+ Ita 473/2012Director Of Income Tax v. + Ita 500/2012Director Of Income Tax Versus

$~ * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 30.11.2015 Pronounced on: 08.02.2016 + ITA 473/2012DIRECTOR OF INCOME TAX …….Appellant Versus NEW SKIES SATELLITE BV ……Respondent+ ITA 474/2012DIRECTOR OF INCOME TAX …….AppellantVersus NEW SKIES SATELLITE BV ……Respondent+ ITA 500/2012DIRECTOR OF INCOME TAX …….Appellant + ITA 500/2012DIRECTOR OF INCOME TAX Versus ……Respondent SHIN SATELLITE PUBLIC CO. LTD. + ITA 244/2014, C.M. APPL.9724/2014DIRECTOR OF INCOME TAX-II …….Appellant……Respondent Versus SHIN SATELLITE PUBLIC CO. LTD. ……RespondentThrough: Sh. Rohit Madan, Sh. Ruchir Bhatia and Sh. Akash Vajpai, Advocates, for DIT in ITA 244/2014, ITA 473/2012, ITA 474/2012 & ITA 500/2012 Sh. M.S. Syali, Sr. Advocate with Sh. Mayank Nagi and Ms. Bhawna Bakshi, Advocates, for respondent in ITA 473/2012 and ITA 474/2012. Sh. T.V.S. Raghavendra Sreyas and Sh. N. Sai Vinod, Advocates, for respondent in ITA 474/2012. Sh. F.V. Irani, Sh. Nikhil Nayyar, Sh. Arun. H. Mehta and Ms. Akansha, Advocates, for respondent in ITA 500/2012. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT % 1.The present appeals, by the Revenue, under Section 260A of the Income Tax Act 1961 (“the Act”) are preferred against orders of the Income Tax Appellate Tribunal (“ITAT”), which upset Assessment Orders that ruled that the income derived by the assessees through data transmission services was taxable as royalty under Section 9(1)(vi) of the Act as well as Article 12 of the relevant Double Tax Avoidance Agreements (“DTAA”). The ITAT however, in the light of the judgment in Asia SatelliteCommunications Co. Ltd. V. Director of Income Tax[1], interpreting Section 9(1)(vi) in the context of such services, reversed the said orders. During the pendency of these appeals, the Finance Act of 2012 amended Section 9(1)(vi) and inserted Explanations 4, 5, and 6. 2.The substantial question framed by this Court is two-fold; 1[2011] 332 ITR 340 (Del) (1) whether the receipts of the assessees earned from providing data transmission services, fall within the term royalty under the Income Tax Act, 1961, and (2) if the answer to the first is in the affirmative, whether the assessees would be eligible for the benefit under the relevant Double Tax Avoidance Agreements. 3. In the interest of both brevity and clarity, below is a table of details with respect to the assessment orders and the orders of the ITAT: Brief Facts: Pre-Finance Act 2012 4. The assessee in ITA 500/12 and 244/14, M/s Shin Satellite Public Co. Ltd. (hereafter “Shin”), is a company incorporated in Thailand, engaged in the business of providing digital broadcasting services as well as consultancy services to its customers who consist of both residents of India and non-residents. Shin provides these services through its satellite Thaicom 3, whose footprint covers a large geographical area, including India. In AY 2007-08 and 2009-10, the assessee filed NIL returns. The AO reviewed the return under Section 143(3) read with Section 144C of the Act and held that the income was taxable under Explanation 2(iii) and (iva) of Section 9(1)(vi) of the Act as well as Article 12 of the Indo-Thai DTAA. 5. Likewise, the assessee in ITA 473/2014 and 474/2012 is a company incorporated in Netherlands, namely M/s New Skies Satellite B.V. (hereafter “New Skies”) that engages in providing digital broadcasting services. On filing a return of NIL taxable income for the relevant years, the AO again under Section 143(3) r/w 144C applied Section 9(1)(vi) of the Act to tax the income of the assessee as royalty. 5. Likewise, the assessee in ITA 473/2014 and 474/2012 is a company incorporated in Netherlands, namely M/s New Skies Satellite B.V. (hereafter “New Skies”) that engages in providing digital broadcasting services. On filing a return of NIL taxable income for the relevant years, the AO again under Section 143(3) r/w 144C applied Section 9(1)(vi) of the Act to tax the income of the assessee as royalty. 6. The assessees in the present cases both derive income from the “lease of transponders” of their respective satellites. This lease is for the object of relaying signals of their customers; both resident and non-resident TV channels that wish to broadcast their programs for a particular audience situated in a particular part of the world. In the present cases, the assessees were chosen for the simple reason that the footprint of their satellites, i.e. the area over which the satellite can transmit its signal, includes India. The process by which the TV programmes reach the viewers in India can be simply described. The TV channels produce or acquire the tapes of the programs, which they then uplink to the satellite. The satellite then receives the content, amplifies it, changes its frequency by undertaking certain processes, and then downlinks it, scattering the signal over the area of its footprint. The cable operators who ultimately relay it to the viewers in their homes then receive the downlinked signal. 7. These satellites are geostationary satellites placed in an orbit 22240 miles above the surface of the Earth. The repeater section of the satellites contains antenna systems and microwave electronics that receive, amplify, modify (in frequency and in polarization) and retransmit the signals received by it. This antenna section has two reflectors, one for receiving and the other, for transmitting. The path of each channel between the receiving antennae to transmitting antennae is called the transponder. The transponder is used to amplify and shift the frequency of each signal. The uplinked signal emanates from the uplink earth station and enters the repeater through the receiving antenna. This antenna on the satellite transforms the wireless (electromagnetic) signals into an electrical form suitable for amplification in the Low Noise Receiver (LNR). The signals are modified within the LNR in frequency to correspond to the relay range and then amplified again before the individual filters. A microwave type boosts the power of the signal within each transponder to a high power level such as 100 Watts before applying it to the transmitting antenna. The latter transforms the electrical signal from all the transponders into an equivalent electromagnetic form for radiation into the footprint where the receiving terminals are located. 8. This is the service the assessees provide to their customers, the income from which is sought to be taxed under Section 9(1)(vi) of the Act. This section has however, since the time of the first assessment order in this case, undergone an amendment. Section 9(1)(vi) as it existed then, and on the basis of which the Assessment Orders were made reads as follows: “Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India —(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 purposes of making or earning any income from any source outside India ; or (c) a person who is a 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 : 9. (1) The following incomes shall be deemed to accrue or arise in India —(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 purposes of making or earning any income from any source outside India ; or (c) a person who is a 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. —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 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 ; 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 ; 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 ; industrial, commercial or scientific knowledge, experience or skill ; (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 ; 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 ; 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 ; industrial, commercial or scientific knowledge, experience or skill ; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; scientific equipment but not including the amounts referred to in section 44BB; (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 work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 9. In ITA 500/2012 the assessee, Shin had on 30.10.2007 filed a NIL return of income, which was processed under Section 143(1) on 26.03.2009. In the previous year, the receipts accrued and arising in India to the assessee had been treated as “royalty”. Consequently, the assessee was asked to show cause why the receipts may not be treated as royalty and taxed accordingly as had been done in the past. By its letters dated 03.09.2009 and 16.11.2009, the assessee submitted that the previous treatment of the income as royalty was in fact, erroneous. The income from the services it provided, the assessee asserted, were business profits, which in the absence of a permanent establishment in India, are not subject to tax in India as per Article 7 of the Indo Thai DTAA. Further, it was submitted, that the relevant receipts did not partake the character of royalty. The assessee further quoted the decision of the ITAT in M/s. Pan AmSat International Systems Inc. v. DCIT, NR Circle, New Delhi[2] where in the context of similar facts it was held that income of such nature is not liable to tax in India. The assessee also cited the ruling of the Advance Ruling Authority in the case of ISRO Satellite Centre V. DIT[3] where it was held that payment by an Indian resident to a foreign company, for utilization of transponder centered on a satellite, is not in the nature of royalty in terms of the provisions of the Act 2 ITA No. 1796/(Del)/2001 3 [2008] 307 ITR 59 or the DTAA (in that case with the UK); and in the absence of a permanent establishment in the territory of India not taxable as business profits either. 2 ITA No. 1796/(Del)/2001 3 [2008] 307 ITR 59 or the DTAA (in that case with the UK); and in the absence of a permanent establishment in the territory of India not taxable as business profits either. 10. The AO recognised that the operative words in the definition would be “use” and “process”. First, as regards the word “process”, the AO held that the series of acts undertaken within the transponder are done to achieve a particular result, i.e. to make the signals viewable, and this clearly qualifies as a “process”, the consideration for the “use” of which would amount to royalty. Noting the nature of the services provided by the assessee, (as recounted above), the AO observed that the agreements signed by it with its various customers showed that the agreements were not for the purpose of satellite hiring, but for the purpose of providing digital channel services. After enumerating certain clauses of the agreement, the AO held that it was evident that the assessee was providing complete digital broadcasting services right from receiving the signals from its customers, to encoding the signals, feeding them into the uplinking system and to then transmitting these to the required space segment and that this constituted the “process” required to bring the income under the fold of Section 9(1)(vi). He further distinguished the case from the the decision rendered in PanAmSat[4].In that case, the only activity carried out was the processing of the telecasting signal, whereas here, the assessee carried out a number of critical processes required for satellite television broadcast and satellite internet service. Thus, the AO held, that the assessee is receiving payments from its customers for the “use” as well as the right to use a “process” and not for hiring the transponder. Consequently it was held that the assessee’s receipts 4 supra note 2supra note 2 were squarely covered by sub clause (iii) of Explanation 2 to Section 9(1)(vi) which states as follows: “(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property” 11. It is also important to note that the AO construed the word “process”in Section 9(1)(vi) of the Act, and held that the word “secret” qualifies only the term “formula” and not process. Resultantly, it would suffice that for the consideration to be termed as royalty, it need only be paid for the use of a process and not a secret process. In any case, the AO also held that the process utilized in the present case would qualify as a secret process. The AO, in doing so, was referring to the transponder as an in-severable part of the satellite itself. Though the agreement states that the lease is that of the transponder capacity, in essence, the required roles cannot be performed without the other essential components of the satellite. In other words, the use of the transponder necessarily means use of the satellite. To support this, the AO referred to the price paid by the customer to the assessee and states that this is disproportionately high in comparison to the cost incurred by the assessee for the transponder. This according to the AO lead to an inference that the customers are compensating the assessee for not only the transponder cost but also the cost of the satellite. The AO did this in an attempt to establish that the secret process therefore being used is the secret process of the satellite itself. He stated that while it may be argued that the theoretical aspects of satellite technology may be available to the interested off the shelves, the finer practical aspects and critical technologies are kept a secret. It is important to note that the AO in fact does quote the commentary of Klaus Vogel where secret formula or process has been defined as one which enjoys “at least a relative protection or is capable of being protected”. It was also held that similar to sub clause (iva) of Explanation 2, the receipt would also be royalty under Article 12 for the “use of, or right to use industrial, commercial or scientific equipment”. which enjoys “at least a relative protection or is capable of being protected”. It was also held that similar to sub clause (iva) of Explanation 2, the receipt would also be royalty under Article 12 for the “use of, or right to use industrial, commercial or scientific equipment”. 12. Second, on the question of whether the royalty received by a non-resident Telecasting Company is taxable, the AO held that the same would be taxable only if it had been paid in respect of services utilized for the purposes of making or earning any income from any source in India. The source, the AO argues, are the Indian audience, for whom the programs are created, and thus India becomes the territory of commercial exploitation by these non-resident Telecasting Companies. Placing reliance on an AAR Ruling in Steffen, Robertson and Kirsten Consulting Engineers and Scientists v. CIT[5], the AO stated that it had been held that for determining the place of accrual the important consideration is not the place where the services for which the payment are being made, but the place where the services are actually utilized. As a result, the AO held that the receipts from non resident and non-resident customers were taxable as royalty both under the Act as well as the Indo Thai DTAA. 13. Having held the receipts as taxable under Section 9(1)(vi) of the Act, the AO also held that the assessees would not get the benefit of the Indo Thai DTAA. 14. Briefly, Article 12 of the Treaty states that royalties, which arise in one of the Contracting States and are payable to a resident of the other Contracting State, may be taxed in that other State. In other words, the general rule is that the Resident State has the right to tax royalties 5 [1998] 230 ITR 206 AAR irrespective of the fact that they arise in the Source State. However, the Source State may also choose to tax to a ceratin limit, that limit not exceeding 15 percent of the gross amount of royalties. Royalties as used in Article 12 is defined as: “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, commericial or scientific experience.” Since the AO was of the opinion that the definitions were pari materia, he extended his interpretation of “royalty” under Section 9(1)(vi) to Article 12 under the DTAA. 15. By order-dated 22.07.2011, the ITAT set aside the Assessment Order. By this time the judgment of this Court in Asia Satellite Telecommunication Company Ltd.[6]. The ITAT held that the facts of the case were now squarely covered by the said judgment. The Court in that case held that the receipts earned from providing data transmission services through the provision of space segment capacity on satellites do not constitute royalty within the meaning of Section 9(1)(vi) of the Act. The Court held that while providing transmission services to its customers, the control of the satellite always remains with the satellite operator and the customers are only given access to the transponder capacity. The customer does not therefore use the satellite or the process of the satellite itself. Since that is the case, the payment 6 supra note 1supra note 1 cannot then be termed as royalty for the use of a process or equipment. Resultantly, the ITAT allowed the appeal of the assessee. It would be wise to remember that the judgment in Asia Satellite[7] was solely in the context of Section 9(1)(vi) of the Act, there being no Double Tax avoidance Agreement in that factual matrix. 6 supra note 1supra note 1 cannot then be termed as royalty for the use of a process or equipment. Resultantly, the ITAT allowed the appeal of the assessee. It would be wise to remember that the judgment in Asia Satellite[7] was solely in the context of Section 9(1)(vi) of the Act, there being no Double Tax avoidance Agreement in that factual matrix. 16. ITA 244/2014, also in the case of assessee Shin, was preferred by the Revenue against the order of the ITAT applying the judgment of Asia Satellite[8]. Here too the ITAT had overturned the Assessment Order dated 09.04.2012. The order was similar if not wholly identical to the one passed in ITA 500/2012. 17. ITA 473/2012 and 474/2012 are filed by the Revenue against the order of the ITAT overturning common assessment order dated 17.08.2011, in the case of assessee New Skies. Here the return of income for the AY 2008-09 was filed on 10.10.2008 declaring NIL income. For the same reasons as above, the AO held the income taxable under Section 9(1)(vi). However, in addition to this, the AO also went into the difference between the definition of royalty under Section 9(1)(vi) and the treaty, in that case, the Indo-Netherlands DTAA. Here, the definition of royalty under Article 12(4) is as follows: “The terms “royalties” as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.” 7 Supra note 1 8 supra note 1supra note 1 Compared to the definition in Explanation 2(iii) of 9(1)(vi) the only distinction between the two was one of punctuation, specifically, the existence of a single “comma” following the word “process” in Article 12(4), a comma which is absent from the definition under domestic law. The only question was whether this comma dictated a particular consequence, namely whether its presence would mean that the word secret did qualify the word process in Article 12(4), and that its absence under domestic law would mean that it did not. In other words, if the comma was allowed to influence the interpretation of Article 12(4), it would mean that for the purposes of consideration to be termed as royalty under the DTAA, the process utilized would necessarily have to be a “secret process”, whereas the position under domestic law is that the secrecy or not of the process utilized is irrelevant. After delving into a list of case law which lay down the rules for when punctuation is not to be taken seriously while interpreting an act or treaty, the AO decided that the presence of the comma was inconsequential. Here too, without prejudice to its above finding, the AO held that the process of providing the transponder would still qualify as a secret process. Quoting the Oxford Dictionary, the AO held that secret means kept or meant to be kept private, unknown or hidden from all but a few. It was held that the process was within the exclusive knowledge of the assessee. The customer is neither in the know nor is it empowered to use the process in its own way. Post Finance Act 2012 18. It can be seen, therefore, that while the assessment orders consistently held that the income from data transmission services shall be taxable under Section 9(1)(vi) as royalty, the Tribunal equally consistently, set aside these orders applying, as it is bound to do so, on the basis of Asia Satellite[9].However, as it has been noted, the Finance Act of 2012 amended Section 9(1)(vi) inserted Explanation 4, 5, and 6. The inclusion of these Explanations, clarificatory as they claim they are, have attempted to undo the implications of Asia Satellite.[10]Explanations 4, 5, and 6 are reproduced below: Post Finance Act 2012 18. It can be seen, therefore, that while the assessment orders consistently held that the income from data transmission services shall be taxable under Section 9(1)(vi) as royalty, the Tribunal equally consistently, set aside these orders applying, as it is bound to do so, on the basis of Asia Satellite[9].However, as it has been noted, the Finance Act of 2012 amended Section 9(1)(vi) inserted Explanation 4, 5, and 6. The inclusion of these Explanations, clarificatory as they claim they are, have attempted to undo the implications of Asia Satellite.[10]Explanations 4, 5, and 6 are reproduced below: “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;” Contentions of parties 9 supra note 1supra note 1 10 supra note 1supra note 1 19. The Revenue argues in their appeals that with the insertion of the three explanations to Section 9 (1)(vi) of the Act, the matter has been settled beyond controversy. Consequently, the impugned orders, based as they are, on the reasoning in Asia Satellite[11]., cannot stand, because the basis of that ruling has been undone. It was argued that it matters little as to whether the amendment is held to be declaratory or clarificatory, because it imperatively suggests that if there were any doubts as to whether the activity was taxable, those stood removed. Necessarily, the amendment therefore, applied to all transactions- past and present. Asia Satellite[12], therefore, was statutorily overborne. For this simple reason alone, argued counsel, the impugned orders are to be set aside and the matters remitted to the AO to give tax effect and work out the assessee’s liabilities. 20. It was submitted that as far as the second question, i.e. whether the DTAA applied and resulted rendering the activity non-taxable was concerned, the question should not arise. Here, learned counsel stated that the DTAA predated the amendment. Consequently, the interpretation placed in Asia Satellite[13], which was in relation to Section 9, could not be said to be an authority on treaty interpretation. Furthermore, argued counsel for the Revenue, the terms of the treaty and the terms of the pre-amended Act being similar, the subsequent amendment rendered the reasoning in Asia Satellite academic. Therefore, the assessees could not take shelter under the DTAA, which was cast in identical terms with the pre-amended statute. Since the 11supra note 1supra note 1 12 supra note 1supra note 1 13supra note 1supra note 1 same has subsequently been amended, the Courts are bound to give effect to it. 11supra note 1supra note 1 12 supra note 1supra note 1 13supra note 1supra note 1 same has subsequently been amended, the Courts are bound to give effect to it. 21. Learned counsel for the assessees contended that the matter is no longer res integra. It was submitted that having regard to the structure of Section 92 of the Act, there is little elbow room for the Revenue; it cannot be contended that any change in the substantive law would automatically result in a like change in respect of taxability of a transaction or service, which is otherwise tax exempt in terms of a DTAA or which is subject to a lower rate of taxation mandated by a treaty. Counsel relied on the judgment of the Bombay High Court in Commissioner of Income Tax v. Seimens Aktiongessellschaft[14]and the Andhra Pradesh High Court in M/s Sanofi Pasteur Holding SA v. Department of Revenue.[15]. 22. Learned counsel, most importantly stressed upon the decision of this Court, in Director of Income Tax v Nokia Networks[16]which had dealt with a similar issue, with respect to applicability of the amended Section 9 (1) (vi) in the light of insertion of the Explanations, the context being the efficacy of the interpretation given to the statute vis-à-vis a double taxation avoidance treaty. In that case, this Court had rejected that any amendment could change the situation and render the service or activity taxable. 23. Taking the argument to its logical end, counsel further argued that it is not possible for one nation to, by way of a unilateral amendment to tax income which otherwise was not subject to tax under the treaty. In other words, argued counsel, the rule of referential incorporation cannot be 14 [2009] 310 ITR 320[2009] 310 ITR 320 15 (2013) 354 ITR 316 (AP) 16 2013 (358) ITR 259 applied in dealing with a DTAA between two Sovereign Nations. Though it is open to a Sovereign Legislature to amend its Laws, a DTAA entered into by the Government has to be reasonably construed. Analysis and Conclusions: 24. International double taxation typically occurs when two jurisdictions claim the right to tax the same tax entity or subject with respect to the same income for the same period. Indisputably, taxation of income twice over by two different jurisdictions has an adverse impact on the movement of goods and services across international borders. For this purpose, jurisdictions with concurrent taxing rights enter into Double Tax Avoidance Agreements, which set rules that attempt, at the very least, theoretically, to eliminate a double incidence of tax. The States therefore limit their legitimate taxing powers in favour of the other State, by either agreeing not to tax a certain income, which has been reserved for the other Contracting State, or taxing that income to a limited extent. These treaties therefore have the effect of restraining the operation of the domestic taxing laws of a Contracting State. Justifiably, the balance between the domestic law of the Contracting State and its obligations under the treaty is a delicate matter worthy of critical consideration and is often the subject of Parliamentary legislation. In this context, Section 90 of the Act of 1961, which is law relatable to Article 253 of the Constitution, read with Entries 13, 14 and 82 of List 1 of the Seventh Schedule holds the field. It states that where the Central Government has entered into a Double Tax Avoidance Agreement, then in relation to the taxpayer who is contemplated by such agreement, the provisions of the Act shall apply to the extent that they are more beneficial to the assessee. 25. The underlying presumption of a DTAA being that in the absence of such agreement, the income in question is taxable in both jurisdictions as under their domestic laws, whenever Courts are confronted with taxability of an income in the context of such an agreement, they must as a matter of course, first decide whether the income in issue is taxable under domestic legislation, specifically the Act. It is only when that issue is answered in the affirmative that the Court turns its attention to the tax convention in issue, to ascertain primarily whether the terms of the convention exempt that particular income from being taxed under the Act. 26. Section 9(1)(vi) is, aside from changes made by the Finance Act, 2012, a long and winding provision, subject to several explanations andprovisos. It will therefore be prudent to undertake a systematic approach to it, whereby each stage of the section is examined. The opening words of Section 9; “the following incomes shall be deemed to accrue or arise in India” indicate at the outset that the provision is a deeming one whereby, income otherwise not accruing in India, will be deemed to have accrued in certain cases. Until 1922, various provisions enumerated cases under which income accruing to an assessee abroad was deemed to accrue in India. The 1961 Act collects these provisions and covers them under the ambit of Section 9. One of such deeming provisions is Section 9(1)(vi), which states that income by way of royalty, shall be deemed to have accrued in India. For income of such nature to be taxable under the Act, two aspects must be examined, first, whether the income partakes the character of royalty as defined in Explanation 2, and second, depending on who it is payable by, whether the conditions governing payment by such person have been met. As to the second aspect, Section 9(1)(vi) begins with the following words: —“(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 purposes of making or earning any income from any source outside India ; or (c) a person who is a 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” Three categories are intended here, namely, (i) the Government, (ii) residents of India and (iii) non-residents. Once it is established that the income accruing to the assessee is in fact, royalty under the second Explanation, the individual conditions annexed to each of the three above must be met. In the present case, both residents as well as non-residents have paid the income purported to be taxed by the Revenue, which argues that the conditions for both have been satisfied. Briefly, royalty paid by a resident is taxable as long as it is not paid for the purpose of a business or profession carried on outside India or for the purposes of making or earning income from any source outside India. In the case of a non-resident, royalty paid shall be taxable when it is paid for the purposes of a business or profession carried on in India or for the purposes of making or earning any income from any source in India. In other words, for both residents as well as non-residents, either of two situations must occur; (i) the business or profession for the purpose of which the royalty is paid must be carried on by such person in India or (ii) the royalty must be paid for the purposes of making or earning any income from any source situated in India. 27. Since the underlying premise is that the payment is “royalty”, the Court must first deal with Explanation 2, most pertinently to sub-clause (iii) and (iva) under which the income in the present case is sought to be taxed. person in India or (ii) the royalty must be paid for the purposes of making or earning any income from any source situated in India. 27. Since the underlying premise is that the payment is “royalty”, the Court must first deal with Explanation 2, most pertinently to sub-clause (iii) and (iva) under which the income in the present case is sought to be taxed. “(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (…) (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB” 28. The two clauses as applicable to data transmission services have been the subject of debate in courts as well as business circles. The debate was finally settled by the judgment delivered in Asia Satellite[17]. In Asia Satellite[18]this Court held that income from data transmission services would not qualify as royalty in order for it to be taxable under the Act. The Court first recognized that the definition of royalty in the section is with respect to permission granted to use the right in respect of the patent, invention, process, etc., all essentially forms of intellectual property. This permission restricts itself merely to the letting of the licensed asset. The permission does not go so far as to allow alienation of the asset itself. That being said, it is not so restricted as to qualify as a case where the licensor uses the asset himself, albeit for the purposes of his customers. The Court took note of the features of the agreements between the assessee in that case, which was a 17 supra note 1supra note 1 18 supra note 1supra note 1 foreign company, incorporated in Hong Kong, and its customers, which were TV channels. The agreement was essentially one of allocation of the transponder capacity available on the satellite to enable the channels to relay their signals. The customers had their own relaying facilities. No different from the case at hand, the transponder receives the signal, amplifies it, and downlinks it to facilitate transmission of the signals. Quoting the judgment of the AAR in ISRO[19], the Court held that it becomes clear that all the customer gets through the agreement with the assessee is mere access to a broadband width available in the transponder. The control over the parts of the satellite and naturally the transponder remains with the assessee. At no point does the assessee cede control over the satellite to the customers. Logically therefore, since the transponder is a part of the satellite that cannot be severed from it, there can be no independent control of the transponder without control of the satellite itself. The AAR had specifically rejected the revenue’s contention that in substance there is use of equipment; that being the transponder. The fact that the transponder automatically responds to the data commands sent from the ground station network and retransmits the same data over a wider footprint area does not mean that control and operation of the transponder is with the customer. Interestingly, this has not escaped the notice of the AO, except that the Assessment Order conveniently employs the in-severability of the transponder from the satellite to assert that that the technology of the satellite would qualify as the “secret process” but conveniently divorces the transponder from the satellite while trying to prove that there is use of the transponder as an equipment. However,equipment as envisaged in the section must be capable of 19 supra note 3 19 supra note 3 functioning independently, or in other words, must be able to perform an activity by itself without material reliance on another. Essentially therefore, Asia Satellite[20], held that the presence of control was a critical factor in adjudging whether there was “use” of a particular process. On the question of whether the “process” so used must be a secret process or not, thejudgment did not return any finding specifically, other than quoting with approval the OECD Commentary which alludes to the indispensability of the secrecy of the process. 29. The Revenue argues that critical aspects of this judgment, primarily that the function performed by the transponder could not be categorized as a “process” and that even in the event it could be, there was no “use” of this process since there was no control exercised by the customers, is no longer good law in light of the inclusion of Explanations 4-6 by the Finance Act, 2012. In other words the Revenue contends that a mere reading of Explanation 4-6 will go to show that they are clarificatory and are therefore automatically retrospective. By this reason, as clarificatory amendments do, these explanations relate back to the time when the main provision of Section 9(1)(vi) first came into force. By logical extension, the judgment in Asia Satellite[21]was based on a misinterpretation of the section and thus no longer holds the field or corresponds to the correct interpretation of the definition of royalty. 30. Undoubtedly, the legislature is competent to amend a provision that operates retrospectively or prospectively. Nonetheless, when disputes as to their applicability arise in court, it is the actual substance of the amendment 20 supra note 1supra note 1 21 supra note 1supra note 1 that determines its ultimate operation and not the bare language in which such amendment is couched. Two judgments of note have succeeded the Finance Act, 2012 in this context. In Director of Income Tax v. TV Today Network Limited[22] , a Division Bench of this Court was confronted with the question of taxability of income from data transmission services. Answering the question in favour of the Revenue, the Court held that as far as the domestic taxability of the said income is concerned, the Finance Act 2012 mandates it to be as such. Interestingly however, the Court did not rule out any relief that the assessees may be entitled to by virtue of the DTAA between India and the United States for the simple reason that the ITAT had not rendered any finding in that regard. Resultantly, the Court remitted the matter to the ITAT to decide that question. “In an appeal under Section 260A of the Act, we are not required to consider the constitutional validity and vires of the said amendments but have to apply the amended provision. In view of the said statutory amendments, the reasoning given by the Tribunal cannot be sustained is has to be reversed. Learned counsel for the respondent assessee has however rightly drawn our attention to the assessment order in which the assessee had also pleaded and submitted that the payments made cannot be considered as royalty or fee for included services as defined in the Double Taxation Avoidance Agreement (DTAA) between India and United states of America. It is submitted that the payments were business profit and accordingly not taxable or chargeable to tax under the Act. The tribunal has not referred to and examined the effect of the DTAA between India and the USA and whether the assessee is entitled to benefit or advantage under the said agreement and therefore, payments made were not taxable in India in the hands of the recipient. Accordingly while answering the question of law in favour of the Revenue we pass 22 ITA 600/2012 decided on 12.11.2013 an order of remit and ask the tribunal to decide the other contention raised by the respondent assessee; whether the payments made nevertheless remain untaxable in view of the provisions of the DTAA.” 22 ITA 600/2012 decided on 12.11.2013 an order of remit and ask the tribunal to decide the other contention raised by the respondent assessee; whether the payments made nevertheless remain untaxable in view of the provisions of the DTAA.” 31. In a judgment by the Madras High C