Modern technology has been posing challenges before the tax administrators time and again. May it be e-commerce, use of telecom circuits or Internet bandwith or transponder capacity for relaying over a footprint area; the emerging issues have left tax experts all over the world scratching their heads and compelled the judiciary across the globe to probe into the complicated technical facts to arrive at a fair conclusion.
One such issue, being leasing of transponder capacity in a satellite has been a matter of vexed litigation in India in the past decade. After having conflicting tribunal decisions, some resolution seems to have been now reached in this context with the recent decision of the Hon’ble Delhi High Court in the case of Asia Satellite Telecommunications (AsiaSat). In the said decision, the Delhi High Court held that payments for use of transponder capacity to satellite operators by Television (TV) channels cannot be taxed as ‘royalty’ in India. This has rendered a sigh of relief to the satellite operators, given that the quantum of tax involved in these disputes is very large.
Here is a quick backdrop of the litigation history in this context and the key findings of the Delhi High Court also keeping in mind the OECD commentary and the Direct Taxes Code Bill, 2010.
Common Facts From a reading of the various tribunal decisions on this issue, it appears that the facts are almost the same in all cases where TV channels make payments for use of transponder capacity in a satellite. The facts in the case of AsiaSat were as follows:
AsiaSat, a Hong Kong based company, is engaged in the business of providing data and video transmission services to TV channels through its satellites (owned and leased) placed in the geostationary orbital slots at a distance of 36000km from the earth. These satellites neither use Indian orbital slots, nor are they positioned over Indian airspace.
In the transmission chain, the TV channels uplink their signals to the transponder in the satellite through ground stations which are located outside India. The signals are then amplified by the transponder and downlinked with a different frequency (without any change in the content of the programmes) over the footprint area covered by the satellite, which also included India amongst the four continents covered.
Under the arrangement, AsiaSat has complete control over the satellite (including the transponder) and the tracking, telemetering, and other control operations of the satellite are done by AsiaSat from its control centre located outside India.
The typical flow of activities in a transaction of leasing of transponder capacity is as in the diagram:
Issue The main issue in all the cases that came up before the Tribunal Benches was, whether the payments being made by the TV Channels to the satellite operator for the use of transponder capacity could be characterised and taxed as ‘royalty’ within its meaning u/s. 9(1)(vi) of the Income-tax Act, 1961 (‘the Act’) or under the relevant article of the relevant tax treaty (if applicable).
In order to conclude on the above issue, the important aspects that need to be decided upon are:
1. Whether the payments can be said to be for ‘use of’ or ‘right to use of’ the process involved in the transponder?
2. If the answer to the above is yes, whether to be characterised as ‘royalty’ u/s. 9(1)(i), the process needs to be ‘secret’ in nature?
3. If a tax treaty is applicable, whether the payments could be said to be covered within the definition of the term ‘royalty’, under the relevant article in such tax treaty?
Indian litigation history prior to Delhi High Court’s decision
(a) Raj Television Networks – Chennai Tribunal (unreported) (2001)
The Chennai Tribunal’s decision in the case of Raj Television Networks (unreported) was one of the initial decisions dealing with this issue. It was held that since the payments are not for use of any specified intellectual property rights or imparting any industrial, commercial or scientific information, the same cannot be said to be ‘royalties’ under the Act.
(b) Asia Satellite Telecommunications Co. Ltd. v. DCIT (2003)1
The Delhi Bench of the Tribunal, in the matter of AsiaSat held that the satellite company’s revenues fell within the purview of royalty u/s. 9(1)(vi) of the Act. In arriving at this conclusion, the Tribunal held that the TV channels were not merely using the facility, but were using the process as a result of which the signals after being received in the satellite were converted to a different frequency and after amplification were relayed to the footprint area. Further, it held that ‘process’ need not necessarily be a secret process, as the expression ‘secret’, as appearing in Explanation 2(iii) to section 9(1)(vi) of the Act, qualifies the expression ‘formula’ only and not ‘process’. The decision in the case of Raj Television Networks was considered and it was held that transponder was not ‘equipment’ and the payments cannot be regarded as for use of equipment.
Since AsiaSat was a Hong Kong based entity, the Tribunal did not deal with the arguments in connection with the treaty.
(c) DCIT v. PanAmSat International Systems Inc. (2006)2
In PanAmSat’s case, while the Delhi Tribunal, followed the conclusion in case of AsiaSat with respect to the definition of ‘royalty’ under the Act, it further carved out the distinction between the language in India-US Tax Treaty (‘tax treaty’) and the Act. It held that, in the definition under the tax treaty, the term ’secret‘ also qualifies ‘process’, unlike the Act. Since the process being used in the satellite was not ‘secret’, it was held that they are not taxable as ‘royalty’ under the tax treaty.
(d) ACIT v. Sanskar Info. T.V. P. Ltd. (2008)3
In this case, the Mumbai Tribunal placed heavy reliance on the AsiaSat decision and held that the payments are taxable as ‘royalty’ under the Act. The Tribunal does not seem to have considered the India Thailand Treaty as well as the decision in the case of PanAmSat in arriving at its conclusion.
(e) ISRO Satellite Centre [ISAC], In re4
In this case, ISRO had entered into a contract with a UK based satellite operator for leasing of a navigation transponder capacity for uplinking of augmented data and transmission by the transponder for better navigational accuracies. The Authority for Advance Ruling (‘AAR’) has made detailed observations regarding functioning and use of the transponder. It ruled that the payment by ISRO could not be regarded as one for the “use of” or “right to use” any equipment. It was held that the transponder and the process therein were utilised by the satellite operator to render a service to ISRO and ISRO neither uses nor is it conferred with the right to use the transponder. Hence, the receipts cannot be taxable as ‘royalty’ under the Tax Treaty or under the Act.
(f) New Skies Satellites N.V. v. ADIT (2009)5
The Delhi Special Bench constituted in light of inconsistent decisions in the cases of AsiaSat and PanAmSat, held in October 2009 that revenues earned by the satellite operators are taxable as ‘royalty’ both under the Act and various tax treaties, thereby reversing the PanAmSat decision. It held that the payments are for the ‘use’ or ‘right to use’ the process involved in the transponder and that for the purpose of determining the payments as ‘royalty’ it is not necessary for the ‘process’ to be ‘secret’ under the Act as well as the tax treaty.
Key findings of Delhi High Court in case of AsiaSat
1. The High Court stated that merely because the footprint area includes India and the programmes are watched by the ultimate consumers/viewers in India, it would not mean that satellite operator is carrying out its business operations in India attracting the provision of section 9(1)(i) of the Act.
2. The transponder is an inseparable part of a satellite and is incapable of functioning on its own and so is the case with the transponder’s process.
3. The substance of the agreement between AsiaSat and the TV channels is not to grant any ‘right to use’ qua the process embedded in the transponder or satellite, since the entire control of the satellite and transponder remains with AsiaSat. It is observed that the process in the transponder is used by the satellite operator for rendering services to the TV channels, thus holding that the satellite operator itself was the user of the satellite and not the TV channels who were given mere access to the broadband available.
4. The High Court has distinguished between transfer of ‘rights in respect of a property’ and transfer of ‘right in the property’. In case of royalty, the ownership of property or right remains with the owner and the transferee is permitted to use the right is respect of such property. A payment for the absolute assignment of and ownership of rights transferred is not a payment for the use of something belonging to another party and therefore not royalty.
5. It has supported the illustration that there is distinction between hiring of a truck for a specified time period and use of transportation services of a carrier who uses a truck for rendering such services.
6. Thus, relying upon the detailed observations in the AAR’s ruling in case of ISRO (mentioned above), the High Court held that the payments for the use of transponder capacity cannot be said to be for the use of a process or equipment by its customers.
7. Though there was no treaty involved in this case, to support its view, the High Court has also referred to the OECD model commentary in this context. It observed that the OECD model commentary may be relied upon to understand the meaning of similar terms used in the Act.
8. While, it did not get into a detailed comparison of the language of the definition of ‘royalty’ in the Act and treaty, it observed that the definition in the OECD model is virtually the same as the Act in all material respects. The High Court has made a mention of the OECD Commentary (para 9.1 of the commentary on Article 12) which suggests that payments made by customers under typical ‘transponder leasing’ arrangements (which is not a leasing of industrial, commercial or scientific equipment due to the fact that the customers do not acquire the physical possession of the transponder, but simply its transmission capacity) would be in the nature of business profits and not royalty.
Overall Comments
1. The issue, whether the ‘process’ needs to be ‘secret’ remains unanswered, as the High Court did not comment on the same given that it concluded that the payments were not for use of process.
2. There is no mention of the Special Bench’s ruling in the case of New Skies Satellite in the High Court decision.
3. While the High Court has referred to the inter-pretation in paragraph 9.1 of Article 12 of the OECD Commentary which states that payment for transponder leasing will not constitute royalty, there is no mention of the specific reservation that India has made against the same. India, in its position on OECD commentary has mentioned that India intends to tax such payments as equipment royalty under its domestic law and many treaties. It has also expressly been mentioned that as per India’s position, the payment for use of transponder is a payment for use of a ‘process’ resulting in ‘royalty’ under Article 12.
DTC Scenario
Under the proposed Direct Tax Code (‘DTC’), the definition of royalty includes payments made for ‘the use of or right to use of transmission by satellite, cable, optic fibre or similar technology’. Hence the definition is wide enough to encompass payments for transponder capacity and hence, would be taxable under the DTC.
Notwithstanding the above, the taxpayer could always claim the benefit of the tax treaty.
Conclusion
The decision of the Delhi High Court would have a significant favourable impact on taxability of revenues earned by foreign satellite operators and other connectivity service providers. Of course, the High Court decision would serve as a strong precedent for such companies at lower Appellate levels for the past years. However the decision would be helpful only in the pre-DTC scenario and the impacting companies would need to make fresh representation for relief in the post-DTC scenario given the High Court ruling.
