Adore Technologies Ptd. Ltd., Singapore V. ACIT, Circle-1(1)(1), Int, Taxation, New Delhi

ITA 702/DEL/2021

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Adore Technologies Pvt Ltd, a Singapore-based company, appealed against the assessment order which treated certain payments received from Indian customers for disaster recovery uplinking and playout services as royalty and fees for technical services (FTS) under the Income Tax Act, 1961 and the India-Singapore Tax Treaty. The Tribunal examined whether these services fell under the definitions of royalty and FTS as per the treaty and the Act. The Tribunal concluded that the services provided were mere renditions of services without any transfer of technology or control over the equipment, and thus, did not qualify as royalty or FTS.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 108377 (ITAT-DELHI)
• Duration Of Justice: 10 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 12-12-2022
• Assessment Year: misc
• Appeal Filed On: 10-07-2012
• Other Referred Cases: Director of Income Tax v New Skies Satellite BV, Sanofi Pasteur Holding SA v Department of Revenue, Asia Satellite Telecommunications Co. Ltd v. DIT, NEO Sports Broadcast Pvt Ltd v. CIT, Atos Information Technology, Singapore v. CIT
• Laws Referred To: Income-tax Act, 1961, India-Singapore Tax Treaty
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Deemed to accrue or arise in india
• Section: 27; 90; 2; 143(3); 5(2); 234B; 144C; 264; 9(1); 9(1); 9(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘D’ BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA No. 702/DEL/2021 [A.Y 2017-18] Adore Technologies Pvt Ltd Vs. The A.C.I.T 151, Lorong Chuan Number 03-02 Circle -1(1)(1) New Tech Park, Singapore New Delhi PAN: AANCA 4305 L (Applicant) (Respondent) Assessee By : Shri Ajay Vohra, Sr. Adv Shri Parth, Adv Department By : Shri Gangadhar Panda, CIT-DR Date of Hearing : 13.12.2022 Date of Pronouncement : 19.12.2022 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- This appeal by the assessee is preferred against the order dated 15.04.2021 framed u/s 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act']. 2 2. Grievances of the assessee read as under: The Appellant respectfully submits that the present appeal before the Hon’ble Income Tax Appellate Tribunal (‘Hon’ble ITAT’) is being filed on the following grounds: 1. That the assessment order passed under section 143(3) read with section 144C of the Income Tax Act, 1961 (‘the Act’) by the learned Assistant Commissioner of Income Tax, Circle-1 (1)(1) International Taxation, New Delhi (‘the Id. AO’) in pursuance of the directions of the Hon’ble Dispute Resolution Panel -1 (Hon’ble DRP) is wrong and bad in law, contrary to facts and circumstances of the case and unsustainable in law. 2. Based on the facts and circumstances of the case and in law, the Id. AO has erred in alleging that payments amounting to INR 6,26,29,403 received by the Appellant from Indian customers (‘customers’/ ‘service recipient’/ ‘payer’) for provision of disaster recovery up-linking services and various satellite based telecommunication services (Space Segment capacity services, Downlinking and Distribution services, Digital News Gathering services) as consideration for the use of or the right to use of an equipment and/ or use of a process is taxable as Royalty under section 9(l)(vi) of the Act and under Article 12(3) of the India Singapore Tax Treaty (‘Tax Treaty’) in contravention of the following well-established facts and legal positions: 2.1 That the Tax Treaty provisions apply in the Appellant’s case and the aforesaid services do not fall in the definition of royalty contained in Article 12(3) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by various courts including the jurisdictional High Court of Delhi. 3 2.2 That the insertion of Explanations 5 and 6 vide Finance Act 2012 (with retrospective effect from 1 June 1976) to section 9(l)(vi) of the Act does not override the definition of royalty contained in Article 12(3) of the Tax Treaty and hence, not applicable in interpreting the nature of above services under the provisions of the Tax Treaty. 2.3 That the Id. AO erred in facts and in law in relying on the commentary of Dr. Klaus Vogel to interpret the definition of Royalty under the Tax Treaty by invoking the provisions of Article 3(2) of the Tax Treaty without applying the decisions of the Hon’ble Delhi High Court in the case of Director of Income Tax v New Skies Satellite BV (ITA 473,474,500/ 2012 and 244/2014, CM Apppl.9724/2014), and Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA v Department of Revenue [2013] [354 ITR 316] which correctly holds that the retrospective amendments to the Act cannot be read as an amendment to the tax treaties by virtue of Article 3(2) of the tax treaties. 2.4 That indisputably the above transaction is that of rendition of services by the Appellant, wherein the customer enjoys an uninterrupted services and the failure by the Appellant to render the aforesaid services results in non-payment or loss of consideration for the Appellant further factually substantiates and proves that the transaction under question is a pure service transaction, and is not a transaction in the nature of royalty. 2.5 That based on the facts and circumstances of the case and in law, the Id. AO has erred in construing “the rendering of service” by a service provider as “grant of use or right to use any 4 equipment or process” without appreciating the distinction between the two, where the former has been consistently held not to be taxable as royalty. 2.6 That the Id. AO has inadvertently clubbed the disaster recovery up-linking services along with various satellite based telecommunication services without appreciating that the aforesaid services are distinct from each other / rendered to different customers. 3. Based on the facts and circumstances of the case and in law, the Id. AO has erred in alleging that payments amounting to INR 13,03,58,744 received by the Appellant from Indian customers (‘customers’/ ‘service recipient’/ ‘payer’) for provision of disaster recovery playout services is taxable as Fee for Technical Services (‘FTS’) under section 9(l)(vii) of the Act and under Article 12(4) of the India-Singapore Tax Treaty (‘Tax Treaty’) in contravention of the following well-established facts and legal positions: 3.1 That the Tax Treaty provisions apply in the Appellant’s case and the aforesaid services do not fall in the definition of FTS contained in Article 12(4) of the Tax Treaty and the Id. AO has failed to appreciate the well-established legal position and judicial precedents decided by various courts. 3.2 That the Id. AO has erred in stating that the “disaster recovery playout services” is managerial in nature for holding it to be FTS under Article 12(4) of the Tax Treaty by wrongly assuming that any disaster recovery work involves high level of management control, supervision. The Id. AO has failed to appreciate that the above service involves scheduling of content 5 received from the customer, as per their specifications, for playout and is immediately activate only in the eventuality that the main playout equipment becomes unavailable/ non-functional. 3.3 That the Id. AO has erred in holding that the provision of disaster recovery playout service is technical in nature as contained within Article 12(4) of India-Singapore Tax Treaty without appreciating the facts that such services are routine in nature, provided by various other services providers in the industry, and do not involve application of any specialized technical knowledge or skill. 3.4 That the Id. AO has erred in holding that the provision of disaster recovery playout service is consultancy / technical in nature as contained within Article 12(4) of India-Singapore Tax Treaty without appreciating the fact that no human intervention is involved in the actual rendition of playout service. The Id. AO has failed to appreciate that the Appellant does not have any right to mix, modify, edit, remove or delete the content or part thereof thereby, demonstrating that the Appellant is not involved in decision making in the rendition of disaster recovery playout service. 3.5 That the Id. AO has erred in holding that disaster recovery playout services are inextricably linked to the disaster recovery up-linking services without appreciating the fact that disaster recovery playout services are completely independent services and it can in no way be said that predominant purpose of the disaster recovery playout service is to facilitate effective enjoyment of the disaster recovery up- linking service. 6 3.6 That the Hon’ble DRP has erred in relying on the Committee of Experts on International Co-operation in Tax matters reported (7 th session, Geneva, 11 th -14 th October 2016) to determine factors that may be relevant to interpret the phrase “ancillary and subsidiary” under Article 12(4) of the Tax Treaty. That as per the factors put forth by the Hon’ble DRP under such consideration, the provision of disaster recovery playout services by the Appellant does not satisfy the pre-requisite aspects of qualifying as “ancillary and subsidiary” cumulatively such as execution of the different services by single contract, payment for FTS constituting insubstantial portion of total payment etc. 3.7 That the Id. AO has erred in holding that Disaster Recovery Playout Services make available any technical knowledge, skills, know-how or process without appreciating the facts that disaster recovery playout services are mere rendering of services, and do not result in customers becoming equipped to render these services on their own without recourse to the Appellant. That the customers are not provided any technical knowledge, experience, skill, know-how or process, as envisaged under Article 12(4) of the India-Singapore Tax Treaty. 4. On the facts and in the circumstances of the case and in law, the Id. AO has erred in computing interest u/s 234B of the Act amounting to Rs. 80,21,300 being consequential in nature and resulting on account of additions made in the assessment order 5. On the facts and in the circumstances of the case and in law, the Id. AO has erred in initiating penalty proceedings under section 270A of the Act against the Appellant for each of the additions made in the assessment order The grounds above are without prejudice to each other. 7 The Appellant craves leave to add, amend, vary, omit or substitute all or any of the aforesaid grounds of appeal at any time before or at the time of hearing of the Appeal.” 3. The representatives of both the sides were heard at length, the case records carefully perused and we have duly considered the relevant documentary evidences and judicial decisions relied upon in light of Rule 18(6) of ITAT Rules. 4. Briefly stated, the facts of the case are that the appellant is a Singapore based company and a tax resident of Singapore within the meaning of Article 4 of India-Singapore Double Taxation Avoidance Agreement (DTAA). The assessee holds a Tax Residency Certificate issued by Government of Singapore for the period 01.04.2016 to 31.03.2017. 5. The primary business of the assessee is to provide broadcasters with state-of-art media technology solutions. The assessee offers a wide spectrum of satellite based telecommunication services to media and entertainment businesses under the license from Info- Communications Development Authority of Singapore. 8 6. The assessee does not have a Permanent Establishment (PE) and/or Business connection in India in the year under consideration and is eligible for beneficial provisions of India-Singapore DTAA. 7. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has receipts majorly from following activities from India: (a) Uplinking Service and allied services (b) Playout Services (c) Sale of Equipment 8. The assessee was asked to show cause and explain as to why receipts from transactions relating to uplinking services and play out services be not taxed as ‘Royalty’ as the same falls under the definition of Royalty as defined u/s 9(1)(vi) and Article 12(3) of the DTAA. 9. In its reply, referring to Article 12(3) of the DTAA, it was explained that the customers of the assessee were neither in possession of any equipment nor had any control over the equipment used by the assessee for providing uplinking and playout services to its 9 customers. It was explained that the assessee while providing this service is the sole bearer of the risks in relation to the said equipment. 10. It was categorically mentioned that payment made for Disaster Recovery Uplinking and Playout services cannot be said for use of or right to use any industrial, scientific or commercial equipment. Further, payment also cannot be construed as payment for use of or right to use secret formula or process since it does not involve imparting any technical know-how by the assessee to its customers. Hence the same cannot be qualified as Royalty under Article 12 of the DTAA. 11. In so far as taxability of business income is concerned, it was explained that payments made by Indian customers to the assessee, though constitute business income of the assessee, but in the absence of PE of the assessee in India, income is not chargeable to tax in India in accordance with Article 7 of the DTAA. 12. in so far a Disaster recovery-Playout Service is concerned, it was explained that Playout services encompasses provision of equipment, infrastructure and manpower to manage continuous playing of channel 10 content based on minute to minute schedule. It was explained that for providing Disaster recovery Uplinking and Playout services, the uplinking and playout equipment installed at the teleport facility of the assessee at Singapore is kept preconfigured and in readiness. In the event that the main uplink and playout equipment becomes unavailable/ non-functional, the uplink at Singapore facility immediately gets activated. 13. In support of its submissions, specific reference to Article 12(3) of DTAA where royalty has been defined and further reference was made to Article 12(4) of India Singapore DTAA where Fees for Technical Services has been defined. 14. Submissions of the assessee were dismissed by the Assessing Officer who was of the firm belief that the assessee has received considerations from India for its activities relating to uplinking services and playout services. Referring to Explanation 2 to section 9(1)(vi) of the Act, the Assessing Officer was confident that the impugned transaction fall within the four walls of Royalty. 11 15. The Assessing Officer further observed that with retrospective amendment vide Finance Act, 2012, more clarity was provided in relation to certain terms which were not defined under the DTAA, and in particular, referring to Explanation 6 to section 9(1)(vi) of the Act, it was emphasized by the Assessing Officer that “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 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” 16. Applying Explanation 6 to section 9(1)(vi) of the Act, the Assessing Officer conclusively held that nature of disaster recovery uplinking service of the assessee is nothing but part of a process wherein signals are taken from the playout equipments and sent to the satellite for broadcasting them to cable operators/direct to home operators. 17. The Assessing Officer finally concluded by holding that income amounting to Rs. 6,26,29,403/- received under the head ‘Disaster recovery uplinking service’ is Royalty as per provisions of section 9(1)(vi) Explanation 2(iii) of the Act. 12 18. In relation to income from Disaster Recovery Playout Service, the Assessing Officer took a leaf from the submissions of the assessee wherein it has submitted that “Playout services are inextricably linked to uplinking services and encompasses provision of equipment infrastructure and manpower to manage continuous playing of channel content based on minute to minute schedule. 19. The Assessing Officer formed a belief that playout service are of managerial and technical nature and falls within the ambit of definition of Fees for Technical Services as defined in Explanation 2 under section 9(1)(vi) of the Act as well as Article 12(4) of the DTAA. 20. Referring to Article 12(4) of the DTAA, the Assessing Officer came to the conclusion that playout services do not fall under the Article 12(4)(b) but rather under Article 12(4)(a) and, accordingly, treated the receipts from disaster recovery play out services amounting to Rs. 13,03,58,744/- as fees for technical services and taxed accordingly as per Article 12(2) @ 10%. 21. Objections were raised before the DRP but without any success. 13 22. We have given thoughtful consideration to the orders of the authorities below. The first quarrel is whether receipt from uplinking services construe royalty as per Article 12(3) of the DTAA. We find that as per Article 12(3) of DTAA, Royalty has been defined to include, inter alia, use or right to use of secret formula or process and use or right to use of industrial, commercial or scientific equipment. 23. In our understanding of facts, customers of the assessee were neither in possession of any equipment nor had any control over the equipment used by the assessee for providing uplinking and playout services to its customers. We find that while providing these services, the assessee was the sole bearer of the risks in relation to the said equipment. 24. In our considered opinion, the term process can be understood as a sequence of interdependent and linked procedures or actions consuming resources to convert inputs into outputs. Various tangible equipment and resources may be employed in executing a process but 'process' per se, just like a formula or design, is intangible. 14 25. In our understanding, the term 'process' as contemplated under the definition of royalty has been rather been used in the context of' know-how' and intellectual property. We are of the considered view that Royalty in relation to ‘use of a process’ envisages that the payer must use the ‘process’ on its own and bear the risk of its exploitation. However, in the case in hand, If the ‘process’ is used by the service provider himself and he bears the risk of exploitation or liabilities for the use, then as the service provider makes own entrepreneurial use of the process, therefore, income cannot be characterized as royalty. 26. Considering the facts of the case in totality, we are of the considered view that the assessee provides services to its customers using its equipment outside India. Various satellite based telecommunication services provided by the assessee to its customers are standard services, provided by various other service providers in the industry. Thus, it can be safely stated that there is no ‘know how’ or ‘intellectual property’ involved in the provision of such services by the assessee. Moreover, various satellite-based telecommunication services nowhere envisage granting the use of, or the right to use any technology or process to the customers. 15 27. The assessee is responsible for maintaining the continuity of the service using its own equipment and facilities since the possession and control of equipment is with the assessee. It is merely making an entrepreneurial use of its own equipment to provide services and it cannot be said that customers have a right to use the process, if any, involved or applied by the assessee in its capacity as a service provider. 28. In other words, the customers are not granted the use of or the right to use any process by the assessee during the course of providing various satellite-based telecommunication services which means that the customers are merely availing a service from the assessee and are not bearing any risk with respect to exploitation of the assessee’s equipment involved in the provision of such service. 29. Therefore, in our considered opinion, the amount received by the assessee from its customers in India as consideration for the provision of a service cannot be characterized as royalty for the use or right to use of a process. 16 30. Heavy emphasis has been made on retrospective amendment brought by the Finance Act with special reference to Explanation 6 of section 9(1)(vi) of the Act. This issue has been well settled by the Hon'ble Jurisdictional High Court of Delhi in the case of New Skies Satellite 382 ITR 114. Relevant findings of the Hon'ble High Court read as under: “54. Neither can an Act of Parliament supply or alter the boundaries of the definition under Article 12 of the DTAAs by supplying redundancy to any part of it. This becomes especially important in the context of Explanation 6, which states that whether the 'process' is secret or not is immaterial, the income from the use of such process is taxable, nonetheless. Explanation 6 precipitated from confusion on the question of whether it was vital that the "process" used must be secret or not. This confusion was brought about by a difference in the punctuation of the definitions in the DTAAs and the domestic definition. For greater clarity and to illustrate this difference, we reproduce the definitions of royalty across both DTAAs and sub clause (iii) to Explanation 2 to 9(1)(vi). Article 12(3), Indo Thai Double Tax Avoidance Agreement: 3. The term "royalties" as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning 17 industrial, commercial or scientific experience." (emphasis supplied) Article 12(4), Indo Netherlands Double Tax Avoidance Agreement "4. The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience." (emphasis supplied) Section 9(1)(vi), Explanation 2, Income Tax Act, 1961 (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (emphasis supplied) 55. The slight but apparently vital difference between the definitions under the DTAA and the domestic definition is the presence of a comma following the word process in the former. In the initial determinations before various ITATs across the country, much discussion took place on the implications of the presence or absence of the "comma". A lot has been said about the relevance or otherwise of punctuation in the context of statutory construction. In spoken English, it would be unwise to argue against the importance of punctuation, where the placement of commas is notorious for diametrically opposite implications. However in the realm of statutory interpretation, courts are circumspect in allowing punctuation to dictate the meaning of provisions. Judge Caldwell once famously said "The words control the punctuation marks, and not the punctuation marks the words." Holmes v. Pheonix Insurance Co.47. It has been held in CGT v. Budur 48and Hindustan Const v. CIT49 that while 18 punctuation may assist in arriving at the correct construction, yet it cannot control the clear meaning of a statutory provision. It is but, a minor element in the construction of a statute, Hindustan Construction Co 56. The courts have however created an exception to the general rule that punctuation is not to be looked at to ascertain meaning. That exception operates wherever a statute is carefully punctuated. Only then should weight undoubtedly be given to punctuation; CIT v. Loyal Textile51; Sama Alana Abdulla vs. State of Gujarat52; Mohd Shabbir vs. State of Maharashtra53; Lewis Pugh Evans Pugh vs. Ashutosh Sen54; Ashwini Kumar Ghose v. Arbinda Bose55; Pope Alliance Corporation v. Spanish River Pulp and Paper Mills Ltd.56. An illustration of the aid derived from punctuation may be furnished from the case of Mohd. Shabbir v. State of Maharashtra57 where Section 27 of the Drugs and Cosmetics Act, 1940 came up for construction. By this section whoever "manufactures for sale, sells, stocks or exhibits for sale or distributes" a drug without a license is liable for punishment. In holding that mere stocking shall not amount to an offence under the section, the Supreme Court pointed out the presence of after "manufactures for sale" and "sells" and the absence of any comma after "stocks" was indicative of the fact "stocks" was to be read along with "for sale" and not in a manner so as to be divorced from it, an interpretation which would have been sound had there been a comma after the word "stocks". It was therefore held that only stocking for the purpose of sale would amount to an offence but not mere stocking. 57. However, the question, which then arises, is as follows. How is the court to decide whether a provision is carefully punctuated or not? The test- to decide whether a statute is carefully (read consciously) punctuated or not- would be to see what the consequence would be had the section been punctuated 19 otherwise. Would there be any substantial difference in the import of the section if it were not punctuated the way it actually is? While this may not be conclusive evidence of a carefully punctuated provision, the repercussions go a long way to signify intent. If the inclusion or lack of a comma or a period gives rise to diametrically opposite consequences or large variations in taxing powers, as is in the present case, then the assumption must be that it was punctuated with a particular end in mind. The test therefore is not to see if it makes "grammatical sense" but to see if it takes on any "legal consequences". 58. Nevertheless, whether or not punctuation plays an important part in statute interpretation, the construction Parliament gives to such punctuation, or in this case, the irrelevancy that it imputes to it, cannot be carried over to an international instrument where such comma may or may not have been evidence of a deliberate inclusion to influence the reading of the section. There is sufficient evidence for us to conclude that the process referred to in Article 12 must in fact be a secret process and was always meant to be such. In any event, the precincts of Indian law may not dictate such conclusion. That conclusion must be the result of an interpretation of the words employed in the law and the treatises, and discussions that are applicable and specially formulated for the purpose of that definition. The following extract from Asia Satellite58 takes note of the OECD Commentary and Klaus Vogel on Double Tax Conventions, to show that the process must in fact be secret and that specifically, income from data transmission services do not partake of the nature of royalty. "74. Even when we look into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the appellant gets boost. The Organisation of Economic Cooperation and Development 20 (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India are based. Article 12 of the said model DTAA contains a definition of royalty which is in all material respects virtually the same as the definition of royalty contained in clause (iii) of Explanation 2 to Section 9(1) (vi) of the Act. This fact is also not in dispute. The learned counsel for the appellant had relied upon the commentary issued by the OECD on the aforesaid model DTAA and particularly, referred to the following amendment proposed by OECD to its commentary on Article 12, which reads as under: '9.1 Satellite operators and their customers (including broadcasting and telecommunication enterprises) frequently enter into transponder leasing agreements under which the satellite operator allows the customer to utilize the capacity of a satellite transponder to transmit over large geographical areas. Payments made by customers under typical transponder leasing agreements are made for the use of the transponder transmitting capacity and will not constitute royalties under the definition of paragraph 2; these payments are not made in consideration for the use of, or right to use, property, or for information, that is to in the definition (they cannot be viewed, for instance, as payments for information or for the use of, or right to use, a secret process since the satellite technology is not transferred to the customer). As regards treaties that include the leasing of industrial, commercial or scientific (ICS) equipment in the definition of royalties, the characterization of the payment will depend to a large extent on the relevant contractual arrangements. Whilst the relevant contracts often refer to the lease of a transponder, in most cases the customer does not acquire the physical possession of the transponder but 21 simply its transmission capacity: the satellite is operated by the lessor and the lessee has no access to the transponder that has been assigned to it. In such cases, the payments made by the customers would therefore be in the nature of payments for services, to which Article 7 applies, rather than payments for the use, or right to use, ICS equipment. A different, but much less frequent, transaction would be where the owner of the satellite leases it to another party so that the latter may operate it and either use it for its own purposes or offer its data transmission capacity to third parties. In such a case, the payment made by the satellite operator to the satellite owner could well be considered as a payment for the leasing of industrial, commercial or scientific equipment. Similar considerations apply to payments made to lease or purchase the capacity of cables for the transmission of electrical power or communities (e.g. through a contract granting an indefeasible right of use of such capacity) or pipelines (e.g. for the transportation of gas or oil). 75. Much reliance was placed upon the commentary written by Klaus Vogel on Double Taxation Conventions (3rd Edition)'. It is recorded therein: 'The use of a satellite is a service, not a rental (thus correctly, Rabe, A., 38 RIW 135 (1992), on Germany's DTC with Luxembourg); this would not be the case only in the event the entire direction and control over the satellite, such as its piloting or steering, etc. were transferred to the user.' 76. Klaus Vogel has also made a distinction between letting an asset and use of the asset by the owner for providing services as below: 22 'On the other hand, another distinction to be made is letting the proprietary right, experience, etc., on the one hand and use of it by the licensor himself, e.g., within the framework of an advisory activity. Within the range from services', viz. outright transfer of the asset involved (right, etc.) to the payer of the royalty. The other, just as clear- cut extreme is the exercise by the payee of activities in the service of the payer, activities for which the payee uses his own proprietary rights, know-how, etc., while not letting or transferring them to the payer.' 77. The Tribunal has discarded the aforesaid commentary of OECD as well as Klaus Vogel only on the ground that it is not safe to rely upon the same. However, what is ignored is that when the technical terms used in the DTAA are the same which appear in Section 9(1)(vi), for better understanding all these very terms, OECD commentary can always be relied upon. The Apex Court has emphasized so in number of judgments clearly holding that the well-settled internationally accepted meaning and interpretation placed on identical or similar terms employed in various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income Tax Act.... 78. There are judgments of other High Courts also to the same effect. (a) Commissioner of Income Tax Vs. Ahmedabad Manufacturing and Calico Printing Co., [139 ITR 806 (Guj.)] at Pages 820-822. (b) Commissioner of Income Tax Vs. Vishakhapatnam Port Trust [(1983) 144 ITR 146 (AP)] at pages 156-157. (c) N.V. Philips Vs. Commissioner of Income Tax [172 ITR 521] at pages 527 & 538-539." 23 59. On a final note, India's change in position to the OECD Commentary cannot be a fact that influences the interpretation of the words defining royalty as they stand today. The only manner in which such change in position can be relevant is if such change is incorporated into the agreement itself and not otherwise. A change in executive position cannot bring about a unilateral legislative amendment into a treaty concluded between two sovereign states. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Any attempt short of this, even if it is evidence of the State's discomfort at letting data broadcast revenues slip by, will be insufficient to persuade this Court to hold that such amendments are applicable to the DTAAs. 60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite59, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so supra note 1 ITA 473/2012, 474/2012, 500/2012 & 244/2014 Page 49 that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement. 24 61. For the above reasons, it is held that the interpretation advanced by the Revenue cannot be accepted. The question of law framed is accordingly answered against the Revenue. The appeals fail and are dismissed, without any order as to costs.” 31. Similar view was taken by the Hon'ble High Court of Judicature at Bombay in the case of NEO Sports Broadcast Pvt Ltd. 264 Taxmann.com 323. The relevant findings read as under: “3. We notice that an identical issue came up for consideration before Delhi High Court in case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT, reported in (2011) 332 ITR 340. It was the case in which the assessee a non-resident was engaged in satellite communication, having control of satellites. The assessee would provide use of transponder facility on satellite to the television companies outside India, which in turn would be routed to the operators in India, who would pass them on to the customers. The question was whether the payments made to the non-resident were in the nature of royalty and therefore come within the scope of section 9(1) of the Income Tax Act, 1961 ('the Act' for short). The Court by a detailed judgment held that the payments were not in the nature of royalty charges. The Court made a distinction between transfer of rights in respect of property and transfer of rights in the property. 4. Later on similar issue once again came before Delhi High Court in the case of Directorate of Income-tax Vs. New 4/7 06-ITXA- 1487-18.odt Skies Satellite BV, reported in (2016) 382 ITR 114. The Court followed the earlier decision in case of Asia Satellite Telecommunication (supra) and dismissed the revenue's Appeal. It was held that the explanations added below section 9(1) of the Act were not merely clarificatory in nature. Respectfully agreeing 25 with the said decisions of the Delhi High Court, this question is not considered” 32. The Hon'ble High Court of Delhi in the case of Asia Satellite Telecommunications Co. Ltd 332 ITR 340 had the occasion to consider a similar grievance and held as under: “It is clear from the reading of section 5(2) that a non-resident is liable to pay tax on the income derived by him, which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India during the relevant year. Thus, a non-resident is under an obligation to pay tax in respect of the income generated/earned by him in India. Section 9 lays down the various circumstances under which income would be deemed to accrue or arise in India. [Para 25] In the instant case, the endeavour of the revenue was to bring the case of the assessee within the mischief of all or any of the clauses f\ ) and (V\) of sub-section (1) of section 9 in order to bring the assessee within the tax net in India. [Para 26] Applicability of section 9(1)(vii) The findings of the Tribunal on the non-applicability of section 9(1)(\) were proper, justified and legally sustainable. The Explanation (a) to this section, lays down that in a case in which all the operations are not carried out in India, the income of the business deemed to have accrued or arisen in India shall be only such part of the income as is reasonably attributable to the 26 operations carried out in India. It, thus, clearly follows that carrying out of the operations in India, wholly or at least partly, is sine qua non for the application of clause () of sub-section (1) of section 9. Under the agreement with TV channels, role attributed to the assessee could be paraphrased in the following steps : Programmes were uplinked by the TV channels (admittedly, not from India). ii) After receipt of the programmes at the satellite (at the locations not situated in the Indian airspace), those ™A ere amplified through a complicated process. iii) The programmes so amplified were relayed in the footprint area including India where the cable operators received the waves and passed them over to the Indian population. [Para 32] Accepted position was that the first two steps were not carried out in India and the entire thrust of the reroute was limited to the third step and the argument was that the relaying of the programmes in India amounted to the operations carried out in India. That argument was not sustainable. Merely because the footprint area included India and the ultimate consumers/viewers were watching the programmes in India, even when they were uplinked and relayed outside India, would not mean that the assessee was carrying out its business operations in India. The Tribunal had rightly emphasized on the expressions 'operations' and 'carried out in India' occurring in the Explanation (a ) to hold that these expressions signify that it was necessary to establish that any part of the assessee's operations was being carried out in India. No machinery or computer, etc., was installed by the assessee in India through which the programmes were reaching India. The process of amplifying and relaying the programmes 27 was performed within the satellite which was not situated in the Indian airspace and even the Tracking, Telemetering and Control (TTCj operations were also performed outside India in Hongkong. No man, material or machinery or any combination thereof was used by the assessee in the Indian territory. There was no contract or agreement between the assessee with the 0(able operators or with the viewers for reception of the signals in India. [Para 33] Thus, section 9(I)(i) was not attracted in the instant case. [Para 34] Applicability of section 9(1)( vi] The entire controversy revolved around the interpretation to be given to clause (vi) of section 9(1). This clause makes income by way of royalty payable by certain persons as chargeable to tax. [Para 52] Following principles are to be kept in mind while interpreting provisions of clause (vi) of section 9(1) Section 9 is a deeming provision and if the situation specified therein exists, it is to be deemed that income has accrued or arisen in India. 2. Clause) says that the imparting of any information concerning the working of or the use of a patent invention model, design, secret formula or process or trade mark or similar property. 2 It is a settled-law that the words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences are construed according to their grammatical meaning, unless that leads some absurdity or unless there is something in the context or in the object of the statute 28 to suggest to the contrary. In case the language of the statute is not clear and there is need to resort to aids of construction such aids can either be internal or external. Internal aids of constructions are definitions, exceptions, the Explanations . fictions, deeming provisions, headings, marginal notes, preamble, provisos, punctuation,.- saving clauses, non obstante clauses, etc. The external aids are dictionaries, the earlier Acts, history of legislation, the Parliamentary history, the Parliamentary proceedings, state of law as it existed when the la was passed, the mischief sought to be suppressed and the remedy sought to be advanced by the AL.' Therefore, need for these aids would arise only if some ambiguity is found in the definition of term 'royalty appearing in the aforesaid provision. (4) As per section 9(1)(Vi), the income by way of royalty payable by the Government or a resident or a nonresident shad be deemed to accrue or arise in India. The term 'royalty' has been defined in //^Explanation 2 to section 9(1)(vi). In the case o/ Keshavji Ravji & Co. v. C1T [I990j 183 ITR I 49 Taxman 87. the Supra'-. Court held that an Explanation, generally speaking, is intended to explain the meaning of certain phrases an, expressions contained in the statutory provisions. There is no general theory as to the effect and intendment of an Explanation, except that the purpose and intendment are determined by its own words. An Explanation depending upon its own language, might supply or take away something from the contents of a provision It also true that an Explanation may be introduced by way of an abundant caution in order to clear any menu cobwebs surrounding the meaning of the statutory provision spun by interpretative errors and to place who the Legislature considers to be true meaning, beyond any controversy or doubt. In view of the decision of Supreme Court in 29 Keshavji Ravji & Co.'s case /supra), the Explanation 2 has to be read as part and parcel section 9(1)(Vi). From a joint reading of the Explanation to section 9 inserted with effect from 1-6-1976 by the Finance A c 2007 which has been again substituted by the Finance Act, 2010 with retrospective effect from 1-6-1976, it . clear that income of a non-resident shall be deemed to accrue or arise in India under clause (x) or clause (x or clause /vii ), irrespective of the fact whether the non- resident has a residence or a place of business • business connection in India or the non-resident has rendered services in India. Therefore, once the consideration is received by non- resident for the transfer of all or any rights, including the granting of licence in respect of a patent, invention, model, design, secret formula or process or similar property or am. copyright for literary, artistic or scientific work, the consideration received shall be deemed to accrue < arise in India and will be taxable in India. Section 90 provides relief from double taxation. The four clause of sub-section (1) of section 90 lay down the scope of power of the Central Government to enter into a agreement with another country. Clause (a) contemplates situations where tax has already been paid on to same income in both the countries and in that case it empowers the Central Government to grant relief w respect of such double taxation. Clause (b) of section 90(1), which is wider than clause (a), provides that a agreement may be made for the avoidance of double taxation of income under the Act and the corresponding laws may be enforced in that country. Clauses (c) and (A ) essentially deal with the agreements made fey exchange of information, investigation of cases and recovery of income-tax. The effect of an agreement man. pursuant to section 90 is that if no tax liability is imposed under the Act, the question of resorting l agreement would not arise. No provision of the 30 agreement can fasten a tax liability when the liability is nt imposed by the Act. If a tax liability is imposed by the Act, the agreement may be resorted to for negativing reducing it. In case of difference between the provisions of the Act and the provisions of an agreement under section 90, the provisions of the agreement shall prevail over the provisions of the Act and can be enforced ~ an appellate authority or the Court. However, as provided by sub-section (2), the provisions of the Act u apply to the assessee in the event they are more beneficial to him. Where there is no specific provision in the. agreement, it is the basic law. i.e., the Income-tax Act which will govern the taxation of income. [Para 54] Keeping in view the aforesaid principles, one should embark upon the interpretative process while defining the ambit and scope of the term ’royalty’ appearing in the Explanation 2 to clause (vi) of section 9(1). Clause (i) deals with the transfer of all or any rights (including the granting of a licence) in respect of a patent, rtc. Thus, what this clause envisages is the transfer of "rights in respect of property" and not transfer of "right : the property". The two transfers are distinct and have different legal effects. In the first category, the rights are purchased which enable use of those rights, while in the second category, no purchase is involved: o>: the right to use has been granted. Ownership denotes the relationship between a person and an obp. forming the subject-matter of his ownership. It consists of a bundle of rights, all of which are rights in re~ being good against the entire world and not merely against a specific person and such rights a . indeterminate in duration and residuary in character When the rights in respect of a property are transfer. and not the rights in respect of property are transferred and not the rights in the property there is no transfer of the rights in rem which may be good against the world but not against the transferor . In that 31 case, the transferee does not have a right which are indeterminate in duration and residuary in character Lump as the payment made by the telecast operators situated abroad to the ' set also a non-resident, that was sought to be brought within the tax net. [Para 72] For the aforesaid reasons, it was difficult to accept such a far- fetched reasoning with no causal connection. [Para 73] 35 Even when one looked into the matter from the standpoint of Double Taxation Avoidance Agreement (DTAA), the case of the assessee got a boost. The Organization of Economic Cooperation and Development (OECD) has framed a model of Double Taxation Avoidance Agreement (DTAA) entered into by India Article 12 of the said model DTAA contains a definition of 'royalty' which is in all material respects virtually the same as the definition of' royalty' contained in clause (iii) of (Explanation 2 to section 9(l)(x\). The assessee had relied upon the commentary issued by the OECD on the aforesaid model DTAA. [Para 74] The Tribunal had discarded the aforesaid commentary of the OECD only on the ground that it was not safe to rely upon the same. However, what was ignored was that when the technical terms used in the DTAA are the same as in section 9(1)(C\), for better understanding all these very terms, the OECD commentary can always be relied upon. The Apex Court has emphasized so in a number of judgments, clearly holding that the well- settled internationally accepted meaning and interpretation placed on identical or similar terms employed in the various DTAAs should be followed by the Courts in India when it comes to construing similar terms occurring in the Indian Income-tax Act. [Para 77] For the aforesaid reasons, the view taken by the Tribunal in the impugned judgment on the interpretation of section 9(1)(C\) could not be accepted. [Para 79] Thus, the Tribunal was not justified in holding that the amount paid to the assessee by its customers , represented, income by way of royalty, as the said expression is defined in the Explanation 2 to section 9(1)(vi).” 36 33. Considering the facts in totality, in light of the judicial decision discussed hereinabove, we direct the Assessing Officer to delete the addition of Rs. 6,26,29,403/-. Ground No. 2 with all its sub-grounds is allowed. 34. Coming to the receipts from Disaster Recovery Playout Services being treated as FTS, we find that Article 12(4) of the DTAA defines FTS as “payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature including provision of such services through technical or other personnel, if such services: (i) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; (ii) making available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or (iii) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable 37 the person acquiring the service to apply the technology contained therein. 35. We find that the terms ‘managerial’, ‘technical’ and ‘consultancy’ appearing in the definition of ‘fees for technical services’ have not been specifically defined in the treaty and the Act. In our understanding, Managerial service signifies a service for management of affairs or services rendered in performing management functions. 36. It involves controlling, directing, managing or administrating the business of the service recipient and can be rendered only with the application of human mind and must involve human interface/ human intervention. 37. Similarly, ‘technical service’ means a service requiring expertise in technology. Services are of a ‘technical’ nature when special skills or knowledge related to technical field 3 are required for provision of such services. 38 38. In our understanding, only those services which involve application of any expert technical education or skill can be classified as technical service and routine services, which do not require application of any technical knowledge or skill cannot be classified as technical service. Further, the term ‘consultancy services’ involves giving of an advice or advisory services by a professional. With such understanding, we are of the considered view that disaster recovery playout services cannot be considered as being ‘managerial’ in nature as such services do not involve any element of controlling, directing or administering the business of customers. 39. In our understanding of the facts, Playout service is nothing but the broadcasting and/ or transmission of channels by the assessee for its customers, without any involvement in decision-making with respect to the playlists and the content being broadcasted. Moreover, the assessee does not have a right to edit, mix, modify, remove or delete any content or part thereof as provided by the customer. 40. The disaster recovery playout service merely involves provision of uninterrupted availability of the playout service at a pre- determined level. Therefore, receipts from disaster recovery playout 39 services are not in the nature of FTS as envisaged under Article 12(4)(a) of the DTAA as they are not ancillary or subsidiary to disaster recovery uplinking and allied services. 41. We are of the considered view that service must be related to application or enjoyment of the right, property, or information for which a payment in the nature of royalty is received and predominant purpose of the arrangement under which payment of service fee is received must be application or enjoyment of the right, property, or information in respect of which the royalty is received. Thus, both conditions must be cumulatively satisfied for services to be considered as ancillary or subsidiary to the payment of royalty. 42. Therefore, in our considered view, receipts from disaster recovery playout services are not in the nature of FTS as they do not make available any technical knowledge, experience, skill, know- how, or process or consist of the development and transfer of any technical plan or technical design. 40 43. The Hon'ble Karnataka High Court in the case of De Beers India Pvt Ltd 346 ITR 467 and the Hon'ble Delhi High Court in the case of Guy Carpenter & Co. 346 ITR 504 have held that mere rendition of services does not fall within the term ‘make available” unless the recipient of services is enabled and empowered to make use of technical knowledge by itself in its business or for its own benefit without recourse to original service provider in future. 44. The co-ordinate bench in the case of Atos Information Technology, Singapore ITA Nos. 7144/MUM/17 and 5744/MUM/18 had the occasion to consider similar issue and held as under: “26. Having held so, now let us examine whether the payment received can be treated as FTS. Before we proceed to decide the issue, it is necessary to look at the definition of FEES FOR TECHNICAL SERVICES as per Article 12(4) of the India Singapore DTAA, which reads as under:- “4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or (b) make available technical knowledge, experience, skill, know-how or 41 processes, which enables the person acquiring the services to apply the technology contained therein ; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person” 27. On a careful reading of Article 12(4) of the tax treaty, it becomes very much clear that Article 12(4)(a) and 12(4)(c) are not applicable to the present case. Insofar as Article 12(4)(b) is concerned, it clearly denotes that a payment can be treated as FTS, if it makes available technical knowledge, experience, skill, knowhow or process which enables the person acquiring the services to apply the technology contained therein. Therefore, the most crucial factor which requires examination is, while rendering services, whether the assessee has made available any technical knowledge, experience, skill, know- how or process in terms of section 12(4)(b). In our view, the material on record would not persuade one to conclude so. The true meaning of the aforesaid provision is, not only the payment is received for providing technical or managerial services, but, while doing so the service provider also makes available any technical knowledge, experience, skill, know-how or process, etc. to the recipient of services, which enables the person acquiring such services to apply the technology contained therein independent of the service provider. In other words, the service recipient must be in a position to apply the technical knowledge, experience, skill, knowhow, etc. without requiring the permission or presence of the service provider. 42 28. In the facts of the present case, there is nothing on record to suggest that Atos India can use any technical knowledge, experience, skill, know-how or process, etc. independently on its own without requiring the involvement of the assessee. Therefore, in our considered opinion, the tests and conditions of Article 12(4)(b) are not satisfied. That being the case, the payment received by the assessee from various projects related services would not qualify as FTS either. That being the case, the payment received by the assessee has to be treated as business profits; hence, would not be taxable in absence of a permanent establishment in India. 45. In light of the above decisions, the facts of the case in hand clearly show that the assessee has provided Disaster Recovery Playout services to its customers through its facility in Singapore and the customers are not provided with any technology knowledge, experience, skill, know-how or processes as envisaged under Article 12(4)b of the DTAA. 46. Further, receipts are also not in the nature of FTS as per Explanation 2 of section 9(1)(vii) of the Act. 43 47. Considering the facts of the case in totality, in light of the decisions referred to hereinabove, payments received by the assessee as consideration for providing disaster recovery playout services are not taxable as FTS and the Assessing Officer is directed to delete the same. Ground No. 3 with its sub-grounds is allowed. 48. The other grounds are consequential in nature and need no separate adjudication. 49. In the result, the appeal of the assessee in ITA No. 702/DEL/2021 is allowed. The order is pronounced in the open court on 19.12.2022. Sd/- Sd/- [KUL BHARAT] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 19 th December, 2022. VL/ 44 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr.PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order