NEW SKIES SATELLITES B V,NEW DELHI vs. DCIT, CIRCLE- 2(2)(2), INTL. TAXATION, NEW DELHI

ORDER PER O.P. KANT, A.M.:

This appeal by the assessee is directed against order dated 28/07/2017 passed by the Ld. Deputy Commissioner of Income Tax – Circle - 2(2)(2), International Taxation, New Delhi (hereinafter referred to as ‘the Assessing Officer’) pursuant to the direction of the Ld. Dispute Resolution Panel (DRP). The assessee raised following grounds:

1. That on the facts and in the circumstances of the case and in law, the Ld. Dispute Resolution Panel (‘the Panel’) erred in not directing the Learned Assessing Officer (‘Ld. AO’) to pass appropriate orders holding that the Appellant is not liable to be assessed to tax in India. 1.1 That on the facts and circumstances of the case and in law, the Panel and the Ld. AO erred in not following the orders passed by the Hon’ble High Court of Delhi for the Assessment years 2000-01 to 2008-09 in the Appellant’s own case since there was no change in facts recorded for the present year. 1.2 That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not holding that the payments received by the Appellant from providing data transmission services via Space Segment Capacity are assessable as business profits in India and in the absence of a Permanent Establishment under Article 5 of the India-Netherlands Double Taxation Avoidance Agreement between India and Netherlands (“the DTAA”), the receipts earned by the Appellant are not taxable in India.

2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the payments received by the Appellant as consideration for data transmission services are in the nature of ‘Royalty’ as defined under section 9(1 )(vi) of the Income Tax Act, 1961 (‘the Act’) and Article 12(4) of the DTAA.

2.1 That without prejudice to the above, on facts and circumstances of the case and in law, the Panel and the Ld. AO erred in reading into the expanded meaning of ‘Royalty’ contained in section 9(1 )(vi) of the Act as retrospectively amended by Finance Act, 2012, for the purpose of interpreting the definition of ‘Royalty’ as provided under Article 12(4) of the India-Netherlands DTAA, when it is a settled position in law that amendment in the Act cannot have any effect in interpretation of DTAA as also held by the Hon’ble High Court of Delhi in the Appellant’s own case in [2016] 382 ITR 114 (Delhi) for AY 2006-07 and AY 2008-09. 2.2. Without prejudice to ground 2 above, the Ld. AO and the Panel erred in not taking cognizance of the fact that ‘use of a secret process’ is a sine qua non for the payments to qualify as ‘Royalty’ under the India-Netherlands DTAA.

4. The Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act. The above grounds are without prejudice to each other. That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal.

2. Briefly stated facts of the case are that the assessee is a company incorporated under the laws of Netherlands and was deriving income during the year under consideration from lease of transponders of the satellite. The assessee company operates satellite and the signals transmitted from the satellite are used by various TV channels and Internet service providers for the purpose of telecommunication, broadcasting, transfer of data image or voice etc. The assessee company filed return on 26/09/2014 declaring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. According to the assessee, its receipt/income was not liable to tax in India. However according to the Assessing Officer, payment received as consideration for the use of or the right to use, any process (transmission by satellite including uplinking, amplification, conversion or down linking of any signal) falls within the definition of the royalty as per the domestic law as well as India Netherland double tax avoidance agreement (DTAA). The Assessing Officer also alternatively held that receipt in the hand of the assessee qualify as fee for technical services (FTS) within the meaning of Article-12 of the DTAA between India and Netherlands and section 9(1)(vii) of the Act. 2.1 Accordingly, the Assessing Officer proposed additions in the draft assessment order. In the draft assessment order, the Ld. Assessing Officer specifically mentioned finding of the Hon’ble Delhi High Court in the case of the assessee for assessment years 2008-09 & 2006-07 and mentioned that addition was made since the issue was contested by the Department before the Hon’ble Supreme Court. The relevant para 9.9 of the impugned order is reproduced as under:

9.9 Further, during the course of assessment proceedings, the assessee submitted that the Hon’ble Delhi High Court in the assessee’s own case in DIT Vs. New Skies Satellite B.V. vide an order dated 08.02.2016 in ITA 473-474/2012 decided the issue of taxability of data transmission services as in favour of the assessee. The assessee submitted that in the said decision the Hon’ble High Court has comprehensively dealt with the retrospective amendment made vide Finance Act, 2012 and held that unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, the provision of data transmissions services would not amount to Royalties under the DTAA. However, the Revenue Department has not accepted the decision of the Hon’ble High Court of Delhi and has filed an appeal before the Hon’ble Supreme Court against the said order which has been admitted by the Hon’ble Supreme Court.

2.2 Further the Assessing Officer also noted that facts in the current assessment year are identical to the facts for earlier assessment year 2013-14. The relevant finding of the Assessing Officer is reproduced as under:

10.4 It is pertinent here to mention that the assessee has submitted that there was no change in business/process model of the assessee in current year under consideration vis a vis the last year. The submissions made during the current assessment proceeding, are identical to those submitted during the earlier assessment proceedings. The Ld. DRP through their order/direction u/s 144C(5) dated 08.09.2016, has also confirmed all the views taken by the AO in the draft assessment order for the AY 2013-14 and confirmed the proposed additions fully, thereby rejecting all the grounds of objection raised by the assessee. Considering that the facts of the year under consideration are similar to earlier assessment years, in consonance with the method of computation of income adopted in the earlier assessment years which has been confirmed by learned CIT (A) as well as DRP in past years rejecting the assessee's contention, the same are being followed.

2.3 Aggrieved with the draft assessment order, the assessee filed objections before the Ld. DRP, who confirmed the addition proposed in draft assessment order of the Assessing Officer. According to the Ld. DRP, it is an extension of the assessment process and to keep the matter alive before the Hon’ble Apex Court, the addition was upheld. The relevant finding of the Ld DRP is reproduced as under:

“3. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in holding that the payments received by the assessee would also qualify as “fee for technical services” as defined under section 9(1 )(vii) of the Act as well as within the meaning of Article 12(5) of the India-Netherlands DTAA. DRP Directions: All these grounds revolve around the issue of amended definition of Royalty in the Income Tax Act and the definition taken in the DTAA when it was signed. The assessee operates satellites and derives income by leasing out its transponders for telecasts by various TV channels and Internet Service providers (clients). The clients enter agreements with the assessee directly or indirectly to avail of the services. The services are beamed in specific footprints of the satellite catchment area. The services availed by Indian Channels and payments made by such channels have been assessed by the AO as ‘Royalty’ in view of the amended definition of Royalty per section 9 (1) vi read with explanations (Expl. 2 in particular). The assessee has challenged this contention by referring to the definition of Royalty in the relevant DTAA. The assessee has also submitted the judgment by Hon’ble Delhi High Court in its own case on similar issues where relief has been granted to the assessee basis the definition of Royalty in the DTAA. The matter was referred to the AO/CIT for comments. It has been replied that the department is in appeal before Hon’ble Supreme Court against the judgment of Hon’ble Delhi High Court in case of the assessee which has been admitted. It has to be borne in mind that the panel is an extension of the assessment process and the AO is now bound by the directions of DRP. Accordingly, the matter needs to be kept alive in view of its pendency before the Apex Court. The panel accordingly upholds addition by the AO in this matter.

2.4 Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above. 3. Before us, the learned counsel pressed only ground Nos. 2 and 3 of the appeal, thus rest of the grounds are dismissed as infructuous.

“5.2 We have heard the rival submissions and perused the relevant material on record. We find that Hon’ble Delhi High Court in the case of assessee in and 474/2012 for assessment year 2006-07 and 2008-09, which is reported in 382 ITR 114, framed the question of law as under: (1) whether the receipts of the assessee earned from providing data transmission services, fall within the terms royalty under the Income Tax Act, 1961, and (2) if the answer to the first is in the affirmative, whether the assessee would be eligible for benefit under the relevant Double Tax Avoidance Agreements.

5.3 The Hon’ble Delhi High Court answered to the question of law against the Revenue with following finding: “60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word “royalty” in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner 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.

4.4 Similarly on the issue of Fee for Technical Services (FTS), the Tribunal decided the issue in favour of the assessee as under:

“6.3 We have heard the rival submission on the issue in dispute. We find that the Assessing Officer in the impugned assessment order alternatively held that the payment received was Fee for Technical Services (FTS). The Tribunal in the case of the assessee in and 4177/Del/2011 for assessment year 2006-07 and 2008-09 respectively has decided the ground related to characterization of the payment received by the assessee as royalty or Fee for Technical Services (FTS) as under:

5. The Id. DR, on the other hand, has strongly relied on the impugned order, contending that the decision of the Hon’ble Delhi High Court in the case of “Asia Satellite Telecommunications Co. Ltd.

(supra), stands challenged by the Department before the Hon’ble Supreme Court.

4.5 Since the issues in consideration in the present appeal are identical to the issues raised in the case of the assessee in earlier years decided by the Tribunal (supra), respectfully following the decision of the Tribunal(supra), we allow the ground Nos. 2 and 3 of the appeal in favour of the assessee.

6. Since the appeal of the assessee has been decided and allowed partly, the stay application bearing S.A. No. 644/Del/2017 has become infructuous, accordingly, the same is dismissed as infructuous. The decision is pronounced in the open court on 14th Dec., 2017.