ASIA SATELLITE TELECOMMUNICATIONS COMPANY LIMITED,HONG KONG vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE INT TAX 1(1)(1), DELHI, CIVIC CENTRE, MINTO ROAD, NEW DELHI

Shri Ajay Vohra, Sr. Advocate appearing on behalf of the assessee submitted that, identical issue has been considered by the Hon’ble Delhi High Court in assessee’s own case reported as 197 Taxman 263(Del.). The Hon’ble High Court held that the fee received by the assessee for providing transmission facility through satellite is not in the nature of royalty within the meaning of section 9(1)(vi) of the Act. Thereafter, the provisions of section 9(1)(vi) of the Act were amended by the Finance Act, 2012 to nullify the aforesaid judgment rendered by the Hon’ble High Court in assessee’s case. Thereafter, the Hon’ble Delhi High Court in the case of DIT vs. New Skies Satellite BV, 382 ITR 114 considered the same issue and examined taxability of the fees under the provisions of DTAA. The Hon’ble High Court in the said case held that the amendment brought in by the Finance Act, 2012 which resulted in widening the scope of definition of royalty under the Act has no effect on the definition of ‘royalty’ as provided in DTAA. Hence, such receipt do not fall within the meaning of ‘royalty’ as defined under Article 12 of India-Thailand DTAA. The provisions of Article 12 of India-Thailand DTAA dealing with Royalties are pari & 2353/DEL/2023(A.Ys. 2020-21 & 2021-22) materia to that of India-Hong Kong DTAA Article 12. Thus, the fee charged by the assessee for providing access to satellite transmission services is not taxable as royalty in India. The ld. Counsel pointed that the Hon’ble Supreme Court of India in the case of Engineering Analysis Centre of Excellence (P) Ltd., 432 ITR 471 has affirmed the decision rendered in the case of DIT vs. New Skies Satellite BV (supra).

Per contra, the ld. DR vehemently supported the impugned order. The ld. DR filed his written submissions, the same are reproduced hereunder: - “The assessee, a Hong Kong-based entity, contends that transponder fees are not taxable as "Royalty" under the India-Hong Kong DTAA, relying on the Delhi High Court's judgment in DIT v. New Skies Satellite BV. Their defense rests on the principle that the "static" definition of Royalty in a Treaty cannot be overridden by a subsequent unilateral amendment to the domestic Income Tax Act. The Department submits that this defense is legally untenable in the present case. Unlike the treaties in New Skies (which pre-dated the amendment), the India-Hong Kong DTAA was signed in 2018, six years after the Finance Act, 2012 expanded the definition of Royalty. Furthermore, applying the Supreme Court's ruling in Gramophone Co. of India Ltd., the clear legislative mandate of the Indian Parliament regarding "process" must prevail, rendering the income taxable as Royalty. DRP Order para 4.2.3 to 4.2.11 is relied upon.

Argument I: The "Chronological" Bar to the New Skies Defense The New Skies judgment protected assessees from "Treaty Override" only where the Treaty was signed before the domestic amendment. The Court reasoned that two nations could not have intended a definition that did not exist at the time of signing. Distinguishing Facts for Hong Kong: • Date of Domestic Amendment: The Finance Act, 2012 inserted Explanation 6 to Section 9(1)(vi), explicitly defining "process" to include satellite transmission (uplinking/downlinking). • Date of Treaty: The India-Hong Kong DTAA was signed on March 19, 2018. Submission: Since the DTAA was concluded after the domestic law was amended, the Contracting States are presumed to be aware of the expanded definition of "Royalty" (which included transponder fees) under Indian law. Therefore, the New Skies ratio— which applies only to subsequent unilateral amendments—is factually inapplicable. The & 2353/DEL/2023(A.Ys. 2020-21 & 2021-22) Treaty definition of "process" must be read in harmony with the law existing at the time of signature (2018).

Argument II: Ambulatory Interpretation (Article 3(2)) Article 3(2) of the India-Hong Kong DTAA mandates an "Ambulatory" (dynamic) rather than "Static" interpretation for undefined terms. "As regards the application of the Agreement at any time by a Contracting Party, any term not defined therein sball, unless the context otherwise requires, have the meaning that it has at that time under the law of that Party..." • "Process" is Undefined: The DTAA defines Royalty as payment for the use of a "process" but does not define the term "process" itself. • Domestic Meaning Applies: Under Article 3(2), the meaning of "process" must be derived from the Indian Income Tax Act "at that time" (i.e., the current assessment year). • Current Law: Explanation 6 to Section 9(1)(vi) clearly states that "process" includes transmission by satellite. • Result: Via Article 3(2), the domestic definition flows into the Treaty, making transponder fees taxable as Royalty.

Argument III: Sovereign Supremacy (The Gramophone Principle) Even if the Assessee argues that the Treaty definition conflicts with the Domestic definition, the Supreme Court's judgment in Gramophone Company of India Ltd. v. Birendra Bahadur Pandey [1984] provides the ultimate safeguard for the Revenue. In Gramophone, the Supreme Court held that while courts should endeavor to harmonize municipal law with international law, the Municipal Law (Parliamentary Statute) prevails in case of a clear conflict. Key Extracts for submissions: • On Legislative Supremacy: "National courts cannot say yes if Parliament has said no to a principle of international law. National Courts will endorse international law but not if it conflicts with national law." • On Clear Statutes: 'If statutory enactments are clear in meaning, they must be construed according to their meaning even though they are contrary to the comity of nations or international law." Application: The Parliament, via Finance Act 2012, explicitly expressed its Sovereign Will to tax satellite transmission services as "Royalty" (Explanation 6). This is a clear statutory enactment. Relying on Gramophone, the Tribunal/Court cannot bypass this clear legislative mandate by citing "International Law" or "Treaty Interpretation" theories like those in New Skies. The specific definition in the Act overrides the general interpretation of the Treaty.

This issue was considered by the Hon’ble High Court in assessee’s own case for AY 1997-98, the Hon’ble Delhi High Court decided the issue in favor of the assessee holding that the fee received by the assessee for providing satellite transmission services to customers in India does not fall within the definition of royalty u/s.9(1)(vi) of the Act. At that time the receipts were not tested as royalty against provisions of DTAA as no treaty between the two countries was in force. Thereafter, the provisions of section 9(1)(vi) of the Act were amended by the Finance Act, 2012 by way of insertion of Explanations 4, 5 and 6 to section 9(1)(vi) of the Act, which resulted in widening the definition of royalty under the provisions of Act.

It is now essential to decide the second question i.e. whether the assessees in the present case will obtain any relief from the provisions of the DTAAs. Under Article 12 of the Double Tax Avoidance Agreements, the general rule states that whereas the State of Residence shall have the primary right to tax royalties, the Source State shall concurrently have the right to tax the income, to the extent of 15% of the total income. Before the amendment brought about by the Finance Act of 2012, the definition of royalty under the Act and the DTAAs were treated as pari materia. The definitions are reproduced below: Article 12(3), Indo Thai Double Tax Avoidance Agreement: '3. The term "royalties" as used in this article means payments of any kind received as a consideration for the alienation or the use of, or the right to use, any copyright of literary, artistic or scientific work (including cinematograph films, phonographic records and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.' 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.' 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"

In Asia Satellite Telecommunications Co. Ltd's Case (supra) the Court, while interpreting the definition of royalty under the Act, placed reliance on the definition in the OECD Model Convention. Similar cases, before the Tax Tribunals through the nation, even while disagreeing on the ultimate import of the definition of the word royalty in the context of data & 2353/DEL/2023(A.Ys. 2020-21 & 2021-22) transmission services, systematically and without exception, have treated the two definitions as pari materia. This Court cannot take a different view, nor is inclined to disagree with this approach for it is imperative that definitions that are similarly worded be interpreted similarly in order to avoid incongruity between the two. This is, of course, unless law mandates that they be treated differently. The Finance Act of 2012 has now, as observed earlier, introduced Explanations 4, 5, and 6 to the Section 9(1)(vi). The question is therefore, whether in an attempt to interpret the two definitions uniformly, i.e. the domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. In essence, will the interpretation given to the DTAAs fluctuate with successive Finance Act amendments, whether retrospective or prospective? The Revenue argues that it must, while the Assessees argue to the contrary. This Court is inclined to uphold the contention of the latter.

This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible.

It takes little imagination to comprehend the extent and length of negotiations that take place when two nations decide to regulate the reach and application of their legitimate taxing powers. In Union of India v. AzadiBachao Andolan [2003] 263 ITR 706/132 Taxman 373 (SC) where the Indo Mauritius Double Tax Avoidance Convention was before the Supreme Court, the Court said the following of the essential nature of these treaties, "132. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief is that treaties are negotiated and entered into at a political level go ahead and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief , David R. Davis, Principles of International Double Taxation Relief , Pg.4 (London Sweet & Maxwell, 1985)points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06): The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of & 2353/DEL/2023(A.Ys. 2020-21 & 2021-22) one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides."

The Vienna Convention on the Law of Treaties, 1969 ("VCLT") is universally accepted as authoritatively laying down the principles governing the law of treaties. Article 39 therein states the general rule regarding the amendment of treaties and provides that a treaty may be amended by agreement between the parties. The rules laid down in Part II of the VCLT apply to such an agreement except insofar as the treaty may otherwise provide. This provision therefore clearly states that an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited.

We do not however rest our decision on the principles of the VCLT, but root it in the inability of the Parliament to effect amendments to international instruments and directly and logically, the illegality of any Executive action which seeks to apply domestic law amendments to the terms of the treaty, thereby indirectly, but effectively amending the treaty unilaterally. As held in Azadi Bachao Andolan's case (supra) these treaties are creations of a different process subject to negotiations by sovereign nations. The Madras High Court, in CIT v VR. S.RM. Firm [1994] 208 ITR 400 held that "tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries".

At the very outset, it should be understood that it is not as if the DTAAs completely prohibit reliance on domestic law. Under these, a reference is made to the domestic law of the Contracting States. Article 3(2) of both DTAAs state that in the course of application of the treaty, any term not defined in the treaty, shall, have the meaning which is imputed to it in the laws in force in that State relating to the taxes which are the subject of the Convention. "Indo Thailand DTAA: ARTICLE 3: GENERAL DEFINITIONS 2. In the application on the provisions of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has for the purposes of the laws in force in that State relating to the taxes which are the subject of this Convention. Indo Netherlands DTAA:

Though this has been the general rule, much discussion has also taken place on whether an interpretation given to a treaty alters with a transformation in, or amendments in, domestic law of one of the State parties. At any given point, does a reference to the treaty point to the law of the Contracting States at the time the treaty was concluded, or relate to the law of the States as existing at the time of the reference to the treaty? The former is the 'static' approach while the latter is called the 'ambulatory' approach. One opportunity for a State to ease its obligations under a tax convention comes from the ambulatory reference to domestic law. States seeking to furtively dodge the limitations that such treaties impose, sometimes, resort to amending their domestic laws, all the while under the protection of the theory of ambulatory reference. It thereby allows itself an adjustment to broaden the scope of circumstances under which it is allowed to tax under a treaty. A convenient opportunity sometimes presents itself in the form of ambiguous technical formulations in the concerned treaty. States attempting to clarify or concretize any one of these meanings, (unsurprisingly the one that benefits it) enact domestic legislation which subserves such purpose.” [Emphasised by us] 12. The Hon’ble High Court after considering catena of judgments, amended provisions of Finance Act, 2012, and treaty interpretation concluded as under:-

Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so 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.

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.” [Emphasised by us] 13. Thereafter, in the case of Engineering Analyses Centre of Excellence P. Ltd. vs. CIT (supra), the Hon’ble Supreme Court of India affirmed the decision of Hon’ble Delhi High Court in the case of DIT vs. New Skies Satellite BV (supra) holding as under:-

One of the argument put forth by ld. DR is that that judgement rendered in the case of New Skies Satellite BV (supra) protects the assessee from ‘Treaty Override’ only where treaty was already in existence at the time of amendment to domestic law. Where the treaty comes into existence at later point of time as is the case here, where India-Hong Kong DTAA was signed in the year 2018, the provisions of Act would apply.

Thus, in light of facts of the case and decisions referred above, we hold that the fee received by the assessee for providing satellite transmission services does not fall within the definition of royalty under Article 12 of India-Hong Kong DTAA. Section 90 sub section (2) of the Act provides that where the provisions of DTAA are more beneficial to the assessee, the same shall override the provisions of the Act. Thus, the assessee succeeds on ground of appeal no. 3 & 4.

In the result, appeal of the assessee for AY 2020-21 is partly allowed.

Both sides are unanimous in stating that the facts in AY 2021-22 are similar to AY 2020-21, hence, the submissions made for AY 2020-21 would equally apply to present appeal.

We find that the grounds of appeal no. 3 & 4 in the instant appeal are identical to ground no. 3 & 4 of appeal in AY 2020-21, except the amount. Thus, the findings given by us while adjudicating the issue in AY 2020-21 would mutatis mutandis apply to the appeal for AY 2021-22. For parity of reasons, ground no. 3 & 4 of appeal are allowed.

The ld. Counsel for the assessee made statement at Bar that he is not pressing ground of appeal no. 5 & 6 challenging validity of assessment order on the & 2353/DEL/2023(A.Ys. 2020-21 & 2021-22) ground of limitation. In light of the statement made by ld. Counsel for the assessee, ground of appeal no. 5 & 6 are dismissed as not pressed.

In the result, appeal of the assessee for AY 2021-22 is partly allowed.

To sum up, both appeals of the assessee are partly allowed.