* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.131 of 2003
with
ITA No.134 of 2003
Reserved On: July 07, 2010
% Pronounced On: JANUARY 31, 2011
1) ITA No.131 of 2003 & CM No.2865/2009
ASIA SATELLITE TELECOMMUNICATIONS CO. LTD.
. . . Appellant
through : Mr. S. Ganesh, Sr. Advocate with
Ms. Anuradha Dutt, Ms.
Vijayalakshim Menon, Ms. Ekta
Kapil, Mr. Anish Kapur, Mr. Kuber
Dewan and Ms. Vrinda Tulshan,
Advocates
VERSUS
DIRECTOR OF INCOME TAX . . .Respondent
through: Mr. Sanjeev Sabharwal, Advocate
2) ITA No.134 of 2003
DIRECTOR OF INCOME TAX . . .Respondent
through: Mr. Sanjeev Sabharwal, Advocate
VERSUS
ASIA SATELLITE TELECOMMUNICATIONS CO. LTD.
. . . Appellant
through : Mr. S. Ganesh, Sr. Advocate with
Ms. Anuradha Dutta, Ms.
Vijayalakshim Menon, Ms. Ekta
Kapil, Mr. Anish Kapur, Mr. Kuber
Dewan and Ms. Vrinda Tulshan,
Advocates
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MS. JUSTICE REVA KHETRAPAL
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
ITA Nos.131 & 134 of 2003 Page 1 of 74
A.K. SIKRI, J.
1. Both these appeals, one preferred by the Revenue and other by
the assessee, arise out of same judgment of the Income Tax
Appellate Tribunal (hereinafter referred to as ‗the Tribunal’). In
fact, as noted hereafter at the appropriate stage, some of the
issues are decided by the Tribunal in favour of the assessee and
some other issues against the assessee and in favour of the
Revenue. It is for this reason that both feel aggrieved by some of
the findings of the Tribunal and have approached this Court in the
form of these appeals preferred under Section 260A of the Income
Tax Act (hereinafter referred to as ‗the Act’). ITA No.131 of 2003
filed by the assessee was admitted on the following substantial
questions of law:
―(i) Whether on the facts and in the circumstances of the
case, the Tribunal was right in law in holding that the
amounts received by the Appellant (a non-resident)
from its non-resident customers for availing
transponder capacity was chargeable to tax in India
where the satellite was not stationed over Indian
airspace and in directing how much income is to be
determined?(ii) Whether on the facts and in the circumstances of the
case Tribunal was right in holding that the Appellant
had a business connection in India through or from
which it earned income?(iii) Whether on the facts and in the circumstances of the
case the Tribunal was justified in holding that the
amount paid to the Appellant by its customers
represented income by way of royalty as the said
expression is defined in Explanation 2 to Section 9(1)(vi) of the Income Tax Act?
(iv) Whether on the facts and in the circumstances of the
case the Tribunal was justified in holding that the
customers of the Appellant were either carrying on
business in India or had a source of income in India
and, hence, the amount received by the Appellant
from its customers were chargeable to tax in India?ITA Nos.131 & 134 of 2003 Page 2 of 74
(v) Whether on the facts and in the circumstances of the
case the Tribunal was justified in admitting the
additional ground raised by the revenue seeking to
assess the amounts received by the Appellant as
fees for technical services in terms of Section
9(1)(vii)?(vi) Whether on the facts and in the circumstances of the
case the Tribunal was justified in directing the
Assessing Officer to allow the expenditure relatable
to India only whilst computing the income chargeable
to tax in India?(vii) Whether on the facts and in the circumstances of the
case the Tribunal erred in holding that depreciation
was admissible to the appellant only on a
proportionate basis?‖2. Likewise, in ITA 134 of 2003, the following substantial questions of
law were framed for determination:
―(i) Whether the ITAT is right in law in holding that the
interest under Section 234B of the Income Tax Act,
1961 should be calculated by giving benefit to the
assessee of tax deductible under Section 195 by the
payer though no such deduction in fact was made?(ii) Whether Ld. ITAT is right in law in holding that
sec.9(1)(i) of the Income Tax Act, 1961 is not
applicable in the case of the assessee?(iii) Whether the Ld. ITAT has erred in not deciding the
issue whether income of the assessee is taxable u/s
9(1)(vii) of the Income Tax Act, 1961?(iv) Whether ITAT is right in holding that transponders
cannot be regarded as equipment under Explanation
2 clause (iva) to section 9(1)(vi) of the Income Tax
Act, 1961?‖3. Though both the parties have preferred appeals and are therefore,
they are appellants in their respective appeal. For the sake of
convenience, M/s. Asia Satellite would be referred to as the
appellant and the Director, Income Tax is referred to as the
Revenue, hereinafter.
4. A glimpse of questions of law enumerated above gives a fair idea
of the contours and the nature of dispute involved. However, it
would still be necessary to highlight the factual premises under
ITA Nos.131 & 134 of 2003 Page 3 of 74
which the dispute has arisen. This job can be accomplished bytaking stock of the factual matrix of ITA No.131 of 2003, as the
similar scenario prevails in the other appeal as well.
Re: Statement of Facts:
5. The appellant/assessee, viz., Asia Satellite Telecommunications
Co. Ltd., is a company incorporated in Hong Kong and carries on
business of private satellite communications and broadcasting
facilities. This company was formed in 1988 and it claims that it
had no office in India. Appeal pertains to the assessment year
1997-98 and it is also claimed that during the relevant previous
assessment year, i.e., 1996-97, the assessee had no customers,
who are residents of India. During the previous year, relevant to
the assessment year under appeal, the appellant was the lessee of
a satellite called AsiaSat 1 which was launched in April 1990 and
was the owner of a satellite called AsiaSat 2 which was launched
in November 1995. These satellites were launched by the
appellant and were placed in a geostationary orbit in orbital slots,
which initially were allotted by the International
Telecommunication Union to UK, and subsequently handed over
the China. These satellites neither use Indian orbital slots nor are
they positioned over Indian airspace. The footprints of AsiaSat 1
and AsiaSat 2 extend over four continents, viz., Asia, Australia,
Eastern Europe and Northern Africa. The footprint is that area of
the earth’s surface over which a signal relayed from the
appellant’s satellite can be received. AsiaSat 1 comprises of a
South Beam and a North Beam and AsiaSat 2 comprises of the C
ITA Nos.131 & 134 of 2003 Page 4 of 74
Band and the Ku Band. The territory of India falls within thefootprint of the South Beam of AsiaSat 1 and the C Band of
AsiaSat 2.
6. It enters into an agreement with TV channels, communication
companies or other companies who desire to utilize the
transponder capacity available on the appellant’s satellite to relay
their signals. The customers have their own relaying facilities,
which are not situated in India. From these facilities, the signals
are beamed in space where they are received by a transponder
located in the appellant’s satellite. The transponder receives the
signals and on account of the distance the signals have travelled,
they are required to be amplified. The amplification is a simple
electrical operation. Thereafter, the frequency on which the
signals are to be downlinked is changed only in order to facilitate
the transmission of signals so that there is no distortion between
the signals that are being received and the signals that are being
relayed from the transponder. The transponder operations are
commonly known, which are carried out not only in satellite
transmission but also in the case of terrestrial transmission. There
is no change in the content of the signals whatsoever that is
carried out by the appellant in the transponder. Thereafter, the
signals leave the transponder and are relayed over the entire
footprint area where they can be received by the facilities of the
appellant’s customers or their customers.
7. It is the case of the assessee that it has no role whatsoever to play
either in the uplinking activity or in the receiving activity. Its role
is confined in space where the transponder which it makes
ITA Nos.131 & 134 of 2003 Page 5 of 74
available to its customers performs a function which it is designedto perform. The only activity that is performed by the appellant on
earth is the telemetry, tracking and control of the satellite. This is
carried out from a control centre at Hong Kong.
8. For this reason, it is claimed by the appellant that no part of the
income generated by it from the customers to whom the aforesaid
services are provided was chargeable to tax in India and for this
reason no return income was filed in India. However, Deputy
Commissioner of Income Tax (Non-resident Circle), New Delhi as
Assessing Officer issued a letter notice dated20.10.1999 under
Section 142(1) stating that the assessee had entered into
agreements with various companies for lease of transponders for
downlinking programmes to various countries including India and
therefore, income of the assessee was chargeable in India. The
appellant was accordingly called upon to file its return. The
assessee responded by questioning the authority of the AO and
explaining as to why its income was not chargeable to tax in India.
It also sought some time to file its return of income. Ultimately,
the return was filed on 30.12.1999, reiterating that no income
earned by the appellant was chargeable to tax in India.
9. The AO, however, went ahead with the assessment proceedings.
The assessment order dated 29.03.2000 was passed assessing the
income of the assessee at `160,28,03,316. According to the AO,
the appellant had a business connection in India and, therefore,
was chargeable to tax in India. He rejected the appellant’s
contention that its revenues ought to be apportioned having
regard to the number of countries covered by the footprint.
ITA Nos.131 & 134 of 2003 Page 6 of 74
According to him, the revenues would have to be apportioned onthe basis of countries targeted by the T.V. Channels who were the
appellant’s customers. On this basis, he estimated that ninety
percent of the appellant’s revenue was attributable to India. After
arriving at the income of the appellant, he held that eighty per
cent thereof was apportioned to India as most of the channels
were India specific and their advertisement revenue was from
India.
Order of the CIT(A)
10. Being aggrieved by the order of the AO, the appellant preferred an
appeal to the CIT (A). Various grounds were urged challenging the
liability to pay tax in India as well as the manner in which the AO
had computed the appellant’s income chargeable to tax.
11. The CIT (A) disposed of the appeal by an order dated 04.12.2000.
He noted that there was no dispute that the appellant had not
received any income in India. The only dispute, according to the
CITA (A), was as to whether any income could be deemed to have
accrued to the appellant in India within the meaning of Section 9
of the Act. He held that although it could be said that there was
some kind of territorial nexus of the beam which was downlinked
from the appellant’s satellite with India, the proprietary rights in
the nature of copyright, etc. in the down linked beam did not
belong to the appellant but belonged to the T.V. channels. He
held that there was no evidence on record to hold that the
appellant had any India specific beaming facility. He found that on
the basis of the facts brought on record it could not be said that
ITA Nos.131 & 134 of 2003 Page 7 of 74
the down linked beam could be restricted to any particular regionor country. According to the CIT (A), it was the responsibility of
the appellant to keep the equipment in good shape and to ensure
the quality of the down linked beam in the footprint area in
respect of a beam uplinked by the customer. He found that the
telemetry, tracking and control operations were carried out from
Hong Kong and that no beam was uplinked from India. His finding
was that the agreements were signed outside India and the
payments were also received outside India. Only the signals could
be received in India but as a matter of fact these were not
received in India either by the appellant or its agent but by cable
TV operators who had agreements for reception of signals with the
TV channels to whom the property in the signal belonged. He
accordingly held that as the performance of the contract was not
in India it could not be said that any income accrued to the
appellant in India. He found that the circular, being Circular
No.742 dated 2nd May, 1996, issued by the Central Board of Direct
Taxes in connection with the taxation of foreign telecasting
companies would have no application to the appellant’s case. He
rejected the argument of the AO that the waves generated by the
appellant on which the programmes were mounted penetrating
Indian space to reach the footprint area. According to him, the
substance of the agreement was the hiring of transponder time
and it was not an agreement for carrying programmes of the
customers. He further held that having regard to the judgment of
the Supreme Court in the case of 20th Century Finance
Corporation and Anr. Vs. State of Maharashtra [119 STC
ITA Nos.131 & 134 of 2003 Page 8 of 74
182], the taxable event would have to be decided on the basis ofthe execution of the contract and as admittedly the contracts were
entered into outside India the accrual of income would also take
place outside India.
12. Thereafter, the CIT (A) dealt with the issue as to whether the
appellant would have a business connection in India. After
referring to certain decisions of the Supreme Court, he concluded
that the appellant did not have any agreement with any Indian
company and was not rendering any service to any Indian
company and, therefore, it could not be said that the appellant
had a business connection in India. He also held that the
appellant was not carrying out any operations in India as the only
operations that were carried out by the appellant were in the
satellite which was located outside India. The mere fact that the
appellant had put in place a satellite in a manner that downlinked
signals could be received in Indian territory also did not result in
an inference that any part of the appellant’s business operations
were carried out in India. As per him, the position may have been
different if it had been shown that the satellite company, the TV
channels and the cable operators were interconnected or that the
transactions among them were not carried out at arms length. But
as there was no evidence or mention of any of these factors, he
held that no income could be said to be deemed to accrue or arise
in India in terms of Section 9(1)(i).
13. CIT (A) thereafter proceeded to deal with the issue as to whether
the amounts received by the appellant were liable to be taxed in
India in terms of Section 9(1)(vi) of the Act. Argument of the
ITA Nos.131 & 134 of 2003 Page 9 of 74
Revenue in this behalf was that the appellant received paymentsfrom some companies located outside India which companies in
turn received payments from Indian companies or companies
operating in India in respect of signals received in India and,
therefore, the provisions of Section 9(1)(vi) would be attracted.
According to the AO, the appellant would fall within the definition
of royalty as the said term was defined in Explanation 2 below
Section 9(1)(vi), as it was a payment for use of ―similar property‖.
The CIT(A) held that the issue to be decided was whether the
customers were merely using a physical asset or were they using
the process installed in the transponder. According to him, the
signals were uplinked by the customers and were received in the
transponder. The complicated devices in the transponder
segregated the programme from the beam, amplified them,
mounted them on new beams of wavelengths different from the
original wavelength of the customers and transmitted the
programmes on the new beam in the footprint area of the beam.
The payments that are made by the customers were for this
purpose and not for the use of the physical asset simpliciter. The
details of the operations carried in the transponder were not
known to the customer, the customer made the payment because
they were aware of the fact that the uplinked beam would be
processed in the satellite and would be downlinked in the manner
that it could be received by the customers viz., the TV channels,
communication companies or their agents. The CIT (A) held that
the customers were, therefore, using the secret process put in
place in the transponder on the satellite and the payments were
ITA Nos.131 & 134 of 2003 Page 10 of 74
made for this purpose and not for merely the use of a physicalasset. He, therefore, came to the conclusion that the amount paid
to the appellant by its customers represented royalty as the said
expression was defined in Explanation 2 below Section 9(1)(vi).
He further held that in view of the judgment of the Supreme Court
in the case of Performing Rights Society Vs. Commissioner
of Income Tax [106 ITR 11), it would be apparent that the TV
channels would be making the payment by way of royalty in
respect of a right or information used or services utilized for the
purpose of a business carried on by them in India. The TV
channels which made programmes predominantly meant for
Indian persons were utilizing the processing facilities of the
appellant for the business carried on by them in India and hence
the appellant was chargeable to tax in India.
14. Having regard to the view that he took, viz., that the income was
chargeable to tax in terms of Section 9 (1) (vi), he felt that it was
not necessary to consider the question of deductibility of the
expenses. Nevertheless, he thought it fit to dispose of all the
grounds that were raised and were filed before him. Insofar as the
claim for lease rentals is concerned, he held that 50% of the lease
rentals payable for AsiaSat 1 ought to be allowed as a deduction.
Similarly, the expenditure on maintenance and satellite operations
was also allowed to the extent of 50% insofar as AsiaSat 1 was
concerned and 75% insofar as AsisSat 2 was concerned. As
regards the claim for depreciation, he accepted the contention of
the appellant that depreciation would have to be allowed on the
actual cost of the satellite and not on a notional written down
ITA Nos.131 & 134 of 2003 Page 11 of 74
value which was computed as if depreciation had been allowed inthe earlier years. However, he rejected the contention of the
appellant that it was entitled to a deduction by way of
depreciation on the entire cost of the asset by relying on Section
38 of the Act. He held that the C Band of AsiaSat 2 generated only
75% of the total revenues of AsiaSat 2, and therefore, 75% of the
depreciation that was calculated on the actual cost ought to be
allowed as a deduction. He considered the question as to what
portion of the income so arrived at was to be considered
chargeable to tax in India. He noted that the AO had not given
any reason as to why 80% of the revenues should be attributed to
India. He also noted that the appellant was located in Hong Kong
and, therefore, a substantial part of its business was likely to come
from clients of Chinese and Japanese origin. He rejected the
appellant’s contention that the test to be applied whilst pro-rating
the income would be either the number of countries which are
covered by the footprint or the Gross National Product (GDP) per
capita of the countries covered by the footprint. He held that
appropriate ratio to be applied would be the area of the country to
the total area of the footprint with areas of large water bodies like
inland lakes, seas and oceans being ignored. He also cancelled
the levy of interest under Section 234B of the Act, but upheld the
levy of interest under Section 234A of the Act.
The Order of the Income Tax Appellate Tribunal: The
Impugned Order15. Aggrieved by the said order, both the appellant as well as the AO
field appeals before the Tribunal, which appeals were consolidated
ITA Nos.131 & 134 of 2003 Page 12 of 74
and heard together and have been dispose of the appeals by acommon order dated 01.11.2002. The Tribunal first addressed the
issue as to whether income of the appellant was chargeable to tax
in terms of Section 9(1)(i). It held that no income accrued to the
appellant from any property in India or from an asset or source in
India or through the transfer of a capital asset situated in India. It,
however, held that the appellant could be said to have a business
connection in India because according to the Tribunal, in order to
constitute a business connection, the test to be applied was that
there must be an activity of the non-resident in India having an
intimate relationship of a business character with the business of
the non-resident which contributes to the earning of the profit by
the non-resident in his business. According to the Tribunal, the
activity of the appellant was to amplify and relay the signals over
the footprint once the signals were uplinked to the satellite by the
TV channels. The Tribunal concluded that the obligation of the
appellant was to make available programmes of the TV channels
in India through the transponder on its satellite. The appellant
could acquire the right to receive its income only if the
programmes were made available in India, and therefore, the
Tribunal held that the appellant would have a business connection
in India.
16. The Tribunal further held that no part of the appellant’s income
was chargeable to tax in India in terms of Section 9 (1) (i) as no
operations to earn the income were carried on in India. The
Tribunal held that in order to establish that the business
operations were carried out in India, it was necessary to point out
ITA Nos.131 & 134 of 2003 Page 13 of 74
that some part of the appellant’s operations were carried out inthe territory of India. The Tribunal found that the appellant had no
office or agent or subsidiary in India which acted between it and
the cable operators in facilitating the receipt of the signals. No
machinery was installed by the appellant in India through which
the programmes were reaching India. The Tribunal further found
that the Department had not brought to its notice any operation
which was done by the appellant in India and hence it held that
the provisions of Section 9(1)(i) would have no application.
17. The Tribunal next dealt with the question as to whether the
provisions of Section 9(1)(vi) would be attracted. The Tribunal
noted that the only operation conducted by the appellant was
confined to receiving the signals, amplifying them and after
changing the frequency, relaying them back to earth. However,
the Tribunal held that the word ―used‖ in clause (iii) of Explanation
2 to Section 9(1)(vi) must be given the meaning which it has in
common parlance. According to the Tribunal it was not necessary
that there must be a physical connection with the item to the
used. It is held that as long as the user derived advantage out of
the property by amplifying the signals, it would tantamount to
―use‖ within the meaning of clause (iii). It further held that there
was a physical contact of the signal of the TV channels with the
process in the transponder provided by the appellant. It was only
when the signals came into contact with the process in the
transponder that the desired results were produced. Therefore,
the Tribunal concluded that the TV channels were using
transponder capacity so as to enable the cable operators to
ITA Nos.131 & 134 of 2003 Page 14 of 74
receive the programmes. The Tribunal further held that ―process‖referred to in clause (iii) need not necessarily be a secret process
as the word ―secret‖ only qualified ―formula‖. The Tribunal
thereafter referred to several dictionary meanings of the word
―process‖ as well as the published material filed by the appellant
and concluded that the TV channels were using the process made
available by the appellant through its transponder. The function of
the satellite in the transmission channel was to receive the
modulated carrier that the earth station emits, to amplify it and
thereafter relay it for reception at the destination earth station.
18. According to the Tribunal, considering the role of the appellant in
the light of the meaning of the term ―process‖, it became evident
that the ―particular end‖ viz. viewership by public at large was
achieved only through a series of steps taken by receiving the
uplinked signals, amplifying them and relaying them after
changing the frequency in the footprint area which would include
India. As per its findings, the TV channels were not merely using
the facility but were using a process as a result of which the
signals after being received in the appellant’s satellite were
converted to a different frequency and after amplification were
relayed to the area covered by the footprint. The Tribunal held
that judgment of the Madras High Court in Skycell
Communications Ltd. Vs. DCIT [251 ITR 53) relied upon by the
appellant was distinguishable on facts and would not apply. The
Tribunal thereafter considered the applicability of the decision of
the Madras Bench in the case of Raj Television Network Ltd. It
held that the said decision need not be followed inasmuch as the
ITA Nos.131 & 134 of 2003 Page 15 of 74
Madras Bench did not have the advantage of considering variousarguments regarding process and other aspects of royalty as were
urged before it. The Tribunal found that the transponder was not
―equipment‖ and hence the payment made by the TV channels to
the appellant could not be regarded as one for use of equipment.
The Tribunal held that the appellant had not leased out any
equipment but had only made available the process that was
carried out in the transponder to its customers.
19. As regards the contention that even if the payment was to be
regarded as one falling within the definition of royalty,
nevertheless, as the TV channels were non residents, the income
could not be brought to tax by virtue of sub-clause (c) of Section
9(1)(vi), the Tribunal held that the TV channels were using the
services of the appellant for the purpose of their business, which
business was being carried on in India. The Tribunal took the view
that business is carried on at a place where some activity capable
of producing income is carried on. The source of income of the TV
channels were the Indian advertisers who made payment for
advertising their products during the course of the relay of the
programmes in India. The other source of revenue was the cable
operators who caught the signals and distributed them to the
public. According to the Tribunal, therefore, the essential activity
was to make available the programmes of the TV channels in India
and, therefore, they found that the TV channels would be carrying
on business in India. The Tribunal also held that in any event, the
source of the income of the TV channels would certainly be in
India. It accepted the appellant’s contention that the source did
ITA Nos.131 & 134 of 2003 Page 16 of 74
not refer to the persons who made the payment but referred tothe activity which gave rise to the income. According to the
Tribunal, it was the ultimate viewership of the programmes
transmitted by the TV channels which actually produced the
income and, hence, the source of income of the TV channels must
be regarded to be in India. The Tribunal held that the TV channels
could earn income in many forms such as receipts from
advertisers or from cable operators. The possibility of a channel
not earning income from any source in India also could not be
ruled out and in such an eventuality, the lease rentals earned by
the appellant from such TV channels could not be assessed to tax
in India under Section 9 (1)(vi). On this premise, the AO was been
directed to determine the income chargeable to tax after giving an
adequate opportunity of being heard to the appellant.
20. The Tribunal, thereafter, considered whether it would be open to
the Revenue to raise an additional ground to urge that the amount
received would be chargeable to tax under Section 9(1)(vii) as a
fee for technical service. The Tribunal held that it would be open
to either party viz., an assessee or the revenue to raise a legal
ground before the Tribunal for the first time and if the ground is
only a legal ground which does not require consideration of any
fresh facts, it was not only the right of the parties but the duty of
the Tribunal to admit the ground. According to the Tribunal, all
the facts necessary for adjudication of the issues as to whether
the amount received was chargeable to tax under Section 9(1)(vii)
were available on record and hence they considered it appropriate
to admit the additional ground. However, having admitted the
ITA Nos.131 & 134 of 2003 Page 17 of 74
additional ground, the Tribunal felt that it was not necessary todeal with the same inasmuch as it had already upheld the
contention that the amount was chargeable to tax in terms of
Section 9 (1)(vi).
21. The Tribunal, thereafter, proceeded to consider the manner of
computation of the income. The Tribunal held that the provisions
of Section 44D would be inapplicable and hence the appellant
would be entitled to a deduction of the expenditure incurred by it.
The Tribunal held that the income received by the appellant would
be chargeable to tax under the head ―Profits and gains of business
or profession‖. Therefore, the Tribunal held that the computation
would have to be made in accordance with Chapter IV D. The
Tribunal stated that if the starting point of the computation of the
total income was only the revenue relatable to India, then, only
the proportionate expenses relating to India should have been
deducted rather than deducting the expenses in total from the net
revenue relatable to India and thereafter apportioning the net
income of the South Beam and C Band to India. The Tribunal,
therefore, set aside the computation and directed that it would be
done de novo by the AO. The computation to be done would
involve two steps. First, the AO would have to calculate the gross
receipts relatable to India and thereafter deduct therefrom the
expenses in relation to income attributable to India.
22. Having said so, the Tribunal then dealt with the question as to
what was the depreciation that would be allowed to the appellant.
The Tribunal held that there was a difference between income
which was exempt from income-tax and income which was outside
ITA Nos.131 & 134 of 2003 Page 18 of 74
the scope of the charging provision. The Tribunal held thatdepreciation allowable to the appellant had to be apportioned.
However, the Tribunal accepted the contention of the appellant
that the depreciation would be allowable on the actual cost and
not on the written down value calculated on the basis of a notional
allowance of depreciation. The Tribunal also upheld the
contention of the appellant that the provisions of Section 44C
would not be attracted and hence the disallowing provisions
thereof would be inapplicable.
23. As regards the levy of interest under Sections 234A and 234B was
concerned, the Tribunal held that the appellant would be liable to
pay interest under Section 234A. However, with regard to levy of
interest under Section 234B, the Tribunal held that if the receipt of
income by the appellant was of such a nature on which tax was
deductible, then, the appellant would not be obliged to pay
advance tax and consequently there would be no liability to
interest. It, therefore, directed the AO to examine whether the
amount of tax deductible by the TV channels by virtue of the
provisions of Section 195 was equal to or more than the tax
payable by the appellant, and if so, then no liability to pay interest
under Section 234B would arise. If however, the tax deductible
was less than the tax payable by the appellant, the difference
would be considered for the purpose of levy of interest under
Section 234B.
Relevant Statutory Provisions:
ITA Nos.131 & 134 of 2003 Page 19 of 74
24. Chapter II of the Income Tax Act under the caption ―Basis of
Charge‖ enumerates various provisions on the basis on which
income of a person is exigible to tax in India. Section 4 is the
charging Section. Section 5 delineates the ‗scope of total income’.
Sub-section (1) thereof deals with total income earned by a
resident with which we are not concerned in the instant case, as
the appellant is admittedly a non-resident. It is the sub-section
(2), which is relevant for a non-resident, which reads as under:
“Section 5(2)
(2) Subject to the provisions of this Act, the total income of
any previous year of a person who is a non-resident includes
all income from whatever source derived which –(a) Is received or is deemed to be received in India in such
year by or on behalf of such person; or(b) Accrues or arises or is deemed to accrue or arise to
him in India during such year.Explanation 1 : Income accruing or arising outside India shall
not be deemed to be received in India within the meaning of
this section by reason only of the fact that it is taken into
account in a balance sheet prepared in India.Explanation 2 : For the removal of doubts, it is hereby
declared that income which has been included in the total
income of a person on the basis that it has accrued or arisen
or is deemed to have accrued or arisen to him shall not again
be so included on the basis that it is received or deemed to
be received by him in India.‖25. It is clear from the reading of the aforesaid provision that a non-
resident is liable to pay tax on the income derived by him, which is
received or deemed to be received in India or which accrues or
arises or is deemed to accrue or arise in India during the relevant
year. Thus, a non-resident is under an obligation to pay tax in
respect of income generated/earned by him in India. Section 9 of
the Act lays down the various circumstances under which income
would be deemed to accrue or arise in India. We are concerned
ITA Nos.131 & 134 of 2003 Page 20 of 74
herewith Clause (i), (vi) and (vii) therefore, we are extractingbelow only those portions of this provision and omitting other
portions of this lengthy Section:
“Section 9
(1) The following incomes shall be deemed to accrue or arise
in India :- (i) All income accruing or arising, whether directly
or indirectly, through or from any business connection in
India, or through or from any property in India, or through or
from any asset or source of income in India, or through the
transfer of a capital asset situate in India;Explanation [1] : For the purposes of this clause – (a) In the
case of a business of which all the operations are not carried
out in India, the income of the business deemed under this
clause to accrue or arise in India shall be only such part of
the income as is reasonably attributable to the operations
carried out 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 :ITA Nos.131 & 134 of 2003 Page 21 of 74
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 [2]:………………………….
(iii) The use of any patent, invention, model, design, secret
formula or process or trade mark or similar property;xxx xxx xxx
(vi) The rendering of any services in connection with the
activities referred to in sub-clauses (i) to (v);xxx xxx xxx
(vii) Income by way of fees for technical services payable by –
(a) The Government; or
(b) A person who is a resident, except where the fees are
payable in respect of services utilised in 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 fees are
payable in respect of services utilised in 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 any income by way of fees for technical services
payable in pursuance of an agreement made before the 1st
day of April, 1976, and approved by the Central
Government.‖RE: Areas of Controversy:
26. The facts noted above would demonstrate that the endeavour of
the Revenue is to bring the case of the appellant within the
mischief of all or any of the aforesaid clauses (i), (vi) and (vii) of
sub-section (1) of Section 9 of the Act in order to bring the
appellant within the tax net in India. For applicability of Clause (i),
ITA Nos.131 & 134 of 2003 Page 22 of 74
it is necessary to establish that the appellant has businessconnection in India. It is also necessary to establish that the
appellant was carrying out some operation in India from which the
income was earned in this country. Though the Tribunal has held
that the appellant has business connection in India, it has also
returned the findings that no operation was done by the appellant
in India and therefore, Section 9(1)(i) of the Act would have no
application. The appellant has challenged the finding of the
Tribunal holding that it had a business connection in India.
However, it was accepted at the bar that in case the finding of the
Tribunal that there was no operation in India is affirmed, issue as
to whether the appellant had business connection in India would
be of academic interest.
27. Insofar as income earned by the appellant from its customers in
India is concerned, the Tribunal has held that this would qualify as
‗royalty’ as defined in Explanation 2 to Section 9(1)(vi) of the Act.
28. As far as applicability of Clause (vii) of Section 9(1) of the Act is
concerned, though this was an issue raised by the Revenue for the
first time before the Tribunal, the Tribunal admitted the additional
ground as purely legal, at the same time the Tribunal also refused
to answer this issue. Basically, therefore, issues which arise for
consideration in this appeal concern Clauses (i), (vi) and (vii) of
sub-Section (1) of the Section 9 of the Act and we proceed to deal
with these issues in that order.
Re: Applicability of Section 9(1)(i):
ITA Nos.131 & 134 of 2003 Page 23 of 74
29. The Tribunal has held that even when the appellant has business
connection in India, no part of the appellant’s income was
chargeable to tax in India in terms of Section 9 (1) (i) as no
operations to earn the income were carried on in India. The
Revenue in its appeal has challenged this finding of the Tribunal.
On the other hand, the appellant is aggrieved against that part of
order, which holds its business connection in India and the
contention is that the appellant does not even have business
connection in India.
30. We have already reproduced the provision of Section 9(1)(i) of the
Act along with Explanation 1 thereof. In order to succeed, the
Revenue has to prove that the income has accrued or arisen,
whether directly or indirectly in India, i.e. (a) through or from any
business in India; or (b) through or from any property in India; or
(c) through or from any assets or source of income in India; and
(d) through or from transfer of capital assets situate in India. The
case is sought to be covered only on the premise that the income
to the appellant accrued or arisen through or from business
connection in India. Explanation 1 clarifies that if a business of
which all operations are not carried out in India, the income of the
business deemed under this clause to accrue or arise in India shall
be only such part of the income as is reasonably attributable to
the operations carried out in India. In order to bring the case
within this clause, it was stressed by the learned counsel for the
Revenue that the business of the appellant was to help its clients
who were the TV channels , in relaying their programmes from the
satellites in the footprint including India. It was explained that the
ITA Nos.131 & 134 of 2003 Page 24 of 74
TV channels were uplinking their programmes and after thereceipt of the signals at the satellite and processing through
various processes embedded in the transponders, the appellant
was making available the signals in the footprint area including
India; agreements were entered into with these clients by the
appellant to ensure that the programmes are made available in
India and it was the duty of the appellant to make available those
programmes in India. Therefore, urged the learned counsel, not
only there was a direct business connection of the appellant in
India, income which was received as a result of these operations
should be treated as received or accrued or arisen in India. It was
argued that Explanation 1 created a fiction by laying down a
deeming provision. It was also argued that the words ‗directly or
indirectly’ used in Clause (i) of sub-section (1) of Section 9 of the
Act clearly demonstrated that wider possible interpretation tot his
deeming provision was to be given. It was the endeavour of the
learned counsel to demonstrate that a causal link was established
to attract the deeming provision inasmuch as the appellant by
providing its services to the TV channels was making it possible for
those TV channels to relay their programmes in India and the
viewers watching those programmes as well as cable operator
located in India were making payments to the TV channels and
these TV channels were in turn out of those earnings were making
payments to the appellant with whom these TV channels were
directly connected.
31. On the other hand, Mr. S. Ganesh, learned Senior counsel
appearing for the appellant, submitted that the Tribunal with well
ITA Nos.131 & 134 of 2003 Page 25 of 74
supported reasoning had arrived at the conclusion that income didnot accrue or arise in India under Clause (i) of sub-section (1) of
Section 9 of the Act and heavily relied upon the same.
32. After considering the respective submissions, we are of the view
that the findings of the learned Tribunal on the non-applicability of
Section 9(1)(i) of the Act are proper, justified and legally
sustainable. We have already taken note of the Explanation (a) to
this sub-clause, which lays down that in the case of which all the
operations are not carried out in India, the income of the business
deemed under this clause to accrue or arise in India shall be only
such part of the income as is reasonably attributable to the
operations carried out in India. It, thus, clearly follows that
carrying out the operations in India, wholly or at least partly, is
sine qua non of the application of Clause (i) of sub-section (1) of
Section 9 of the Act. Can it be said that the appellant, under the
given circumstances, is doing some business in India, i.e., is there
any business act of the appellant which could be attributed to the
Indian territory? Under the agreement with TV channels, role
attributed to the appellant can be paraphrased in the following
steps:
(i) Programmes are uplinked by the TV channels
(admittedly not from India).
(ii) After receipt of the programmes at the satellite (at the
locations not situated in India airspace), these are
amplified through complicated process.
ITA Nos.131 & 134 of 2003 Page 26 of 74
(iii) The programmes so amplified are relayed in the
footprint area including India where the cable
operators catch the waves and pass them over to the
Indian population.
33. Accepted position is that the first two steps are not carried out in
India and the entire thrust of the Revenue is limited to the third
step and the argument is that the relaying of the programmes of
in India amounted to the operations carried out in India. Whether
this argument is sustainable? Answer is emphatic no! Merely
because the footprint area includes India and the programmers by
ultimate consumers/viewers are watching the programmes in
India, even when they are uplinked and relayed outside India,
would not mean that the appellant is carrying out its business
operations in India. The Tribunal has rightly emphasized the
expressions ―operations‖ and ―carried out in India‖ occurring in
Explanation (a) to hold that these expression signify that it was
necessary to establish that any part of the appellant’s operations
were carried out in India. No machinery or computer, etc. is
installed by the appellant in India through which the programmes
are reaching India. The process of amplifying and relaying the
programmes is performed in the satellite which is not situated in
the Indian airspace. Even the Tracking, Telemetering and Control
(TTC) operations are also performed outside Indian in Hong Kong.
No man, material or machinery or any combination thereof is used
by the appellant in the Indian territory. There is no contract or
ITA Nos.131 & 134 of 2003 Page 27 of 74
agreement between the appellant either with cable operators orviewers for reception of signals in India.
34. We, thus, hold that Section 9(1)(i) is not attracted in the present
case.
Re: Applicability of Section 9(1)(vi)
35. The Tribunal has covered the case of the assessee under this
provision and therefore, it is the subject matter of challenge in the
appeal filed by the appellant. To recapitulate briefly the process
of transmission of TV programmes, it starts with TV channels
(customers of the appellant) uplinking the signals containing the
TV programmes; thereafter the satellite receives the signals and
after amplifying and changing their frequency relays it down in
India and other countries where the cable operators catch the
signals and thereafter distribute them to the public. If any person
has got dish antenna, he can also catch the signals relayed from
these satellites. The role of the assessee in this cycle is that of
receiving the signals, amplifying them and after changing
frequency relaying them on the earth. It is for this service, the TV
channels make payment to the assessee. The learned CIT(A) held
that the payment so made by the customers was in the nature of
royalty liable to tax under Section 9(1)(vi) of the Act.
36. Royalty is given a specific meaning in Explanation 2 which has
already been extracted above. The Tribunal is also in agreement
with the conclusion of the CIT(A) and the reasons which led to
taking this view by the Tribunal have also been stated above.
ITA Nos.131 & 134 of 2003 Page 28 of 74
37. The basic submission of Mr. Ganesh was that the service charges
received by AsiaSat from its customers are not ―royalty‖ because
the said charges are not recovered for the use of any equipment
or process as such by the customer. AsiaSat renders services to
its customers by operating and using the transponders on the
satellite. It is emphasized that the satellites and their operations,
and the processes by which the satellites operate, are used only
by AsiaSat and not by AsiaSat’s customers, because AsiaSat has
complete control over the operation of the satellites and AsiaSat’s
customers have no control over them. The operation of the
transponder involves reception of a wireless signal at a particular
frequency, selection of the component equipment which combine
to form the transponder by means of commands through AsiaSat’s
Telemetry, (―TT&C‖), conversion of the signal to another
frequency, amplification of the signal and retransmission of the
same. There is no confidential or protected intellectual property
which is at all involved in any of these operations, and further, in
any event, the equipment and the process involved in the
operation thereof are used by AsiaSat and not by its customers.
As the customer does not utilize the said equipment or the process
involved in its operations, the charges paid by it to AsiaSat are not
covered by Clause (iii) of Explanation 2 to Section 9(1)(vi) of the
Act and therefore, the same are not ―royalty‖.
38. The learned Senior counsel referred to and gave his own analysis
to the Standard Agreement entered into by AsiaSat with its
customers, which is summarized below:
ITA Nos.131 & 134 of 2003 Page 29 of 74
Definition of ‗AsiaSat 1′ as per which, the appellant is the
operator of the satellites. Clause 3.2(ii) and (iii), Clause 3.4 as per
which, submitted the learned Senior counsel, not only the
appellant is the operator of the satellite and to obtain the requisite
licenses to operate the satellite and maintain the same, the
appellant remains in the control of this satellite and is in fact
prohibited from giving control of operation of satellite or any part
thereof to its customers.
39. He also referred to the ruling of the Authority for Advance Rulings
(AAR) in the case of ISRO Satellite Centre [ISACT] Vs.
Commissioner concerned DIT (Intl. Taxation) [307 ITR 59]
pointing out that the process of operation of a satellite and the
role played by the transponder therein and the control and
operation of the transponder have been discussed in detail in the
Ruling in the said judgment. It was argued that this judgment
gives the definition and explains the working of the transponder.
Every transponder receives a signal at a particular frequency and
retransmits it at a different frequency over the footprint area of
the satellite. This is the process employed in the transponder.
Further, the transponder may also amplify the signal before
retransmitting it. In the ISRO (supra) case, there was no
amplification of the signal, but the ruling of the AAR is not based
or founded on this fact as such. The learned counsel emphasized
that ratio of the aforesaid Ruling was that where transponder and
the process therein are actually utilized by the satellite operator
for rendering a service to the customer, it cannot be said that the
transponder or process employed therein are used by the
ITA Nos.131 & 134 of 2003 Page 30 of 74
customer. On this premise, it was argued that the question ofreceiving any royalty for ‗use’ of the transponder does not arise,
as there was no such user.
40. Reliance was also placed on the judgment of the Supreme Court in
the case of Bharat Sanchar Nigam Ltd. and Anr. Vs. Union of
India (UOI) and Ors. [282 ITR 273] wherein the Apex Court laid
down the crucial significance of holding the license required to
operate the equipment in question. It is only the person who holds
the requisite license as required by the statute, who can be said to
operate, use and control the equipment in question,. In the
present case, the license required by the statute for operating the
satellite and all its parts, components and systems is held only by
AsiaSat and not by its customers. Further, AsiaSat is prohibited
from parting with control of any part of the operations of the
satellite to its customers.
41. It was also argued that the essence of the agreement was required
to be seen and nomenclature as held by the Supreme Court in the
case of Puran Singh Sahini Vs. Sundari Bhagwandas
Kripalani & Ors. [(1991) 2 SCC 180]. On the reading of the
agreement with the customers, argued the learned Senior counsel,
it was clear that the appellant had not leased out the equipments
to the customers. On the contrary, the equipment was used by
the appellant as its owner only to provide and render services to
its customers, which was a vital distinction brought out clearly by
the Karnataka High Court in the case of Lakshmi Audio Visual
Inc. Vs. Assistant Commissioner of Commercial Taxes (Kar.)
[124 STC 426], which reads as under:
ITA Nos.131 & 134 of 2003 Page 31 of 74
―9. Thus if the transaction is one of leasing/hiring/letting
simpliciter under which the possession of the goods, i.e.,
effective and general control of the goods is to be given to
the customer and the customer 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. Commercial Tax
Officer.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 ; (hi) 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 further
transportation and delivery at destination.(ii) On the other hand, let us consider the case 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 anyITA Nos.131 & 134 of 2003 Page 32 of 74
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.‖42. Mr. Ganesh also submitted that the language of Section 9 1(vi)
was almost verbatim and identical to the language which also had
earlier been used in international tax treaties. In that international
tax treaties, the term ‗royalty’ came up for discussion before the
Courts in the following cases:
a) Commissioner of Income Tax Vs. Ahmedabad
Manufacturing and Calico Printing Co. [139 ITR 806
(Guj)].
b) Commissioner of Income Tax Vs. Vishakhapatnam
Port Trust [(1983) 144 ITR 146 (AP).
c) N.V. Philips Vs. Commissioner of Income Tax [172
ITR 521].
d) Commissioner of Income Tax Vs. Neyvali Lignite
Corporation Ltd. [243 ITR 459 (Mad.)].
43. It was, thus, urged that the same meaning to the term ‗royalty’
should be assigned while interpreting Section 9(1)(vi) as well. He
emphasized that one has to keep in mind that every item in
Clause (iii) of Explanation 2 to Section 9(1)(vi) refers to an item of
intellectual property. The doctrine of noscitur a sociis, therefore,
applies squarely to the interpretation of Clause (iii) of Explanation
2 to Section 9(1)(vi). This doctrine has been applied by this Court
in the case of Commissioner of Income Tax Vs. Bharti Cellular
Ltd. [175 Taxman 573] for the interpretation of Explanation 2 to
ITA Nos.131 & 134 of 2003 Page 33 of 74
Section 9(1)(vii). Therefore, the term ―process‖ occurring inClause (iii) of Explanation 2 to Section 9(1)(vi) means a process
which is an item of intellectual property. The process employed in
the transponder of a satellite, i.e., of changing the frequency and
amplifying the signal is not at all an item of intellectual property
because that process has been in the public domain for more than
half a century. The payment received by AsiaSat from its
customers is, therefore, not a payment for the use of the process
employed in the transponder any more than the payment made by
a customer using a chauffeured private taxi is for the use of the
internal combustion engine in the car.
44. It was further submitted that Section 9(1)(vi)(c) only applies where
the use of the process in question has taken place in India, just as
it was held by the Supreme Court in the case of Ishikawajima-
Harima Heavy Industries Ltd. Vs. DIT [(2007) 288 ITR 408
(SC)] that Fee for Technical Services is taxable in India under
Section 9(1)(vii)(c) only if such technical services are rendered in
India. The language of Section 9(1)(vi)(c) is similar to that of
Section 9(1)(vii)(c) and therefore, the ratio of Ishikawajima-
Harima Heavy Industries Ltd. (supra) case applies squarely to
the interpretation of Section 9(1)(vi)(c).
45. Mr. Sanjeev Sabharwal, learned counsel for the Revenue,
staunchly refuted the aforesaid contentions. His first submission
was that whether the appellant had control over the satellite or
not makes no difference having regard to the language of the
provision. He drew our attention to sub-section (3) of Explanation
ITA Nos.131 & 134 of 2003 Page 34 of 74
2 which according to him, merely states ‗use of standard facility’.His submission was that:
a) ‗Use’ in context means only ‗usage simpliciter’ and
nothing more;b) Legislature has ‗intentionally’ used the expression ‗use’
because in other sub clause of Explanation 2 to Section
9(1)(vi) wherever required expression used is ‗use or
right to use’;c) In view of the aforesaid distinction maintained
deliberately by the legislature, hence it is not the case of
‗causus omissus;d) Thus, according to the respondent it makes no difference
in what capacity the appellant allows someone to use the
process.46. His alternate submission was that even if the control is relevant,
the same was with the customer (whom the services were
provided). For this purpose, he referred to the definition of
transponder, which makes a difference between satellite as carrier
and the transponder. According to him, what is relevant is the
‗control of the transponder’ and not the satellite which merely is a
carrier, i.e., Nuclear Warhead has two parts, Carrier or rocket and
‗payload’ or ‗bomb’. Further to determine control, the agreement
needs to be examined. The agreement states:
1. Transponder no. 7H is identified and earmarked for the
assessee.
2. Page 284/285 gives the appellant not only exclusive lease
right but also right to sublease in clause 10 of course
safeguarding appellant’s commercial interests from
competitions.
ITA Nos.131 & 134 of 2003 Page 35 of 74
3. Page 189/290 gives exclusive right of enjoyment to
broadcaster. It even is entitled to damages in case the
broadcaster curtails its form of agreement of 12 years,
determining damages of ‗unutilized period of lease’.
4. Decision of this Court in the case of Antrix Satellite has
held it to be a case of control vested in the earth station
users.
5. Exhibit at 2/5 of the paper book provides:
a) Exclusive frequency to broadcaster.
b) Bandwidth for broadcaster including encryption code.
c) Broadcaster to define the uplinking programmes and
time.
d) Broadcaster to use the process embedded in the
transponder.
e) Broadcaster to define in which area/footprint the
satellite is to relay.
6. Physical control is neither necessary nor warranted in
present context. The control of satellite is with appellant.
However, more relevant and effective control of the ‗use’
of the transponder is with the broadcaster.
47. Mr. Sabharwal also joined the issue with the learned counsel on
the applicability of the judgment in the case of ISRO (supra). He
submitted that the appellant was not right in relying upon the
ISRO (supra) because of the following reasons:
a) ISRO’s case does not apply to the facts of the
present case.
ITA Nos.131 & 134 of 2003 Page 36 of 74
b) The difference lies in the type of the transponder
being used. There are two types of transponder
being used, i.e., Active or Passive.
c) The difference as recognized is that the process of
―Amplification‖ takes place in the communication
active satellite whereas not in the case of passive
satellite.
d) Authority of Advance Rulings was well aware of the
same while dealing with facts of the ISRO’s case
and even put a question to the assessee about the
same.
48. He also submitted that argument of the appellant that sub-clause
(iii) to Explanation 2 is limited to IPR as ‗process’ on the
application of the principle of noscitur a sociis was incorrect for the
following reasons:
a) That the work ‗process’ in sub clause (iii) refers to
the ‗process per se’ for the reason that ‗process’
being a generic word is preceded by ‗patent’ –
which would always include ‗process patent’
therefore in case patent is not protected, then over
a period of time becomes ‗process of general
application’ and thus no infringement is possible.
b) The distinction is not only maintained between
‗patent’ and process but patent is followed by
‗process’ and thus the legislature while using the
word process was aware of the restrictive meaning
ITA Nos.131 & 134 of 2003 Page 37 of 74
patent connotes and hence in income tax act it hasbeen given a ‗wider’ definition.
c) The usage of the wider word after restrictive word
would show the intention of the legislature is to
give it an extended meaning.
d) Lastly and more importantly, sub-clause (vi) to
Explanation 2 further extends its meaning by
stating that even ‗any services’ – all services which
are not IPR proper are included.
‗In connection with' - which would include any service ‗related to or in connection with' would also be included. In this regard, reference be made to HOME Solution's case. ‗Activities stand in Sub -clause (iii)' - Thus reiterating the difference further and extending it to include more than mere IPR.49. He also referred to Article 12-Royalties in the book ―Interpretation
and Application of Tax Treaties‖ by Ned Shelton. This article with
captioned ‗Royalties’ makes reference to satellite services and
states that:
(i) They were always included; and
ITA Nos.131 & 134 of 2003 Page 38 of 74
(ii) In fact for removal of doubts/to clarify Australian-
Canadian DTAA has been even amended.
Following passage from the book was relied for this purpose:
―An increasingly important issue is the treatment of
payments made for satellite services. There has been a
view in one particular country, for example, at least by tax
officials there, that payments by customers for satellite TV
services is a royalty. Separately, as an illustration of the
importance of this area, the definition of royalty in the
Australia – Canada Treaty (1980) has recently been
broadened. The following is a comment on the new
provision from the Australian tax authorities made in
January, 2002:―27. The definition of royalties has been expanded
in conformity with current Australian tax treaties
practice (Article 12). The definition now specifically
includes payments for the reception or use of
transmissions by satellite, cable, fiber optic or similar
technology (Article 12 (8), as well as reproduction
techniques in connection with television (Article 12
(3)). These were inserted in order to remove any
doubt as to whether they were covered by the
previous definition. The definition also specifically
excludes payments for the use or acquisition of
source code of software that is granted purely to
enable effective operation of the program by the
user.‖Para (3) can be said to deal with ‗know-how’. Payments
made purely for the use of know-how constitute royalties.
‗Purely’ in this context means that the provider of the
know-how does not provide additional services to the user.
If, for instance, the contract also involves technical
assistance, the character is mixed and the payment should
be split into a part considered a royalty (to which Article 12
applies) and a part considered a service payment (to which
Article 7 applies). Payments for services and advice given
by engineers, lawyers or accountants do not constitute
royalties, but are covered by Article 7. The same applies to
payments made for management and similar services. It
should be noted, however, that this is often ignored by
source countries; consequently, these countries
(particularly developing countries) frequently subject such
payments to a withholding tax on royalties.‖50. Mr. Sabharwal also argued that the ‗process’ in sub-clause (iii)
need not be ‗secret’ and following justification was sought to be
given for this argument:
(a) The ‗secret’ is prefixed to the word formula and not to
‗process’.
ITA Nos.131 & 134 of 2003 Page 39 of 74
(b) Sub-clause (iii) states ―a secret formula or process or
Trademark or similar property‖ and in case ―secret‖ is
to be prefixed to ―process‖ as well it needs to be also
prefixed to trademark and in such a case why would
anyone pay royalty for use of trademark.
(c) Importantly ‗patented process’ will be protected but
‗process’ if not registered will be widely used and
hence, there is no question of same being ‗secret also.
(d) Alternatively, even assuming for the argument that
the ‗process’ is IPR, the same merely gives right to
control the use. In present context it will mean that
―Access to process is restricted/checked or made
secure and thus process kept for intended
user”. However, the same has been used it being
“unknown process or unknown mysterious
entity”.
(e) IPR even otherwise, has to do with commercial
exploitation after recognition of right in process, which
is not same thing as it being ―secret‖. The exclusive
right has been recognized of assessee and broadcaster
is being given ‗use of process’ right through restrictive
access.
Thus, it was submitted that ‗process need not be secret’ but
should protect the commercial interest of the appellant, which is
protected in the agreement.
51. His next submission was that the payment of interest, royalty and
fee for Technical Services (FTS) need not have territorial nexus as
ITA Nos.131 & 134 of 2003 Page 40 of 74
the same is governed by ‗Source Rule’. He explained ‗SourceRule’ to mean that the country from which the services are
utilized/payments are made, would determine territorial
jurisdiction. Dealing with the judgment of the Supreme Court in
Ishikawajima-Harima Heavy Industries Ltd. (supra), he
submitted that it was held therein that country from which
services are ‗received’ will have jurisdiction. The said decision
was rendered on 06.01.2007 by the Supreme Court. According to
him, this principle is not applicable for following reasons:
(i) The Court was dealing the same in context of
Permanent Establishment for offshore services.
(ii) However, Explanation to Section 9 was brought about
immediately ―clarifying and for removal of doubt‖ that
‗source rule’ was always intended by introduction of
sub-section (v), (vi) and (vii) to Section 9(1) of the Act
with effect from 01.06.1976.
(iii) Importantly the said Explanation as clarification not
only brought about immediately in the said Finance
Bill of 2007 (normally introduced in February of every
year in Parliament).
(iv) The Memorandum of Understanding explaining the
said Explanation stated at the time of introduction of
the bill clearly referred to certain contrary view in
some ―decisions‖.
(v) The said source was further clarified by Finance Act,
2010 by introduction of Clause (ii) to the Explanations.
ITA Nos.131 & 134 of 2003 Page 41 of 74
In nutshell, he submitted that the territorial nexus is not relevant
in taxing the ‗satellite services’/’utilization of segmented
transponder capacity’ and is to fall in the tax jurisdiction of the
source country, i.e., where services are utilized in regard to use of
process embedded in the active transponder, [control whereof is
with the broadcaster] and in view of use of word ―process‖, which
does not have to be ‗secret’ but having restrictive access to be
commercially exploitable.
52. The entire controversy revolves round the interpretation which is
to be given to sub-clause (vi) of Section 9(1) of the Act. This sub-
clause makes income by way of royalty payable by certain persons
as chargeable to tax. These persons pay the ‗royalty’ made either
by the Government or a resident or a non-resident. We have to
keep in mind that Section 9 of the Act is a deeming provision and
if the situation specified therein exists, it is to be deemed that
income has accrued or arisen in India. The term ‗royalty’ is
assigned a specific meaning in Explanation 2 to sub-clause (vi) of
Section 9(1) of the Act. We have already pointed out above that in
this case, we are concerned with sub-clause (i), (iii) and (vi) of the
said Explanation. Though these sub-clauses have already been
reproduced above, for the sake of continuity in our discussion, we
take note of these sub-clause once again, which are as follows:
―(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;xxx xxx xxx
(iii) The use of any patent, invention, model, design,
secret formula or process or trade mark or similar
property;ITA Nos.131 & 134 of 2003 Page 42 of 74
xxx xxx xxx
(vi) The rendering of any services in connection with the
activities referred to in sub-clauses (i) to (v);‖53. Sub-clause (i) deals with the situation when the rights in the
intellectual property of the nature specified therein are
transferred. This transfer includes ‗the granting of a licence’ as
well. As per sub-clause (iii), even when the kind of intellectual
property therein is allowed to be used, consideration paid for use
thereof would qualify for my ‗royalty’. Sub-clause (vi) makes it
wider as payments made even when any services are rendered in
connection with activities referred to in sub-clauses (i) to (iv), (iva)
and (v), those payments are to be termed as ‗royalty’ for the
purpose of Section 9.
54. Having commented broadly upon the nature of ‗royalty’ specified
in the aforesaid provision and before we interpret the provisions
with reference to certain specific language used therein, we deem
it apposite to lay down the ground rules which are to be kept in
mind before undertaking the exercise of interpretative process.
(1) It is to be kept in mind that Section 9 of the Act is a
deeming provision and if the situation specified therein
exists, it is to be deemed that income has accrued or
arisen in India.
(2) Clause says that 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.
ITA Nos.131 & 134 of 2003 Page 43 of 74
(3) It is settled law that the words of a statute are firstunderstood in their natural, ordinary or popular sense
and phrases and sentences are construed according
their grammatical meaning unless that leads to some
absurdity or unless there is something in the context,
or in the object of the statute to suggest the contrary.
In a case if the language of the statute is not clear and
there is need to resort to aids of construction, such
aids can be either internal or external. Internal aids of
constructions are definitions, exceptions, explanations,
fictions, deeming provisions, headings, marginal notes,
preamble, provisos, punctuations, saving clauses, non
obstante clauses, etc. The external aids are
dictionaries, earlier Acts, history of legislation,
parliamentary history, parliamentary proceedings,
state of law as it existed when the law was passed, the
mischief sought to be suppressed and the remedy
sought to be advanced by the Act. Therefore, need
for these aids would arise only if some ambiguity is
found in the definition of term ‗royalty’ as appearing in
the aforesaid provision.
(4) As per Section 9(1)(vi) of the Act, the income by way
of royalty payable by the Government or a resident; or
a non-resident shall be deemed to accrue or arise in
India. The term royalty has been defined in
Explanation 2 to Section 9(1) (vi) of the Act. In the
case of Keshavji Ravji & Co. Vs. CIT [(1990) 183 ITR
ITA Nos.131 & 134 of 2003 Page 44 of 74
1 (SC), the Supreme Court said that an Explanationgenerally speaking, is intended to explain the meaning
of certain phrases and expressions contained in the
statutory provisions. There is no general theory as to
the effect and intendment of an Explanation except
that the purpose and intendment are determined by
its own words. An Explanation depending upon its own
language might supply or take away something from
the contents of a provision. It is also true that an
Explanation may be introduced by way of abundant
caution in order to clear any mental cobwebs
surrounding the meaning of the statutory provision
spun by interpretative errors and to place what
Legislature considers to be true meaning beyond any
controversy or doubt. In view of decision of the
Supreme Court in Keshavji Ravji & Co. (supra),
Explanation 2 has to be read as part and parcel of
Section 9 (1)(vi) of the Act.
(5) The Finance Act, 2007 inserted the following
Explanation to Section 9 with retrospective effect from
01.06.1976, which reads as under:
―Explanation – For the removal of doubts, it is
hereby declared that for the purposes of this
Section, where income is deemed to accrue or
arise in India under clause (v), (vi) and (vii) of
sub-section (1), such income shall be included
in the total income of the non-resident,
whether or not the non-resident has a
residence or place of business or business
connection in India.‖Further, by the Finance Act, 2010 with retrospective
effect from 01.06.1976, the Explanation inserted by
ITA Nos.131 & 134 of 2003 Page 45 of 74
the Finance Act, 2007 has been substituted by thefollowing Explanation:
―Explanation – For the removal of doubts, it is
hereby declared that for the purposes of this
Section, income of a non-resident shall be
deemed to accrue or arise in India under
Clause (v) or Clause (vii) or Clause (viii) of sub-
section (1) and shall be included in the total
income of the non-resident, whether or not, –(i) the non-resident has a residence or place of business or business connection in India; or(ii) the non-resident has rendered service in
India.‖From plain reading of the Explanation inserted with
effect from 01.06.1976 by the Finance Act, 2007 which
has been again substituted by the Finance Act, 2010
with retrospective effect from 01.06.1976, it is clear
that income of a non-resident shall be deemed to
accrue or arise in India under clause (v) or clause (vi)
or clause (vii) irrespective of the fact whether the non-
resident has a residence or a place of business or
business connection in India or the non-resident has
rendered services in India. Therefore, once the
consideration is received by non-resident for the
transfer or all or any rights including the granting of a
licence in respect of a patent, invention, model,
design, secret formula or process or similar property or
any copyright literary, artistic or scientific work, the
consideration received shall be deemed to accrue or
arise in India and will be taxable in India.
ITA Nos.131 & 134 of 2003 Page 46 of 74
(6) Section 90 of the Act provides relief from double
taxation and reads as under:
―90 (1) The Central Government may enter
into an agreement with the Government of any
country outside India – (a) For the granting of
relief in respect of income on which have been
paid both income-tax under this Act and
income-tax in that country, or income tax
chargeable under this Act and under the
corresponding law in force in that country to
promote mutual economic relations, trade and
investment, or(b) For the avoidance of double taxation of
income under this 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 this 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 this Act
and under the corresponding law in force in
that country, and may, by notification in the
Official Gazette, make such provisions as may
be necessary for implementing the agreement.(2) Where the Central Government has entered
into an agreement with the Government of any
country outside India under sub-section (1) 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.(3) Any term used but not defined in this Act
or in the agreement referred to in sub-Section
(1) shall, unless the context otherwise requires,
and is not inconsistent with the provisions of
this Act or the agreement, have the same
meaning as assigned to it in the notification
issued by the Central Government in the
Official Gazette in this behalf.Explanation – For the removal of doubts, it is
hereby declared that the charge of tax in
respect of a foreign company at a rate higher
than the rate at which a domestic company is
chargeable, shall not be regarded as less
fafourable charge or levy of tax in respect of
such foreign company.‖ITA Nos.131 & 134 of 2003 Page 47 of 74
(7) The four clauses of sub-section (1) lay down the scopeof power of Central Government to enter into an
agreement with another country. Clause (a)
contemplates situations where tax has already been
paid on the same income in both the countries and in
that case it empowers the Central Government to
grant relief in respect of such double taxation. Clause
(b) of Section 90 which is wider than clause (a)
provides that an agreement may be made for the
avoidance of double taxation of income under this act
and the corresponding laws enforced in that country.
Clause (c) and (d) essentially deal with the
agreements made for exchange of information,
investigation of cases and recovery of Income-tax.
The effect of an agreement made pursuant to the
Section 90 is that if no tax liability is imposed under
this Act, the question of resorting to agreement would
not arise. No provision of the agreement can fasten a
tax liability when the liability is not imposed by this
Act. If a tax liability is imposed by this Act, the
agreement may be resorted to for negativing or
reducing it. In case of difference between the
provisions of the Act and of an agreement under
Section 90, the provisions of the agreement shall
prevail over the provisions of the Act and can be
enforced by an appellate authority or the Court.
However, as provided by sub-section (2), the
ITA Nos.131 & 134 of 2003 Page 48 of 74
provisions of this Act will apply to assessee in theevent they are more beneficial to him. Where there is
no specific provision in the agreement, it is the basic
law i.e. the Income-tax Act which will govern the
taxation of income.
55. Keeping in view the aforesaid principles, we now embark upon the
interpretative process in defining the ambit and scope of term
‗royalty’ appearing in Explanation 2 to sub-clause (vi) of Section
9(1) of the Act. Sub-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 sub-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
first category, the rights are purchased which enable 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 Swadeshi Ranjan Sinha Vs. Hardev 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
ITA Nos.131 & 134 of 2003 Page 49 of 74
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 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 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 property is necessary.
56. As noticed above, the Tribunal has held that the appellant is
deriving income from lease of transponder capacity of its
satellites. The appellant is deriving income from lease of
transponder capacity of its satellites. The appellant is amplifying
and relaying the signals in the footprint area after having been
linked up by the TV channels. The essence of the agreement of
the TV channels with the appellant is to relay their programmes in
India. The responsibility of the appellant is to make available
programmes of the TV channels in India through transponders on
its satellite. The function of the satellite in the transmission chain
is to receive the modulator carrier that earth stations emitted as
uplinking, amplifying them and retransmitting them and downlink
for reception at the destination earth stations. The meaning of the
word ―process‖ being a series of action or steps taken in order to
ITA Nos.131 & 134 of 2003 Page 50 of 74
achieve a particular end, considering the role of the appellant inthe light of meaning of the term ‗process’, it is evident that the
particular end, viz., viewership by the public at large was achieved
only through the series of steps taken by receiving the uplinked
signals, amplifying them and relaying them after changing the
frequency in the footprint area including India. This is held that
the TV channels in entire cycle of relaying the programmes in
India were using the process provided by the assessee and,
therefore, it is liable to be taxed as royalty income.
57. We have to test the rationality of the aforesaid reasoning and
consider the attack thereupon by the appellants in their
arguments recorded above. Before that, we may take note of few
judgments relevant to the context. In the case of Commissioner
of Income Tax Vs. Datacons P. Ltd. [155 ITR 66 (Kar.)], the
company was engaged in processing the data supplied by its
customers by using IBM unit record machine computer. The
assessee received vouchers and statements of accounts from its
customers and converted them into balance sheets, stock
accounts, sales analyses etc. They were printed as per the
requirement of the customers. The Karnataka High Court held
that in all these activities, the assessee had to play an active role
by coordinating the activities and collecting the information. Such
activities amounted to processing of goods. In the case of NV
Philips Vs. Commissioner of Income Tax [172 ITR 521], the
assessee received the amount for providing specialized knowledge
of manufacturing particular commodity which included working
methods, manufacturing process including indications,
ITA Nos.131 & 134 of 2003 Page 51 of 74
instructions, specifications, standards and formulae, method ofanalysis and quality control. It was held that the payment for the
user of such specialized knowledge, though not protected by a
patent, was assessable as royalty. In the case of DCM Ltd. Vs.
Income Tax Officer, the issue related to transfer of
comprehensive technical information know-how and supply of
equipment. It was held that the collaboration agreement dealing
with the dispatch of one or more of its engineers, technologists to
visit the factory site of the assessee, train the factory personnel
and to commission the specified processes, would not create a
permanent establishment. Therefore, it was held that the
payments were not in the nature of ‗royalty’. In Modern Threads
(I) Ltd. Vs. DCIT, it was held that the payments were made in
installments to Italian company for supply of technical know-how
and also for supply of basic process engineering documentation
for designing, construction and operation of plant subject to their
liability on account of rectifying form, it was held that the amount
paid for supply of technical know-how and basic engineering
documentation for setting of the plant in India for manufacturing
of PTA was the business profit in the hands of Italian company in
the absence of permanent establishment in India.
58. In the light of our discussion explaining Explanation 2 to Section
9(1) of the Act, let us proceed to apply these principles on the
facts of the case. The starting point has to be the nature of
services provided by the appellant to its customers as per the
agreement arrived at between them. Keeping in view the
aforesaid operation of the satellites, we revert back to the
ITA Nos.131 & 134 of 2003 Page 52 of 74
agreement entered into between the appellant and its customers.It is clear from various clauses of the agreement (and noticed
above), the appellant is the operator of the satellites. It also
remains in the control of the satellite. It had not leased out the
equipments to the customers. On this basis, it is argued by the
appellant that the equipment is used by the appellant and it is
only providing and rendering services to its customers and not
allowing the customers to use the process. In the case of ISRO
(Supra), AAR has narrated in detail the process of the operation
of a satellite and the role played by the transponder therein.
59. Following features of the agreement entered into by the appellant
with its clients need to be highlighted at this stage:
(a) The appellant is a foreign company incorporated in
Hong Kong and carries business of providing satellite
business and broadcasting facilities.
(b) The clients with whom the appellant has entered into
agreement are not the residents of India.
(c) The appellant has launched its satellites in the orbit
footprint on which it is extended over four continents
including Asia and, thus, covers India.
(d) The agreement signed with the customers which are
TV channels, the appellant provides facility of
transponder capacity available on its satellite to
enable these TV channels to relay their signals. These
customers have their own relaying facilities, which are
situated outside India. From this facility, the signals
are beamed in space where they are received by a
ITA Nos.131 & 134 of 2003 Page 53 of 74
transponder located in the appellant satellite. Thetransponder receives the signal and on account of the
distance these signals have to travel, they are
required to be amplified. After amplification frequency
of signals are downlinked to facilitate the transmission
of signals. This is how the signals are received over
various parts of the earth spanning numerous
countries including India.
(e) The outcome, thus, would entirely depend upon the
question as to whether any ―process‖ is used by the
TV Channels and also whether a ―secret process‖ is
required to bring within the ambit of Explanation 2.
60. Once we keep in mind the aforesaid important aspects, it is not
difficult to find the answer to the question posed. In fact, we can
say that it is SO provided by the AAR in ISRO (supra). A close
scrutiny of the said ruling of the AAR would clearly reveal that
where the operator has entered into an agreement for lease of
transponder capacity and has not given any control over parts of
satellite/transponder, the provisions of sub-clause (vi) would not
apply. In the present case also, the appellant had merely given
access to a broadband with available in a transponder which can
be utilized for the purpose of transmitting the signals of the
customer. In that case, after taking note in depth, the operation
and the functioning of transponder, the AAR emphasized on the
fact that data sent by the telecast operator does not undergo any
change for improvement through the media of transponder.
ITA Nos.131 & 134 of 2003 Page 54 of 74
Following discussion from the said judgment needs to bereproduced:
―13. As IGL does not carry on any business in India
through P.E., as discussed towards the end, the main
contention of Revenue is that the ‗charges’ paid by the
applicant – ISRO under the terms of the agreement is in the
nature of consideration paid for the ‗use of’ or ‗right to use’
the scientific equipment within the meaning of Clause (b) of
Article 13(3) of the Treaty.14. The crucial question that needs to be addressed,
therefore, is whether the payment made to IGL under the
aforementioned contract constitutes consideration for the
use of or right to use equipment of IGL. To answer this
question, we have to discern the substance and essence of
the contract as revealed from the terms of the contract
document, the technical report and other facts furnished by
the applicant. The first Article in the contract makes it clear
that the payment is for the ―lease of’ navigation
transponder segment capacity‖. From the designated
transponder (L1 and L5) of Inmarsat satellite, this capacity
at a particular frequency is made available to the applicant
through INLUS (Navigation Land Uplink Station) which is set
up and operated by the applicant. The capacity is meant to
be used for the purpose of providing an augmentation to
global satellite navigation system. The capacity will be
utilized through data commands issued from the ground
station(INLUS). Undeniably, the applicant will not be able to
operate the transponder in the space but it will be
transmitting/ uplinking the augmented data to the
navigation transponder. Access to the transponder’s space
capacity is established through the applicant’s operations
at the ground station (INLUS) pursuant to which the
transponder transmits signals/data received from INLUS
from the geo-stationary orbits. The Inmarsat satellite
carries many transponders out of which the
transponder for navigation purposes will provide the
satellite based augmentation system signals in
space at two frequencies i.e. 1575.42 MHz (L1) and
1176.45 MHz (L5) which are accessed for the GAGAN
project undertaken by the applicant. It is also seen that the
navigation transponder which uplinks and downlinks the
data is a passive transponder unlike the
communication transponder.15. It will be relevant to know the connotation of the term
‗transponder’. In Mc Graw Hill’s Dictionary of Scientific and
Technical Terms, the meaning given is ―a transmitter-
receiver capable of accepting the challenge of an
interrogator and automatically transmitting an appropriate
reply‖. In Chamber’s Dictionary of Science and Technology,
‗transponder’ (communication), is defined as an equipment
forming part of a communications satellite, which receives
signals from a ground station at one frequency and re-ITA Nos.131 & 134 of 2003 Page 55 of 74
transmits them to another ground station or to domestic
satellite receivers at another frequency‖.16. It is clear that the applicant in the course of carrying
out its objectives and operations will not be using any
equipment of IGL satellite or the transponder. What the
applicant needs to do is to adjust or tune its system to
access the navigation transponder space segment capacity.
By earmarking a space segment capacity of the
transponder for use by the applicant, the applicant does not
get possession (actual or constructive) or control of the
equipment of IGL. The applicant and the end-users are
enabled to have the benefit of use of facility provided by
Inmarsat 4th generation satellite and the navigational
transponder it has. That is the objective of GAGAN Project.
The applicant does not use or operate any equipment of
IGL. The lease of space segment capacity related to L1 and
L5 transponder only means that a segment of the
navigational transponder though which the data passes is
allocated to the applicant so that it could be utilized for the
specific purpose of making available the augmented data
sent by the applicant through its ground station to the
users extensively. The substance of the contract is the
facility given to the applicant for the utilization of space
segment capacity of the transponder for transmitting the
augmented data as to the position of an object on land, air
or water so that the end user can have access to it through
SABS receiver. The use of capacity, as clarified by the
applicant involves the use of bandwidth, that is to say, a
particular bandwidth in the transponder meant exclusively
for navigational purposes is linked to the earth station
(INLUS). The expression ‗use of space segment capacity’ of
transponder has no reference to any operations performed
by means of the transponder. The use or operation of
transponder as such is not at all contemplated under the
Contract. What really happens is that the augmented
data sent by INLUS reaches the transponder and it is
transmitted back to the Earth and the same is
accessed by SBAS user receivers in the coverage
area. In response to a query, the applicant
specifically clarified that the transponder does not
perform any operation with reference to the data
uplinked and downlinked and “there is no on-board
data storage.‖61. It is worthwhile to note that the contention of the Department that
there was use of transponder by the applicant was specifically
rejected in the following terms:
―17. It is contended by the Revenue that in substance,
there is use of equipment i.e. transponder by the applicant.
The exclusive capacity of specific transponder is kept
entirely at the disposal of the applicant. The use ofITA Nos.131 & 134 of 2003 Page 56 of 74
transponder is ensured when it responds to the directions
sent through the ground station. Such directions, it is
stated, are akin to the operation of TV by remote control
apparatus. We find it difficult to accept this contention. 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
covered by Inmarsat satellite does not mean that the
control and operation of transponder is with the applicant.
Undoubtedly, the applicant does not operate the
transponder; it gets access to the navigation transponder
through the applicant’s own network/apparatus. The data
sent by the applicant does not undergo any change
or improvements through the media of transponder.
In essence, it amounts to the provision of a communication/
navigational link through a facility owned by IGL and
exclusively operated/controlled by it. The operation and
regulation of transponder is always with IGL. It is also
pertinent to notice that a navigation transponder
unlike a communication transponder is not an active
transponder in the sense it does not amplify. It is a
passive transponder, as pointed out by the
applicant. This is also a pointer that the applicant
does not use the equipment (transponder) as such.‖62. It is also clear from the above that the aspect of amplification of
data by the transponder is taken only as additional factor, but the
judgment is not entirely rested on that. This Ruling further
categorically demonstrates that in a case like this, services are
provided which is integral part of the satellite, remains under the
control of the satellite/transponder owner (like the appellant in this
case) and it does not vest with the telecast operator/TV channels.
63. Position is substantially the same in the present case as well. The
Tribunal has distinguished this judgment and has opined that it is
not applicable because of the reason that in ISRO (supra), there
was any amplification of the signal whereas in the present case,
signals are amplified. That, to our mind, would not make any
difference insofar as ultimate conclusion is concerned, inasmuch
as the ruling of the AAR is not founded on the aforesaid
consideration. It becomes manifest when we take note of the
ITA Nos.131 & 134 of 2003 Page 57 of 74
question posed by the AAR before answering the same. The AARexpressed this as under:
―The crucial question that needs to be addressed,
therefore, is whether the payment made to IGL under the
aforementioned contract constitutes consideration for the
use of or right to use equipment of IGL. To answer this
question, we have to discern the substance and essence of
the contract as revealed from the terms of the contract
document, the technical report and other facts furnished by
the applicant. ‖64. On the aforesaid poser, the AAR discussed the issue and held that
the transponder and the process therein are actually utilized for
the satellite use3r for rendering the services to the customer and
further that it cannot be said that the transponder or process
employed therein are used by the customer.
65. It needs to be emphasized that a satellite is not a mere carrier, nor
is the transponder something which is distinct and separable from
the satellite as such. It was explained that the transponder is in
fact an inseverable part of the satellite and cannot function
without the continuous support of various systems and
components of the satellite, including in particular:
(a) Electrical Power Generation by solar arrays and
Storage Battery of the satellite, which is common to
and supports multiple transponders on board the
satellite.
(b) Common input antenna for receiving signals from the
customers’ ground stations, which are shared by
multiple transponders.
(c) Common output antenna for retransmitting signals
back to the footprint area on earth, which are shared
by multiple transponders.
ITA Nos.131 & 134 of 2003 Page 58 of 74
(d) Satellite positioning system, including position
adjusting thrusters and the fuel storage and supply
system therefor in the satellite. It is this positioning
system which ensures that the location and the angle
of the satellite is such that it receives input signals
properly and retransmits the same to the exact
desired footprint area.
(e) Temperature control system in the satellite, i.e.,
heaters to ensure that the electronic components do
not cease to operate in conditions of extreme cold,
when the satellite is in the ―shadow‖.
(f) Telemetry, tracking and control system for the
purpose of ensuring that all the above mentioned
systems are monitored and their operations duly
controlled and appropriate adjustments made, as and
when required.
66. It was also not disputed that each transponder requires continuous
and sustained support of each of the above-mentioned systems of
the satellite without which it simply cannot function.
Consequently, it is entirely wrong to assume that a transponder is
a self-contained operating unit, the control and constructive
possession of which is or can be handed over by the satellite
operator to its customers. On the contrary, the transponder is
incapable of functioning on its own. In fact, the Tribunal has itself
demonstrated so in the order as is clear from the following:
―A bare perusal of this meaning reveals that equipment is
an instrument or tool which is capable of doing some job
independently or with the help of other tools. A part of a
equipment incapable of performing any activity in itselfITA Nos.131 & 134 of 2003 Page 59 of 74
cannot be termed as an equipment. We take an example of
scissors which has two blades. This scissor is n equipment
but when one blade is separated from the other blade, it
ceases to be an equipment. In other words, the blade in
isolation cannot be termed as an equipment. Reverting to
the facts of the present case, we find that the transponder
is not an equipment in itself On other words, it is not
capable of performing any activity when divorced from the
satellite. It was fairly conceded by the Ld. AR that the
transponder in itself without other parts of satellite is not
capable of performing any function. Rightly so because
satellite is not plotted at a fixed place. It rotates in the
same direction and speed as the earth. If it had been fixed
at a particular place or the speed or direction had been
different from that of earth, it could not have produced the
desired results. Transponder is part of satellite, which is
fixed in the satellite and is neither moving in itself nor
assisting the satellite to and the transponder, namely, a
part of it, playing howsoever important role, cannot be
termed as equipment.‖67. Even after stating so, the Tribunal did not take the aforesaid view
to its logical conclusion, viz., the process carried on in the
transponder in receiving signals and retransmitting the same, is
an inseparable part of the process of the satellite and that process
is utilized only by the appellant who is in control thereof. Whether
it is done with or without amplification of the signal would not
make any difference, in such a scenario.
68. We are inclined to agree with the argument of the learned Senior
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
ITA Nos.131 & 134 of 2003 Page 60 of 74
that against the decision of the AAR in ISRO (supra) case, SpecialLeave Petition was dismissed by the Supreme Court (see Puran
Singh Sahni Vs. Sundari Bhagwandas Kripalani & Ors.,
(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. Vs. Asstt. Commissioner of
Commercial Taxes (Kar.) [124 STC 426] in the following terms:
―9. Thus if the transaction is one of leasing/hiring/letting
simpliciter under which the possession of the goods, i.e.,
effective and general control of the goods is to be given to
the customer and the customer 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. Commercial Tax
Officer.Illustration :
(f) 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 theITA Nos.131 & 134 of 2003 Page 61 of 74
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 ; (hi) 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 further transportation and
delivery at destination.(ii) On the other hand, let us consider the case
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.‖70. Argument was addressed on the meaning which is assigned to
the term ―royalty‖ occurring in sub-clause (iii) of Explanation 2.
The learned counsel for the appellant had argued that the
doctrine of niscitur a sociis would apply and the process should be
treated as item of intellectual property. 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 TV channels. Moreover, no such purported use has taken
ITA Nos.131 & 134 of 2003 Page 62 of 74
place in India. It is stated at the cost of repetition that thetelecast 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 Ishikawaima-Harima Heavy Industries
Ltd. (supra). 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)
receiving, storage and regasification facility in Gujarat. The
contract specified the role and responsibility of each member of
the consortium and the consideration to be paid separately for
the respective work of each member. The appellant was to
develop, design, engineer, procure equipment, materials and
supplies to erect and construct storage tanks including marine
facility (jetty and island breakwater) for transmission and supply
of LNG to purchasers, to test and commission the facilities, etc.
The contract involved : (i) offshore supply, (ii) offshore services,
(iii) onshore supply, (iv) onshore services and (v) construction and
erection. The price for offshore supply and offshore services was
payable in US dollars, that for onshore supply and onshore
services and construction and erection partly in US dollars and
partly in Indian rupees. The payment for offshore supply of
equipment and materials supplied from outside India was
ITA Nos.131 & 134 of 2003 Page 63 of 74
received by the appellant by credit to a bank account in Tokyoand the property in the goods passed to Petronet on the high seas
outside India. Though the appellant unloaded the goods, cleared
them from Customs and transported them to the site, it was for
and on behalf of Petronet and the expenditure including the
customs duty was reimbursed to it. The price of offshore services
for design and engineering including detailed engineering in
relation to the supplies, services and construction and erection
and the cost of any other services to be rendered from outside
India, was also paid in US dollars in Tokyo. On these facts the
appellant applied to the Authority for Advance Rulings (Income
Tax) for a ruling on the following points:
(a) Whether the amounts received/receivable by the
appellant from Petronet for offshore supply of
equipment, materials, etc., were liable to tax in India
under the provisions of the Income tax Act, 1961, and
the Double Taxation Avoidance Convention between
Indian and Japan;
(b) Whether the amounts received/receivable form
Petronet for offshore services were chargeable to tax
in India under the Act and the Convention; and
(c) Would the appellant be able to claim deduction for
expenses incurred in computing the income from
offshore services.
The Authority ruled:
(i) That though property in the goods passed to Petronet
while the goods were on the high seas, and insofar as
ITA Nos.131 & 134 of 2003 Page 64 of 74
the activities of the appellant for taking delivery of thegoods 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 with
respect to Taxes on Income between India and Japan
read with paragraph 6 of the Protocol supply of
equipment or machinery (sale of which was completed
around, the order having been placed directly by the
ITA Nos.131 & 134 of 2003 Page 65 of 74
overseas office of the enterprise) would be within themeaning of the phrase ―directly or indirectly attributable
to that permanent establishment‖ and, therefore, so
much of the amount received or receivable by the
appellant as was directly or indirectly attributable to the
permanent establishment as postulated in paragraph 6
of the Protocol would be taxable in India. The price of
the offshore services would be deemed to accrue or
arise under Section 9(1)(vii) of the Income Tax Act,
1961. And inasmuch as fees for technical services were
specifically provided in Article 12 of the Convention,
they would not fall under Article 7. Therefore, the price
of the offshore services was taxable in India under the
Act as well as the Convention.
(iii) That, however, in view of Section 115A(1)(b)(B) of the
Act and Article 12(2) of the Convention, tax was payable
at the fixed rate of 20 per cent of the gross amount of
fees for technical services and the applicant would not
be able to claim any deduction from the amount.
71. In that case, the appellant approached the Supreme Court
challenging the aforesaid judgment of the AAR. The Supreme
Court reversed the decision of the AAR and in the process, inter
alia, held as under:
―(i) That Section 9 of the Income tax Act, 1961, raises a
legal fiction; but, having regard to the contextual
interpretation and in view of the fact that the court is
dealing with a taxation stature, the legal fiction must
be construed having regard to the object it seeks to
achieve. The legal fiction created under Section 9
must also be read having regard to the other
provisions thereof.ITA Nos.131 & 134 of 2003 Page 66 of 74
(ii) That the second sentence of Article 7(1) which
allowed the State of the permanent establishment to
tax business profits, but only so much of them as
was attributable to the permanent establishment
excluded the applicability of the principle that where
there was a permanent establishment, the State of
the permanent establishment should be allowed to
tax all income derived by the enterprise from sources
in the State irrespective of whether or not such
income was economically connected with the
permanent establishment. The State of the
permanent establishment was allowed to tax
only those profits which were economically
attributable to the permanent establishment,
i.e., those which resulted from the permanent
establishment’s activities, which were
economically from the business carried on by
the permanent establishment. In this case, the
permanent establishment’s non-involvement in the
transaction of offshore supply, excluded it from being
a part of the cause of the income itself and thus
there was no business connection.(iii) That for attracting the tax there had to be
some activities through the permanent
establishment. If income arose without any
activity of the permanent establishment, even
under the Convention the taxation liability in
respect of overseas services would not arise in
India. Section 9 spelled out the extent to which the
income of a non-resident would be liable to tax in
India. Section 9 had a direct territorial nexus. Relief
under a Double Taxation Avoidance Treaty, having
regard to the provisions contained in Section 90(2),
would arise only in the event taxable income of the
assessee arose in one Contracting State on the basis
of accrual of income in another Contracting State on
the basis of resident. So far as accrual of income in
India was concerned, taxability must be read in
terms of Section 4(2) read with Section 9, whereupon
the question of seeking assessment of such income
in India on the basis of the Double Taxation Treaty
would arise. Paragraph 6 of the Protocol to the
Convention was not applicable, because, for the
profits to be ―attributable directly or indirectly‖, the
permanent establishment must be involved in the
activity giving rise to the profits.(iv) That where different severable parts of a composite
contract were performed in different places, as in
this case, the principle of apportionment could be
applied to determine which fiscal jurisdiction could
tax that particular part of the transaction. This
principle helped determine where the territorial
jurisdiction of a particular State lay and to determine
its capacity to tax on event. Applying it to composite
transactions which had some operations in one
territory and some in the other, was essential to
determine the taxability of various operations. TheITA Nos.131 & 134 of 2003 Page 67 of 74
concepts of profits of business connection was
relevant for the purpose of application of
Section 9, the concept of permanent
establishment was relevant for assessing the
income of a non-resident under the
Convention.(v) That in this case the entire transaction was
completed on the high seas and, therefore, the
profits on sale did not arise in India. Once
excluded from the scope of taxation under the
Income – tax Act application of the Double
Taxation Avoidance Treaty would not arise.(vi) That, in relation to offshore services, Section
9(1)(vii)(c ) required two conditions to be met: to be
taxable in India the services which were the source
for the income sought to be taxed had to be
rendered in India as well as utilized in India.(vii) That whatever was payable by a resident to a non-
resident by way of technical fees would not always
come within the purview of Section 9(1)(vii). It must
have sufficient territorial nexus with India so as to
furnish a basis for imposition of tax.(viii) That even in relation to such income, viz., income
from offshore services, the provisions of Article 7 of
the Convention would be applicable, as services
rendered outside India would have nothing to
do with the permanent establishment in India.
Thus, if any services had been rendered by the head
office of the appellant outside India, only because
they were connected with the permanent
establishment, even in relation to the principle of
apportionment would apply.‖ (emphasis
supplied)72. The Tribunal has made an attempt to trace the fund flow and
observed that since the end consumers, i.e., persons watching TV
in India are paying the amounts to the cable operators who in turn
are paying the same to the TV channels, the flow of fund is traced
to India. That is a far-fetched ground to rope in the appellant in
the taxation net. The Tribunal has glossed over an important fact
that the money which is received from the cable operators by the
telecast operators is treated as income by these telecast operators
which has accrued in India and they have offered and paid tax.
ITA Nos.131 & 134 of 2003 Page 68 of 74
Thus, the income which is generated in India has been dulysubjected to tax in India. It is the payment which is made by the
telecast operators who are situated abroad to the appellant which
is also a non-resident, i.e., sought to be brought within the tax net.
73. For the aforesaid reasons, it is difficult to accept such far-fetched
reasoning with no causal connection.
74. 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 Cooperation 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 DTAA 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 DTAA and particularly,
referred to the following amendment proposed by OECD to its
commentary on Article 12, which reads as under:
―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 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 ofITA Nos.131 & 134 of 2003 Page 69 of 74
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 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 frequent, transaction would be
where the owner of the satellite leases it to another party
so that the latter may operate it and either use it for its
own purposes or offer its data transmission capacity to
third parties. In such a case, the payment made by the
satellite operator to the satellite owner could well be
considered as a payment for the leasing of industrial,
commercial or scientific equipment. Similar considerations
apply to payments made to lease or purchase the capacity
of cables for the transmission of electrical power or
communities (e.g. through a contract granting an
indefeasible right of use of such capacity) or pipelines (e.g.
for the transportation of gas or oil).‖75. 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 DTC
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. ‖76. 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 payer.‖ITA Nos.131 & 134 of 2003 Page 70 of 74
77. The Tribunal has discarded the aforesaid commentary of OECD as
well as Klaus Vogel only on the ground that it is not safe to rely
upon the same. However, what is ignored is that when the
technical terms used in the DTAA are the same which appear in
Section 9(1)(vi), for better understanding all these very terms,
OECD commentary can always be relied upon. The Apex Court
has emphasized so in number of judgments clearly holding that
the well-settled internationally accepted meaning and
interpretation placed on identical or similar terms employed in
various DTAAs should be followed by the Courts in India when it
comes to construing similar terms occurring in the Indian Income
Tax Act. We may reproduce the following passage from the
judgment of the Court in the case of Union of India and Another
Vs. Azadi Bachao Andolan and Another, [(2003) 263 ITR
706] in the following words:
85. In our view, the contention of the respondents proceeds
on the fallacious premise that liability to taxation is the
same as payment of tax. Liability to taxation is a legal
situation; payment of tax is a fiscal fact. For the purpose of
application of Article 4 of the DTAC, what is relevant is the
legal situation, namely, liability to taxation, and not the
fiscal fact of actual payment of tax. If this were not so, the
DTAC would not have used the words liable to taxation, but
would have used some appropriate words like pays tax. On
the language of the DTAC, it is not possible to accept the
contention of the respondents that offshore companies
incorporated and registered under MOBA are not liable to
taxation under the Mauritius Income Tax Act; nor is it
possible to accept the contention that such companies
would not be resident in Mauritius within the meaning of
Article 3 read with Article 4 of the DTAC.86. There is a further reason in support of our view. The
expression liable to taxation has been adopted from the
Organisation for Economic Co-operation and Development
Council (OECD) Model Convention 1977. The OECD
commentary on article 4, defining resident, says :
“Conventions for the avoidance of double taxation do not
normally concern themselves with the domestic laws of the
Contracting States laying down the conditions under whichITA Nos.131 & 134 of 2003 Page 71 of 74
a person is to be treated fiscally as “resident” and,
consequently, is fully liable to tax in that State”. The
expression used is liable to tax therein, by reasons of
various factors. This definition has been carried over even
in Article 4 dealing with resident in the OECD Model
Convention 1992.87. In A Manual on the OECD Model Tax Convention on
Income and On Capital, at paragraph 4B.05, while
commenting on Article 4 of the OECD Double Tax
Convention, Philip Baker points out that the phrase liable to
tax used in the first sentence of Article 4.1 of the Model
Convention has raised a number of issues, and observes :“It seems clear that a person does not have to be
actually paying tax to be “liable to tax” otherwise
a person who had deductible losses or
allowances, which reduced his tax bill to zero
would find himself unable to enjoy the benefits of
the convention. It also seems clear that a person
who would otherwise be subject to
comprehensive taxing but who enjoys a specific
exemption from tax is nevertheless liable to tax, if
the exemption were repealed, or the person no
longer qualified for the exemption, the person
would be liable to comprehensive taxation.”
78. There are judgments of other High Courts also to the same effect.
These are as under:
(a) Commissioner of Income Tax Vs. Ahmedabad
Manufacturing and Calico Printing Co., [139 ITR
806 (Guj.)] at Pages 820-822.
(b) Commissioner of Income Tax Vs.
Vishakhapatnam Port Trust [(1983) 144 ITR 146
(AP)] at pages 156-157.
(c) N.V. Philips Vs. Commissioner of Income Tax
[172 ITR 521] at pages 527 & 538-539.
79. For the aforesaid reasons, we are unable to subscribe to the view
taken by the Tribunal in the impugned judgment on the
interpretation of Section 9(1) (vi) of the Act. We, thus, answer
ITA Nos.131 & 134 of 2003 Page 72 of 74
Question No. (3) in favour of the assessee and against the
Revenue and set aside the order of the Tribunal on this aspect.
Re: Applicability of Section 9(1)(vii):
80. It was for the first time that the Revenue argued before the
Tribunal that income of the appellant was taxable under Section
9(1)(vii) of the Act as well. The appellant had objected to the
admission of this ground. The Tribunal brushed aside this
objection and admitted the ground. At the same time, the
Tribunal did not decide the issue as the income of the assessee is
held taxable under Section 9(1)(vi) of the Act. It is for this reason
both the assessee and the Revenue have challenged the order of
the Tribunal whereas the appellant states that the Tribunal erred
in admitting this ground, the Revenue pleads that the Tribunal
erred in not deciding the issue even after admission. Insofar as
the objection of the appellant is concerned, we are of the opinion
that it has no merit. The Tribunal rightly held that the issue raised
was purely legal, which did not require consideration of any fresh
facts, as all necessary facts were adjudication of the issue as to
whether the amount received was chargeable to tax under Section
9(1)(vii) were available on record. Insofar as the issue on merit is
concerned, interestingly no arguments were advanced by the
learned counsel for the Revenue. The ground was admitted at the
instance of the Revenue. Further specifically, question of law was
raised and appeal admitted on that ground as to whether the
Tribunal erred in law in not deciding the issue. In spite thereof,
during arguments, this aspect on merits was not touched,
therefore, we cannot accept the submission of the Revenue for
ITA Nos.131 & 134 of 2003 Page 73 of 74
covering the case under Section 9(1)(vii) of the Act. Presuming,
form the aforesaid conduct, the case is not sought to be covered
under this Section.
81. As a result, the appeal preferred by the assessee is allowed and
the judgment of the Tribunal is set aside and the appeal of the
Revenue is dismissed.
(A.K. SIKRI)
JUDGE
(REVA KHETRAPAL)
JUDGE
JANUARY 31, 2011
pmc
ITA Nos.131 & 134 of 2003 Page 74 of 74