(2016) 382 ITR 114 (Del)
Income deemed to accrue or arise in India; double taxation relief
No. A treaty is a bilateral instrument and its terms cannot be amended by unilateral domestic legislation. Where the treaty definition is narrower, it prevails regardless of a later domestic expansion.
Can a retrospective amendment widening the domestic definition of royalty alter the meaning of that term in a tax treaty?
The assessees were foreign satellite operators which provided transponder capacity to Indian broadcasters and telecom companies. The Revenue sought to tax the payments as royalty, relying on explanations inserted into the domestic definition with retrospective effect, which expanded the concept of royalty to cover consideration for the use of transmission by satellite and for a process whether or not it is secret or the payer has possession or control of it. The applicable treaties contained their own, narrower, definitions of royalty which had not been amended.
The matter came before the Delhi High Court, which had earlier held on the unamended law that such payments were not royalty. The Revenue contended that the retrospective explanations altered the position, including for treaty purposes.
For the assessee
A treaty represents a bargain between two sovereign states and its terms can be altered only by agreement between them or by the procedure the treaty itself provides. A domestic amendment, however worded and whatever its retrospective reach, binds only domestic law and cannot rewrite a defined term in a bilateral instrument.
For the Revenue
The explanations were declaratory of what the law had always meant and merely clarified the existing definition. Where the treaty does not itself define a term exhaustively, the domestic meaning may be imported, and the clarified domestic meaning should therefore apply.
The Court held that a treaty cannot be amended unilaterally. The definitions contained in a treaty are the product of negotiation between two states, and altering the domestic statute does not and cannot alter what the parties agreed. Where the treaty supplies its own definition of royalty, that definition governs for the purpose of applying the treaty, and the domestic definition is not imported. The Court rejected the characterisation of the explanations as merely clarificatory, observing that they substantially expanded the concept and that a real change in the law cannot be given effect in the treaty sphere by labelling it a clarification. It held that if a state wishes to enlarge a treaty term it must renegotiate the treaty or follow the amendment procedure the treaty prescribes. Applying the unamended treaty definition, payments for transponder capacity did not constitute royalty, since what the customer obtained was a standard service using the operator's equipment rather than the use of, or the right to use, any secret process or equipment placed at its disposal.
The reasoning was expressly approved by the Supreme Court in Engineering Analysis, which applied the same principle to software payments. Under the IT Act 2025 the analysis runs through Section 9 for the domestic charge and Section 159 for treaty relief. It is directly relevant to satellite, bandwidth, transponder and data transmission payments, and more broadly to any case where a retrospective domestic amendment is invoked against a treaty-protected taxpayer.