The Authority for Advance Rulings (AAR), in a 22 October ruling in the case of the Indian Space Research Organisation, or Isro, has held that payment by an Indian resident to a foreign company for utilization of leased capacity of navigational transponder centred on a satellite is neither in the nature of royalty under the double taxation avoidance agreement between India and UK or under the Income-tax Act, 1961, nor fees for technical services (FTS) under the tax treaty.
Isro had a contract with Inmarsat Global Ltd (IGL) for leasing the navigation transponder capacity for one of its projects. Certain key terms of the contract are:
• The charges payable by Isro for the utilization of the leased capacity during the specified term shall be firm and fixed and all the charges shall be payable irrespective of the amount of utilization of the capacity.
• IGL would reserve the right to relocate, reposition or replace any satellite through which the capacity is provided, after giving prior notice.
• The entire operations and maintenance of the satellite, including spacecraft maintenance, repositioning of the satellite in orbit, reorientation, etc., would be under the control of IGL.
• Isro can only access the passive navigation transponder for uplinking data, which can’t affect satellite operations or those of the transponder.
• The transponder would at all times be maintained and regulated by IGL and Isro would make use of the facility of the satellite and transponder for relaying satellite-based augmented data.
The space agency contended that there is no use of equipment belonging to IGL. The consideration paid to IGL under the contract can only be classified as business income, which is not exigible to income tax in India by virtue of the tax treaty provisions as IGL does not have a permanent establishment in India. Under the contract, all taxes and duties payable in India would be to Isro’s account; that was the context in which Isro approached AAR.
The India-US double tax avoidance agreement provides for withholding taxes on cross-border royalty payments. The definition of “royalties” includes, among other things, payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment. In that context, the revenue department’s contention was that the charges paid by Isro under the terms of the contract are in the nature of consideration paid for the “use” or “right to use” of the scientific equipment within the meaning of “royalty” under the tax treaty. Further analogy was drawn with the operation of a TV by remote control.
AAR observed that the crucial question is whether the payment to IGL under the contract constitutes payment for the use, or right to use, IGL’s equipment. For this, the substance and essence of the contract had to be analysed.
The control of the satellite and transponder is at all times exclusively with IGL and hence there is no use of equipment, i.e., satellite or transponder, by Isro. The objective of the service is that Isro has the benefit of using the facility provided by the satellite and the navigational transponder. By earmarking a space segment capacity of the transponder for use by Isro doesn’t mean the agency gets possession (actual or constructive) or control of IGL’s equipment. The control or operation of the transponder cannot be said to be Isro’s merely because the transponder automatically responds to data commands sent from the ground station network and re-transmits the same data over a wider footprint area covered by the satellite. Isro only gets access to the navigation transponder through its own network/apparatus. In essence, then, it is a provision of a communication/navigational link through a facility owned, exclusively operated and exclusively controlled by IGL. Therefore, the use or operation of a transponder as such is not contemplated under the contract. Accordingly, the payment by Isro to IGL was not for the use, or right to use, IGL’s equipment and was, therefore, not royalties within the meaning of the tax treaty.
The tax treaty contains a clause for taxability of FTS, which is a narrower definition in the tax treaty compared with India’s domestic legislation. The FTS definition speaks of taxability where the services “make available technical knowledge, experience, skill, know-how or processes”. The issue of payment being in the nature of FTS has not been raised by the revenue department; however, AAR observed that the case does not amount to making available any technical knowledge, skill, experience, know-how or process. AAR reiterated the principle of “make available” and held that it implies the technical knowledge, skill, etc., remains with the person utilizing the services even after the particular transaction. Merely enabling the use of services or products into which technical inputs have gone doesn’t amount to “making available” technical knowledge, skills, etc. The recipient of the service must be able to absorb and apply the technology on its own in its future activities.
AAR also observed that there is no stipulation in the agreement on any local support to be provided on a regular basis by IGL personnel. The nature of operations carried out under the contract would also rule out IGL rendering any assistance to Isro in relation to its day-to-day operations.
Accordingly, the revenue department’s contentions regarding the existence of a permanent establishment were held to have no factual base. Hence no part of the business profits flowing from the contract would be attributable to a permanent establishment.
Accordingly, the payment by Isro to IGL was not for the use of equipment and, therefore, not royalty. Further, it was not FTS and was business profit not attributable to a permanent establishment and, therefore, not taxable in India.
Prior to this ruling, different benches of the tax tribunal had given conflicting decisions on the taxability of transponder service payments. So, a special bench of the tax tribunal has been set up to hear matters related to taxation of foreign firms receiving payments for transponder services.
AAR rulings are binding on the particular set of facts and the applicant of the ruling. But though this ruling by AAR on the taxability of transponder service fee is strictly not binding on other taxpayers or on the special bench, it could have persuasive value and bring much needed relief.
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at firstname.lastname@example.org.