2013 (9) TMI 187 - AT - Income Tax

TDS on Payment of transponder fee by assessee to its subsidiary M/s. Expand Fast Holding Ltd. - royalty nor fee for technical services - Disallowance of transponder fee u/s 40(a) - The assessee is engaged in the business of broadcasting T.V. programmes under brand name Zee i.e. zee T.V., Zee cinema etc. These channels are uplinked to satellite in a foreign territory and through the transponder on the satellite, the uplinked programmes are transmitted over the entire footprint of the satellite. The assessee claimed that it had taken space on transponder on Asiasat, through its subsidiary M/s. Expand Fast Holding Ltd. (EFHL), a non resident company Held that - It is M/s. EFHL which had made payment to the Asiasat for use of transponder bandwidth - M/s. EFHL has business connection in India and has permanent establishment (PE) through its holding company i.e. the assessee - Therefore, the income arising in case of M/s. EFHL on account of payment made by the assessee may be taxable as business income. It was a contractual payment by the assessee in connection with the business which is chargeable to tax in India and, therefore, the provisions of section 40(a) are apparently attracted - Provisions of Section 40(a) only on the limited ground of royalty/fees for technical services. Though, the assessee, as is clear from the assessment order, had filed copies of separate agreements between Zee Telefilms and M/s. EFHL as well as between M/s. EFHL and Asiasat but these have not been examined Restored the matter back to Commissioner(A) for passing a fresh order after necessary examination in the light of the observations made Decided against the Assessee. Expenditure on issuance of Foreign currency convertible bond (FCCB) - Within section 35D as preliminary expnediture or is allowable as revenue expenditure Held that - from assessment year 2004-06 even the interest on capital borrowed which otherwise was allowable as revenue expenditure is required to be capitalized if the same had been borrowed in connection with extension of existing business. Therefore, expenses incurred on borrowing the capital cannot, in our opinion, be considered as revenue expenditure. Further, the expenditure has been incurred in connection with extension of business in the field of television and setting up of new channels, which will result in addition to the existing profit earning apparatus giving advantage in the capital field. Any expenditure incurred existing into any advantage in the capital field has to be considered as capital in nature as held by the Hon ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 1980 (5) TMI 1 - SUPREME Court . Expenses incurred for issue of debenture for the purpose of extension of business has to be considered as capital expenditure and, accordingly has to be amortized under section 35D. - Decided against the assessee.

Summary

Issues Involved:
1. Disallowance of transponder fee under section 40(a) of the Income Tax Act.
2. Disallowance of expenses incurred for the issue of Foreign Currency Convertible Bonds (FCCB) under section 35D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Transponder Fee:

The assessee paid Rs. 15,89,74,445 as a transponder fee to its non-resident subsidiary, M/s. Expand Fast Holding Ltd. (EFHL). The assessee argued that the payment was for leasing space on a transponder, not for using any equipment or technical services, thus no tax was required to be deducted. The assessee relied on various judgments, including AAR in ISRO Satellite Center and Dell International Services (P.) Ltd., which held that such payments were neither royalty nor fees for technical services. However, the AO disagreed, treating the payment as royalty and technical services, thus requiring tax deduction at source under section 40(a).

The CIT(A) upheld the AO's decision, referencing the Special Bench decision in New Skies Satellites BV, which deemed such payments taxable. The assessee argued that subsequent judgments, including the Delhi High Court in Asia Satellite Telecommunications Ltd., reversed these decisions, holding that transponder fees were neither royalty nor fees for technical services, thus no tax deduction was needed.

The Tribunal examined the case, noting the differences from Asia Satellite Telecommunications Ltd., where the payer and payee were both foreign entities with no business connection in India. In contrast, EFHL had a business connection and a PE in India through the assessee. The Tribunal found that the authorities had not examined the taxability of the payment as business income for EFHL. The matter was remanded to the CIT(A) for a fresh examination, considering the business connection and PE aspects.

2. Disallowance of FCCB Expenses:

The assessee issued FCCBs worth USD 100 million, incurring expenses of Rs. 11,85,26,700. The AO treated these expenses as capital in nature, requiring amortization under section 35D. The assessee argued that the FCCBs were optionally convertible and primarily a borrowing mechanism, thus the expenses should be allowable as revenue expenditure under section 37, citing the Supreme Court's judgment in India Cement Ltd. and CBDT Circular No. 56.

The CIT(A) upheld the AO's decision, noting that the primary objective was conversion into shares, thus the expenses were capital in nature. The assessee cited various High Court judgments allowing such expenses as revenue expenditure, but the CIT(A) relied on the Special Bench decision in Ashima Syntex Ltd., which required amortization under section 35D.

The Tribunal noted conflicting judgments on the issue. However, it emphasized that from the assessment year 2004-05, even interest on capital borrowed for business expansion must be capitalized. The Tribunal held that expenses for FCCBs, aimed at business expansion, were capital in nature, thus requiring amortization under section 35D. The Tribunal upheld the CIT(A)'s decision, confirming the disallowance.

Conclusion:

The appeal was partly allowed for statistical purposes, with the transponder fee issue remanded for further examination and the FCCB expenses disallowance upheld.