M/S NEW SKIES SATELLITES B.V.,,GURGAON vs. DCIT (INTL. TAXATION), NEW DELHI

And Assessment Year: 2012-13 Vs. DCIT (International Taxation) M/s. New Skies Satellites B.V., C/o- Pricewaterhouse Coopers Circle - 2(2)(2), New Delhi (P) Ltd., Sucheta Bhawan, Gate No. 2, 1st Floor, 11A, Vishnu Digamber Marg, New Delhi PAN : AACCN1866C (Appellant) (Respondent) And Assessment Year: 2013-14 M/s. New Skies Satellites B.V., Vs. DCIT (Intl. Taxation) Circle - C/o- Pricewaterhouse Coopers 2(2)(2), New Delhi (P) Ltd., Sucheta Bhawan, Gate No. 2, 1st Floor, 11A, Vishnu Digamber Marg, New Delhi PAN : AACCN1866C (Appellant) (Respondent) Assessee by Sh. Salil Kapoor, Adv.; Sh. Arvind Rajan, CA; Sh. Divesh Dhawan, CA; and Sh. Abhinav Vijh, CA. Department by Sh. T.M. Shiv Raman, CIT(DR) Date of hearing 31.08.2017 Date of pronouncement 17.10.2017 ORDER PER O.P. KANT, A.M.:

These five appeals of the assessee are directed against separate orders of the Assessing Officer in terms of section 144C(13) read with section 143 (3) of the Income-tax Act, 1961 (in short ‘the Act’) pursuant to direction of the Ld. Dispute Resolution Panel (DRP) for assessment year 2009-10 to assessment year 2013-14 respectively. Since common issues are involved in these appeals, same were heard together and disposed off by way of this consolidated order.

ITA No. 5616/Del/2012 2. First we take up the appeal having for assessment year 2009-10. The grounds raised by the assessee are as under:

2. That on the facts and in the circumstances of the case and in law, the Panel erred in not directing the Ld. AO to follow the order passed by the Hon’ble Delhi High Court (in ITA 1167/2009 and ITA 1122 to 1129/2011) and the Hon’ble Income Tax Appellate Tribunal, New Delhi (‘the Tribunal’) (in 5387/Del/2004, 2623-2624/Del/2008, 735-736/Del/2010, 4176- 4177/Del/2011) in Appellant’s own case holding that the Appellant is not liable to be assessed to tax in India, when there was no change of facts recorded by the Ld. AO from the preceding years. 3. That on 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 Double Taxation Avoidance Agreement between India and Netherlands (“the DTAA”). 4. 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 not assessable as business profits in India and in the absence of a Permanent Establishment under Article 5 of the India-Netherlands DTAA, the receipts earned by the Appellant are not taxable in India.

5. That the Ld. AO erred in holding that income received by the Appellant from the non-resident companies is taxable in India under Article 12(4) read with Article 12(2) and 12(8) of India Netherlands DTAA 6. That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not discharging the burden of proving that: i. The Appellant’s non-resident customers had a Permanent Establishment in India in connection with which the alleged Royalty was paid; and ii. The alleged Royalty payments were borne by such Permanent Establishment of the non-resident customers. 7. That the Ld. AO erred in holding that the payments received by the assessee would qualify as “fee for technical services”as-defmed- under section 9(1)(vii) of the Act as well as within the meaning of Article 12(5) of the India Netherlands DTAA. 8. That without prejudice to the above, on facts and circumstances of the case and in law, the Ld. AO has erred in arbitrarily attributing the entire receipts from the customers falling on the beam covering India either fully or partially and not apportioning receipts which were India specific. 3. The briefly stated facts of the case are that the assessee company was incorporated in the Netherlands and is a tax resident of that country. The assessee company is engaged in the services relating to transmission of voice, data and programmes by providing space segment capacity to customers on satellites under various contracts with the customers around the world. Before the lower authorities, the assessee submitted that the satellite is located in the space at the height of 36,000 kms above the Earth and, therefore, the satellites as well as operating facilities are maintained and controlled outside India and the customers have no control on physical possession over the satellite nor any rights to use the satellite, are granted to the customers. The customers use the uplink facilities to send the encoded signals to the satellite. The signals are then amplified by the transponder and down-linked over the area covered by the satellite beam. 3.1 For the assessment year under consideration, the assessee filed its return of income on 29/09/2009 declaring nil income. The assessee explained that its profit from business are not taxable in India as no permanent establishment (PE) was maintained by the assessee in India. In the draft assessment order, the Assessing Officer proposed to tax the income of the assessee from satellite transmission operations as royalty/fee for technical services. The Ld. DRP also upheld the decision of the Assessing Officer stating that the SLP filed by the Department against the decision of the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT (2011) 332 ITR 340 was pending for adjudication before the Hon’ble Supreme Court and therefore the matter being subjudice, no interference was required in the draft order proposed by the Assessing Officer. 3.2 Pursuant to the direction of the Ld. DRP the Assessing Officer in final order dated 05/09/2012 under section 144C read with section 143(3) of the Act, computed the income of the assessee as under:

Receipt from Indian Customers USD 18,362,481 Receipt from Non-Indian Customers USD 302,166 Total Royalty income of the assessee USD 18,664,647 (Converted into INR @ 50.53) USD 943,124,632 3.3 Aggrieved, the assessee in appeal before the Tribunal raising the grounds as reproduced above.

(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.

5.4 In view of binding precedent, respectfully following the decision of the Hon’ble Delhi High Court, we hold that payment received by the assessee during the year under consideration as consideration for data transmission service cannot be held as royalty in terms of article 12(4) of the DTAA between India and Netherlands. Accordingly, the ground No. 3 of the appeal is allowed.

6. The ground No. 7 of the appeal relates to characterization of the receipt in the nature of fee for technical services (FTS) under the Act and Indian Netherlands DTAA. 6.1 The learned counsel submitted that issue in dispute has already been decided in favour of the assessee in its own case by the Tribunal for assessment year 2006-07 and 2008-09 vide order dated 16/11/ 2011 and no substantial question of law has been raised by the Revenue on the issue in dispute in the appeal filed before the Hon’ble Delhi High Court.

6.2 The Ld. CIT(DR), on the other hand, relied on the finding of the lower authorities. 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.

6.4 Since the issue in dispute has already been decided in favour of the assessee by the Tribunal (supra) and the issue has not been raised further in the appeal file by the Revenue, respectfully following the decision of the Tribunal, we allow the ground No. 7 of the appeal of the assessee.

“5. That the learned AO erred in holding that income received by the appellant from the non-resident companies is taxable in India under Article 12(4) read with Article 12(2) and 12(8) of India Netherlands DTAA.

6. That on the facts and in the circumstances of the case and in law, the ld. AO erred in not discharging the burden of proving that: i) The appellant’s non-resident customers had a Permanent Establishment in India in connection with which the alleged Royalty was paid; and ii) The alleged Royalty payments were borne by such Permanent Establishment of the non-resident customers.”

7.4 The Tribunal (supra) rejected the above grounds that in view of the grounds in respect of characterization of income as royalty or fee for technical services already decided in favour of the assessee and therefore ground Nos. 5, 6, and 8 no longer survived. 7.5 As above grounds raised in are identical to the grounds No. 5, 6 and 8 respectively raised in the present appeal, respectfully, following the decision of the Tribunal (supra), the grounds No. 5, 6 and 8 are dismissed as infructuous. 7.6 In the result, appeal of the assessee is partly allowed.

ITA Nos.1061/Del/2014; 680/Del/2015; 281/Del/2016 & 5840/Del/2016 8. Now, we take up the appeals having for assessment year 2010-11, ITA No. 680/Del/2015 for assessment year 2011-12, ITA No. 281/Del/2016 for assessment year 2012-13 and 2013-14. 9. The grounds of the appeal raised in the above appeals are reproduced as under:

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.

2. That on the facts and circumstances of the case and in law, the Panel erred in not directing the Ld. AO to follow the order passed by the Hon’ble Delhi High Court (in ITA 1167/2009 and ITA 1122 to 1129/2011) and the Hon’ble Income Tax Appellate Tribunal, New Delhi (‘the Tribunal’) (in ITA nos. 5385-5387/Del/2004, 2623- 2624/Del/2008, 735-736/Del/2010, 5160/2010, 4176- 4177/Del/2011) in Appellant’s own case holding that the Appellant is not liable to be assessed to tax in India, when there was no change of facts recorded by the Ld. AO from the preceding years. 3. 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 not 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. 4. 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 “royalties” as defined under section 9(1)(vi) of the Income Tax Act, 1961 (‘the Act’) and Article 12(4) of the DTAA.

5. Without prejudice to above, on facts and circumstances of the case, the Ld. AO erred in wrongly computing the total assessed income of the Appellant at USD 24,390,163/-.

6. Without prejudice to above, on facts and circumstances of the case and in law, the Ld. AO erred in not granting the entire credit of the taxes deducted at source as claimed in the return of income filed by the appellant. 7. The Ld. AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.

Grounds raised in ITA No. 680/Del/2015

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 erred in not directing the Ld. AO to follow the order passed by the Hon’ble Delhi High Court (in ITA 1167/2009 and ITA1122 to 1129/2011) and the Hon’ble Income Tax Appellate Tribunal, New Delhi (‘the Tribunal’) (in 2623- 2624/Del/2008, 735-736/Del/2010, 5160/2010, 4176- 4177/Del/2011) in Appellant’s own case holding that the Appellant is not liable to be assessed to tax in India, when there was no change of facts recorded by the Ld. AO from the preceding years. 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 not 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 “royalties” as defined under section 9(1)(vi) of the Income Tax Act, 1961 ('the Act’) and Article 12(4) of the DTAA.

4. That without prejudice to the above, on the facts and in the circumstances of the case and in law, the Panel and Ld. AO erred in holding that the revenues earned from non-resident customers of the Appellant are also chargeable to tax in India as per the provisions of section 9(1)(vi)(c) of the Act and Article 12(8) of the India-Netherlands DTAA. 4.1 That on the facts and in the circumstances of the case and in law, the Ld. AO erred in not discharging the burden of proving that: (i) The Appellant’s non-resident customers had a Permanent Establishment in India in connection with which the alleged Royalty was paid; and (ii) The alleged Royalty payments were borne by such Permanent Establishment of the non-resident customers.

5. That without prejudice to the above, on facts and circumstances of the case and in law, the Ld. AO has erred in arbitrarily attributing the entire receipts from the customers falling on the beam covering India either fully or partially and not apportioning receipts which were India specific.

6. That the Ld. AO erred in holding that the payments received by the appellant as consideration for data transmission services 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.

7. Without prejudice to above, while computing the tax payable, the Ld. AO erred in law in levying surcharge and education cess (including secondary and higher education cess) on the rate of tax as provided under the Article 12 of the India- Netherlands DTAA.

8. That the Ld. AO has erred in levying interest under section 234B of the Act, by not appreciating the fact that the Appellant is not under any obligation to pay advance tax since the entire revenues earned by the Appellant were subject to tax deduction at source under section 195 of the Act. The Ld. AO further erred in levying Interest u/s 234D of the Act.

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 erred in not directing the Ld. AO to follow the order passed by the Hon’ble Delhi High Court (in ITA 1167/2009 and ITA 1122 to 1129/2011) and the Hon’ble Income Tax Appellate Tribunal, New Delhi (‘the Tribunal’) for AY 2000-01 to AY 2008-09 in Appellant’s own case holding that the Appellant is not liable to be assessed to tax in India, when there was no change of facts recorded by the Ld. AO from the preceding years. 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 not 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.

3. 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 “royalties” contained in section 9(1 )(vi) of the Act as retrospectively amended by Finance Act, 2012, for the purpose of interpreting the definition of "royalties" 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 for the purpose of interpretation of DTAA. 4. That the Ld. AO erred in holding that the payments received by the appellant as consideration for data transmission services 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. 5. That the Ld. AO has erred in levying interest under section 234B of the Act, by not appreciating the fact that the Appellant is not under any obligation to pay advance tax since the entire revenues earned by the Appellant were subject to tax deduction at source under section 195 of the Act. The Ld. AO erred in further levying Interest u/s 234D of the Act. 6. Without prejudice to above, while computing the tax payable, the Ld. AO erred in law in levying surcharge and education cess (including secondary and higher education cess) on the rate of tax as provided under the Article 12 of the India- Netherlands DTAA. 7. Without prejudice to above, on facts and circumstances of the case, the Ld. AO erred in not granting the entire credit of taxes deducted at source as claimed in the return of income filed by the Appellant. 8. The Ld. AO erred in initiating penalty proceedings under section 271(1 )(c) of the Act.

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.

3. That the Ld. AO erred in holding that the payments received by the Appellant as consideration for data transmission services 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.

4. Without prejudice to above, on facts and circumstances of the case and in law, the Ld. AO erred in not granting the entire credit of taxes deducted at source as claimed in the return of income filed by the Appellant. 5. The Ld. AO erred in initiating penalty proceedings under section 271 (1 )(c) of the Act.

in respective appeals.

12. Further, Ground No. 6 of ITA No. 1061/Del/2014, Ground No. 6 of ITA No. 680/Del/2015, Ground No. 4 of ITA No. 281/Del/2016 and Ground No. 3 of ITA No. 5840/Del/2016 are related to the issue of characterization of receipts in the nature of Fee for Technical Services (FTS) under the Act and Indian Netherlands DTAA. The issue in dispute is identical to the issue raised in ground No. 7 of ITA No. 5616/Del/2012, which we have adjudicated in favour of the assessee. Accordingly, following the same finding, we allow the above grounds raised in respective appeals.

13. Further ground No. 4, 4.1 and 5 of ITA No. 1061/Del/2014 and ground No.4, 4.1 and 5 of ITA No. 680/Del/2015 are related to taxability of revenues from non-resident customers under article 12(8) of India Netherlands DTAA as well as within section 9(1)(vi)(c) of the Act and quantification of revenue liable to tax in India. The identical Ground no. 5, 6 & 8 have been adjudicated by us in ITA No. 5616/Del/2012, accordingly, following our findings, above grounds are dismissed as infructuous.

14. The Ground No. 7 of ITA No. 1061/Del/2014, Ground No. 8 of ITA No. 680/Del/2015 and Ground No. 5 of ITA No. 281/Del/2016 relates to levy of interest under section 234B of the Act. 14.1 The learned counsel of the assessee submitted before us that the Tribunal for assessment years 2006-07 and 2008-09 in the assessee’s own case observed that the issue has become infructuous, since the primary issue on characterization of receipts as being in the nature of royalty has been decided in favour of the assessee. 14.2 The Ld. CIT(DR), on the other hand, relied on the finding of the lower authorities. 14.3 We have heard the rival submission and perused the relevant material on record. Since the issue of characterization of receipt as royalty or fee for technical services has been decided in favour of the assessee, the issue of charging interest under section 234B of the Act is merely rendered academic and accordingly, we dismiss the same as infructuous.