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TMI Blog2024 (7) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... L. OPERATIVE DIRECTIONS 107-108 A. PROLOGUE 1. The Commissioner of Income Tax questions the correctness of the judgments rendered by the Income Tax Appellate Tribunal [Tribunal] dated 30 September 2020 [ITA 334/2022, ITA 335/2022 and ITA 597/2023], 13 September 2022 [ITA 55/2023 and ITA 61/2023], 27 September 2022 [ITA 206/2023] and 17 July 2023 [ITA 171/2024 and ITA 174/2024] and posits the following questions of law for our consideration: "2.1 Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in holding that the receipts from Indian customers for services provided outside' Indian Territory in connection with use or right to use of process or equipment by the assessee company cannot be taxed as royalty as per section 9(l)(vi) of the Act and Article 12 of the DTAA between India and Singapore? 2.2 Whether on the facts and in the circumstances of the case, the ld. ITAT has erred in interpreting the meaning of Royalty under Article 12 of the India Singapore DTAA without considering Article 3 (2) of the said DTAA when the word 'process' is not defined in the said DTAA? 2.3 Whether on the facts and in the circumstances of the case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts decision dated 30 September 2020 and which pertained to AYs' 2011-12, 2012-13, and 2014-15. B. THE FACTS 4. The undisputed facts on which the appeals proceed are as follows. The respondent-Telstra Singapore Pte Ltd. [Telstra Singapore] is a company incorporated in Singapore and is engaged in the business of providing connectivity solutions. Amongst the range of services with which we are concerned, are the provision of international private leased circuits, multi-protocol label switching and which are essentially used to facilitate high speed data connectivity. The data connectivity service has been described as bandwidth services. It is also admitted that Telstra Singapore holds and owns the infrastructure and equipment outside India which is utilized in connection with providing of bandwidth services to customers. 5. As per the appellants, in order to facilitate the provision of bandwidth services in India, Telstra Singapore had also entered into a One Stop Shopping Service Agreement [OSS Agreement] with Bharti Airtel Ltd. [Bharti] and other related telecom operators. In terms of the aforenoted OSS Agreement, the respondent-assessee is obliged to provide bandwidth services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnationally ("Frame Relay"); (c) global ATM services being a digital transmission link for the carriage of data via asynchronous transfer mode between access ports on a permanent virtual circuit ("ATM"); (d) internet access services providing connectivity between a port located at an Administrations point of presence in a country and the global internet ("GIA"); (e) global IP VPN Service being a service providing a TCP/IP Virtual Private Network connectivity between designated access end points (being ports) ("IP VPN"), operated by each of the Administrations and the. "OSS Service" means the one-stop-shop service for International Services as more particularly described in clause 2.1." 9. The acronyms SEB and SEO, which are repeatedly used in various clauses of the OSS Agreement are defined as under: "SEB" means single end billing, whereby the Customer in one country can pay to an Administration in a single currency the amounts invoiced for the International Services provided by Administration A and Administration B. "SEO" means single end billing, whereby Administration A assists its Customer to obtain an International Service from Administration B." 10. Clause 2 set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Administration. The Administrations will exchange instructions on the method of completion of Customer Contracts. Once the Customer has signed the Customer Contract, a copy of the signed Customer Contract must be returned to Administration B for approval. The overall provisioning interval for each International Service will be the longer of the two lead times of each of the Administrations. 4.3 The Customer may, in writing, elect SEB at any time. Administration A shall coordinate the billing when SEB is requested. Any proposed variation of this procedure will be considered by the Administrations on a case by case basis. Administration A shall be responsible for collecting payment from the Customer for the International Service within the billing period as set out in this agreement. Each Administration's billing period will be respected and Administration A will ensure that Administration B is paid according to Administration B's billing cycle and payment due date. The SEB invoice will be payable by the Customer in the currency of the country of Administration A. Administration A shall ensure that the Customer is notified that, notwithstanding subscribing to SEB, the distant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministration B's contract with the Customer) for the International Service Provided by Administration B will be. Administration A will then invoice the Customer on that basis. Administration B may vary charges (other than taxes and other government or regulatory charges) by giving Administration A not less than 30 days notice. Taxes and other government or regulatory charges apply as varied from time to time by the relevant authorities and Administration B will advise Administration A of such changes as soon as is practicable. The parties acknowledge that this clause 5.6 (d) (i) is necessary for operational purposes to enable Administration A to invoice the Customer in accordance with Administration A's normal billing cycle without having to first receive the corresponding invoice issued each month by Administration B under clause 5.6 (d) (ii); (ii) Administration B will send its invoice in its local currency (indicating therein the equivalent amount in USD which amount is payable under 5.6 (d) (iv) together with a mutually-agreed upon settlement request form to Administration A, first by facsimile or email in pdf format and then by courier; (iii) International Services will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting from any taxes, penalties and interest relating to or arising out of the first-mentioned Administration's failure to do so; and (x) Tax reclamation will be the responsibility of the Customer. Both Administrations will make best endeavours to make available to the Customer, the requisite documentation by the fiscal authority in the appropriate jurisdiction, to enable the relevant refunds to be claimed whenever appropriate." 13. The relationship between the two Administrations is spelt out in Clause 6 and which acknowledges the understanding of parties that both administrations are independent business entities and the agreement not being liable to be construed as resulting in the creation of a principal and agent relationship. The arrangement between the two parties was on a non-exclusive basis with it being further specified that neither Administration would have the right to represent or hold itself out to be a contracting agent of the other or having the authority to bind the other party in any way or to any extent whatsoever. This becomes evident from a reading of Clause 6 of the OSS Agreement which is extracted hereinbelow: "6 Relationship of the Administrations 6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent from Indian customers for the provision of bandwidth services outside India being liable to be construed as constituting equipment/process royalty taxable under Section 9 (1) (vi) of the Act read along with Article 12 (3) of the DTAA. Assailing the proposed assessment, the respondent filed its objections before the Dispute Resolution Panel [DRP] on 16 October 2015. Consequent to the DRP upholding the proposed assessment, a final assessment order came to be framed on 16 November 2015 with the AO determining the total taxable income of the assessee at INR 26,75,15,533/-. It is this final order of assessment which was assailed before the Tribunal. 16. In terms of the judgment impugned before us the Tribunal has held in favour of the respondent-assessee and has come to conclude that the consideration received by Telstra Singapore from Indian customers would not be taxable as royalty bearing in mind the beneficial provisions of the DTAA and which had remained unamended notwithstanding the changes which had come to be introduced in Section 9 of the Act. C. CHALLENGE IN THE APPEAL 17. Appearing in support of the appeals, Mr. Chawla, learned counsel, submitted that the receipts f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment and Training, 1986 of the Government of India. Explanation 1.-For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub-section (1) or sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976. Explanation 2.-For the purposes of this clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 6.-For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;]" 18. Mr. Chawla highlighted the fact that Explanation 6 had come to be introduced with retrospective effect from 01 June 1976 by virtue of Finance Act, 2012. It was contended by Mr. Chawla that Explanation 6 to Section 9 (1) (vi) is clearly clarificatory in character and stipulates that the expression "process" would be deemed to have always included transmission by satellite, cable, optical fibre or any other similar technology, including the provision of services, such as, up-linking, amplification, conversion for down-linking irrespective of whether or not such process were a secret. In order to discern the intent of the Legislature while introducing Explanation 6, Mr. Chawla also placed reliance upon the relevant parts of the Memorandum which had explained the various clauses of the Finance Bill, 2012 and the relevant parts whereof ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the concept of royalty in light of the DTAA would have to be understood bearing in mind the provisions made in Article 12. Article 12 of the DTAA reads as follows:- "ARTICLE 12 ROYALTIES AND FEES FOR TECHNICAL SERVICES 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent. 3. 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 : (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply. 7. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l gains derived from immovable property is income and therefore Article VI would be attracted." 21. Mr. Chawla contended that when faced with a situation where the meaning of a term is not defined under a tax treaty, Courts would have to necessarily follow the ambulatory approach, as enunciated, as opposed to a static approach. Mr. Chawla submitted that the private line services which are provide by the respondent are supported by an "exclusive range" of bandwidth options dedicated for "exclusive use" and which is suggestive of "use" as well as a "right to use" of industrial, commercial or scientific equipment and consequently clearly falling within the ambit of royalty as defined not only under the DTAA but the Act itself. 22. The sheet anchor of the challenge raised by the appellants however rested on the judgment rendered by the Madras High Court in Verizon Communications Singapore Lte Ltd. vs. Income Tax officer, International Taxation-I [2013 SCC OnLine Mad 3316] and to the following observations as appearing therein: "25. Keeping these principles in the background as far as the present case is concerned, we are concerned about the treatment of income under the head "royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian half circuit is provided by Indian telecom company, namely, VSNL with whom BTA has a tie-up. The bandwidth so provided by BTA would give full country coverage in both the countries of delivery, i.e., USA and India. The fixed monthly recurring charge for the circuit between America and Ireland and for the circuit between Ireland and India is payable to BTA. xxxx xxxx xxxx 77. In the background of the service agreement with the customer, service agreement with VSNL and the one between customer and VSNL, it is clear that these are part and parcel of one composite agreement split into four for the purposes of convenience and the nature of services to be offered through the different agencies having a bearing on each other. The ultimate aim, however, being to give the customer a point-to-point private line to communicate between offices that are geographically dispersed throughout the world for the purposes of accessing business data exchange, video conferencing or any other form of telecommunication. As is evident from the reading of the terms of all these agreements, parties have agreed to go for one stop shopping, which allows an organisation, namely, customer to place a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at customer premises, configured and customised to ensure that the customer gets the uninterrupted connectivity from one end to the other end in different geographical point. 88. A reading of the agreement with VSNL also shows that the configuration at the customer's end and at the VSNL end and in the other half managed by the assessee match with each other and compatible for ensuring the integrated service to the customer. The arrangement between the assessee and the VSNL has to be necessarily integrated and technically and financially viable having regard to the close functional relationship between the two. For this, the Indian customer pays through the single billing system called OSS for the integrated services. Thus, the service agreement assuring the service is possible and workable only when the assessee and VSNL are considered as rendering the service jointly in their respective leg. Thus, the two half being the mirror image of each other and going by the terms of the agreements, the assessee renders service in India and the consideration received attracts the incidence of taxation in India. xxxx xxxx xxxx 97. Thus, even going by the above decision, we hold that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bandwidth is shared with others, however, has to be seen in the light of the technology governing the operation of the process and this by itself does not take the assessee out of the scope of royalty. Thus, the consideration being for the use and the right to use of the process, it is "royalty" within the meaning of clause (iii) of Explanation 2 to section 9 (1) (vi) of the Income-tax Act. xxxx xxxx xxxx 106. In the circumstances, we affirm the order of the Tribunal holding that the consideration paid by the customer to the assessee is "royalty" within the meaning of Explanation 2(iva) or in the alternative under Explanation 2(iii) of section 9 (1) (vi) of the Income-tax Act and article 12 (3) of the DTAA between India and Singapore. With regard to the levy of interest under sections 234A, 234B and 234D of the Income-tax Act, as the case may be, we remand this issue alone to the Income-tax Appellate Tribunal for its consideration on the merits and in accordance with law. Accordingly, the above tax case (appeals) are disposed of. No costs. Consequently, the connected miscellaneous petitions are closed." 23. Mr. Chawla submitted that if the provisions of the OSS Agreement were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ail of the date when the International Service and billing should commence. Refer Para 72 @ Pg.81 (Pdf pg 839) of the compilation filed by appellant dated 14 January 2024 "72. Upon satisfactory completion of the end-to-end testing, Administration A will advise the customer that the service has been satisfactorily established. Billing will commence after the satisfactory completion of the end-to-end testing. Clause 6: "Relationships of the Administrators" of OSS Agreement @ Pg.18 of document filed by the respondent dated 3 February 2024 Refer Para 6.1 @ Pg.18 (Pdf pg 512) "6.1. Notwithstanding anything in this Agreement, the Administrations are independent business entities, and nothing herein shall be construed so as to constitute the parties as principal and agent, partners, joint venture participants, or employer and employee. Refer Para 6.2 @ Pg.18 (Pdf pg 512) "6.2. Each Administration hereby appoints the other, on a non-exclusive basis, as its representative in the other Administration's country, to market and co-ordinate the provision of the International Services. The activities of each Administration in the course of such representation shall be by way of introd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The charges or fees raised by MCI through its invoices will be the total charges to be paid by VSNL under the Agreement. Schedule 2: "When Bharti is Administration-B" of OSS Agreement @ Pg. 29 of document filed by the respondent dated 3 February 2022 Refer Para 1.2 @ Pg.29 (Pdf pg 523) "1.2 Telstra, shall get the relevant documents filled by the Customer at their end as per the Customer Contract and terms & conditions made available to them by Bharti. This document shall be handed over to Bharti at the earliest, by courier and also intimated by facsimile/email to contacts of Bharti as provided, for expediting the order. Refer Para 1.5 @ Pg.29 (Pdf pg 523) "1.5. The charges or fees raised by Bharti through its invoices will be the total charges to be paid by Telstra under this Agreement. Refer Para 74 @ Pg.82 (Pdf pg 840) of the compilation filed by appellant dated 14 January 2024 "74. When VSNL is Administration B, under SEO, MCI shall get the relevant documents filled by the customer at their end as per the customer order form made available to them by VSNL. This document shall be handed over to VSNL at the earliest time possible, by courier and also communicated by facsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation. The process, even if it is construed to be intellectual property, for falling within the ambit of royalty, it is not necessary that the process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding out that whether a process was actually used by the payer. In the case of satellites, physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression "for the use of or right to use". Leaving aside the arguments on "equipment" for a moment, when we look at the commentary on article 12, one would note in paragraph 8.2, taking the view that where a payment is for consideration for transfer of full ownership of an element of property referred to in the definition, the payment is not in consideration "for the use of, or the right to use" that property and cannot, therefore, represent a royalty. It further pointed out to the changes brought to the model convention that the expression "for the use of, or right to use" industrial, commercial or scientific equipment was subsequently deleted by using the expression "for the use of, or right to use" industrial, commercial and scientific experience. It was observed that given the nature of income from leasing of industrial, commercial, scientific equipment including the leasing of containers, the Committee on Fiscal Affairs decided to exclude the income from such leasing from the definition of "royalty" and to consequently remove it from the application of article 12, in order to make sure that it would fall under the Rules for the taxation of business profits, as defined in ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration contain the clauses on consideration for use of or right to use of industrial, commercial and scientific equipment as well as experience as "royalty". 92. Thus, when the use or right to use the ship for an economic benefit is given to the assessee, the consideration for the use of the industrial, commercial and scientific equipment is "royalty", assessable under Explanation 2(iva) to section 9 (1) (vi) of the Income-tax Act. Thus, for the purposes of Income-tax Act, under the time charter, the payment made being for the use of the ship, the same comes within the meaning of the word "royalty"." D. SUBMISSIONS OF TELSTRA 29. Appearing for the respondents, Mr. Sabharwal submitted that undisputedly, the assessee is a foreign telecom operator engaged in the business of providing data transmission/ bandwidth services from outside India facilitating high speed data connectivity. It was submitted that in pursuance of the above, it enters into contracts for transmission of voice and data to customers. Mr. Sabharwal pointed out that for rendering telecom services in India, it is incumbent upon an operator to obtain a telecom license and which the assessee, admittedly, does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inafter referred to as the 'Act') will also result in amendment of the Double Taxation Avoidance Agreements? 3. Whether the Income-tax Appellate Tribunal was correct in holding that payments made to non-resident telecom operators for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty in view of the inclusion of the terms 'right' and 'process' in the clarificatory Explanations 2, 5 and 6 of section 9 (1) (vi) of the Act, and consequently, the appellant was bound to deduct tax at source thereon under section 195 of the Act? 4. Whether the Income-tax authorities in India have jurisdiction to bring to tax income arising from extra-territorial source, that is outside India, in respect of business carried on by foreign companies outside India just because Indian residents use and pay for the facilities provided by these foreign companies contrary to the Constitution of India, International Law and Treaties and law declared by the apex court? 5. Whether the first respondent was correct in holding that for the current assessment year the withholding tax liability should be levied at a higher rate at 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oidance Agreement." 21. The third question is, whether the payments made to NTOS for providing interconnect services and transfer of capacity in foreign countries is chargeable to tax as royalty. It was argued by Shri Pardiwala, that for subsequent years in the assessee's own case, the Income-tax Appellate Tribunal has held that tax is not deductible when payment is made to non-resident telecom operator. This factual aspect is not refuted. Thus the Revenue has reviewed its earlier stand for the subsequent assessment years placing reliance on Viacom, etc., W. P. No. 36 of 2018, rendered by the Income-tax Appellate Tribunal. In that view of the matter this question also needs to be answered against the Revenue. 22. The fourth question is whether the Income-tax authorities have jurisdiction to bring to tax income arising from extra-territorial source. Admittedly, the NTOs have no presence in India. The assessee's contract is with Belgacom, a Belgium entity which had made certain arrangement with Omantel for utilisation of bandwidth. In substance, Belgacom has permitted utilisation of a portion of the bandwidth which it has acquired from Omantel. It is also not in dispute t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Pvt. Ltd., is a non-resident company incorporated in Singapore. It is engaged in the business of providing connectivity solutions (International Private Leased Circuits, Multi-Protocol Label Switching ('MPLS'), IP/VPN etc.) to facilitate high speed data connectivity (hereinafter referred to as 'bandwidth services'). Telstra Singapore holds the infrastructure and equipment, either owned or leased, outside India required to provide bandwidth services to customers. Under the Indian telecom regulations, only a licensed service provider can provide Bandwidth Services in India. To facilitate provision of bandwidth services in India, it entered into an agreement with Bharti Airtel Limited ('Bharti'), an unrelated telecom company (referred as One Stop Shop ('OSS') Agreement). xxxx xxxx xxxx 5.1 The assessee submitted that after considering the following relevant clauses of the various agreements, contracts and service schedules, it is indisputably clear that the transaction is a mere rendition of bandwidth services wherein the customer enjoys an uninterrupted 24x7 service to receive and send voice and data at a standard rate of reliability. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer in this regard, has placed reliance on Hon'ble Madras High Court in the case of Verizon Singapore Pte Ltd. vs ITO [2013] 39 taxmann.com 70 (Madras) and in Special Bench of Delhi ITAT in the case of New Skies Satellite NV vs ADIT (2009) (126 TTJ 1), The DRP upheld the findings of the Assessing Officer in view of the ratio laid down by the Hon'ble Madras High Court in the case of Verizon Singapore Pte Ltd. vs ITO (supra). The Assessing Officer passed the final assessment order against which the assessee is in appeal before us. xxxx xxxx xxxx 13. We have heard the rival contentions and perused the record. The issue which arises in the present appeal filed by the assessee for different Assessment Years is against the chargeability of amount received from Indian customers for providing bandwidth services outside India as equipment/process royalty u/s 9 (1) (vi) of the Act and/or Article 12 (3) of the India Singapore Tax Treaty. The assessee is a tax resident of Singapore and the bandwidth services are provided as standard services wherein the customer enjoys an uninterrupted 24x7 service to transmit voice and data at standard rate of reliability. Delivery of Bandw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V (2) Shin Satellite Public Co. Ltd. (supra). The Tribunal after referring to the decision in DIT Vs. (1) New Skies Satellite BV(2) Shin Satellite Public Co. Ltd. (supra) in paras 17 to 20 had further vide paras 21 and 22 held that where the term 'royalty' under DTAA between India and USA was not amended, then the assessee was not liable to withhold tax on payments made to its associated enterprises on account of lease line charges and in tum, relying on the decision of Hon'ble Bombay High Court in the Hon'ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman: 317 (Bam), held as under:- "21. In the present case also, though definition of 'Royalty' under the Act had been amended, but the term 'Royalty' under the DTAA between India and USA is not amended. In the absence of the same, we hold that in view of the definition of 'royalty' under DTAA, the assessee is not liable to withhold tax on the payments made to its associated enterprise on account of lease line charges. We are not going into different decisions of the Tribunal on this aspect, in view of the ratio laid down by the Hon'ble High Court of Delhi, which though is not the jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of the term under DTAA. Hence, we hold reliance of learned Departmental Representative for the Revenue on Mumbai Bench of Tribunal in Viacom 18 Media (P.) Ltd. Vs. ACIT (supra) and Bangalore Bench of Tribunal in Vodafone South Ltd. Vs. DDIT (IT) and also Mumbai Bench of Tribunal in C.U. Inspections (I) (P) Ltd. Vs. Delhi (supra) are not to be applied in view of the issue being settled by the Hon'ble High Court of Delhi. 23. The assessee on the other hand, has relied on the decision in WNS North America Inc. Vs. ADIT (supra) i.e. decision of Mumbai Bench of Tribunal, which has been approved by the Hon'ble High Court in DIT Vs. WNS UK Ltd. (2013) 214 taxman 317 (Bom). The issue before the Hon'ble High Court of Delhi was in the hands of recipient of lease line charges. The assessee therein had recovered internal telecommunication charges from WNS charges and the Tribunal held the amount in question was received by the said assessee as reimbursement of lease line charges and would not qualify either as 'royalty' or as income attributable to PE in India and hence, it was held that there was no income earned by the assessee. The question before the Hon'ble High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel for the appellant that in the present case, control of the satellite or the transponder always remains with the appellant. We may also observe at this stage that the terms "lease of transponder capacity", "lessor", "lessee" and "rental" used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. We may also point out that against the decision of the Authority for Advance Rulings in ISRO case (2008) 307 ITR 59, special leave petition was dismissed by the Supreme Court (see Puran Singh Sahni v. Sundari Bhagwandas Kripalani (1991) 2 SCC 180). 69. We may also refer to the following distinction brought out by the Karnataka High Court between leasing out of equipment and the use of equipment by its customer. This was done in the case of Lakshmi Audio Visual Inc. v. Asst. CCT 124 STC 426 (Karn) in the following terms (page 433): "9. Thus if the transaction is one of leasing/hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a customer (say a factory) entering into a contract with the transport operator, under which the transport operator has to provide a lorry to the customer, between the hours 8.00 a.m. to 8.00 p.m. at the customer's factory for its use, at a fixed hire per day or hire per km subject to an assured minimum, for a period of one month or one week or even one day ; and under the contract, the transport operator is responsible for making repairs apart from providing a driver to drive the lorry and filling the vehicle with diesel for running the lorry. The transaction involves an identified vehicle belonging to the transport operator being delivered to the customer and the customer is given the exclusive and effective control of the vehicle to be used in any manner as it deems fit ; and during the period when the lorry is with the customer, the transport operator has no control over it. The transport operator renders no other service to the customer. Therefore, the transaction involves transfer of right to use the lorry and thus be a deemed sale." 39. According to learned counsel, a more detailed enunciation on the meaning liable to be ascribed to the expression "right to use" is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... control of any equipment of BTA. 12.6 The other case cited by the learned counsel for applicant to explain the meaning of expressions 'use' and 'right to use' is that of BSNL v. UOI [2006] 3 STT 245 (SC). Even that case turned on the interpretation of the words "transfer of right to use the goods" in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough its network/circuits, there is no usage of equipment by the applicant except in a very loose sense such as using a road bridge or a telephone connection. The user of BT's equipment as such would not have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is noth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of transmission of voice/data contains proprietary resources. It is not a case of mere rendition of service, but the quality of service and secrecy are also material. It is further stated that the services to be availed by the applicant would amount to the use of a secret process and thus is covered by royalty as stipulated in article 13 (3) of the treaty. But, no material has been placed before us to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well-settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India (P.) Ltd. (supra). In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold good in view of the clear language in article 12 (3) of the Treaty. It has been so pointed out very rightly by another Bench of ITAT in Panamsat International Systems Inc. v. Dy. CIT (IT Appeal No. 1796/Delhi/2001, dated 11-8-2006) at paragraph 6.18. Going by such Interpretation, it cannot be held that there is, in the instant case, the use of or the right to use a secret process. In fact it is nobody's case that any secret process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services; through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite Telecommunication Co. Ltd.'s case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect." (p. 494)" 41. In view of the above, it was Mr. Sabharwal's submission that dominion and control over infrastructure and equipment constitute the primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apacity and will not constitute royalties under the definition of paragraph 2: these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterisation of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the "lease" of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of services, ......in connection with the various subjects of licenses). Neither extreme comes under Art. 12, all that does is the central category, viz., 'letting'." 45. Questioning the correctness of the view expressed by the Madras High Court in Verizon, Mr. Sabharwal argued that the judgment clearly does not lay down the correct law since the same is founded on the basis that Explanations 5 and 6 of Section 9 as inserted by Finance Act, 2012, are liable to be read into the DTAA. Mr. Sabharwal submitted that this contention stands specifically negated by not only this Court in New Skies Satellite but also by the Supreme Court in Engineering Analysis. 46. Learned counsel submitted that the various Explanations which came to be introduced in Section 9 of the Act and are claimed by the appellants to be declaratory, clearly attempt to expand the meaning to be assigned to the expression "royalty" with retrospective effect. This, according to learned counsel, are "transformative and substantive amendments" and would thus clearly be hit by the principles laid down by the Supreme Court in Commissioner of Income Tax (Central)-1,New Delhi vs. Vatika Township Private Limited (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mer legislation. We need not note the cornucopia of case law available on the subject because aforesaid legal position clearly emerges from the various decisions and this legal position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later. 30. We would also like to point out, for the sake of completeness, that where a benefit is conferred by a legislation, the rule against a retrospective construction is different. If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators' object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In Govt. of India v. Indian Tobacco Assn. [(2005) 7 SCC 396], the doctrine of fairness was held to be relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a Preamble, and also the word "declared" as well as the word "enacted".' But the use of the words 'it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduced new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language 'shall be deemed always to have meant' is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the pre-amended provision was clear and unambiguous. An amending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal: - "3.1 That Telstra Singapore Pte Ltd. (hereinafter referred to as 'the Assessee') is incorporated in Singapore. It is engaged in the business of providing digital transmission of data through international private line or multi-protocol label switching, etc. to facilitate high speed data connectivity (hereinafter referred to as 'bandwidth services'). xxxx xxxx xxxx 3.3 That during the Assessment proceeding, it was noticed by the Assessing officer that the assessee provides bandwidth services outside India to its customers. It has entered into Global Business Service Agreement ('GBSA') with various customers. In case where services are provided by Indian telecom operator like Bharti Airtel in India and the services outside India are provided by the assessee, it enters into One Stop Shopping Services Agreement('OSS') with Bharti Airtel or any other Indian telecom operator, to facilitate single billing facility to the customer. Under the agreement with the customer, uninterrupted 24X7 services are available to it. In case the services are unavailable or not available at the requisite speed, the customer shall be entitled to rebate as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Delhi High Court's New Satellite NY case (319 ITR 269). It is pertinent to mention here that the Department has not accepted the order of Hon'ble Delhi High Court and preferred further appeal before the Hon'ble Supreme Court which is pending for adjudication. Further, the Hon'ble Madras High Court in the case of M/s Verizon Singapore Pte Ltd.(2013) has taken a contrary view on the identical issue. Thus the order of the Id. ITAT is not correct on merit." 53. Seeking to expand upon the meaning of the expression "right to use", Mr. Sabharwal also placed reliance upon the following paragraphs of the judgment rendered by the Constitution Bench in Bharat Sanchar Nigam Ltd and Another vs. Union of India and Ors (2006) 3 SCC 1.:- "58. The State respondents in their submissions had initially differed as to what constituted "goods" in telecommunication. Ultimately, the consensus among the respondents appeared to be that the "goods" element in telecommunication were the electromagnetic waves by which data generated by the subscriber was transmitted to the desired destination. The inspiration for the argument has been derived from the provisions of the Telegraph Act, 1885 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mation they carry. To reduce these problems they have been organised within the spectrum into bands of frequencies or wavelengths for the transmission of particular types of services and information." 62. The process of sending a signal is as follows: "Data is superimposed on a carrier current or wave by means of a process called modulation. Signal modulation can be done in either of two main ways: analog and digital. In recent years, digital modulation has been getting more common, while analog modulation methods have been used less and less. There are still plenty of analog signals around, however, and they will probably never become totally extinct. Except for DC signals such as telegraph and baseband, all signal carriers have a definable frequency or frequencies. Signals also have a property called wavelength, which is inversely proportional to the frequency". (Encyclopedia of Technology Terms of Techmedia) 63. It is clear, electromagnetic waves are neither abstracted nor are they consumed in the sense that they are not extinguished by their user. They are not delivered, stored or possessed. Nor are they marketable. They are merely the medium of communication. What is tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others. 98. In my opinion, none of these attributes are present in the relationship between a telecom service provider and a consumer of such services. On the contrary, the transaction is a transaction of rendition of service. xxxx xxxx xxxx Nature of transaction in the present case 108. The contract between the telecom service provider and the subscriber is merely to receive, transmit and deliver messages of the subscriber through a complex system of fibre optics, satellite and cables. 109. Briefly, the subscriber originates/generates his voice message through the handset. The transmitter in the handset converts the voice into radio waves within the frequency band allotted to the petitioners. The radio waves are transmitted to the switching apparatus in the local exchange and thereafter after verifying the authenticity of the subscriber, the message is transmitted to the telephone exchange of the called party and then to the nearest Base Transceiver Station (BTS). BTS transmits the signal to the receiver apparatus of the called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of goods has to be under a contract i.e. it is consensual. 115. Section 4 of the Telegraph Act maintains the integrity of the subject-matter of the licence viz. "establish, maintain or work a telegraph". Therefore, the transaction of service is a composite one not capable of being disintegrated. Except in sub-clause (a) [of Article 366(29-A)] in all other sub-clauses the transactions are contractual. There is no scope for importing any doctrine of statutory agency of the service provider. Except in the case of sub-clause (a) where the transfer otherwise than in pursuance of contract of property in any goods is deemed to be sale in each one of the other sub-clauses the transaction is consensual. The contrast between sub-clause (a) and all other sub-clauses clearly manifests that the transactions involved in the present dispute are contractual. The fiction operates to deem what is not otherwise a sale of goods as a sale of goods i.e. even the transfer of a right to use goods is deemed to be a sale of the goods. 116. It is not possible to interpret the contract between the service provider and the subscriber that the consensus was to mutilate the integrity of contract as a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able under copyright, patent, service mark, trademark, or trade secret laws from imitation, infringement, and dilution. Intellectual property includes brand names, discoveries, formulas, inventions, knowledge, registered designs, software, and works of artistic, literary, or musical nature. It is one of the most readily tradable properties in the digital market place." (as per the definition provided in Business Dictionary.com) 53. The term "process" is, therefore, to be understood as an item of intellectual property resulting from the discovery, specialised knowledge, creative ideas, or expressions of human mind having a commercial value and not widely available in public domain. It is, therefore, an intangible asset, the exclusive right over which normally rests with its developer/ creator or with the person to whom such asset has been exclusively transferred. In order to receive a "royalty" in respect of allowing the usage or right to use any property including an intellectual property, the owner thereof must have an exclusive right over such property. As far as intellectual properties (IPs) are concerned, these have significance for the purpose of "royalty" only till the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to the same as long as he chooses not to make such specialised knowledge public. It is also conceivable that such a person can exploit and utilise such specialised knowledge in the same way as a person holding a patent or owning a mineral right or having the copyright of a publication to allow a limited user of such specialised knowledge to others in confidence against payment. There is no reason why payment for the user of such specialised knowledge, though not protected by a patent, should not be treated as royalty or in the nature of royalty. Handley Page v. Butterworth (H. M. Inspector of Taxes) (1935) 19 TC 328 (HL) relied on." Thus, the term "royalty" connotes exclusivity and the exclusive right in relation to the thing (be it physical or intellectual property) for which royalty is paid should be with the grantor of that right. In case an intellectual property, it is generally associated with some discovery, invention, creation, specialised knowledge, etc., emanating from human mind and is payable to the inventor/creator for allowing the usage of his invention or creation and having an exclusive right over it. The hon'ble Calcutta High Court in the case of N. V. Phi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson enjoying exclusive ownership of such process. The owner of the "process" might grant the "use" or "right to sue" to different persons at the same time but the exclusivity of the ownership should be with the grantor. The royalty is paid for the "use of" the "process" as an item of intellectual property by the manufacturing company in contradistinction to the equipment or resources deployed in the execution of such "process". The payer must, therefore, use the intellectual property on its own and bear the risk of its exploitation. If the intellectual property is used by the owner himself and he bears the risk of exploitation or liabilities for the use, then as the owner makes own entrepreneurial use of the intellectual property the income would fall under the scope of "business income" and not "royalty". A "process" which is widely known and deployed by everyone in the field and for which the owner does not have exclusive rights cannot be a "process" contemplated in this section 9 (1) (vi) (iii). 54.2 In the case of telecom industry, all the telecom operators have similar infrastructure and telecom networks in place, for rendition of telecommunication services. The process emb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etwork and the process embedded therein. This is a standard facility which is used by the FTO itself. Thus, the insertion of Explanation 6 to section 9 (1) (vi) does not alter the decision taken by us on this issue. 56. As far as the insertion of Explanation 5 to section 9 (1) (vi) is concerned, we hold that this Explanation comes into play only in case of royalty falling within the ambit of Explanation 2 to section 9 (1) (vi). When a process is widely available in the public domain and is not exclusively owned by anyone it cannot constitute an item of intellectual property for the purpose of charge of "royalty" under clauses (i), (ii) and (iii) of Explanation 2 to section 9 (1) (vi). Hence, the criteria of possession, control, location, indirect use, etc., as explained by Explanation 5 has no effect in the case in hand. 57. The arguments of the learned Departmental representative that Explanation 5 is attracted since the assessee-company is indirectly using such equipment and process through the services provided by the FTO, in our view, is devoid of merits. There is difference between the services rendering agreements and royalty agreements. If the arguments of the Department ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already stands negated by the Court in New Skies Satellite. Mr. Sabharwal referred to Paras 45 to 49 of the report which are extracted hereunder: - "45. At the very outset, it should be understood that it is not as if the double taxation avoidance agreements completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3 (2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. "Indo-Thailand Double Taxation Avoidance Agreements ((1986) 161 ITR (St.) 82, 83): 'Article 3 : General definitions 2. In the application on the provisions of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has for the purposes of the laws in force in that State relating to the taxes which are the subject of this Convention.' Indo-Netherlands Double Taxation Avoidance Agreement (see (1989) 177 ITR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopments Inc. 82 DTC 6281 (1982), the Canadian Supreme Court held that the ambulatory approach is antithetical to treaty obligations: "There are 26 concluded and 10 proposed tax conventions, treaties or agreements between Canada and other nations of the world. If the submission of the appellant is correct, these agreements are all put in peril by any legislative action taken by Parliament with reference to the revision of the Income-tax Act. For this practical reason one finds it difficult to conclude that Parliament has left its own handiwork of 1956 in such inadvertent jeopardy. That is not to say that before the 1956 Act can be amended in substance it must be done by Parliament in an Act entitled 'An act to Amend the Act of 1956'. But neither is the converse true, that is that every tax enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do." 48. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), the Bombay High Court citing R. v. Melford Developments Inc. held that (page 333 of 310 ITR): "The ratio of the judgment, in our opinion, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Explanation 5.-For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not- (a) The possession or control of such right, property or information is with the payer ; (b) Such right, property or information is used directly by the payer ; (c) The location of such right, property or information is in India. Explanation 6.-For the removal of doubts, it is hereby clarified that the expression 'process' includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret ;" 24. The above Explanations have been inserted with retrospective effect from Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 1st June, 1976, and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years." 25. On the basis of this amendment made effective from June 1, 1976, Mr. Parasaran argued that the above amendments are only clarificatory in nature depicting Parliament intention, viz. ; (i) the medium through which the software is transferred itself will not affect the taxability of the royalty payments made for the transfer of right to use or actual use of the software in India by a non-resident. (ii) It is not necessary that the actual software be transferred to an Indian user or in fact used in India so long as the right to use has been transferred to a resident taxpayer for valuable consideration. 26. He, thus submitted that the question of "copyrighted article" or actual copyright does not arise in the context of software both in the Double Taxation Avoidance Agreement 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 Income-tax Appellate Tribunal has dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , optic fibre or similar technology, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding cinematograph films or films or tapes used for television or radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. (b) The term "fees for technical services" as used in this Article means payments of any kind, other than those mentioned in Articles 14 and 15 of this Agreement as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LATES 59. As would be evident from a recordal of the rival submissions which were addressed, the appellants principally seek to base the challenge upon Section 9 of the Act and question the view that was expressed in New Skies Satellite and Asia Satellite. This submission was addressed with Mr. Chawla essentially arguing that "satellite cases" rest on a distinct pedestal and were rendered in the context of distinguishable facts. It was Mr. Chawla's submission that the amendments introduced in Section 9 constitute a paradigm shift of the Legislature requiring us to revisit the meaning to be ascribed to the expression royalty wherever it occurs. According to Mr. Chawla, Section 9 as it stands in its present avatar would have to inevitably looked at in order to discern the various attributes of the expressions "royalty", "process" and "equipment" as they appear in different parts of the DTAA. 60. However, and before we proceed to analyze the various contentions, which were advanced by Mr. Chawla, it would be apposite to bear in mind the indubitable position that both New Skies Satellite as well as Engineering Analysis had taken due notice of Section 9 as it came to exist in the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is an inherent part of the sovereign power of the State. By Article 73, subject to the provisions of the Constitution, the executive power of the Union extends to the matters with respect to which Parliament has power to make laws. Our Constitution makes no provision making legislation a condition for the entry into an international treaty in times either of war or peace. The executive power of the Union is vested in the President and is exercisable in accordance with the Constitution. The executive is, qua the State, competent to represent the State in all matters international and may by agreement, convention or treaty incur obligations which in international law are binding upon the State. But the obligations arising under the agreement or treaties are not by their own force binding upon Indian nationals. The power to legislate in respect of treaties lies with Parliament under Entries 10 and 14 of List I of the Seventh Schedule. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax to a level lower than what has been provided in the tax treaty. 43.1. Since the tax treaties are intended to grant tax relief and not put residents of a contracting country at a disadvantage vis-à-vis other taxpayers, Section 90 of the Income Tax Act has been amended to clarify that any beneficial provision in the law will not be denied to a resident of a contracting country merely because the corresponding provision in the tax treaty is less beneficial." 21. The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act", which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued under Section 90, is no longer res integra. 22. The Andhra Pradesh High Court in CIT v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] held that provisions of Sections 4 and 5 of the Income Tax Act are expressly made "subject to the provisions of the Act" which means that they are subject to the provisions of Section 90. By necessary implication, they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the Agreement, if there was a recognition of the power of taxation with the Malaysian Government, by implication it takes away the corresponding power of the Indian Government. The Agreement was thus held to operate as a bar on the power of the Indian Government to tax and that the bar would operate on Sections 4 and 5 of the Income Tax Act, 1961, and take away the power of the Indian Government to levy tax on the income in respect of certain categories as referred to in certain articles of the Agreement. The High Court summed up the situation by observing (ITR at pp. 512-13): "The effect of an 'agreement' entered into by virtue of Section 90 of the Act would be: (i) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enfo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed: - "48. The clearest enunciation of law, on Section 90 can be found in Union of India (UOI) v. Azadi Bachao Andolan. Apart from noticing the decisions of various High Courts (i.e. Commissioner of Income Tax v. Visakhapatnam Port Trust, Commissioner of Income Tax v. Davy Ashmore India Ltd., Leonhardt Andra Und Partner, Gmbh v. Commissioner of Income Tax, Commissioner of Income Tax v. R.M. Muthaiah and Arabian Express Line Ltd. of United Kingdom v. Union of India) this court held as follows: "The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act", which would include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income Tax Act and a notification issued Under Section 90, is no longer res integra. ********* 26. A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 8 (5) of the Central Sales Tax Act, 1956). therefore we are unable to accept the contention that the delegate of a legislative power cannot exercise the power of exemption in a fiscal statute." 84. Klaus Vogel (an acknowledged authority on double taxation), in the Treatise Double Taxation Conventions, comments-pertinently states, on the aspect of assimilation of international treaties into municipal (national) laws, that: "45. For purposes of international law, a tax treaty comes into existence upon the declaration of consent by both Contracting States (Article 9 (1) VCLT). Ordinarily, the Head of State is authorized to make the declaration. In Germany, the declaration under Article 59 Abs. 1 GG is made by the Federal President. In the US, under Article II, section 2, clause 2 of the Constitution, the President, as Head of State, declares the consent of the United States to be bound by the treaty under international law. This power is ordinarily delegated to the Secretary of State or a US Ambassador. 46. The method by which the Contracting States declare their consent is left to the Contracting Parties (Article 11 et seq. VCLT). For important treaties, however, it is gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of domestic law was for long referred to by German theorists as a 'transformation' (i.e., as the promulgation of a domestic statute parallel to the treaty and incorporating the treaty text). A similar view can also be found, though often not very explicit, in other countries. This theory, however cannot explain why, among other things, the treaty, even after parliamentary consent, becomes applicable domestically only when it enters into force under international law or why it loses its binding force internally when it is rescinded or terminated at the international level. For these reasons, the German doctrine of international law abandoned the transformation theory. Parliamentary consent is now understood as a mandate through which the treaty itself - rather than a corresponding internal legislative provision-becomes applicable within the scope of domestic law. 51. The point in time at which a treaty enters into force internationally and the point at which it becomes applicable under domestic law must be distinguished from the point in time at which the material consequences of the treaty begin to take effect, or, in other words, the taxable period or the date from which taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitory of the power of the Union Government to enter into and enforce the terms of a DTAA, but more importantly, upon such a convention coming into force, its provisions with respect to cases to which they may apply becoming operable even if they be inconsistent with the provisions of the Act. This proposition also stood reaffirmed in paragraphs 130 and 131 of the report which are extracted hereinbelow: - "130. The principles adopted in interpretation of treaties are not the same as those in interpretation of a statutory legislation. While commenting on the interpretation of a treaty imported into a municipal law, Francis Bennion observes: "With indirect enactment, instead of the substantive legislation taking the well-known form of an Act of Parliament, it has the form of a treaty. In other words, the form and language found suitable for embodying an international agreement become, at the stroke of a pen, also the form and language of a municipal legislative instrument. It is rather like saying that, by Act of Parliament, a woman shall be a man. Inconveniences may ensue. One inconvenience is that the interpreter is likely to be required to cope with disorganised composition in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act, 1961 (hereinafter referred to as "the Act") provides for "agreement with foreign countries": (a) for granting of relief in respect of income on which have been paid both income tax under the Act and income tax in that country, or (b) for the avoidance of double taxation of income under the Act and under the corresponding law in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or (d) for recovery of income tax under the Act and under the corresponding law in force in that country. By virtue of provisions of sub-section (2) thereof it is provided that where such agreement has been entered into for granting relief of tax, or as the case may be, avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. 8. Where liability to tax arises under the local enactment provisions of Sections 4 and 5 of the Act provide that taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the expression "law in force in Canada" relating to the taxes which are the subject of the Convention whether it means the laws as they existed in 1956 or the laws of Canada from time to time in force. The court observed that: "Laws enacted by Canada to redefine taxation procedures and mechanisms with reference to income not subjected to taxation by the agreement are not, in my view, incorporated in the expression 'laws in force' in Canada as employed by the agreement. To read this section otherwise would be to feed the argument of the appellant, which in my view is without foundation in law, that sub-section (2) authorizes Canada or Germany to unilaterally amend the tax treaty from time to time as their domestic needs may dictate." 33. The ratio of that judgment, in our opinion, would mean that by an 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". Income covered by the provisions of the Income-tax Act is subject to tax. The question which calls for consideration is article III and articles V to XII of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discernible and lend to an uncontestable comprehension on good faith interpretation, no further interpretive exertion is authorized ; for that would tantamount to usurpation (by an unauthorized body-the interpreting agency/tribunal), intrusion and unlawful encroachment into the domain of treaty-making under article 253 (in the Indian context), an arena off-limits to the judicial branch ; and when the organic charter accommodates no participatory role, for either the judicial branch or the executors of the Act." 68. In Engineering Analysis, the Supreme Court reiterated the legal position in respect of Section 90 and the provisions of the Act being applicable only to the extent that they may be more beneficial to the assessee in the following terms: - "31. That such transaction may be governed by a DTAA is then recognised by Section 5(2) read with Section 90 of the Income Tax Act, making it clear that the Central Government may enter into any such agreement with the Government of another country so as to grant relief in respect of income tax chargeable under the Income Tax Act or under any corresponding law in force in that foreign country, or for the avoidance of double taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes apparent that changes in domestic legislation cannot, principally speaking, override the treaty provisions. If a contrarian position were to be accepted, it would lead us to hold that treaty provisions could be amended or overcome based upon the will of Legislatures of independent nations to amend domestic legislation unilaterally and without being bound by the Convention. That is clearly not the position which merits acceptance from either a constitutional or statutory point of view. It is this fundamental position which appears to have weighed upon the Court in New Skies Satellite to observe that a treaty cannot be overridden by independent legislative amendments that a contracting nation may choose to introduce. The fact that treaty provisions supervene and the option available to the assessee to opt for the more beneficial scheme stands statutorily recognised and reiterated in Section 90 (2) of the Act. G. THE SECTION 9 ARGUMENT 70. We thus come to the firm conclusion that the Section 9 amendments cannot be read as having subsumed, eclipsed or overridden the provisions of the DTAA. If one were to accept the proposition propounded by the appellants, it would lead us t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not presumed to be retrospective irrespective of the fact that the phrase used is "it is declared" or "for the removal of doubts". In determining, therefore, the nature of the Act, regard must be had to the substance rather than to form. While adjudging whether an amendment was clarificatory or substantive in nature, and whether it will have retrospective effect or not, it was held in CIT v. Gold Coin Health Food (P.) Ltd. (2008) 304 ITR 308 (SC) ; (2008) 9 SCC 622 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR625 (SC) ; (1997) 5 SCC 482 that, (i) the circumstances under which the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the double taxation avoidance agreement. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act." 72. The Court thereafter and while speaking of the extent of parliamentary power to overcome or override treaty provisions significantly observed: - "41. This court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax Appellate Tribunal also dealt with the contention of the appellant-Revenue regarding Explanation 4 to section 9 (1) (vi) of the Act for interpreting the terms used in article 13 of the Double Taxation Avoidance Agreement and observed in para 6 of the impugned order that, "In view of section 90 (2) of the Income-tax Act, the assessee opts for Double Taxation Avoidance Agreement between India and UK to override the provisions of the Act as there is no corresponding amendment to the definition of the term "royalty" in article 13 (3) of the aforesaid Double Taxation Avoidance Agreement as carried out in the definition of royalty under section 9 (1) (vi) of the Act". The learned Income-tax Appellate Tribunal then rejected the contention of the appellant-Revenue by relying upon the judgment of this court in DIT v. New Skies Satellite BV [2016] 382 ITR 114 (Delhi) ; [2016] 285 CTR (Delhi) 1 which deals with the question of retrospective effect of the amendment. The relevant portion as quoted in para 8 of the impugned order is reproduced herein below- "8. .. The learned Departmental representative's contention was that as per the judgment in the case of Shine Satellite, the ame ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke note of the following observations rendered by the Supreme Court: - "78. The insertion of sub-sections (v), (vi) and (vii) in Section 9 (1) of the Income Tax Act, by way of an amendment through the Finance Act, 1976 [Act 66 of 1976, (w.e.f. 1-6-1976).] was to introduce source-based taxation for income in the hands of a non-resident by way of interest, royalty and fees for technical services. In Carborandum & Co. v. CIT [Carborandum & Co. v. CIT, (1977) 2 SCC 862 : 1977 SCC (Tax) 391], this Court, applying residence-based rules of taxation, held that the technical service fees received by the non-resident assessee (relatable to Assessment Year 1957-1958) could only be deemed to accrue in India if such income could be attributed to a business connection in India. In the facts of that case, since no part of the foreign assessee's operations were carried on in India, the technical services being rendered wholly in foreign territory, it was held that no part of the technical service fees received by the foreign assessee accrued in India. xxxx xxxx xxxx 84. Even if we were to consider the ambit of "royalty" only under the Income Tax Act on the footing that none of the DTAAs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act, to apply with effect from 1-6-1976, when technology relating to transmission by a satellite, optic fibre or other similar technology, was only regulated by Parliament for the first time through the Cable Television Networks (Regulation) Act, 1995, much after 1976. For all these reasons, it is clear that Explanation 4 to Section 9 (1) (vi) of the Income Tax Act is not clarificatory of the position as of 1-6-1976, but in fact, expands that position to include what is stated therein, vide the Finance Act, 2012." 76. Similar arguments at the behest of the Revenue appear to have been urged before the Karnataka High Court in Vodafone Idea. Taking a cue from the legal position which had been enunciated by the Supreme Court in Engineering Analysis, the Karnataka High Court held: - "19. The second question for consideration is whether the Income-tax Appellate Tribunal was correct in holding that the amendment to provisions of section 9 (1) (vi) inserting the Explanations will result in amendment of Double Taxation Avoidance Agreement. The answer to this question must be in the negative because in Engineering Analysis, the apex court has held that Explanation 4 to section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find that paragraph 3 thereof defines "royalty" to mean the payment of consideration for the use or the right to use, any copyright, patent, trademark, design or model plan, secret formula or process, and other activities mentioned therein. The respondents had sought to contend that the service availed of by customers from the respondent assessee would fall within the ambit of 'secret formula' or 'process'. It is in the aforesaid context that Mr. Sabharwal had commended for our consideration the principle of noscitur a sociis and had submitted that the word 'process' must derive colour and meaning from the other intellectual property rights which are spoken of in Para 3 of Article 12. There appears to be significant force in that submission when one views Para 3(a) in its entirety. 79. As noted hereinabove, Article 12 (3) defines 'royalty' to mean payments received for the use or right to use copyrighted articles, patents, trademarks, designs, models, secret formulae or processes. The latter part of Para 3(a) also ropes in consideration that may be received from the alienation of any such right, property, or information. The expression "use" or "right to use" must consequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ranjan Sinha v. Hardeb Banerjee, AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that case, the transferee does not have the rights which are indeterminate in duration and residuary in character. Lump sum consideration is not decisive of the matter. That sum may be agreed for the transfer of one right, two rights and so on all the rights but not the ownership. Thus, the definition of the term "royalty" in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with the owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the prope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Illustration: (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer's depot, picks up the consignment and proceeds to the destination for delivery of the consignment. The lorry is used exclusively for the customer's consignment from the time of loading, to the time of unloading at destination. Can it be said that right to use of the lorry has been transferred by the carrier to the customer ? The answer is obviously in the negative, as there is no transfer of the 'use of the lorry' for the following reasons : (i) the lorry is never in the control, let alone effective control of the customer ; (ii)the carrier decides how, when and where the lorry moves to the destination, and continues to be in effective control of the lorry ; (iii)the carrier can at any point (of time or place) transfer the consignment in the lorry to another lorry ; or the carrier may unload the consignment en-route in any of his godowns, to be picked up later by some other lorry assigned by the carrier for furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expressions "use" or "right to use". 82. A lucid explanation of the meaning liable to be ascribed to those expressions appear in the decision of the Constitution Bench in Bharat Sanchar Nigam Ltd. Though rendered in the context of Article 366(29A) of the Constitution, the following observations appear pertinent to the question that stands posed before us: - "64. The second reason is more basic. A subscriber to a telephone service could not reasonably be taken to have intended to purchase or obtain any right to use electromagnetic waves or radio frequencies when a telephone connection is given. Nor does the subscriber intend to use any portion of the wiring, the cable, the satellite, the telephone exchange, etc. At the most the concept of the sale in a subscriber's mind would be limited to the handset that may have been purchased for the purposes of getting a telephone connection. As far as the subscriber is concerned, no right to the use of any other goods, incorporeal or corporeal, is given to him or her with the telephone connection. xxxx xxxx xxxx 95. The petitioner Bharat Sanchar Nigam Ltd. (for short "BSNL") is a licensee under the Telegraph Act, 1885. The licen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n service rendered by them be so mutilated. Not only does this position flow from the terms of contract, this also flows from Section 4 of the Telegraph Act which provides for grant of licence on such conditions and in consideration of such payments as it thinks fit, to any person "to establish, maintain or work a telegraph". The integrity of establishing, maintaining and working is not to be mutilated. 113. Clause 9 clearly interdicts the licensee provided that the licensee will not assign or transfer his rights in any manner whatsoever under the licence to third party. It is impossible to contend that the right to use goods, assuming without conceding that they are goods, which are essential for the rendition of service can never be a transaction or transfer of right to use goods. Nor can the contract between subscribers and licensee viz. service provider be interpreted as involving transfer of right to use goods." 83. The AAR in Dell International pertinently observed that the word "use" cannot possibly be interpreted as contemplating availing of a benefit of equipment or property. This becomes clearer from the following discussion which appears in that decision: - "12.5 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TT 245 (SC). Even that case turned on the interpretation of the words "transfer of right to use the goods" in the context of sales-tax Acts and the expanded definition of sale contained in clause (29A) of section 366 of the Constitution. The question arose whether a transaction of providing mobile phone service or telephone connection amounted to sale of goods in the special sense of transfer of right to use the goods. It was answered in the negative. The underlying basis of the decision is that there was no delivery of goods and the subscriber to a telephone service could not have intended to purchase or obtain any right to use electro-magnetic waves. At the most, the concept of sale in any subscriber's mind would be limited to the handset that might have been purchased at the time of getting the telephone connection. It was clarified that a telephone service is nothing but a service and there was no sale element apart from the obvious one relating to the handset, if any. This judgment, in our view, does not have much of bearing on the issue that arises in the present application. However, it is worthy of note that the conclusion was reached on the application of the well-know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have figured in the minds of parties. As stated earlier, the expression 'use' occurring in the relevant provision does not simply mean taking advantage of something or utilizing a facility provided by another through its own network. What is contemplated by the word 'use' in clause (iva) is that the customer comes face to face with the equipment, operates it or controls its functioning in some manner, but, if it does nothing to or with the equipment (in this case, it is circuit, according to the revenue) and does not exercise any possessory rights in relation thereto, it only makes use of the facility created by the service provider who is the owner of entire network and related equipment. There is no scope to invoke clause (iv.a) in such a case because the element of service predominates. 13.2 Usage of equipment connotes that the grantee of right has possession and control over the equipment and the equipment is virtually at his disposal. But, there is nothing in any part of the agreement which could lead to a reasonable inference that the possession or control or both has been given to the applicant under the terms of the agreement in the course of offering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and thus is covered by royalty as stipulated in article 13 (3) of the treaty. But, no material has been placed before us to show that C&W UK uses any secret process in the transmission of the international leg of the service, or that the applicant pays towards the use or right to use that secret process. It is well-settled that telecom services are standard services. The arrangement between the applicant and C&W UK is for rendition of service and the applicant pays for the same. It is for C&W UK to see how it will provide that service. The applicant is not concerned with the same. This Authority has dealt with this issue in the case of Dell International Services India (P.) Ltd. (supra). In that case BT America provided two way transmission of voice and data to Dell India between India and USA. For providing this service, BT America had tied up with VSNL in India and other telecom service providers outside India. Dell India had an agreement with BT America for the entire service for which it made payment directly to BT America. One of the issues that arose for consideration was whether the payment made by the applicant to BT America was in the nature of royalty falling either und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, it cannot be held that there is, in the instant case, the use of or the right to use a secret process. In fact it is nobody's case that any secret process is involved here and the applicant makes use of it. The use of secret process is alien to the minds of contracting parties. Incidentally, we may mention that it was brought to our notice that similar bandwidth services; through private circuits are being provided by many other telecom operators. Hence, the royalty definition under the treaty relating to secret process is not attracted here. We may mention that the applicant contended that the decision of ITAT in Asia Satellite Telecommunication Co. Ltd.'s case (supra) is distinguishable on facts. It is unnecessary to deal with this aspect." (p. 494)" 85. Our Court in Asia Satellite had also noticed with approval the following passages from the OECD Commentary on Article 12:- "9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into 'transponder leasing' agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) will not constitute royalties under the definition of paragraph 2 since these payments are not made in consideration for the use of, or right to use, property, or for information, referred to in the definition (they cannot be viewed, for instance, as payments for the use of, or right to use, a secret process since no secret technology is used or transferred to the operator). This conclusion holds true even in the case of treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties since the operator that pays a charge under a roaming agreement is not paying for the use, or the right to use, the visited network, to which it does not have physical access, but rather for the telecommunications services provided by the foreign network operator. 9.3 Payments for the use of, or the right to use, some or all of part of the radio frequency spectrum (e.g. pursuant to a so-called "spectrum license" that allows the holder to transmit media content over designated frequency ranges of the electromagnetic spectrum) do not constitute payments for the use of, or the right to use, property, or for information, that is referred in the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumer context, include (this is not an exhaustive list) ships, aircraft, cars and other vehicles, cranes, containers, satellites, pipelines and cables etc. 20. A clear distinction must be made between royalties paid for the use of equipment, which fall under Article 12, and payments constituting consideration for the sale of equipment, some or all of which may, depending on the case, fall under Articles 7, 11, 13, 14 or 21. Some contracts combine the lease element and the sale element, so that it sometimes proves difficult to determine their nature and economic substance. In the case of credit sale agreements, hire purchase agreements and other forms of finance leases, it seems clear that the sale element is paramount, because the parties have from the outset agreed that the ownership of the property in question shall be transferred from one to the other, although they have made this dependent upon the payment of the last instalment. Consequently, the instalments paid by the purchaser/hirer do not, in principle, constitute royalties. In the case, however, of an operating lease, the sole, or at least the principal, purpose of the contract is normally that of lease, even if the les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the part of the definition of royalties dealing with payments received as consideration for "information concerning industrial, commercial or scientific experience", it addressed the problems of distinguishing royalties from types of income properly subject to other Articles of the Convention. A member from a developed country asserted that the problem was that the "royalties" definition makes an imperfect distinction between revenues that constituted royalties in the strict sense and payments received for brain-work and technical services, such as surveys of any kind (engineering, geological research etc.). The member also mentioned the problem of distinguishing between royalties akin to income from capital and payments received for services. Given the broad definition of "information concerning industrial, commercial or scientific experience", some countries tend to regard the provision of brain-work and technical services as the provision of "information concerning industrial, commercial or scientific experience" and to regard payment for such information as royalties." I. SCOPE OF THE OSS/GBSA 88. If one were to test the OSS Agreement or the GBSA on the aforenoted precepts, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neither attracted to the OSS Agreement/GBSA nor do the concepts of process or equipment royalty have any application to the transactions in question. This since they were quintessentially concerned with the rendering of services as distinct from the grant of effective control over a process or equipment. The mere utilisation of a process or equipment in the course of providing a service would not qualify the test of use or right to use as contemplated under Article 12 of the DTAA. J. ARTICLE 3 (2) 90. Turning then to the argument addressed on Article 3 (2) of the DTAA we find that the submission quite apart from being fallacious is fundamentally flawed. It becomes pertinent to note that the said Article bids us to refer to the domestic law of one of the Contracting States in order to discern the meaning to be assigned to a particular term used in the Convention. However, Article 3 (2) would be triggered only if one was seeking to find a defining term for an expression appearing in the DTAA and which has not been explicated therein. This becomes evident from that Article using the phrase "any term not defined therein". Undisputedly, royalty is a term which stands duly defined by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to determine the meaning of terms that are not defined in the treaty, the relevant domestic law is that in force at the time of the application of the treaty rather than at the time the treaty was signed. The second modification clarified that the reference to the domestic law is not restricted to the domestic tax laws but, in case of variations in the meaning given to a term under different domestic laws, the meaning that prevails is that given to the term for the purposes of the laws imposing the taxes to which the Convention applies. The Committee considers that the following part of the Commentary on Article 3 of the 2017 OECD Model Tax Convention, which explains these two modifications, is applicable to paragraph 2 of Article 3 of the United Nations Model Tax Convention (the modifications that appear in italics between square brackets, which are not part of the Commentary on the OECD Model Tax Convention, have been inserted in order to provide additional explanations or to reflect the differences between the provisions of the OECD Model Tax Convention and those of this Model): 11. This paragraph provides a general rule of interpretation for terms used in the Convention but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vations appearing in that decision:- "45. At the very outset, it should be understood that it is not as if the double taxation avoidance agreements completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3 (2) of both double taxation avoidance agreements state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. ..................... The treaties therefore, create a bifurcation between those terms, which have been defined by them (i.e the concerned treaty), and those, which remain undefined. It is in the latter instance that domestic law shall mandatorily supply the import to be given to the word in question. In the former case however, the words in the treaty will be controlled by the definitions of those words in the treaty if they are so provided. 46. Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end the Act of 1956'. But neither is the converse true, that is that every tax enactment adopted for whatever purpose, might have the effect of amending one or more bilateral or multilateral tax conventions without any avowed purpose or intention so to do." 48. In CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom), the Bombay High Court citing R. v. Melford Developments Inc. held that (page 333 of 310 ITR): "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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence to its tax code. As a consequence, the purpose of entering into a treaty with a view to avoiding double taxation of cross-border transactions would be frustrated." 51. Pertinently, this court in DIT v. Nokia Networks OY (2013) 358 ITR 259 (Delhi) 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 taxation avoidance agreement. This court rejected that any amendment could change the situation and render the service or activity taxable, in the following observations (page 281 ITR 358 ITR): "He, thus submitted that the question of 'copyrighted article' or actual copyright does not arise in the context of software both in the double taxation avoidance agreement 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 Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act of the executive. Logically therefore, the executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and annul this economic bargain. It may decide to not follow the treaty, it may chose 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 be 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 operationalising 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in Explanation 2 to clause (vi) of section 9 (1) of the Act. Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, etc. Thus, what this clause envisages is the transfer of "rights in respect of property" and not transfer of "right in the property". The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable the use of those rights, while in the second category, no purchase is involved, only right to use has been granted. Ownership denotes the relationship between a person and an object forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in rem, being good against the entire world and not merely against a specific person and such rights are indeterminate in duration and residuary in character as held by the Supreme Court in the case of Swadesh Ranjan Sinha v. Hardeb Banerjee, AIR 1992 SC 1590. When rights in respect of a property are transferred and not the rights in the property, there is no transfer of the rights in rem which may be good against the world but not against the transferor. In that cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomer has the freedom and choice of selecting the manner, time and nature of use and enjoyment, though within the frame work of the agreement, then it would be a transfer of the right to use the goods and fall under the extended definition of 'sale'. On the other hand, if the customer entrusts to the assessee the work of achieving a certain desired result and that involves the use of goods belonging to the assessee and rendering of several other services and the goods used by the assessee to achieve the desired result continue to be in the effective and general control of the assessee, then, the transaction will not be a transfer of the right to use goods falling within the extended definition of 'sale'. Let me now clarify the position further, with an illustration which is a variation of the illustration used by the Andhra Pradesh High Court in the case of Rashtriya Ispat Nigam Ltd. v. CTO 77 STC 182 (AP). Illustration: (i) A customer engages a carrier (transport operator) to transport one consignment (a full lorry load) from place A to B, for an agreed consideration which is called freight charges or lorry hire. The carrier sends its lorry to the customer' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty. On this it was argued that the process employed in the transponder of a satellite, i.e., changing of frequency and amplifying the signal, is not at all an item of intellectual property. Though there appears to be some force in this argument, it is not necessary to answer it conclusively. The fact remains that there is no use of "process" by the television channels. Moreover, no such purported use has taken place in India. It is stated at the cost of repetition that the telecast companies/customers are situated outside India and so is the appellant. Even the agreements are executed abroad under which the services are provided by the appellant to its customers. The transponder is in the orbit. Merely because it has its footprint on various continents would not mean that the process has taken place in India. This aspect now stands concluded by the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408. In that case, the appellant, a non-resident company incorporated in Japan, along with five other enterprises formed a consortium. The consortium was awarded by Petronet a turnkey project for setting up a liquefied natural gas (LNG) receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of the appellant for taking delivery of the goods from the ship, payment of customs duty and transportation of the goods to the site were concerned, these facts did not militate against the property in the goods passing to the appellant. In connection with the offshore supply, certain operations were inextricably interlinked in India, such as, signing of the contract in India which imposed liability on the appellant to procure equipment and machinery in India and receiving, unloading, storing and transporting, paying demurrage and other incidental charges on account of delay in clearance. The price of the goods covered not only their price but also of all these operations which were carried out in India and from which income accrued to the appellant. Therefore, income accrued to the appellant from the offshore supply through business connection in India and some operations of the business were carried out in India. Profits were deemed to accrue/arise in India would be only such part of the profits as was reasonably attributable to the operation carried out in India. (ii) That having regard to article 7(1) of the Convention For Avoidance of Double Taxation and Fiscal Evasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er large geographical areas. Payments made by customers under typical 'transponder leasing' agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2 : these payments are not made in consideration for the use of, or right to use, property, or for information, that is referred to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the 'lease' of a transponder, in most cases the customer does not acquire the physical possession of the transponder but simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new rules of law. If the amendment changes the law it is not presumed to be retrospective irrespective of the fact that the phrase used is "it is declared" or "for the removal of doubts". In determining, therefore, the nature of the Act, regard must be had to the substance rather than to form. While adjudging whether an amendment was clarificatory or substantive in nature, and whether it will have retrospective effect or not, it was held in CIT v. Gold Coin Health Food (P.) Ltd. (2008) 304 ITR 308 (SC) ; (2008) 9 SCC 622 and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR625 (SC) ; (1997) 5 SCC 482 that, (i) the circumstances under which the amendment was brought in existence, (ii) the consequences of the amendment, and (iii) the scheme of the statute prior and subsequent to the amendment will have to be taken note of. 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idance agreements. Learned Counsel for the assessee has therefore contended that even if the first question is answered in favour of the Revenue, the income shall nevertheless escape the Act by reason of the double taxation avoidance agreement. The court therefore proceeds with the assumption that the amendment is retrospective and the income is taxable under the Act. xxxx xxxx xxxx 40. In Asia Satellite the court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the tax tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data transmission services, systematically and without exception, have treated the two definitions as parimateria. This court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of royalty across both double taxation avoidance agreements and clause (iii) to Explanation 2 to 9 (1) (vi). Article 12 (3), Indo-Thai Double Taxation Avoidance Agreement: "3. The term 'royalties' as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Article 12(4), Indo-Netherlands Double Taxation Avoidance Agreement: "4. 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, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cially formulated for the purpose of that definition. The following extract from Asia Satellite takes note of the OECD Commentary and Klaus Vogel on Double Taxation Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty (page 391 of 332 ITR): "Even when we look into the matter from the standpoint of double taxation avoidance agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Co-operation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model double taxation avoidance agreement contains a definition of royalty which is in all material respects virtually the same as the definition of 'royalty' contained in clause (iii) of Explanation 2 to section 9 (1) (vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model double taxation avoidance agreements and particularly, referred to the following amendment proposed by the OECD to its commentary on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; 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 Double Taxation Convention with Luxembourg) ; this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. were transferred to the user.' Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below: 'On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear-cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question, since it ultimately came to hold that the amendments would have no impact on the provisions of the DTAA. The Court's conclusion in this behalf was based on it having found in law that Parliament could not be said to be empowered to amend a provision of a treaty. It was significantly observed that an act of Parliament can neither supply nor alter the boundaries of the definition under Article 12. It was also found that the Explanations could not be countenanced to be clarificatory, since they were introduced principally to overcome the basis of a verdict rendered by the Court, namely Asia Satellite and which had held that both "secret formula" and "process" were to be read in conjunction. It is this which appears to have weighed upon the Court to observe that the Explanations appear to have been introduced primarily to overcome binding judicial decisions. We, on an overall analysis of all of the above, find no justification to either draw a different line or doubt the correctness of the decisions handed down in Asia Satellite and New Skies. 103. We find ourselves unconvinced with the submissions addressed on this score by the appellants for the following additional reason ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der, we find that the Court appeared to be convinced that the issue in any case stood settled in light of the judgment of the Court in New Skies Satellite and which had by then been affirmed by the Supreme Court in Engineering Analysis. 105. That only leaves us to deal with the decision of the Madras High Court in Verizon and which constituted the sheet anchor for the appellants. The said decision firstly proceeds on the premise that the definition of royalty under the DTAA as well as the Act are pari materia. However, this premise clearly appears to be incorrect as is borne out from the preceding discussion. The Madras High Court then proceeded to rest its judgment principally on Section 9 and the Explanations forming part of that statutory provision. The issue of the extent to which that provision would be applicable as well as the degree to which it could influence Article 12 of the DTAA, however, does not appear to have been critically evaluated. The tenor of that decision appears to suggest that it proceeded on the basis that Section 9 undoubtedly applied. With due respect, and for reasons aforenoted, we find ourselves unable to agree with or affirm the position as struck in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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