As diverse the culture and dialects that India has, so are diverse and varied the 300+ channels currently being beamed over India - partly by foreign telecasting companies (FTCs) located overseas and partly by local telecasting companies. Most of these FTCs broadcast their channels by utilising the telecommunication satellite facility provided by satellite companies located overseas (satellite cos).
Satellite cos have their satellites in outer space, which are used for beaming the signals to all the desired countries of broadcast. The taxability of these satellite cos in India in respect of the overseas payments made by FTCs to satellite cos for using the transponder space on their satellites has always been a challenging proposition and the debate has still not seen its end. The moot question is whether these satellite cos, which are situated outside India and whose satellites are used for transmitting signals into India, can be held to be liable to income tax in India by way of 'royalty' or 'fees for included services' (FIS). (These satellite cos generally do not have any presence in India). Recently, the Income Tax Appellate Tribunal (ITAT), Delhi, was faced with a similar issue in the case of PanAmSat International Systems Inc, USA (PanAmSat) for the assessment year 1997-98.
This issue was also addressed earlier, inter alia, by a different bench of the Delhi ITAT in the case of Asia Satellite Telecommunication Co Ltd (85 ITD 478). This decision was rendered under the provisions of the Indian Income Tax Act, 1961 (Act), since AsiaSat was tax resident in Hong Kong and India does not have a tax treaty with Hong Kong.
The Delhi ITAT in AsiaSat observed that the process of uplinking from overseas and downlinking of signals into India definitely entails a 'process'. Further, the term 'secret', appearing in the definition of royalty under the Act as 'secret formula or process', is a prefix only to the term 'formula' and its scope does not extend to the term 'process'. Also, 'process' refers to a series of actions/steps taken in order to achieve a particular end. Accordingly, it was concluded that payments made by FTCs to AsiaSat constitutes 'royalty' under provisions of the Act and it accrues or arises in India. Consequently, AsiaSat was held to be liable to tax in India.
This issue was revisited by a different bench of the Delhi ITAT recently in the case of PanAmSat. One significant factual difference in the case of PanAmSat was that it was analysed both under Act as well as the India-USA tax treaty, the latter being more beneficial in nature.
In PanAmSat's case, the Delhi ITAT observed that as opposed to the Act, the Indo-US treaty provided for a comma after the term 'secret formula or process' in the definition of royalty. Hence, it was concluded that the term 'secret' had to be applied as a prefix to both 'formula' and 'process'.
In the facts of the case, the process was being made available by PanAmSat off the shelf to several FTCs and also printed in the form of a literature. Consequently, there was no element of 'secrecy' in the process and hence, it was held that the payment for the use of process cannot constitute 'royalty'.
Further, the Delhi ITAT analysed whether these payments could be characterised as fees for included services under the Indo-US tax treaty. It was argued by PanAmSat that it only provides a standard facility/ service to all those who are willing to pay for the same, while relying on the decision in the case of Skycell Communications (251 ITR 53).
Further, no technology relating to the satellite can be said to have been 'made available' (a concept unique to the Indo-US treaty as against the Act) to the FTCs, since the FTCs are not enabled to utilise the technology in any way.
Accordingly, it was held that the payment does not fall within the definition of FIS under the Indo-US treaty, and in the absence of a permanent establishment in India, the payments made by FTCs to PanAmSat are not liable to tax in India.
The Delhi ITAT also made an important passing observation (though no conclusive views were provided) that even if the payments were to be construed as 'royalty' or 'FIS', the same may not accrue or arise in India.
The PanAmSat decision should breathe a fresh lease of life in those satellite cos who have adopted a similar business model and are enjoying similar treaty protection.
SANDEEP LADDA & SUROJIT RAY
The authors are with PricewaterhouseCoopers