2011 (3) TMI 466 - AT - Income Tax

DTAA - Royalty - The assessee company is a satellite company which is having footprint in India and has leased out the transponders for beaming the programmes in India by various telecasting companies - It is the case of the assessee that it has no role whatsoever to play either in the uplinking activity or in the receiving activity. Its role is confined in space where the transponder which it makes available to its customers performs a function which it is designed to perform - In the case of Asia Satellite Telecommunications Co. Ltd. v. Dy. CIT (2002 -TMI - 64060 - ITAT DELHI) - Held that the service charges received by the assessee from various TV channels on account of providing facility of broadcasting their programmes through the transponders located in the satellites are not liable to be taxed as royalty in India - Appeals are allowed

Issues Involved:
1. Taxability of income from providing services in India.
2. Classification of income as 'royalty' under section 9(1)(vi) of the Income-tax Act.
3. Definition of 'process' and whether it includes the appellant's activities.
4. Requirement of customer usage for payment to qualify as 'royalty'.
5. Classification of changing frequencies/amplification of signals as a 'process'.
6. Intellectual property availability and its sufficiency to constitute 'royalty'.
7. Interpretation of 'secret process' under section 9(1)(vi).
8. Nature of appellant's service (space segment capacity vs. process availability).
9. Source of income location in India based on viewership and signal relay.
10. Definition of 'royalty' under Article 12 of the DTAA between India and the Netherlands.
11. Interpretation of 'secret process' under Article 12 of the Indo-Netherlands DTAA.

Detailed Analysis:

1. Taxability of Income from Providing Services in India:
The Income-tax Appellate Tribunal (ITAT) examined whether the appellant's income from providing services was chargeable to tax in India. The Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the appellant's activities constituted a 'process' and were therefore taxable in India under section 9(1)(vi) of the Income-tax Act. However, the ITAT, referencing the Delhi High Court's decision in Asia Satellite Telecommunications Co. Ltd., determined that the appellant's income was not chargeable to tax in India.

2. Classification of Income as 'Royalty' under Section 9(1)(vi):
The AO and CIT(A) classified the appellant's income as 'royalty' under section 9(1)(vi). They argued that the appellant's activities involved a 'process' and thus fell within the definition of 'royalty'. The ITAT, however, relying on the Delhi High Court's judgment in Asia Satellite Telecommunications Co. Ltd., concluded that the income from leasing transponders did not constitute 'royalty'.

3. Definition of 'Process' and Whether It Includes the Appellant's Activities:
The CIT(A) and AO held that the appellant's activities, such as changing frequencies and amplifying signals, amounted to a 'process'. The ITAT, following the Delhi High Court's interpretation, found that these activities did not constitute a 'process' as defined under section 9(1)(vi).

4. Requirement of Customer Usage for Payment to Qualify as 'Royalty':
The CIT(A) concluded that it was not necessary for the 'process' to be used by the customer for the payment to qualify as 'royalty'. The ITAT disagreed, referencing the Delhi High Court's decision, which emphasized that the control of the satellite or transponder remained with the satellite operator, and customers merely accessed the transponder capacity.

5. Classification of Changing Frequencies/Amplification of Signals as a 'Process':
The CIT(A) classified the changing of frequencies and amplification of signals as a 'process'. The ITAT, however, found that these activities did not change the content of the signals and did not constitute a 'process' under section 9(1)(vi).

6. Intellectual Property Availability and Its Sufficiency to Constitute 'Royalty':
The CIT(A) concluded that the mere availability of intellectual property was sufficient to constitute 'royalty'. The ITAT, however, held that since the customers did not utilize the process or equipment involved in the operations, the charges paid were not 'royalty'.

7. Interpretation of 'Secret Process' under Section 9(1)(vi):
The CIT(A) interpreted that the term 'secret' did not qualify 'process' and was restricted to 'formula'. The ITAT, following the Delhi High Court's interpretation, found that the term 'secret' did not apply to the appellant's activities.

8. Nature of Appellant's Service (Space Segment Capacity vs. Process Availability):
The CIT(A) concluded that the appellant's case was about making a 'process' available rather than providing space segment capacity. The ITAT, however, determined that the appellant provided space segment capacity, not a 'process'.

9. Source of Income Location in India Based on Viewership and Signal Relay:
The CIT(A) concluded that the appellant's source of income was located in India due to viewership and signal relay. The ITAT, referencing the Delhi High Court's decision, found that the appellant's income was not attributable to a business connection in India.

10. Definition of 'Royalty' under Article 12 of the DTAA between India and the Netherlands:
The CIT(A) classified the appellant's income as 'royalty' under Article 12 of the DTAA. The ITAT, however, found that the income did not constitute 'royalty' under the DTAA, following the Delhi High Court's judgment.

11. Interpretation of 'Secret Process' under Article 12 of the Indo-Netherlands DTAA:
The CIT(A) interpreted that the term 'secret' did not qualify 'process' under Article 12 of the DTAA. The ITAT, following the Delhi High Court's interpretation, concluded that the term 'secret' did not apply to the appellant's activities.

Conclusion:
The ITAT, following the Delhi High Court's decision in Asia Satellite Telecommunications Co. Ltd., held that the service charges received by the appellant from various TV channels for broadcasting their programs through the transponders located in satellites were not liable to be taxed as royalty in India. The orders of the authorities below were set aside, and the additions made by the AO were deleted. All the appeals filed by the assessee were allowed.

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