Payments of transponder hire charges to foreign company by Indian Company is Royalty

CASE LAWS DETAILS

DECIDED BY: ITAT, BENCH `A’ CHENNAI,

IN THE CASE OF: Asia net Communications Ltd. Vs DCIT, APPEAL NO: ITA No. 1657/Mds./2002, DECIDED ON: December 11, 2009

ORDER

These are cross appeals filed by the assessee and revenue respectively for Assessment Year 1995- 96.

2. Revenue’s appeal is taken up first. Grounds taken by revenue read as under:

1. The ld. CIT(A) has erred in deleting the addition made viz. Rs. 20,62,32,621/- u/s 40(a)(i) of the Income-tax Act, 1961 [for short, the Act].

2. The ld. CIT(A) has erred in holding that the payment of transponder hire charges made by the assessee on which no tax has been deducted does not come within the purview of royalty fee in which case tax is required to be deducted.

3. The ld. CIT(A) failed to note that the charges paid to two foreign companies are covered by the provisions of section 5(2) r.w.s. 9(1)(vi) of the Act and the assessee company.

4. The Tribunal order relied on by the ld. CIT(A) in the case of M/s Raj Television Net Works Ltd has not been accepted by the department.

5. For these and other grounds that may be adduced at the time of hearing it is prayed that the order of the ld. CIT(A) may be set aside and that of Assessing Officer restored.”

3. Short facts apropos are that assessee engaged in the business of TV broadcasting and software development, filed a return of income showing loss of Rs. 24,60,840/- which was processed u/s 143(1)(a) of the Act by making prima facie adjustment through dis allowance of development expenses resulting in an assessed loss of Rs.19,70,012/-. Subsequently, the case was selected for scrutiny and assessment later completed u/s 143(3) of the Act and loss determined at Rs. 4,85,641/-. This order was set aside by ld. CIT(A) invoking powers u/s 263 of the Act, for, according to him, a sum of Rs. 20,62,23,621/- which was allowed to assessee as ‘Transponder Hire Charges’ ought to have been disallowed u/s 40(a)(i) of the Act, tax having not been deducted tax at source therefrom, as per section 195 of the Act. in the re-assessment, pursuant to the order of ld. CIT u/s 263 of the Act, assessee was requested to give details regarding transponder hire charges paid. Based on such details, Assessing Officer was of the opinion that transponder hire charges paid to two companies were covered by section 5(2) r.w.s. 9(1)(vi) of the Act. Therefore, according to him, assessee ought have deducted tax at source, before effecting payments, which it had failed to do. Assessing Officer noted that in so far as payments of Rs. 19,24,97,790/- made to M/s Menon Ltd., U.K., no tax was deducted and in so far as a sum of Rs. 3,08,79,261/- paid to M/s Rimsat, U.S.A. tax was deducted only at 11.11% against 20% which was deductible. Assessing Officer therefore put the assessee on notice that he was proposing disallowance on such sums prorata. Assessee’s reply was that such payments were not royalty nor technical services, but only hiring charges paid to foreign companies, which had no permanent establishment in India. Therefore, according to him, sec. 40(a)(i) of the Act was not attracted. Assessing Officer was, however, not impressed. According to him, such payments were nothing but royalty in view of Explanation 2 to section 9(1)(vi) of the Act. Assessing Officer was of the opinion that foreign companies were providing scientific knowledge, experience or skill in the field of satellite communication to the assessee company and hence fully covered by the definition of ‘royalty’ as given in Explanation 2 to section 9(1)(vi) of the Act. Vis-a-vis assessee’s argument that foreign companies were not having a PE in India, Assessing Officer noted that the utilisation of transponder and up linking services were integral part of assessee’s business, and services of the foreign companies were utilised in Indian soil. According to him, the payments made to the foreign companies, were income accruing to such companies in India only. Vis-a-vis assessee’s submission that services rendered by foreign companies were entirely outside India, Assessing Officer’s opinion was that there was exploitation of services in India and therefore, a vicarious liability cast on assessee, for deducting of tax at source. Again, according to Assessing Officer, fees for technical services paid by an Indian resident for services rendered anywhere in the world would be liable to tax in India and there was no necessity for having a business connection. Thus he held that assessee had not deducted tax at source which was statutorily deductible and, therefore, disallowed the following payments u/s 40(a)(i) of the Act:

4. Before the ld. CIT(A), submission of the assessee was that Additional Commissioner of I.T. had given instructions u/s 144A of the Act to the Assessing Officer for completing the assessment which was set aside earlier by ld. CIT(A) invoking powers u/s 263 of the Act. Line of arguments taken by assessee were almost same as taken before Assessing Officer, and could be summarised as under:

a. recipients were not residents of India.

b. income of the recipients never accrued in India nor was received in India and therefore, it could not be taxed in India.

c. recipients had not performed any activity in India and the transponders were located outside India ruling out any accrual of income to such recipients u/s 5(2) of the Act.

d. none of the assets or services of recipients were located in India.

e. payments paid by assessee would not fall within definition of royalty nor fees for technical services as given u/s 9(1)(vi) of the Act.

5. When the above submissions were put to concerned Assessing Officer, following comments were given by her to the ld. CIT(A):

a. for determining the place of accrual, the statutory test is not place where services were being rendered, but places where services were utilised. Here the services were undoubtedly used by assessee in India.

b. decision of Sky cell Communication Ltd. 251 ITR 53, of Honourable Jurisdictional High Court relied on by the assessee was misplaced since it was a case of use of satellite services by retail users whereas in case of the assessee, agreements entered with respective parties showed that it was for work and services.

c. even if assessee’s payments were merely for having equipment, these were not borne out of agreements entered by assessee, especially so, vis a vis agreement entered with M/s Menon Ltd., U.K., and therefore its contention that TDS was not deductible had to be rejected.

6. Ld. CIT(A), after going through the rival submissions was of the opinion that the case of assessee was similar in facts to that in the decision of this Bench in the case of ITO Vs. Raj Television Net Works Ltd in ITA Nos. 1827 and 1828/Mds/1998. According to him, decision in the case of Raj Television Net Works Ltd. clearly brought out that payment for transponder hire would not fall within the definition of royalty or fees for technical services as provided u/s 9(1) of the Act. Hence, according to him, assessee was not liable to deduct tax at source on such payments. In this view of the matter, he was of the opinion that the rigor of section 40(a)(i) of the Act was not attracted and dis allowances made were not warranted.

7. Now when the matter came up before us, ld. D.R. submitted that the issue is now covered in favour of the revenue by the decision of the Special Bench in the case of New Skies Satellite& Others vs. ACIT [121 ITD 1] According to him as per this decision where telecasting companies uplink the desired images/ data and down link the same in desired areas, which, inter alia, covers Indian territory also, there is a ‘process’ involved and such process fell within the scope of the term “royalty”, since the process was not necessarily to be a secret one. According to him, assessee was using a “process” in the satellites as per the agreements with the respective parties and therefore, payments made for use of such process was very much “royalty” coming within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi) of the Act as also within the meaning of clause (vi) of Explanation 2 of section 9(1)(vi) of the Act. As per the Ld. CIT(A), assessee having not made deduction of tax at source, section u/s 40(a)(i) of the Act was rightly applied by Assessing Officer. In his view, the decision of Special Bench brought to ‘nought’ the effect of the order in Raj Television Net Works Ltd [supra] and hence reliance on the latter decision placed by ld. CIT(A) was incorrect.

8. In reply to above submissions, ld. A.R. first argued that admittedly that there were two payments one to M/s Rimsat, U.S.A. and the other to M/s Menon Ltd., U.K. According to him, even if it was presumed that the law was settled against the assessee in view of decision of Special Bench in New Skies Satellites (supra) as of now, it would apply only to hire charges paid to M/s Rimsat , U.S.A. According to him, vis-a-vis payment made to M/s Menon Ltd., U.K., that company was not having any transponder in its ownership or possession but had only agreed to hire the services of Russian Satellite for use of the assessee. Therefore, it was submitted that payments made to M/s Menon Ltd., U.K. would not be royalty or technical services and decision of Special Bench in New Skies Satellites [supra] would not apply. On the other hand, according to him, the decision of the coordinate Bench in Raj Television Net Works Ltd. [supra] squarely applied here. He called the attention of the Bench to page 4 of the order under section 144A of the Additional Commissioner wherein the scope of work agreed by M/s Menon Ltd., U.K. was elucidated. According to him, it was clear therefrom that the said company was not having any transponder of its own, but was availing the services of Ekran Satellite which was under Russian ownership. Drawing parallel from the case of Raj Television Net Works Ltd [supra]- of the co-ordinate Bench, ld. counsel submitted that there also, payments were made to a company not having any transponder in its ownership and it was for this reason the co-ordinate Bench held such payments not to be royalty or technical services. According to him, sec. 40(a)(i) of the Act would not be applicable, since payment made by assessee to M/s Menon Ltd., UK, was, one on which tax was not deductible under Chapter XVIIB of the Act. According to him, to be brought within the rigour of the said section, not only sums should be payable outside India, amounts covered in such payments should be one on which tax was statutorily required to be deducted under Chapter XVIIB of the Act. Ld. counsel further submitted that payments made by the assessee to M/s Menon Ltd., U.K. being neither technical services nor royalty nor any other sum chargeable under the Act, assessee was not obliged to deduct tax at source. Ld. counsel, then relying on the decision of the Karnataka High Court in the case of Jindal Thermal Power Company Pvt. Ltd. Vs. DCIT 182 Taxman 252 argued that, even if the services rendered were considered to be technical in nature, to fall within the realm of Explanation to section 9(1)(vi) of the Act, such services or at least a part thereof had to be rendered in India. According to him, if such services were rendered outside India, remuneration paid thereof would not attract any tax liability. For the proposition that Explanation to sub-section (2) of section 9 inserted by Finance Act, 2007 w.r.e.f 1.6.1976 would not do away with the criteria of residence or place of business, or business connection, ld. counsel relied on the decision of the Karnataka High Court in the case of Jindal Thermal Power Company Pvt. Ltd. (supra). For the proposition that in order to bring a service within the definition of technical services rendering of service in India was essential, he relied on the decision of Honourable Apex Court in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT 288 ITR 408. Therefore, according to him, at least vis-a-vis payments to M/s Menon Ltd., U.K., these were neither technical services nor royalty and hence question of deduction of tax therefrom was ruled out. Ld. counsel then submitted that sec. 40(a)(i) of the Act was triggered only when a payment is made to a non resident on which tax has not been deducted or paid under Chapter XVIIB of the Act and therefore, according to him, there should be a failure envisaged under Chapter XVIIB of the Act for triggering the application of section u/s 40(a)(i) of the Act. Relying on section 195 of the Act. ld. counsel submitted that sums paid to M/s Menon Ltd., U.K. was not chargeable under the provisions of the Act and therefore, assessee was not liable to make any deduction of tax at source. Placing reliance on a Special Bench decision in the case of Mahindra & Mahindra Vs. DCIT [313 ITR [AT] 263], he submitted that an assessee cannot be treated as one in default, if recipient was not chargeable to tax under the Act. Again referring to section 201(1) of the Act, he submitted that an assessee can be treated as assessee in default only when payee is chargeable to tax. Thus according to him, prerequisite condition for application of section 195 and 201 was that amount paid should be chargeable to tax in the hands of the non-resident recipients. In this case, according to him, payments received by M/s Menon Ltd., U.K. neither being royalty nor technical services, was not chargeable to tax. He placed on record an intimation u/s 143(1)(a) of the Act relating to M/s Menon Ltd., U.K. for Assessment Year 2000-01 wherein tax deducted at sources was refunded to the said company. According to him, this amply proved that revenue never considered such receipts in the hands of M/s Menon Ltd., U.K. as taxable receipts According to him, when eventual recipients had no liability for paying tax under the Indian Income-tax, the payer was not under any obligation to deduct tax. Reliance was also placed on Honourable Apex Court decision in Transmission Corporation of A.P. Ltd. Vs. CIT 239 ITR 587 for contending that obligation of assessee to deduct tax u/s 195 was limited only to appropriate proportion of sum which was chargeable to tax.

9. While admitting that payments made to M/s Rimsat, U.S.A. was covered by the decision of the Special Bench in the case of New Skies Satellite [supra], ld. counsel called the attention of the Bench to the Double Taxation Agreement between India and USA [DTA for short]. According to him, Article 26(3) of the DTA clearly prohibited discrimination. Further, according to him, section u/s 40(a)(i) of the Act, before it was amended w.e.f. 1.4.2005 Finance (No. 2) Act, 2004 by substituting sub-clause (i), (ia ) and (ib) in place of said clause (i), was clearly discriminatory since it applied only to non residents. According to him, vide Article 26(3) of the India – USA Tax Treaty, interest, royalties and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State, shall for the purpose of determining taxable profits of the first mentioned resident, be deductible under same conditions as if they had been paid to the resident of the first mentioned State. According to him, such payments made by assessee, had it been paid to a resident of India, would not have been subjected to the rigor of disallowance u/s 40(a)(i) of the Act as it stood at that time. Therefore, it was argued that in view of Article 26(3) of the DTA, there was no obligation cast on the assessee for effecting any deduction on the tax. Further, according to him, the dis allowance of payments made to M/s Rimsat, U.S.A. also was against law notwithstanding the decision of the Special Bench decision in New Skies Satellites [supra]. In support of this line of argument, ld. A.R. relied on the decisions of Delhi Bench of Tribunal in the case of Millennium Info com Technologies Ltd Vs. ACIT 117 ITD 114 and Herbal Life International India P. Ltd. Vs. ACIT (101 ITD 450) . On his submission that triggering u/s 195 of the Act was required for application of sec 40(a)(i) of the Act, ld. counsel for assessee relied on the decision of the Special Bench in the case of Mahindra and Mahindra [supra], which, according to him, clearly brought out that liability u/s 201(1A) was fastened on an assessee only on failure of applying section 195 of the Act. According to him, failure u/s 195 not only triggered the treatment of an assessee as assessee in default, but this was also the triggering point for application of section u/s 40(a)(i) of the Act. Ld. counsel also brought to the attention of the Bench that similar Articles, akin to that in Indo-US Treaty was also there in Indo-UK, DTA, and hence the contentions as above would apply to payments made to M/s Menon Ltd., UK also.

10. In reply, ld. D.R. submitted that the issue has to be viewed in light of the wordings in section 40(a)(i) of the Act. According to him, once assessee was paying any sum outside India which was chargeable under the Act, then he was to deduct tax at source under Chapter XVIIB of the Act. Ld. D.R. further submitted that in view of the decision of the Special Bench, there cannot be any doubt that such payments were “royalty” on which tax had to be deducted and assessee having failed to do so, the disallowances were rightly, made. Vis-a-vis the claim that income of M/s Menon Ltd., U.K. was not at all taxable, this being neither royalty nor fee for technical service, ld. D.R. submitted that this was never substantiated by the assessee before any of the lower authorities According to him, intimation u/s 143(1)(a) of the Act, produced by assessee relating to M/s Menon Ltd., U.K. for Assessment Year 2000-01 would not have any relevance vis a vis impugned assessment year. Further, according to the ld. D.R, decision in Raj Television Net Works Ltd [supra] was not applicable in view of the fact that such decision was considered by the Special Bench in New Skies Satellites (supra) and only thereafter they had come to a conclusion that hiring of transponder was hiring of a process coming within the definition of “royalty”. Ld. D.R. was of the opinion that it was not for the assessee to decide whether income was taxable in the hands of the recipient. According to him, he ought to have taken recourse to subsection (2) of section 195 of the Act if he was of the opinion that such amount was not wholly taxable in the hands of the recipient. Specific reliance was placed on the decision of a coordinate Bench in the case of Frontier Offshore Exploration of India Vs. DCIT 118 ITD 494 in support of this line of argument. According to him, even if services were rendered outside India, there was no doubt that such services were exploited by assessee in India and, therefore, in view of the retrospective amendment in section 9 of the Act by adding Explanation to sub-section (2) thereof, which has been further elucidated in the Explanatory Memorandum vide 289 ITR 302 [Statute], it would fall within the terminology of technical services falling within the said clause [vii] of section 9(1). The ld. counsel then submitted that reliances placed by the assessee on the DTA with U.S.A. and U.K. was incorrect. According to him, DTA was only for advantage of non residents and could not be taken advantage by a resident for getting out of its statutory liability under the Act. Vis-a-vis reliance placed on the decision of Honourable Karnataka High Court in the case of Jindal Thermal Power Company Ltd. [supra]. It was submitted by the ld. D.R. that the said decision was only confined to treatment of income from technical services under the head ‘business’ and this could not be cited for support by assessee. Reading through sub clause (i) of clause (a) of section 40, ld. D.R. strongly urged that it was for the assessee to establish that the amounts payable by it outside India, were not taxable under the I.T. Act, if it wanted to contend that tax was not deductible thereon.

11. In his rejoinder to the above, ld. A.R. submitted that the decision of Frontier Offshore Exploration of India [supra] was only vis a vis the question whether any payments made were chargeable to tax or not and when whole of the payment was outside the tax ability under I.T. Act, said decision had no applicability. Relying on the decision of the Honourable Madras High Court in the case of CIT. Vs. India Pistons Ltd. 252 ITR 632 [Mad], ld. A.R. submitted that once something was not chargeable to tax and TDS was not attracted, there was no question of application of u/s 40(a)(i) of the Act.

12. We have heard the rival contentions and perused the orders. Taking up the payment made to Menon Ltd., UK, the first line of defence is that such payment is not ‘royalty’ as defined in Explanation 2 to clause (vi) of sec.9(1), despite the decision of the Special Bench in New Skies Satellites & Others (121 ITD 1). According to the assessee, here the payments were not made to a company which was owning any transponder, whereas all the assessees who were parties or interveners before the Special Bench, had effected payments to persons who owned the transponder and satellites. Second line of defence is that if it is considered as payment for technical services, there was no services whatsoever rendered in India, the transponders being placed about 30000 ft. into the space, and without any citus of service or PE for M/s. Menon Ltd. in India, no income accrues or arises or can be deemed to accrue or arise in India to M/s. Menon Ltd. Consequently, M/s. Menon Ltd. being not exigible to Indian Income-tax, assessee is not under any legal obligation to deduct tax. As aforesaid the second line of defence has different limbs in it, all of which are crucial. These are :

(i) It is not royalty as envisaged in Spl. Bench decision.

(ii) If it is technical services the citus of service is not in India.

(iii) There is no PE for M/s. Menon Ltd. in India

(iv) Income of M/s. Menon Ltd. is not taxable in India

(v) Assessee is not obliged to deduct tax under sec. 195.

In the words of ld. A.R. to trigger the application of sec.40(a)(i), Sec. 195 has to be violated. Failure to deduct tax at source as specified in sec. 195, which is the relevant one for payments made to non-residents under Chapter XVIIB, would result in three scenario. First is the payer being treated as assessee-in-default , second is the payer being considered as an agent of the nonresident and third is the payer being fastened with a disallowance of the claim of payment as an expenditure while computing its income from business. Types of payment that are covered by sec. 195 are of the kind which would be chargeable to tax under the Act in the hands of the recipients. Sub-sec.(2) thereof specifies the course to be adopted if a payer feels that the whole of the payment made is not exigible to tax. Then he has to make an application to the lower authorities concerned for this. Then comes, the vexed question whether assessee itself is having the right to decide the exigibility to tax of the receipts in the hands of recipient or he has to necessarily take recourse to sec. 195(2). Before going into all these aspects, we have to see whether payment made by assessee to M/s. Menon Ltd. is royalty or not. For this the clauses in assessee’s agreement with Menon Ltd. as reproduced at para 6.2 of the ACIT’s order dated 26.3.2002 under sec. 144A of the Act, and referred to by both the parties would be very relevant, and this reads as under :

“To provide TV transponder operating in 754 MHz band on EKRAN satellite located at geostationary orbit at 99 degrees East with parameters registered for the satellite Stationar -T2 in the Main Frequency Register of the International Telecommunication Union (See Annexure 2)

To provide for transmission from the earth station at Dubna having all the necessary transmitting equipment.

To provide video playback equipment Betacam SP for transmission of TV programmes from tapes supplied by the customer compatible with the above mentioned equipment.

To provide communications for transmission of information from the control room to the transmitting earth station.

To provide transmission of TV signals with the characteristics given in Annexure I and Annexure 2 to the present contract.

To prepare a scheme of TV transmission and get it approved by the customer.

To provide connection of signal scrambling devices to the executor’s equipment in case the devices are supplied by the customer.

At the customer’s request and according to a separate contract, to send technical experts to India for assistance in assembly of the first receiving stations made in Russia and training of Indian operators on the said receiving stations.

To prepare an offer for transmission of both TV and radio signals together, as well as broadcasting of ITN, CNN and other TV programmers to India through the channel provided by the Executor. The above mentioned offer should be submitted by November 30th, 1992. Work shall be carried out under a special contract.

To provide personnel to ensure effective operation of the equipment located in Russia required for broadcasting of signals to India.

To assist the customer at his request to source ground receiving stations for EKRAN and cable networking systems for distribution of the EKRAN and other TV signals.”

Assessee is banking on the last clause, to say that M/s. Menon Ltd. was not the owner of the satellite ‘Ekran’ and hence it would not be covered by the decision of SB in New Skies Satellites (supra). Let us see how far it is true. A look at the SB decision clearly brings out that, this was not the clinching reason for it to hold that the assessee there, was hiring a ‘process’ by taking up a transponder in a satellite, bringing the payment made thereon, within the ambit of the term ‘royalty’ as defined in sec.9(1)(vi) of the Act. Para 252 of the decision is reproduced to bring out this aspect.

“On facts, it is held that a process is involved in the transponder through which the telecasting companies are able to uplink the desired images/data and down link the same in the desired area which inter alia covers Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of “royalty” has not been restricted either by the domestic provisions or by the provisions contained in respective DTAA’s. Insertion of ‘comma’ after the words “secret formula or process in the respective DTAA’s does not give different interpretation to the provisions of DTAA as compared to the provisions of domestic law. The process, even if it is construed to be intellectual property, for falling within the ambit of royalty, it is not necessary that the process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding out that whether a process was actually used by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enable to telecast their programmes by up linking and down linking the same with the help of that process. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing use and right to use of the process and, thus, it is royalty within the meaning of clause (iii) of Explanation 2 to Section 9(1)(vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to Section 9(1)(vi).”

Further, if we look at the agreement between assessee and M/s Menon Ltd. closely, there can be no doubt whatsoever that the latter was having possession and control of transponders and also right to hire it out for long periods. In our opinion, therefore treating M/s. Menon Ltd. only as an intermediary would not be correct. Assessee did not bring on record anything to show that M/s. Menon Ltd. was just passing on the money to the owner of satellite Ekran. That a satellite might have a number of transponders and such transponders could be given for long term use to different parties by its owners and who in turn might give time slots or independent use thereof to various others, all should not take our vision away from the vital aspect that the ultimate user of the transponder was using a ‘process’, while utilising it for the transmission of its signals and it was paying the fees for such use. The payments retain the same character, despite change of hands from M/s Menon Ltd, to a third party, and for the recipient also it is nothing but a receipt for using the “process” in the transponder. That the recipient would be having his rights for transponder use, through another contract with the ultimate owner of the satellite, makes no difference, since he had such rights which included right to use various processes in the transponder, which was in turn hired out by him. Here the possession, rights and control over the transponders were held by M/s. Menon Ltd. and this is writ large on the clauses in the agreement mentioned, supra, and in our opinion, just because Ekran satellite was owned by a Russian company, would not change the colour of payment, which would remain a ‘royalty’, as interpreted by the Special Bench. In our opinion the case of Raj TV (supra) on which reliance was placed by the ld. A.R. as well as CIT(A) is not appropriate since here M/”s. Menon Ltd. was not a mere intermediary, and the payments were in the nature of royalty in view of the SB decision in New Skies Satellite (supra). Since the payment is considered as ‘royalty’, the other limbs of the argument, whether it was technical services, or whether a PE was necessary, whether such receipts would be taxable in the hands of the recipient under Indian Income-tax Act becomes irrelevant. This is because the Spl. Bench decision has considered all these aspects and held that tax had to be deducted at source from such payments made to non-residents.

13. Vis a vis the second payment to M/s. Rimsat, USA, ld. A.R. himself agrees that SB decision applies to it, without qualms and they were nothing but ‘royalty’ payment. But we can’t leave it like that. It is necessary to consider the second line of defence of the assessee for both the payments. According to it, the rigour of sec.40(a)(i) of the Act would not apply to it since in view of the DTA with the concerned countries, non-resident Indian cannot be worse off from a resident tax payer in relation to a transaction entered by the latter with anybody in India. Sec.40(a)(i) as it stood at the relevant point of time read as under :

“Amounts not deductible

Notwithstanding anything to the contrary in Sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-

(a) in the case of any assessee-

(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, outside India, on which tax is deductible at source under Chapter XVII- B and such tax has not been deducted under Chapter XVII-B:

Provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid or deducted.”

Clearly it was applicable only to payments made to non-residents or persons outside India, till such time legislature deemed it fit to make wholesale amendments thereto, through Finance (No.2) Act, w.e.f. 1.4.2005, rendering its rigour equal vis-a-vis Indian residents as well. Hence there was a different treatment, which was of course worse off, prior to such amendment for payments made to persons outside India. Now we have to take a look at Article 26(3) of DTAA between US and India and Article 26(4) of DTT between UK and India which runs as under :

“Article 26

3. Except where the provisions of paragraph 1 of Article 9 (Associated enterprises), paragraph 7 of Article 11 (interest), or paragraph 8 of Article 12 (Royalties and fees for included services) apply, interest, royalties, and other disbursements paid by a resident of a Contracting State to a resident of the other Contracting State shall, for the purposes of determining the taxable profits of the first-mentioned resident, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned State.”

“Article 26

4. Enterprises of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first- mentioned State are or may be subjected.”

Though these are not similarly worded, it does look that both these Articles are intended to avoid discrimination. Applicability of sec.46(a)(i) in the context of Article 26(3) of Indo-US Treaty had already come up before the Delhi Bench of this Tribunal in the case of Millennium Info com Technologies Ltd. and Herbal Life International India Pvt. Ltd. (supra). It was held by the Bench that, rigour of sec.40(a)(i) was neutralised by the operation of the above were not bound by the rigour of sec.40(a)(i). In our opinion, these decisions do come to the help of the assessee very much. As to the contention of the ld. D.R. that, DTTs are not to be taken advantage by Indian resident but meant only for non-resident, we are afraid this line of reasoning has already rejected by the Honourable Delhi Bench at para 8.16 of its decision in Millennium Info com Technologies Ltd. (supra) which is reproduced as under :

“8.16 Now question arises as to whether the resident assessee could take advantage of provisions of article 26(3) of DTAA. As already observed by us, the provisions of section 40(a)(i) as it existed prior to its amendment by the Finance (No.2) Act, 2004, with effect from 1-4-2005 and subsequent amendment by the Taxation Laws (Amendment) Act. 2006 with retrospective effect from 1-4-2006, provided for dis allowance of payments made to a non-resident only where tax is not deducted at source at the time of remittance. However, a similar payment to a resident does not result in dis allowance in the event of non-deduction of tax at source. Thus, a non-resident left with a choice of dealing with a resident or a non-resident left with a choice of dealing with a resident or a non-resident in business would opt to deal with a resident owing to the provisions of section 40(a)(i) of the Act. To this extent the non-resident is discriminated. Article 26(3) of Indo-US DTAA seeks to provide relief against such discrimination by saying that deduction should be allowed on the same condition as if the payment is made to a resident. Thus, this clause in DTAA neutralises the rigour of the provisions of section 40(a)(i) of the Act. in this regard it would be relevant to refer to the provisions of section 90(2) of the IT Act, 1961. It reads thus :-

“90(2) Where the Central Government has entered into an agreement with the Government of any other 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.”

Hence by virtue of the provisions of section 90(2), the law which is beneficial to the assessee to whom DTAA applies, should be followed, This view is supported by the decision of Honourable Supreme Court in the case of Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 =. Honourable Supreme Court held as under: –

“No provision of the Double Taxation Avoidance Agreement can possibly fasten a tax liability where the liability is not imposed by the Act, the Agreement may be restored to for negativing or reducing it; and, in case of difference between the provisions of the Act and the agreement, the provisions of the Agreement would prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.

Section 90 is specifically intended to enable and empower the Central Government to issue notification for implementation of the terms of a Double Taxation Avoidance Agreement. The provisions of such an Agreement, with respect to cases to which they apply, would operate even if in consistence with the provisions of the Income-tax Act. If it was not the intention of the Legislature to make a departure from the general principles of charge ability to tax under section 4 and the general principle of ascertainment of taxable income under section 5, then there was no purpose in making those sections ‘subject to the provisions of the Act’.

Section 90 was brought into the statute book prescribed to enable the executive to negotiate a Double Taxation Avoidance Agreement and quickly implement it. Even accepting that the powers exercised by the Central Government under section 90 are delegated powers of legislation, there is no reason why a delegate of legislative power, in all cases, has no power to grant exemption. The delegate of a legislative power can exercise the power of exemption in a fiscal statute.

When the requisite notification has been issued under section 90, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the Double Taxation Avoidance Agreement is entitled to seek the benefits there under, even if the provisions of the Double Taxation Avoidance Agreement are inconsistent with those of the Act.”

But at the same time this line of defence taken by the assessee was never there before the Assessing Officer or the ld. CIT(A). Before ruling that assessee can take advantage of such articles in relevant DTTs it is necessary to see whether application thereof can be made use of by the assessee after considering all related articles in such treaties as also the meaning of ‘royalty’ as per the DTTs. Since these aspects have never been examined by the lower authorities, we are of the opinion that the claim has to be verified by the Assessing Officer. Therefore, while holding that the payments were only ‘royalty’ we set aside the orders of Assessing Officer and CIT(A), and remit the issue back to the Assessing Officer for the limited aspect of examining it’s claim that it was saved from the rigour of sec.40(a)(i) on account of relevant articles in the respective DTTs.

14. In result, appeal of the revenue is allowed for statistical purposes.

15. When assessee’s appeal was taken up, ld. counsel submitted that he was not pressing it due to small quantum involved. Therefore, assessee’s appeal is dismissed as not pressed.

16. To summarize, appeal of the revenue is allowed for statistical purposes, whereas that of the assessee stands dismissed.

NF