TMI Blog2009 (12) TMI 1023X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been accepted by the department. 5. For these and other grounds that may be adduced at the time of hearing it is prayed that the order of the learned Commissioner of IT (Appeals) may be set aside and that of the assessing officer restored. 3. The short facts a propos are that the assessee engaged in the business of TV broadcasting and software development, filed a return of income showing loss of ₹ 24,60,840 which was processed under Section 143(1)(a) of the Act by making prima facie adjustment through disallowance of development expenses resulting in an assessed loss of ₹ 19,70,012. Subsequently, the case was selected for scrutiny and assessment later completed under Section 143(3) of the Act and loss was determined at ₹ 4,85,641. This order was set aside by the learned Commissioner of Income-tax invoking powers under Section 263 of the Act, for, according to him, a sum of ₹ 20,62,23,621 which was allowed to the assessee as transponder hire charges ought to have been disallowed under Section 40(a)(i) of the Act, tax having not been deducted tax at source therefrom, as per Section 195 of the Act. In the reassessment, pursuant to the order of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services paid by an Indian resident for services rendered anywhere in the world would be liable to tax in India and there was no necessity for having a business connection. Thus he held that the assessee had not deducted tax at source which was statutorily deductible and, therefore, disallowed the following payments under Section 40(a)(i) of the Act: (Rs.) M/s. Menon Ltd., U.K. 19,24,97,790 M/s. Rimsat, U.S.A 1,37,25,831 20,62,23,621 4. Before the learned Commissioner of IT (Appeals), the submission of the assessee was that the Additional Commissioner of Income-tax had given instructions under Section 144A of the Act to the assessing officer for completing the assessment which was set aside earlier by the learned Commissioner of Income-tax invoking powers under Section 263 of the Act. The line of arguments taken by the assessee were almost same as taken before the assessing officer, and could be summarised as under: (a) the recipients were not residents of India. (b) the income of the recipients n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow when the matter came up before us, the learned departmental representative submitted that the issue is now covered in favour of the revenue by the decision of the Special Bench in the case of New Skies Satellites N.V. v. Assistant Director of Income-tax (International Taxation) (2009) 319 ITR 269: (2009) 121 ITD 1. According to him, as per this decision, where telecasting companies uplink the desired images/data and downlink the same in desired areas, which, inter alia, covers the Indian territory also, there is a process involved and such process fell within the scope of the term royalty , since the process was not necessarily to be a secret one. According to him, the assessee was using a process in the satellites as per the agreements with the respective parties and therefore, payments made for use of such process was very much royalty coming within the meaning of Clause (iii) of Explanation 2 to Section 9(1)(vi) of the Act as also within the meaning of Clause (vi) of Explanation 2 of Section 9(1)(vi) of the Act. As per the learned Commissioner of Income-tax, the assessee having not made deduction of tax at source, Section 40(a)(i) of the Act was rightly applied by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in such payments should be one on which tax was statutorily required to be deducted under Chapter XVIIB of the Act. Learned Counsel further submitted that payments made by the assessee to M/s. Menon Ltd., U.K. being neither technical services nor royalty nor any other sum chargeable under the Act, the assessee was not obliged to deduct tax at source. Learned Counsel, then relying on the decision of the Karnataka High Court in the case of Jindal Thermal Power Co. Pvt. Ltd. v. DCIT: (2009) 182 Taxmann 252 : (2010) 321 ITR 31 argued that, even if the services rendered were considered to be technical in nature, to fall within the realm of the Explanation to Section 9(1)(vi) of the Act, such services or at least a part thereof had to be rendered in India. According to him, if such services were rendered outside India, remuneration paid therefore would not attract any tax liability. For the proposition that the Explanation to Sub-section (2) of Section 9 inserted by the Finance Act, 2007 with retrospective effect from June 1, 1976 would not do away with the criteria of residence or place of business, or business connection, learned Counsel relied on the decision of the Karnataka High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any obligation to deduct tax. Reliance was also placed on the hon'ble apex court decision in Transmission Corporation of A.P. Ltd. v. CIT: (1999) 239 ITR 587 for contending that the obligation of the assessee to deduct tax under Section 195 was limited only to appropriate proportion of sum which was chargeable to tax. 9. While admitting that the payments made to M/s. Rimsat, U.S.A. was covered by the decision of the Special Bench in the case of New Skies Satellites: (2009) 319 ITR 269 (Delhi) : (2009) 121 ITD 1, learned Counsel called the attention of the Bench to the Double Taxation Agreement between India and the USA (DTA for short). According to him, Article 26(3) of the DTA clearly prohibited discrimination. Further, according to him, Section 40(a)(i) of the Act, before it was amended with effect from 1-4-2005, by the Finance (No. 2) Act, 2004 by substituting Sub-clauses (i), (ia) and (ib) in place of said Clause (i), was clearly discriminatory since it applied only to non-residents. According to him, vide Article 26(3) of the India-USA tax treaty, interest, royalties and other disbursements paid by a resident of a contracting State to a resident of the other contracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the decision of the Special Bench, there cannot be any doubt that such payments were royalty on which tax had to be deducted and the assessee having failed to do so, the disallowances were rightly made. Vis-a-vis the claim that income of M/s. Menon Ltd., U.K. was not at all taxable, this being neither royalty nor fee for technical service, the learned departmental representative submitted that this was never substantiated by the assessee before any of the lower authorities. According to him, the intimation under Section 143(1)(a) of the Act, produced by the assessee relating to M/s. Menon Ltd., U.K. for the assessment year 2000-01 would not have any relevance vis-a-vis impugned assessment year. Further, according to the learned departmental representative, the decision in Raj Television Net Works Ltd. (supra) was not applicable in view of the fact that such decision was considered by the Special Bench in New Skies Satellites: (2009) 319 ITR 269 (Delhi) : (2009) 121 ITD 1 and only thereafter they had come to a conclusion that hiring of transponder was hiring of a process coming within the definition of royalty . The learned departmental representative was of the opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had no applicability. Relying on the decision of the hon'ble Madras High Court in the case of CIT v. India Pistons Ltd.: (2006) 282 ITR 632, the learned authorised representative submitted that once something was not chargeable to tax and TDS was not attracted, there was no question of application of under Section 40(a)(i) of the Act. 12. We have heard the rival contentions and perused the orders. Taking up the payment made to Menon Ltd., UK, the first line of defence is that such payment is not royalty as defined in Explanation 2 to Clause (vi) of Section 9(1), despite the decision of the Special Bench in New Skies Satellites: (2009) 319 ITR 269 (Delhi) : (2009) 121 ITD 1. According to the assessee, here the payments were not made to a company which was owning any transponder, whereas all the assessees who were parties or interveners before the Special Bench, had effected payments to persons who owned the transponder and satellites. The second line of defence is that if it is considered as payment for technical services, there were no service whatsoever rendered in India, the transponders being placed about 30000 ft into the space, and without any situs of service or per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) To provide for transmission from the earth station at Dubna having all the necessary transmitting equipment. To provide video playback equipment Betacam SP for transmission of TV programmes from tapes supplied by the customer compatible with the abovementioned equipment. To provide communications for transmission of information from the control room to the transmitting earth station. To provide transmission of TV signals with the characteristics given in Annexure 1 and Annexure 2 to the present contract. To prepare a scheme of TV transmission and get it approved by the customer. To provide connection of signal scrambling devices to the executors equipment in case the devices are supplied by the customer. At the customers request and according to a separate contract, to send technical experts to India for assistance in assembly of the first receiving stations made in Russia and training of Indian operators on the said receiving stations. To prepare an offer for transmissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 out that whether a process was actually used by the payer. In the case of satellites, physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process. Time of telecast and the nature of programme, all depends upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payments were in the nature of royalty in view of the Special Bench decision in New Skies Satellites: (2009) 319 ITR (AT) 269 (Delhi) : (2009) 121 ITD 1. Since the payment is considered as royalty , the other limbs of the argument, whether it was technical services, or whether a permanent establishment was necessary, whether such receipts would be taxable in the hands of the recipient under the Indian Income Tax Act becomes irrelevant. This is because the Special Bench decision has considered all these aspects and held that tax had to be deducted at source from such payments made to non-residents. 16. Vis-a-vis the second payment to M/s. Rimsat, USA, the learned authorised representative himself agrees that the Special Bench decision applies to it, without qualms and they were nothing but royalty payment. But we can't leave it like that. It is necessary to consider the second line of defence of the assessee for both the payments. According to it, the rigour of Section 40(a)(i) of the Act would not apply to it since in view of the DTAA with the concerned countries, a non-resident Indian cannot be worse off than a resident tax payer in relation to a transaction entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. 18. Though these are not similarly worded, it does look that both these articles are intended to avoid discrimination. Applicability of Section 40(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.: (2009) 309 ITR 18 : (2009) 117 ITD 114 and Herbalife International India P. Ltd. v. Asst. CIT (2006) 101 ITD 450. It was held by the Bench that, rigour of Section 40(a)(i) was neutralised by the operation of the above were not bound by the rigour of Section 40(a)(i). In our opinion, these decisions do come to the help of the assessee very much. As to the contention of the learned departmental representative that, the DTAAs are not to be taken advantage of by an Indian resident but meant only for non-resident, we are afraid this line of reasoning has already rejected by the hon'ble Delhi Bench at paragraph 8.16 of its decision in Millen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gativing 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 inconsistent 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 brought into the statute book precisely to enable the executive to negotiate a Double Taxation Avoidance Agreement and quickly implement it. Even accepting that the powers exercised by the Central Government under Section 90 are delegated powers of legislation, there is no reason why a delegatee ..... 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