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 under section 9(1)(vi) of the Income Tax Act and Article 12 of the Indo-US DTAA. The use of the transponder involves a "process" as defined in the Act, including uplinking and downlinking of signals in India. Relying on precedent, the tribunal affirmed that the rights in the process are located in India, and thus the payments qualify as royalty income taxable in India. The decision of the CIT(A) was upheld, ruling against the assessee.

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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.

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