Transponder fees treated as royalty where satellite transmission was read as use of a process under domestic law and treaty terms.

Transponder fees paid for satellite broadcasting services were analysed as royalty under the Income-tax Act and the India-USA DTAA because the treaty and domestic definition were treated as materially pari materia. As the treaty did not define "process," domestic law meaning applied under Article 3(2), and Explanation 6 to section 9(1)(vi) was read to include satellite transmission, including uplinking, amplification and downlinking. On that basis, use of transponder capacity was treated as consideration for use of a process, bringing the payment within royalty and supporting withholding under section 195.

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Issues: Whether transponder fees paid for satellite broadcasting services constitute royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3) of the India-USA DTAA, so as to attract tax withholding under section 195.

Analysis: The definition of royalty in the treaty and the Act was held to be materially pari materia. The term "process" in Article 12(3) was not defined in the treaty, so Article 3(2) permitted the domestic law meaning to apply. Explanation 6 to section 9(1)(vi), inserted with retrospective effect, clarifies that "process" includes transmission by satellite, including uplinking, amplification and downlinking of signals. On that basis, payment for use of transponder capacity was treated as consideration for the use of a process, falling within royalty. The earlier view in Asia Satellite was held inapplicable on the facts after the statutory amendment, and the treaty did not exclude the payment from the royalty definition.

Conclusion: The transponder fee was held to be royalty taxable in India, and the withholding obligation was upheld against the assessee.

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