India: Tax Treaty Not To Be Affected By Retroactive Amendments: Rules Delhi High Court

  • Beneficial provisions under a tax treaty will apply irrespective of amendment in the Income Tax Act.
  • Payments for data transmission services provided by satellites are not in the nature of royalties under the tax treaties.
  • Payments must be for the use of "secret process" and not merely "process" in order to qualify as royalties under a Double Taxation Avoidance Agreement.
  • Union Budget tempts settlement in disputes on retrospective amendments – Settlement Scheme is one-sided and contemplates full payment of tax.

In Director of Income Tax v. New Skies Satellite BV and Anr.1 the Delhi High Court held that payments made in consideration for lease of transponder capacity would not be royalties under the India – Thailand Tax Treaty ("Thailand Treaty") and the India – Netherlands Tax Treaty ("Dutch Treaty"), notwithstanding an amendment to the definition of royalty2 under the ITA ("Amendment"). The Amendment sought to clarify that royalty payments would include, among others, payments for data transmission services provided by satellites. The court held that amendments made to the Income Tax Act, 1961 ("ITA") cannot be extended to a Double Taxation Avoidance Agreement ("tax treaty") between India and another nation and consequently, although ITA was amended, tax payers were entitled to claim beneficial treatment under the tax treaty by virtue of Section 90 of the ITA.

The court, without expressing an opinion on whether the Amendment would apply retrospectively, has rightly held that an amendment to a domestic statute cannot unilaterally be deemed to amend an international treaty as doing so would be in violation of certain fundamental principles of public international law.3 The court has also provided clarity on the nature of services in relation to transponder hire charges holding that payments in consideration of the same does not amount to royalty under the Dutch Treaty and the Thailand Treaty.


The background of the case pertains to two separate taxpayers – Shin Satellite Public Co. Ltd. ("SSPCL") and New Skies Satellite BV ("NSSBV") (both parties collectively, "Taxpayers"). SSPCL is a company incorporated in Thailand whereas NSSBV is a company incorporated in Netherlands. Both are engaged in the business of providing 'digital broadcasting services' and derive income from the lease of transponders of their respective satellites. The transponder capacity of the Taxpayers is hired by resident and non-resident TV channels who pay fees to the Taxpayers for the service provided.

Lease of Transponder – How the process works

The customers of Taxpayers are resident and non-resident TV channels that uplink their signals to the satellite. The satellite receives the content, amplifies it, changes its frequency by undertaking certain processes, and then downlinks it, scattering the signal over its footprint area which includes India. The amplification and shifting of frequency of each signal within the satellite is conducted by an equipment within the satellite called the "transponder". Finally, the cable operators within the footprint area receive the downlinked signal and relay it to the viewers in their homes. The satellite company merely provides access to the bandwidth of the transponder and the possession and control of the transponder remains with the satellite company.

Revenue sought to tax the respective incomes of the Taxpayers as royalty under the unamended Section 9(1)(vi) of the ITA for Assessment Years 2007-08 and 2008-09. By the time the Taxpayers' appeals were heard before the Income Tax Appellate Tribunal ("ITAT"), the Delhi High Court pronounced its judgment in Asia Satellite Telecommunications Company Ltd. v. DIT4 ("Asia Satellite") on an issue identical to the Taxpayers' where it held that transponder services provided would not be royalty. Accordingly, in the appeals of Taxpayers the ITAT relied on Asia Satellite and held that the payments received by the Taxpayers were not royalties under the ITA and tax treaties. Subsequently, the definition of royalties under the ITA was purportedly amended retrospectively, in an effort to overturn the judgment in Asia Satellite. Based on the Amendment, the Revenue filed appeals before the Delhi High Court against the orders of ITAT, contending that the basis of the ITAT's decisions had been undone.

Asia Satellite, Amendment to Finance Act / ITA and contentions of Parties

In Asia Satellite, the Delhi High Court held that receipts earned from providing data transmission services through the provision of transponder capacity on satellites do not constitute royalty within the meaning of Section 9(1)(vi) of the ITA. The High Court arrived at this conclusion based on the following rationale:

  • The functions performed by the transponder do not constitute "process".

  • Even if it was "process", there was no "use "of this process for the payments to qualify as royalty under the ITA because the possession and control of the satellite always remained with the satellite operator and the customers were only given access to the transponder capacity.

  • The control over the transponder and the satellite was not with the customer and merely because customers had access to broadband width available in the transponder it would not constitute "use or right to use" an equipment.

  • The activity of the taxpayer was in the nature of service in relation to the transponder and control over the transponder always remained with the taxpayer. The agreement was one of allocation of transponder capacity available on the satellite to enable channels to relay their signals.

Consequent upon the decision in Asia Satellite, Parliament by way of Amendment inserted certain clarificatory explanations in Section 9(1)(vi) of the ITA through Finance Act, 2012. These explanations, materially, stated that:

  • Possession or control of a right, property or information was irrelevant in determining whether the consideration for the same constitutes royalty, and

  • "process" includes transmission by satellite whether or not such process is secret.

While the Revenue contended that retrospective effect from April 1, 1977 ought to be given to the Amendment, it further contended that the Amendment would have the effect of amending the respective tax treaty as well. Revenue further contended that the ratio in Asia Satellite will not be applicable in light of the Amendment and therefore, the ruling of ITAT was liable to be set aside.

Taxpayers contended that even assuming that the Amendment was retrospective, it did not have the effect of amending the tax treaty itself. Consequently, Taxpayers were entitled to benefit under Section 90 of the ITA.


  1. Whether the amendments to the definition of royalties under the ITA can be deemed to extend to the definition of royalties under the tax treaties entered into by India with other countries.

  2. Whether the definitions of royalties under the Thailand Treaty and the Dutch Treaty refer to "process" or "secret process".

The court did not specifically rule on the nature of the Amendment – whether it was clarificatory in nature and whether it would be applicable retrospectively since Taxpayers did not press that line of argument and argued assuming the Amendment to be retrospective.


The Delhi High Court held that any amendment in the domestic law cannot be read into the corresponding provisions of a tax treaty, and that the royalty definition in the tax treaties refers to "secret process" and not merely "process". Finally, the court held that the interpretation given to the term "royalty" in Asia Satellite before the Amendment will continue to apply to the definition under tax treaties irrespective of the Amendment under the ITA.

1. Treaty provisions are not affected by amendments in domestic law

The court held that an amendment to the ITA could not be read in a manner so as to extend its operation to a tax treaty, irrespective of whether the amendment was retrospective prospective or clarificatory.

  1. Treaties cannot be unilaterally amended: Relying on Union of India v. Azadi Bachao Andolan5 the court noted that while interpreting provisions of an international treaty including a tax treaty, it must be borne in mind that such treaties are negotiated at a political level based on several considerations. The court held that a tax treaty can be amended only by agreement between the countries and not unilaterally by one country, citing Article 39 of the Vienna Convention on the Law of Treaties, 1969 ("VCLT"). It is a settled principle of international law and as also provided in VCLT that parties shall give effect to their treaty obligations in good faith (pacta sunt servanda). Therefore, it would be incumbent on India to give effect to its treaties as it was executed by two contracting nations and it would not be possible for authorities to indirectly circumvent treaty obligations.

  2. Bifurcation between terms defined in a tax treaty and terms not defined: The court restated the settled position of law that terms which are not defined in a tax treaty have to be interpreted in light of its definition under the domestic law. In such cases, amendments to those terms in the domestic law may be extended in its application to a tax payer even if there was a tax treaty. However, in respect of terms which are defined in the tax treaty, the court held that such terms must be interpreted in light of the treaty definition alone, and any definition under the domestic law, including amendments thereto, cannot apply. Reliance was placed on the judgments of Andhra Pradesh High Court in Sanofi Pasteur Holding SA v. Department of Revenue6 and Delhi High Court in DIT v. Nokia Networks7.

2. Process must necessarily be "secret process"

ITA defines royalty as consideration for, inter alia:

"the use of any patent, invention, model, design, secret formula or process or trademark or similar property"

Tax treaties, including the Dutch Treaty and the Thai Treaty, generally define royalties as consideration for:

"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"(emphasis added)

The court noted that in the tax treaty definitions, the term "process" was followed by a comma, which was not the case of the definition under the ITA. The court held that the test for interpretation of punctuation would be the legal consequences of the same and not whether it made grammatical sense. Where the presence or absence of a punctuation give rise to large variations in taxing powers, as in the present case, it must be assumed that it was carefully punctuated. Hence, the comma which follows the word "process" clearly indicated that "process" was qualified by the term "secret". The court noted that even the OECD commentary construes the term as "secret process" and held that India's change in position to OECD commentary would not affect interpretation of a tax treaty.

In conclusion, the court held that since the definition under the tax treaties would apply, the ruling in Asia Satellite would be applicable and consequently, income from data transmission services would not be royalty.


This is an admirable judgment by the Delhi High Court where it has cleared many ambiguities relating to tax treaty interpretation vis-à-vis amendments to the ITA. The Delhi High Court in DIT v. Nokia Networks had previously held, in the context of amendments to the ITA which included payments for use of "copyrighted article" within the definition of royalty, that the same cannot override beneficial provisions of a tax treaty. However, the present case is a landmark judgment in respect of transponder hire charges since it clarifies the nature of such services after the Amendment. This should be seen as a welcome development by the media and telecommunication industry. The court specifically did not rule on whether the amendment was retrospective or clarificatory – it would therefore be open to a tax payer in an appropriate case to contend that Amendment is in fact not retrospective.

The Amendment was one of the many draconian aspects of Finance Act, 2012 which demonstrated an attempt to re-characterise the nature of receipt through amendments ostensibly in order to achieve fiscal objectives. The recommendations of the Expert Committee8 on retrospective amendments relating to indirect transfers set up by the Prime Minister in 2012 stated that retrospective amendments to tax law should occur in exceptional or rarest of rare cases, such as (a) to correct apparent mistakes/anomalies in the statute; (b) to remove technical defects in procedure which vitiate the substantive law; (c) to protect the tax base from highly abusive tax planning schemes – but not to "expand" the tax base. It may therefore be contended that the Amendment is not merely clarificatory in nature since it significantly expands the scope of the definition.

Finally, the court reinforced the importance of internationally accepted interpretation of terms employed in the treaty as laid down in the OECD commentary. It held that the interpretation of the OECD commentary must apply in reading the term "process" in a tax treaty as "secret process", irrespective of the fact that Indian Parliament has chosen to place no relevance to the term "secret" in construing "process" under the ITA. Any shift from an internationally accepted construction of a tax treaty can only be made by a bilateral amendment in the treaty terms as opposed to a unilateral amendment in the ITA. The court also underscored principles of interpretation of international treaties and has emphasised that international treaties cannot be amended by one state party amending a domestic statute. Tax Authorities failed to appreciate that a similar argument could be raised by foreign tax authorities against tax payers in India. Such interpretation, apart from being contrary to fundamental principles of treaty interpretation, is capable of frustrating cooperation among nations and could lead to more hardship to tax payers in India.

Recent Developments – Union Budget, Finance Bill, 2016

The current Government has been quite vocal about its agenda to curb the menace of retrospective taxation and has assured taxpayers that no new action would be taken based on a retrospective amendment. It has introduced a Direct Tax Dispute Resolution Scheme9 ("Settlement Scheme") in the recent Finance Bill, 2016 to tackle pending disputes arising out of retrospective amendments. The Settlement Scheme provides for a one time alternative for the taxpayer to settle such disputes by paying the disputed tax amount (without having to pay the interest and penalty), and withdrawing any pending litigation including any appeal, writ, or arbitration under Bilateral Investment Treaties. The scheme is however one-sided and only contemplates settlement by tax-payer through payment of the entire disputed tax amount, and does not provide for withdrawal of appeals filed by Department.


1 ITA Nos. 473 of 2012, 474 of 2012, 500 of 2012 and 244 of 2014

2 Section 9(1)(vi) of the ITA

3 Pacta sunt servanda

4 [2011] 197 Taxman 263 (Delhi)

5 (2003) 263 ITR 706 (SC)

6 (2013) 354 ITR 316 (AP)

7 2013 (358) ITR 259

8 Accordingly, the committee opined that the retrospective amendments relating to indirect transfer were not clarificatory in nature, and ought be applied prospectively; source -

9 Direct Tax Dispute Resolution Scheme, 2016, Cl. 198 to 202 of the Finance Bill, 2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions