Case Law Details
ACIT Vs Reliance Jio Infocomm Ltd. (ITAT Mumbai)
Let us appreciate the nature of development, from the treaty perspective, in case one is to hold that the retrospective amendments defining the expression ‘process’ would be equally applicable for definition of ‘royalties’ under the tax treaty. Thus viewed, situation could be like this. There are judicial rulings which decide something in favour of the residence jurisdiction, and the source jurisdiction is not happy with that outcome, and it’s a coincidence, coincidence if it is, that the source jurisdiction changes the domestic law in a way that, once that amended domestic law is applied in the context of article 3(2), a different outcome to the same treaty provision, which favours the source jurisdiction, is possible. In effect, thus, what was not taxable in the source jurisdiction in pre domestic law amendment situation becomes taxable in source jurisdiction post domestic law amendment. Undoubtedly, legislation is a sovereign function and it is indeed open to any jurisdiction to amend, even retrospectively, its domestic laws to bring new incomes to taxability in the source jurisdiction, but so far as the source jurisdiction taxability under the treaty provisions is concerned, legal amendments so as to influence the taxability even under the treaty situation, by the source jurisdictions unilaterally, are impermissible. That is a classic case of a subtle unilateral treaty override. While, in India, the expression ‘treaty override’ is often loosely used for the situations where the provisions of tax treaty prevails over any inconsistent provisions of domestic law, this approach seems to be at variance with the international practices wherein connotations of ‘treaty override’ refer to a situation in which domestic legislation of a treaty partner jurisdiction overrules the provisions of a single treaty or all treaties hitherto having had effect in that jurisdiction. That will be the end result of a domestic law amendment of an undefined treaty term, in departure from the current position, and import such amended meaning of that term, under article 3(2), in the treaty situations as well. Such an approach, on the first principles, is unsound inasmuch as it is well settled in law that the treaty partners ought to observe their treaties, including their tax treaties, in good faith. Article 26 of Vienna Convention on Law of Treaties provides that, “Pacta sunt servanda: Every treaty in force is binding on the parties to it and must be performed by them in good faith”. What it implies is that whatever be the provisions of the treaties, these provisions are to be given effect in good faith. Therefore, no matter how desirable or expedient it may be from the perspective of the tax administration, when a tax jurisdiction is allowed to amend the settled position with respect to a treaty provision, by an amendment in the domestic law and admittedly to nullify the judicial rulings, it cannot be treated as performance of treaties in good faith. That is, in effect, a unilateral treaty over-ride which is contrary to the scheme of Article 26 of Vienna Convention on Law of Treaties. As observed by Hon’ble Delhi High Court, in the case of DIT Vs New Skies Satellite BV [(2016) 328 ITR 114 (Del)], “the Vienna Convention on the Law of Treaties, 1969 (“VCLT”) is universally accepted as authoritatively laying down the principles governing the law of treaties”. Even though India is not a signatory to the Vienna Convention, Hon’ble Supreme Court has referred to the same time and again and, in the case of Ram Jethmalani Vs Union of India [(2011) 339 ITR 107 (SC)], observed that “it contains many principles of customary international law” and the rules set out therein provides “a broad guideline as to what could be an appropriate manner of interpreting a treaty in the Indian context also”. In our humble understanding, therefore, the additional test that is required to be put, while adopting the ambulatory interpretation in such a situation, is whether the amendment is domestic law ends up unsettling a conclusion arrived at under the pre domestic law amendment position i.e. reversing the judicial rulings in favour of the residence jurisdiction, and, if the answer is in the positive, the ambulatory interpretation is to be discarded because that approach would patronise, and legitimise, a unilateral treaty override, and the outcome of ambulatory interpretation in such a case will be incompatible with the fundamental principles of treaty interpretation under the Vienna Convention. The approach is justified on the first principles on the ground that when two approaches are possible for incorporation of domestic law provisions in the tax treaties and one of these approaches is compatible with Article 26 of the VCLT while the other is incompatible with the same, the approach compatible with the VCLT provisions is to be adopted.
In view of these discussions, and bearing in mind entirety of the case, we find no legally sustainable merits in the grievances raised before us. The arguments raised before us do not lead us to a different conclusion either. Concurring with the coordinate bench decisions, therefore, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As we hold so, we may add that these observations regarding ambulatory or dynamic approach being inappropriate in the context of article 3(2) is confined to the peculiar facts discussed above, and, are not, therefore, of general application.
We find that there is no dispute with the factual position that the RJ-S did not have any permanent establishment in India, and with the legal principle laid down in the applicable tax treaty that, in the absence of the PE of RJ-S, its business profits could not be taxed in India. The taxability under the source state under Article 7 of the applicable tax treaty, therefore, clearly fails. We further find that so far as taxability under Article 12, i.e. with respect to ‘Royalties and fees for technical services’ is concerned, we find that Article 12(4) provides that, “The term “fees for technical services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.” So far as 12(4)(a) is concerned, that comes into play only when the services are incidental to enjoyment of right, property or information held to be in the nature of “royalty”. Vide our discussions earlier in this order, we have already held that the payments made to RJ-S for availing bandwidth services are not in the nature of royalty. Once the taxability of payment for the main services as ‘royalty’ is ruled out, article 12(4)(a) ceases to be applicable for this short reason alone. As regards the scope of article 12(4)(b) is concerned, it can indeed be invoked for the payments for fees of technical services but, even it is a condition precedent that the services should enable the person acquiring the services to apply technology contained therein, but then it is nobody’s case that services rendered by RJ-S were such that the assessee was enabled to apply technology contained therein. The services were simply maintenance services which did not involve any transfer of technology. In response to our specific question, learned DR could not enlighten us about what was the nature of technology transferred under these arrangements. The amounts received by RJ-S could not, therefore, be taxed as ‘fees for technical services either. There are at least two non-jurisdictional High Court decisions, namely Hon’ble Delhi High Court in the case of DIT Vs Guy Carpenter & Co Ltd [(2012) 346 ITR 504 (Del)] and Hon’ble Karnataka High Court in the case of CIT Vs De Beers India Pvt Ltd [(2012) 346 ITR 467 (Kar)], in favour of the assessee, and there is no contrary decision by Hon’ble jurisdictional High Court or by Hon’ble Supreme Court. We bow before higher wisdom of Hon’ble Courts above and hold that unless there is a transfer of technology involved in technical services extended by Singapore company, the ‘make available’ clause is not satisfied and, accordingly, the consideration for such services cannot be taxed under Article 12(4)(b) of India Singapore tax treaty. As regards the taxability under article 12(4)(c), it is nobody’s case that there is any development and transfer of a technical plan or technical design, and, therefore, this provision does no come into play either. Once we come to the conclusion that the payment for these services is not taxable as fees for technical services under article 12(4), it is immaterial whether it could be taxable under section 9(1)(vii) for the simple reason that this being a treaty situation, the provisions of the Income Tax Act, 1961, could come into play only when favourable to the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
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