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2008 (10) TMI 15 - AAR - Income TaxApplicant a part of the Department of Space Govt. of India had contract with M/s. Inmarsat Global Ltd. (IGL U.K.) applicant pay amount to IGL for getting lease of space segment capacity - IGL has no PE in india - business of IGL is not liable to tax in India in respect of lease amount - income arising out of payments received by IGL from the applicant pursuant to the Agreement is not in the nature of royalty either under IT Act or the Treaty hence applicant is not liable to TDS u/s 195
Issues Involved:
1. Whether the payment to M/s. Inmarsat, UK, for leasing of transponder is considered as royalty under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA) with the UK. 2. Whether M/s. Inmarsat, UK, has a Permanent Establishment (PE) in India, making the lease amount taxable in India and hence liable to TDS under Section 195 of the IT Act 1961. Detailed Analysis: Issue 1: Classification of Payment as Royalty The primary question was whether the payment made by the applicant to Inmarsat Global Ltd. (IGL) for leasing transponder capacity constitutes 'royalty' under Article 13 of the DTAA between India and the UK and Section 9(1)(vi) of the Income-tax Act, 1961. The payment was for the lease of navigation transponder segment capacity on an Inmarsat satellite, utilized for the GAGAN project. 1. Contractual Terms: - The contract specified that the applicant would lease navigation transponder capacity consisting of L1 and L5 transponders on an Inmarsat satellite. - The applicant would operate a ground station (INLUS) to access this capacity. - The payment was a fixed annual charge, irrespective of actual usage. 2. Nature of Use: - The applicant argued that it did not use the equipment (transponder) directly but accessed the space segment capacity through its ground station. - The transponder is a passive device that does not modify or store data; it merely transmits signals received from the ground station. 3. Legal Interpretation: - The term 'royalty' under Article 13(3)(b) of the DTAA and Section 9(1)(vi) of the Income-tax Act includes payments for the use of or right to use industrial, commercial, or scientific equipment. - The Authority concluded that the applicant did not use or operate the transponder but only accessed the facility provided by IGL. The applicant did not have control or possession of the transponder. - The analogy with the Dell International Service case was drawn, where the use of telecom bandwidth was not considered as 'use of equipment' under similar circumstances. 4. Conclusion: - The payment to IGL was not for the use of equipment but for accessing a facility. Thus, it did not constitute 'royalty' under the DTAA or the Income-tax Act. - The income received by IGL was not in the nature of royalty or fees for technical services. Issue 2: Permanent Establishment (PE) in India The second question was whether IGL had a Permanent Establishment (PE) in India, which would make the income from the lease taxable in India. 1. Revenue's Argument: - The Revenue pointed out that IGL had a regional office in Faridabad, India, which could be considered a PE. 2. Applicant's Clarification: - The applicant clarified that the regional office had no connection with the contract in question and did not provide any support or assistance related to the contract. 3. Legal Interpretation: - Article 13(6) of the DTAA specifies that if the beneficial owner of the royalties or fees for technical services carries on business through a PE in the other contracting state, the income can be taxed as business profits. - The Authority found no factual basis for the existence of a PE in India, as the regional office did not participate in the operations under the contract. 4. Conclusion: - IGL did not have a PE in India concerning the contract, and therefore, no part of the business profits could be attributed to a PE in India. - Consequently, the applicant was not required to deduct tax at source under Section 195 of the Income-tax Act. Ruling: Both questions were answered in favor of the applicant. The payments made to IGL were not considered as royalty or fees for technical services, and IGL did not have a PE in India. Therefore, the applicant was not obligated to deduct tax at source.
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