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2014 (4) TMI 737 - AT - Income TaxFee payable to be treated as Royalty or not Scope of section 9(1)(vi) of the Act Article 12 of Indo-US DTAA - Whether the fee payable by the assessee to Intelsat Corporation, a tax resident of USA is in the nature of Royalty in the light of amended provisions of section 9(1)(vi) as well as under Article 12 of Indo-US DTAA Held that - The payments were made to the Intelsat is for user of transponder capacity by the assessee for telecasting/broadcasting of its various programmes on television channels including marketing and advertising airtime etc. Relying upon Asia Satellite Telecommunications Co. Ltd. Versus Director of Income-tax 2011 (1) TMI 47 - DELHI HIGH COURT - the application of the term royalty to the transaction on the premise of territorial jurisdiction in-as-much as the said process was not being used in India - Without doubt, the rights in or for the use of the process vesting in the assessee are located in India, where at the signals are downlinked as also uplinked from it has to be read in conjunction with Explanation below section 9(2), inserted on the statute by Finance Act, 2007 w.r.e.f 01.06.1976 - The use of transponder by the assessee for telecasting/broadcasting the programme involves the transmission by the satellite including uplinking, amplification, conversion for downlinking of signals which falls in the expression Process as per Explanation 6 of section 9(1)(vi) - the payments made for use/ right to use of process falls in the ambit of expression royalty as per DTAA as well as provisions of Income Tax Act there was no reason to interfere in the decision of CIT(A) Decided against Assessee.
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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