TMI Blog2022 (5) TMI 1589X X X X Extracts X X X X X X X X Extracts X X X X ..... l (Judicial Member For the Appellant : Aarati Sathe. For the Respondent : Milind Chavan. ORDER PER PRAMOD KUMAR VP 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 09.04.2021, passed by the Deputy Commissioner of Income Tax under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, for the assessment year 2017-18. 2. In ground no 1 to 4, we will to take up together. The assessee-appellant has raised the following grievances:- Ground number 1 erred in determining the total income of the Appellant at Rs 5,82,70,600 instead of Nil‟ income as declared by the appellant in the return of income; Ground number 2 erred in holding the amounts received by the Appellant from Tata Communications Limited (TCL') [earlier known as Videsh Sanchar Nigam Limited] to be 'Royalty as defined under Article 13(3)(a) of the Double Taxation Avoidance Agreement between India and United Kingdom ('India-UK Tax Treaty'); Ground number 3 erred in not following the decision of the jurisdictional Mumbai Tribunal in the Appellant's own case for previous Assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 13 of the India-U.K. Tax Treaty. As observed by us hereinabove, it was the claim of the assessee before the lower authorities that the issue that the amounts received by it from TCL were not to be held as royalty was squarely covered by the order passed by the Tribunal in its own case for A.Y. 2000-01 to A.Y. 2005-06, vide its consolidated order dated 14.07.2017. In the course of the hearing of the appeal the ld. Authorized Representative (for short A.R ) for the assessee took us through the consolidated order passed by the Tribunal while disposing off the assessee s appeals for A.Y. 2000-01 to A.Y. 2005-06, dated 14.07.2017. It was further submitted by the ld. A.R, that the issue pertaining to treating of the amounts received by the assessee from TCL for providing Satellite Telecommunication Services, as royalty, by the A.O/DRP, had again came up before the Tribunal in the assessee s own case for A.Y. 2007-08 to A.Y. 2012-13, wherein after exhaustive deliberations and relying on its earlier order, the Tribunal had concluded that the same was not to be treated as royalty. 9. Per contra, the ld. Departmental Representative (for short D.R ) relied on the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s out the mechanics of the manner in which the assessee is providing telecommunication services from outside India and deriving its earning from TCL, the same is reproduced below :- 2.1 Background Inmarsat is engaged in the business of providing telecommunication services from outside India. The aforesaid nature of services essentially 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 i.e a Land Earth Service Operator ( LESO ). Inmar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts similar to the facts in the present proceedings with ISRO which has been followed after a detailed discussion and in fact extracted by the Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. (2011) 332 ITR 340(Del.). We note that no arguments have been advanced by the Revenue to rebut the assessee s arguments that facts as considered in ISRO Satellite Centre are identical in the present proceedings also. We have taken into consideration 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 Aktionges wells chaft (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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ude a tax already covered by the treaty but would also include any other tax as taxes of a substantially similar character subsequent to the date of the agreement 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 Tax Avoidance Agreement was entered into. 49. It is essential to note the context in which this judgment was delivered. There, the Court was confronted with a situation where the word royalty was not defined in the German DTAA. Following from our previous discussion on the bifurcation of terms within the treaty, in situations 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 assesses s contention that the law applicable would be the law as it existed at This is the context in which the ambulatory approach to tax treaty interpretation was not rejected. The situation before this Court however is ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax v Nokia Networks, 2013 (358) ITR 259 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 Tax Avoidance Agreement. This 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 abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to not follow the treaty, it may choose 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 by 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 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 Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to it, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision. In our opinion, international taxation issues have to be decided 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 strongl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpression commercial or industrial profits as per the then DTAA (Old) and therefore could not be taxed in India in absence of PE. The provisions of DTAA being the beneficial to the assessee were preferred over the provisions of the Income-tax Act; iii) In paras 13, 22 and 28 of its order, the Hon ble High Court has approved the insertion of Explanation below section 9(2) inserted by the Finance 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r software and the I.T. resources installed at Belgium for which the payment is made by the Head Office towards the use of such software license. Since the Branch is using the same software for the purpose of business operations, the Head Office allocates the said expenditure on a prorata basis for the use of the said resources which is being reimbursed by the Branch to the Head Office. It is not in dispute that 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 rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the use and exploitation of the software programme. Here, there is no such right which has been acquired by the Branch in relation to the usage of software, because the Head Office alone has the exclusive right of the license to use the software. Thus, the reimbursement of the data processing cost to the Head Office does not fall within the ambit of definition of royalty under Article 12(3)(a). 17. The learned Commissioner (Appeals) and the learned 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 us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving perused these classifications and having considered the facts before us, we are of the considered view that the payment does not fit into any of these classifications. It is, however, contended that the impugned payment is covered by the residuary clause, i.e., other like property or right . It is contended that by making payment of US $ 60,000 per annum, the Indian company gets a valuable property and right as the payment cannot be said to have been made in 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition and the scope of royalty as given in section 9(1)(vi).The said amendment cannot be read into the treaty and will not influence the definition of royalty , as given in Article 12(3). This proposition is squarely covered by the decision of the Bombay High Court in Siemens Aktiongesellschaft (supra), the decision of Delhi High Court in Nokia Network (supra) and DIT v/s Ericson AB, [2012] 343 ITR 470. Even the decisions of Madras High Court as relied upon by the learned 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 Article 12(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 ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assesse 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 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 find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lhi High Court in the order of the Coordinate Bench in Viacom 18 the benefit of the said decisions was not available and in the said decisions relied upon by the Revenue, the similarity of the peculiar facts with the facts of AAR s ruling in ISRO as considered by the Hon'ble Delhi High Court was not considered. Thus the lone ITAT decision cited by the learned CIT-DR of the Mumbai Tribunal it has been noticed did not have the benefit of the decisions of the Hon'ble Delhi High Court and in fact relies on the order of the Special 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by orders of the coordinate benches in assessee s own case in the preceding years. We may in this regard referred to the following observation made by the co-ordinate bench vide order dated 23.10.2020 in the order for the assessment year 2015-16. 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. 12. We shall now deal with the issue as to whether or not the assessee had a PE in India during the year under consideration. As observed by us hereinabove, the A.O/DRP had concluded that the Land Earth Station (LES) constituted a PE of the assessee in India. It has been the claim of the assessee before the lower authorities that as the LES was owned and operated by TCL and not by the assessee, therefore, on the said count it could not have been held to have constituted a PE of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the considered view that the basis and the facts therein involved for concluding that the assessee had a PE in India during the year under consideration had not witnessed any change as in comparison to the facts which were there in its case for the preceding years. On a perusal of the order of the Tribunal for A.Y. 2007-08 to A.Y. 2012-13, we find, that after exhaustive deliberations the Tribunal had concluded that the assessee did not had a PE in India, observing as under: 10. So far as Ground of appeal no. 4 is concerned, the same deals with the grievance of the assessee against the income-tax authorities holding that it has a PE in India. In this context, the relevant facts are that the Assessing Officer noted that assessee owned Space Segment Monitoring System (SSMS), which was equipment installed/located at Arvi, Maharashtra. The Assessing Officer further notes that the Land Earth Station (LES) of VSNL/TCL is also located at this place and that the SSMS equipment plays a critical role in providing telecommunication services to the Land Earth Service Operator (LESO), which is VSNL. The Assessing Officer noted that the said equipment is installed and maintained by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representative for the assessee relied on the judgment of the Hon'ble Delhi High Court in the case of DIT vs Mitsui Co. Ltd., [2017] 84 taxmann.com 3 (Delhi) to point out that the onus was on the Revenue to show that any activity in the nature of business or trading was carried out in the liaison office. It was pointed out that the liaison office of the assessee has been in existence since it was initially approved by the RBI vide its permission dated 20.10.1999, a copy of which has been placed in the Paper Book at pages 39 to 42. It has been further pointed out that the approval granted by the RBI has been renewed from time to time and so far as the captioned period is concerned, the approval of the RBI vide order dated 10.10.2008 subsists. It is pointed out that the very fact that the RBI continues to accord approval for the liaison office shows that there is no activity of trading, commercial or industrial nature which is carried out so as to treat such liaison office as a PE. 12. So far as the reference made by the lower authorities to SSMS equipment is concerned, the learned representative for the assessee pointed out that in the past years also such equipment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the RBI specifically prohibited the liaison office from undertaking any other activity of trading, commercial or industrial nature. The liaison office was also, inter-alia, prohibited from entering into any business contract in its own name. It further prescribed that the liaison office will not charge any Commission or fee for its liasioning activity/services rendered by it. The standard terms and conditions also stated that the entire expense of the liaison office were to be met exclusively out of the funds received from abroad and that the liaison office could not borrow or lend any money from or to any person in India without prior approval, etc. The aforesaid permission has been further renewed and there is no dispute that for the period under consideration also the requisite approval of the RBI exists for the liaison office of the assessee. We are only highlighting the aforesaid features of the permission granted by the RBI to point out that the liaison office is prohibited from carrying out any business or trading activity. At the time of hearing, it was also stated by the learned representative for the assessee at Bar that till now there is no infringement or any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing manner :- 4.1 The Assessee has a SSMS located in India at VSNL s Land Earth Station ( LES ) at Arvi. The purpose of the SSMS is to provide a degree of surveillance capability to the Inmarsat Network Operations Centre in the UK whereby the Assessee can monitor the transmitted power levels of individual channels (both signalling and voice carriers) to and from satellites in the Indian Ocean region and the frequency deviations. SSMS is not a critical component to the services rendered by the Assessee and even without SSMS, these services can be continued to be rendered. The cost of this equipment is approximately USD 150,000. This investment is insignificant when compared with the total cost of the Assessee s assets worldwide (including satellites) which is USD 2,230,839,000 as per the audited accounts for the year 1998. Thus, SSMS is not contributing to the revenues and hence, no part of the amounts receivable is attributable to SSMS. 4.2 The Assessee has a LO in India, which has been set-up with the approval of the Reserve Bank of India ( RBI ). All the activities of the LO are in accordance with the RBI s approval. The LO undertakes liaison and coordination activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing services that it is the LESO, i.e. VSNL, who has the full right and responsibility with regard to the LES. In any case, it is undeniable that the LES is not owned by the assessee, an aspect which the DRP itself has noted in its order. Therefore, considering the matter in its entirety, we find it erroneous on the part of the Assessing Officer to hold that there exists a PE of the assessee in India. Thus, assessee succeeds on this aspect also. 19. Insofar as Ground of appeal no. 5 is concerned, the same relates to income computed by the Assessing Officer, which can be attributable to the PE of the assessee in India. Since we have upheld the primary stand of the assessee that there does not exit any PE of the assessee in India, the dispute in Ground of appeal no. 5 is rendered academic and is dismissed as infructuous. 15. As the facts in the backdrop of which the 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. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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