TMI Blog2023 (10) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... ite BV [ 2016 (2) TMI 415 - DELHI HIGH COURT ] held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite [ 2011 (1) TMI 47 - DELHI HIGH COURT] when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, 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 supra note 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. - SHRI G. S. PANNU, PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER For the Appellant : Shri Percy Pardiwalla, Sr. Adv. Ms. Aarti Sathe, Ms. Aasavari Kadam, Adv.; For the Respondent : Ms. Prajna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tax Residency Certificate (TRC) obtained from the Netherland tax authorities. During the year under consideration assessee received Rs. 30,21,79,450/- and claimed as business income. The assessee claimed that in the absence of a permanent establishment in India the income is not chargeable to tax in India. The Assessing Officer issued show cause as to why total consideration earned by the assessee should not be considered as royalty under section 9(1)(vi) of the Act and Article 13 of Indo Netherland DTAA. The assessee filed objections as under:- 5. The Assessing Officer did not accept the contentions of the assessee and proposed to assess Rs. 38,05,85,665/- as royalty under section 9(1)(vi)(c) of the Act and Article 12(8) of the tax treaty observing as under:- 7. The assessee's reply has been perused but not found tenable. The assessee has provided a number of case laws on which it has relied its argument. These cases have in turn relied on broadly 3 Cases which are: i. New Skies Satellite BV (382 ITR 114)(Delhi HC) ii. Asia Satellite Telecommunication Co. Ltd. vs. DIT (332 ITR 340) (Delhi HC) In addition, the assessee has also relied upon the decision of the Hon'ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment that the transponder leasing constitute process royalty. 6. The assessee filed objections before the DRP and the DRP disposed of the objections observing as under:- Prof Profile of Assessee: 1 The Assessee is a company incorporated and registered under the laws of the Netherlands. The Assessee is a tax resident of Netherlands for the purpose of the India- Netherlands Tax Treaty. The Assessee is a distribution partner of Inmarsal Global Limited (IGL'). In this respect, the Assessee's primary activity is purchase of airtime from IGL for resale as a packaged solution to third-party customers, mainly in the maritime industry. In relation to its activities as a distribution partner, the primary risks borne by the Assessee are market, credit, and product defect risk. It also bears limited foreign exchange and inventory risk. Further, in relation to its activities as a service provider, all services undertaken are routine in nature and the Assessee is characterised as a limited risk service provider. The Assessee derives income from transmission of satellite signals from ship to the customers in India and vice versa. An equipment (not owned by the Assessee) is located on a sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06-SC-2021) on the basis that the same was rendered in the context of income from sale of software The learned AO did not follow the favourable decision of jurisdictional Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (2011) (332 ITR 340) and New Skies Satellite BV (2016) (382 ITR 114) wherein it has been held that receipts from lease of transponder capacity are not in the nature of 'royalty' under the Act as well as under the Tax Treaty The learned AO did not follow the favourable decision of the Hon'ble Mumbai ITAT in case of one of the group entities (i.e. IGL) rendered vide orders dated 14 July 2017, 12 December 2018, 23 October 2020 and 24 March 2021 on the same issue, wherein, it has been held that, the consideration received by IGL from its customer is not in the nature of 'Royalty' under the provisions of the Act as well as India - United Kingdom Tax Treaty The above decisions of the jurisdictional Courts and Mumbai ITAT have not been followed by the learned AO on the ground that the Tax Department has not accepted these decisions and further appeal has been preferred before the higher appellate forums. 4.2.1 The assessing off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of its group entity Inmarsat Global Limited, UK. However, it ought to be noted here that the Department has not accepted the decision of the Hon'ble ITAT for A.Y. 2000-01 to A.Y 2005-06 and A.Y. 2007-08 to 2012-13 and has filed appeal in Mumbai High Court, wherever the Tax Effect is more than the prescribed monetary limit, in view of Circular Negified ue Copy 3 of 2018 dated 11.07.2018, read with F. No. 279 /Misc.142/2007 ITJ(Pt) dated 20.08.2018 and Circular 17 of 2019 dated 08/08/2019. Hence, it is learnt that the assessee's claim, in light of the above judicial pronouncements, was very much in the knowledge of the AO which cognizance was taken by the Assessing Officer before the finalizing the draft order as per the prevailing practice of the revenue when any matter is sub-judice. The Panel does not find any infirmity in the AO's order on this aspects, hence, the action of the AO is upheld. 7. We have perused the order of the co-ordinate bench of the Tribunal in assessee s group concern in the case of Inmarsat Global Ltd. Vs. DCIT in ITA. No. 626/Mum/2022 dated 22.08.2022 for assessment year 2018-19, which is placed at page Nos. 1 to 50 of the paper book an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly involves making available a channel (frequency) in air through which the communication signals are transmitted. This frequency is made available by a network which includes the following resources : Satellite Network Co-ordinating Station ( NCS ) Network Operation Centre ( NOC ) Satellite Control Centre Other infrastructure Inmarsat provides a telecommunication link between the user of mobile telephone system known as Mobile Earth Station ( MES ) and Land Earth Station ( LES ). MES is an equipment located on a ship, aircraft or vehicle or carried in hand held case. The users of the equipment are third parties who are not connected with Inmarsat. The LES is a fixed site (with large satellite dishes and related equipment), which is operated by a third party ie a Land Earth Service Operator ( LESO ). Inmarsat is engaged in rendering various telecommunication services including the following : Voice transmission services Fax transmission service Data transmission service E-mail transmission private/corporate networks, value added networks transmission Internet access-browsing e-mail Video conferencing-store and forward video, real time, etc. In this connection, we enclose herewith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the learned CIT-DR has placed reliance on the decisions of the Hon'ble Madras High Court in the case of Verizon Communications Singapore Pte Ltd. vs. Income Tax Officer (IT) (2014) 361 ITR 575 (Mad), the decision of the Karnataka High Court in the case of CIT vs. CGI Information Systems and Management Consultants (P) Ltd. and the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Siemens Aktiongeswellschaft (2009) 310 ITR 320 (Bom). Reliance has been placed on the order of the Mumbai Bench of the Tribunal in the case of Viacom 18 Media P. Ltd. vs. ADIT (International Taxation)-2(2), Mumbai(2014) 44 taxmann.com 1 (Mum-Trib) in support of the argument that this is the view taken by the Mumbai Bench of the Tribunal. Notwithstanding the fact that at that point of time the Coordinate Bench did not have the benefit of the orders of the Hon'ble Delhi High Court in Asia Satellite Communication Co. Ltd. We also note that consistently the Mumbai Bench of the Tribunal has taken into the consideration the distinction in facts, law and the issue which was posed before different forums for consideration and find that it has been consistently held relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. 8544/M/2010 5 ors. 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 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 Tax 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations: He, thus submitted that the question of copyrighted article 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 a copyrighted article as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 operationalizing domestic law states that such amendments are to become automatically applicable, Parliament will have to by either a separate law, or through an amendment to the original law, make the amendment effective. Similarly, amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. 53. Finally, States are expected to fulfill their obligations 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 interpretation under Article 31 (1) (i.e that it shall be interpreted in good faith, in accordance with ordinary meaning to be given to the te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping in mind the above broad principles. 5.1. It is found that all the issues raised by the DR, before us, have been dealt with by the Tribunal in the case of Antwerp Diamond(supra). We are reproducing the arguments of the representatives of both the sides and the relevant portion of that order and it reads as under: 2. At the outset, the Ld. Counsel, Mr. K. K. Ved submitted that similar issue has been decided by the Tribunal in favour of the assessee in assessee s own case right from the assessment years 2004-05, 2005-06 and 2008-09. The second issue relating to disallowance of interest paid to the Head Office also has been decided in favour of the assessee by the Special Bench in Sumitomo Mitsui Banking Corpn., wherein, the assessee was one of the party. 3. On the other hand, Ld. DR strongly relied upon the order of the Assessing Officer and submitted that, so far as Data Processing Cost is concerned, the same is in the nature of Royalty and in support he has strongly relied upon the two Karnataka High Court decisions in the case of:- i) CIT vs. Wipro Ltd., reported in 355 ITR 284; ii) CIT vs. CGI Information Systems Management Consultants (P) Ltd., 226 Taxman 319 The issue w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 2007, thereby implying that the explanations inserted by FA 2007 could be read into modern DTAAs; iv) Mumbai Tribunal in the case of Viacom 18 Media (P.) Ltd. [2014] 162 TTJ 336 (Mum) has explained the import of Bombay High Court decision in right perspective in paras 16 and 17 of its order while rejecting the assessee s argument that the HC has held that amendments in the Act cannot be read into DTAAs; and v) The Bombay High Court has approved ambulatory approach (para 22) to interpretation of treaties against Static approach adopted by the Delhi High Court. So far as the interest paid by the Branch Office to the Head Office income of Headquarter, he submitted that, expenditure including interest attributable of earning of income which does not form part of the total income has to be disallowed under section14A if it has to be held that in view of the Special Bench decision in the case of the assessee, the interest paid by the Branch Office to the Head Office is not the commission of the Head Office. In support, he relied upon the decision of Oman International Bank AG on the admissibility of the belief, he relied upon the decision of Hon ble Supreme Court in the case of NTPC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has sought the benefit of treaty between India and Belgium and had specifically relied upon the definition of royalty as given in the Article 12. Clause (a) of Para 3 of Article 12, which defines the term royalty in the following manner: 3(a) 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 cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 16. The above definition of royalty thus provides that, when the payment of any kind is received as a consideration for use of or the right to use of any of the copy right of any item or for various terms used in the said Article, then only it can be held to be for the purpose of royalty . The said definition of royalty is exhaustive and not inclusive and, therefore, it has to be given the meaning as contained in the Article itself and no other meaning should be looked upon. If the assessee is claiming the application of the DTAA, then the definition and scope of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Senior Counsel have strongly relied upon the decision of the co ordinate bench of the Tribunal in Kotak Mahindra Primus Ltd. (supra). On a perusal of the said decision, it is seen that the conclusion drawn by the Tribunal, is directly applicable to the facts of the assessee s case also, which is evident from the following observations and conclusions drawn by the Tribunal: 11. The consideration of payment is only this data process work. No part of this payment can be said to be for the use of specialized software on which data is processed or for the use of mainframe computer because the Indian company does not have any independent right to use the computer or even physical access to the mainframe computer, so as to use the mainframe computer or the specialized software. All that the right is for processing of data, and the use of mainframe computer is permitted only for that purpose. The Indian company can feed the raw data in the mainframe computer in Australia, with the help of the telecommunication link, and the output data, after due processing is transmitted back to the Indian company. There is no privilege or right granted to the Indian company by the Australian company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n vacuum and without any consideration. This plea also does not impress us. It is not every property or right which can be covered by these expressions appearing in the end of article 12(3)(a), because, following the principles of ejusdem generis meaning of the general words following the specific words have to take colour from the specific words preceding it. When that property or right, even if it so exists, is not of the nature of any of the specific categories set out in article 12(3)(a), it cannot be covered by the general words following those categories either. For all these reasons, we are of the considered view that provisions of article 12(3)(a)cannot be invoked on the facts of the case before us. That takes us to the question whether the provisions of article 12(3)(b), as relied upon by the revenue authorities, can be invoked on the facts of the present case. Article 12(3)(b) can apply only when the payment in question can be held to be payment for the use of, or the right to use, any industrial, commercial or scientific equipment . This condition can only be satisfied when it is established that the impugned payment is made for the use of, or right to use of, mainframe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Departmental Representative is not applicable which is evident from the issue involved as is evident from the substantial question of law which were formulated by the High Court for adjudication. Hence, the said decisions are not applicable. 19. Thus, in view of the aforesaid reasons, we hold that the impugned payment made by the Branch to the H.O. towards reimbursement of cost of data processing cannot be held to be covered within the scope of expression royalty under Article12(3)(a) of the India Belgium DTAA. Accordingly, the conclusion drawn by the learned Commissioner (Appeals) is affirmed. 20. Since we have already held that the data processing cost paid by the assessee does not amount to royalty, consequently, there is no requirement for deducting tax at source on such payment. Therefore, the provisions of section 40(a)(i) will not apply. Accordingly, the issue arising out of ground no.1 and 2 is dismissed . This decision of the Tribunal have been followed in the subsequent years by the Tribunal, i.e., in AY2006-07 and 2007-08. In the aforesaid decision of the Tribunal, the decision of Bombay High Court in the case of Siemens Aktiongesellschaft (supra) and Delhi High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this 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 situation, thus allowing for successive amendments into the realm of laws in force . We express no opinion in this regard since it is not in issue before this Court. This Court s finding is in the context of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Bench of the ITAT and the position of law as was then available. Accordingly, in view of the preponderance of the consistent views of Coordinate Benches the appeals of the assessee are allowed. 8. Since the facts and circumstances in this year remain the same as in the past years, which has been considered by the Tribunal, we find no reason to distract from the earlier decision of the Tribunal dated 14.07.2017 (supra). Pertinently, it is also not the case of the Revenue that there is any change in the nature of the income being earned by the assessee from TCL than that considered by the Tribunal in its order dated 14.07.2017 (supra). Therefore, following the precedent in assessee s own case for Assessment Years 2000-01 to 2005-06, the stand of the assessee has to be approved. 9. So, however, before parting, we may make a mention of the discussion sought to be made by the DRP in the impugned order regarding the inapplicability of the ratio of the decision of the AAR in the case of ISRO Satellite Centre reported in 307 ITR 59 (AAR). In this context, we find that this aspect of the controversy has been expressly considered by our coordinate Bench while rendering its decision dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied) 55. The slight but apparently vital difference between the definitions under the DTAA 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 for diametrically opposite implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of provisions. Judge Caldwell once famously said The words control the punctuation marks, and not the punctuation marks the words. Holmes v. Pheonix Insurance Co.. It has been held in CGT v. Budur and Hindustan Const v. CIT that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 sense but to see if it takes on any legal consequences . 58. Nevertheless, whether or not punctuation plays an important part in statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient 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 Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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 leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communities (e.g. through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil). 75. Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein: 'The use of a satellite 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 ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me that any change made 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 the DTAAs. 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word royalty in Asia Satellite59, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, 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 sup ..... X X X X Extracts X X X X X X X X Extracts X X X X
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