KPMG IN INDIA

KPMG Flash News

2 February 2011

TAX

Payments to Satellite Operators for broadcasting do not qualify as

royalties
Recently, the Delhi High Court in the case of Asia Satellite
Telecommunications Co. Ltd. 1 (taxpayer) held that the payments made
for using capacity in a transponder for uplinking/down linking data do
not constitute royalty under the provisions of the Income-tax Act,
1961 (the Act). The High Court held that the customers did not make
payments for the use of any process or equipment, since control over the
process or equipment was with the taxpayer and not with the customers.
Facts of the case

The taxpayer, a company incorporated in Hong Kong, is in the

business of providing private satellite communications and
broadcasting facilities. The taxpayer provides transponder capacity
of its satellites. 2

For providing transponder capacity, the taxpayer enters into

contracts with television channels, etc (the customers) and enables
them to relay their signals over the footprint 3 of the satellite, which
includes India.

- The customers have their own relay facilities outside India for
uplinking the signal to the satellite;

- The signal is received, amplified and re-sent by the transponder

through a different frequency without any change in signal
content;

1
Asia Satellite Telecommunications Co. Ltd. v. DIT [2011-TII-05-HC-DEL-INTL]
(Judgement date: 31 January 2011)
2
A transponder is a part of the satellite which receives signals from the earth stations
and re-transmits the same back to the earth with or without amplifying them.
3
Footprint is the area over the Earths surface over which a signal relayed from the
satellite can be received

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
1
 - The signal is received for down linking by cable operators, etc.

The taxpayer does not have any facility, assets or presence in India.
Further, the tracking, telemetering and control operations in respect
of the satellites were performed by the taxpayer from Hong Kong.

The Income-tax Appellate Tribunal (the Tribunal) had held that the
customers were using a process as a result of which the signals,
after being received in the taxpayers satellite were converted to a
different frequency and were relayed to the area covered by the
footprint, after amplification.

A pictorial depiction of the process involved is given below:

Amplification

Uplinking Downlinking

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
2
 Issues before the High Court
Applicability of Section 9(1)(i) of the Act to the payments received
by the taxpayer
Whether payment received by the taxpayer can be regarded as
royalty under section 9(1)(vi) of the Act

Whether the payment by the taxpayer can be regarded as Fee for

technical Services under section 9(1)(vii) of the Act
Issue 1 - Applicability of Section 9(1)(i) of the Act
Tax departments contentions
The tax department contended that the business of the taxpayer was
to help its customers in relaying their programmes to the regions in
its satellite footprint (including India). It was contended that it is the
duty of the taxpayer to make those programmes available in India.
In view of this, the tax department urged that the taxpayer has a
direct business connection in India.
Further, taxpayers revenues were ultimately being derived from
household viewers as well as cable operators in India; therefore,
such income was taxable in India. The Tribunal held that even
though the taxpayer has a business connection in India, no part of
the taxpayers income was chargeable to tax in India as no operations
to earn the income were carried out in India.
High Courts ruling
High Court observed that in terms of Explanation (a) to Section
9(1)(i) of the Act only so much of the income as is reasonably
attributable to the operations carried out in India can be brought to
tax under Section 9(1)(i) of the Act. Therefore to determine whether
any operations were carried out by the taxpayer in India, the High
Court considered the clauses of the Agreement between the taxpayer
and its customers and observed that:
o Programmes are uplinked by the customers outside India;
o Amplification of signals takes place at the satellite, which is
not located in Indian airspace; and
o The amplified programme signals are relayed over the footprint
area, which includes India, for the cable operators to downlink
the signal and pass on the same for viewing by Indian
population.
The High Court emphatically held that relay of the programmes in
India does not amount to operations being carried in India by the
taxpayer. Further, as the taxpayer did not have any facility, assets or

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
3
 presence in India, the provisions of Section 9(1)(i) of the Act are not
attracted.
Issue 2 - Whether payment received by the taxpayer can be regarded as
royalty under section 9(1)(vi) of the Act
Taxpayers contentions
The taxpayer argued that the service charges received from its
customers are not in relation to use of any equipment or process by
the customers. It was further argued that the taxpayer has complete
control over the operation of the satellites by way of its tracking,
telemetering and control operations in Hong Kong and the
customers have no control over them.
Tax departments contentions
The tax department, on the other hand, contended that control over
the satellite was not relevant since the word use in the definition
of royalty under the Act means only usage simpliciter and does
not require right to use of the equipment or process. It further
submitted that even if control is considered to be relevant, the same
was in the hands of the TV channels (i.e. the customers).
High Courts ruling

On a perusal of the clauses of the agreement between the taxpayer

and the customers, the High Court observed that the taxpayer was
the operator of satellites. Further, the arrangement was only to lease
transponder capacity, while the taxpayer enjoyed control over the
satellite.

The High Court relied heavily on the ruling of the Authority of

Advance Rulings (AAR) in the case of ISRO 4 . In this ruling, the
AAR had held that in case of an agreement for lease of transponder
capacity, if no control over parts of satellite/ transponder has been
given to the customers, then the payments for use of transponder
capacity would not qualify as royalty under the Act.

While refuting the Tribunals contention, the High Court held that
the fact that no amplification of the signals was involved was not
important because the decision of the AAR in case of ISRO (supra)
was not based on this consideration alone. The High Court further
held that it was the substance of the agreement that should be
considered to understand the underlying intention. It held that
various clauses of the agreement clearly indicate that the control
over the transponders was always with the taxpayer. It was observed
that the taxpayer had merely given access to a broadband/ capacity
available with the transponder to its customers.

4
ISRO Satellite Centre [ISAC], In re [2008] 307 ITR 59 (AAR)

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
4
 The High Court also held that the transponder is an in-severable part
of the satellite. It cannot function without the continuous support of
various systems and components of the satellite. Consequently, it is
wrong to assume that the control and constructive possession of the
transponder can be handed over by the satellite operator to its
customers.

In concluding the above issue, the High Court considered the

Tribunals findings that the transponder being a part of satellite,
playing howsoever important role cannot be termed as equipment.

Further, the High Court held that there was no use of the
transponder/ process in India. The following facts were found to be
relevant in this context:

o The customers as well as the taxpayer are non-residents of

India;

o Agreements are executed outside India; and

o The transponder is in orbit, thus not located in India.

It was reiterated that merely because the satellite had a footprint in

India would not mean that the process took place in India. In this
context, reliance was placed on the decision of the Supreme Court in
the case of Ishikawajima-Harima Heavy Industries Company
Limited 5 , in which it was held that sufficient territorial nexus with
India was sine qua non for attracting taxation. Therefore, payments
from TV channels could not be taxed in India as there was
insufficient territorial nexus with India.

OECD commentary on Model Double Tax Avoidance Agreement

(OECD Model Convention)
The High Court noted that the definition of royalty under the Act
is materially the same as stipulated under the OECD Model
Convention 6 . It was held that where the technical terms used in the
OECD Model Convention are the same as appearing under the
domestic tax laws, OECD commentary can be relied upon for better
understanding. Further, it also noted that various courts have on
several occasions 7 held that the well settled internationally accepted

5
Ishikawajima-Harima Heavy Industries Company Limited v. DIT [2007] 288 ITR 408
(SC)
6
As per the Model Tax Convention on Income and on Capital issued on 22 July 2010,
OECD has observed that payments made by customers under transponder leasing
agreements will be considered for use of the transponder transmitting capacity. Further,
as per the OECD, the same will not constitute royalties since such payments are not
made in consideration for the use of, or right to use, property, or for information, etc.
7
Reliance placed on Supreme Courts decision in Ishikawajima (supra) and other High
Court decisions

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
5
 meaning and interpretations placed on identical or similar terms
employed in various bilateral tax treaties should be followed by the
Courts in India when it comes to construing similar terms occurring
in the Act.

Based on the above, the High Court held that the said payments do
not constitute royalty and are not taxable in India.

Issue 3 - Whether the payment by the taxpayer can be regarded as Fee

for technical Services under section 9(1)(vii) of the Act

High Courts ruling

Taxability of the payments as Fee for technical Services was

admitted as an additional ground before the Tribunal. However, the
Tribunal did not decide on the issue because it held that the income
was taxable under Section 9(1)(vi) as royalty.

Since no argument was advanced by the tax department on this

ground before the High Court, the High Court did not adjudicate on
this matter.

Our Comments

This decision by the Delhi High Court certainly provides a welcome

relief for international satellite operators especially after the Special
Bench ruling of the Delhi Tribunal in New Skies BV 8 .

The High Court has addressed some crucial questions regarding the situs
of the operations carried out by the Satellite Operators as well as the
source of their income from overseas television broadcasting
companies.

The High Court has settled a long standing controversy and aligned
Indias position with various international forums such as OECD.

It would also be interesting to analyze the impact of the proposed

amendment to the definition of royalty in the Direct Taxes Code Bill,
2010 wherein payments for the use or right to use of transmission by
satellite have been specifically included.

8
New Skies Satellites NV v. ADIT [2009] 126 TTJ 1 (Del)

2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
6
 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
7
 www.kpmg.com/in

Bangalore Mumbai
Maruthi Infotech Centre, 11-12/1 Lodha Excelus, Apollo mills
Inner Ring Road compound,
Koramangala, Bangalore 560071 NM Joshi Marg, Mahalaxmi,
Phone: + 91 80 3980 6000 Mumbai 400 011
Fax: +91 80 3980 6999 India
Phone: +91 22 39896000
Chennai Fax: + 91 22 39836000
KPMG House
No.10, Mahatma Gandhi Road, Pune
Nungambakkam High Road, 703, 7th Floor Godrej Castlemaine,
Chennai 600034 Next to Ruby Hall Clinic,
Phone: +91 44 39145000 Bund Garden Road, Pune 411001
Fax: +91 44 39145999 Phone: +91 20 30585764/65
Fax: +91 20 3058 5775
Chandigarh
SCO 22-23 Kochi
1st Floor, Sector 8 C 4/F, Palal Towers, M. G. Road,
Madhya Marg Ravipuram, Kochi 682016
Chandigarh 160019 Phone: +91 (484) 305 9000
Tel: 0172 3935778 Fax: +91 (484) 305 9001
Fax: 0172 3935780

Delhi
DLF Cyber City, Building no. 10,
Block B, Phase II
Gurgaon, Haryana 122 002
Phone: +91 124 307 4000
Fax: +91 124 254 9195

Hyderabad
KPMG, 8-2-618/2
Reliance Humsafar, 4th Floor
Road No.11, Banjara Hills
Hyderabad - 500 034
Phone: +91 40 30465000
Fax: + 91 40 30465299

Kolkata
KPMG Infinity Benchmark
Plot No. G-1, 10th floor Block - EP &
GP,
Sector V, Salt Lake City
Kolkata - 700091
Phone: +91 33 4403 4000

The information contained herein is of a general nature and is not intended to address the circumstances of 2011 KPMG, an Indian Partnership and a member firm
any particular individual or entity. Although we endeavour to provide accurate and timely information, there of the KPMG network of independent member firms
2011that
can be no guarantee KPMG, an Indian Partnership
such information is accurate asand a member
of the date it is firm of the
received KPMG
or that it willnetwork
continueof
toindependent member
affiliated firmsInternational
with KPMG affiliated with
Cooperative (KPMG
be accurate inKPMG International
the future. Cooperative
No one should (KPMG
act on such International),
information a Swiss professional
without appropriate entity. All rights
advicereserved.
International), a Swiss entity. All rights reserved.
after a thorough examination of the particular situation. 1