ITAT held that the amount paid towards transponder2hire charges by a TV Channel company to a non-resident cannot be treated as ‘royalty’ under the Income-tax Act, 1961 (the Act). The Tribunal relying on the Supreme Court decision in the case of GE India Technology Centre P Ltd v. CIT  327 ITR 456 (SC) and Delhi High Court’s decision in the case of Asia Satellite telecommunications Co Ltd v. DIT  322 ITR 140 (Del) held that since the amount was not liable to tax the same cannot be disallowed under Section 40(a)(i) of the Act.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
I.T.A.No. 5868/Mum/2010 (Assessment year: 2007- 08)
Times Global Broadcasting Co. Ltd. Vs. DCIT
Date of pronouncement: 13.01.2012
Per J. Sudhakar Reddy (AM):-
This is an appeal filed by the assessee directed against the order of learned CIT(A)-13, Mumbai dated 18.3.20 10 for A.Y. 2007- 08.
2. Facts in brief. The assessee is a company engaged in the business of broadcasting, operating a TV channel called ‘Times Now’. The company video-graphs events that takes place, as and when they happen and by using up-linking facilities, it sends signals to a satellite that is hovering in space. The satellite, also known as a transponder, is owned by intelsat and is taken for the purpose of beaming the events. The signals sent to the satellite are decoded and down-linked over the area covered by the satellite. The assessee- company entered into an agreement with Pan Amsat International Systems Inc. for using the transponder capacity, to make the signals available to the cable operators, who in turn beam the signals to the viewers in their homes. Viewers can also gather the signals through their dish antenna. The Assessing Officer applied the Judgement of Special Bench of the Tribunal in the case of New Skies Satellites N.V. Vs. Asst. DIT, 121 ITD 1 (SB) and held that the payment made for the use of the transponder falls within the definition of ‘Royalty’ and is liable to tax in the hands of the recipient i.e. Pan Amsat International Systems. He further held that the assessee ought to have deducted tax at source and as tax was not deducted at source, the claim of expenditure was disallowed u/s. 40(a)(i) of the Act.
3. Further the assessee had paid consultancy charges to M/s. Ernst & Young for conducting feasibility study for a new channel. The Assessing Officer disallowed the same on the ground that the expenditure was in capital field.
4. On appeal, the first appellate authority confirmed the order of the Assessing Officer. Aggrieved, the assessee is in appeal on the following grounds :-
1) On the facts and circumstances of the case and in law, learned CIT(A) erred in upholding the dis allowance of ~ 89,53,336/- made under section 40(a)(i) of the Income Tax Act, 1961 by the Assessing Officer.
2) On the facts and circumstances of the case and in law, the assessee submits that the provisions of section 40(a)(i) of the Act are not attracted as the remittance was not income chargeable to tax and consequently there was no requirement to deduct tax at source and hence no dis allowance is warranted.
3) On the facts and circumstances of the case and in law, learned CIT(A) erred in upholding the dis allowance of consultancy fee paid for carrying out a feasibility study for a new channel as capital expenditure.
5. We have heard Mr. S. Venkatraman, learned counsel for the assessee and Mr. V.V. Shastri, Senior AR on behalf of the revenue. On carefully consideration of the facts and circumstances of the case, perusal of the papers on record and the orders of the authorities below as well as case law cited, we hold as follows :-
The first appellate authority relied on the Judgement of HonHble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd., in ITA No. 2808 of 2005. This Judgement was reversed by HonHble Supreme Court in the case of GE India Technology Centre P. Ltd. Vs. CIT and Another, 327 ITR 456. Honbble Supreme Court at page No. 463 and 464 observed as follows :-
“Sec. 195 appears in Chapter XVII which deals with collection and recovery. As held in the case of CIT vs. Eli Lilly & Company (India) (P) Ltd. (2009) 223 CTR(SC) 20 : (2009) 21 DTR (SC) 74 : (2009) 312 ITR 225 (SC) the provisions for deduction of TAS which is in Chapter XVII dealing with collection of taxes and the charging provisions of the IT Act form one single integral, inseparable code and, therefore, the provisions relating to TDS applies only to those sums which are “chargeable to tax” under the IT Act. It is true that the judgment in Eli Lilly (supra) was confined to s. 192 of the IT Act. However, there is some similarity between the two. If one looks at s. 192 one finds that it imposes statutory obligation on the payer to deduct TAS when he pays any income “chargeable under the head salaries”. Similarly, s. 195 imposes a statutory obligation on any person responsible for paying to a non-resident any sum “chargeable under the provisions of the Act”, which expression, as stated above, do not find place in other sections of Chapter XVII. It is in this sense that we hold that the IT Act constitutes one single integral inseparable code. Hence, the provisions relating to TDS applies only to those sums which are chargeable to tax under the IT Act. If the contention of the Department that any person making payment to a non-resident is necessarily required to deduct TAS then the consequence would be that the Department would be entitled to appropriate the moneys deposited by the payer even if the sum paid is not chargeable to tax because there is no provision in the IT Act by which a payer can obtain refund. Sec. 237 r/w s. 199 implies that only the recipient of the sum, i.e., the payee could seek a refund. It must therefore follow, if the Department is right, that the law requires tax to be deducted on all payments. The payer, therefore, has to deduct and pay tax, even if the so-called deduction comes out of his own pocket and he has no remedy whatsoever, even where the sum paid by him is not a sum chargeable under the Act. The interpretation of the Department, therefore, not only requires the words “chargeable under the provisions of the Act” to be omitted, it also leads to an absurd consequence. The interpretation placed by the Department would result in a situation where even when the income has no territorial nexus with India or is not chargeable in India, the Government would nonetheless collect tax. In our view, s. 195(2) provides a remedy by which a person may seek a determination of the “appropriate proportion of such sum so chargeable” where a proportion of the sum so chargeable is liable to tax. The entire basis of the Department’s contention is based on administrative convenience in support of its interpretation. According to the Department huge seepage of revenue can take place if persons making payments to non-residents are free to deduct TAS or not to deduct TAS. It is the case of the Department that s. 195(2), as interpreted by the High Court, would plug the loophole as the said interpretation requires the payer to make a declaration before the ITO(TDS) of payments made to non-residents. In other words, according to the Department s. 195(2) is a provision by which payer is required to inform the Department of the remittances he makes to the non-residents by which the Department is able to keep track of the remittances being made to nonresidents outside India. We find no merit in these contentions. As stated herein above, s. 195(1) uses the expression “sum chargeable under the provisions of the Act.” We need to give weightage to those words. Further, s. 195 uses the word ‘payer’ and not the word “assessee”. The payer is not an assessee. The payer becomes an assessee- in default only when he fails to fulfill the statutory obligation under s. 195(1). If the payment does not contain the element of income the payer cannot be made liable. He cannot be declared to be an assessee-in¬default. The above mentioned contention of the Department is based on an apprehension which is ill founded. The payer is also an assessee under the ordinary provisions of the IT Act. When the payer remits an amount to a non-resident out of India he claims deduction or allowances under the IT Act for the said sum as an “expenditure”. Under s. 40(a)(i), inserted vide Finance Act, 1988 w.e.f. 1st April, 1989, payment in respect of royalty, fees for technical services or other sums chargeable under the IT Act would not get the benefit of deduction if the assessee fails to deduct TAS in respect of payments outside India which are chargeable under the IT Act. This provision ensures effective compliance of s. 195 of the IT Act relating to TDS in respect of payments outside India in respect of royalties, fees or other sums chargeable under the IT Act. In a given case where the payer is an assessee he will definitely claim deduction under the IT Act for such remittance and on inquiry if the AO finds that the sums remitted outside India comes within the definition of royalty or fees for technical service or other sums chargeable under the IT Act then it would be open to the AO to disallow such claim for deduction. Similarly, vide Finance Act, 2008, w.e.f. 1st April, 2008 sub-s. (6) has been inserted in s. 195 which requires the payer to furnish information relating to payment of any sum in such form and manner as may be prescribed by the Board. This provision is brought into force only from 1st April, 2008. It will not apply for the period with which we are concerned in these cases before us. Therefore, in our view, there are adequate safeguards in the Act which would prevent revenue leakage.”
6. Thus, the basis on which the first appellate authority confirmed the dis allowance is no more good law. Reliance was placed by the Assessing Officer on the decision of the Special Bench in the case of Asia Satellite Telecommunications Co. Ltd. Vs. DIT, 332 ITR 340 (Del) has held that the payment in question cannot be termed as ‘Royalty’. This order of the Honorable Special bench in the case of Asia Satellite Telecommunications Co. Ltd. (supra) was reversed by the Honorable Delhi High Court in the case of Asia Satellite telecommunications Co. Ltd. Vs. Director of Income Tax (2011) 322 ITR 140 (Del) and Honorable High Court held as follows :-
Held,_ (i) that under the agreement with television channels, the role attributed to the assessee was as follows : (i) programmes were up linked by the television channels (admittedly not from India) ; (ii) after receipt of the programmes at the satellite (at locations not situated in Indian airspace), these were amplified through complicated process ; and (iii) the programmes so amplified were relayed in the footprint area including India where the cable operators caught the waves and passed them over to the Indian population. The first two steps were not carried out in India. Merely because the footprint area included India and the programmers by ultimate consumers/viewers watched the programmes in India, even when they were uplinked and relayed outside India, that would not mean that the assessee was carrying out its business operations in India. The expressions “operations” and “carried out in India” occurring in Explanation 1(a) to section 9(1)(i) signify that it was necessary to establish that any part of the assessee’s operations were carried out in India. No machinery or computer was installed by the assessee in India through which the programmes reached India. The process of amplifying and relaying the programmes was performed in the satellite which was not situated in Indian airspace. Even the tracking, telemetry and control operations were performed outside India in Hong Kong. There was no contract or agreement between the assessee either with the cable operators or viewers for reception of signals in India. Thus, section 9(1)(i) was not attracted.
(ii) That the process of transmission of television programmes started with television channels (customers of the assessee) uplinking the signals containing the television programmes ; thereafter the satellite received the signals and after amplifying and changing their frequency relayed it down in India and other countries where the cable operators caught the signals and distributed them to the public. Any person who had a dish antenna, could also catch the signals relayed from these satellites. The role of the assessee was that of receiving the signals, amplifying them and after changing the frequency relaying them on the earth. For this service, the television channels made payment to the assessee. The assessee was the operator of the satellites and was in control of the satellite. It had not leased out the equipment to the customers. The assessee had merely given access to a broadband width available in a transponder which can be utilized for the purpose of transmitting the signals of the customer. A satellite is not a mere carrier, nor is the transponder something which is distinct and separable from the satellite as such. The transponder in fact cannot function without the continuous support of various systems and components of the satellite. Consequently, it is entirely wrong to assume that a transponder is a self-contained operating unit, the control and constructive possession of which is or can be handed over by the satellite operator to its customers. The terms “lease of transponder capacity”, “lessor”, “lessee” and “rental” used in the agreement would not be the determinative factors. There was no use of “process” by the television channels. Moreover, no such purported use had taken place in India. The telecast companies/customers were situated outside India and so was the assessee. The agreements under which the services were provided by the assessee to its customers were executed abroad. The transponder was in orbit. Merely because it had its footprint on various continents that would not mean that the process had taken place in India. ISRO Satellite Centre [ISAC], In re  307 ITR 59 (AAR), Ishikawajima¬Harima Heavy Industries Ltd. v. DIT  288 ITR 408 (SC) and Lakshmi Audio Visual Inc. v. Asst. CCT  124 STC 426 (Karn) applied.
(iii) That the money received from the cable operators by the telecast operators was treated as income by these telecast operators which had accrued in India and they had offered and paid tax. Thus, the income generated in India had been duly subjected to tax in India. The payment made by the telecast operators situated abroad to the assessee which was also a non-resident did not represent income by way of royalty as defined in Explanation 2 to section 9(1)(vi) of the Act. Article 12 of the model double taxation avoidance agreement framed by the Organization of Economic Co-operation and Development contains a definition of “royalty” which is in all material respects virtually the same as the definition of “royalty” contained in clause (iii) of Explanation 2 to section 9(1)(vi) of the Act. The commentary issued by the OECD can be relied upon.
7. Hence the amount paid by the assessee to Pan Amsat International Systems is not asses sable to tax. Thus, the assessee is not required to deduct tax at source as held by Honorable Supreme Court in the case of GE India Technology Centre Pvt. Ltd. (supra). In view of the above legal position, we allow ground No. 1 of the assessee.
8. Coming to ground No. 2, the undisputed fact is that the consultancy fees was paid, to M!s. Ernst & Young, to submit feasibility report on setting up of a new channel. In our opinion, the expenditure is in the revenue field, as it did not bring any new assets into existence nor did it provide any enduring benefit to the assessee in the capital field. It did not touch the structure of fixed capital. We rely on the decision of Honorable Supreme Court in the case of Empire Jute reported in 124 ITR 1. Case laws relied upon by the first appellate authority are distinguishable. In the result, this ground of the assessee is also allowed.
9. In the result, appeal of the assessee is allowed.
Order has been pronounced on 13th Day of January, 2012.