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Transponder capacity lease not taxable: AAR
November, 10th 2008

In a ruling that may give relief to foreign companies, the Authority for Advance Rulings (AAR) has said that payments made by an Indian entity to an overseas company for leasing of navigational transponder capacity is not taxable in India.

It also said that the Indian entity has no obligation to deduct tax at source on payments made in this regard to the overseas company.

Tax payers dealing with foreign companies seek advance rulings to determine their tax liability to avoid litigations. The rulings are binding on the tax authorities and also on the applicant.

The case pertains to Indian Space Research Centre (ISRO) Satellite Centre (the applicant), which has entered into a contract with Inmarsat Global Ltd, UK (IGL) for leasing Immarsats navigational transponder capacity for its Global Positioning System (GPS)-aided Geo Augmented Navigation project.

ISRO Satellite Centre had taken on lease two transponders for a fixed annual charge. It sought advance ruling on whether the payment to IGL is not royalty under the Income Tax Act 1961 as well as under the Double Taxation Avoidance Agreement and hence not liable for TDS.

ISRO also wanted to know whether IGL is not liable to tax in India and hence not liable to TDS under Section 195 of the Income Tax Act.

In its ruling, the AAR said the transponder capacity at a particular frequency is received by ISRO Satellite Centre at a ground station set up and operated by it. ISRO also adjusts or tunes its system to access the navigational transponder space segment capacity and by doing so ISRO does not get possession or control of the equipment of IGL.

If an advantage is taken from sophisticated equipment instaled and provided by another, it is difficult to say that the recipient or customer used the equipment as such, AAR said. The ruling held that payment for lease of the navigation transponder would not constitute royalty.

The Revenue Department contended that IGLs regional office in India provides ground support to customers. The applicant said it is not taking any assistance from the regional office.

Taking the facts into account, the AAR ruled that no part of the business profits flowing to IGL from the contract in question is attributable to permanent establishment in India.

AAR ruled that as the income of IGL arising out of the lease of transponders to the applicant is not chargeable to tax in India under both Income Tax Act and DTAA, and that ISRO Satellite has no obligation to deduct TDS.

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