October 23, 2009
Payments for use of satellite transponders held to be "royalty"
In a landmark ruling, the Special Bench of the Income Tax Appellate Tribunal, New Delhi (the “Tribunal”) has held that the payments made to the satellite companies for use of satellite transponders would be characterized as “royalty” income as it involved the use of a ‘process’ and therefore was liable to tax in India, both under the Income Tax Act, 1961 (the “Act”) and the relevant DTAAs. This decision reversed the decision delivered in the case of PanAmSat International Systems1 and reinstates the 2002 decision in Asia Satellite Telecommunications Limited.2
New Satellites, N.V and Shin Satellite Public Company (the “Satellite Companies”), both being non-resident companies from the Indian perspective, are engaged in the business of providing satellite transponder facilities to telecasting and telecom companies in the Asian region. The Indian telecasting/ telecom companies enter into agreements with the Satellite Companies for obtaining transponder’s capacity to enable them to up-link and down-link programmes to be telecasted. For obtaining such transponder’s capacity an agreed amount is periodically paid to the Satellite Companies.
The issue that arose in the present case was with respect to the taxability of such consideration received by the Satellite Companies from the telecasting companies.
The Tribunal held that consideration was paid to the Satellite Companies for the use of the ‘process’ of transponders for the purpose of up-linking and down-linking data/signals and such consideration should be characterised as “royalty” within the meaning of the Act and the relevant DTAAs, based on the following observations and conclusions:
· ‘Use’ of process of the transponder: The Tribunal observed that the ‘process’ of uplinking and downlinking was used by the telecasting companies and not the Satellite Companies.
In coming to this conclusion, the Tribunal noted that Satellite Companies provide to the telecasting companies a particular transponder capacity. The Satellite Companies have no control over the data to be uplinked or downlinked. In fact, the telecasting companies, in accordance with the provisions of the agreement, are authorised to uplink and downlink data at its own, based on their own specific requirements. The obligation of the Satellite Companies is restricted to maintaining the satellite and the transponders in a working condition so as to ensure uninterrupted service to the telecasting companies.
In this regard, the Tribunal made a reference to the various clauses of the agreements entered into between the Satellite Companies with the telecasting Companies which supported the conclusion that the telecasting companies were in fact granted the right to ‘use’ the transponder and the process involved therein.
- provision which permitted a telecasting company to assign their transponder capacity and enter into sub-utilization agreement in this regard;
- provision which permitted the Satellite Companies to cease and desist using the transponder in certain specified circumstances and concluded that unless the telecasting companies have the right to “use” the transponders, such clauses in the agreement would be rendered otiose
The Tribunal further observed that in case of a satellite, the test of ‘physical possession’ could not be satisfied practically. The Tribunal instead referred to the test of ‘control’ and in that respect concluded that the telecasting companies had control over the transponder through sophisticated instruments.
· Connotation of “Process” under the definition of royalty: The Satellite Companies argued that not every ‘process’ falls within the definition of ‘royalty’ and the principle of ejusdem generisshould be applied, thereby claiming that ‘process’ within the ambit of the royalty definition should be considered as that related to protected intellectual property. In this respect the Tribunal observed that the definition of royalty extends to all intellectual property and is not restricted only to protected intellectual property. The Tribunal further observed that the process used in a transponder was of a like nature as an invention and therefore, like intellectual property; however, because of its inherent nature, not capable of protection as other intellectual property. Therefore, such rationale could not be adopted to oust the process in a transponder from the ambit of “royalty”.
· Characterization of consideration as “royalty”: The Satellite Companies contented that for the consideration to be characterised as ‘royalty’, the payment must be for the use of a “secret” process and since the process of up-linking and downlinking was available by means of a Technical User Guide, such condition was not met. In this context, the Tribunal observed that to fall within the meaning of “royalty”, as envisaged under the Act and the DTAAs, it is not necessary that the consideration is for a “secret” process and can be for any process. Further, placing reliance on the observations of the Madras High Court in Neyveli Lignite3, the Tribunal noted that for a payment to be classified as ‘royalty’ under the Act, the consideration need not be for the use of intellectual property only.
The Tribunal thus held that the consideration paid for the use of process in the transponder will fall within the ambit of “royalty”.
The Tribunal in this case has extensively examined the scope of the definition of royalty and analyzed the earlier decisions. As mentioned above, there is a clear departure from the judicial stance and position which had been followed for the past few years and the judgment of PanAmSat(cited above) stands overruled. The position taken in the case of AsiaSat (cited above) whereby it was held that the term ‘secret’ need not qualify ‘process’ for it to be considered as ‘royalty’, and such position has now been reinforced by the Special Bench. Undoubtedly, this ruling would have far reaching consequences for this industry and especially for the non-resident service providers. Acceptance of the reasoning given in this ruling may even lead to an expansion of the definition of “royalty” to include any consideration that is paid for the hire of equipment.