2014 (4) TMI 737 - AT - Income Tax

Fee for US transponder use is royalty under Section 9(1)(vi) and Indo-US DTAA, taxable in India

The ITAT Mumbai held that the fee paid by the assessee to a US-based entity for use of transponder capacity for telecasting and broadcasting constitutes ... Royalty - fees for included services - use of process (transmission by satellite) - Double Taxation Avoidance Agreement - Article 12 (Royalties) - Article 3(2) - meaning of undefined terms in DTAA - Explanation 6 to section 9(1)(vi) - clarificatory definition of 'process' - section 195 - withholding obligation on payments to non residentsRoyalty - use of process (transmission by satellite) - Article 12 (Royalties) of Indo US DTAA - Explanation 6 to section 9(1)(vi) - Article 3(2) of DTAA - section 195 withholding - Whether the transponder fees payable by the assessee to Intelsat Corporation constitute 'royalty' under the Indo US DTAA and section 9(1)(vi) of the Income tax Act and are therefore subject to withholding under section 195. - HELD THAT: - The Tribunal examined the definition of 'royalty' in Article 12(3) of the Indo US DTAA and Explanation 2 to section 9(1)(vi) of the Act and found them to be pari materia insofar as payments for the use of, or the right to use, any 'process' or equipment are concerned. Article 3(2) of the DTAA requires that terms not defined in the treaty take their meaning from the domestic law; 'process' was not defined in the DTAA and therefore its meaning is to be derived from the Income tax Act. Explanation 6 to section 9(1)(vi), inserted retrospectively, clarifies that 'process' includes transmission by satellite (including uplinking, amplification, conversion for down linking of any signal) and similar technologies. That clarification is declaratory of the legislature's intended meaning of 'process' and falls within the contemplation of the term as used in both the Act and the DTAA. The Delhi High Court decision in Asia Satellite (relied on by the assessee) is distinguishable on facts and was rendered prior to the statutory clarifications; the Madras High Court decision in Verizon supports application of the amended/explanatory provisions. The Tribunal held that the assessee's use of transponder capacity for uplinking and downlinking signals involves the transmission processes encompassed by Explanation 6 and, read with the DTAA definition, the payments fall within 'royalty'. Consequently, the payments are taxable in India and subject to withholding under section 195. The Tribunal rejected reliance on decisions which treated similar payments as non royalty where the statutory position had since been clarified, and held that Siemens (on which the assessee also relied) does not assist because Explanation 6 defines 'process' (not 'royalty') and the present case turns on that definition. [Paras 15, 16, 17, 18, 19]Transponder fees to Intelsat constitute 'royalty' under the DTAA and section 9(1)(vi) read with Explanation 6; payments are taxable in India and liable to withholding under section 195; appeals dismissed.Final Conclusion: Appeals dismissed. The transponder fees payable to Intelsat are held to be 'royalty' (being payment for use/right to use a 'process' of transmission by satellite as clarified by Explanation 6 and applicable under Article 12 of the Indo US DTAA) and thus taxable in India, attracting withholding under section 195. Issues Involved:1. Whether the transponder fees payable by the assessee to Intelsat Corporation are in the nature of 'royalty' under the Income Tax Act, 1961 and the India-USA Tax Treaty.2. Whether the payments for transponder service fees are subject to tax withholding under section 195 of the Income Tax Act.Detailed Analysis:1. Nature of Transponder Fees as 'Royalty':The primary issue was whether the transponder fees paid by the assessee to Intelsat Corporation, a tax resident of the USA, qualify as 'royalty' under both the Income Tax Act, 1961, and the India-USA Tax Treaty. The assessee contended that the payments were not taxable in India as 'royalty' or 'fees for included services' under Article 12 of the India-USA Tax Treaty, citing the absence of a Permanent Establishment (PE) of Intelsat in India. The Assessing Officer (AO) disagreed, holding that the transponder fees were 'royalty' under section 9(1)(vi) of the Act and Article 12 of the Treaty, thus subject to tax withholding.The CIT(A) upheld the AO's decision, referencing the Special Bench decision in New Skies Satellite v. ADIT. The assessee's counsel argued that the Delhi High Court had reversed this decision in Asia Satellite Communication Co. Ltd., and subsequent Tribunal decisions had followed this precedent, ruling that payments for transponder services were not 'royalty' and thus not taxable in India.The Tribunal examined the definition of 'royalty' under Article 12(3) of the India-USA DTAA and the Income Tax Act. It noted that the term 'process' included satellite transmission activities, as clarified by Explanation 6 to section 9(1)(vi) of the Act. The Tribunal concluded that the transponder services provided by Intelsat involved the use of a 'process' as defined under both the DTAA and the Act, making the payments 'royalty'.2. Tax Withholding under Section 195:Given the Tribunal's conclusion that the transponder fees constituted 'royalty', the payments were subject to tax withholding under section 195 of the Income Tax Act. The Tribunal rejected the assessee's argument that the unilateral amendment to the Act could not override the DTAA provisions, emphasizing that the definition of 'process' in the Act applied due to Article 3(2) of the DTAA.The Tribunal also addressed the assessee's reliance on the Delhi High Court's decision in Asia Satellite Communication Co. Ltd., distinguishing it based on the territorial nexus and subsequent legislative amendments. The Tribunal referenced the Madras High Court's decision in Verizon Communications Singapore Pte. Ltd., which supported the view that the amended definition of 'process' under the Act applied to the DTAA.Conclusion:The Tribunal upheld the CIT(A)'s order, affirming that the transponder fees paid by the assessee to Intelsat Corporation were 'royalty' under both the Income Tax Act and the India-USA Tax Treaty, and thus subject to tax withholding under section 195. The appeal by the assessee was dismissed.