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2009 (10) TMI 69 - AT - Income TaxDeemed To Accrue Or Arise In India - receipts taxed by the revenue as royalty either under the provisions of Income-tax Act, 1961 (Act) or under the provisions of respective Double Taxation Avoidance Agreement (DTAA) - Income from Bandwidth/transmission charges for uplinking/downlinking signals/data transmission through the use of transponders in the satellite is taxable in the hands of foreign companies in accordance with provisions of the Income-tax Act read with relevant provisions of Tax treaties with respective countries - Assessees are non-residents and are earning income from telecasting companies for providing them transponder capacity - engaged in operating telecommunication satellites which are called geostationary satellites and are placed at the distance of around 36000 Kms. from the equator - Each satellite rotates in the same direction as earth at a velocity that matches the earth's rotation - It was pleaded that there are certain embedded processes which are carried out within the satellite through the transponder. However, the said processes are used by the assessee for the purpose of rendering service and the customer is merely getting a service and is not using such processes on its own. HELD THAT - On facts, it is held that a process is involved in the transponder through which the telecasting companies are able to uplink the desired images/data and downlink the same in the desired area which inter alia covers Indian territory. For the purpose of falling within the scope of royalty, it is not necessary that the process which has been used and in respect of which the consideration is paid should be a secret process. Even consideration paid in respect of simple process shall be covered by the scope of royalty. The scope of royalty has not been restricted either by the domestic provisions or by the provisions contained in respective DTAA's. Insertion of 'comma' after the words secret formula or process in the respective DTAA's does not give different interpretation to the provisions of DTAA as compared to the provisions of domestic law. The process, even if it is construed to be intellectual property, for falling within the ambit of royalty, it is not necessary that the process should be protected one. The simple process, even if it is intellectual property, will fall within the ambit of royalty. For holding that consideration is in respect of royalty, it is not necessary that the instruments through which the process is carried on should be in the control or possession of the person who is receiving the payment. The context and factual situation has to be kept in mind while finding out that whether a process was actually used by the payer. In the case of satellites physical control and possession of the process can neither be with the satellite companies nor with the telecasting companies. The control of the process, by either of them will be through sophisticated instruments either installed at the ground stations owned by the satellite companies or through the instruments installed at the earth stations owned and operated by telecasting companies. The use of process, according to agreement, was provided by the satellite companies to the telecasting companies whereby the telecasting companies are enabled to telecast their programmes by uplinking and downlinking the same with the help of that process. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process. The consideration paid by telecasting companies to satellite companies is for the purpose of providing use and right to use of the process and, thus, it is royalty within the meaning of clause (iii) of Explanation 2 to section 9(1)(vi). It is also a royalty within the meaning of clause (vi) of Explanation 2 to section 9(1)(vi). Whether the services rendered by the assessees involved in these appeals, through their satellites for telecommunication or broadcasting, amount to 'secret process' or only 'process'? - On the facts and in the circumstances of the case, the services rendered by the assessees involved in these appeals through their satellites for telecommunication or broadcasting amounts to process. Whether the term 'secret' appearing in the phrase 'secret formula or process' in Explanation 2 to section 9(1)(vi) and in the relevant article of the Treaties, will qualify the word 'process' also? If so, whether the services rendered through secret process only will be covered within the meaning of royalty? - The terms secret appearing in the phrase secret formula or process in Explanation 2 to section 9(1)(vi) and in the relevant Article of DTAA will not qualify the word process. Therefore, to fall within the meaning of royalty as envisaged in these provisions, it is not necessary that the services rendered must be through secret process only. Even services rendered through simple process will also be covered within the meaning of royalty. Whethe, the payment received by the assessees from their customers on account of use of their satellites for telecommunication and broadcasting, amounts to 'royalty' and if so, whether the same is liable to tax under section 9(1)(vi) of the Income-tax Act, 1961 read with relevant provisions of DTAA? - The payments received by assessee from their customers is on account of use of process involved in the transponder and it amounts to royalty within the meaning of section 9(1)(vi) of Income-tax Act, 1961. It also amounts to royalty within the meaning of respective Articles of DTAA.
Issues Involved:
1. Whether the services rendered by the assessees through their satellites for telecommunication or broadcasting amount to 'secret process' or only 'process'. 2. Whether the term 'secret' in the phrase 'secret formula or process' qualifies the word 'process' in Explanation 2 to section 9(1)(vi) and the relevant article of the Treaties, and if so, whether services rendered through a secret process only will be covered within the meaning of royalty. 3. Whether the payment received by the assessees from their customers for the use of their satellites for telecommunication and broadcasting amounts to 'royalty' and if so, whether it is liable to tax under section 9(1)(vi) of the Income-tax Act, 1961 read with relevant provisions of DTAA. Detailed Analysis: Issue 1: Services Rendered Amounting to 'Secret Process' or 'Process' - The court determined that the services rendered by the assessees through their satellites for telecommunication or broadcasting amount to a 'process' and not a 'secret process'. The term 'process' was interpreted in its ordinary sense, meaning a series of actions or steps taken to achieve a particular end. The court noted that the transponders on the satellites perform a process by receiving uplinked signals, amplifying them, and downlinking them to the footprint area. This process is essential for the telecasting companies to transmit their data/images. Issue 2: Qualification of the Term 'Secret' - The court concluded that the term 'secret' in the phrase 'secret formula or process' does not qualify the word 'process' in Explanation 2 to section 9(1)(vi) and the relevant article of the Treaties. The court emphasized that the punctuation (comma) after 'secret formula or process' in the DTAA does not alter the interpretation of the term 'process'. Therefore, it is not necessary for the process to be secret for the consideration to be classified as royalty. Issue 3: Payment Amounting to 'Royalty' and Taxability - The court held that the payment received by the assessees from their customers for the use of their satellites for telecommunication and broadcasting amounts to 'royalty' under section 9(1)(vi) of the Income-tax Act, 1961. The court reasoned that the telecasting companies are using the process in the transponder to uplink and downlink their data/images, and this use of the process constitutes royalty. The court further clarified that the consideration paid for this use falls within the ambit of royalty under both the domestic law and the relevant DTAA provisions. The court also noted that the consideration falls within clause (vi) of Explanation 2 to section 9(1)(vi), which covers the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva), and (v). Conclusion: - The services rendered by the assessees amount to a 'process'. - The term 'secret' does not qualify the word 'process' in the relevant provisions. - The payment received by the assessees amounts to 'royalty' and is liable to tax under section 9(1)(vi) of the Income-tax Act, 1961, read with the relevant provisions of DTAA.
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