Payment by ICO to FCO for transponder hire charges is not ‘royalty’ under provisions of Income-tax Act.
Obligation to withhold tax at source only arises when income is chargeable to tax in India.
Facts:
The
taxpayer, Indian company (ICO), was engaged in the business of
broadcasting and operating TV channel. ICO videographed events by using
up-linking facilities, and sent signals to satellite hovering in space.
The signals sent to the satellite were decoded and downlinked over the
area covered by the satellite. The satellite, also known as a
transponder, was owned by Intelsat and was taken for the purpose of
beaming the events.
ICO entered into an agreement with US-based
Company (FCO) for using the transponder capacity, to make the signals
available to cable operators.
The Tax Department relied on Delhi
ITAT’s Special Bench (SB) ruling in the case of New Skies Satellites
N.V1 to hold that payment made for use of transponder falls within the
definition of ‘Royalty’ and is liable to tax in the hands of the
recipient.
Held:
ITAT rejected contentions of the Tax
Department and held that payment for transponder hire charges is not
‘royalty’ for the following reasons:
The SB decision in the case
of Asia Satellite Telecommunications Co Ltd. relied by the Tax
Department has been reversed by the Delhi High Court in the case of Asia
Satellite Telecommunications Co Ltd.2.:
In terms of the Delhi High Court decision:
FCO
was the operator of satellites and was in control of the satellite. FCO
had not leased out equipment to customers. FCO had merely given access
to a broadband width available in a transponder which was utilised by
ICO for the purpose of transmitting signals to customers.
A
satellite is not a mere carrier, nor is the transponder something which
is distinct and separable from the satellite. 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 can be handed over by the
satellite operator to its customers.
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. The agreements under which the services were
provided by ICO to its customers were executed abroad. Mere existence of
its footprint on various continents would not mean that the process had
taken place in India.
Also, there can be no business taxation
u/s.9(1) (i) as no operations are carried out in India. The expressions
‘operations’ and ‘carried out in India’ occurring under Explanation 1(a)
to section 9(1)(i) of Income-tax Act signify that it is necessary to
establish that taxpayer’s operations are carried out in India. This test
is not met in case where the process of amplifying and relaying the
programs was performed in the satellite which was not situated in Indian
airspace.
