TMI Blog2021 (4) TMI 213X X X X Extracts X X X X X X X X Extracts X X X X ..... be held as royalty in its hands. PE in India - whether Liaison Office (LO) of the assessee constituted its PE in India and that the Land Earth Stations (LES) constituted a PE of the assessee in India - HELD THAT:- As decided in own case [ 2020 (10) TMI 1188 - ITAT MUMBAI] A.O/DRP had in the aforesaid preceding years concluded that the LO and LES were to be treated as the PE on the assessee in India, remains the same, as are involved in the appeal of the assessee for the year under consideration, we therefore respectfully follow the aforesaid order of the Tribunal. Accordingly, in the backdrop of our aforesaid observations, we herein conclude that the assessee did not have any PE in India during the year under consideration. Considering the profitability on ad hoc basis of 30% on gross receipts from TCL by applying the Rule 10 of Income Tax Rules, 1962 - HELD THAT:- Theaforesaid issue pertains to the computing the income of the assessee attributable to its PE in India. Since we have upheld the primary stand of the assessee that there does not exist any PE of the assessee in India, thus, the dispute in ground of appeal No. 8 having been rendered as merely academic as dism ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffirmed by Hon'ble Supreme court) obtained by Indian Space Research Organisation ('ISRO') (a customer of Inmarsat), and taxing the receipts from TCL as 'Royalty' pursuant to the retrospective amendment inserted vide Explanation 5/6 to Section 9(1)(vi) of the Act by Finance Act 2012 as well as Article 13(3)(a) of the India-UK Tax Treaty; Ground number 5 Erred in holding that a unilateral amendment of the term process under the Act would get imported into the definition of royalty given under article 12 of India-UK Treaty Ground number 6 The Hon'ble DRIP has erred in concluding that the Liaison Office (LO) constitutes a permanent establishment in India, without appreciating the fact there are no activities that are carried out by the LO in India; Ground number 7 The Hon'ble DRIP has erred in concluding that the Land Earth Station ('LES') constitutes a permanent establishment of the Appellant in India, without appreciating the fact that the said LES was owned and operated by TCL and not Appellant, thereby not appreciating the facts appropriately; Ground number 8 The learned AO has erred in considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reply on 22.11.2017, referred at para 4 of the order. The A.O considered the submissions and advance rulings and the assessee's own cases for the earlier years and observed that the intention of the agreement is rendering of telecommunication services by the assessee to the TCL. The assessee made submissions on the claim u/s. 80IA of the Act and applicability of provisions under India-UK Tax Treaty. The A.O dealt on the basic principles and governing of royalty and the submissions of the assessee and DTAA between the India and UK. But the A.O. has relied on the earlier years decisions and observed that no details are available or provided by the assessee. Therefore on applying the Rule 10 of the IT Rules, 1962, A.O invoked expenses @30%which worked out to 1,85,69,467/- and the balance receipts are treated as royalty income and not business income and taxable @10% under India-UK Tax Treaty and assessed the total income of ₹ 6,18,98,220/- and passed the draft assessment order u/s. 144C of the Act dated 10.12.2018. 3. Aggrieved by the order, the assessee has filed objections before the DRP, whereas, the Hon'ble DRP has considered the objections, observations of the A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment years the Hon'ble Tribunal has granted the relief and prayed for allowing the appeal. Contra, the Ld. DR relied on the order of the A.O and submitted that the facts are different and the revenue is contesting the decision of the Hon'ble Tribunal with the Higher forums. 7. We heard the rival submissions and perused the material on record. The sole crux of disputed issue as envisaged by the Ld. AR that the A.O erred in treating the receipts from TCL as royalty and taxed under India-UK Tax Treaty. The Ld. AR submitted that the lower forums and the DRP has treated the receipts from TCL as royalty and made taxable at 10% under India-UK Tax Treaty. Therefore the action of the A.O and lower forums are not in accordance with law and the Hon'ble Tribunal in assessee's own case in earlier years has granted relief to the assessee. We find the submissions of the Ld. AR are realistic and the Ld. AR also referred to the DTTA between India-UK Tax Treaty and decision of the Hon'ble Tribunal for the A.Y 2015-16, wherein this disputed issues have been dealt. The Hon'ble Tribunal in assessee's own case in ITA No. 7025/Mum/2018, for the A.Y 2015-16 dated 23.10.2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: 5. In order to appreciate the controversy, the following discussion is relevant. The appellant is a company incorporated in United Kingdom and is also a tax resident of United Kingdom. The appellant is engaged in the business of providing telecommunication services and for Assessment Year 2007-08, it filed its return of income declaring NIL income, inter-alia, contending that its income was not taxable in India. So far as the income earned by the assessee in this year is concerned, the same stands on similar footing as in the past years, namely, from rendering of telecommunication services to Videsh Sanchar Nigam Ltd. (in short 'VSNL'), whose name has subsequently been changed to Tata Communication Ltd. (in short 'TCL'). The receipts from rendering of telecommunication services to TCL were claimed to be not taxable in India; however, the Assessing Officer has taxed the same as Royalty under the Act as well as in terms of the India-UK Double Taxation Avoidance Agreement (in short 'India-UK DTAA'). The stand of the assessee has been that its receipts from TCL are in the nature of 'business profits' covered by Article 7 of the India-UK DTAA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into by Inmarsat with VSNL for provision of telecommunication services. The LES is linked on the ground to the local public telecommunication network. This system enables communication to take place between users of the MES equipment and either other users of similar equipment or users of the public telephone network. In each case, the communication passes via an Inmarsat satellite and is co-ordinated and connected by the LESO. 6. The Assessing Officer, however, took the stand, following the stand of the assessing authorities of the past years that the impugned receipts earned by the assessee from TCL are in the nature of 'Royalty'. We find that the DRP has also affirmed the decision of the Assessing Officer. 7. On this aspect of the royalty issue controversy, it has been pointed out before us that the Tribunal vide its order in ITA Nos. 5102/Mum/2004 others dated 14.07.2017 in the context of Assessment Years 2000-01 to 2005-06 has evaluated the rival stands and have disagreed with the stand of the Revenue that the nature of receipt was Royalty. At the time of hearing, the learned representative for the assessee has taken us through the detailed de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA Nos. 7299 7300/Mum/2010 for A.Y. 2005-06 and 2007-08, DDIT vs. Shell Information Technology International BV dated 15.03.2017 in ITA No. 5051/Mum/2009 Others for A.Y. 2006-07 to 2008-09 and ADIT vs. Taj TV Ltd. dated 05.07.2016 in ITA No. 4678/Mum/2007 for A.Y. 2003-04 to 2005-06. We have also noted that reliance placed by the learned CIT-DR on the decision of the Hon'ble Jurisdictional High Court in Siemens Aktionges wellschaft (supra) supports its case is misplaced. Specific mention may be made to para 20 of the said decision. Reference therein has been made to a decision of the Canadian Court in the case of Her Majesty the Queen vs. Melford Development Inc. 82 DTC 6281 and the categoric observation on unilateral amendment by a nation which is party to the agreement leaves the issue in no doubt about the view favoured. Accordingly we quote here the decision of the Hon'ble Delhi High Court in DIT vs. New Skies Satellite BV cited supra to support the conclusion why the consistent orders of the ITAT on the issue are being followed:- 48. In Commissioner of Income Tax v. Siemens Aktiongessellschaft, [2009] 310 ITR 320 (Bom), the Bombay High Court citing R v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second situation, where there does exist a definition of a term within the DTAA. When that is the case, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA and the ultimate taxability of the income under the 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), had also held similarly: We are in agreement with the petitioners and in the light of our preceding analyses, discern no textual, grammatical or syntactic ambiguity in Article 14(5), warranting an interpretive recourse. In the circumstances, invoking provisions of Article 3(2) by an artificial insemination of ambiguity (to accommodate an expanded meaning to the DTAA provision), would be contrary to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 if it were in violation of treaty principles, is to be given effect to; but where the State unilaterally seeks to amend a treaty through its legislature, the situation becomes one quite different from when it breaches the treaty. In the latter case, while internationally condemnable, the State's power to breach very much exists; Courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate legislation in accordance with Article 253 of the Constitution, 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, through domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Formula One World Championship Ltd. vs. CIT (International Taxation) for the proposition that the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and New Skies Satellite is overruled. On a reading of the said decision we note that the reliance is misplaced. The issue for consideration before the Hon'ble Apex Court was on an entirely different set of facts and circumstances and an entirely different issue was being considered. The said decisions were neither cited before the Court nor referred to by it nor considered in the said judgement. Accordingly on a reading of the decisions rendered on peculiar facts of the present case which we have brought out in detail in the earlier part of this order we find ourselves in agreement with the detailed finding and conclusion drawn by the Coordinate Benches and respectfully following the same conclude that the appeals of the assessee are to be allowed. For ready reference we extract from one of the decisions cited before us. We reproduce the relevant extract from the decision in the case of Alcatel Lucent USA Inc. being the most latest in point of time hereunder:- 5. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Siemens Aktiongesellschaft, reported in 310 ITR 320 (Bom HC) accordingly, he submitted that other decisions rendered by the Delhi High Court and the Tribunal may not be applicable. While appreciating the Siemens AG (supra) he submitted that, it may kind be borne in mind that: i) The question of law before the Hon'ble High Court was not that whether amendments in the Income-tax Act can be read into the DTAA or not; ii) In the said case, old DTAA (1960) between India and Germany was under consideration; iii) The said decision was rendered in 20008 when the only clarificatory provision by way of Explanation in section 9 was the Explanation below S. 9(2) inserted by the Finance Act, 2007 doing with the requirement of PE for Royalty; iv) That amendments/Explanations in the Income tax Act are being sought to be read into DTAA by virtue of Article 3(12) of the modern treaties; v)Section 9(1)(vi) up to and including Explanation 2 are substantive provisions as inserted by Finance Act 1976 and thereafter, Explanation 3 to 6 are only clarificatory provisions inserted subsequently; and vi) It is not disputed by the revenue that the provisions of DTAA if beneficial to the assessee sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee right from the earlier years. The Ld. CIT(A) too has followed the CIT(A)'s orders for the assessment years 2003-04 to 2004-05, 2005-06 and 2008-09. The Tribunal in the assessment year 2004-05 in ITA No. 7347/Mum/2007 on the issue of disallowance of Data Processing Cost has dealt and decided this issue in the following manner:- 15. Now, coming to the main issue i.e., whether the reimbursement of data processing cost of ₹ 34,03,734, amounts to royalty or not, we find from the record that the assessee is engaged in the banking business and operates in India through branch in Mumbai. It has acquired banking application software named as Flexcube from an Indian software company which is exclusively used for the banking purpose by the assessee all over the world. When the Mumbai Branch was set-up, the Branch was allowed to use the said software by making it assessable through servers located at Belgium. The Branch sends its data to the Belgium server from where the data gets processed as per the requirement of the banking operations. As per the terms of agreement between the Branch and the Head Office for the usage of software by the Branch, which has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right to use of the computer software, which is a kind of copy right. In the present case, the payment made by the Branch is not for use of or right to use of software which is being exclusively done by the Head Office only, installed in Belgium. The Branch does not have any independent right to use or control over such main frame of the computer software installed in Belgium, but it simply sends the data to the Head Office for getting it processed. Insofar as the Branch is concerned, it is only reimbursing the cost of processing of such data to the Head Office, which has been allocated on pro rata basis. Such reimbursement of payment does not fall within the ambit of definition of royalty within the Article 12(3)(a). To fall within its ambit, the Branch should have exclusive and independent use or right to use the software and for such usage, payment has to be made in consideration thereof. It is not the case of the Revenue that the Head Office has provided any copy right of software or any copyrighted article developed by the Head Office for the exclusive use of the assessee for, which the assessee is making the payment along with the mark-up exclusively for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exclusive control of the Australian company and it is for this work that the Australian company gets paid. In our considered view, therefore, in essence the impugned payment is made to the Australian company inconsideration of its processing of data belonging to the Indian company. As far as the scope of article 12(3)(a) is concerned, we find that it covers only a payment for the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right. The case of the revenue is that the payment is made for the use of specialized software with the help of which data is processed. We are not persuaded. As we have concluded earlier in this order, on the facts of this case, the payment made by the Indian company is not for the use of, or right to use of, software, the payment is for data processing. Be that as it may, even if stand of the revenue is to be upheld and it is to be concluded that the payment is made for software per se, that does not lead to taxability of receipt in the hands of the Australian company either. It is also by now settled that the payment for software is for a copyrighted article an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of payment for use of the mainframe computer. It is indeed true that the use of mainframe computer is integral to the data processing but what is important to bear in mind is the fact that the payment is not for the use of mainframe computer per se, that the Indian company does not have any control over the mainframe computer or physical access to the mainframe computer, and that the payment is for act of specialized data processing by the Australian company. Use of mainframe computer in the course of processing of data is one of the important aspects of the whole activity but that is not the purpose of, and consideration for, the impugned payment being made to Australian company. The payment, as we have observed earlier, is for the activity of specialized data processing. It is neither practicable, nor permissible, to assign monetary value to each of the segment of this economic activity and consider that amount in isolation, for the purpose of deciding character of that amount. Therefore, neither the impugned payment can be said to be towards use of, or right to use of, the mainframe computer, nor is it permissible to allocate apart of the impugned payment, as attributable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 470 have been taken note of. Thus, this issue has been decided in favour of the assessee after detail analysis and discussion. Moreover, we find that in the latest decision of Hon'ble Delhi High Court in the case of DIT vs. News Sky Satellite BV passed in ITA 473/2012, order dated 8.02.2016 have explained the ratio and principle of Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra). The relevant observation of the Hon'ble Delhi High Court in the said case reads as under:- 48 In Commissioner of Income Tax v. Siemens 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 agreement to tax income which otherwise was not subject to tax. Such income would not be subject to tax under the expression laws in force . While considering the Double Tax Avoidance Agreement the expression laws in force would not only include a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tour, 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 . 5. Thus, on the facts of the present case, we are bound to follow the judicial precedence in assessee's own case for the earlier years and in view of the finding given therein, we upheld the order of the CIT(A) and dismiss the grounds raised by the revenue. Accordingly, grounds no. 1, 2 3 are dismissed. 5.2. As far as filing of writ petition to be filed before the Hon'ble High court is concerned if would be sufficient to mention that nothing was brought on record to prove that writ had been filed and heard. Had the final hearing taken place, it would have been a different situation. So, in anticipation of filing of a writ-petition, we are not inclined to defer the decision especially when same is covered by the orders for the earlier years. Considering the above and respectfully following the orders of the Tribunal in the cases of Antwerp Diamond Bank NV Engineering Centre (supra) and Antwerp Diamond Bank NV(supra), we decide the effective ground of appeal in favour of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no reason to uphold the stand of the Revenue in this year following the precedent in the assessee's own case. Therefore, so far as Ground of appeal nos. 2 3 are concerned, the same are allowed, as above. 11. As the facts and the issue involved in the case before us remains the same as was there before the Tribunal in the preceding years, therefore, we respectfully follow the view therein taken, and conclude, that the amounts received by the assessee from TCL for providing Satellite Telecommunication Services is not to be held as royalty in its hands. The Grounds of appeal Nos. 2 to 5 are allowed in terms of our aforesaid observations. 8. In respect of ground of appeal, whether the assessee company had PE in India during the financial year. The Hon'ble Tribunal has observed at page 42 para 14 of the order as under: 14. We find that the lower authorities had concluded that the assessee had a PE in India on two grounds, viz. (i) that the Liaison Office (LO) of the assessee constituted its PE in India; and (ii) that the Land Earth Stations (LES) constituted a PE of the assessee in India. We find that the factual position pertaining to the aforesaid two aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by the assessee from VSNL was attributable to the assessee's PE in India. Thus, notwithstanding his stand that the receipts from VSNL were in the nature of Royalty, the Assessing Officer held that even going by Article 7 of the India-UK DTAA (by which such receipts are treated as business profits), because of the presence of a PE in India, income arising from receipts from VSNL was attributable to a 'business connection' in India. Therefore, he applied Rule 10 of the Income Tax Rules, 1962 and estimated the profit of the PE at 30% of the gross receipts. The aforesaid addition proposed by the Assessing Officer was objected to by the assessee before the DRP by raising various objections. The DRP, however, affirmed the ultimate conclusion of the Assessing Officer to the effect that assessee has a PE in India. In coming to such a decision, the DRP has confined its observation to the presence of the liaison office of the assessee in India and not given any finding on the aspect of location of SSMS equipment. As per the DRP, the activities of the liaison office could not be considered to be preparatory and ancillary, as the basic job of the office to act as a fixed plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 4th generation satellite which was thereafter used to provide the services which were earlier being provided by the use of SSMS equipment. 13. It was, therefore, contended that it is wholly erroneous on the part of the lower authorities to hold that the liaison office and SSMS equipment constituted a PE of the assessee in India. 14. On the other hand, the ld. DR appearing for the Revenue defended the stand of the lower authorities by placing reliance on the respective orders. Further, insofar as the assessment years 2010-11 to 2012-13 is concerned, the ld. DR raised a further point based on the observation of the DRP. In the aforesaid three years, the Assessing Officer held the existence of a PE in India on the basis of the existence of the liaison office and location of SSMS equipment. On the other hand, the DRP in Assessment Years 2007-08 to 2009-10 concluded the existence of a PE on the basis of existence of liaison office whereas for Assessment Years 2010-11 to 2012-13, the DRP has based its decision on the existence of liaison office as well as the use of LES by the assessee for providing services. In this manner, the ld. DR has defended the stand of the lower aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the receipts from VSNL/TCL, there was no adverse conclusion with regard to the nature of activities being carried out by the liaison office. The Hon'ble Delhi High Court in the case of Mitsui Co. Ltd. (supra) noted that in a case where assessee was found adhering to the conditions imposed by the RBI for running of a liaison office, it increases the burden of the Revenue to show that notwithstanding the subsisting RBI permission, the liaison office can be construed as a PE in India. In our view, the factual matrix in the instant case clearly attracts the legal position enunciated by the Hon'ble Delhi High Court in the case of Mitsui Co. Ltd. (supra) and, therefore, we proceed further to examine as to whether the Revenue has discharged its burden on this aspect in the present case. In this context, we have perused the discussion made by the Assessing Officer, wherein he has concluded the existence of a PE in para 11.1 of his order based on the existence of liaison office and the location of SSMS equipment owned by the assessee. We find that apart from making bald assertions that the activity of the liaison office cannot be mere liasioning , no other specific po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services to VSNL. 4.3 Based on the above, Inmarsat submits that the presence of the SSMS and the LO in India does not constitute a PE of Inmarsat in India. 16. The aforesaid fact-situation asserted by the assessee has not been countered by the DRP in any manner. In fact, the learned representative for the assessee has pointed out that with regard to the discontinuation of the use of SSMS equipment, communication to VSNL dated 28.04.2005 (copy placed at page 64 of the Paper Book) was also furnished, which clearly establishes that the same was not used in rendering services during the period under consideration. 17. Thus, we find that the assertions of the assessee qua the activity of the assessee and liaison office as well as the significance of the use of SSMS equipment located in India qua the services provided to VSNL clearly establishes that the same could not be construed to constitute a PE in India. The DRP, in our view, has also not referred to any specific instances in the functioning of the liaison office to point out that it was rendering services which could be construed as being a PE in India. Considering the orders of the authorities below as well as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he observations of the Hon'ble Tribunal in the above paragraphs squarely cover the grounds of appeal no 2 to 7 raised by the assessee in the present assessment year. We respectfully follow judicial decision of the Hon'ble Tribunal and allow the grounds of appeal Nos. 2 to 7 of the assessee. 10. The assessee has raised the ground of appeal No. 8, that the Ld. AO erred in considering the profitability on ad hoc basis of 30% on gross receipts from TCL by applying the Rule 10 of Income Tax Rules, 1962. We find that the Hon'ble Tribunal has dealt on this issue at page 47 para 16 of the order and dismissed as infructuous: 16. We shall now deal with the contention of the assessee that the AO had erred in considering its profitability on an ad hoc basis at 30% of its gross receipts from TCL by applying Rule 10 of the Income Tax Rules, 1962. We find that the aforesaid issue pertains to the computing the income of the assessee attributable to its PE in India. Since we have upheld the primary stand of the assessee that there does not exist any PE of the assessee in India, thus, the dispute in ground of appeal No. 8 having been rendered as merely academic as dismissed as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the India-U.K. tax treaty is not be subjected to any additional taxes in the form of surcharge or education cess. We thus set aside the view taken by the lower authorities and direct the A.O to recompute the tax liability of the assessee in terms of our aforesaid observations. The Ground of appeal No. 9 is allowed . 13. In the present appeal, the issues are similar and identical. Accordingly, we remit the disputed issue to the file of the A.O for limited purposes to compute the taxability as per the observations and allow the ground of appeal. 14. The assessee raised the ground of appeal that it was not granted TDS credit to the extent of ₹ 61,89,852/-.Since the matter requires examination and verification of the facts in respect of Tax credits. We restore this disputed issue to the file of A.O to grant credit after verification and allow the ground of appeal for the statistical purposes. 15. In respect of other grounds of appeal the Ld. AR of the assessee has not made any submissions, therefore, the same are treated as not pressed and dismissed. 16. In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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