Booking fees received from Airlines is business income: ITAT Delhi

Amadeus IT Group SA Vs Asstt. DIT (ITAT Delhi)

The AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income. The AO observed that the assessee supplies/ licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers. As per the Distribution Agreement, the assessee has authorized Amadeus India to conclude “Subscriber Agreement” with the Subscribers which allows the Travel Agents to use the CRS Owned by it. The Assessing Officer has given a finding that the paying airlines have offices in India. The assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/ software/ product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India.

20. The AO has held that a software is also type of equipment in the facts of the case. The system comprising of equipments is used by the subscribers to book tickets and the same is the source of income for the assessee. The AO held that the income of the assessee is taxable as royalty also as ‘use of process’.

21. The ld. DRP confirmed the order of the Assessing Officer.

22. In the assessment framed for assessment year 2006-07, the Assessing Officer had substantively brought to tax, the booking fee as business income and protectively held the same to royalty since in that year the tax worked out in treating the income as royalty was less than the tax worked out after attributing income to the alleged PE of the assessee.

23. The Delhi Tribunal in assessee’s own case for the assessment year 2006-07 has held that booking fee received by the assessee is taxable as business income and not under the head royalty. For the sake of ready reference and brevity, the relevant portion of the order of the ITAT in ITA No. 1494/Del/2011 is reproduced below:

“In the present case, too, as submitted hereinabove, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software to the user of the CRS. The appellant does not make available to the participating airlines any secret formula or process. Also, no equipment is provided by the appellant for use to the participating airlines. Further, no payment is made by the subscribers, viz., the travel agents to the appellant, unlike the aforesaid case.

In that view of the matter, the booking fee received by the appellant from the participating airlines does not answer the description of ‘royalty‘ and, thus, is not chargeable to tax in India.”

24. Since, the facts have not been disputed in the absence of any material changes, we hereby hold that the booking fee received is in the nature of business income.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeals have been filed by the assessee against the orders passed by the AO u/s 143(3)/144C(13) of the Income Tax Act, 1961 dated 04.10.2011, 30.10.2012, 29.01.2014, 25.11.2014 and 13.01.2016.

2. Since, the issues involved in all these appeals are similar, they were heard together and are being disposed off by the common order.

3. In ITA No. 4906/Del/2010, following grounds have been raised by the assessee:

“1. That the assessing officer erred on facts and in law in computing the income of the appellant for the relevant assessment year at Rs.381,32,77,751/- as against ‘Nil’ income returned by the appellant.

2. That the assessing officer erred on facts and in law in passing the impugned order without affording the appellant reasonable and adequate opportunity of being heard.

3. That the assessing officer erred on facts and in law in alleging that the appellant’s replies were evasive and the appellant purposely avoided replying to the queries raised/ did not furnish the specific information called for in the assessment.

Re: CRS income – Permanent establishment

4. That the assessing officer erred on facts and in law in holding the appellant to be liable to tax in India in respect of receipts from airlines, etc. relating to segments booked from India through the appellant’s computer reservation system, not appreciating that no income accrued or arose to the appellant in India.

5. That the assessing officer erred on facts and in law in holding that computers, electronic hardware, and the connectivity provided by the appellant to the travel agents through SITA nodes located in India, collectively, constituted PE of the appellant in India under Article 5 of the Indo-Spain DTAA (“the Treaty”) and the income arising to the appellant from the airlines, etc. was attributable to the activities of the alleged PE in India.

6. That the assessing officer erred on facts and in law in alleging that Amadeus India (P) Ltd. (AIPL) constituted dependent agent permanent establishment (PE) of the appellant in India and the income arising to the appellant from the airlines, etc., was attributable to the activities of the alleged PE in India.

6.1 That the assessing officer erred on facts and in law in alleging that the appellant was not making any payment to AIPL towards the activities of marketing the appellant’s CRS and providing the hardware support to the travel agent and therefore the distribution fee paid to AIPL was not at arm’s length and consequently AIPL constituted dependent agent PE of the appellant.

Without prejudice – Re: Attribution of Income

7. That the assessing officer erred on facts and in law in computing the profits attributable to the alleged PE of the appellant in India at Rs. 108,94,12,818/-.

8. That the assessing officer erred on facts and in law in not appreciating that even if it is assumed that AIPL or the computers, electronic hardware provided to the travel agents etc., constituted PE of the appellant in India, the income derived from such PE was completely consumed by distribution and other expenses attributable thereto and that no income survives for taxation.

9. That the assessing officer erred on facts and in law in not following the order of the Delhi Bench of the Tribunal in the appellant’s case for the assessment years 1996-97 to 1998-99, wherein the Tribunal had attributed 15% of the revenues relating to the bookings made from India as attributable to the appellant’s PE in India and held that no income is taxable as the payment made to dependent agent was more than the revenues so attributed, alleging that the facts before the Tribunal in the aforesaid assessment years were different than the facts obtaining in the assessment year 2007-08.

9.1 That the assessing officer erred on facts and law in misinterpreting the aforesaid order of the Tribunal and alleging that the Tribunal has attributed revenues to only the software development related services provided by AIPL, not appreciating that the Tribunal considered all the services required to be provided by AIPL under the Distribution Agreement and AIPL continued to provide the same services under the Distribution Agreement during the previous year under consideration, too.

10. That the assessing officer erred on facts and in law in alleging that no remuneration was paid by the appellant to AIPL for main activity of marketing the CRS and providing the hardware support to travel agents and, therefore, profits from such functions were required to be attributed to the appellant’s dependent agency PE in India.

11. Without prejudice, that the assessing officer erred on facts and in law in not allowing deduction on account of distribution fee paid to AIPL on the ground that in the invoices raised by AIPL on the appellant, the fee was described as “charges for export of processed data/software” and not distribution fee.

11.1 That the assessing officer erred on facts and in law alleging that AIPL was remunerated only for software development services and not CRS marketing support services, on the ground that AIPL had claimed deduction under section 80HHE of the Act in respect of the remuneration received by the appellant.

12. That the assessing officer erred on facts and in law in disallowing deduction of Euro 6,335,000/-incurred by the appellant under the head ‘Development Cost’, while computing the income attributable to the alleged PE.

12.1 That the assessing officer erred on facts and in law in not appreciating that the appellant was engaged in the business of providing CRS services and the expenses incurred in connection with product development function carried out outside India were required to be excluded while computing the income of the alleged PE of the appellant in India.

Re: CRS income – Royalty

13. That the assessing officer erred on facts and in law in alternatively holding that booking fee of Euro 59,867,000 received by the appellant was taxable in India as ‘royalty’ both under section 9(1)(vi) of the Act and Article 13(3) of the Treaty.

14. That without prejudice, the assessing officer erred on facts and in not appreciating that the booking fee received from non-resident airlines was not sourced in India in terms of Article 13(6) of the Treaty and was not liable to tax in India as ‘royalty’.

14.1 That the assessing officer erred on facts and in law in holding that source of income of the alleged royalty income was located in India alleging that the most of the airlines from whom booking fees was received were resident in India.

14.2 That the assessing officer erred on facts and in law in not bringing any evidence on record to establish that the non-resident airlines making payment to the appellant had permanent establishment in India and the booking fee paid by them to the appellant was borne by such permanent establishments.

15. Without prejudice, the assessing officer erred on facts and in law in levying tax @ 20% on the aforesaid alleged ‘royalty’ income, not appreciating that in terms of Article 13 of the Treaty read with paragraph (7) of the Protocol thereto, such income could be taxed only @ 10%.

Re: Altea system

16. That the assessing officer erred on facts and in law in holding that payments received by the appellant from British Airways in relation to the alleged use of Altea system and Article was taxable in India as ‘royalty’ both under section 9(1)(vi) of the Act 13(3) of the Treaty.

17. That the assessing officer erred on facts and in law in alleging that the appellant filed the agreement with British Airways in relation to use of Altea system at the fag end of the assessment and that the nature of Altea Reservation System was explained for the first time at the fag end of the assessment, vide reply dated 28.12.2009.

18. That without prejudice, the assessing officer erred on facts and in law in not appreciating that the payments received from British Airways in relation to the Altea System were not sourced in India in terms of Article 13(6) of the Treaty and were liable to tax in India as ‘royalty’.

18.1 That the assessing officer erred on facts and in law in not bringing any evidence on record to establish British Airways had permanent establishment in India and the payments made for the use of Altea system were borne by such permanent establishment.

19. Further without prejudice, the assessing officer erred on facts and in law in holding on adhoc basis a sum of Euro 6 million as the income of the appellant liable to tax in India as ‘royalty’ for the alleged use of Altea system by British Airways.

20. Without prejudice, the assessing officer erred on facts and in law in levying tax @ 20% on the aforesaid alleged ‘royalty’ income, not appreciating that in terms of Article 13 of the Treaty read with paragraph (7) of the Protocol thereto, such income could be taxed only @ 10%.

Re: Charge of interest

21. That the assessing officer erred on facts and in law in levying interest under section 234B of the Act.

Re: Credit for tax deducted at source

23. That the assessing officer erred on facts and in law in not allowing credit for tax deducted at source by various airlines making payment to the appellant, amounting to Rs.5,33,03,605/-.”

4. The issues have been clubbed and adjudicated together for all the years.

Permanent Establishment:

5. The AO has computed the income of assessee as PE at Rs.1,45,25,50,424/- in relation to the booking fee relatable to the segments booked from India through the CRS developed by the assessee. Then, the AO attributed 75% of the income as income of the assessee as PE in India.

6. At the outset, it was brought to our notice by the ld. AR that the Hon’ble High Court of Delhi in the assessee’s own case for the assessment years 1996-97 to 2006-07 has held that computers installed at the premises of the subscribers constitute a PE of the assessee in India in terms of Article 5(1) of Indo-Spain treaty. It was also held that since the Amadeus India is functionally dependent upon the assessee it do constitute an agency PE in India in terms of Article 5(iv) of the Indo-Spain treaty.

7. Since, the facts are undisputed and since the Hon’ble Jurisdictional High Court in assesee’s own case ITA Nos.191, 192, 193/2011 {( based on the judgment in the case of DIT Vs. Galileo International Inc. (224 CTR 251)} has held that the assessee constitutes an agency PE and as the matter pending before the Hon’ble Supreme Court, the issue do not call for any interference from our side. The order of the ld. DRP is being upheld on this ground.

Attribution of Profit:

8. Ground Nos. 7 to 12.1 pertains to attribution of profits.

9. The AO held that the assessee has earned a profit of Rs.1,452,550,424/- or Euro 2,50,90,000 from India. The ratio of attribution is to be worked out, by considering the importance & range of functions of AIPL especially in the new agreement dated 01.10.2004. The AO held that as the competition is growing in the market, the role of marketing functions in earning profit increases. Further, it was held that the number of assets of the assessee is growing in India and new facts relating to presence of assets in India have also been found out. Holding thus, the AO worked out the profit attributable to India @ 75% of the total profit. The AO held that the Profit attributable to Indian Permanent Establishments was Rs.1,08,94,12,818/- taxable at the rate of 40% plus surcharge & education cess i.e. 41.82%.

10. The ld. DRP confirmed the order of the Assessing Officer.

11. This issue has been adjudicated over a period of time for various years and the decision of the Tribunal has been affirmed by the Hon’ble Jurisdictional High Court. The Co-ordinate Bench of the Tribunal for the assessment years 1996-97 to 1998-99, after considering the extent of activities in India and abroad, the assets employed and risks assumed, held 15% of the revenues relating to the bookings made from India as attributable to the assessee’s PE in India.

12. The Co-ordinate Bench of ITAT, vide order dated 16.11.2016 passed for assessment years 1999-00 and 2000-01, following the order for the assessment years 1996-97 to 1998­99, held that 15% of the revenues earned by Amadeus from its activities in India shall be attributable to the PE. It is also pertinent to point out that the ITAT, vide order dated 24.04.2009, in MA Nos. 212 to 213/D/2008, filed by the Department against the order dated 30.11.2007 relating to AYs 1997-98 and 1998-99, categorically held that revenues of 15% attributed by it to the PE were in relation to activity of the PE as a whole, i.e., considering the agency and as well as fixed place of business functions.

13. The Hon’ble Delhi High Court following its decision in the case of DIT v. Galileo International 224 CTR 251, has affirmed the orders of the Tribunal passed for assessment years 1996-97 to 2006-07.

14. It was brought to our notice that the Assessing Officer had, in the assessment order for assessment year 2005-06, sought to distinguish the decision of the Tribunal in assessee’s own case for assessment years 1996-97 to 1998-99 on similar grounds. However, the ld. CIT(A), vide order dated 25.02.2010, allowed the appeal of the assessee holding that no more than 15% of the revenues generated from India could be attributed to the alleged PE of the assessee in India. The aforesaid order passed by the ld. CIT(A) for assessment year 2005-06 has been confirmed by the ITAT, vide order dated 29.10.2010 and the Hon’ble High Court vide order dated 31.05.2011 (Revenue appeal) and dated 13.08.2013 (Assessee appeal).

15. Since, the facts remained unaltered and since payment to the agent is already @33%, no further addition is warranted in the case of the assesse.

Disallowance of Expenses:

16. The Assessing Officer has disallowed the claim of the assessee on account of the distribution expenses. The ld. DRP upheld the addition on the grounds that no documents have been filed in support of the distribution activity.

17. We have gone through the history of such expenditure and find that the addition is being made owing to confusion in the description of the services as “export of processed data/software” or “distribution fee”

18. This expenditure has been allowed by the Co-ordinate Bench of the Tribunal from the assessment years 1996-97 to 2006-07. Since, the facts have not been disputed, in the absence of any material change, we hereby allow the claim of distribution expenses.

CRS Income – Royalty:

19. The AO has held that the income received by the assessee with respect to bookings arising from India is also taxable as royalty income. The AO observed that the assessee supplies/ licenses its proprietary products free of charge to Amadeus India for distribution to the Subscribers. As per the Distribution Agreement, the assessee has authorized Amadeus India to conclude “Subscriber Agreement” with the Subscribers which allows the Travel Agents to use the CRS Owned by it. The Assessing Officer has given a finding that the paying airlines have offices in India. The assessee has granted to Amadeus India the right to further grant the right to access and right to use its platforms/ software/ product offerings to Subscribers. Amadeus India has the exclusive rights to distribute the CRS in India.

20. The AO has held that a software is also type of equipment in the facts of the case. The system comprising of equipments is used by the subscribers to book tickets and the same is the source of income for the assessee. The AO held that the income of the assessee is taxable as royalty also as ‘use of process’.

21. The ld. DRP confirmed the order of the Assessing Officer.

22. In the assessment framed for assessment year 2006-07, the Assessing Officer had substantively brought to tax, the booking fee as business income and protectively held the same to royalty since in that year the tax worked out in treating the income as royalty was less than the tax worked out after attributing income to the alleged PE of the assessee.

23. The Delhi Tribunal in assessee’s own case for the assessment year 2006-07 has held that booking fee received by the assessee is taxable as business income and not under the head royalty. For the sake of ready reference and brevity, the relevant portion of the order of the ITAT in ITA No. 1494/Del/2011 is reproduced below:

“In the present case, too, as submitted hereinabove, the appellant uses sophisticated technology/software in the course of providing a service/facility but the appellant does not divulge any process involved in the technology/software to the user of the CRS. The appellant does not make available to the participating airlines any secret formula or process. Also, no equipment is provided by the appellant for use to the participating airlines. Further, no payment is made by the subscribers, viz., the travel agents to the appellant, unlike the aforesaid case.

In that view of the matter, the booking fee received by the appellant from the participating airlines does not answer the description of ‘royalty‘ and, thus, is not chargeable to tax in India.”

24. Since, the facts have not been disputed in the absence of any material changes, we hereby hold that the booking fee received is in the nature of business income.

Altea Reservation System:

25. The AO held that in relation to the bookings arising from India, the payment for Altea Reservation System (ARS) is made by the British Airways for the use of system for the purpose of business in India and for the purpose of earning income from India. On the travel agents, offices of British Airways use this system as a right provided by the British Airways. The AO held that the ARS has been specifically and exclusively used by British Airways. Hence, taxed this amount under the head “income from royalty” and tax @ 20%.

26. The ld. DRP has upheld the action of the Assessing Officer on the grounds that the functionality on the business module facts of ARS suggests that the revenue charging on this account may be linked to the number of reservations/bookings done through this system.

27. It was canvassed before us, the ARS system is installed at the Airports and is accessed only by the Airlines and not by the agents of the assessee. It was argued that the system was available only to British Airways for the purpose of accepting payment and travelled documentation only at the Airport counters. It was argued that the payment made by British Airways to the assessee in relation to the ARS is for services rendered by the Amadeus and not for use of any process. It was argued that since the inventory hosting takes place outside India and payment is made by non-resident Airlines to another non-resident outside India, in terms of Article 13(6) of the treaty, the payments deemed to have been not sourced in India. We find that the revenue has brought out information which proclaim that the assessee with British Airways developed Altea Reservation System for distribution through British Airways Sales Outlets, the products namely Altea Inventory for Global Inventory Management and Altea Departure Control for passenger checking and flight departure management. The British Airways uses ARS on its website and for revenue management system. We also heard the argument of the assessee that the ARS has no relation to the PE of the assessee in India. The source of revenue received by the assessee in connection with ARS is not situated in India. We find that ARS is essentially an inventory hosting and management system developed by the assessee which some airlines outsourced to Amadeus, with British Airways as a launch customer. The payment for the ARS is made by the British Airways for the use of the system for the business in India at the Indian Airport is an undisputable fact. While the contention of the assessee is that the software was not available outside the Indian Airport or to any of the agents of the assessee in India, the revenue contended that the ARS also provides key operational services to British Airways like accepting payment and issuance of travel documents and manage customer checking. It was also submitted by the assessee that the arguments taken up with regard to CRS activity as royalty may also be considered while dealing with ARS issue.

28. The Article 7 reads as under:

ARTICLE 7

BUSINESS PROFITS

1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is permanent establishment. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.

3. (a) In determining the profits of a permanent establishment, there shall be allowed as deductions, expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. Provided that where the law of the State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and a third State which enters into force after the date of entry into force of this Convention, the competent authority of that State shall notify the competent authority of the other State of the terms of the corresponding paragraph in the Convention with that third State immediately after the entry into force of that Convention and, if the competent authority of the other State or requests, the provisions of this sub-paragraph shall be amended by protocol to reflect such terms.

(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise, or any of its other offices.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. For the purposes of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.”

29. Article 13 reads as under:

ARTICLE 13

ROYALTIES AND FEES FOR TECHNICAL SERVICES

1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services the tax so charged shall not exceed :

3. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematographic films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The term “fees for technical services” as used in this Article means payments of any kind to any person other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15 (Independent Personal Services), in consideration for the services of a technical or consultancy nature, including the provision of services of technical or other personnel.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15, as the case may be, shall apply.

6. Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer in that State itself, a political sub­division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for technical services whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services paid, exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.”

30. After going through the Article 13 and Article 7 and keeping in view the fact that the computer terminals are at Airport terminals and since the amounts have been received for utilization of ARS which is predominantly a reservation system, the same may be treated as “income from royalty”. We upheld the action of the AO to this extent.

31. During the arguments, the ld. AR raised a point regarding the taxability of royalty income in the hands of the assessee as per DTAA. He argued that in the absence of corresponding change in the DTAA with regard to interpretation of royalty in the domestic law. He relied on the ratio law laid down by the Hon’ble Jurisdictional High Court in the case of Director of Income Tax vs New Skies Satellite Bv vide order dated 8 February, 2016. The ld. DR argued that the provisions of DTAA would have primacy over the domestic provisions.

32. The operative part of the said judgment is as under:

“54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs by supplying redundancy to any part of it. This becomes especially important in the context of Explanation 6, which states that whether the ‘process’ is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 precipitated from confusion on the question of whether it was vital that the “process” used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the DTAAs and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both DTAAs and sub clause (iii) to Explanation 2 to 9(1)(vi).

Article 12(3), Indo Thai Double Tax Avoidance Agreement:

3. The term “royalties” as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.” (emphasis supplied)

Article 12(4), Indo Netherlands Double Tax Avoidance Agreement

“4. The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.”

(emphasis supplied)

Section 9(1)(vi), Explanation 2, Income Tax Act, 1961

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied)

55. The slight but apparently vital difference between the definitions under the DTAA and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various ITATs across the country, much discussion took place on the implications of the presence or absence of the “comma”. A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious for diametrically opposite implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of provisions. Judge Caldwell once famously said “The words control the punctuation marks, and not the punctuation marks the words.”

Holmes v. Pheonix Insurance Co.

47. It has been held in CGT v. Budur and Hindustan Const v. CIT that while punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Const50.

56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation; CIT v. Loyal Textile51; Sama Alana Abdulla vs. State of Gujarat52; Mohd Shabbir vs. State of Maharashtra53; Lewis Pugh Evans Pugh vs. Ashutosh Sen54; Ashwini Kumar Ghose v. Arbinda Bose55; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.56. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra where Section 27 of the Drugs and Cosmetics Act, 1940 came up for construction. By this section whoever “manufactures for sale, sells, stocks or exhibits for sale or distributes” a drug without a license is liable for punishment. In holding that mere stocking shall not amount to an offence under the section, the Supreme Court pointed out the presence of comma 98 F 240 (1899) 103 ITR 189 208 ITR 291 supra note 46 231 ITR 573 AIR 1996 SC 569 AIR 1979 SC 564 AIR 1929 Privy Council 69 AIR 1952 SC 369 AIR 1929 PC 38 AIR 1979 SC 564 after “manufactures for sale” and “sells” and the absence of any comma after “stocks” was indicative of the fact “stocks” was to be read along with “for sale” and not in a manner so as to be divorced from it, an interpretation which would have been sound had there been a comma after the word “stocks”. It was therefore held that only stocking for the purpose of sale would amount to an offence but not mere stocking.

57. However, the question, which then arises, is as follows. How is the court to decide whether a provision is carefully punctuated or not? The test- to decide whether a statute is carefully (read consciously) punctuated or not- would be to see what the consequence would be had the section been punctuated otherwise. Would there be any substantial difference in the import of the section if it were not punctuated the way it actually is? While this may not be conclusive evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically opposite consequences or large variations in taxing powers, as is in the present case, then the assumption must be that it was punctuated with a particular end in mind. The test therefore is not to see if it makes “grammatical sense” but to see if it takes on any “legal consequences”.

58. Nevertheless, whether or not punctuation plays an important part in statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for us to conclude that the process referred to in Article 12 must in fact be a secret process and was always meant to be such.

In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty.

“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 supra note 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 of 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.’

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….

***** ********** *****

78. There are judgments of other High Courts also to the same effect.

(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.”

59. On a final note, India’s change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State’s discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs.

60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word “royalty” in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement.

61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs.”

32. In view of the law laid down, the revenue is hereby directed not to tax the royalty in accordance with the judgment of the Hon’ble High Court.

33. Regarding the Charge of Interest u/s 234B, the ratio laid down by the Tribunal for the assessment year 2006-07 applies. The relevant portion of the Co-ordinate Bench of ITAT in ITA No. 1494/Del/2011, order dated 18.07.2019 is as under:

“19. Ground no. 17 is with respect to the charge of the interest u/s 234B of the Income Tax Act. The claim o the lerned authorized representative is that no intere u/s 234B of the Income Tax Act was chargeable since the entire payment received by the assessee from India was subject to deduction of tax at source on the above payment. The learned departmental representative payment objected to the same and submitted that charge of interest u/s 234B of the Act is not dependent on the deductibility of the tax by the payer. We have carefully considered the rival contention and perused the orders of the lower authorities the issue squarely covered in favour of the assessee by the decision of the Hon’ble Delhi High Court in the case of DIT Vs GE Packaged Power Incorporation 373 ITR 65. The amendment brought into the Act by the Finance Act 2012 is applicable with effect from the fund of 2012 and is applicable from assessment year 2013-14. In view of this we direct the learned Assessing Officer to not to charge interest u/s 234B of the Income Tax Act for the above reasons.”

34. In the absence of any material change in the facts and circumstances of the case, we hereby concur with the ratio of the Co-ordinate Bench of ITAT.

TDS Credit:

35. The AO shall allow the TDS credit as per the provisions of I.T. Act after due verification

36. In the result, all the appeals of the assessee are allowed.

Order Pronounced in the Open Court on 26/10/2020.