TMI Blog2018 (5) TMI 339X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. The assessee has filed these appeals for the Assessment Year 2006-07 2011-12 against the respective orders of the ld Assessing Officer passed u/s 143(3) of the Act read with Section 144C(1) of the Act on the separate directions of ld. Dispute Resolution Panel-II, New Delhi. Since the issues involved in these appeals are common and identical, hence, the same were heard together and are being disposed of by this common order for the sake of convenience, by dealing with ITA No. 1063/Del/2015 (AY 2011-12) first. 2. The following grounds have been raised by the Assessee in ITA No. 1063/Del/2015 (AY 2011-12):- 1. The order of the Dy. Commissioner of Income-tax, Circle 2(2), International Taxation, New Delhi (the DCIT) read with the directions of DRP are bad in law and on facts. 2. The DCIT erred on facts and in law, in assessing the Appellant to tax in respect of the income earned by it from providing telecasting services. The DDIT erred in following, in this regard, the Assessment Orders passed in the Appellant s case for earlier Assessment years. 3. The DCIT failed to appreciate that the Appellant was not liable to Indian Taxation at all in respect of the income earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices; (vi) in not following the judgement cited by the Appellant including those passed in its own case. 9. The DCIT erred in directing the levy of interest under section 234B of the Act. The Appellant says that the levy of such interest is illegal and without jurisdiction and denies its liability to such interest. 10. That without prejudice to above, the Ld. DCIT erred in making erronoues compation of tax demand. 11. The Ld. DCIT erred in initiating penalty proceedings under section 271 (1) (c) of the Act The assessee craves leave to add, supplement, revise and delete grounds of appeal as raised hereinabove. 3. The following grounds have been raised in ITA No. 1062/Del/2015 (AY 2006-07):- 1. That the order of the learned Deputy Commissioner of Income-tax, Circle 3(1)(2), International Taxation, New Delhi ( DCIT ), as passed under section 143(3)/148 read with the directions of Dispute Resolution Panel ( DRP ) under section 144C of the Income-tax Act, 1961 ( the Act ), is bad both in law and on facts of the case. 2. That the notice under section 148 of the Act, as issued by the learned DCIT after four years from the end of subject assessment year, is illegal, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s against claim for non-taxability made by the assessee. 3.2 That the learned DCIT failed to appreciate that the assessee was not liable to Indian Taxation at all in respect of the income earned by it from providing transponder services, read with Article 12 of the DTAA. 3.2 That the learned DCIT erred, on facts and in law, in holding that the income earned by the assessee from providing transponder services to residents as well as non-residents was taxable in India as 'royalty' as defined under Explanation 2 to section 9(i)(vii) of the Act, without appreciating the provisions of the DT AA. 3.3 That the learned DCIT erred, on facts and in law, in holding that the income earned by the assessee from providing consultancy services was taxable in India: a) under the Act b) under the DTAA 3.4 That, without prejudice to the Ground No.4, the learned DCIT has erred in not considering the provisions of the DTAA, providing tax rate of 15% on 'royalty' receipts under Article 12 of the DTAA, while holding the receipts taxable as 'royalty' under section IISA of the Act. 3.5 That, without prejudice to the Ground No.4, the learned DCIT has erred in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to tax according to the Indian Income Tax Act as royalty u/s. 9(1)(vi) of the Act as well as under Article 12 of the DTAA between India and Thailand . According to assesse the same is not chargeable to tax in India. However, according to the AO the same is taxable as royalty and therefore, the total sum received of ₹ 4,10,65,176/- was considered as royalty at appropriate rate provided u/s. 115A were applied and total income of ₹ 2,11,89,295/- was chargeable to tax as royalty income. Consequently, a draft assessment order was passed on 28.2.2014. The Ld. Dispute Resolution Panel (DRP) on objection before them confirmed the finding of the Assessing Officer and consequently final assessment order u/s. 143(3) read with section 144C(1) of the Act was passed on 22.12.2014. 4.2 The Ld. A.R. of the assessee submitted that identical issue in the case of the assessee from assessment years 2005-06 to 2010-11 is covered in favour of the assessee by the order of the Coordinate Bench dated 16.10.2017. The Ld. AR furnished the copy of the decision and showed various grounds in respective orders which are identical with the grounds of appeal before us. He therefore, submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 television channels. The agreement was essentially one of allocation of the transponder capacity available on the satellite to enable the channels to relay their signals. The customers had their own relaying facilities. No different from the case at hand, the transponder receives the signal, amplifies it, and downlinks it to facilitate transmission of the signals. Quoting the judgment of the Authority for Advance Rulings in ISRO Satellite Centre [ISAC], In re [2008] 307 ITR 59 (AAR), the court held that it becomes clear that all the customers get through the agreement with 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is competent to amend a provision that operates retrospectively or prospectively. None the less, when disputes as to their applicability arise in court, it is the actual substance of 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 DIT v. TV Today Network Ltd. I. T. A. No. 600 of 2012 decided on November 12, 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 taxability of the said income is concerned, the Finance Act, 2012 mandates it to be as such. Interestingly however, the court did not rule out any relief that the assessees may be entitled to by virtue of the Double Taxation Avoidance Agreement between India and the United States for the simple reason that the Income-tax Appellate Tribunal had not rendered any finding in that regard. Resultantly, the court remitted the matter to the Income-tax Appellate Tribunal to decide that question : In an appeal under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by 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. There is a general presumption against retrospectivity of an amendment. This is the principle of lex prospicit non respicit which implies that unless explicitly stated, a piece of legislation is presumed not to be intended to have retrospective operation. 34. Most recently in CIT v. Vatika Township P. Ltd. [2014] 367 ITR 466 (SC) ; [2015] 1 SCC 1, the Constitution Bench, while quoting Govinddas v. ITO [1976] 103 ITR 123 (SC) ; [1976] 1 SCC 906 and CIT v. Scindia Steam Navigation Company Ltd. [1961] 42 ITR 589 (SC) ; [1962] 1 SCR 788 held as follows (page 486 of 367 ITR) : Of the various rules guiding how a legislation has to be inter preted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a ret rospective operation. The idea behind the rule is that a current law should govern current ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to 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 v. Padmini Chandrasekharan [1995] 213 ITR 340 (SC) ; [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 law it is not presumed to be retrospective irrespective of the fact that the phrase used is it is declared or for the removal of doubts . In determining, therefore, the nature of the Act, regard must be had to the substance rather than to form. While adjudging whether an amendment was clarificatory or substantive in nature, and whether it will have retrospective effect or not, it was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 section 9(1)(vi) is indeed merely clarificatory as the Revenue suggests it is, or prospective, given what its nature may truly be. The issue of taxability of the income of the assessees in this case may be resolved without redressal of the above question purely because the assessee has not pressed this line of arguments before the court and has instead stated that even if it were to be assumed that the contention of the Revenue is correct, the ultimate taxability of this income shall rest on the interpretation of the terms of the double taxation avoidance agreements. Learned Counsel for the assessee has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the double taxation avoidance agreement. 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., whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations 4, 5, and 6 to the section 9(1)(vi). The question is therefore, 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 double taxation avoidance agreement 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 that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied as occur ring 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 quo is obtained by both sides.' 43. The Vienna Convention on the Law of Treaties, 1969 ( VCLT ) is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the Vienna Convention on the Law of Treaties apply to such an agreement except in so far as the treaty may otherwise provide. This provision therefore 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 Vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll man datorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time 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 the scope of circumstances under which it is allowed to tax under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the date of the agree ment as set out in article I(2). Considering the express language of article 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 taxation 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 Double Taxation Avoidance Agreements. Following our previous discussion on the bifurcation of terms within the treaty, in situations where words remain undefined, assistance is to be drawn from the definition and import of the words as they exist in the domestic laws in force . It was in this context that the Bombay High Court held that they were unable to accept the assessee's contention that the law applicable would be the law as it existed at the time the double taxation avoidance agreement was entered into. This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this court however is materially different as there is in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 frus trated. 51. Pertinently, this court in DIT v. Nokia Networks OY [2013] 358 ITR 259 (Delhi) specifically dealt with the question of the effect of amendments to domestic law and the manner of their operation on parallel treaties. The court delivered its judgment in the context of the very amendments that are in question today ; the Explanations to section 9(1)(vi) vis a vis the interpretation of a double taxation avoidance agreement. This court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations (page 281 ITR 358 ITR) : He, thus submitted that the question of 'copyrighted article' or actual copyright does not arise in the context of software both in the double taxation avoidance agreement 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a treaty. A treaty to begin with, is not drafted by Parliament ; it is an act of the executive. Logically therefore, the executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic 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 conspectus of domestic law. Now, if an amendment were to be effected to the terms of such treaty, unless the existing operationalising domestic law states that such amendments are to become automatically applicable, Parliament will have to by e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 experi ence. (emphasis supplied) Article 12(4), Indo-Netherlands Double Taxation Avoidance Agree ment : 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, artistic or scientific work including cinema tograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commer cial or scientific experience. (emphasis1 supplied) Section 9(1)(vi), Explanation 2, Income-tax Act, 1961 ( iii) the use of any patent, invention, model, design, secret for mula or process or trade mark or similar property ; (emphasis1 sup plied) 55. The slight but apparently vital difference between the definitions under the double taxation avoidance agreements and the domestic definition is the presence of a comma following the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve 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 would have been sound had there been a comma after the word stocks . It was therefore held that only stocking for the purpose of sale would amount to an offence but not mere stocking. 57. However, the question, which then arises, is as follows. How is the court to decide whether a provision is carefully punctuated or not ? The test to decide whether a statute is carefully (read consciously) punctuated or not- would be to see what the consequence would be, had the section been punctuated otherwise. 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 test therefore is not to see if it makes grammatical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by customers under typical transponder leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2 ; these payments are not made in consideration for the use of, or right to use, property, or for infor mation, 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 characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but sim ply its transmission capacity : the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 interpretation placed on identical or similar terms employed in various double tax ation avoidance agreement should be followed by the courts in India when it comes to construing similar terms occurring in the Indian Income-tax Act . . . There are judgments of other High Courts also to the same effect. ( a) CIT v. Ahmedabad Manufacturing and Calico Printing Co. [1983] 139 ITR 806 (Guj) at pages 820-822. ( b) CIT v. Visakhapatnam Port Trust [1983] 144 ITR 146 (AP) at pages 156-157. ( c) N. V. Philips v. CIT (No. 1) [1988] 172 ITR 521 (Cal) at pages 527 and 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 legislat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the same is not chargeable to tax, despite the amendment in the Income Tax Act with retrospective effect by Finance Act, 2012. In the result, the common ground raised in both the appeals i.e. whether income received by the assessee is chargeable to tax according to the Indian Income Tax Act as royalty u/s. 9(1)(vi) of the Act as well as under Article 12 of the DTAA between India and Thailand are allowed. 6. As regards common grounds involved in both the appeals relating to charging of interest u/s. 234B of the Act and levy of penalty u/s. 271(1)(c) of the Act are concerned, the same are premature and hence, dismissed as such. 7. As regards ITA No. 1062/Del/2015 (AY 2006-07) wherein the issue of reassessment under section 147/143(3)/144C for taxing the receipts from transponders services at 20% as against 10% (15% in some cases where DTAA rate was more beneficial) applied in the original assessment order, ignoring that the receipts are not taxable was raised, since we have already held that income received by the assessee is not a royalty as per Article 12 of the DTAA between India and Thailand and therefore, the same is not chargeable to tax, the ground raised in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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