+ Ita 334/2022The Commissioner Of Income Tax - International Taxation -3 v. Telstra Singapore Pte Ltd

IN THE HIGH COURT OF DELHI AT NEW DELHI % Judgment reserved on: 17 May 2024 Judgment pronounced on: 24 July 2024 Judgment pronounced on: 24 July 2024 + ITA 334/2022THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 ..... Appellant Through: Mr. Aseem Chawla, SSC with Ms. Monica Benjamin, JSC along with Ms. Pratishtha Chaudhary, Mr. Naveen Rohila, and Ms. Simran Jha, Advs. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. + ITA 335/2022THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 ..... Appellant Through: Mr. Aseem Chawla, SSC with Ms. Monica Benjamin, JSC along with Ms. Pratishtha Chaudhary, Mr. Naveen Rohila, and Ms. Simran Jha, Advs. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. Signature Not Verified + ITA 206/2023 THE COMMISSIONER OF INTERNATIONAL TAXATION -3 OF INCOME TAX - ..... Appellant Through: Mr. Ruchir Bhatia, SCC with Mr. Anant Mann, JSC. versus + TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. ITA 55/2023 THE COMMISSIONER OF INCOME TAX - INTERNATIONAL TAXATION -3 ..... Appellant Through: Mr. Aseem Chawla, SSC with Ms. Monica Benjamin, JSC along with Ms. Pratishtha Chaudhary, Mr. Naveen Rohila, and Ms. Simran Jha, Advs. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. + ITA 597/2023 THE COMMISSIONER OF INTERNATIONAL TAXATION -3 INCOME TAX - ..... Appellant Through: Mr. Ruchir Bhatia, SCC with Mr. Anant Mann, JSC. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. Signature Not Verified Page 2 of 149 + ITA 61/2023 THE COMMISSIONER OF INTERNATIONAL TAXATION -3 OF INCOME TAX - ..... Appellant Mr. Aseem Chawla, SSC with Ms. Monica Benjamin, JSC along with Ms. Pratishtha Chaudhary, Mr. Naveen Rohila, and Ms. Simran Jha, Advs. Through: versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Sudip Lodh, Advs. Mr. Manuj Sabharwal and Mr. + ITA 171/2024 & CM APPL 15018/2024 THE COMMISSIONER OF INTERNATIONAL TAXATION -3 OF INCOME TAX - ..... Appellant Through: Mr. Ruchir Bhatia, SCC with Mr. Anant Mann, JSC. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. + ITA 174/2024 & CM APPL 15029/2024 THE COMMISSIONER OF INTERNATIONAL TAXATION -3 INCOME TAX - ..... Appellant Through: Mr. Ruchir Bhatia, SCC with Mr. Anant Mann, JSC. versus TELSTRA SINGAPORE PTE LTD. ..... Respondent Page 3 of 149 Through: Mr. Manuj Sabharwal and Mr. Sudip Lodh, Advs. CORAM:HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV J U D G M E N T YASHWANT VARMA, J. A.PROLOGUE 1. 1.The Commissioner of Income Tax questions the correctness of the judgments rendered by the Income Tax Appellate Tribunal[1]dated 30 September 2020 [ITA 334/2022, ITA 335/2022 and ITA 1 Tribunal 597/2023], 13 September 2022 [ITA 55/2023 and ITA 61/2023], 27 September 2022 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? 1. 1.The Commissioner of Income Tax questions the correctness of the judgments rendered by the Income Tax Appellate Tribunal[1]dated 30 September 2020 [ITA 334/2022, ITA 335/2022 and ITA 1 Tribunal 597/2023], 13 September 2022 [ITA 55/2023 and ITA 61/2023], 27 September 2022 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, the ld. ITAT has erred in not adopting the meaning of royalty as per Explanation 2 and Explanation 6 of section 9(1)(vi) of the Income Tax Act in view of the Article 3(2) of the India Singapore DTAA? 2.4 Whether on the facts and in the circumstances of the case, the ld. IT AT has erred in holding that provision of DT AA being beneficial to the Assessee is to be followed as per section 90(2) of the Income Tax Act even though there is no difference in scope of taxation of Royalty as per DT AA and that in Income Tax Act in view of the Article 12 read 'with Article 3(2) of the India Singapore DTAA and section 9(1)(vi) of the Income Tax Act, 1961?‖ 2. 2.By our order of 08 February 2023 passed in ITA 335/2022, we had, however, taken note of the submissions addressed on behalf of the appellant with learned counsel appearing on its behalf seeking to restrict the consideration on these appeals to the question proposed in terms of paragraph 2.1. A perusal of the question formulated would establish that the appellant seeks our opinion on whether the receipts from Indian customers for services provided outside the territory of India would be taxable under Section 9(1)(vi) of the Income Tax Act, Signature Not Verified 1961[2]read along with Article 12 of the Double Taxation Avoidance Agreement[3] between India and Singapore. According to the appellants, the receipts become taxable under the Act since the services provided are liable to be viewed as being in connection with the “use” or “right to use” of process or equipment. They thus seek to invoke the concepts of process and equipment royalty and would bid us to hold that the income in question would be taxable under the Act. 3.These appeals originate from four sets of orders passed by the Tribunal and the details of the individual appeals as instituted before this Court are set out hereinbelow:- We note that the Tribunal for AYs‘ 2015-16, 2016-17, 2017-18, 2018-19, and 2019-20 has principally followed its decision dated 30 September 2020 and which pertained to AYs‘ 2011-12, 2012-13, and 2014-15. 2 Act 3 DTAA Signature Not Verified ITA 334/2022 & connected matters Digitally SignedBy:KAMLESH KUMARSigning Date:24.07.202419:47:53 B.THE FACTS 3.These appeals originate from four sets of orders passed by the Tribunal and the details of the individual appeals as instituted before this Court are set out hereinbelow:- We note that the Tribunal for AYs‘ 2015-16, 2016-17, 2017-18, 2018-19, and 2019-20 has principally followed its decision dated 30 September 2020 and which pertained to AYs‘ 2011-12, 2012-13, and 2014-15. 2 Act 3 DTAA Signature Not Verified ITA 334/2022 & connected matters Digitally SignedBy:KAMLESH KUMARSigning Date:24.07.202419:47:53 B.THE FACTS 4.The undisputed facts on which the appeals proceed are as follows. The respondent-Telstra Singapore Pte Ltd.[4]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[5]with Bharti Airtel Ltd.[6]and other related telecom operators. In terms of the aforenoted OSS Agreement, the respondent-assessee is obliged to provide bandwidth services to the customers of Bharti outside India with a corresponding obligation being placed on Bharti to provide those services within India. The OSS Agreement essentially envisages reciprocal services being provided by the respondent assessee and Bharti dependent upon the location of their customers. The essential structure of that agreement can be discerned from a perusal of the following chart which formed part of the submissions which were filed before the Tribunal: 4 Telstra Singapore 5 OSS Agreement 6 Bharti Signature Not Verified 6.The OSS Agreement which came to be entered into between Bharti and the respondent-assessee contains the following salient provisions. As per the definition and interpretation clause, the words ―Administration‖, ―Administration A‖ and ―Administration B‖ stand defined as follows: ―"Administration" means either Bharti or Telstra as appropriate and "Administrations" means both of them. "Administration A" means the Administration who shall have the authority from its Customer(s) to co-ordinate and co-operate with Administration B inter alia to order, procure , implement and terminate International Service(s) to receive invoices and make payments in respect of the International Service(s), for and on behalf of such Customers in accordance with this Agreement. ―Administration B‖ means the Administration which co-ordinates and co-operates with the Administration A in order for Administration A and Administration B to provide their respective Service(s) to the End User(s).‖ 7.The OSS Agreement defines the expression ―customers‖ and ―end users‖ in the following terms: ―Customer‖ means any person or entity who authorises that Administration A to order, procure, implement and terminate the International Service(s) from the Administration B, for and on that person‘s behalf. For the avoidance of doubt, neither Administration is a Customer of the other for the purposes of this Agreement. Signature Not Verified ―End Users‖ means any person or entity who uses the International Services. 8.The words ―International Services‖ and ―OSS Service‖ are ascribed the following meaning: "International Services" or ―Services‖ means the following international data communications services and each such service is an ―International Service‖: (a)private leased circuit service between international gateways (―IPLC‖); (―IPLC‖); ―Customer‖ means any person or entity who authorises that Administration A to order, procure, implement and terminate the International Service(s) from the Administration B, for and on that person‘s behalf. For the avoidance of doubt, neither Administration is a Customer of the other for the purposes of this Agreement. Signature Not Verified ―End Users‖ means any person or entity who uses the International Services. 8.The words ―International Services‖ and ―OSS Service‖ are ascribed the following meaning: "International Services" or ―Services‖ means the following international data communications services and each such service is an ―International Service‖: (a)private leased circuit service between international gateways (―IPLC‖); (―IPLC‖); (b)global frame relay services being frame-switched data carriage services connecting intelligent end-points internationally (―Frame Relay‖); carriage services connecting intelligent end-points internationally (―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‖); 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‖); 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‖), 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 sets out in some detail the scope of service and is structured in the following terms: ―2 Service Description 2.1 OSS Service is a service by which: Signature Not Verified (a)Customers may SEO: (i)in the case of IPLC, Frame Relay and ATM, both of the half circuits comprising an International Service; and half circuits comprising an International Service; and (ii)GIA and IP VPN, and Local Loop, through a single point of contact at either of the Administrations, with the option of requesting SEB and SPFR ; and of the Administrations, with the option of requesting SEB and SPFR ; and (b)Administration B may provide SEB and SPFR to Administration A in respect of the International Service subject to the SEO. Administration A in respect of the International Service subject to the SEO. 2.2 The Administrations shall offer OSS Service to their respective Customers on a non-exclusive basis. Each Administration retains the absolute right to enter into similar or other agreements with other parties for the provision of a similar service. 2.3 One Administration, selected in each case by the Customer, shall be the single point of contact for the Customer in respect of the International Service and shall liaise in relation thereto with the Customer and with the other Administration. (b)Administration B may provide SEB and SPFR to Administration A in respect of the International Service subject to the SEO. Administration A in respect of the International Service subject to the SEO. 2.2 The Administrations shall offer OSS Service to their respective Customers on a non-exclusive basis. Each Administration retains the absolute right to enter into similar or other agreements with other parties for the provision of a similar service. 2.3 One Administration, selected in each case by the Customer, shall be the single point of contact for the Customer in respect of the International Service and shall liaise in relation thereto with the Customer and with the other Administration. 2.4 The provision of OSS Service hereunder is without prejudice to the independent contractual relationship that each Administration has or may have with its respective Customers. Each Administration may separately contract with Customers to provide other International Services not the subject of OSS which it provides whether originating or terminating in its operating territory and each such Customer will be liable to that Administration for all charges, fees and taxes billed under that contract.‖ 11.The principles which would govern One Stop Shopping are set forth in Clause 4 and which is extracted hereinbelow: ―4 Principles Involved in One Stop Shopping 4.1 Each Administration shall use it‘s form of Customer Contract to enter into agreements with Customers for provision of each Administration's International Service to the Customer. The Administrations will exchange Customer Contracts, information and any promotional literature relating to their respective International Services and keep each other informed of any amendments thereto. 4.2 Where an Administration introduces the International Services of the other Administration to any Customer it shall notify the Customer that such services will be provided by the other Administration under the relevant terms and conditions of the other Administration. The Administrations will exchange instructions on Signature Not Verified Signature Not Verified 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 end charges will be subject to exchange rate fluctuations. Each Party shall be responsible for the bank charges and other charges in its respective country, arising from the performance of its obligations under this Agreement in the settlement of the respective bills. 4.4 Settlement between the Administrations will be via bank wire transfer. Administration A will pay Administration B in full the amount stated in Administration B‘s invoice in the currency stated therein by the relevant Payment Due Date, irrespective of whether the Customer has paid Administration A. Credit for service interruptions, if any, shall be given in accordance with each Administration's relevant terms and conditions of service and shall be indicated as a deduction on a subsequent invoice. Each Administration shall notify the other Administration(s ) of any tariff changes as soon as possible. 4.5 The provision of SEB does not relieve the Customer of any financial obligation placed on it by Administration B. The Customer shall remain liable to pay for all charges and fees of and taxes on services of both Administrations, notwithstanding election of SEB. 4.6 Unless agreed by both administrations, the scope of OSS agreement shall be limited to the International Services. The principles set out herein may be reviewed from time to time in view of the prevailing market conditions. No amendments to this Agreement shall be effective unless agreed in writing by both Administrations and signed by their authorized representatives.‖ 12.The issues pertaining to billing and settlement arrangements are regulated by Clause 5.6 which reads thus: ―5.6 Billing and Settlement Arrangements (a)A Customer may request SEB at any time. If the Customer requests SEB, Administration A will communicate this to Administration B as soon as reasonably practicable. requests SEB, Administration A will communicate this to Administration B as soon as reasonably practicable. (b)If the Customer requests SEB, either Administration may in its discretion decline to provide SEB. Administration A will advise the Customer whether SEB will be provided. discretion decline to provide SEB. Administration A will advise the Customer whether SEB will be provided. (c)Each Administration reserves the right to levy a special surcharge on its Customer for providing the SEB service. surcharge on its Customer for providing the SEB service. (d)Where both Administrations agree to provide SEB: (i)Administration B will advise Administration A what the total charges (including taxes and other government or regulatory charges recoverable by Administration B from the Customer under Administration 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 invoiced by Administration B on a monthly basis; (iv) Administration B's invoice shall set out all Administration B‘s charges associated with the provision of the International Service, inclusive of any tax where applicable; Signature Not Verified Signature Not Verified (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 invoiced by Administration B on a monthly basis; (iv) Administration B's invoice shall set out all Administration B‘s charges associated with the provision of the International Service, inclusive of any tax where applicable; Signature Not Verified Signature Not Verified (v)Administration A will convert Administration B's charges into the local currency of Administration A at the appropriate prevailing exchange rate as at the date of Administration A‘s invoice and present these together with the charges of Administration A to the Customer for payment. The invoice to the Customer shall show clearly that it represents charges on behalf of both Administrations and shall set out each Administration‘s charges separately; (vi)Administration A shall arrange for the settlement of Administration B 's invoices by bank wire transfer and shall ensure Administration B is paid in full (amount indicated in USD) in Administration B's invoices. The payment for International Services service should be made separately and not to be clubbed with Administration -B‘s receivables for any other services. Administration A shall be responsible for any exchange loss due to currency fluctuation; The details of Administration-B‘s Bank Account for wire transfer is indicated in Schedule 3 and Schedule 4. (vii)Administration A shall ensure that settlement is made to Administration B on or before the due date of Administration B‘s invoice, irrespective of whether the Customer has paid Administration A within that period. Any sums not paid by the relevant Payment Due Date, irrespective of whether the Customer had paid Administration A within that period, shall be subject to late payment interest (to be calculated at the Interest Rate) for the period beginning from the Payment Due Date to the date payment of wire transfer to Administration B. (viii)Administration A shall instruct its bank to quote the appropriate Administration B reference number on any settlement advice note. Once settlement has been made, Administration A shall complete the applicable portion of the settlement request form and send it by facsimile to Administration B's Billing Department; (ix)Each Administration shall file all returns and remit all such taxes to the applicable taxation authorities with respect to taxes applicable to its own services and will hold the other Administration harmless from and against any liability resulting 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 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 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. 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 introduction only to a prospective Customer. Neither Administration shall be obliged or required to provide the Service to a Customer in its country until it has accepted a Customer‘s Customer Contract in accordance with the other Administration‘s International Service Terms and countersigned Customer Contract for the International Service. 6.3 Neither Administration shall have any right to represent or hold itself out as the contracting agent of the other nor as having any authority to bind or commit the other in any way or to any extent whatsoever. Neither Administration shall give or make any warranty, representation or contractual stipulation of any kind which is in any way in addition to or inconsistent with the other Administration‘s Customer Contract.‖ 14.Apart from the OSS Agreement, Telstra Singapore also entered into a Global Business Services Agreement[7]with various telecom operators in India. The question which principally arises is whether the services of Telstra Singapore when utilized outside the territories of India and the consideration received by it from Indian customers in that regard would amount to a process or equipment royalty taxable under Section 9(1)(vi) of the Act read along with article 12 of the DTAA. 15.For purposes of brevity, we propose to notice the salient facts as they obtain in ITA 335/2022. For Assessment Year[8] 2012-13, the respondent-assessee had furnished Returns of Income declaring ‗nil‘ income. Those Returns are stated to have been selected for scrutiny assessment as a consequence of which notices under Section 143(2) came to be issued. Following the route of assessment as prescribed by Section 144C of the Act, a Draft Assessment Order is stated to have been framed with the Assessing Officer[9] proposing that the amount received by the respondent 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[10] 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 7 GBSA 8 AY 9 AO 10 DRP Signature Not Verified 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. 7 GBSA 8 AY 9 AO 10 DRP Signature Not Verified 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 from Indian customers for services provided outside Indian territories is liable to be viewed as those being “”“”in connection with the use or right to use of process or equipment. According to learned counsel, the Tribunal clearly erred in failing to construe royalty in light of Explanations 2 and 6 which form part of Section 9(1)(vi) of the Act. In order to appreciate the submissions which were canvassed by Mr. Chawla, we deem it apposite to extract Section 9(1)(vi) as well as the Explanations which are relied upon hereinbelow: ―9. Income deemed to accrue or arise in India.— (1) The —following incomes shall be deemed to accrue or arise in India xxxx xxxx xxxx —(vi) income by way of royalty payable by (a) the Government; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the Signature Not Verified Signature Not Verified purposes of making or earning any income from any source outside India; or (c) a person who is non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source in India: Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government: Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India. Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development 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. Signature Not Verified —Explanation 2.For the purposes of this clause, ―royalty‖ means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ―Capital gains‖) for— (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iv-a) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Section 44-BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iv-a) and (v); —Explanation 3.For the purposes of this clause, ‗computer software‘ means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data;]. —Explanation 4.For the removal of doubts, 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 4.For the removal of doubts, 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;]‖ 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 are extracted hereinbelow: ―II. Section 9(1)(vi) provides that any income payable by way of royalty in respect of any right, property or information is deemed to be accruing or arising in India. The term "royalty" has been defined in Explanation 2 which means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. Some judicial decisions have interpreted this definition in a manner which has raised doubts as to whether consideration for use of computer software is royalty or not; whether the right, property or information has to be used directly by the payer or is to be located in India or control or possession of it has to be with the payer. Similarly, doubts have been raised regarding the meaning of the term processed. Considering the conflicting decisions of various courts in respect of income in nature of royalty and to restate the legislative intent, it is further —proposed to amend the Income Tax Act in following manner: Signature Not Verified ITA 334/2022 & connected matters Digitally SignedBy:KAMLESH KUMARSigning Date:24.07.202419:47:53 (i)To amend section 9(1)(vi) to clarify that the consideration for use or right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any right, property or information as mentioned in Explanation 2, 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. use or right to use of computer software is royalty by clarifying that transfer of all or any rights in respect of any right, property or information as mentioned in Explanation 2, 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. (ii)To amend section 9(1)(vi) to clarify that royalty includes and has always included consideration in respect of any right, property or information, whether or not 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; information is with the payer; (b)such right, property or information is used directly by the payer; payer; (c)the location of such right, property or information is in India. India. (iii)To amend section 9(1)(vi) to clarify that the term "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. 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. These amendments will take effect retrospectively from 1st June, 1976 and will accordingly apply in relation to the assessment year 1977-78 and subsequent assessment years.‖ 19.Mr. Chawla then 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 Signature Not Verified 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 touse : (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 from the alienation of any such right, property or information; 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 from the alienation of any such right, property or information; (b)any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8. 4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or of the right, property or information for which a payment described in paragraph 3 is received ; or (b)make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (a)are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or of the right, property or information for which a payment described in paragraph 3 is received ; or (b)