Article on Delhi Tribunal ruling in New Skies Satellite published Tax Notes International


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Recently in October 2009 the Special Bench of Income Tax Appellate Tribunal, Delhi (“Delhi ITAT”) ruled in favor of the revenue authorities holding that the payment made by the telecasting companies in India to the nonresident satellite companies for use of transponder capacity will be royalty and hence taxable in India. This ruling has attracted the attention of the industry personnel in TMT sector because the stakes involved in this issue are significant.
The views expressed hereunder are just an illustration of some of the possible views emerging from the interpretation of the said ruling.

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Article on Delhi Tribunal ruling in New Skies Satellite published Tax Notes International

  1. 1. Volume 56, Number 11 December 14, 2009 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. The Future for the Telecommunication, Media, and Technology Sector in India After New Skies by D.V. Manohar, Romesh S.A. Sankhe, Ishita Bhaumik, and Garima Jain Reprinted from Tax Notes Int’l, December 14, 2009, p. 867
  2. 2. (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. The Future for the Telecommunication, Media, and Technology Sector in India After New Skies by D.V. Manohar, Romesh S.A. Sankhe, Ishita Bhaumik, and Garima Jain D.V. Manohar, Romesh S.A. Sankhe, Ishita Bhaumik, and Garima Jain are with Deloitte Haskins & Sells in Mumbai and Bangalore. Copyright © 2009 Deloitte Touche Tohmatsu. All rights reserved. O n October 16, 2009, the Special Bench of Income Tax Appellate Tribunal, Delhi (ITAT), issued a ruling in favor of the revenue authorities in appeals The process of uplinking or downlinking is embedded in the transponder, which is used by the customers at the time of uplinking or downlinking. The SatCos pre- filed by the nonresident satellite companies (SatCos) determine the transponder process and make it avail- New Skies Satellites N.V. and Shin Satellite Public Co. able to customers for a fee. Ltd. The ITAT held that the consideration paid by tele- The Indian tax authorities maintained that the fees casting companies to satellite companies was for the paid to the SatCos were in the nature of royalties un- use of a ‘‘process’’ and therefore was a royalty under der both the Indian Income Tax Act, 1961 and India’s Indian tax law, despite the process not being a secret tax treaties and therefore were taxable in the hands of one. (For the ruling in New Skies Satellites v. ADIT the SatCos. The SatCos argued that the payments did (I.T.A. Nos. 5385-5387/DEL/2004 and I.T.A. Nos. not qualify as royalties and that in the absence of a 2623-2624/DEL/2008), see Doc 2009-23299 or 2009 permanent establishment in India, the income was not WTD 203-17. For prior coverage, see Doc 2009-23506 or taxable in India. (In addition to the appellant SatCos, 2009 WTD 205-7.) Asia Satellite Telecommunications Co. Ltd. (Hong The ruling has attracted attention from industry pro- Kong) was given leave to participate as an intervenor.) fessionals around the world because the tax implica- In concluding that the payments were royalties and tions on payments for the use of transponder capacity taxable in India, the ITAT rejected the arguments of are important throughout India — potentially affecting the SatCos that no use of process was involved and all satellite and telecommunication companies broad- that the process must be secret before the payment for casting in India. the process can be characterized as royalty. The ITAT held that the services provided by the SatCos did in- This article examines the ITAT’s observations and volve a process and that they provided their customers analyzes the findings regarding the tax implications on with a particular capacity of the transponder’s pre- services involved in the telecommunication, media, and determined and preguided process. To fall within the technology (TMT) sector in India. scope of a royalty, the process does not have to be se- cret. The consideration paid by telecasting companies Background to the SatCos is for the use and right to use the process New Skies Satellite (a Dutch tax resident) and Shin and thus is a royalty under the ITA. Satellite Public Co. (a tax resident of Thailand) provide transponder capacity from their satellites to telecasting/ Analysis telecommunications service providers, enabling cus- tomers (including Indian companies) to transmit voice TMT Sector and data around the world. All equipment and facili- The SatCos argued that their case was similar to ties are owned, maintained, and controlled by the Sat- that of Skycell Communications Ltd. v. DCIT (251 ITR 53 Cos from outside India. The SatCos have no control (Mad)), in which the Madras High Court held that over the data uplinked or downlinked by customers. even though sophisticated equipment was used by a TAX NOTES INTERNATIONAL DECEMBER 14, 2009 • 867
  3. 3. VIEWPOINTS cellular mobile service provider in the course of pro- similar equipment, which are passive in nature and do (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. viding cellular mobile telephone facilities to its cus- not contribute to the data being processed or transmit- tomers, the payments received by Skycell could not be ted. regarded as ‘‘fees for technical services.’’ Payment for the Use of a Process The ITAT, however, stated that Skycell was inappli- cable: The ITAT’s deliberations zeroed in on the interpre- tation of ‘‘payment for use of a process.’’ The SatCos What was interpreted in Skycell’s case was in the argued that the payments were merely for the telecaster context of ‘‘fee for technical services’’ vis-a-vis availing itself of the service and that the telecasting deduction of tax for such fee. . . . We are con- company is neither concerned with the process being cerned with the provisions defining the royalty used nor using the process in and of itself. The ITAT which includes in its ambit many other aspects rejected this argument, making several observations: also. • Control and use of the transponder is a compli- Without denying the tax authorities’ contention that cated matter, involving sophisticated instruments Skycell was further distinguishable on its facts, the owned by the SatCos or the telecasting compa- ITAT also noted that: nies. The process is predetermined and preguided [Skycell’s] customer was only to make a request by the SatCos, and then made available for con- to the service provider for providing the service sideration to the telecasters for their use according and beyond that nothing was to be done by the to their needs. subscriber except that on allocation of connec- • The argument that the telecasting companies were tion, the subscriber was entitled to use the serv- interested only in telecasting their programs and ice. [In contrast, the New Skies/Shin] customer not in using the process is unpersuasive. Without was to have his own earth station . . . pick up the using the process involved in the transponder, the signals . . . uplink the signals . . . catch the signals telecasting companies would be unable to telecast at the earth stations or to downlink the signals, their programs in the desired area at the desired and, therefore, the customer is a part of process. time. The inference, therefore, can be drawn that the • After entering into the contract, satellite compa- ITAT has noted the nuances of processes being used in nies have no right to interfere in the process in- the transponder and telecommunication sector, so the volved in the transponder except as provided in ruling delivered in the case of telecommunication com- the agreement. The SatCos have no control over panies cannot be applied to satellite companies and the time or programs being telecasted. vice versa. After an analysis of the appellants’ agreements with Payments Made to Satellite Companies the telecasting companies, the ITAT concluded that the The appellants argued that the decision of the Au- payments were for the use of the process and thus thority of Advance Rulings (AAR) in ISRO Satellite Cen- were a royalty. It appears that this conclusion was pri- tre applied. In ISRO, the AAR held that payment for marily influenced by the fact that the telecasting com- the use of a navigational transponder was not taxable panies, while relaying live or recorded programs to in India as a royalty. Again, the ITAT found the two their customers, use their ground stations to uplink the cases distinguishable after a detailed comparison of the data to satellites, with the data also received by the facts in ISRO: telecasters’ ground stations in the downlinking process by which the telecasting companies provide program- • the ISRO transponder was a navigational tran- ming to their customers. The ITAT found support for sponder; this reasoning in PanAm Sat International Systems Inc. (7 • as the AAR pointed out, there are differences be- Intl. Tax Law Report 419), in which a Chinese court tween navigational transponders (which do not ruled on analogous facts that the fee was a royalty. amplify a signal) and communication transpon- Taxability of Payments ders (which are active transponders), and the ISRO applicant was found not to operate the tran- The Finance Ministry released a draft Direct Taxes sponder; and Code (DTC) on August 12, 2009, for public discussion. The ministry proposes that the DTC take effect April • in contrast, it was admitted in New Skies that the 1, 2011, and increase the withholding tax on some roy- signal uplinked by the telecasters to the transpon- alties to 20 percent. Further, the definition of royalty der was amplified and given strength so as to would include payment for ‘‘the use or right to use of reach the broadcast area in good condition. transmission by satellite, cable, optic fiber or similar Therefore, it is clear that the principle laid down in technology.’’ Interestingly, the word ‘‘process’’ has not New Skies Satellite cannot be applied when the payments been used in the portion of the proposed definition are made for the use of a navigation transponder or dealing with transmission by satellite, cable, optic fiber, 868 • DECEMBER 14, 2009 TAX NOTES INTERNATIONAL
  4. 4. VIEWPOINTS and so forth. Therefore, it appears that the DTC’s defi- facility used by the customer without any participation (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. nition is being introduced to cover all payments made by the customer in the transmission process — for ex- for the transmission of data, irrespective of the use of ample, a telecommunication company using a cable process by the customer, and all such payments will network or the use of a passive transponder such as a deemed to be a royalty and thus taxable in India. navigation transponder. This will change once the DTC comes into effect, absent changes to the draft provi- Final Remarks sions. The principles established by the Delhi Special Bench can be simply illustrated by an analogy exam- However, a royalty will be found when the nature of ined by the court comparing the transmission of data the services is a transmission facility used by a cus- through a satellite to a glass of juice and the process tomer that itself participates in the transmission proc- by which it is made. That is, when a customer merely ess — for example, a communication transponder used places an order for juice made from some fruit, it can- by telecasting companies with the customer operating not be termed as a ‘‘use of process.’’ In such a process, certain processes through ground stations in its posses- the fruit will be delivered to the machine, but the trans- sion. formation will be purely operated by the service pro- vider, and the customer will have no control over it. The ruling illustrates the need for companies under- However, when the customer has control over the input taking similar transactions to understand the nature of and output process of the juice machine, controlling each transaction to avoid potential noncompliance with the quantity and ingredients of the juice produced, it tax obligations. This ruling further illustrates an evolu- could amount to a ‘‘use of process.’’ tion in the approach followed by the courts and other Consequently, under the ruling, no royalty will be judicial bodies by which industry practices are consid- found when the nature of the service is a transmission ered in developing the rulings. ◆ TAX NOTES INTERNATIONAL DECEMBER 14, 2009 • 869