Transponder payments: Are they royalty or not?

Rapid and constant change in technology is creating challenges for both revenue authorities and taxpayers, in terms of the finer technical nuances of new technology, the characterization of payments relating to it, and its taxability in India. Controversy and litigation repeatedly arises when it comes to assessing the taxability of e-commerce, information technology, relaying of signals through a transponder, bandwidth and other payments, primarily because India’s tax laws have not kept pace with these developments.

Among such issues, payment for transponder leasing has been matter of persistent litigation for almost a decade.

Background

In a landmark decision in 2011 in the case of Asia Satellite Telecommunica-tions (Asia Sat), Delhi High Court held that payments by broadcasting companies to satellite operators for use of transponder capacity cannot be taxed as royalty under the provisions of the Income Tax Act, 1961, and accordingly are not taxable under the act.

The court’s key observations included:

• The substance of the agreement between Asia Sat and the broadcasting company was the provision of broadband capacity available on the transponder and not the right to use any process embedded in it.

• A transponder being an inseparable part of the process of a satellite, its possession and control cannot be handed over to a broadcasting company. Thus, the broadcasting company can neither control nor operate the satellite or a transponder by themselves.

• The arrangement between Asia Sat and the broadcasting company was only for lease of the transponder capacity and not for lease of the equipment.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Pranay Bhatia is a partner at the firm and Hardik Choksi is an associate.