India, 16 October 2009: consideration paid by telecasting companies to satellite companies was for the use of a “process” and so was a royalty under Indian tax law even though the process was not “secret.”
New Skies Satellite N.V. v ADIT (ITAT Delhi Special Bench) 85 ITD 478
New Skies (a Dutch company) operated geostationary telecommunication satellites with transponder capacity which were provided to telecasting companies in India for a fee. The Tribunal was asked to consider whether the fee was “consideration for … the use of any … secret formula or process”. If so, the fee would be “royalty” under Indian tax law.
The Tribunal held that:
(i) The provision of the transponder through which images/data was uploaded and downloaded was a “process”. For a fee to constitute a royalty, there is no requirement that the process be “secret” (reversing an earlier decision – PanAmSat 9 SOT 100) – the Tribunal held that the reference in legislation to “secret” applied only to the word “formula”;
(ii) The Tribunal rejected the argument that there was no “use” of the satellite by the payer as it had no control or possession of the satellite. There was no need for the instruments through which the “process” was carried on to be in the control or possession of the payer – the question was whether the process was used by the payer.
Therefore the fee paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently assessable as a royalty under Indian tax law and therefore taxable in India by withholding taxes when paid to a foreign entity.
Note that the draft Direct Taxes Code released by India earlier this year proposed an increase in withholding tax on certain royalties to 20% and specifically includes payments for “the use or right to use transmission by satellite, cable, optic fiber or similar technology” within in the definition of “royalties” – there is no reference to the word “process”, which suggests that any fee for transmission of data will be a royalty and subject to withholding taxes when paid by an Indian entity to a foreign entity.
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Tags: fee, india, royalty, satellite, withholding