Men judge by the complexion of the sky the state and inclination of the day, reads a line in the Bard’s ‘King Richard II’. And in ‘As You Like It,’ he offers another nugget of wisdom – that ‘men are April when they woo, December when they wed: maids are May when they are maids, but the sky changes when they are wives.’
While the genders may eternally dispute such poetic assertions, a different dispute may rage in space with the skies having changed for the satellite companies, post a recent Tribunal decision on the taxability of transponder lease payments.
Sky that hangs above our heads, describes Shakespeare’s King John. “So foul a sky clears not without a storm,” he says, elsewhere in the play. And that could apply to transponders, too, as they get carried by satellites orbiting in space.
For starters, the transponder is what facilitates the transmission of a signal (for example, a television signal) from a single point on the earth (the earth station) to a wide area (the footprint) so that it can be accessed and distributed to individual viewers.
It amplifies the signal received from an earth station and retransmits it over a wide area, which is referred to as the footprint of the satellite, explains Amod Khare, a Partner in BMR Advisors, leading the Media and Entertainment practice in the firm.
Typically, a broadcaster leases capacity on a transponder under a long-term lease, and the broadcaster does not have control over either the satellite or the transponder, continues Amod, during the course of an email interaction with Business Line.
“Indian and foreign companies have been making payments to satellite companies for use of transponders in connection with their broadcasting businesses, and there has been considerable debate on the taxability of transponder lease payments.” He traces how, over the last few years, a few judgments have been issued on the taxability of such payments (Raj TV, Asiasat and Panamsat).
For instance, the Delhi Income-tax Appellate Tribunal judgment in the case of Asiasat was that payments for lease of a transponder were taxable under the Indian tax law as royalties. In the case of Panamsat, the Delhi Tribunal held that such payments were not taxable under the double taxation avoidance agreement (or tax treaty) as royalties and also alluded to the fact that such payments may not taxable under the Indian tax law.
To resolve the taxability issue of transponder lease payments, a special bench of the Delhi Tribunal was constituted to decide the taxability of New Skies Satellite, a Dutch company. The decision of the Special Bench, which binds all the division benches in India, impacts satellite companies by bringing their income to tax in India, Amod observes.
“Also, the telecasting companies and other companies which make payment for bandwidth charges could be now fastened with obligation of withholding tax at source. This is a landmark decision as it has a far-reaching impact on all satellite and telecommunications cases throughout the country.”
Excerpts from the interview.
First, what are the definitions we should be familiar with?
To decode the dispute we need to start with the definition of royalties under the Indian tax law, which includes payments made for the use of ‘any patent, invention… secret formula or process or trademark or similar property.’ Typically, tax treaties define royalties to include payments made for the use of ‘…any patent, trade mark, design or model, plan, secret formula or process, or for information….’
It has been argued that given the definition of royalties under tax treaties, the reference under tax treaties is to a ‘secret’ process and not any process. This interpretation relies on the positioning of the comma under the tax treaty definition – the comma appears before secret and after process, thereby attaching the word ‘secret’ to not only the word ‘formula’ but also to the word ‘process.’
Under the Indian tax law, due regard needs to be given to the fact that the royalty definition, as discussed earlier, ends with the words ‘similar property.’ The other terms in the definition of royalties under the Indian tax law, such as ‘patent’, ‘trademark’, ‘design’ etc. refer to items which fall within the realm of intellectual property rights (IPRs). The term ‘process’ should be interpreted with due regard to these other terms that appear along with the word ‘process.’
Accordingly, it has been argued that all terms referred to in the context of royalties must be understood in the context of IPRs. It follows therefore that only payments for those processes which fall within the ambit of IPRs ought to be taxed as royalties and not payments for any process.
What are the key findings of the Tribunal, and what do you see as the impact of the judgment?
The Tribunal held that a process is embedded within the transponder, and this process is used by the customers and not the satellite companies. The Tribunal has held that the term ‘secret’ as appearing in tax treaties does not cover a process but covers only a formula. The Tribunal concluded that the payment for use of a transponder is a payment for a process and is taxable under the provisions of the Indian tax law as well as tax treaties.
One expects that the parties to this litigation would file an appeal to the higher authorities – in this case the High Court. Accordingly, while presently such payments are likely to suffer tax on the basis that they constitute royalties, one expects that the litigation on this issue is not yet settled.
Given the New Skies Satellite judgment, payments for use of transponder would fall within the ambit of ‘royalties’ and would be taxable. Normally, payments to foreign companies for lease of transponders are made under tax-protected contracts, whereby the tax burden falls back on the transponder lease payer. Owing to the taxability of these companies, one would expect that the effective cost of leasing transponder capacity would increase.
Judgments have also been issued in the context of taxability of bandwidth provision services. In the context of Wipro Ltd., the Bangalore Tribunal has held that payments for bandwidth services cannot be regarded as payments for the use of a process. As such, a transponder is also used to provide bandwidth services. It is interesting to note that, based on judicial precedents, while provision of bandwidth through a transponder would amount to use of a process, the provision of bandwidth through a leased line would not amount to use of a process.
Does the Direct Taxes Code address the issue?
Under the proposed Code, the definition of royalties includes payments made for ‘the use of or right to use of transmission by satellite, cable, optic fibre or similar technology.’ Considering this wide definition, transponder lease payments would be taxable as royalties under the Direct Taxes Code. However, given that the Code contains an expanded scope for the definition of royalties, one could stake a claim that the current provisions of the Indian tax law did not intend to tax such payments.
How is the international experience in this sphere?
In the international context, one may be hard-pressed to find a precedent which holds that payment for any process is a payment in the nature of royalties. One understands that in the UK and some of the EU jurisdictions, such payments are likely to be taxed on the basis that they constitute payments for the use of equipment. Holding such payments to be made for use of equipment would not necessarily lead to taxation of all satellite companies, since some of the tax treaties that India has executed do not tax use of equipment as royalties.
Interestingly, the New Skies Satellite judgment discusses a ruling issued by the Chinese Courts in which it has been concluded that payments for use of transponder lease constitute payments for use of equipment and accordingly should be liable to tax royalties (given the fact in that particular context the tax treaty does tax payments for use of equipment as royalties).
In New Skies Satellite, the Indian Revenue authorities did not argue that the payment should be regarded as one being made for use of equipment. On could attribute this to the fact that the under the Indian-Netherlands tax treaty (which applied in the context of New Skies Satellite) the definition of royalties does not include payments for use of equipment and also possibly to the fact that in the Asiasat judgment, the Delhi Tribunal had concluded that the payment for a transponder cannot be regarded as a payment for equipment.
Are there also other regulatory aspects of relevance?
In the past, payments for foreign transponders required an approval of the Ministry of Information and Broadcasting as well as an approval from the Reserve Bank of India (RBI). However, over the last few years, exchange control regulations have been liberalised on account of which payments for foreign transponders require an approval of the Ministry of Information and Broadcasting and do not require an approval of the RBI.
On a related note, payments for transponder lease also find a mention in various guidelines issued by the Ministry of Information and Broadcasting in connection with the broadcasting industry. The Uplinking Guidelines (which are applicable to television channels which are uplinked from India) provide that preference (for the issue of an uplink licence) would be given to applicants who use Indian transponders. A similar condition is contained in the guidelines applicable to providers of direct-to-home services.