No income deemed to accrue in India from use of satellite outside India to beam TV signals into India even if bulk of revenue arises due to viewers in India.
Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT [201 1-TII-05-HC-DEL-INTL] (Judgement date: 31 January 2011) held that the payments made for using capacity in a transponder for uplinking/down linking data do not constitute ‘royalty’ under the provisions of the Income-tax Act, 1961 (the Act). The High Court held that the customers did not make payments for the use of any process or equipment, since control over the process or equipment was with the taxpayer and not with the customers.
Facts of the case
• The taxpayer, a company incorporated in Hong Kong, is in the business of providing private satellite communications and broadcasting facilities. The taxpayer provides transponder (See Note-1 at Bottom) capacity of its satellites.
• For providing transponder capacity, the taxpayer enters into contracts with television channels, etc (the customers) and enables them to relay their signals over the footprint (See Note-2 at Bottom) of the satellite, which includes India.
– The customers have their own relay facilities outside India for uplinking the signal to the satellite;
– The signal is received, amplified and re-sent by the transponder through a different frequency without any change in signal content;
– The signal is received for down linking by cable operators, etc.
• The taxpayer does not have any facility, assets or presence in India. Further, the tracking, telemetering and control operations in respect of the satellites were performed by the taxpayer from Hong Kong.
• The Income-tax Appellate Tribunal (the Tribunal) had held that the customers were using a process as a result of which the signals, after being received in the taxpayers satellite were converted to a different frequency and were relayed to the area covered by the footprint, after amplification.
Issues before the High Court
• Applicability of Section 9(1)(i) of the Act to the payments received by the taxpayer
• Whether payment received by the taxpayer can be regarded as “royalty” under section 9(1 )(vi) of the Act
• Whether the payment by the taxpayer can be regarded as Fee for technical Services under section 9(1)(vii) of the Act
Issue 1 – Applicability of Section 9(1)(i) of the Act
Tax department’s contentions
• The tax department contended that the business of the taxpayer was to help its customers in relaying their programmes to the regions in its satellite footprint (including India). It was contended that it is the duty of the taxpayer to make those programmes available in India. In view of this, the tax department urged that the taxpayer has a direct business connection in India.
• Further, taxpayer’s revenues were ultimately being derived from household viewers as well as cable operators in India; therefore, such income was taxable in India. The Tribunal held that even though the taxpayer has a business connection in India, no part of the taxpayers income was chargeable to tax in India as no operations to earn the income were carried out in India.
High Court’s ruling
• High Court observed that in terms of Explanation (a) to Section 9(1)(i) of the Act only so much of the income as is reasonably attributable to the operations carried out in India can be brought to tax under Section 9(1 )(i) of the Act. Therefore to determine whether any operations were carried out by the taxpayer in India, the High Court considered the clauses of the Agreement between the taxpayer and its customers and observed that:
o Programmes are uplinked by the customers outside India;
o Amplification of signals takes place at the satellite, which is not located in Indian airspace; and
o The amplified programme signals are relayed over the footprint area, which includes India, for the cable operators to down link the signal and pass on the same for viewing by Indian population.
• The High Court emphatically held that relay of the programmes in India does not amount to operations being carried in India by the taxpayer. Further, as the taxpayer did not have any facility, assets or presence in India, the provisions of Section 9(1)(i) of the Act are not attracted.
Issue 2 – Whether payment received by the taxpayer can be regarded as “royalty” under section 9(1)(vi) of the Act
Taxpayer’s contentions
• The taxpayer argued that the service charges received from its customers are not in relation to use of any equipment or process by the customers. It was further argued that the taxpayer has complete control over the operation of the satellites by way of its tracking, telemetering and control operations in Hong Kong and the customers have no control over them.
Tax department’s contentions
• The tax department, on the other hand, contended that control over the satellite was not relevant since the word “use” in the definition of “royalty” under the Act means only usage simpliciter and does not require “right to use” of the equipment or process. It further submitted that even if control is considered to be relevant, the same was in the hands of the TV channels (i.e. the customers).
High Court’s ruling
• On a perusal of the clauses of the agreement between the taxpayer and the customers, the High Court observed that the taxpayer was the operator of satellites. Further, the arrangement was only to lease transponder capacity, while the taxpayer enjoyed control over the satellite.
• The High Court relied heavily on the ruling of the Authority of Advance Rulings (AAR) in the case of ISRO Satellite Centre [ISAC], In re [2008] 307 ITR 59 (AAR). In this ruling, the AAR had held that in case of an agreement for lease of transponder capacity, if no control over parts of satellite! transponder has been given to the customers, then the payments for use of transponder capacity would not qualify as royalty under the Act.
• While refuting the Tribunals contention, the High Court held that the fact that no amplification of the signals was involved was not important because the decision of the AAR in case of ISRO (supra) was not based on this consideration alone. The High Court further held that it was the substance of the agreement that should be considered to understand the underlying intention. It held that various clauses of the agreement clearly indicate that the control over the transponders was always with the taxpayer. It was observed that the taxpayer had merely given access to a broadband! capacity available with the transponder to its customers.
• The High Court also held that the transponder is an in-severable part of the satellite. It cannot function without the continuous support of various systems and components of the satellite. Consequently, it is wrong to assume that the control and constructive possession of the transponder can be handed over by the satellite operator to its customers.
• In concluding the above issue, the High Court considered the Tribunals findings that the transponder being a part of satellite, playing howsoever important role cannot be termed as equipment.
• Further, the High Court held that there was no use of the transponder/ process in India. The following facts were found to be relevant in this context:
o The customers as well as the taxpayer are non-residents of India;
o Agreements are executed outside India; and
o The transponder is in orbit, thus not located in India.
• It was reiterated that merely because the satellite had a footprint in India would not mean that the process took place in India. In this context, reliance was placed on the decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Company Limited v. DIT [2007] 288 ITR 408 (SC), in which it was held that sufficient territorial nexus with India was sine qua non for attracting taxation. Therefore, payments from TV channels could not be taxed in India as there was insufficient territorial nexus with India.
• OECD commentary on Model Double Tax Avoidance Agreement (OECD Model Convention)
The High Court noted that the definition of “royalty” under the Act is materially the same as stipulated under the OECD Model Convention (See Note 3 below). It was held that where the technical terms used in the OECD Model Convention are the same as appearing under the domestic tax laws, OECD commentary can be relied upon for better understanding. Further, it also noted that various courts have on several occasions (See Note 4 below) held that the well settled internationally accepted meaning and interpretations placed on identical or similar terms employed in various bilateral tax treaties should be followed by the Courts in India when it comes to construing similar terms occurring in the Act.
• Based on the above, the High Court held that the said payments do not constitute royalty and are not taxable in India.
Issue 3 – Whether the payment by the taxpayer can be regarded as Fee for technical Services under section 9 (1) (vii) of the Act
High Court’s ruling
• Tax ability of the payments as Fee for technical Services was admitted as an additional ground before the Tribunal. However, the Tribunal did not decide on the issue because it held that the income was taxable under Section 9(1)(vi) as royalty.
• Since no argument was advanced by the tax department on this ground before the High Court, the High Court did not adjudicate on this matter.
Our Comments
This decision by the Delhi High Court certainly provides a welcome relief for international satellite operators especially after the Special Bench ruling of the Delhi Tribunal in New Skies Satellites NV v. ADIT [2009] 126 TTJ 1 (Del).
The High Court has addressed some crucial questions regarding the situs of the operations carried out by the Satellite Operators as well as the source of their income from overseas television broadcasting companies.
The High Court has settled a long standing controversy and aligned India’s position with various international forums such as OECD.
It would also be interesting to analyze the impact of the proposed amendment to the definition of ‘royalty’ in the Direct Taxes Code Bill, 2010 wherein payments for the “use or right to use of transmission by satellite” have been specifically included.
Note
1. A transponder is a part of the satellite which receives signals from the earth stations and re-transmits the same back to the earth with or without amplifying them.
2. Footprint is the area over the Earths surface over which a signal relayed from the satellite can be received
3. As per the Model Tax Convention on Income and on Capital issued on 22 July 2010, OECD has observed that payments made by customers under “transponder leasing” agreements will be considered for use of the transponder transmitting capacity. Further, as per the OECD, the same will not constitute royalties since such payments are not made in consideration for the use of, or right to use, property, or for informat+
4. Reliance placed on Supreme Courts decision in Ishikawajima (supra) and other High Court decisions
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