Inmarsat Global Ltd. v. Dy. CIT [ITA No.
7025/Mum/2018, dt. 23-10-2020] : 2020 TaxPub(DT) 4440 (Mum.-Trib.)
Satellite transponder -- Whether royalty under Indo-UK DTAA
-- Land Earth Station (LES) whether a place PE -- Static vs. Ambulatory
approach of reading DTAA provisions whether empower reading of IT Act
amendments into DTAA unilaterally
Facts:
Assessee was a UK entity which was into leasing of space
capacity navigational transponder for beaming telecommunication signals.
Arising out of an agreement with Tata Communications Ltd. (TCL) (then VSNL)
they had leased out their services to TCL for which payments were received by
the assessee. They had a Liaison Office (LO) in India as well. As against the
NIL return filed by the assessee in the scrutiny assessment the assessing
officer held that the Land Earth Station (LES) which was in the control of TCL
constituted a place PE for the assessee thus 30% of the receipt were
attributable as income in India to the tune of Rs. 1.76 crores. On the contrary
the said payments also constituted royalty under Indo-UK DTAA Article 13 thus
taxable @ 10%. This was upheld by the DRP. Aggrieved the assessee went in
higher appeal claiming --
1. The liaison office/the LES
did not constitute a PE in India.
2. There can be no income
attributable in India in the absence of a PE.
3. Transponder fees received was
not royalty either under the Indo-UK DTAA Article 13 as the treaty definition
was much narrower in scope relatively to the Income Tax.
4. The rates of tax imposed by
the assessing officer was inclusive of surcharge/Education cess, etc. which
cannot be read into DTAA.
Held in favour of the assessee that --
1. The LO/LES did not constitute
a PE.
2. No income is attributable in
India.
3. Transponder fees is not
royalty the IT Act definition amended definition cannot be read into DTAA
unilaterally.
4. The rates of tax in the DTAA
are all inclusive rates no further surcharge/cess can be topped on it.
Editorial Note: The
decision deals with a fine aspect as to whether static vs. ambulatory reading
of the DTAA provisions would mean definitions of IT Act can be read into DTAA.
In CIT v. Siemens Aktiongeswellschaft (2009) 310 ITR 320
(Bom) : 2009 TaxPub(DT) 1060 (Bom-HC) the high court did concur with the
ambulatory reading of a DTAA that the winds of change in taxation cannot be
exclusive to IT Act alone but may need to be read into DTAA which was in the
realm of definitions or items which did not exist in the DTAA per se.
The ambulatory reading still does not confer the right to a state to impose tax
by unilaterally amending its domestic tax provisions vis-a-vis liberal DTAA
provisions which cannot tax a certain subject. This fine point was also dealt
in New Skies Satellite (2016) 382 ITR 114 (Del) : 2016 TaxPub(DT) 1115
(Del-HC).
The existence of the LES alone cannot create a PE. It has
to be borne in mind that the territory of India extends to 12 nautical miles in
the Indian ocean as well. Such reading may not be possible in the aerospace
domain it would only call for hair splitting exercise of what portion of the
fee attributed to the strength of the signal which fell in the Indian aerospace
and outside otherwise leading to unnecessary litigation. Like ships - space
crafts or their owners are normally taxed in their country of residence. Then
they being positioned in a tax favourable jurisdiction or the ship being in a
tax neutral or zero tax country is a separate aspect of locational advantage
existing across the world. Domestic tax laws cannot try to extend its taxing
arm ambit beyond a certain point. A correct approach to it would be to amend
DTAA or bring in anti-abuse provisions like GAAR into DTAA in some other form.