Bombay HC directs Income Tax Commissioner to decide Royalty on Payment for Transponder Services [Read Order]

In a decision affecting how payments for satellite transponder services are taxed, the BombayHigh Court has ordered the Income Tax Commissioner (Appeals) to closely examine whether fees paid for such services should be classified as “royalty” under Indian tax laws and the India-USA Double Taxation Avoidance Agreement (DTAA).

The case centers around payments made by Viacom 18 to Intelsat Corporation, a US-based satellite communication company, for transponder services essential for television signal transmission and the ruling came after a series of appeals by media giant Viacom 18 Media Pvt Ltd, spanning multiple assessment years between 2009 and 2014.

Viacom 18 argued that the payments to Intelsat do not constitute royalty under the treaty or domestic tax law and that Intelsat does not have a permanent establishment in India, so no withholding tax should apply.

The tax department, however, took a different view. They relied on an explanation introduced by the Finance Act of 2012 that expanded the definition of “process” to explicitly include satellite transmission technologies. The authorities argued this means the payments fall under the definition of royalty and are taxable.

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The Bombay High Court bench of Justices M.S. Sonak and Jitendra Jain found that the tax authorities had failed to analyze the actual service agreements between Viacom 18 and Intelsat in detail. The Court noted that none of the lower authorities examined whether the services rendered truly qualify as “royalty” under the treaty or domestic law.

Highlighting this gap, the Court held that deciding such a complex tax question requires a thorough factual inquiry, which can only be done by the tax authorities themselves.

The Court sent the matter back to the Commissioner of Income Tax (Appeals) with clear instructions to verify if Intelsat Corporation was held liable to pay tax in India for the years in question. If Intelsat is not taxable, Viacom 18 should not face withholding tax liability.

Examine whether payments made before the 2012 amendment can be taxed retrospectively. Analyze the terms of the transponder service agreements to understand the nature of the services and decide if they fall under “royalty” as defined by the tax law or the treaty. Determine if Intelsat has a permanent establishment in India, which impacts tax treatment.

The Court noted it was not expressing an opinion on the merits but was ensuring the proper authorities undertake a detailed fact-based and legal review.

This ruling is important for companies dealing with satellite services and cross-border transactions involving technical services.

Additionally, the decision reaffirms that when a Double Taxation Avoidance Agreement exists, the taxpayer benefits from whichever provision—domestic law or treaty—is more favorable.

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