The assessee, a foreign company, was engaged in operating geostationary telecommunication satellites with transponder capacity which were provided to telecasting companies in India for a fee.
The question arose whether the said fee was “consideration for … the use of any … secret formula or process …” so as to constitute “royalty” under Expl. 2 to s. 9 (1)(vi) and corresponding definition under the DTAA.
In Asia Satellite 85 ITD 478 the Tribunal held that the said receipts were taxable as ‘royalty’ having been paid in respect of a “process”. However, in PanAmSat 9 SOT 100 it was held that as in the term “royalty” in Art. 12 of the India-USA DTAA there was a ‘comma’ after the words “secret formula or process”, it was only a ‘secret process’ which would qualify as royalty and not what was provided by the assessee. To resolve the conflict, the issue was referred to the Special Bench. HELD, reversing PanAmSat:
(i) The provision of the transponder through which the telecasting companies are able to up link the desired images/data and down link the same in the desired area is a “process”. To constitute “royalty”, it is not necessary that the process should be a “secret process”. The fact there is a ‘comma’ after the words “secret formula or process” in the DTAA does not mean that a different interpretation has to be given to the DTAA as compared to the Act;
(ii) The argument that there is no “use” of the satellite by the payer as it has no control or possession of the satellite is not acceptable. To constitute “royalty”, it is not necessary that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The fact that the telecasting companies are enabled to telecast their programmes by up linking and down linking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process;
(iii) The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently asses sable as “royalty” under the Act and the DTAA.