the bare language in which such amendment is couched. Two judgments of note have succeeded the Finance Act, 2012 in this context. In Director of Income Tax v. TV Today Network Limited ITA 600/2012 decided on 12.11.2013 , a Division Bench of this Court was confronted with the question of taxability of income from data transmission services. Answering the question in favour of the Revenue, the Court held that as far as the domestic tax .....

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l validity and vires of the said amendments but have to apply the amended provision. In view of the said statutory amendments, the reasoning given by the Tribunal cannot be sustained is has to be reversed. Learned counsel for the respondent assessee has however rightly drawn our attention to the assessment order in which the assessee had also pleaded and submitted that the payments made cannot be considered as royalty or fee for included services as defined in the Double Taxation Avoidance Agree .....

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of the Revenue we pass an order of remit and ask the tribunal to decide the other contention raised by the respondent assessee; whether the payments made nevertheless remain untaxable in view of the provisions of the DTAA. 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I [2014] 361 ITR 575 (Mad) , the Court held the Explanations to be applicable to not only the domestic definition but also carried them to .....

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ments to the DTAA. 32. Explanations 4-6 are designed as clarificatory amendments. Unarguably they have all the apparent characteristics of one. The words for the removal of doubts, it is hereby clarified…includes and has always included qualify the interpretation in Explanation 5. In Explanation 6, the same words have been modified and they state includes and has always deemed to have always included . This is the standard language used to communicate an intended retrospective effect. 33. .....

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tion Company Ltd. [1962] 1 SCR held as follows: 31. Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomor .....

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nduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past transactions carried on upon the faith of the then existing law. 35. This presumption against retrospectivity stems from an indispensible need for each rule of law to answer to the principle of fairness. L Office Cherifien des Phosphates v. Yamashita-Shinnihon Steamship Company Ltd. [1994] 1 AC 486 . This presumption can be displaced in either of two situation .....

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ents of the original section itself. They thus dictate the interpretation of law since the time it was first drafted or brought into force. However, in order for such clarificatory amendments to be sustained as retrospective, they must answer to this description. 36. A clarificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing wit .....

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o clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. In R. Rajagopal Reddy and Ors. v. Padmini Chandrasekharan (1995) 2 SCC 630 , it was held that the use of the words it is declared is not conclusive that the Act is declaratory because it may be used to introduce new rules of law. If the amendment changes the l .....

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hat, (i) the circumstances under which the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other wo .....

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fect is prospective. Any other result would make the legislature a court of last resort. United States v. Gilmore 8 Wall (75 US) 330, 19 L Ed 396 (1869) , Peony Park v. O Malley 223 F2d 668 (8th Cir. 1955) . It does not mean that the legislature does not have the power to override judicial decisions which in its opinion it deems as incorrect, however to respect the seperation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only (Re .....

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tion alludes not to an attempt to illuminate or clarify a perceived ambiguity or obscurity as to interpretation of the definition itself, but towards enlarging its scope. Predicated upon this, the retrospectivity of the amendment could well be a contentious issue. Be that as it may, this Court is disinclined to conclusively determine or record a finding as to whether the amendment to 9(1)(vi) is indeed merely clarificatory as the Revenue suggests it is, or prospective, given what its nature may .....

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t question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the DTAA. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act. 39. It is now essential to decide the second question i.e. whether the assessees in the present case will obtain any relief from the provisions of the DTAAs. Under Article 12 of the Double Tax Avoidance Agreements, the general rule states that whereas the S .....

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ind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Article .....

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iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property 40. In Asia Satellite supra note 1 the Court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without .....

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, whether in an attempt to interpret the two definitions uniformly, i.e. the domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. In essence, will the interpretation given to the DTAAs fluctuate with successive Finance Act amendments, whether retrospective or prospective? The Revenue argues that it must, while the Assessees argue to the contrary. This Court is inclined to uphold the contention of the latter. 41. This Court is of the view tha .....

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ry attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible. 42. It takes little imagination to comprehend the extent and length of negotiations that take place when .....

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es are negotiated and entered into at a political level go ahead and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief , David R. Davis, Principles of International Double Taxation Relief , Pg.4 (London Sweet & Maxwell, 1985)points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as bei .....

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other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro q .....

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re clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. 44. We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indire .....

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ctive countries". 45. At the very outset, it should be understood that it is not as if the DTAAs completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3(2) of both DTAAs state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. Indo Thai .....

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erein shall, unless the context otherwise requires, have the meaning which it has under the law of that State concerning the taxes to which the Convention applies. The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty wil .....

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of the reference to the treaty? The former is the static approach while the latter is called the ambulatory approach. One opportunity for a State to ease its obligations under a tax convention comes from the ambulatory reference to domestic law. States seeking to furtively dodge the limitations that such treaties impose, sometimes, resort to amending their domestic laws, all the while under the protection of the theory of ambulatory reference. It thereby allows itself an adjustment to broaden th .....

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discussed and subscribed to the ratio of the Supreme Court of Canada in R. v. Melford Developments Inc. 36 DTC 6281 (1982) with respect to the applicability of domestic amendments to international instruments. In R v. Melford supra note 40 , the Canadian Supreme Court in a first, held that the ambulatory approach is antithetical to treaty obligations: There are 26 concluded and 10 proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission o .....

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t is that every tax enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do. 48. In Commissioner of Income Tax v. Seimens Aktiongessellschaft [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. Melford Developments Inc. held that The ratio of the judgment, in our opinion, would mean that by a unilateral amendment it is not possible for one nation which is party to an a .....

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rticle I(2) it is not possible to accept the broad proposition urged on behalf of the assessee that the law would be the law as applicable or as define when the Double Tax Avoidance Agreement was entered into. 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations wher .....

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Court however is materially different as there is in fact a definition of the word royalty under Article 12 of both DTAA, thus dispensing with the need for recourse to Article 3. 50. There are therefore two sets of circumstances. First, where there exists no definition of a word in issue within the DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State called upon to interpret the word. The Bombay High Court seems to accept the ambulatory approach in such a situat .....

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e agreement. That is not to say that the Court may be inconsistent in its interpretation of similar definitions. What that does imply however, is that just because there is a domestic definition similar to the one under the DTAA, amendments to the domestic law, in an attempt to contour, restrict or expand the definition under its statute, cannot extend to the definition under the DTAA. In other words, the domestic law remains static for the purposes of the DTAA. The Court in Sanofi (supra) supra .....

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dly invite application of domestic law of a contracting State would be that while India would interpret an undefined DTAA provision according to the provisions of the Act, France could do so by reference to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double-taxation of cross-border transactions would be frustrated. 51. Pertinently, this Court in Director of Income Tax v Nokia Networks 2013 (358) ITR 259 specifically dealt with the question of the .....

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le" or actual copyright does not arise in the context of software both in the DTAA and in the Income Tax Act since the right to use simpliciter of a software program itself is a part of the copyright in the software irrespective of whether or not a further right to make copies is granted. The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute .....

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son (supra) that a copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no.1 & 2 in favour of the assessee and against the Revenue. 52. Thus, an interpretive exercise by the Parliament cannot be taken so far as to control the meaning of a word expressly defined in a treaty. Parliament, supreme as it may be, is not equipped, with the power to amend a treaty. It is certainly true that law laid down by the Parliament in our domestic context, even .....

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on, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, thr .....

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nomic bargain. It may decide to not follow the treaty, it may chose to renege from its obligations under it and exit it, but it cannot amend the treaty, especially by employing domestic law. The principle is reciprocal. Every treaty entered into be the Indian State, unless self-executory, becomes operative within the State once Parliament passes a law to such effect, which governs the relationship between the treaty terms and the other laws of the State. It then becomes part of the general consp .....

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ligations under a treaty in good faith. This includes the obligation to not defeat the purpose and object of the treaty. These obligations are rooted in customary international law, codified by the VCLT, especially Article 26 (binding nature of treaties and the obligation to perform them in good faith); Article 27 (Internal law and observance of treaties, i.e provisions of internal or municipal law of a nation cannot be used to justify omission to perform a treaty); General rule of interpretatio .....

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cially important in the context of Explanation 6, which states that whether the process is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 precipitated from confusion on the question of whether it was vital that the process used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the DTAAs and the domestic definition. For greater clarity and to illustrate this difference, we r .....

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patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (emphasis supplied) Article 12(4), Indo Netherlands Double Tax Avoidance Agreement 4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, arti .....

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TAA and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various ITATs across the country, much discussion took place on the implications of the presence or absence of the comma . A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious .....

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yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Const supra note 46 . 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation; CIT v. Loyal Textile 231 ITR 573 ; Sama Alana Abdulla vs. State of Gujarat AIR 19 .....

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is section whoever manufactures for sale, sells, stocks or exhibits for sale or distributes a drug without a license is liable for punishment. In holding that mere stocking shall not amount to an offence under the section, the Supreme Court pointed out the presence of comma after manufactures for sale and sells and the absence of any comma after stocks was indicative of the fact stocks was to be read along with for sale and not in a manner so as to be divorced from it, an interpretation which wo .....

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Would there be any substantial difference in the import of the section if it were not punctuated the way it actually is? While this may not be conclusive evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically opposite consequences or large variations in taxing powers, as is in the present case, then the assumption must be that it was punctuated with a particular end in mind. The .....

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fficient evidence for us to conclude that the process referred to in Article 12 must in fact be a secret process and was always meant to be such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite supra note 1 takes note of the O .....

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ia 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 relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which r .....

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finition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the chara .....

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payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasi .....

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atellite 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 .....

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77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in Section 9(1)(vi), for better understanding all these very terms, OECD commentary can always be relied upon. The Apex Court has emphasized so in number of judgments clearly holding that the well-settled internationally accepted meaning and interpre .....

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AP)] at pages 156-157. (c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521] at pages 527 & 538-539. 59. On a final note, India s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legisl .....

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