Payments received for leasing of transponder capacity and bandwidth cannot be taxed as ‘royalty’ under the Section 9(1)(vi) of the Act

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Intelsat Corporation (ITA No. 5443/D/2010) (Judgment Date: 4 March 2011, Assessment Year: 2007- 08) held that income received by the non-resident taxpayer from leasing of transponder capacity and bandwidth cannot be taxed as ‘royalty’ under the provisions of Income-tax Act, 1961 (the Act).

Facts of the Case

The taxpayer, a tax resident of USA, was owner and operator of global network of telecommunication satellites located in outer space. It was engaged in the business of transmitting telecommunication signals to and from the earth stations. The taxpayer entered into contracts with TV Channels, NICNET and Internet Service providers to lease its transponder capacity and bandwidth to various customers in India and outside India, who used the transponders for their business in India.

For the assessment years 1996-97 to 2004-05, the assessment of the taxpayer was completed based on the Mutual Agreement Procedure. However, the taxpayer for the year under consideration filed nil return of income after claiming its income not taxable in India. The Assessing Officer (AO), based on the terms of the MAP, completed the assessment and raised demand of INR 112.34 million.

The taxpayer relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. v. DIT (201 1-TII-05-HC-DEL-INTL) (Judgement Date: 31 January 2011) where it was held that the payments made for using capacity in a transponder for up linking/down linking data do not constitute ‘royalty’ under the provisions of the Act.

Tribunal’s ruling

The Tribunal relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and held that the payments received by the taxpayer cannot be considered as ‘royalty’ under the provisions of Section 9(1)(vi) of the Act. The Tribunal also held that since the receipts are not taxable under the Act, in view of the provisions of Section 90(2) of the Act there is not need to apply the provisions of the India-USA tax treaty.

Our Comments

This is a welcome decision by the Delhi Tribunal which has relied on the decision of the Delhi High Court which had recently provided a relief for international satellite operators. The Tribunal held that income received by the taxpayer from leasing of transponder capacity and bandwidth is not taxable as ‘royalty’ within the provisions of Section 9(l)(vi) of the Act.