The Hindu Business Line : Tax signals from a transponder case

Merely enabling the use of services or products into which technical inputs have gone in will not amount to ‘making available’ technical knowledge or skills.

T. C. A. Ramanujam

Despite television becoming one of the main mediums for communication and entertainment, India is still largely dependant on foreign satellites and space technology for telecast services. It depends on transponders which are nothing but transmitter-receivers, which receive signals from a ground station at one frequency and retransmit the same to another ground station at another frequency.

Fixed charges

India’s ISRO Satellite Centre (ISAC) has an agreement with UK’s Immarsat Global Ltd for leasing navigation transponder capacity for use in its technology demonstration system.

The Immersat Satellite is located at 64{+o} east and orbits around the earth at an altitude of 36,000 km . ISRO has set up a ground station for utilising the capacity through data commands. The data is used for better navigational accuracy.

ISRO pays a fixed annual charge regardless of the actual use of the transponder’s capacity. The corrected augmented data is transmitted over the entire coverage of the satellite.

The question arose whether the fixed annual charge for leasing of the transponder can be considered royalty under the Indian Income-Tax Act and the Double Taxation Avoidance Agreement (DTAA) between India and the UK.

ISRO submitted that access to the navigation transponder will not amount to use of any equipment because ISRO will not be able to operate the satellite or transponder by itself. Equipment belonging to IGL is not used and, therefore, no royalty income was derived by IGL.

Assuming that there was use of the equipment, it was submitted, such use is not in Indian territory but in space. Therefore, there was no territorial nexus for levying income-tax. Even if it is considered as business income, tax is not leviable because IGL did not have a Permanent Establishment (PE) in India.

AAR view

The Revenue contended that the exclusive capacity of the specific transponder is kept entirely at the disposal of ISRO. The transponder responds to the directions sent through the ground station. This is akin to the operation of TV by remote control apparatus.

The Authority for Advance Ruling (AAR) was not impressed by the Revenue’s comparison with TV remote control device. It pointed out that remote is an accessory to the TV and a person operates it himself.

In ISRO’s case, the ground station cannot be used to operate the transponder or satellite. The ground station is an independent unit and not an accessory to the satellite.

Only a communication/navigational link was provided through a facility owned by IGL which was exclusively operated/controlled by it. The operation and regulation of the transponder are always with IGL. It is a passive transponder and ISRO does not use the equipment as such.

The satellite itself is not a customised one. ISRO happened to be one of the customers deriving the benefit of navigational transponder capacity. IGL made available a facility out of the satellite infrastructure it possessed. This cannot be considered as payment made for use of IGL’s equipment.

Using a facility

The customer merely makes use of the facility though not making use of the equipment himself. The AAR examined the contract between ISRO and IGL and held that no income was received by IGL answering the definition of royalty either under the Income-Tax Act, 1961 or under the DTAA. Nor did it represent fees for technical services.

Uninterrupted access to the space segment capacity of IGL did not amount to making available any technical knowledge, skill, experience, knowhow or process.

Once the project-related contract is over, the technical inputs or specification furnished to ISRO by IGL will be of no use. Merely enabling the use of services or products into which technical inputs have gone in will not amount to ‘making available’ technical knowledge or skills.

Territorial nexus

The recipient of the service must be able to absorb and apply the technology on its own in its future activities. Unless this criterion is satisfied, there can be no question of levying tax [307 ITR 59].

The AAR did not consider it necessary to go into the question of territorial nexus with “India” as defined in Section 2(25A) of the Act. The decision was rendered in favour of the taxpayer on the point of user or right to use the equipment.

The AAR also ruled that no part of the business profits flowing from the contract was attributable to a PE in India and no question of tax deduction at source can arise.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)