Bombay High Court Remands Appeals to Commissioner of Income Tax (Appeals) [CIT(A)] in Transponder Royalty Dispute: “Absence of Foundational Facts and Agreement Analysis Makes All Orders Non-Speaking”

Court’s Decision

The Bombay High Court remanded a series of connected Income Tax Appeals to the Commissioner of Income Tax (Appeals) [CIT(A)] for fresh adjudication. The appeals revolved around whether payments made by the appellant to Intelsat Corporation (USA) for transponder services constitute “royalty” under Section 9(1)(vi) of the Income-tax Act, 1961 and/or Article 12(3) of the India-USA Double Taxation Avoidance Agreement (DTAA).

The Court held that:

“There is an absence of foundational facts in the orders of all the three authorities… The orders are non-speaking orders.”

Accordingly, the matter has been remanded to the CIT(A) with a specific timeline to dispose of the matter by 31 December 2025 and with directions to undertake a detailed factual determination on the nature of services rendered and their classification under Indian tax law and the treaty.

Facts

• The appellant had entered into an agreement dated 19 August 2011 with Intelsat Corporation for the provision of satellite transponder services.
• The appellant filed a NIL deduction application under Section 195 of the Act for AY 2013–14, asserting that the payments to Intelsat did not amount to “royalty” under the Act or DTAA.
• The Assessing Officer rejected the NIL deduction request, applying Explanation 6 to Section 9(1)(vi) introduced via the Finance Act, 2012.
• The CIT(A) and ITAT upheld this decision, primarily relying on domestic law and prior orders in earlier assessment years, without analyzing the agreement or service nature in depth.
• The High Court admitted the appeal on substantial questions of law, including whether such payments are taxable as royalty and whether retrospective amendments to the Act can override treaty provisions.

Issues

1. Whether payments made for transponder services are assessable as “royalty” under Section 9(1)(vi) and/or Article 12(3) of the India-USA DTAA?
2. Can retrospective amendments (Explanations 5 and 6 to Section 9(1)(vi)) be read into treaty provisions?
3. Whether tax is deductible at source under Section 195 even if the payee (Intelsat Corp) is not liable to pay tax in India?

Petitioner’s Arguments

• Invoked Section 90(2) of the Act to assert that the DTAA provisions, being more beneficial, override the domestic law.
• Contended that the definition of “royalty” under Article 12 of the DTAA is exhaustive and does not include transponder services.
• Argued that Explanation 6 introduced in 2012 cannot retrospectively impose withholding tax obligations for prior payments.
• Distinguished Madras High Court’s ruling in Verizon Communications and relied upon judgments such as:
  • Engineering Analysis Centre of Excellence Pvt. Ltd. v. CIT
  • PCIT v. NEO Sports Broadcast Pvt. Ltd.
  • DIT v. New Skies Satellite BV

Respondent’s Arguments

• Claimed that Article 3(2) of the DTAA permits importing definitions from domestic law where the treaty is silent—thus permitting reliance on Explanation 6.
• Asserted that the agreement included services constituting a “secret process”, falling within the definition of royalty under the Act and the treaty.
• Urged remand to allow factual examination of the agreement clauses and their relevance to the term “royalty”.
• Relied upon Neyveli Lignite Corporation and N.V. Philips v. CIT to support the classification of such services as royalty.

Analysis of the Law

• The Court reiterated the settled legal position that under Section 90(2), whichever is more beneficial to the assessee—domestic law or the DTAA—will apply.
• The scope of “royalty” under domestic law includes transmission via satellite, even if the process is not secret (Explanation 6), whereas the DTAA restricts it to payments for a “secret process”.
• The distinction between statutory and treaty definitions was emphasized, especially in light of Engineering Analysis Centre and Azadi Bachao Andolan rulings.

Precedent Analysis

• Reliance Industries Ltd.: Retrospective amendments cannot impose withholding tax liability if payments were made prior to such amendment.
• Engineering Analysis Centre: Treaty provisions prevail where beneficial, and domestic law definitions cannot be mechanically imported.
• The Court noted that authorities wrongly relied on domestic law without applying or analyzing treaty language and relevant agreements.

Court’s Reasoning

• None of the authorities below analyzed the clauses of the agreement to determine whether the services qualify as royalty under the Act or the DTAA.
• The findings were conclusory and lacked factual foundation.
• Since these appeals were filed under Section 260A on substantial questions of law, the High Court refused to undertake a factual determination itself:

“Any exercise by this Court on the factual determination… would set a wrong precedent and would be contrary to Section 260A.”

Conclusion

The High Court remanded the matters to the CIT(A) with the following directions:

1. If there is a final determination that Intelsat Corp. is not liable to tax on these payments, then the appellant cannot be held liable to deduct tax at source.
2. For payments made prior to the Finance Act, 2012, no withholding tax liability shall arise due to retrospective amendments.
3. For payments made post-2012, CIT(A) must examine the nature of the services and determine if they fall within the definition of “royalty” under domestic law or the treaty.
4. All contentions are kept open, and parties are free to rely on precedents during remand proceedings.

Implications

• The judgment clarifies the requirement of factual determination before applying treaty or statutory provisions to cross-border payments.
• Reaffirms that retrospective amendments cannot override beneficial treaty provisions for withholding tax obligations.
• Provides a structured framework for assessing similar royalty disputes in international tax matters and signals courts’ unwillingness to substitute factual analysis with assumptions.

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