No Acts & Articles mentioned in this case
TCA Nos.277 to 280 of 2016
IN THE HIGH COURT OF JUDICATURE AT MADRAS
RESERVED ON: 08.08.2025
DELIVERED ON: 25.11.2025
CORAM :
THE HONOURABLE MR. MANINDRA MOHAN SHRIVASTAVA,
CHIEF JUSTICE
AND
THE HONOURABLE MR.JUSTICE SUNDER MOHAN
TCA Nos.277 to 280 of 2016
Cognizant Technology Solutions
India Private Limited
38, Whites Road, 3
rd
Floor,
Chennai – 600 014
Now at No.165/110
Menon Eternity Building
6
th
Floor, St. Mary's Road
Alwarpet, Chennai – 600 018.
Appellant(s)
in both appeals
Vs
Commissioner of Income Tax
Large Taxpayer Unit, Chennai
1775, Jawaharlal Nehru Inner Ring Road
Anna Nagar Western Extension
Chennai – 600 101.
Respondent(s)
in both appeals
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TCA Nos.277 to 280 of 2016
PRAYER : Appeals under Section 260A of the Income-tax Act, 1961
against the order of the Income Tax Appellate Tribunal, Madras “C”
Bench, dated 30.9.2015 in ITA.Nos.209/Mds/2007; in CO
No.47/Mds/2007 in ITA No.591/Mds/2007; in ITA No.591/Mds/
2007, in ITA No.2536/Mds/2007, respectively.
For Appellant(s): Mr.N.V.Balaji
For Respondent(s): Mr.Karthik Ranganathan
Senior Standing Counsel
COMMON JUDGMENT
THE CHIEF JUSTICE
Impugning the common order dated 30.9.2015 passed by the
Income Tax Appellate Tribunal [ITAT], the assessee has filed these
appeals pertaining to assessment years 2003-2004 and 2004-2005,
which have been admitted on the following substantial questions of
law:
T.C.A.No.277 of 2016:
"(i) Whether under the facts and circumstances of
the case, the Income Tax Appellate Tribunal was
right in holding that the losses of the software
technology park units of the appellant cannot be set
off against the income from other units in arriving at
total income?
(ii) Whether under the facts and circumstances of
the case, the Income Tax Appellate Tribunal was
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right in holding that amounts paid by the appellant
to M/s.Sprint USA, for International Private Leased
Circuits (IPLC) is to be disallowed under Section
40(a)(i) of the Act?
(iii) Whether under the facts and circumstances of
the case, the Income Tax Appellate Tribunal was
right in holding that amounts paid by the appellant
to M/s.Sprint USA, for International Private Leased
Circuits (IPLC) is 'royalty' under Section 9 of the Act
read with the Double Taxation Avoidance Agreement
between India and United States of America?
(iv) Whether under the facts and circumstances of
the case, the amounts paid by the appellant to
M/s.Sprint USA towards IPLC should be subject to
deduction of tax at source considering the non
discrimination Article of the Double Taxation
Avoidance Agreement between India and United
States of America? and
(v) Whether under the facts and circumstances of
the case, the Income Tax Appellate Tribunal has
erred in not adjudicating the ground of appeal raised
by the appellant with respect to claim of tax holiday
deduction under Section 10A/10B on miscellaneous
income?"
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TCA Nos.277 to 280 of 2016
TCA No.278 of 2016:
(i) Whether under the facts and circumstances of the
case, the Income Tax Appellate Tribunal was right in
holding that amounts paid by the appellant to
M/s.Sprint USA, for International Private Leased
Circuits (IPLC) is to be disallowed under Section
40(a)(i) of the Act?
(ii) Whether under the facts and circumstances of
the case, the Income Tax Appellate Tribunal was
right in holding that amounts paid by the appellant
to M/s.Sprint USA, for International Private Leased
Circuits (IPLC) is 'royalty' under Section 9 of the Act
read with the Double Taxation Avoidance Agreement
between India and United States of America? And
(iii) Whether under the facts and circumstances of
the case, the amounts paid by the appellant to
M/s.Sprint USA towards IPLC should be subject to
deduction of tax at source considering the non
discrimination Article of the Double Taxation
Avoidance Agreement between India and United
States of America?
T.C.A.No.279 of 2016
Whether under the facts and circumstances of the
case, the Income Tax Appellate Tribunal was right in
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holding that the appellant is liable for interest under
Section 234D of the Act?
T.C.A.No.280 of 2016:
Whether under the facts and circumstances of the
case, the Income Tax Appellate Tribunal was right in
holding that the losses of the software technology
park units of the appellant cannot be set off against
the income from other units in arriving at total
income?
2. It behooves us to give a recount of the factual matrix that
propelled the assessee to file these appeals.
2.1. The assessee is a company engaged in the business of
software development and export. The return filed by the assessee
was processed under Section 143(1) of the Income-tax Act, 1961
[the Act] and, subsequently, selected for scrutiny by issue of notice
under Section 143(2) of the Act. The Assessing Officer completed
the assessment of income of the assessee under Section 143(3) of
the Act for the assessment years 2003-2004 and 2004-2005 vide
orders dated 28.2.2006 and 18.12.2006, respectively, thereby
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denying the claim of the assessee for set off of current year losses
of assessee’s Pune, Chennai I and Kolkata II units for the
assessment years 2003-2004 and that of the Bangalore unit for the
assessment year 2004-2005 on the ground that these units are
Software Technology Parks in India [STPI] registered units claiming
exemption under Section 10A/10B of the Act.
2.2. Apropos of assessment year 2003-2004, the Assessing
Officer finding that the amount paid by the assessee to Sprint USA,
for International Private Leased Circuits (IPLC), was without
deduction of tax at source, disallowed it under Section 40(a)(i) of
the Act. For the said assessment year, the Assessing Officer also
denied claim of tax holiday deduction under Section 10A/10B of the
Act on miscellaneous income.
2.3. In view of the rejection of the aforesaid claims for set off
of loss, tax holiday deduction on miscellaneous income and
deduction of expenditure, the Assessing Officer raised demand on
the assessee, including interest under Sections 234B and 234D of
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the Act for both the years.
2.4. Assailing the assessment orders, the assessee
approached the Commissioner of Income Tax (Appeals) [CIT(A)] by
filing appeals. The CIT(A) rejected the appeal in so far as the claim
for set off of losses of the Pune, Chennai I and Kolkatta II units of
the assessee for the assessment year 2003-2004 and that of
Bangalore unit for the assessment-year 2004-2005. The
disallowance of the claim of the assessee qua payments made to
Sprint USA for the assessment year 2004-2005 made by the
Assessing Officer was affirmed by the CIT(A). The CIT(A) also
upheld the order of the Assessing Officer on the issue of claim of
tax holiday deduction on miscellaneous income, however, with a
direction to the Assessing Officer to verify whether the
miscellaneous income, in so far as it relates to sale of scrap has
direct nexus with the eligible undertaking or not. The challenge
made by the assessee to the interest claimed under Section 234B of
the Act was rejected. However, in respect of interest under Section
234D of the Act, the CIT(A) relied upon an earlier decision of ITAT
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and allowed the ground of appeal for the assessment year 2003-
2004 and dismissed the claim for the assessment year 2004-2005.
2.5. Assailing the orders passed by the CIT(A), the assessee
as well as the revenue filed appeals before the ITAT. With respect
to the issue of disallowance of payments made to Sprint, USA, the
assessee preferred a cross objection for the assessment year 2003-
2004.
2.6. The ITAT, vide the common impugned order for both the
assessment years, dismissed the grounds of appeal of the assessee
on the issue of set off of losses of the STPI units against the income
of other taxable units. Qua disallowance of payments made to
Sprint USA, the ITAT held that the payment is in the nature of
royalty and subject to deduction of tax at source. The ITAT did not
adjudicate the ground of appeal on the issue of miscellaneous
income being granted tax holiday deduction. The ITAT allowed the
revenue’s appeal on the issue of interest under Section 234D of the
Act. The ITAT dismissed the cross objection of the assessee.
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3. As overlapping questions of law are involved in these
appeals, the issues, which are common, are dealt with in tandem,
considering the arguments advanced by either side on each issue.
FIRST SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.277 OF 2016
AND SOLE SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.280 OF
2016
4. This issue pertains to set-off of losses of the units of the
assessee against the income from other units in arriving at total
income. The said claim of the assessee was rejected by all the
authorities.
5.1. Mr.N.V.Balaji, learned counsel for the assessee, contends
that the loss of the eligible units could be set off against other
income of the taxpayer, since the provisions of Section 10A/10B
provide a deduction. To fortify the said submission, he placed
reliance on a decision of the Supreme Court in the case of CIT v.
Yokogawa India Limited
1
.
1(2017) 2 SCC 1
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5.2. Learned counsel for the assessee, referring to the Circular
No.7/DV/2013, dated 16.7.2013, which was also referred to in CIT
v. Yokogawa India Limited (supra), submitted that the circular
makes it abundantly clear that losses incurred by units eligible for
tax holiday deduction can be set off against other taxable income/
income of units not eligible for tax holiday deduction.
5.3. It is further submitted that, in assessee's own case, a Co-
ordinate Bench of this Court, vide judgment dated 20.10.2021
passed in T.C.A Nos.1234 to 1236 of 2015, following the decision of
the Supreme Court in CIT v. Yokogawa India Limited (supra),
answered the issue in favour of the assessee.
6.1. Mr.Karthik Ranganathan, learned Senior Standing
Counsel appearing on behalf of the revenue, while distinguishing
the applicability of the decision of the Supreme Court in CIT v.
Yokogawa India Limited (supra), submitted that the Supreme Court
did not deal with a case of loss making 10A unit against the profits
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of non-10A unit, but, on the facts of the said case, held that the
profits of a 10A unit have to be treated independently and all the
benefits of deduction/exemption have to be first given to that unit
which will be completed at Chapter IV of the Act stage itself.
6.2. It is further contended that, as per Section 10A(6) of the
Act, after the amendment in 2003, all the losses that have been
incurred by a 10A unit have to be carried forward until the 10 years
tax holiday period is over and thereafter, it can be adjusted/offset
against the profits earned by the assessee. He hastened to add
that this position has also been accepted by various assessees who
were parties to the decision in CIT v. Yokogawa India Limited
(supra), as is evident from paragraph 16 of the said judgment in
which carrying forward of the the losses of a 10A unit after the tax
holiday period and setting off thereafter has been accepted by the
assessees.
6.3. It is, thus, submitted that the losses of the various 10A
units, as claimed by the assessee, cannot be adjusted against the
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profits of non-10A units and the said will run afoul of the ratio laid
down in CIT v. Yokogawa India Limited (supra)
7.1. On the issue of claim of set-off of losses of the units of
the assessee against the income from other units in arriving at total
income, the ITAT took into consideration its earlier order dated
23.1.2013 in the assessee's own case for the assessment years
2005-2006 and 2007-2008; and the order dated 11.3.2014 in
respect of the assessee for the assessment year 2008-2009.
The earlier orders passed by the ITAT, which have been
followed for the relevant assessment years in the present cases,
relied upon the orders passed by the ITATs in other cases, placing
reliance upon the decisions of the Karnataka High Court in CIT and
another v. Yokogawa India Ltd and others
2
; and CIT and another v.
Tata Elxsi Ltd and others
3
, wherein it has been held that current
year's profit of the eligible units should not be reduced by setting
off of the brought forward losses of earlier years, even though
relating to eligible units. It was also held therein that the Assessing
2(2012) 246 CTR 226 (Kar)
3(2013) 247 CTR 334 (Kar)
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Officer has to give deduction under Section 10A of the Act on
eligible profits of the current assessment year.
The ITAT has, thus, followed its earlier orders in respect of the
assessee's own case for the assessment years 2005-2006, 2007-
2008 and 2008-2009 and answered the issue in favour of the
assessee.
7.2. The submission made by learned counsel for the Revenue
that losses of 10A units cannot be adjusted against the profits of
non-10A units; that the decision of the Supreme Court in CIT v.
Yokogawa India Limited (supra) is distinguishable; and that as per
Section 10A(6) of the Act, after the amendment in 2003, all the
losses that have been incurred by a 10A unit have to be carried
forward until the 10 years tax holiday period is over and thereafter
it can be adjusted/offset against the profits earned by the assessee,
is required to be tested in the light of the Supreme Court decision in
the case of CIT v. Yokogawa India Limited (supra), on which heavy
reliance is placed by learned counsel for the assessee. Not only
this, the assessee has also relied upon the Circular dated
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16.7.2013, which also clarifies the issue.
7.3. It is relevant to note that the claim of the assessee was
allowed on the basis of the order passed by the Karnataka High
Court in CIT and another v. Yokogawa India Ltd and others (supra).
The appeal preferred by the Revenue before the Supreme Court
against the said order was dismissed and the order passed by the
Karnataka High Court was affirmed.
7.4. The issue that arose for consideration before the
Supreme Court, as noted therein, was as below:
“2. The true and correct meaning and effect of the
provisions of Section 10-A of the Income Tax Act, 1961
(hereinafter referred to as “the Act”) is the principal issue
arising for determination of the Court. At the outset, it
must be made clear that the decision of this Court with
regard to the provisions of Section 10-A of the Act would
equally be applicable to cases governed by the provisions
of Section 10-B in view of the said later provision being
pari materia with Section 10-A of the Act though
governing a different situation.”
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7.5. The broad question indicated above was further dissected
by the Supreme Court into five specific questions as below:
“3.1. (i) Whether Section 10-A of the Act is beyond the
purview of the computation mechanism of total income
as defined under the Act? Consequently, is the income of
a Section 10-A unit required to be excluded before
arriving at the gross total income of the assessee?
3.2. (ii) Whether the phrase 'total income' in Section 10-
A of the Act is akin and pari materia with the said
expression as appearing in Section 2(45) of the Act?
3.3. (iii) Whether even after the amendment made with
effect from 1-4-2001, Section 10-A of the Act continues
to remain an exemption section and not a deduction
section?
3.4. (iv) Whether losses of other 10-A units or non 10-A
units can be set off against the profits of 10-A units
before deductions under Section 10-A are effected?
3.5. (v) Whether brought forward business losses and
unabsorbed depreciation of 10-A units or non 10-A units
can be set off against the profits of another 10-A units of
the assessee?”
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7.6. The Hon'ble Supreme Court noted the statutory scheme
under Section 10A of the Act, as it existed prior to its amendment
by the Finance Act, 2000 with effect from 1.4.2001, as also the
effect of subsequent amendment of Section 10A of the Act by the
Finance Act, 2003 with retrospective effect from 1.4.2001.
At this juncture, it is to be noted that the relevant assessment
years in the present cases are subsequent to the aforesaid
amendments and, therefore, the decision of the Supreme Court
would be applicable on all fours.
7.7. On analyzing the provisions contained in Section 10A of
the Act, their Lordships in the Supreme Court noted that the
amendment of Section 10A by the Finance Act, 2000 with effect
from 1.4.2001 specifically uses the words “deduction of profits and
gains derived by an eligible unit ... from the total income of the
assessee”. They further noted that, after amendment, though
Section 10A of the Act had changed its colour from being an
exemption section to a provision providing for deduction, yet it
continued to remain in Chapter III of the Act, which deals with
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incomes which do not form part of the total income.
7.8. Their Lordships also referred to Circular No.7, dated
16.7.2013 as also another Circular No.1 of 2013, dated 17.1.2013
and noted certain discrepancies.
7.9. After referring to the provisions contained in Section 10A
of the Act, as it stood prior to amendment and after amendment, as
also various circulars, the Hon'ble Supreme Court held as below:
“14. ... The true and correct purport and effect of the
amended section will have to be construed from the
language used and not merely from the fact that it has
been retained in Chapter III. The introduction of the word
'deduction' in Section 10-A by the amendment, in the
absence of any contrary material, and in view of the
scope of the deductions contemplated by Section 10-A as
already discussed, it has to be understood that the
section embodies a clear enunciation of the legislative
decision to alter its nature from one providing for
exemption to one providing for deductions.
15. The difference between the two expressions
'exemption' and 'deduction', though broadly may appear
to be the same i.e. immunity from taxation, the practical
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effect of it in the light of the specific provisions contained
in different parts of the Act would be wholly different.
The above implications cannot be more obvious than
from the case of Civil Appeals Nos. 8563 and 8564 of
2013 and civil appeal arising out of SLP (C) No. 18157 of
2015, which have been filed by loss-making eligible units
and/or by non-eligible assessees seeking the benefit of
adjustment of losses against profits made by eligible
units.”
7.10. What has been observed by the Hon'ble Supreme Court
in paragraph 15, extracted herein above, makes it clear that the
cases also involved loss making eligible units and/or non-eligible
assessees seeking the benefit of adjustment of losses against profits
made by eligible units.
7.11. In the said decision, it was further observed as under:
“16. ... The provisions of Sections 80-HHC and 80-HHE of
the Act providing for somewhat similar deductions would
be wholly irrelevant and redundant if deductions under
Section 10-A were to be made at the stage of operation
of Chapter VI of the Act. The retention of the said
provisions of the Act i.e. Sections 80-HHC and 80-HHE,
despite the amendment of Section 10-A, in our view,
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indicates that some additional benefits to eligible Section
10-A units, not contemplated by Sections 80-HHC and
80-HHE, was intended by the legislature. Such a benefit
can only be understood by a legislative mandate to
understand that the stages for working out the
deductions under Sections 10-A and 80-HHC and 80-HHE
are substantially different.”
7.12. The interpretation placed on the scheme of provision
contained in Section 10A of the Act was further clarified as below:
“17. From a reading of the relevant provisions of Section
10-A it is more than clear to us that the deductions
contemplated therein are qua the eligible undertaking of
an assessee standing on its own and without reference to
the other eligible or non-eligible units or undertakings of
the assessee. The benefit of deduction is given by the Act
to the individual undertaking and resultantly flows to the
assessee. This is also more than clear from the
contemporaneous Circular No. 794 dated 9-8-2000 which
states in para 15.6 that,
'The export turnover and the total turnover for
the purposes of Sections 10-A and 10-B shall be
of the undertaking located in specified zones or
100% export-oriented undertakings, as the case
may be, and this shall not have any material
relationship with the other business of the
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assessee outside these zones or units for the
purposes of this provision'.
18. If the specific provisions of the Act provide [first
proviso to Sections 10-A(1); 10-A(1-A) and 10-A(4)] that
the unit that is contemplated for grant of benefit of
deduction is the eligible undertaking and that is also how
the contemporaneous circular of the department (No.
794 dated 9-8-2000) understood the situation, it is only
logical and natural that the stage of deduction of the
profits and gains of the business of an eligible
undertaking has to be made independently and,
therefore, immediately after the stage of determination
of its profits and gains. At that stage the aggregate of
the incomes under other heads and the provisions for set
off and carry forward contained in Sections 70, 72 and 74
of the Act would be premature for application. The
deductions under Section 10-A therefore would be prior
to the commencement of the exercise to be undertaken
under Chapter VI of the Act for arriving at the total
income of the assessee from the gross total income. The
somewhat discordant use of the expression 'total income
of the assessee' in Section 10-A has already been dealt
with earlier and in the overall scenario unfolded by the
provisions of Section 10-A the aforesaid discord can be
reconciled by understanding the expression 'total income
of the assessee' in Section 10-A as 'total income of the
undertaking'.”
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7.13. The aforesaid decision of the Hon'ble Supreme Court is
clearly applicable to the facts of the present case and the loss of the
eligible units could be set-off against the other income of the tax
payer in view of the provision relating to deduction as contained in
Section 10A of the Act and it cannot be said that the decision of the
Supreme Court does not apply in a case of loss-making 10A unit
against the profits of non-10A unit.
7.14. The Circular dated 16.7.2013, which was considered by
the Supreme Court in the aforesaid decision and also placed for our
perusal, clearly provides as below:
“5.2 The income computed under various heads of
income in accordance with the provisions of Chapter
IV of the IT Act shall be aggregated in accordance
with the provisions of Chapter VI of the IT Act, 1961.
This means that first the income/loss from various
sources i.e. eligible and ineligible units, under the
same head are aggregated in accordance with the
provisions of section 70 of the Act. Thereafter, the
income from one ahead is aggregated with the
income or loss of the other head in accordance with
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the provisions of section 71 of the Act. If after giving
effect to the provisions of sections 70 and 71 of the
Act there is any income (where there is no brought
forward loss to be set off in accordance with the
provisions of section 72 of the Act) and the same is
eligible for deduction in accordance with the
provisions of Chapter VI-A or sections 10A, 10B etc.
of the Act, the same shall be allowed in computing
the total income of the assessee.”
7.15. In respect of the previous assessment years, in
assessee's own case, referred to herein above, the ITAT decided the
issue in favour of the assessee and learned counsel for the Revenue
could not satisfy the court that the aforesaid orders were taken to
higher courts and reversed.
8. In conclusion, the first substantial question of law in
T.C.A.No.277 of 2016 and the sole substantial question of law in
T.C.A.No.280 of 2016 is decided in favour of the assessee and
against the revenue.
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SECOND & THIRD SUBSTANTIAL QUESTIONS OF LAW IN TCA
No.277 OF 2016 AND FIRST & SECOND SUBSTANTIAL QUESTIONS
OF LAW IN TCA No.278 of 2016
9. These issues challenge the finding rendered by the ITAT that
the amount paid by the assessee to Sprint USA, for International
Private Leased Circuits (IPLC), is to be disallowed under section
40(a)(i) of the Act, and the said amount constitutes ‘Royalty’ under
Section 9 of the Act read with the Double Taxation Avoidance
Agreement (DTAA) between India and United States of America.
10.1. Learned counsel for the assessee submitted that, for
assessment years 2002-2003 and 2003-2004, though an order was
passed under Section 201 of the Act holding the assessee liable to
deduct tax at source on payments made to Sprint USA, on appeal, the
CIT(A) held in favour of the assessee. In the appeal preferred by the
Revenue against the order passed by the CIT(A) in the proceedings
under Section 201 of the Act, the ITAT, following the decision in
Verizon Communications Singapore PTE Ltd v. ITO
4
, allowed the appeal
of the Revenue.
However, for the assessment year 2003-2004, the Assessing
4(2013) 39 taxmann.com 70 (Madras)
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Officer, vide his order under Section 143(3) of the Act, disallowed the
deduction towards payment to Sprint USA applying Section 40(a)(i) of
the Act, which was confirmed by the CIT(A) and the ITAT. The ITAT, in
arriving at such conclusion, followed its earlier order, referred to in the
preceding paragraph, and passed the orders impugned in TCA Nos.277
and 278 of 2016. It is submitted that ITAT, solely based on decision in
Verizon Communications Singapore PTE Ltd v. ITO (supra), jumped to
the conclusion that the appellant’s case is akin to case of Verizon
Communications Singapore PTE Ltd v. ITO (supra), without
independently analyzing any material pertaining to the claim of the
assessee in this regard.
10.2. It is further submitted that the facts of the present case
and that of Verizon Communications Singapore PTE Ltd v. ITO (supra)
are poles apart, as none of the services of Sprint USA is rendered in
India and they were rendering services pertaining to data transmission
outside India. He added that when services are not rendered in India,
there can be no tax incidence for the assessment years in question.
10.3. It is also submitted that the decision of this court in
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Verizon Communications Singapore PTE Ltd v. ITO (supra) is no
more good law in view of the judgment of the Supreme Court in
Engineering Analysis Centre of Excellence Pvt. Ltd v. CIT
5
, wherein,
while considering the effect of amendment to the Act without
making any change in the DTAA, it was held that the amendment to
the Act does not alter the DTAA. He further contended that in
Verizon Communications Singapore PTE Ltd v. ITO (supra), it was
observed that “Royalty” under the Act and the DTAA between India
and Singapore are identical in scope, which runs counter to the
decision of the Supreme Court in Engineering Analysis Centre of
Excellence Pvt. Ltd v. CIT (supra).
10.4. Learned counsel for the assessee argued that the Delhi
High Court in DIT v. New Skies Satellite BV
6
, held that payment for
transponder leaser is only a payment towards service and,
therefore, would not fall within the ambit of royalty, particularly
when the payer did not have control or possession of the
transponder. He added that the Supreme Court in Engineering
5(2021) 432 ITR 471 (SC)
6(2016) 68 Taxmann.com 9 (Del) : (2016) 285 CTR 1 (Del)
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Analysis Centre of Excellence Pvt. Ltd v. CIT (supra), held that the
view expressed in DIT v. New Skies Satellite BV (supra) is correct.
He submits that, in effect, the decision of this court in Verizon
Communications Singapore PTE Ltd v. ITO (supra) is overruled by
the Supreme Court.
10.5. It is argued by learned counsel for the assessee that, in
sooth, the unilateral amendment to the Act cannot be construed to
be a modification of the DTAA entered into between India and USA.
He submitted that in the case of Engineering Analysis Centre of
Excellence Pvt. Ltd v. CIT (supra), the Supreme Court has
emphatically held that persons who pay TDS and/or assessees in
the nations governed by a DTAA have a right to know exactly where
they stand in respect of the treaty provisions that govern them and
for this reliance can be placed upon the Organisation for Economic
Co-operation and Development (OECD) Commentary for provisions
of the OECD Model Tax Convention, which are used without any
substantial change by bilateral DTAAs.
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10.6. It is contended that de hors the meaning of “Royalty” in
respect of clause (iva) to Explanation 2 to Section 9(1)(vi) of the
Act, the meaning in respect of Royalty under DTAA will have to be
interpreted on the strength of OECD commentary, as per which the
meaning of “Royalty” under the DTAA will be only in respect of use
of equipment, where the possession/control is with the payer.
10.7. He relied upon yet another decision of the Delhi High
Court in CIT v. Telstra Singapore Pte Ltd
7
, to bolster his argument
that payments towards IPLC shall not amount to royalty.
11.1. Learned Standing Counsel for the revenue, refuting the
aforesaid submissions, contended that the assessee had made
certain payments to Sprint USA for using the undersea cables for
the purpose of its business and such undersea cables can be treated
as equipment and, therefore, the payments made for using the
equipment would squarely fall within the definition of “royalty” as
defined in Clause (iva) to Explanation 2 to Section 9(1)(vi) of the
Act. To boot, he submitted that the definition of royalty under the
7(2024) 165 taxmann.com 85 (Del)
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India-USA Tax Treaty (DTAA) also is similar to what is found in the
Act and, therefore, even under the tax treaty the payments made
by the assessee would fall within the definition of royalty, as the
treaty does not have any restricted meaning to the term “royalty”.
11.2. It is also submitted that the case of the assessee is
squarely covered by the decision of this court in Verizon
Communications Singapore PTE Ltd v. ITO (supra), wherein it was
held that the payments made by an Indian company to a foreign
company for using its IPLC would squarely fall within the definition
of royalty, both under the Act and the tax treaty between India and
Singapore (in that case). Further, this Court had relied on Clause
(iva) to Explanation 2 to Section 9(1)(vi) of the Act which states
that “any payment made for the use or right to use any industrial,
commercial or scientific equipment” will be treated as royalty. The
said decision holds the field, in as much as no stay was granted, nor
it was overruled by the Supreme Court.
11.3. It is further submitted that the decision in Engineering
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Analysis Centre of Excellence Pvt. Ltd v. CIT (supra) is not directly
on the issue involved in this case, but was qua copyright of
computer software and payments made for use of a copyright
cannot be compared with the definition for use of equipment. He
submitted that, forsooth, the said decision is not applicable to the
case on hand.
11.4. Nextly, it is submitted that in the Poompuhar Shipping
Corporation Limited v. ITO
8
, it has been held that mere use of an
equipment (ship) would amount to royalty. By the same token, the
use of the IPLC, which is an undersea cable, should be treated as a
payment for use of an equipment and, therefore, would fall within
the definition of royalty.
11.5. Learned Standing Counsel relied on a decision of the
Delhi High Court in the case of HCL Ltd v CIT
9
, wherein it was held
that payments can be of two types. One, may be either for ‘use’ or
'right to use’ of an equipment or an intellectual property right (as it
8(2013) 38 taxmann.com 150 (Madras)
9(2015) 54 taxmann.com 231 (Delhi)
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was in that case) or the payment may be for the 'transfer of right to
use’ or ‘sale’ of the same equipment or intellectual property right.
The Court held that insofar as the latter two payments are
concerned, they will not attract any royalty, because they may at
best be treated as capital gains or business income, if there is a
permanent establishment in the country from which the payments
are made. On the other hand, the payments made for the former
two situations i.e., use or right to use of an equipment or an
intellectual property, it was held that they will be treated as a
royalty and, therefore, would attract withholding tax as per the Act
or the tax treaty whichever is more beneficial to the taxpayers. In
the light of the said decision, he submits that mere use is sufficient
to attract royalty payment and there is no necessity that the control
and/or possession of such equipment should also be with the
assessee to be treated as royalty, because if the possession and
control are also handed over to the assessee without there being an
actual sale, then it would amount to “transfer of right to use” of an
equipment, which is treated as a “deemed sale”, which is just one
step short of actual sale. Even though possession and control were
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not granted to the assessee in the case on hand, given the locus of
the equipments (they were undersea cables), it is only natural to
arrive at a conclusion that the payments made will fall within the
meaning of use or a right to use of the equipments, since the
assessee cannot have possession over the same, but is benefited
from those equipments which belong to Sprint USA.
11.6. He submitted that reliance placed by the appellant on
the tax treaties of other countries and the OECD model tax treaty is
off the beam. It is argued that no reliance can be placed on
another tax treaty, which, according to the assessee, is more
beneficial, unless there is a Most Favoured Nation (MFN) clause in
the India-USA tax treaty, which alone permits the reliance on other
tax treaties (third country tax treaties) that have more beneficial
clauses to the assessee. Further, the reliance on the OECD model
tax treaty is over the fence, as, admittedly, India is not even a
member of the OECD. Since India and USA are members of UN, he
submitted that reliance should be placed on the UN model tax
treaty, which gives a wider meaning to the word “use of and right to
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use of” which does not require any possession or control
requirement to fall within the definition of royalty.
12.1. The facts which are not in dispute are that the assessee
has made payments to a foreign based company, namely, Sprint
USA, for availing services of international private leased circuits, as
it is engaged in the business of software development and export,
and is also rendering related services.
12.2. The assessee claimed deduction under Section 40(a)(i)
of the Act. The Assessing Officer found that the assessee was not
entitled to any such deduction claimed by it and concluded that the
amounts paid by the assessee to Sprint USA was without making
deduction of tax at source. In the appeal before the CIT(A), the
assessee challenged the order in so far as the assessee's claim with
regard to payments made to Sprint USA were concerned. On this
issue of disallowance of payments made to Sprint USA, the appeal
was dismissed. The ITAT also dismissed the claim on the issue of
disallowance of payments made to Sprint USA, following the
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judgment of this Court in the case of Verizon Communications
Singapore PTE Ltd v. ITO (supra) and held that the payment is in
the nature of royalty and, therefore, subject to deduction of tax at
source.
12.3. The seminal issue requiring consideration is whether the
payment made by the assessee to Sprint USA constitutes royalty as
provided under Section 9 of the Act read with the DTAA between
India and United States of America.
12.4. In order to decide the issue, it is necessary to first set
out the relevant provisions of the Act.
12.4.1. Section 5 of the Act provides for scope of total income
as below:
“5. Scope of total income.—
(1) Subject to the provisions of this Act, the total income
of any previous year of a person who is a resident
includes all income from whatever source derived which—
(a) is received or is deemed to be received in
India in such year by or on behalf of such
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person; or
(b) accrues or arises or is deemed to accrue or
arise to him in India during such year; or
(c) accrues or arises to him outside India during
such year:
Provided that, in the case of a person not ordinarily
resident in India within the meaning of sub-section (6) of
section 6, the income which accrues or arises to him
outside India shall not be so included unless it is derived
from a business controlled in or a profession set up in
India.
(2) Subject to the provisions of this Act, the total income
of any previous year of a person who is a non-resident
includes all income from whatever source derived which—
(a) is received or is deemed to be received in
India in such year by or on behalf of such
person; or
(b) accrues or arises or is deemed to accrue or
arise to him in India during such year.
Explanation 1.—Income accruing or arising outside India
shall not be deemed to be received in India within the
meaning of this section by reason only of the fact that it
is taken into account in a balance sheet prepared in
India.
Explanation 2.—For the removal of doubts, it is hereby
declared that income which has been included in the total
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income of a person on the basis that it has accrued or
arisen or is deemed to have accrued or arisen to him
shall not again be so included on the basis that it is
received or deemed to be received by him in India.”
12.4.2. Section 9 of the Act makes a provision as to when
income is deemed to accrue or arise in India. The relevant provision
with reference to which the issue has been considered by the ITAT,
CIT(A) and the Assessing Officer is reproduced as below:
“9. Income deemed to accrue or arise in India.—
(1) The following incomes shall be deemed to accrue or
arise in India:—
...
(vi) income by way of royalty payable by—
(a) the Government; or
(b) a person who is a resident, except where the
royalty is payable in respect of any right,
property or information used or services utilised
for the purposes of a business or profession
carried on by such person outside India or for
the purposes of making or earning any income
from any source outside India; or
(c) a person who is a non-resident, where the
royalty is payable in respect of any right,
property or information used or services utilised
for the purposes of a business or profession
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carried on by such person in India or for the
purposes of making or earning any income from
any source in India:
Provided that nothing contained in this clause shall apply
in relation to so much of the income by way of royalty as
consists of lump sum consideration for the transfer
outside India of, or the imparting of information outside
India in respect of, any data, documentation, drawing or
specification relating to any patent, invention, model,
design, secret formula or process or trade mark or similar
property, if such income is payable in pursuance of an
agreement made before the 1st day of April, 1976, and
the agreement is approved by the Central Government:
Provided further that nothing contained in this clause
shall apply in relation to so much of the income by way of
royalty as consists of lump sum payment made by a
person, who is a resident, for the transfer of all or any
rights (including the granting of a licence) in respect of
computer software supplied by a non-resident
manufacturer along with a computer or computer-based
equipment under any scheme approved under the Policy
on Computer Software Export, Software Development
and Training, 1986 of the Government of India.
...
Explanation 2.—For the purposes of this clause, “royalty”
means consideration (including any lump sum
consideration but excluding any consideration which
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would be the income of the recipient chargeable under
the head “Capital gains”) for—
...
(iva) the use or right to use any industrial, commercial or
scientific equipment but not including the amounts
referred to in section 44BB.
...
Explanation 3.—For the purposes of this clause,
“computer software” means any computer programme
recorded on any disc, tape, perforated media or other
information storage device and includes any such
programme or any customized electronic data.
Explanation 4.—For the removal of doubts, it is hereby
clarified that the transfer of all or any rights in respect of
any right, property or information includes and has
always included transfer of all or any right for use or
right to use a computer software (including granting of a
licence) irrespective of the medium through which such
right is transferred.
Explanation 5.—For the removal of doubts, it is hereby
clarified that the royalty includes and has always included
consideration in respect of any right, property or
information, whether or not—
(a) the possession or control of such right,
property or information is with the payer;
(b) such right, property or information is used
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directly by the payer;
(c) the location of such right, property or
information is in India.
Explanation 6.—For the removal of doubts, it is hereby
clarified that the expression “process” includes and shall
be deemed to have always included transmission by
satellite (including up-linking, amplification, conversion
for down-linking of any signal), cable, optic fibre or by
any other similar technology, whether or not such
process is secret.”
12.4.3. As the issue involved in the case is whether the
assessee is entitled to claim deduction under Section 40(a)(i) of the
Act, in respect of payment made to foreign based company, and the
liability is to be ascertained by taking into consideration not only the
provisions contained in Section 9 of the Act, but also the provisions
contained in DTAA as between India and USA, Section 90 of the Act
is also relevant, which provides as below:
“90. Agreement with foreign countries or specified
territories.—
(1) The Central Government may enter into an
agreement with the Government of any country outside
India or specified territory outside India,—
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(a) for the granting of relief in respect of—
(i) income on which have been paid both
income-tax under this Act and income-tax in
that country or specified territory, as the case
may be, or
(ii) income-tax chargeable under this Act and
under the corresponding law in force in that
country or specified territory, as the case may
be, to promote mutual economic relations, trade
and investment, or
(b) for the avoidance of double taxation of income under
this Act and under the corresponding law in force in that
country or specified territory, as the case may be,
without creating opportunities or avoidance (including
through treaty-shopping arrangements aimed at
obtaining reliefs provided in the said agreement for the
indirect benefit to residents of any other country or
territory, or
(c) for exchange of information for the prevention of
evasion or avoidance of income-tax chargeable under this
Act or under the corresponding law in force in that
country or specified territory, as the case may be, or
investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under
the corresponding law in force in that country or specified
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territory, as the case may be,
and may, by notification in the Official Gazette, make
such provisions as may be necessary for implementing
the agreement.
(2) Where the Central Government has entered into an
agreement with the Government of any country outside
India or specified territory outside India, as the case may
be, 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.”
12.5.1. Taking into consideration the provisions of Section 9 of
the Act, including the amendments made therein by introducing and
adding Explanations 4, 5 and 6, in respect of almost a similar
transaction, the Division Bench of this Court in the case of Verizon
Communications Singapore PTE Ltd v. ITO (supra) held that such
payments made would constitute royalty within the meaning of that
expression as defined under Section 9 of the Act, with the result
that it would stand excluded for the purposes of claiming deduction
as provided under Section 40(a)(i) of the Act and, consequently,
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includable as an income and liable for deduction of tax at source.
12.5.2. The aforesaid decision has been made a basis to
disallow the claim of the assessee by holding that what has been
paid by the assessee to Sprint USA constitutes royalty.
12.5.3. The factual premise and the issue which arose for
consideration in the said case, and as set out in the order, are that
the assessee company therein, namely Verizon Communications
Singapore PTE Ltd, originally called as MCI Worldcom Asia Pte Ltd,
and part of the global telecommunication conglomerate of MCI,
USA, was a non-resident company engaged in the business of
providing international connectivity services. Being a point-to-
point private line used by an organisation to communicate between
offices that are geographically dispersed throughout the world, the
assessee therein provided a private link that would transport voice
data and video traffic between the offices in different countries.
Thus, IPLC is an end-to-end managed dedicated bandwidth service
that provided internet service to customers for various applications.
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The international leg of the telecom services provided outside India
was provided by the assessee therein. Since in India, under the
Indian Telecom Regulations, only the licensed service provider could
provide international long distance communication services on the
Indian leg, and the assessee therein was not a licensed service
provider under the Indian laws, Videsh Sanchar Nigam Ltd (VSNL),
a public sector undertaking, provided the Indian leg of the
international service to the customers. Thus, a customer interested
in taking a lease connection between its office in India and an
overseas location entered into an arrangement with the assessee
for the provision of international connectivity in the overseas leg
and with VSNL for Indian half of the connectivity. VSNL transmitted
the traffic of the customer in India from the customer's office in
India and transmitted the traffic to a virtual point outside India and
the assessee transmitted it up to the customer location outside
India. It was stated that the assessee uses its telecom service
equipment situated outside India in providing the international half
circuit. It was also stated that the gateway/the landing station in
India used in transmitting the traffic within India belonged to VSNL
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and is used by VSNL for providing Indian end services pursuant to
its contract with the customer. In the said case, on the analysis of
the facts, the Assessing Officer came to the conclusion that the
payment received by the assessee therein in providing IPLC was
taxable as "royalty" for use of or right to use of commercial and
scientific equipment under Section 9(1)(vi) read with Explanation 2
to the Act and the relevant provisions of the DTAA between India
and Singapore.
12.5.4. In Verizon Communications Singapore PTE Ltd v. ITO
(supra), the assessee objected to the assessment on the basis that
the payments were made in the nature of 'royalty' taxable under
Section 9(1)(vi) read with Explanation 2(iva) and (vi) of the Act
primarily on the ground that the revenue earned by the assessee
could not be considered as 'royalty' paid for the use of the
equipment under the Act. It was the case of the assessee that the
customers have no knowledge of the equipment/network used by
the assessee for the provision of the service. It was also pleaded
that the the customers do not have the control with reference to the
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usage of the equipment/network used for rendering the service. The
case of the assessee was that no part of the international network is
exclusive for any Indian customer or customers as a whole and that
the agreement between the assessee and the customers being one
for rendering of service by the assessee, the payment could not be
treated as 'royalty'. The view taken by the Assessing Officer, CIT(A)
and the ITAT in that case is as under:
“... the receipt of consideration for rendering of services
to the end user is workable only when the assessee and
the VSNL are considered to be rendering the service
jointly to the end user in India. The agreements between
the assessee and the end user and the VSNL are part of
one transaction, but executed through several
agreements/arrangements. The payments made by the
customers for the offshore services rendered by the non-
resident assessee are part of one single agreement to
provide IPLC and, hence, the receipts are taxable as
'royalty' under section 9(1)(vi) read with Explanation 2 to
the Income-tax Act. ... Thus, payments received for
providing communication bandwidth in the form of IPLC
to customers came to be treated as 'royalty'. The
transmission cables and hightech instruments providing a
seamless circuit are 'equipment' and the income earned
by permitting the use of or right to use of equipment fell
within the meaning of 'royalty', both under the Income-
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tax Act and under the DTAA between India and
Singapore.”
12.5.5. In the aforesaid case, the ITAT further that, as per the
agreement, the customer acquired significant, economic or
possessory interest in the equipment of the assessee to the extent
of the bandwidth hired by the customer. This was made available to
the assessee on a dedicated basis. The agreement with VSNL for
split billing is only to overcome the telecom regulatory regime
prevailing in India. VSNL was a sub-contractor and a provisioning
entity on behalf of the assessee and the IPLC is a hightech circuit
comprising transmission cables and sophisticated equipment.
Therefore, even if the payments are not treated as not relating to
the use of the 'equipment', they should be considered as payment
for the use of the 'process'.
12.5.6. The submission made on behalf of the revenue before
this court in that case was that the character of the receipt clearly
fits in with Section 9(1)(vi) read with Explanation 2(iva) of the Act
for equipment royalty and, alternatively, it can also be taxed as
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process, falling under Explanation 2(iii) to Section 9(1)(vi) of the
Act that receipt would nevertheless be held as 'royalty'. It was also
submitted that for royalty there need not be a physical or right to
use to the user and so long as there is nexus between the user, the
situs of the usage (in India) and the purpose of the use (for offering
seamless internet facility), economic exploitation of the equipment
gives rise to the income to be taxed as 'royalty'.
12.5.7. Importantly, the revenue, in the said case, also
referred to 2012 amendment adding Explanation 5, to submit that
Explanation 5 clearly pointed out that for treating a receipt as
'royalty', even possession or control need not be proved. The
submission advanced was that VSNL's services taken by the
assessee was only part of the agreement that the assessee had with
the customer and VSNL acted as provisioning agent. As the network
offered is a single continuous unified system, it cannot be bisected
as onshore and offshore parts and, thus, when the assessee offered
seamless connectivity from one end to the other, the same is
separate logically and artificially because of the geographical
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factors. Therefore, the entire equipment provided for seamless
connection are one whole indivisible equipment towards exploitation
of the connectivity offered to the end. Thus, the payment is not for
pro rata basis, but towards the entire service offered.
12.5.8. Further submissions made on behalf of the revenue
were with specific reference to Explanation 6 to Section 9(1)(vi) of
the Act to buttress the revenue's stand that the payment is also qua
the process as falling under Explanation 2(iii) to Section 9(1)(vi) of
the Act, and that cable is also treated as a commercial equipment
and, thus, for the equipment usage and the services utilised, the
payment falls within the meaning of 'royalty' and Clause (iva) of
Explanation 2 to Section 9(1)(vi) of the Act includes licence and
lease.
12.5.9. Relying upon various judgments, it was submitted on
behalf of the revenue that a right to access and exploit a part of
segment of a larger system to use the capacity of the system and
the consideration paid therefor clearly falls under Clause (iva) of
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Explanation 2 to Section 9(1)(vi) of the Act and, hence, 'royalty'. It
was also submitted therein that it is a right to use a process and a
right to use equipment coming within Explanation 2 to Section
9(1)(vi) of the Act.
12.5.10. The revenue relied on the provisions contained in
Section 9(1)(vi) of the Act and Explanation 2(iva) thereof, besides
Explanations 5 and 6 added by way of amendment of 2012, to
submit that the control and possession of the equipment is not
necessary to constitute payment as 'royalty' and that the
Explanation included the right to use a process.
12.5.11. Another distinctive feature noted by this court in the
said case was that the equipment is transferred to VSNL by MCI for
a token payment of Rs.10,000, and the ownership remained only
with MCI, because VSNL does not have the right to sell the
equipment and the equipment is to be handed over at any time to
MCI on demand for payment of Rs.10,000. The payment by VSNL
was only a token payment and, hence, not the actual consideration
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for the equipment. Taking into consideration the aforesaid aspect,
it was held that the appellant therein had to take the services of
VSNL, as the provisioning entity, for providing that part of the
services in India having regard to the Regulations of the Telecom
Regulatory Authority of India, and as the assessee did not possess
the appropriate licence for doing so in India, it had taken the
services of VSNL as provisioning entity.
12.5.12. The terms of DTAA as between India and Singapore
were also taken into consideration in Verizon Communications
Singapore PTE Ltd v. ITO (supra) and upon reading thereof, it was
concluded that the definition of 'royalty' under DTAA and the Act are
pari materia. Reference was also made to Explanation 6 to Section
9(1)(vi) of the Act, which defines 'process' to mean and include
transmission by satellite (including uplinking, amplification,
conversion for down-linking of any signal) cable, optic fibre, or by
any other similar technology, whether or not such process is secret.
12.5.13. Taking into consideration that the payment for the
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bandwith amounts to 'royalty' for the use of the process, the
payment received by the assessee therein, which was treated as
'royalty' by the ITAT, was upheld by this Court in the aforesaid
decision and it was concluded thus:
“102. In the circumstances, we reject the case of the
assessee holding that the receipts are liable to be treated
as 'royalty' for the use of IPLC under section 9(1)(vi)
read with Explanation 2(iva) and correspondingly article
12(3) of the DTAA between India and Singapore. We also
agree with the Tribunal that even if the payment is not
treated as one for the use of the equipment, the use of
the process was provided by the assessee, whereby
through the assured bandwidth the customer is
guaranteed the transmission of the data and voice. The
fact that the bandwidth is shared with others, however,
has to be seen in the light of the technology governing
the operation of the process and this by itself does not
take the assessee out of the scope of royalty. Thus, the
consideration being for the use and the right to use of
the process, it is 'royalty' within the meaning of clause
(iii) of Explanation 2 to section 9(1)(vi) of the Income-tax
Act.”
12.5.14. The decision of the Delhi High Court in the case of
Asia Satellite Telecommunications Private Limited v. DIT
10
, was also
10(2011) 332 ITR 340 (Delhi)
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sought to be relied upon by the assessee in Verizon
Communications Singapore PTE Ltd v. ITO (supra) in support of its
contention that the agreement between the assessee and customer
contemplated rendering of services only and, hence, consideration
paid would not partake the character of royalty. Why this court did
not agree with the view taken by the Delhi High Court in Asia
Satellite Telecommunications Private Limited v. DIT (supra) shall be
dealt with little later.
12.5.15.1. In the case of Asia Satellite Telecommunications
Private Limited v. DIT (supra), it was held that receipts earned from
providing data transmission services, through the lease of
transponder capacity of its satellites, do not constitute 'royalty'
within the meaning of Section 9(1)(vi) of the Act. The view taken
was that, while providing transmission services to customers, the
control of the satellite always remained with the assessee therein
and the customers are only given access to the broadband available
with the transponder. The customer, therefore, does not use
satellite or the process involved in its operations. That being so,
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the payment cannot be termed as 'royalty' for the use of a process
or equipment. The court recognized therein that definition of
'royalty' in the section is with respect to permission granted to use
the right in respect of the patent, invention, process, etc., all
essentially form part of intellectual property. This permission
restricts itself to merely letting an asset. The permission does not
go so far to allow alienation of the asset itself. Therefore, it is not
so restricted as to qualify as a case where the licensor uses the
asset himself, albeit for the purposes of his customers.
12.5.15.2. In Asia Satellite Telecommunications Private
Limited v. DIT (supra), the Delhi High Court took note of the
features of the agreement entered by the assessee in that case,
which was a foreign company incorporated in Hong Kong, and its
customers, which were television channels. The agreement was
essentially one of allocation of transponder capacity available on the
satellite to enable the channels to relay their signals. The customer
had their own relaying facilities. Further, the transponder receives
the signals, amplifies it and downlinks it to facilitate the
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transmission of signals. Quoting the judgment of the Authority for
Advance Rulings in ISRO
11
, the court held that it becomes clear that
all that the customer gets through the agreement with the assessee
is mere access to broadband width available in the transponder. The
control over the parts of the satellites and, naturally, the
transponder remains with the assessee. At no point does the
assessee cede control over the satellite. Logically, since the
transponder is a part of the satellite that cannot be severed from it,
the process carried on in the transponder in receiving signals and
retransmitting the same, is an inseparable part of the process of the
satellite and that process is utilized only by the assessee who is in
control. It was noted that the Authority for Advance Rulings had
specifically rejected the contention of the revenue that, in
substance, there is use of transponder by the assessee. The fact
that the transponder automatically responds to the data commands
sent from the ground station network and retransmits the same
data over a wider footprint area does not mean that the control and
operation of the transponder is with the customer.
11(2008) 307 ITR 59 (AAR)
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12.5.15.3. Therefore, what was held in Asia Satellite
Telecommunications Private Limited v. DIT (supra) was that the
presence of control was a critical factor in adjudging whether there
was use of a particular process. However, in Verizon
Communications Singapore PTE Ltd v. ITO (supra), this court did
not agree with the assessee regarding the applicability of the
decision in Asia Satellite Telecommunications Private Limited v. DIT
(supra), for the reason that the decision of the Delhi High Court in
that case and the ruling of the Authority for Advance Rulings in
ISRO (supra) were rendered prior to insertion of Explanation 5 and
that the decision of the Delhi High Court rested on the facts therein.
The observations made in Verizon Communications Singapore PTE
Ltd v. ITO (supra) in this regard are quoted below:
“87. We do not agree with the assessee principally for the
reason that the decision of the Delhi High Court reported
in Asia Satellite Telecommunications Co. Ltd. v. DIT
(2011) 332 ITR 340 (Delhi) and the rulings of the
Authority for Advance Rulings reported in (2008) 305 ITR
37 (AAR) (Dell International Services (India) Pvt. Ltd., In
re and Cable and Wireless Network India P. Ltd., In re
(2009) 315 ITR 72 (AAR) on which heavy reliance was
made were all rendered prior to the insertion of
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Explanation 5 and that the decision of the Delhi High
Court rested on the facts therein. The amendments by
insertion of Explanation 5 gives a very expansive
meaning to the term "royalty" and this has a bearing on
the issue so too the various clauses in the agreements
which are to be looked at in a holistic manner. The
agreement entered into between the assessee and the
customer herein is for providing of seamless point-to-
point private line so as to enable the customer to
communicate between its office that are geographically
dispersed. The service order reveals that the parties had
agreed for a particular bandwidth and in entering this the
assessee had provided the necessary equipment at
customer premises, configured and customised to ensure
that the customer gets the uninterrupted connectivity
from one end to the other end in different geographical
point.”
12.5.15.4. It is, thus, clear that one of the main reasons for
not agreeing with the view taken in Asia Satellite
Telecommunications Private Limited v. DIT (supra), was that the
said judgment was rendered prior to amendment brought in vide
Finance Act, 2012. On facts, in Verizon Communications Singapore
PTE Ltd v. ITO (supra), it was found that the agreement entered
into between the assessee and customer was for providing seamless
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point-to-point private line so as to enable the customer to
communicate between its offices that are geographically dispersed
and further that the service order reveals that the parties had
agreed for a particular bandwidth and, in entering this, the assessee
had provided the necessary equipment at customer premises,
configured and customised to ensure that the customer gets the
uninterrupted connectivity from one end to the other end in
different geographical point.
12.5.16. At this stage, it is pertinent to note that the decisions
of the Authority for Advance Ruling, New Delhi, in the cases of Dell
International Services India (P) Ltd, in re
12
and Cable and Wireless
Networks India (P) Ltd, in re
13
, on which reliance was placed by the
assessee therein, were held to be not applicable by this Court in
Verizon Communications Singapore PTE Ltd v. ITO (supra),
considering the amendment brought in under the Finance Act,
2012, by the insertion of Explanations 5 and 6.
12(2009) 308 ITR 37 (AAR – New Delhi)
13(2009) 315 ITR 72 (AAR – New Delhi)
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12.5.17. It is, thus, discernible from a close reading of the
decision in Verizon Communications Singapore PTE Ltd v. ITO
(supra), that the said decision turned on its own distinguishing facts
and on separate agreements – the agreement between the
assessee and VSNL, VSNL acting as provisioning entity on behalf of
the assessee, with specific reference to Explanations 5 and 6 to
Section 9(1)(vi) of the Act, added by the Finance Act, 2012.
12.5.18. Moreover, the aforesaid decision was based on the
conclusion that definition of 'royalty' under DTAA and the Act are
pari materia.
12.6.1. We shall now refer to the decision of the Delhi High
Court in the case of DIT v. New Skies Satellite BV (supra), which
was upheld by the Supreme Court in the case of Engineering
Analysis Centre of Excellence Pvt. Ltd v. CIT (supra), to find answer
to the question as to whether the decision of the Supreme Court
impliedly overrules the view taken in Verizon Communications
Singapore PTE Ltd v. ITO (supra), mainly on the ground that the
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newly added Explanations vide amendment through the Finance
Act, 2012 could be made applicable to the case on hand, as it
relates to assessment years relevant to financial years prior to such
amendment in 2012. The assessee, in the present case, has
heavily relied upon the decision of the Delhi High Court in DIT v.
New Skies Satellite BV (supra) and the Supreme Court decision in
the case of Engineering Analysis Centre of Excellence Pvt. Ltd v.
CIT (supra).
12.6.2. The factual foundation in the case of DIT v. New Skies
Satellite BV (supra), as noted by the court therein, was that the
assessee, a company incorporated in Netherlands, engages in
providing digital broadcasting services. On filing a return of nil
taxable income for the relevant years, the Assessing Officer again
under Section 143(3) read with Section 144C of the Act, applied
Section 9(1)(vi) of the Act to tax the income of the assessee as
royalty. The assessee derived income from the lease of
transponders of satellite. The lease was for the purpose of relaying
signals of their customers - both resident and non-resident
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television channels, that wish to broadcast their programmes for a
particular audience situated in a particular part of the world. In that
case, the assessee was chosen for the simple reason that the
footprint of its satellite, i.e. the area over which the satellite can
transmit its signal, includes India. The process by which the
television programmes reach the viewers in India was that the
television channels produced or acquired the tapes of the
programmess, which they then uplink to the satellite. The satellite
then receives the contents, amplifies it, changes its frequency by
undertaking certain processes, and then downlinks it, scattering the
signal over the area of its footprint. The cable operators who
ultimately relay it to the viewers in their homes then receive the
downlinked signal.
12.6.3. Though the Assessing Officer in that case held the
receipts as taxable under Section 9(1)(vi) of the Act, it being
royalty both under the Act as well as Indo-Netherlands DTAA, the
ITAT set aside the assessment order mainly based on the decision
in Asia Satellite Telecommunications Private Limited v. DIT (supra).
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12.6.4. Assailing the correctness and validity of the order
passed by the ITAT, the Revenue's case before the court was that
with the insertion of the three Explanations to Section 9(1)(vi) of
the Act, the matter has been settled beyond controversy and
reliance could no longer be based on the decision the case of Asia
Satellite Telecommunications Private Limited v. DIT (supra),
because the basis of that ruling has been undone by insertion of
Explanations 4, 5 and 6 to Section 9(1)(vi) of the Act vide Finance
Act, 2012. It was argued that the amendment applied to all
transactions past and present, as it imperatively suggests that if
there were any doubts as to whether the activity was taxable, the
same stand removed.
12.6.5. As far as the application of DTAA and whether it
resulted in rendering the activity non-taxable was concerned, in it
was the contention in DIT v. New Skies Satellite BV (supra) that the
DTAA predated the amendment. Therefore, reliance placed on the
decision in Asia Satellite Telecommunications Private Limited v. DIT
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(supra), which was in relation to Section 9 of the Act, could not be
said to be an authority on treaty interpretation. It was also
submitted that the terms of the treaty and the terms of the pre-
amended Act being similar, the subsequent amendment rendered
the reasoning in Asia Satellite Telecommunications Private Limited
v. DIT (supra) academic and, therefore, the assessee could not take
shelter under the DTAA, which was cast in identical terms with the
pre-amended statute, and since the same has subsequently been
amended, the courts are bound to give effect to it.
12.6.6. In that case, the assessee's reply was that any change
in the substantive law would not automatically result in a like
change in respect of taxability of a transaction or service, which is
otherwise tax exempt in terms of the DTAA or which is subject to a
lower rate of taxation mandated by a treaty.
12.6.7. As to what is the effect of the clarificatory amendment
inserting Explanations 4, 5 and 6 to Section 9(1)(vi) of the Act vide
Finance Act, 2012, after long drawn analysis and interpretation of
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the provisions contained in Section 9(1)(vi) of the Act, particularly
the newly inserted Explanations 4, 5 and 6, and various decisions,
no definite conclusion was arrived at, though the broad prima facie
view taken was against attaching retrospective effect, with the
following observations:
“33. There is a general presumption against
retrospectivity of an amendment. This is the principle of
lex prospicit non respicit which implies that unless
explicitly stated, a piece of legislation is presumed not to
be intended to have retrospective operation.
...
36. A clarificatory amendment presumes the existence of
a provision the language of which is obscure, ambiguous,
may have made an obvious omission, or is capable of
more than one meaning. In such case, a subsequent
provision dealing with the same subject may throw light
upon it. Yet, it is not every time that the Legislature
characterises an amendment as retrospective that the
court will give such effect to it. This is not in derogation
of the express words of the law in question, (which as a
matter of course must be the first to be given effect to),
but because the law which was intended to be given
retrospective effect to as a clarificatory amendment, is in
its true nature one that expands the scope of the section
it seeks to clarify, and resultantly introduces new
principles, upon which liabilities might arise. Such
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amendments though framed as clarificatory, are in fact
transformative substantive amendments, and incapable
of being given retrospective effect. ... If the amendment
changes the law it is not presumed to be retrospective
irrespective of the fact that the phrase used is "it is
declared" or "for the removal of doubts". In determining,
therefore, the nature of the Act, regard must be had to
the substance rather than to form. While adjudging
whether an amendment was clarificatory or substantive
in nature, and whether it will have retrospective effect or
not, it was held in CIT v. Gold Coin Health Food (P.) Ltd.
(2008) 304 ITR 308 (SC) and CIT v. Podar Cement (P.)
Ltd. [1997] 226 ITR625 (SC) that, (i) the circumstances
under which the amendment was brought in existence,
(ii) the consequences of the amendment, and (iii) the
scheme of the statute prior and subsequent to the
amendment will have to be taken note of.
37. An important question, which arises in this context, is
whether a "clarificatory" amendment remains true to its
nature when it purports to annul, or has the undeniable
effect of annulling, an interpretation given by the courts
to the term sought to be clarified. In other words, does
the rule against clarificatory amendments laying down
new principles of law extend to situations where law had
been judicially interpreted and the Legislature seeks to
overcome it by declaring that the law in question was
never meant to have the import given to it by the court?
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38. The circumstances in this case could very well go to
show that the amendment was no more than an exercise
in undoing an interpretation of the court which removed
income from data transmission services from taxability
under section 9(1)(vi). It would also be difficult, if not
impossible to argue, that inclusion of a certain specific
category of services or payments within the ambit of a
definition alludes not to an attempt to illuminate or clarify
a perceived ambiguity or obscurity as to interpretation of
the definition itself, but towards enlarging its scope.
Predicated upon this, the retrospectivity of the
amendment could well be a contentious issue. Be that as
it may, this court is disinclined to conclusively determine
or record a finding as to whether the amendment to
section 9(1)(vi) is indeed merely clarificatory as the
Revenue suggests it is, or prospective, given what its
nature may truly be.”
12.6.8. However, in the said case, as the court was of the
view that the issue of taxability could be resolved without taking a
final view on the issue of retrospectivity, it proceeded to decide the
issue of taxability by examining and interpreting the provisions of
the Act and applicable DTAA.
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12.6.9. It is extremely relevant to mention herein that in DIT
v. New Skies Satellite BV (supra), the decision in the case of
Verizon Communications Singapore PTE Ltd v. ITO (supra) was also
considered, noting that taking the amendments as clarificatory, the
same were applied to assessment years predating the amendment
and that no reasons were assigned for the extension of the
amendments to the double taxation avoidance agreement. It was
noted thus:
“31. In a judgment by the Madras High Court in Verizon
Communications Singapore Pte. Ltd. v. ITO (International
Taxation) (2014) 361 ITR 575 (Mad), the court held the
Explanations to be applicable to not only the domestic
definition but also carried them to influence the meaning
of royalty under article 12. Notably, in both cases, the
clarificatory nature of the amendment was not
questioned, but was instead applied squarely to
assessment years predating the amendment. The crucial
difference between the judgments however lies in the
application of the amendments to the double taxation
avoidance agreement. While TV Today (supra) recognises
that the question will have to be decided and the
submission argued, Verizon cites no reason for the
extension of the amendments to the double taxation
avoidance agreement.”
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12.6.10. It would, thus, be clear that diverse opinions were
recorded in the case of Verizon Communications Singapore PTE Ltd
v. ITO (supra) on the one hand and DIT v. New Skies Satellite BV
(supra) on the other. While in the case of Verizon Communications
Singapore PTE Ltd v. ITO (supra), Explanations 4, 5 and 6 to
Section 9(1)(vi) of the Act were held as clarificatory and, therefore,
applicable to assessments predating the amendment, a discordant
note was struck in DIT v. New Skies Satellite BV (supra), albeit no
final verdict on retrospective operation of newly inserted
explanations was rendered and the court proceeded on the
assumption that the Finance Act, 2012 inserting Explanations 5 and
6 to Section 9(1)(vi) of the Act was retrospective.
12.6.11. As we see, in Verizon Communications Singapore
PTE Ltd v. ITO (supra), there is hardly any discussion to arrive at
the conclusion that the newly inserted explanations are
retrospective, being clarificatory. The relevant observations in this
regard have already been referred to above. In fact, parties did join
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issue whether the Finance Act, 2012 inserting Explanations 5 and 6
to Section 9(1)(vi) of the Act operated retrospectively. It was
neither argued nor any discussion was made in the order to
conclude that the amendment was retrospective. Noting the
expression clarificatory; court held it to be applicable. As far as the
decision in DIT v. New Skies Satellite BV (supra) is concerned, there
also, though the issues were examined at some length, no
conclusive opinion was rendered.
12.7.1. We shall now proceed to consider whether the
Supreme Court decision in the case of Engineering Analysis Centre
of Excellence Pvt. Ltd v. CIT (supra) overrules the view taken in
Verizon Communications Singapore PTE Ltd v. ITO (supra).
12.7.2. In that case, the assessee, Engineering Analysis
Centre of Excellence Pvt. Ltd, was a resident Indian end-user of
shrink-wrapped computer software, directly imported from the
United States of America. The case related to the assessment years
2001-2002 and 2002-2003. Applying Article 12(3) of the DTAA
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between India and USA, and upon applying Section 9(1)(vi) of the
Act, it was found that the assessee, in fact, transferred in the
transaction between the parties copyright, which attracts payment
of royalty and, thus, it was required that tax be deducted at source
by the Indian importer and end-user, (assessee therein). Since that
was not done for both the assessment years, assessee therein was
held liable to pay the tax along with interest. The appeal before the
CIT(A) was dismissed, however, the ITAT, on appeal, allowed the
claim of the assessee therein. On further appeal before the High
Court, it was held that though no application under Section 195(2)
of the Act had been made, the resident Indian importer is liable to
deduct tax at source, without more, under Section 195(1) of the
Income Tax Act.
12.7.3. In that case, the amounts paid by the persons
concerned, resident in India, to non-resident, foreign software
suppliers, were held to constitute royalty, thereby constituting
taxable income deemed to accrue in India under Section 9(1)(vi) of
the Act and making it incumbent upon all such persons to deduct
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tax at source and pay tax deductible at source under Section 195 of
the Act.
12.7.4. We would, thus, find that in that case the issue
essentially related to use of copyright. Though that was a case
relating to copyright, the Supreme Court had an occasion to
examine the statutory scheme of Section 9 of the Act, as also the
effect of DTAA on taxability in such cases. Section 9(1)(vi) of the
Act, including Explanations 4, 5 and 6 thereof, added by way of the
Finance Act, 2012, also fell for consideration. The broad scheme of
the Act with regard to taxability of income and treating certain
payments as royalty was briefly outlined as below:
“25. The scheme of the Income Tax Act, insofar as the
question raised before us is concerned, is that for income
to be taxed under the Income Tax Act, residence in India,
as defined by Section 6, is necessary in most cases. By
Section 4(1), income tax shall be charged for any
assessment year at any rate or rates, as defined by
Section 2(37-A) of the Income Tax Act, in respect of the
total income of the previous year of every person. Under
Section 4(2), in respect of income chargeable under sub-
section (1) thereof, income tax shall be deducted at
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source or paid in advance, depending upon the provisions
of the Income Tax Act. Importantly, under Section 5(2)
of the Income Tax Act, the total income of a person who
is a non-resident, includes all income from whatever
source derived, which accrues or arises or is deemed to
accrue or arise to such person in India during such year.
This, however, is subject to the provisions of the Income
Tax Act. Certain income is deemed to arise or accrue in
India, under Section 9 of the Income Tax Act,
notwithstanding the fact that such income may accrue or
arise to a non-resident outside India. One such income is
income by way of royalty, which, under Section 9(1)(vi)
of the Income Tax Act, means the transfer of all or any
rights, including the granting of a licence, in respect of
any copyright in a literary work.”
12.7.5. The scope of various sub-sections, including sub-
section (vi) to Section 9(1) of the Act, and introduction of what may
be termed as "source rule" was explained thus:
“67. The insertion of sub-sections (v), (vi) and (vii) in
Section 9(1) of the Income Tax Act, by way of an
amendment through the Finance Act, 1976 [Act 66 of
1976, (w.e.f. 1-6-1976)] was to introduce source-based
taxation for income in the hands of a non-resident by
way of interest, royalty and fees for technical services. In
Carborandum & Co. v. CIT, (1977) 2 SCC 862 : 1977
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SCC (Tax) 391, this Court, applying residence-based
rules of taxation, held that the technical service fees
received by the non-resident assessee (relatable to
Assessment Year 1957-1958) could only be deemed to
accrue in India if such income could be attributed to a
business connection in India. In the facts of that case,
since no part of the foreign assessee's operations were
carried on in India, the technical services being rendered
wholly in foreign territory, it was held that no part of the
technical service fees received by the foreign assessee
accrued in India.
68. This position of law was altered by the Finance Act,
1976, which introduced a 'source-rule' to tax income by
way of royalty in the hands of a non-resident, noted in
the Memorandum explaining the provisions of the Finance
Bill, 1976, as follows:
'38. “Source rule” regarding place of accrual of
income by way of interest, royalty and fees for
technical services.—A non-resident taxpayer is
chargeable to tax in India in respect of income
from whatever source derived which is received
or is deemed to be received in India or which
accrues or arises or is deemed to accrue or arise
to him in India. The existing provisions in the
Income Tax Act which provide that certain
incomes will be deemed to accrue or arise in
India are couched in general language. The
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absence of a clear-cut source rule sometimes
creates uncertainty about the chargeability of
certain types of incomes in the case of non-
residents. In order to avoid any doubt or dispute
in regard to the accrual of income by way of
interest, royalty and fees for technical services in
the case of non-residents, it is proposed to make
certain provisions in the Income Tax Act clearly
specifying the circumstances in which such
income shall be deemed to accrue or arise in
India.
***
40. Income by way of royalty payable by the
Government will be deemed to accrue or arise in
India. Royalty payable by a person who is
resident in India will also be deemed to accrue or
arise in India, except in cases where the royalty
is payable for the transfer of any right or the use
of any property or information or for utilising the
services of the recipient for the purposes of a
business or profession carried on outside India
or for the purposes of making or earning any
income from a source outside India. Royalty
payable by a non-resident will be deemed to
accrue or arise in India only in cases where the
royalty is payable in respect of any right,
property or information used or services utilised
for the purposes of a business or profession
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carried on by the non-resident in India or for the
purposes of making or earning any income from
any source in India.'”
12.7.6. The aforesaid case, though was with reference to
copyright, the following pertinent observations were made:
“73. Even if we were to consider the ambit of “royalty”
only under the Income Tax Act on the footing that none
of the DTAAs apply to the facts of these cases, the
definition of “royalty” that is contained in Explanation 2
to Section 9(1)(vi) of the Income Tax Act would make it
clear that there has to be a transfer of “all or any rights”
which includes the grant of a licence in respect of any
copyright in a literary work. The expression “including the
granting of a licence” in clause (v) of Explanation 2 to
Section 9(1)(vi) of the Income Tax Act, would necessarily
mean a licence in which transfer is made of an interest in
rights “in respect of” copyright, namely, that there is a
parting with an interest in any of the rights mentioned in
Section 14(b) read with Section 14(a) of the Copyright
Act. To this extent, there will be no difference between
the position under the DTAA and Explanation 2 to Section
9(1)(vi) of the Income Tax Act.”
12.7.7. In that case, the revenue sought application of the
amendment made vide Finance Act, 2012 with retrospective effect
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from 1.6.1976, which added Explanation 4 to Section 9(1)(vi) of the
Act. Having noted the memorandum explaining the provisions in
the Finance Bill, 2012 and upon consideration of the submissions
made before it, broadly with regard to it being clarificatory of the
position as it always stood since 1.6.1976, their Lordships in the
Supreme Court examined the legal issue as below:
“77. It is equally difficult to accept the learned Additional
Solicitor General's submission that Explanation 4 to
Section 9(1)(vi) of the Income Tax Act is clarificatory of
the position as it always stood, since 1-6-1976, for which
he strongly relied upon CBDT Circular No. 152 dated 27-
11-1974. Quite obviously, such a circular cannot apply as
it would then be explanatory of a position that existed
even before Section 9(1)(vi) was actually inserted in the
Income Tax Act vide the Finance Act, 1976. Secondly,
insofar as Section 9(1)(vi) of the Income Tax Act relates
to computer software, Explanation 3 thereof, refers to
“computer software” for the first time with effect from 1-
4-1991, when it was introduced, which was then
amended vide the Finance Act, 2000. Quite clearly,
Explanation 4 cannot apply to any right for the use of or
the right to use computer software even before the term
“computer software” was inserted in the statute.
Likewise, even qua Section 2(o) of the Copyright Act, the
term “computer software” was introduced for the first
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time in the definition of a literary work, and defined
under Section 2(ffc) only in 1994 (vide Act 38 of 1994).
78. Furthermore, it is equally ludicrous for the aforesaid
amendment which also inserted Explanation 6 to Section
9(1)(vi) of the Income Tax Act, to apply with effect from
1-6-1976, when technology relating to transmission by a
satellite, optic fibre or other similar technology, was only
regulated by Parliament for the first time through the
Cable Television Networks (Regulation) Act, 1995, much
after 1976. For all these reasons, it is clear that
Explanation 4 to Section 9(1)(vi) of the Income Tax Act is
not clarificatory of the position as of 1-6-1976, but in
fact, expands that position to include what is stated
therein, vide the Finance Act, 2012.”
12.7.8. The submission made by the revenue before the court
that being covered by Explanation 4 to Section 9(1)(vi) of the Act,
the persons liable to deduct tax at source under Section 195 of the
Act ought to have deducted tax at source, on the footing that
Explanation 4 existed in the statute book with effect from 1976,
the court proceeded to examine whether the persons liable to
deduct TDS under Section 195 of the Act can be held liable to
deduct such sums at the time when Explanation 4 was not in the
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statute book, all deductions liable to be made and the assessment
years in question being prior to the year 2012. Apply two latin
maxims lex non cogit ad impossibilia and impotentia excusat legem,
the law expounded was as below:
“81. This question is answered by two Latin maxims, lex
non cogit ad impossibilia i.e. the law does not demand
the impossible and impotentia excusat legem i.e. when
there is a disability that makes it impossible to obey the
law, the alleged disobedience of the law is excused.
Recently, in the judgment in Arjun Panditrao Khotkar v.
Kailash Kushanrao Gorantyal, (2020) 7 SCC 1, delivered
by this Court, this Court applied the said maxims in the
context of the requirement of a certificate to produce
evidence by way of electronic record under Section 65-B
of the Evidence Act, 1872 and held that having taken all
possible steps to obtain the certificate and yet being
unable to obtain it for reasons beyond his control, the
respondent in the facts of the case, was relieved of the
mandatory obligation to furnish a certificate. In so
holding, this Court referred to previous judgments
dealing with the doctrine of impossibility and concluded
as follows:
“47. However, a caveat must be entered here. The
facts of the present case show that despite all efforts
made by the respondents, both through the High Court
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and otherwise, to get the requisite certificate under
Section 65-B(4) of the Evidence Act from the
authorities concerned, yet the authorities concerned
wilfully refused, on some pretext or the other, to give
such certificate. In a fact-circumstance where the
requisite certificate has been applied for from the
person or the authority concerned, and the person or
authority either refuses to give such certificate, or
does not reply to such demand, the party asking for
such certificate can apply to the court for its
production under the provisions aforementioned of the
Evidence Act, CPC or CrPC. Once such application is
made to the court, and the court then orders or directs
that the requisite certificate be produced by a person
to whom it sends a summons to produce such
certificate, the party asking for the certificate has done
all that he can possibly do to obtain the requisite
certificate. Two Latin maxims become important at this
stage. The first is lex non cogit ad impossibilia i.e. the
law does not demand the impossible, and impotentia
excusat legem i.e. when there is a disability that
makes it impossible to obey the law, the alleged
disobedience of the law is excused. This was well put
by this Court in Presidential Poll, In re [Presidential
Poll, In re, (1974) 2 SCC 33] as follows:
‘14. If the completion of election before the
expiration of the term is not possible because of
the death of the prospective candidate it is
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apparent that the election has commenced
before the expiration of the term but completion
before the expiration of the term is rendered
impossible by an act beyond the control of
human agency. The necessity for completing the
election before the expiration of the term is
enjoined by the Constitution in public and State
interest to see that the governance of the
country is not paralysed by non-compliance with
the provision that there shall be a President of
India.
15. The impossibility of the completion of the
election to fill the vacancy in the office of the
President before the expiration of the term of
office in the case of death of a candidate as may
appear from Section 7 of the 1952 Act does not
rob Article 62(1) of its mandatory character. The
maxim of law impotentia excusat legem is
intimately connected with another maxim of law
lex non cogit ad impossibilia. Impotentia excusat
legem is that when there is a necessary or
invincible disability to perform the mandatory
part of the law that impotentia excuses. The law
does not compel one to do that which one
cannot possibly perform. “Where the law creates
a duty or charge, and the party is disabled to
perform it, without any default in him, and has
no remedy over it, there the law will in general
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excuse him.” Therefore, when it appears that the
performance of the formalities prescribed by a
statute has been rendered impossible by
circumstances over which the persons interested
had no control, like the act of God, the
circumstances will be taken as a valid excuse.
Where the act of God prevents the compliance
with the words of a statute, the statutory
provision is not denuded of its mandatory
character because of supervening impossibility
caused by the act of God. (See Broom's Legal
Maxims, 10th Edn. at pp. 162-63 and Craies on
Statute Law, 6th Edn. at p. 268.)’
It is important to note that the provision in question in
Presidential Poll, In re [Presidential Poll, In re, (1974) 2
SCC 33] was also mandatory, which could not be
satisfied owing to an act of God, in the facts of that case.
These maxims have been applied by this Court in
different situations in other election cases — See Chandra
Kishore Jha v. Mahavir Prasad, (1999) 8 SCC 266, at
paras 17 and 21; Special Reference No. 1 of 2002, In re
(Gujarat Assembly Election matter) [Special Reference
No. 1 of 2002, In re (Gujarat Assembly Election matter),
(2002) 8 SCC 237], at paras 130 and 151 and Raj Kumar
Yadav v. Samir Kumar Mahaseth [Raj Kumar Yadav v.
Samir Kumar Mahaseth, (2005) 3 SCC 601] , at paras 13
and 14.
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48. These Latin maxims have also been applied in several
other contexts by this Court. In Cochin State Power &
Light Corpn. Ltd. v. State of Kerala [Cochin State Power
& Light Corpn. Ltd. v. State of Kerala, (1965) 3 SCR 187
: AIR 1965 SC 1688], a question arose as to the exercise
of an option of purchasing an undertaking by the State
Electricity Board under Section 6(4) of the Electricity Act,
1910. The provision required a notice of at least 18
months before the expiry of the relevant period to be
given by such State Electricity Board to the State
Government. Since this mandatory provision was
impossible of compliance, it was held that the State
Electricity Board was excused from giving such notice, as
follows : (Cochin State Power & Light case [Cochin State
Power & Light Corpn. Ltd. v. State of Kerala, (1965) 3
SCR 187 : AIR 1965 SC 1688], SCR p. 193 : AIR pp.
1691-92, para 8)
‘8. Sub-section (1) of Section 6 expressly vests
in the State Electricity Board the option of
purchase on the expiry of the relevant period
specified in the licence. But the State
Government claims that under sub-section (2) of
Section 6 it is now vested with the option. Now,
under sub-section (2) of Section 6, the State
Government would be vested with the option
only “where a State Electricity Board has not
been constituted, or if constituted, does not elect
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to purchase the undertaking”. It is common case
that the State Electricity Board was duly
constituted. But the State Government claims
that the State Electricity Board did not elect to
purchase the undertaking. For this purpose, the
State Government relies upon the deeming
provisions of sub-section (4) of Section 6, and
contends that as the Board did not send to the
State Government any intimation in writing of its
intention to exercise the option as required by
the sub-section, the Board must be deemed to
have elected not to purchase the undertaking.
Now, the effect of sub-section (4) read with sub-
section (2) of Section 6 is that on failure of the
Board to give the notice prescribed by sub-
section (4), the option vested in the Board under
sub-section (1) of Section 6 was liable to be
divested. Sub-section (4) of Section 6 imposed
upon the Board the duty of giving after the
coming into force of Section 6 a notice in writing
of its intention to exercise the option at least 18
months before the expiry of the relevant period.
Section 6 came into force on 5-9-1959, and the
relevant period expired on 3-12-1960. In the
circumstances, the giving of the requisite notice
of 18 months in respect of the option of
purchase on the expiry of 2-12-1960, was
impossible from the very commencement of
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Section 6. The performance of this impossible
duty must be excused in accordance with the
maxim, lex non cogit ad impossibilia (the law
does not compel the doing of impossibilities),
and sub-section (4) of Section 6 must be
construed as not being applicable to a case
where compliance with it is impossible. We must,
therefore, hold that the State Electricity Board
was not required to give the notice under sub-
section (4) of Section 6 in respect of its option of
purchase on the expiry of 25 years. It must
follow that the Board cannot be deemed to have
elected not to purchase the undertaking under
sub-section (4) of Section 6. By the notice
served upon the appellant, the Board duly
elected to purchase the undertaking on the
expiry of 25 years. Consequently, the State
Government never became vested with the
option of purchasing the undertaking under sub-
section (2) of Section 6. The State Government
must, therefore, be restrained from taking
further action under its notice, Ext. G, dated 20-
11-1959.’
49. In Raj Kumar Dey v. Tarapada Dey [Raj Kumar
Dey v. Tarapada Dey, (1987) 4 SCC 398], the maxim
lex non cogit ad impossibilia was applied in the context
of the applicability of a mandatory provision of the
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Registration Act, 1908, as follows: (SCC pp. 402-403,
paras 6-7)
‘6. We have to bear in mind two maxims of
equity which are well settled, namely, actus
curiae neminem gravabit — An act of the court
shall prejudice no man. In Broom's Legal
Maxims, 10th Edn., 1939 at p. 73 this maxim is
explained that this maxim was founded upon
justice and good sense; and afforded a safe and
certain guide for the administration of the law.
The above maxim should, however, be applied
with caution. The other maxim is lex non cogit
ad impossibilia (Broom's Legal Maxims, p. 162)
— The law does not compel a man to do that
which he cannot possibly perform. The law itself
and the administration of it, said Sir W. Scott,
with reference to an alleged infraction of the
revenue laws, must yield to that to which
everything must bend, to necessity; the law, in
its most positive and peremptory injunctions, is
understood to disclaim, as it does in its general
aphorisms, all intention of compelling
impossibilities, and the administration of laws
must adopt that general exception in the
consideration of all particular cases.
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7. In this case indisputably during the period
from 26-7-1978 to December 1982 there was
subsisting injunction preventing the arbitrators
from taking any steps. Furthermore, as noted
before the award was in the custody of the
court, that is to say, 28-1-1978 till the return of
the award to the arbitrators on 24-11-1983,
arbitrators or the parties could not have
presented the award for its registration during
that time. The award as we have noted before
was made on 28-11-1977 and before the expiry
of the four months from 28-11-1977, the award
was filed in the court pursuant to the order of
the court. It was argued that the order made by
the court directing the arbitrators to keep the
award in the custody of the court was wrong and
without jurisdiction, but no arbitrator could be
compelled to disobey the order of the court and
if in compliance or obedience with court of
doubtful jurisdiction, he could not take back the
award from the custody of the court to take any
further steps for its registration then it cannot be
said that he has failed to get the award
registered as the law required. The aforesaid two
legal maxims — the law does not compel a man
to do that which he cannot possibly perform and
an act of the court shall prejudice no man would,
apply with full vigour in the facts of this case and
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if that is the position then the award as we have
noted before was presented before the Sub-
Registrar, Arambagh on 25-11-1983 the very
next one day of getting possession of the award
from the court. The Sub-Registrar pursuant to
the order of the High Court on 24-6-1985 found
that the award was presented within time as the
period during which the judicial proceedings
were pending that is to say, from 28-1-1978 to
24-11-1983 should be excluded in view of the
principle laid down in Section 15 of the
Limitation Act, 1963. The High Court [Tarapada
Dey v. District Registrar, Hooghly, 1986 SCC
OnLine Cal 101 : AIR 1987 Cal 107] , therefore,
in our opinion, was wrong in holding that the
only period which should be excluded was from
26-7-1978 till 20-12-1982. We are unable to
accept this position. 26-7-1978 was the date of
the order of the learned Munsif directing
maintenance of status quo and 20-12-1982 was
the date when the interim injunction was
vacated, but still the award was in the custody
of the court and there is ample evidence as it
would appear from the narration of events
hereinbefore made that the arbitrators had tried
to obtain the custody of the award which the
court declined to give to them.’
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50. These maxims have also been applied to tenancy
legislation — see B.P. Khemka (P) Ltd. v. Birendra
Kumar Bhowmick [B.P. Khemka (P) Ltd. v. Birendra
Kumar Bhowmick, (1987) 2 SCC 407] , SCC para 12,
and have also been applied to relieve authorities of
fulfilling their obligation to allot plots when such plots
have been found to be unallottable, owing to the
contravention of the Central statutes — see Hira
Tikkoo v. State (UT of Chandigarh) [Hira Tikkoo v.
State (UT of Chandigarh), (2004) 6 SCC 765] , SCC
paras 23 and 24.
51. On an application of the aforesaid maxims to the
present case, it is clear that though Section 65-B(4) is
mandatory, yet, on the facts of this case, the
respondents, having done everything possible to obtain
the necessary certificate, which was to be given by a
third party over whom the respondents had no control,
must be relieved of the mandatory obligation contained
in the said sub-section.”
82. As a matter of fact, even under the Income Tax Act,
the High Court of Bombay has taken a view, applying the
aforestated maxims in the context of the provisions of
the relevant DTAAs, to hold that persons are not
obligated to do the impossible i.e. to apply a provision of
a statute when it was not actually and factually on the
statute book.
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12.7.9. In the aforesaid decision, it was thus concluded as
below:
“85. It is thus clear that the “person” mentioned in
Section 195 of the Income Tax Act cannot be expected to
do the impossible, namely, to apply the expanded
definition of “royalty” inserted by Explanation 4 to
Section 9(1)(vi) of the Income Tax Act, for the
assessment years in question, at a time when such
Explanation was not actually and factually in the statute.”
12.7.10. Therefore, it is clear position of law, as enunciated
by the Supreme Court as aforesaid, that the Explanations added
vide Finance Act, 2012 cannot be treated as clarificatory in nature,
as if they were in the statute book since 1.6.1976, as the
provisions are expansive in nature and, in substance, not merely
clarificatory.
12.7.11. The aforesaid enunciation of law is applicable in the
present case, because the assessments in question are in relation to
taxability pertaining to finance years prior to introduction of Finance
Act, 2012.
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12.8.1. The view taken in the case of Verizon Communications
Singapore PTE Ltd v. ITO (supra) is that even if the assessee does
not have an effective control over the equipment, the use of
process will render payment liable to be treated as royalty was
based on application of Explanations 4, 5 and 6 added by way of
Finance Act, 2012 and we see from a reading of the said judgment,
that the assessee's case based on decision in the case Asia Satellite
Telecommunications Private Limited v. DIT (supra) and various
rulings of the Authority on Advance Rulings was rejected by holding
that such decisions are of no assistance in view of the amendment
which was introduced by Finance Act, 2012 by insertion of
Explanations 5 and 6.
12.8.2. In Verizon Communications Singapore PTE Ltd v. ITO
(supra), the decision in the case of Poompuhar Shipping
Corporation Limited v. ITO (supra), was relied upon, wherein for
the purposes of determining whether the payments made
constituted royalty, recourse was had to the meaning assigned to it
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by taking into consideration newly inserted Explanations 4 and 5
under the Finance Act, 2012.
12.8.3. It was precisely on application of the newly inserted
Explanations vide Finance Act, 2012, whereafter it became
irrelevant whether or not the assessee has control or possession of
the scientific equipment, that the claim of the assessee therein that
payment made was for service and it was not a case of transfer was
rejected. Therefore, to that extent, the decision in the case of
Verizon Communications Singapore PTE Ltd v. ITO (supra), in our
considered opinion, stands overruled and cannot be relied upon as a
precedent.
12.9. But for the application of newly inserted Explanations 4,
5 and 6 under Finance Act, 2012, the payment made in the present
case by the assessee to Sprint USA for IPLC would not constitute
'royalty' within the meaning of that expression as provided under
clause (iva) to Explanation 2 to Section 9(1)(vi) of the Act, in as
much as it does not partake nature of consideration for the use or
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right to use a scientific equipment, applying the principle laid down
in Asia Satellite Telecommunications Private Limited v. DIT (supra).
13. Accordingly, the questions of law on this issue are
answered in favour of the assessee and against the revenue.
FOURTH SUBSTANTIAL QUESTION OF LAW IN TCA No.277 OF 2016
AND THIRD SUBSTANTIAL QUESTION OF LAW IN TCA No.278 of
2016
14. This issue pertains to the finding rendered by the ITAT
that amount paid by the appellant to Sprint USA should be subject
to deduction of tax at source.
15.1. Questioning the legality of the said finding, learned
counsel for the assessee submitted that, assuming arguendo, even
if the payments are determined to be royalty in nature, no
disallowance under Section 40 of the Act can be made in the hands
of the assessee in view of the non-discrimination article of the
India-USA DTAA. He added that Article 26(3) of the India-USA
DTAA unequivocally provides that payments, inter alia, royalty paid
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to a resident of USA shall be allowable as a deduction in
determining the taxable income of a resident of India under the
same conditions as if they were paid to a resident of India. He
submitted that there should be parity between the deductibility of
expenses whether they are paid to residents of India or residents of
USA and the same conditions should apply to the deductibility of
expenses for both.
15.2. Learned counsel for the assessee instantiated the two
separate provisions for disallowance of expenses, i.e., Section
40(a)(ia) and Section 40(a)(i), by submitting that, if the assessee
had made a payment in the nature of royalty and had failed to
deduct applicable tax on the same, then there is a lack of parity
since: (a) the payment made to non-resident would be liable to
disallowance, since Section 40(a)(i) provides for disallowance of
payments in the nature of royalty; and (b) the payment made to
Indian resident would not be liable to disallowance, since Section
40(a)(ia) does not cover payments in the nature of royalty. This,
according to the assessee, is tantamount to gross discrimination
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that is sought to be nullified under Article 26 of the India-USA
DTAA.
15.3. Referring to Article 26(3) of the India-USA DTAA, it is
submitted that the language in which it is couched makes it clear
that the deduction in the hands of Resident payer on payment to a
US Resident shall be under the same conditions as that of a
payment made to an Indian Resident. In the present case, the
disallowance is made only in respect of payment to a non-resident.
He added that the mere fact that there was no provision under the
Act mandating deduction of tax at source in respect of payment to a
resident does not alter the applicability of Article 26(3).
15.4. In support of the submissions on this issue, learned
counsel for the assessee relied upon the following decisions:
(a)CIT v. Herbalife International India (P) Ltd
14
;
(b)CIT v. Mitsubishi Corporation India (P) Ltd
15
;
(c)Berger Paints India Ltd v. Commissioner of Income
14(2016) 384 ITR 276 (Delhi)
15(2024) 463 ITR 335 (Delhi)
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Tax
16
; and
(d)Union of India v. Kaumudini Narayan Dalal
17
;
16.1. In rebuttal, learned Standing Counsel submitted that
until 13.07.2006, there was no requirement to deduct tax on
royalty payments made to a resident in India. Section 194J Act was
amended with effect from 13.07.2006, in which royalty was also
included. In the same year, vide Finance Act 2006, Section
40(a)(ia) of the Act was also amended by including the term royalty
for the purpose of disallowance of the payments made to a resident
for failure to deduct tax under Section 194J of the Act. Therefore,
when there was no necessity at all to deduct tax on payments made
to a resident until assessment year 2006-2007, the assessee cannot
rely on a non-existent requirement during the assessment years
2003-2004 and 2004-2005 and compare that with a positive
requirement under the Act for deducting tax by the assessee while
making payments to a non-resident.
16(2004) 266 ITR 99 (SC)
17(2001) 249 ITR 219 (SC)
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16.2. It is his submission that it is a policy decision of a
sovereign State to decide as to when a particular domestic
withholding tax has to be introduced on any particular payment and
it cannot be dictated by any other State, far less, a taxpayer.
Therefore, the reliance placed by learned counsel for assessee on
two Delhi High Court judgments, referred supra, is misplaced, as
the said decisions did not consider introduction of royalty
withholding tax requirement in Section 194J of the Act only from
assessment year 2006-2007.
16.3. In any case, it is submitted that discrimination, as long
as it is fair, logical and reasonable, cannot be treated as unfair
discrimination. The recovery of tax from a non-resident on the
payments received will almost be impossible and, therefore, unless
and until a resident payer deducts the taxes on the payments made
to a non-resident, such taxes will have to be foregone once and for
all. When such a reasonable basis is the reason for invoking Section
40(a)(i) of the Act on the assessee for the relevant assessment
years, that too, when it need not shell its money as taxes, as it only
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has to withhold from the payments made to a non-resident, it
cannot be complained that even if it does not deduct tax, it should
not come within the ambit of Section 40(a)(i) of the Act.
17.1. Though we have held that payment made by the
assessee to Sprint USA for use of undersea cables does not
constitute royalty, this question of law being equally important as it
involves the issue of taxability with reference to the provisions of
the Act and DTAA and its interpretation, we shall proceed to decide
the same.
17.2. The provisions of Section 90(2) of the Act have already
been referred to herein above to highlight that where the Central
Government has entered into an agreement with the Government of
any country outside India or specified territory outside India, as the
case may be, 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
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assessee.
17.3. It is undisputed that there exists in operation a DTAA
between India and USA. The Tribunal held that provision qua
'royalty' under DTAA and the Act are pari materia and, therefore,
the payment made by the assessee was treated as royalty and the
assessee's claim of disallowance under Section 40(a)(i) of the Act
was rejected.
17.4. Before referring to the relevant articles of DTAA
between India and USA, as applicable in the present case, it is
relevant to refer to the pertinent observations made by the Delhi
High Court in DIT v. New Skies Satellite BV (supra) and the
conceptual framework of DTAA, its interpretation and taxability as
royalty of certain payments made:
“24. International double taxation typically occurs when
two jurisdictions claim the right to tax the same tax
entity or subject with respect to the same income for the
same period. Indisputably, taxation of income twice over
by two different jurisdictions has an adverse impact on
the movement of goods and services across international
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borders. For this purpose, jurisdictions with concurrent
taxing rights enter into double taxation avoidance
agreement, which set rules that attempt, at the very
least, theoretically, to eliminate a double incidence of tax.
The States therefore limit their legitimate taxing powers
in favour of the other State, by either agreeing not to tax
a certain income, which has been reserved for the other
Contracting State, or taxing that income to a limited
extent. These treaties therefore have the effect of
restraining the operation of the domestic taxing laws of a
Contracting State. Justifiably, the balance between the
domestic law of the Contracting State and its obligations
under the treaty is a delicate matter worthy of critical
consideration and is often the subject of Parliamentary
legislation. In this context, section 90 of the Act of 1961,
which is law relatable to article 253 of the Constitution,
read with Entries 13, 14 and 82 of List 1 of the Seventh
Schedule holds the field. It states that where the Central
Government has entered into a double taxation
avoidance agreement, then in relation to the taxpayer
who is contemplated by such agreement, the provisions
of the Act shall apply to the extent that they are more
beneficial to the assessee.
25. The underlying presumption of a double taxation
avoidance agreement being that in the absence of such
agreement, the income in question is taxable in both
jurisdictions as under their domestic laws, whenever
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courts are confronted with taxability of an income in the
context of such an agreement, they must as a matter of
course, first decide whether the income in issue is
taxable under domestic legislation, specifically the Act. It
is only when that issue is answered in the affirmative
that the court turns its attention to the tax convention in
issue, to ascertain primarily whether the terms of the
convention exempt that particular income from being
taxed under the Act.
...
41. This court is of the view that no amendment to the
Act, whether retrospective or prospective can be read in
a manner so as to extend in operation to the terms of an
international treaty. In other words, a clarificatory or
declaratory amendment, much less one which may seek
to overcome an unwelcome judicial interpretation of law,
cannot be allowed to have the same retroactive effect on
an international instrument effected between two
sovereign states prior to such amendment. In the context
of international law, while not every attempt to subvert
the obligations under the treaty is a breach, it is
nevertheless a failure to give effect to the intended
trajectory of the treaty. Employing interpretive
amendments in domestic law as a means to imply
contoured effects in the enforcement of treaties is one
such attempt, which falls just short of a breach, but is
nevertheless, in the opinion of this court, indefensible.”
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17.5. The nature and the impact of treaties on taxability, as
considered by the Supreme Court in the case of Union of India v.
AzadiBachao Andolan
18
was relied upon by the Delhi High Court in
the aforesaid decision as below:
“42. It takes little imagination to comprehend the extent
and length of negotiations that take place when two
nations decide to regulate the reach and application of
their legitimate taxing powers. In Union of India v. Azadi
Bachao Andolan (2003) 263 ITR 706 (SC), where the
Indo-Mauritius Double Taxation Avoidance Convention
was before the Supreme Court, the court said the
following of the essential nature of these treaties:
"132. An important principle which needs to be
kept in mind in the interpretation of the
provisions of an international treaty, including
one for double taxation relief is that treaties are
negotiated and entered into at a political level
and have several considerations as their bases.
Commenting on this aspect of the matter, David
R. Davis in Principles of International Double
Taxation Relief, (see David R. Davis, Principles of
International Double Taxation Relief, Pg.4
(London Sweet and Maxwell, 1985)) points out
18(2003) 263 ITR 706
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that the main function of a Double Taxation
Avoidance Treaty should be seen in the context
of aiding commercial relations between treaty
partners and as being essentially a bargain
between two treaty countries as to the division
of tax revenues between them in respect of
income falling to be taxed in both jurisdictions. It
is observed (vide para. 1.06):
'The benefits and detriments of a double taxation
treaty will probably only be truly reciprocal
where the flow of trade and investment between
treaty partners is generally in balance. Where
this is not the case, the benefits of the treaty
may be weighted more in favour of one treaty
partner than the other, even though the
provisions of the treaty are expressed in
reciprocal terms. This has been identified as
occurring in relation to tax treaties between
developed and developing countries, where the
flow of trade and investment is largely one way.
Because treaty negotiations are largely a
bargaining process with each side seeking
concessions from the other, the final agreement
will often represent a number of compromises,
and it may be uncertain as to whether a full and
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sufficient quid pro quo is obtained by both
sides.'"
17.6. In the context of a situation, where there does exist a
definition of the term within the DTAA, the legal position was
explained by the Delhi High Court in DIT v. New Skies Satellite BV
(supra) as under:
“50. ... This court's finding is in the context of the second
situation, where there does exist a definition of a term
within the double taxation avoidance agreements. When
that is the case, there is no need to refer to the laws in
force in the Contracting States, especially to deduce the
meaning of the definition under the double taxation
avoidance agreements and the ultimate taxability of the
income under the agreement. That is not to say that the
court may be inconsistent in its interpretation of similar
definitions. What that does imply however, is that just
because there is a domestic definition similar to the one
under the double taxation avoidance agreement,
amendments to the domestic law, in an attempt to
contour, restrict or expand the definition under its
statute, cannot extend to the definition under the Double
Taxation Avoidance Agreement. In other words, the
domestic law remains static for the purposes of the
double taxation avoidance agreement. The court in
Sanofi (supra) had also held similarly:
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"We are in agreement with the petitioners and in
the light of our preceding analyses, discern no
textual, grammatical or syntactic ambiguity in
article 14(5), warranting an interpretive
recourse. In the circumstances, invoking the
provisions of article 3(2) by an artificial
insemination of ambiguity (to accommodate an
expanded meaning to the double tax avoidance
agreement provision), would be contrary to good
faith interpretation. A further problematic of
contriving an ambiguity to unwarrantedly invite
application of domestic law of a Contracting
State would be that while India would interpret
an undefined double taxation avoidance
agreement provision according to the provisions
of the Act, France could do so by reference to its
tax code. As a consequence, the purpose of
entering into a treaty with a view to avoiding
double taxation of cross-border transactions
would be frustrated."
17.7. Referring to another decision of the Delhi High Court,
the principle applicable was explained thus:
“52. Thus, an interpretive exercise by Parliament cannot
be taken so far as to control the meaning of a word
expressly defined in a treaty. Parliament, supreme as it
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may be, is not equipped, with the power to amend a
treaty. It is certainly true that law laid down by
Parliament in our domestic context, even if it were in
violation of treaty principles, is to be given effect to; but
where the State unilaterally seeks to amend a treaty
through its Legislature, the situation becomes one quite
different from when it breaches the treaty. In the latter
case, while internationally condemnable, the State's
power to breach very much exists; courts in India have
no jurisdiction in the matter, because in the absence of
enactment through appropriate legislation in accordance
with article 253 of the Constitution, courts do not possess
any power to pronounce on the power of the State to
enact a law contrary to its treaty obligations. The
domestic courts, in other words, are not empowered to
legally strike down such action, as they cannot dictate
the executive action of the State in the context of an
international treaty, unless of course, the Constitution
enables them to. That being said, the amendment to a
treaty is not on the same footing. Parliament is simply
not equipped with the power to, through domestic law,
change the terms of a treaty. A treaty to begin with, is
not drafted by Parliament; it is an act of the executive.
Logically therefore, the executive cannot employ an
amendment within the domestic laws of the State to
imply an amendment within the treaty. Moreover, a
treaty of this nature is a carefully negotiated economic
bargain between two States. No one party to the treaty
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can ascribe to itself the power to unilaterally change the
terms of the treaty and annul this economic bargain. It
may decide to not follow the treaty, it may chose to
renege from its obligations under it and exit it, but it
cannot amend the treaty, especially by employing
domestic law. The principle is reciprocal. Every treaty
entered into be the Indian State, unless self-executory,
becomes operative within the State once Parliament
passes a law to such effect, which governs the
relationship between the treaty terms and the other laws
of the State. It then becomes part of the general
conspectus of domestic law. Now, if an amendment were
to be effected to the terms of such treaty, unless the
existing operationalising domestic law states that such
amendments are to become automatically applicable,
Parliament will have to by either a separate law, or
through an amendment to the original law, make the
amendment effective. Similarly, amendments to domestic
law cannot be read into treaty provisions without
amending the treaty itself.”
17.8. It was also held in DIT v. New Skies Satellite BV (supra)
that when the technical terms used in the DTAAs are the same
which appear in Section 9(1)(vi) of the Act, for better
understanding all these very terms, OECD commentary can always
be relied upon, by relying upon various judgments of the Apex
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Court emphasizing 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
Act.
17.9. India's change in position to the OECD Commentary was
held not to influence the interpretation of the words defining royalty
as they stood on the date and the only manner in which such
change in position is 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. Therefore, mere
amendment to Section 9(1)(vi) of the Act cannot result in a change
and it is imperative that such amendment is brought about in the
agreement as well.
17.10. Having held that the Finance Act will not effect Article
12 of the DTAA, it was a consequent finding that determinative
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interpretation given to the word 'royalty' in Asia Satellite
Telecommunications Private Limited v. DIT (supra), where
definitions were, in fact, pari materia will continue to hold the field
for the purpose of assessment years preceding the Finance Act,
2012 and in all cases which involved a DTAA, unless the said DTAA
is amended jointly by both the parties to incorporate income from
data transmission services as partaking the nature of royalty, or
amend the definition in a manner so that such income automatically
becomes royalty.
17.11. The aforesaid principles with regard to application of
DTAAs when the same term is used both in the Act and DTAAs was
examined by the Apex Court in Engineering Analysis Centre of
Excellence Pvt. Ltd v. CIT (supra). The appeals before the Supreme
Court concerned the DTAAs between India and several countries/
parties, including USA, as clearly stated in paragraph 40 of the said
judgment. It was then observed that each of these DTAAs
(including agreement with USA) is based on the OECD Model Tax
Convention on Income and on Capital, and are, therefore,
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substantially similar, if not identical, in respect of the provisions
concerning “business profits” and “royalties”.
17.12. The Supreme Court considered various provisions of
India-Singapore DTAA, including Article 12 captioned “Royalties and
Fees for Technical Services”. It considered the provisions contained
in DTAAs and Explanation 4 to Section 90 of the Act to hold that the
definition of the term “royalties” shall have the meaning assigned to
it by the DTAA, meaning thereby that the expression “royalty”,
when occurring in Section 9 of the Act, has to be construed with
reference to Article 12 of the DTAA. The position clarified by the
CBDT Circular dated 2.4.1982 was also referred. The observations
in this regard are as below:
“42. The subject-matter of each of the DTAAs with which
we are concerned is income tax payable in India and a
foreign country. Importantly, as is now reflected by
Explanation 4 to Section 90 of the Income Tax Act and
under Article 3(2) of the DTAA, the definition of the term
“royalties” shall have the meaning assigned to it by the
DTAA, meaning thereby that the expression “royalty”,
when occurring in Section 9 of the Income Tax Act, has
to be construed with reference to Article 12 of the DTAA.
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This position is also clarified by CBDT Circular No. 333
dated 2-4-1982, [ F. No. 506/42/81-FTD.] which states
as follows:
“Circular No. 333 dated 2-4-1982.
Specific provisions made in double taxation
avoidance agreement — Whether it would prevail
over general provisions contained in the Income
Tax Act
1. It has come to the notice of the Board that
sometimes effect to the provisions of double
taxation avoidance agreement is not given by
the assessing officers when they find that the
provisions of the agreement are not in
conformity with the provisions of the Income Tax
Act, 1961.
2. The correct legal position is that where a
specific provision is made in the double taxation
avoidance agreement, that provisions will prevail
over the general provisions contained in the
Income Tax Act. In fact that the double taxation
avoidance agreements which have been entered
into by the Central Government under Section
90 of the Income Tax Act, also provide that the
laws in force in either country will continue to
govern the assessment and taxation of income in
the respective countries except where provisions
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to the contrary have been made in the
agreement.
3. Thus, where a double taxation avoidance
agreement provides for a particular mode of
computation of income, the same should be
followed, irrespective of the provisions in the
Income Tax Act. Where there is no specific
provision in the agreement, it is basic law i.e.
the Income Tax Act, that will govern the taxation
of income.”
43. Thus, by virtue of Article 12(3) of the DTAA, royalties
are payments of any kind received as consideration for
“the use of, or the right to use, any copyright” of a
literary work, which includes a computer program or
software.”
17.13. At this stage, we may note that the provisions
contained in Article 3(2) and Article 12 of the DTAA under
consideration before the Supreme Court (India-Singapore DTAA)
are similar, if not identical, particularly with regard to general
definitions of Article 3(2) and Article 12(3) as regards the meaning
of the term “royalities”, except with the difference that that case
related to use of a copyright. There Lordships proceeded to
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consider in detail the applicability of the provisions of the DTAA,
particularly with reference to India-USA DTAA. The definition of
royalty in the DTAA vis-a-vis the Act was gone into in detail and
then the following legal principle was enunciated:
“100. Also, any ruling on the more expansive language
contained in the Explanations to Section 9(1)(vi) of the
Income Tax Act would have to be ignored if it is wider
and less beneficial to the assessee than the definition
contained in the DTAA, as per Section 90(2) of the
Income Tax Act read with Explanation 4 thereof, and
Article 3(2) of the DTAA. Further, the expression
“copyright” has to be understood in the context of the
statute which deals with it, it being accepted that
municipal laws which apply in the Contracting States
must be applied unless there is any repugnancy to the
terms of the DTAA. For all these reasons, the
determination of the AAR in Citrix Systems Asia Pacific
Pty. Ltd. v. CIT, 2012 SCC OnLine AAR-IT 4 : (2012) 343
ITR 1, does not state the law correctly and is thus set
aside.”
17.14. The interpretation of Treaties, OECD Commentary and
the revenue's own understanding was also considered in detail as
below:
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“145. The DTAAs that have been entered into by India
with other Contracting States have to be interpreted
liberally with a view to implement the true intention of
the parties. This Court, in Union of India v. Azadi Bachao
Andolan, (2004) 10 SCC 1, put it thus:
“98. In John N. Gladden v. Her Majesty the
Queen [85 DTC 5188 at p. 5190] the principle of
liberal interpretation of tax treaties was
reiterated by the Federal Court, which observed:
‘Contrary to an ordinary taxing statute a tax
treaty or convention must be given a liberal
interpretation with a view to implementing the
true intentions of the parties. A literal or
legalistic interpretation must be avoided when
the basic object of the treaty might be defeated
or frustrated insofar as the particular item under
consideration is concerned.’
Interpretation of treaties
130. The principles adopted in interpretation of
treaties are not the same as those in
interpretation of a statutory legislation. While
commenting on the interpretation of a treaty
imported into a municipal law, Francis Bennion
observes:
‘With indirect enactment, instead of the
substantive legislation taking the well-known
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form of an Act of Parliament, it has the form of a
treaty. In other words, the form and language
found suitable for embodying an international
agreement become, at the stroke of a pen, also
the form and language of a municipal legislative
instrument. It is rather like saying that, by Act of
Parliament, a woman shall be a man.
Inconveniences may ensue. One inconvenience
is that the interpreter is likely to be required to
cope with disorganised composition instead of
precision drafting. The drafting of treaties is
notoriously sloppy usually for a very good
reason. To get agreement, politic uncertainty is
called for.
… The interpretation of a treaty imported into
municipal law by indirect enactment was
described by Lord Wilberforce as being
“unconstrained by technical rules of English law,
or by English legal precedent, but conducted on
broad principles of general acceptation. This
echoes the optimistic dictum of Lord Widgery,
C.J. that the words ‘are to be given their general
meaning, general to lawyer and layman alike …
the meaning of the diplomat rather than the
lawyer” [Francis Bennion, Statutory
Interpretation, 2nd Edn. (Butterworths, 1992) p.
461.] .’
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131. An important principle which needs to be
kept in mind in the interpretation of the
provisions of an international treaty, including
one for double taxation relief, is that treaties are
negotiated and entered into at a political level
and have several considerations as their bases.
Commenting on this aspect of the matter, David
R. Davis in Principles of International Double
Taxation Relief [David R. Davis, Principles of
International Double Taxation Relief (Sweet &
Maxwell, London 1985) p.4.], points out that the
main function of a Double Taxation Avoidance
Treaty should be seen in the context of aiding
commercial relations between treaty partners
and as being essentially a bargain between two
treaty countries as to the division of tax
revenues between them in respect of income
falling to be taxed in both jurisdictions. It is
observed (vide Para 1.06):
‘The benefits and detriments of a double tax
treaty will probably only be truly reciprocal
where the flow of trade and investment between
treaty partners is generally in balance. Where
this is not the case, the benefits of the treaty
may be weighed more in favour of one treaty
partner than the other, even though the
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provisions of the treaty are expressed in
reciprocal terms. This has been identified as
occurring in relation to tax treaties between
developed and developing countries, where the
flow of trade and investment is largely one-way.
Because treaty negotiations are largely a
bargaining process with each side seeking
concessions from the other, the final agreement
will often represent a number of compromises,
and it may be uncertain as to whether a full and
sufficient quid pro quo is obtained by both sides.’
And, finally, in Para 1.08:
‘Apart from the allocation of tax between the
treaty partners, tax treaties can also help to
resolve problems and can obtain benefits which
cannot be achieved unilaterally.’ ”
146. Further, the House of Lords in Ostime (Inspector of
Taxes) v. Australian Mutual Provident Society [1959] AC
259 by a judgment dated 16.7.1959 remarked upon,
what it termed the “international tax language” of
bilateral taxation agreements, as follows : (AC p. 480)
“… Bilateral agreements for regulating some of
the problems of double taxation began, at any
rate so far as the United Kingdom was
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concerned, in 1946. The form employed, which,
for obvious reasons, employs similar forms and
similar language in all agreements, is derived, I
believe, from a set of model clauses proposed by
the financial commission of the League of
Nations. The aim is to provide by treaty for the
tax claims of two governments, both legitimately
interested in taxing a particular source of income
either by resigning to one of the two the whole
claim or else by prescribing the basis on which
the tax claim is to be shared between them. For
our purpose it is convenient to note that the
language employed in this agreement is what
may be called international tax language and
that such categories as “enterprise”,
“commercial or industrial profits” and
“permanent establishment” have no exact
counterpart in the taxing code of the United
Kingdom.”
147. All the DTAAs with which we are concerned, have,
as their starting point, either the OECD Model Tax
Convention on Income and Capital [“OECD Model Tax
Convention”] and/or the United Nations Model Double
Taxation Convention between Developed and Developing
Countries [“UN Model Convention”] insofar as the
taxation of royalty for parting with copyright is
concerned.”
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17.15. In Engineering Analysis Centre of Excellence Pvt. Ltd v.
CIT (supra), the Supreme Court examined the OECD Model Tax
Convention and held thus:
“148. The OECD Model Tax Convention speaks of the
importance of the OECD Commentary, as follows:
“2. It has long been recognised among the
member countries of the Organisation for
Economic Cooperation and Development that it
is desirable to clarify, standardise, and confirm
the fiscal situation of taxpayers who are engaged
in commercial, industrial, financial, or any other
activities in other countries through the
application by all countries of common solutions
to identical cases of double taxation. These
countries have also long recognised the need to
improve administrative cooperation in tax
matters, notably through exchange of
information and assistance in collection of taxes,
for the purpose of preventing tax evasion and
avoidance.
3. These are the main purposes of the OECD
Model Tax Convention on Income and on Capital,
which provides a means of settling on a uniform
basis the most common problems that arise in
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the field of international juridical double
taxation. As recommended by the Council of
OECD, member countries, when concluding or
revising bilateral conventions, should conform to
this Model Convention as interpreted by the
Commentaries thereon and having regard to the
reservations contained therein and their Tax
Authorities should follow these Commentaries,
as modified from time to time and subject to
their observations thereon, when applying and
interpreting the provisions of their bilateral tax
conventions that are based on the Model
Convention.
***
29.2. Similarly, taxpayers make extensive use of
the Commentaries in conducting their businesses
and planning their business transactions and
investments. The Commentaries are of particular
importance in countries that do not have a
procedure for obtaining an advance ruling on tax
matters from the tax administration as the
Commentaries may be the only available source
of interpretation in that case.”
(OECD Model Tax Convention 2017 —
Condensed Version)
149. The OECD Model Tax Convention, in Article 12
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thereof, defines the term “royalties” as follows:
“Article 12
ROYALTIES
***
2. 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.”
150. When the definition of “royalties” is seen in all the
DTAAs that we are concerned with, it is found that
“royalties” is defined in a manner either identical with or
similar to the definition contained in Article 12 of the
OECD Model Tax Convention. This being the case, the
OECD Commentary on the provisions of the OECD Model
Tax Convention then becomes relevant. The OECD
Commentary has been referred to and relied upon in
several earlier judgments. See:
(i) Union of India v. Azadi Bachao Andolan,
(2004) 10 SCC 1, at pp. 42-43;
(ii) Formula One World Championship Ltd. v.
CIT, (2017) 15 SCC 602, at pp. 629-30; and
(iii) CIT v. E-Funds IT Solution Inc., (2018) 13
SCC 294] , at pp. 322-23.”
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17.16. The position taken by India (in the capacity of an OECD
non-member) with regard to Article 12 of the OECD Model Tax
Convention and the OECD Commentary, as relied upon by the
revenue, was not accepted as the determinative factor and, in this
regard, the legal position explained by the Delhi High Court in the
case of DIT v. New Skies Satellite BV (supra) was affirmed holding
that mere positions taken with respect to the OECD Commentary do
not alter the DTAA's provisions, unless it is actually amended by
way of bilateral re-negotiation. The following are the pertinent
observations in this regard:
“155. In DIT v. New Skies Satellite BV [2016] 68
taxmann.com 8 [“New Skies Satellite”], a Division Bench
of the High Court of Delhi correctly observed that mere
positions taken with respect to the OECD Commentary do
not alter the DTAA's provisions, unless it is actually
amended by way of bilateral re-negotiation. This was put
thus:
“68. 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
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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.”
156. It is significant to note that after India took such
positions qua the OECD Commentary, no bilateral
amendment was made by India and the other
Contracting States to change the definition of royalties
contained in any of the DTAAs that we are concerned
with in these appeals, in accordance with its position. As
a matter of fact, DTAAs that were amended
subsequently, such as the Convention between the
Republic of India and the Kingdom of Morocco for the
Avoidance of Double Taxation and the Prevention of
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Fiscal Evasion with respect to Taxes On Income,
[Notification: No. GSR 245(E), dated 15-3-2000.]
[“India-Morocco DTAA”], which was amended on 22-10-
2019, [Amended by Notification No. S.O. 3789(E)
[No.84/2019/ F.No.503/09/2009-FTD-II], dated 22-10-
2019, incorporated a definition of royalties, not very
different from the definition contained in the OECD Model
Tax Convention, as follows:
“The term “royalties” as used in this Article
means:
(a) payments of any kind received as a
consideration for the use of, or the right to use,
any copyright of a literary, artistic or scientific
work, including cinematograph films or
recordings on any means of reproduction for use
for radio or television broadcasting, any patent,
trade mark, design or model, plan, computer
software program, secret formula or process, or
for information concerning industrial, commercial
or scientific experience; and
(b) payments of any kind received as
consideration for the use of, or the right to use,
any industrial, commercial or scientific
equipment”
(Article 12.3)
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157. Similarly, though the India-Singapore DTAA came
into force on 8-8-1994, it has been amended several
times, including on 1-9-2011 [Notification No. S.O.
2031(E).] and 23-3-2017 [Notification No. S.O. 935(E).]
However, the definition of “royalties” has been retained
without any changes. Likewise, the Convention between
the Government of the Republic of India and the
Government of Mauritius for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with
respect to Taxes on Income and Capital Gains and for the
Encouragement of Mutual Trade and Investment,
[Notification No. GSR 920(E).] [“India-Mauritius DTAA”]
was entered into on 6-12-1983, and was amended
subsequently on 10-8-2016, [ Notification No. S.O.
2680(E) (No. 68/2016 (F.No.500/3/2012-FTD-II).]
without making any change to the definition of
“royalties”.
158. It is thus clear that the OECD Commentary on
Article 12 of the OECD Model Tax Convention,
incorporated in the DTAAs in the cases before us, will
continue to have persuasive value as to the interpretation
of the term “royalties” contained therein.
159. Viewed from another angle, persons who pay TDS
and/or assessees in the nations governed by a DTAA
have a right to know exactly where they stand in respect
of the treaty provisions that govern them. Such persons
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and/or assessees can thus place reliance upon the OECD
Commentary for provisions of the OECD Model Tax
Convention, which are used without any substantial
change by bilateral DTAAs, in the absence of judgments
of municipal courts clarifying the same, or in the event of
conflicting municipal decisions. From this point of view
also, the OECD Commentary is significant, as the
Contracting States to which the persons deducting
tax/assessees belong, can conclude business transactions
on the basis that they are to be taxed either on income
by way of royalties for parting with copyright, or income
derived from licence agreements which is then taxed as
business profits depending on the existence of a PE in the
Contracting State.”
17.17. In Engineering Analysis Centre of Excellence Pvt. Ltd v.
CIT (supra), it was then concluded as below:
“176. The conclusions in the aforestated paragraph have
no direct relevance to the facts at hand as the effect of
Section 90(2) of the Income Tax Act, read with
Explanation 4 thereof, is to treat the DTAA provisions as
the law that must be followed by Indian courts,
notwithstanding what may be contained in the Income
Tax Act to the contrary, unless more beneficial to the
assessee.”
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17.18. The legal position as adumbrated by the Supreme
Court herein above would leave no manner of doubt that while
determining taxability in cases where payment has been made to a
non-resident, the definition of term 'royalty' as contained in DTAA
can be determinative factor, unless the provisions contained in the
Act, to the contrary, are more beneficial to the assessee. It is,
therefore, clear that the amendments which were made by the
Finance Act, 2012 by inserting Explanations 4, 5 and 6 would not
come to the aid of the revenue. The conclusion, therefore, has to
be that the payment made by the assessee to Sprint USA would not
constitute royalty.
17.19. There is another angle from which the taxability aspect
can be looked into. Learned counsel for the assessee has rightly
relied upon non-discrimination clause in Article 26(3) of the DTAA
between India and USA, which reads as below:
“Article 26: Non-discrimination
...
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
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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.”
17.20. If we look into the provisions contained in Section 40
of the Act along with Article 26(3) of the India-USA DTAA, it is clear
that deduction in the hands of the resident on payment to a USA
resident shall be on the same conditions as that of a payment made
to Indian resident. In the present case, the disallowance was only
in respect of payment made to non-resident. On this score, the
assessee has correctly placed reliance upon the decisions in the
Commissioner of Income-tax v. Herbalife International India (P)
Ltd
19
, and Commissioner of Income-tax v. Mitsubishi Corporation
India (P) Ltd
20
.
17.21. In the decision in Commissioner of Income-tax v.
Herbalife International India (P) Ltd (supra), identical issue was
19(2016) 384 ITR 276 (Delhi)
20(2024) 463 ITR 335 (Delhi)
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considered by the Delhi High Court and it was held that Section
40(a)(i) of the Act is discriminatory and not applicable in terms of
Article 26(3) of the India-USA DTAA. It was held as below:
“56. The argument of the Revenue also overlooks the fact
that the condition under which deductibility is disallowed
in respect of payments to non-residents, is plainly
different from that when made to a resident. Under
section 40(a)(i), as it then stood, the allowability of the
deduction of the payment to a non-resident mandatorily
required deduction of tax at the time of payment. On the
other hand, payments to residents were neither subject
to the condition of deduction of tax at source nor,
naturally, to the further consequence of disallowance of
the payment as deduction. The expression "under the
same conditions" in article 26(3) of the Double Taxation
Avoidance Agreement clarifies the nature of the receipt
and conditions of its deductibility. It is relatable not
merely to the compliance requirement of deduction of tax
at source. The lack of parity in the allowing of the
payment as deduction is what brings about the
discrimination. The tested party is another resident
Indian who transacts with a resident making payment
and does not deduct tax at source and therefore in whose
case there would be no disallowance of the payment as
deduction because tax was not deducted at source.
Therefore, the consequence of non-deduction of tax at
source when the payment is to a non-resident has an
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adverse consequence to the payer. Since it is mandatory
in terms of section 40(a)(i) for the payer to deduct tax at
source from the payment to the non-resident, the latter
receives the payment net of the tax deducted at source.
The object of article 26(3) of the Double Taxation
Avoidance Agreement was to ensure non- discrimination
in the condition of deductibility of the payment in the
hands of the payer where the payee is either a resident
or a non-resident. That object would get defeated as a
result of the discrimination brought about qua non-
resident by requiring the tax to be deducted while
making payment of fees for technical services in terms of
section 40(a)(i) of the Act.”
17.22. Similar is the decision in the case of Commissioner of
Income-tax v. Mitsubishi Corporation India (P) Ltd (supra).
17.23. The submission of the revenue that until 13.07.2006
there was no requirement to deduct tax on royalty payments made
to a resident in India and only by way of amendment under Section
194J Act with effect from 13.07.2006 royalty was also included,
does not alter the legal position in the light of the above decision.
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18. This question of law is answered in favour of the assessee
and against the revenue.
FIFTH SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.277 of 2016
19. For the impugned AY 2003-04, the assessee earned
miscellaneous income in the nature of interest on loan given to
employees and sale of scrap and claimed deduction under Section
10A/10B of the Act, since the same is derived from the eligible
undertaking of the assessee. The Assessing Officer has denied the
claim of the assessee by stating that the miscellaneous income does
not have a direct nexus with the business of the eligible
undertaking. The said order was upheld by the CIT(A), but was not
adjudicated by the ITAT in the impugned order, though a specific
ground was raised.
20.1. Learned counsel for the assessee, relying upon the
decisions in Commissioner of Income-tax v. Sankhya Technologies
(P) Ltd
21
and Commissioner of Income Tax v. Hewlett Packard
21(2020) 427 ITR 319 (Madras)
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Global Soft Ltd
22
, submitted that interest on loans provided to the
employees is to be considered as integral part of the business of the
entity and, hence, eligible to deduction under Section 10A/10B of
the Act.
20.2. It is submitted that the scrap income relates to the
undertaking, since it is derived from the scrap arising from eligible
operations and, therefore, the same is eligible for the deduction
under Section 10A of the Act.
20.3. On this issue, it is ultimately submitted that in respect of
loan to employees and scrap sales, the immediate nexus is the
business of the undertaking only and not an external source like
interest on fixed deposit, as contended by the Revenue. The loan to
employees was given in the ordinary course of the business of the
undertaking and accordingly, the same is part of eligible profits in
determining deduction under Section 10A of the Act. The decisions
in Commissioner of Income-tax v. Sankhya Technologies (P) Ltd
(supra), after considering the Full Bench decision in Commissioner
22(2018) 403 ITR 453 (Karnataka)
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of Income Tax v. Hewlett Packard Global Soft Ltd (supra), expound
the said proposition.
21.1. In reply, learned Standing Counsel submitted that
Section 10A of the Act grants deduction against income tax
specifically on income derived from export of articles or things or
computer software which results in earning of foreign exchange for
India. Admittedly, the miscellaneous income that is earned by the
assessee is neither from export of any articles or things or computer
software, nor it has been earned in foreign exchange, which are the
pivotal requirements to claim deduction under Section 10A of the
Act.
21.2. To shore up the said submission, reliance is placed on
the following decisions:
i.India Comnet International v. ITO
23
;
ii.CIT v. Menon Impex (P) Ltd
24
; and
iii.CIT v. Sterling Foods
25
.
23(2012) 26 taxmann.com 349 (SC)
24(2003) 259 ITR 403 (Madras)
25(1999) 237 ITR 579 (SC)
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22.1. On the issue as to whether the assessee, who earned
miscellaneous income in the nature of interest on loan given to
employees and sale of scrap, is entitled to claim deduction under
Section 10A/10B of the Act, the Assessing Officer denied the claim
by stating that miscellaneous income does not have direct nexus
with the business of the eligible undertaking. It is the case of the
assessee that though the issue was upheld by the CIT(A), it was not
adjudicated by the ITAT in the impugned order, though a specific
ground was raised.
22.2. On this issue, we may profitably refer to two decisions in
Commissioner of Income-tax v. Sankhya Technologies (P) Ltd
(supra) and Commissioner of Income Tax v. Hewlett Packard Global
Soft Ltd (supra), which, in our view, conclude the issue in favour of
the assessee.
22.3. In the case of Commissioner of Income-tax v. Sankhya
Technologies (P) Ltd (supra), it was held by this court as below:
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“5. It has been brought to the notice of this Court that
there is a judgment of the Full Bench of the Karnataka
High Court, to which one of us (Dr. Vineet Kothari, J.)
was a party, in which the Full Bench has held that the
interest on bank deposits is also eligible to be included in
the profits of 100% Export Oriented Units for the purpose
of claiming deduction under Section 10A/10B of the
Income Tax Act. The relevant portion of the judgment of
the Full Bench of the Karnataka High Court is quoted
below.
“35. The Scheme of Deductions under Chapter
VIA in Sections 80-HH, 80-HHC, 80-IB, etc. from
the ‘Gross Total Income of the Undertaking’,
which may arise from different specified
activities in these provisions and other incomes
may exclude interest income from the ambit of
Deductions under these provisions, but
exemption under Section 10-A and 10-B of the
Act encompasses the entire income derived from
the business of export of such eligible
Undertakings including interest income derived
from the temporary parking of funds by such
Undertakings in Banks or even Staff loans. The
dedicated nature of business or their special
geographical locations in STPI or SEZs. etc.
makes them a special category of assessees
entitled to the incentive in the form of 100%
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Deduction under Section 10-A or 10-B of the
Act, rather than it being a special character of
income entitled to Deduction from Gross Total
Income under Chapter VIA under Section 80-HH,
etc. The computation of income entitled to
exemption under Section 10-A or 10-B of the Act
is done at the prior stage of computation of
Income from Profits and Gains of Business as per
Sections 28 to 44 under Part-D of Chapter IV
before ‘Gross Total Income’ as defined under
Section 80-B(5) is computed and after which the
consideration of various Deductions under
Chapter VI-A in Section 80HH etc. comes into
picture. Therefore analogy of Chapter VI
Deductions cannot be telescoped or imported in
Section 10-A or 10-B of the Act. The words
‘derived by an Undertaking’ in Section 10-A or
10-B are different from ‘derived from’ employed
in Section 80-HH etc. Therefore all Profits and
Gains of the Undertaking including the incidental
income by way of interest on Bank Deposits or
Staff loans would be entitled to 100% exemption
or deduction under Section 10-A and 10-B of the
Act. Such interest income arises in the ordinary
course of export business of the Undertaking
even though not as a direct result of export but
from the Bank Deposits etc., and is therefore
eligible for 100% deduction.
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36. We have to take a purposive interpretation
of the Scheme of the Act for the exemption
under Section 10-A/10-B of the Act and for the
object of granting such incentive to the special
class of assessees selected by the Parliament,
the play-in-the-joints is allowed to the
Legislature and the liberal interpretation of the
exemption provisions to make a purposive
interpretation, was also propounded by Hon'ble
Supreme Court in the following cases:—
“I] In Bajaj Tempo Ltd., Bombay v.
Commissioner of Income Tax, Bombay, [(1992)
3 SCC 78], the Hon'ble Supreme Court held
that:- “5. … ..Since a provision intended for
promoting economic growth has to be
interpreted liberally, the restriction on it, too,
has to be construed so as to advance the
objective of the section and not to frustrate it.
But that turned out to be the, unintended,
consequence of construing the clause literally, as
was done by the High Court for which it cannot
be blamed, as the provision is susceptible of
such construction if the purpose behind its
enactment, the objective it sought to achieve
and the mischief it intended to control is lost
sight of. One way of reading it is that the clause
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excludes any undertaking formed by transfer to
it of any building, plant or machinery used
previously in any other business. No objection
could have been taken to such reading but when
the result of reading in such plain and simple
manner is analysed then it appears that literal
construction would not be proper. …”
II] In R.K. Garg v. Union of India, [(1981) 4 SCC
675] = [1982 SCC (Tax) 30 p.690], the Hon'ble
Apex Court has held as under : - “8. Another
rule of equal importance is that laws relating to
economic activities should be viewed with
greater latitude than laws touching civil rights
such as freedom of speech, religion etc. It has
been said by no less a person than Holmes, J.,
that the legislature should be allowed some play
in the joints, because it has to deal with complex
problems which do not admit of solution through
any doctrinaire or strait-jacket formula and this
is particularly true in case of legislation dealing
with economic matters, where, having regard to
the nature of the problems required to be dealt
with, greater play in the joints has to be allowed
to the legislature. The court should feel more
inclined to give judicial deference to legislative
judgment in the field of economic regulation
than in other areas where fundamental human
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rights are involved. Nowhere has this admonition
been more felicitously expressed than in Morey
v. Doud [351 US 457 (1957) : 1 L.Ed.2d 1485
(1957)] where Frankfurter, J., said in his
inimitable style:“In the utilities, tax and
economic regulation cases, there are good
reasons for judicial self-restraint if not judicial
deference to legislative judgment. The
legislature after all has the affirmative
responsibility. The courts have only the power to
destroy, not to reconstruct. When these are
added to the complexity of economic regulation,
the uncertainty, the liability to error, the
bewildering conflict of the experts, and the
number of times the judges have been overruled
by events — self-limitation can be seen to be the
path to judicial wisdom and institutional prestige
and stability.” The Court must always remember
that “legislation is directed to practical problems,
that the economic mechanism is highly sensitive
and complex, that many problems are singular
and contingent, that laws are not abstract
propositions and do not relate to abstract units
and are not to be measured by abstract
symmetry”; “that exact wisdom and nice
adaption of remedy are not always possible” and
that “judgment is largely a prophecy based on
meagre and uninterpreted experience”. Every
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legislation particularly in economic matters is
essentially empiric and it is based on
experimentation or what one may call trial and
error method and therefore it cannot provide for
all possible situations or anticipate all possible
abuses. There may be crudities and inequities in
complicated experimental economic legislation
but on that account alone it cannot be struck
down as invalid.”
37. On the above legal position discussed by us,
we are of the opinion that the Respondent
assessee was entitled to 100% exemption or
deduction under Section 10-A of the Act in
respect of the interest income earned by it on
the deposits made by it with the Banks in the
ordinary course of its business and also interest
earned by it from the staff loans and such
interest income would not be taxable as ‘Income
from other Sources’ under Section 56 of the Act.
The incidental activity of parking of Surplus
Funds with the Banks or advancing of staff loans
by such special category of assessees covered
under Section 10-A or 10-B of the Act is integral
part of their export business activity and a
business decision taken in view of the
commercial expediency and the interest income
earned incidentally cannot be de-linked from its
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profits and gains derived by the Undertaking
engaged in the export of Articles as envisaged
under Section 10-A or Section 10-B of the Act
and cannot be taxed separately under Section 56
of the Act.
38. We therefore affirm and agree with the view
expressed by the first Division Bench of this
Court in the case of Motorola India Electronics
(P) Ltd. (supra) and we do not agree with the
view taken by the subsequent Division Bench on
10/04/2014 in the present case.
39. Both the questions thus framed above are
answered in favour of the Respondent Assessee
and against the Revenue in the terms indicated
above and the matter is sent back to the
Division Bench for deciding this Appeal in
accordance with the aforesaid opinion.”
22.4. Therefore, all profits and gains of the undertaking,
including the incidental income by way of interest on bank deposits
or staff loans, would be entitled to 100% exemption or deduction
under Section 10A/10B of the Act, as such interest income arises in
the ordinary course of export business of the undertaking, even
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TCA Nos.277 to 280 of 2016
though not as a direct result of export.
22.5. In the other decision in Commissioner of Income Tax v.
Hewlett Packard Global Soft Ltd (supra) also, similar view was taken
by a Full Bench of the Karnataka High Court. The relevant portion of
the said decision is reproduced hereunder:
“37. On the above legal position discussed by us, we are
of the opinion that the respondent-assessee was entitled
to 100 per cent. exemption or deduction under section
10A of the Act in respect of the interest income earned
by it on the deposits made by it with the banks in the
ordinary course of its business and also interest earned
by it from the staff loans and such interest income would
not be taxable as "income from other sources" under
section 56 of the Act. The incidental activity of parking of
surplus funds with the banks or advancing of staff loans
by such special category of assessees covered under
section 10A or 10B of the Act is integral part of their
export business activity and a business decision taken in
view of the commercial expediency and the interest
income earned incidentally cannot be de-linked from its
profits and gains derived by the undertaking engaged in
the export of articles as envisaged under section 10A or
section 10B of the Act and cannot be taxed separately
under section 56 of the Act.”
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TCA Nos.277 to 280 of 2016
22.6. Reliance on the decisions in the cases of India Comnet
International v. ITO (supra); CIT v. Menon Impex (P) Ltd (supra);
and CIT v. Sterling Foods (supra) by the revenue is misplaced on
facts.
22.7. In India Comnet International v. ITO (supra), the
Supreme Court considered the decision of the Madras High Court in
CIT v. Menon Impex (P) Ltd (supra), where the nature of interest
income derived by the assessee was from funds in connection with
Letter of Credit. The Supreme Court decision turned more in
respect of the claim of deduction on the interest income on foreign
currency deposit account. Therefore, the said decisions do not come
to the aid of the revenue, as the nature of deposits were not in the
nature of interest earned on loans advanced to the employees and
sale of scrap, which were in the ordinary course of business of the
undertaking.
23. Accordingly, this question of law is also decided in favour
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TCA Nos.277 to 280 of 2016
of the assessee and against the revenue.
SUBSTANTIAL QUESTION OF LAW IN T.C.A.No.279 of 2016:
24. This issue is with respect to the finding of the ITAT that
the assessee is liable to pay interest under Section 234D of the Act
on the excess refund paid.
25. Learned counsel for the assessee, in fairness, submits
that, by virtue of an amendment made vide Finance Act, 2012 with
retrospective effect from 01.06.2003 in Explanation 2 to Section
234D of the Act, which provides that the provisions of Section 234D
of the Act apply even for assessment year 2003-2004 and prior
years, provided the assessment proceedings of that year is
completed after 01.06.2003, and since the assessment order in this
case was passed on 28.02.2006, the question of law is to be
decided against the assessee.
26. In view of the aforesaid submission made by learned
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counsel for the assessee, the view taken by the ITAT that the
appellant is liable to pay interest under Section 234D of the Act on
the excess refund paid is in accordance with law.
27. Accordingly, this question of law is answered against the
assessee and in favour of the revenue.
28. To sum up, the substantial questions of law raised in TCA
Nos.277, 278 and 280 of 2016 are answered in favour of the
assessee and against the revenue and the substantial question of
law raised in TCA No.279 of 2016 is answered in favour of the
revenue and against the assessee.
Resultantly, TCA Nos.277, 278 and 280 of 2016 are allowed
and TCA No.279 of 2016 is dismissed. There shall be no order as to
costs.
(MANINDRA MOHAN SHRIVASTAVA, CJ) (SUNDER MOHAN,J)
25.11.2025
Index : Yes
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Neutral Citation: Yes
sasi
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TCA Nos.277 to 280 of 2016
To:
1. The Assistant Registrar
Income Tax Appellate Tribunal
Madras.
2. The Commissioner of Income Tax (Appeals)-III
Chennai – 600 034.
3. The Assistant Commissioner of Income Tax
Company Cirlce-I(3), Chennai.
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TCA Nos.277 to 280 of 2016
THE HON'BLE CHIEF JUSTICE
AND
SUNDER MOHAN,J.
(sasi)
TCA Nos.277 to 280 of 2016
25.11.2025
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