2011 (1) TMI 47 - HC - Income Tax

Non-resident transponder receipts not taxable as royalty or business profits domestically; operational control and causal link absent

Asia Satellite Telecommunications Co. Ltd. Versus Director of Income-tax

The HC held for the assessee: receipts from non-resident customers for transponder capacity did not create a business connection or royalty taxable in ... Taxability of amounts received by the Appellant (a non-resident) from its non-resident customers for availing transponder capacity - business connection in India through Or from which it earned income - Income by way of royalty - seeking to assess the amounts received by the Appellant as fees for technical services in terms of section 9(1)(vii) - Doctrine of noscitur a sociis - Ambit and scope of term ‘royalty’ - terms “lease of transponder capacity”, “lessor”, “lessee” and “rental” - Fee paid by Indian Broadcasters to foreign satellite service provider - Income deemed to accrue or arise in India - royalty under section 9(1)(vi) - footprint on various continents - process has taken place in India or not - Held that:- Accepted position is that the first two steps are not carried out in India and the entire thrust of the revenue is limited to the third step and the argument is that the relaying of the programmes in India amounted to the operations carried out in India. Whether this argument is sustainable? Answer is emphatic no ! Merely because the footprint area includes India and the programmers by ultimate consumers/viewers are watching the programmes in India, even when they are uplinked and relayed outside India, would not mean that the appellant is carrying out its business operations in India. - section 9(1)(i) is not attracted in the present case. The definition of term ‘royalty’ in respect of the copyright, literary, artistic or scientific work, patent, invention, process, etc. does not extend to the outright purchase of the right to use an asset. In case of royalty, the ownership on the property or right remains with owner and the transferee is permitted to use the right in respect of such property. A payment for the absolute assignment and ownership of rights transferred is not a payment for the use of something belonging to another party and, therefore, no royalty. In an outright transfer to be treated as sale of property as opposed to licence, alienation of all rights in the property is necessary. The meaning of the word ‘process’ being a series of action or steps taken in order to achieve a particular end, considering the role of the appellant in the light of meaning of the term ‘process’, it is evident that the particular end, viz., viewership by the public at large was achieved only through the series of steps taken by receiving the uplinked signals, amplifying them and relaying them after changing the frequency in the footprint area including India. This is held that the TV channels in entire cycle of relaying the programmes in India were using the process provided by the assessee and, therefore, it is liable to be taxed as royalty income. The terms “lease of transponder capacity”, “lessor”, “lessee” and “rental” used in the agreement would not be the determinative factors. It is the substance of the agreement which is to be seen. When we go through the various clauses of the said agreement, it becomes clear that the control always remained with the appellant and the appellant had merely given access to a broadband available with the transponder, to particular customers. The Tribunal has made an attempt to trace the fund flow and observed that since the end consumers, i.e., persons watching TV in India are paying the amounts to the cable operators who in turn are paying the same to the TV channels, the flow of fund is traced to India. That is a far-fetched ground to rope in the appellant in the taxation net. - it is difficult to accept such far-fetched reasoning with no causal connection. – Not liable to pay tax as royalty - Decided in favor of assesse. Issues Involved:1. Taxability of amounts received for availing transponder capacity.2. Existence of business connection in India.3. Classification of income as royalty.4. Customers' business operations or income source in India.5. Admission of additional ground by the Tribunal.6. Allowance of expenditure related to India.7. Proportionate basis for depreciation.8. Calculation of interest under section 234B.9. Applicability of section 9(1)(i).10. Non-decision on income taxability under section 9(1)(vii).11. Classification of transponders as equipment.Detailed Analysis:1. Taxability of amounts received for availing transponder capacity:The Tribunal held that amounts received by the appellant from its non-resident customers for availing transponder capacity were chargeable to tax in India. This was based on the finding that the appellant had a business connection in India and the income was considered as royalty under Explanation 2 to section 9(1)(vi) of the Income-tax Act.2. Existence of business connection in India:The Tribunal concluded that the appellant had a business connection in India because the appellant's activities of amplifying and relaying signals over the footprint area, which included India, contributed to the earning of income. However, the Tribunal also found that no part of the appellant's operations were carried out in India, thus section 9(1)(i) was not applicable.3. Classification of income as royalty:The Tribunal classified the income received by the appellant as royalty under Explanation 2 to section 9(1)(vi), holding that the TV channels were using the process provided by the appellant through its transponder. The Tribunal noted that the process involved receiving, amplifying, and relaying signals, which qualified as a 'process' under the definition of royalty.4. Customers' business operations or income source in India:The Tribunal found that the customers of the appellant, who were TV channels, were carrying on business in India or had a source of income in India. This was based on the fact that the TV channels earned revenue from Indian advertisers and cable operators, making the income received by the appellant chargeable to tax in India.5. Admission of additional ground by the Tribunal:The Tribunal admitted an additional ground raised by the revenue, seeking to assess the amounts received by the appellant as fees for technical services under section 9(1)(vii). The Tribunal held that it was within its right to admit a legal ground that did not require consideration of fresh facts.6. Allowance of expenditure related to India:The Tribunal directed the Assessing Officer to allow only the expenditure relatable to India while computing the income chargeable to tax in India. This was based on the principle that only the proportionate expenses related to the income attributable to India should be deducted.7. Proportionate basis for depreciation:The Tribunal held that depreciation was admissible to the appellant only on a proportionate basis. The depreciation was to be calculated on the actual cost and not on a notional written-down value, and only the proportionate depreciation related to the income attributable to India was to be allowed.8. Calculation of interest under section 234B:The Tribunal held that the interest under section 234B should be calculated by giving the benefit to the assessee of tax deductible under section 195 by the payer, even if no such deduction was made. The Tribunal directed the Assessing Officer to examine whether the tax deductible was equal to or more than the tax payable by the appellant.9. Applicability of section 9(1)(i):The Tribunal held that section 9(1)(i) was not applicable as no operations to earn the income were carried out in India. The Tribunal emphasized that the appellant had no office, agent, or subsidiary in India, and no machinery was installed by the appellant in India through which the programs were reaching India.10. Non-decision on income taxability under section 9(1)(vii):The Tribunal admitted the ground regarding the taxability of income under section 9(1)(vii) but did not decide on it. This was because the Tribunal had already upheld the contention that the amount was chargeable to tax under section 9(1)(vi).11. Classification of transponders as equipment:The Tribunal held that transponders could not be regarded as equipment under Explanation 2 clause (iva) to section 9(1)(vi). The Tribunal found that the appellant had not leased out any equipment but had only made available the process carried out in the transponder to its customers.Conclusion:The High Court allowed the appeal preferred by the assessee and set aside the judgment of the Tribunal. The Court dismissed the appeal of the revenue, holding that the income received by the appellant was not chargeable to tax in India under section 9(1)(i) or section 9(1)(vi) of the Income-tax Act. The Court also held that the Tribunal erred in admitting the additional ground regarding section 9(1)(vii) and not deciding on it.