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TMI Blog2022 (5) TMI 1589X X X X Extracts X X X X X X X X Extracts X X X X ..... idance 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 Years ('AY') 2000-01 to AY 2005-06 and AY 2007-08 to AY 2012-13 wherein it has been held that receipts of the Appellant from TCL are not in the nature of 'royalty' under the Act as well as under the India-UK Tax Treaty; Ground number 4 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 13 of India-UK tax treaty; 3. The short grievance articulated in the above grounds of appeal is that the authorities below holding that the amount of Rs. 5,82,70,600/- received by the assessee from Tata Communication Ltd. is taxable in its hands as royalty under the provisions of the India-UK Tax Treaty or under the provisions of the Income Tax Act. Learned representative fairly agree that this issue is squarely covered by a series of orders of the co-ordinate benches of this Tribunal in assessee's own cases for the preceding asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations 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 lower authorities. However, the ld. D.R could not controvert the claim of the assessee's counsel that the issue was squarely covered by the orders passed by the Tribunal in the assessee's own case for the preceding years. 10. We have given a thoughtful consideration to the aforesaid issue, and find, that the Tribunal while disposing off the assessee's appeals for A.Y. 2007-08 to A.Y. 2012-13, vide its consolidated order dated 12.12.2018, had held, that the amount received by the assessee company from providing Satellite Telecommunication Services to TCL was not to be treated as royalty. The Tribunal while dealing with the aforesaid issue had followed its earlier view that was taken while disposing off the assessee's appeals for A.Y. 2000-01 to A.Y. 2005-06, and vide its order dated 14.07.2017 had observed as under : "5. In order to appreciate the controversy, the following discussion is relevant. The appellant is a company incorporated in United Kingdom and is als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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"). * 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 in Annexure 7, a diagrammatic representation which describes the above mentioned activities. The LESO in India is VSNL. Inmarsat has entered into a LESO Agreement with VSNL for providing satellite telecommunication services. We have enclosed herewith in Annexure 8 a copy of the LESO agreement dated 12 April 1999, 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 othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 upon the decisions of the Hon'ble Delhi High Court in the cases of New Skies Satellite(2016) 382 ITR 1, DIT vs. Nokia Networks OY (2013) 358 ITR 259 and Asia Satellite Communications Co. Ltd. (supra) in the decisions of Alcatel-Lucent USA Inc. dated 25.04.2007 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/Mum2007 for A.Y. 2003- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted at 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 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 incon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 copyrighted article does not fall within the purview of Royalty. Therefore, we decide question of law no.1 & 2 in favour of the assessee and against the Revenue." 52. Thus, an interpretive exercise by the Parliament cannot be taken so far as to control the meaning of a word expressly defined 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eat 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 terms of a treaty) and Article 31 (4) (A special meaning shall be given to a term if it is established that the parties so intended). The expression "process" and treaty interpretation in this case." 10.1 The next decision also cited by the CIT-DR is the case of 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 entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 whether the amendment brought by Finance Act 2012 in Section 9(1)(vi) by way of Explanations inserted in the Incometax Act with retrospective effect can be read into DTAA or not has to be seen in the light of the decision of Hon'ble Bombay High Court in the case of 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, expenditure including interest attributable of earning of income which does not form part of the total income has to be disallowed under section 14A 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 vs. CIT, reported in 229 ITR 383. 4. After considering the aforesaid submissions and on perusal of the impugned orders, we find that so far as the issue raised vide ground No.1 to 3 is concerned it is a recurring issue in the case 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "royalty" given in the domestic law, in the present case, section 9(1)(vi) should not be read into or looked upon. The character of payment towards royalty depends upon the independent "use" or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. The control of the Indian company is only on the input transmission and the right is to get the output processed data back. The actual processing of data is the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 computer. The Indian company does not have any control over, or physical access to, the mainframe computer in Australia. There cannot, therefore, be any question 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 AY 2006-07 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 Court decision in the case of Nokia Network, reported in [2012] 253 CTR (De) 417 and DIT v Sony Ericson AB, reported in [2012] 343 ITR 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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". 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han 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 14.07.2017 (supra). Therefore, we find 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." 4. We see no reasons to take any other view of the matter than the view so taken by the coordinate bench as is evident from the observations made by the learned DRP in paragraph 6.3 (Page no 26-27) of the DRP's order. Respectfully following the same we uphold the plea of the assessee and direct the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld to have constituted a PE of the assessee in India. Also, as is discernible from the orders of the lower authorities, the A.O/DRP had observed that the Liaison Office (LO) constituted a PE of the assessee in India. As observed by us hereinabove, it was the claim of the assessee that as the LO had not carried out any activities in India, it could therefore not be treated as the assessee's PE in India. The ld. A.R submitted that the factual position qua the issue as to whether the assessee had a PE in India on both of the aforesaid counts had been looked into by the Tribunal while disposing off the appeals of the assessee for the preceding years i.e A.Y. 2007-08 to A.Y. 2012-13, vide its order dated 12.12.2018. The ld. A.R taking us through the aforesaid order of the Tribunal in context of the issue under consideration submitted, that as the factual matrix during the year under consideration remained the same as was there before the Tribunal in the aforementioned preceding years, hence, the view therein taken by the Tribunal that the assessee did not have a PE in India would equally apply for adjudicating the said issue for the year under consideration. 13. Per contra, the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstalled and maintained by the assessee and that assessee also has a liaison office in India. The Assessing Officer notes that the activities of the liaison office cannot be "said to be just a mere liaisoning work in India". The Assessing Officer further notes that the employees/staff of the liaison office provide various services to the assessee-company in connection with the contract with VSNL. Therefore, the Assessing Officer concluded that the location of SSMS equipment in India and the presence of the liaison office in India constituted a PE of the assessee in India and, therefore, the payment received 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars also such equipment was existing, but no adverse view has been taken and, in any case, so far as the instant period is concerned, the assessee has foregone the use of such equipment for providing services. In this context, our attention has been drawn to page 64 of the Paper Book wherein a communication dated 28.04.2005 is placed which is addressed to VSNL whereby it is informed that the facility of SSMS equipment would not be used for providing services w.e.f. 17.06.2005. It has been pointed out that such change was on account of an operational requirement as assessee has launched its 4th generation satellite which was thereafter used to provide the services which were earlier being provided by the use of SSMS equipment. 3. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngement or any other adverse view taken by the RBI qua the activities which are being carried out by the liaison office in India. This singular aspect is quite pertinent to establish that if the Assessing Officer is to hold to the contrary, i.e. to say that the liaison office was undertaking activities in the nature of business or commerce, then, the onus was on him to establish so. Another notable feature is that the liaison office of the assessee has been in existence since 1999 and, even in the past assessment years when the Assessing Officer disagreed with the assessee on the 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& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation activities on behalf of the Assessee. There are no income generating activities carried out by the LO in India. The LO was engaged in coordinating a pilot project to assist VSNL and Department of Telecommunications to provide satellite based village public telephone in rural areas. Presently, the LO interacts with the Indian Government to get information and coordinates with the regulatory authorities in connection with the use of Inmarsat's services in India. The LO's activities do not play any role in the rendering of telecommunication 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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