Case Law Details
Citation: Asia Satellite Telecommunication Co. Ltd. Vs. Director of Income tax (Delhi High Court)- Tax case ( Appeal Nos) ITA No. 131/134 of 2003 dated 31st January, 2011
Background
• Asia Satellite Telecommunication Co. Ltd. (Taxpayer) is a company incorporated in Hong Kong and carried on the business of providing transponder capacity on its satellite communication and broadcasting facilities. It entered into agreements with television channels, communication companies etc (customers) who were not residents in India to provide transponder capacity of its satellite.
• In respect of the modus operandi of the operations it was explained that the customers would relay the signals from their own relay facilities outside India which are beamed in space and received by the transponder. The transponder amplifies the signal on a different frequency to facilitate the non-distorted version of the signal, and without any change in its content the signals are relayed over the entire footprint area, where they can be received by the facilities of the Taxpayer?s customers.
• The Taxpayer claimed that its role was confined in space where the transponder capacity was made available to the customers. The only activity it performed on earth is the telemetry, tracking and control of the satellite which was carried out from Hong Kong. Hence the income received from the customers was not chargeable to tax in India.
• The Assessing Officer (AO) held that the Taxpayer had a “business connection” under section 9(1 )(i) of the Income Tax Act, 1961 (the Act) in India on the ground that most of the channels were India specific and the advertisement revenue was from India and estimated 80% of the revenue to be attributable to India.
• The Delhi Tribunal (85 ITD 478) held that although the Taxpayer had a business connection in India, no part of the operations were carried out in India and therefore section 9(1 )(i) of the Act had no application. However it held the customers were not merely using a facility but a process whereby the signals, after being received in the satellite were converted to a different frequency and were relayed to the area covered by the footprint. Hence the payment made for the use of a “process” was asses sable as “royalty” u/s 9(1 )(vi) of the Act.
• Aggrieved by the above order, Taxpayer and the Revenue authorities preferred an appeal before the Hon?ble Delhi High Court.
Issues before the High Court.
• Whether the provisions of section 9(1 )(i) was applicable to Taxpayer in respect of payments received by them?
• Whether payment received by the Taxpayer could be regarded as “royalty” under section 9(1 )(vi) of the Act?
Observation and Ruling of the Delhi High Court.
Section 9(1)(i) of the Act
• The High Court observed that the agreement with the customers provided that:
– programmes were up linked by customers from outside India,
– on receipt these were amplified through a complicated process, which were then relayed over the footprint area including India for the cable operators to down link and pass on to viewers.
• The High Court further observed that the Taxpayer did not have any assets, facility or presence in India. The process of amplification and relaying signals for programmes was performed in the satellite which was not situated in the Indian airspace. The tracking, telemetering and control operations were performed outside India in Hong Kong.
• Accordingly the High Court held that mere relay of the programs over the India footprint did not amount to operations being carried in India by Taxpayer and hence the provisions of Section 9(1 )(i) of the Act were not attracted.
Section 9(1)(vi) of the Act
• In this respect, the High Court drew a similarity in the nature of operations and functioning of the transponder in the case of the taxpayer with that those as enumerated in the ruling of the Authority of Advance Rulings (AAR) in the case of ISRO Satellite Center (307 ITR 59 AAR) wherein the AAR held that in case of an agreement for lease of transponder capacity, if no control over parts of satellite/ transponder had been given to the customers, then the payments for access to a broadband as available in a transponder capacity would not qualify as royalty under the Act.
• In the aforesaid ruling the AAR had emphasized the fact that the data sent by the telecast operator had not undergone any change through the transponder. However the High Court held that in the Taxpayer?s case even where the signals are amplified the ultimate conclusion would not change as the decisive factor was control.
• The High Court observed that the transponder is not distinct and separate from the satellite. It cannot function without the continuous support of various systems and components of the satellite and in the circumstances the process carried on in the transponder in receiving the signals and transmitting the same is an inseparable part of the process of the satellite. Considering the same, the transponder is utilized only be the Taxpayer and control and constructive possession of cannot be handed over by the satellite operator to its customers.
• The High Court also indicated that the substance of the agreement which would be required to be seen and the use of the terms lease of the transponder capacity, ‘lessor’, ‘lessee’, and ‘rental’ would not be the determinative factors.
• The High Court also noted that the customers as well as the Taxpayer were situated outside India, agreements were executed outside India and the transponder in orbit was also not situated in the Indian airspace and merely because the satellite had a footprint in India would not mean that the process took place in India.
• The High Court also drew support from the Commentary to the Organization of Economic Cooperation and Development (OECD) Model Convention, wherein it has been mentioned that payments made by customers under transponder leasing agreements are for use of the transponder transmitting capacity and would not constitute royalty.
• Based on the above discussion, the High Court held that the said payments do not constitute royalty and hence was not taxable in India.
Comment
The Delhi High Court has held that the payment made to foreign satellite service providers for use of transponders does not constitute „royalty? and hence is not taxable in India. It provides a welcome relief to the foreign satellite operating companies as it aligns the Indian position with the stand taken by OECD.
