Section 9(1)(vi): As the term “process” is not defined under the DTAA, in terms of Article 3(2) of DTAA, it will have the same meaning as provided under the ITA; payments made for the transponder service amounts to “royalty” as per the India-USA DTAA.
Facts:
The Taxpayer, an Indian Company, was engaged in broadcasting television channels from India, marketing of advertising airtime on these channels, distribution of the channels, marketing and distribution of films through its film division ‘Studio 18’ and production of program content/television software.
The Taxpayer had entered into an agreement with an US Company (US Co) for availing 24 hour satellite signal reception and retransmission service (‘transponder service’). In consideration of the transponder service, the Taxpayer was required to pay transponder service fee (‘fee’)
Relying on the Delhi High court’s decision in the case of Asia Satellite communications Co. Ltd. (332 ITR 340), the Taxpayer contended that the payments made to US Co. were not taxable under the ITA. Further reference was made to the decision in the case of WNS North America (152 TTJ 145) and Siemens Aktiengesellschaft (310 ITR 320) to contend that the retrospective amendment in the ITA will not affect the benefit available under the DTAA and since the payments are not in the nature of Royalty and fee for included service (FIS) under the India-USA DTAA they are not taxable in India in the absence of a permanent establishment (PE), accordingly approached the Tax Authority requesting Nil withholding order for such payments.
The Tax Authority contended that the payments are taxable as royalty in light of amended provisions of 9(1)(vi) of the ITA and also under Article 12 of the India-USA DTAA and consequently subject to tax withholding.
On Appeal, the First Appellate Authority upheld the Tax Authority’s contention. Aggrieved, the taxpayer appealed to the Tribunal.
Held:
It is well settled that the Taxpayer will be governed either by the provisions of DTAA or the ITA, whichever is more beneficial.
The term “Royalty” is defined in the DTAA, therefore, any amendment in the definition of “Royalty” adversely affecting a Taxpayer covered by the DTAA would be inconsequential due to the protection of the DTAA.
Article 3(2) of the India-US DTAA provides that a term not defined in the DTAA, shall, unless the context requires otherwise, have the meaning which it has under the laws of the contracting state. The term “process” is not defined in the DTAA. Therefore, the meaning of such term under the ITA has to be applied.
However, Explanation 6 was inserted to clarify the meaning of the term “process” in the context of transmission by satellite and it does not in any way modify the definition of the term “royalty”. Thus this amendment cannot be considered as overriding the DTAA.
The use of transponder by the Taxpayer for telecasting/broadcasting the programme involves the transmission by the satellite (including uplinking, amplification, conversion for downlinking of signals) and hence falls within the definition of the term “Process” as per Explanation 6 of section 9(1)(vi). This meaning will also be applicable for interpreting the term “process” existing in the DTAA in terms of Article 3(2). Hence, the payments made for use/ right to use of process would fall in the ambit of the expression “royalty” as per the DTAA as well as the provisions of the ITA.
