The Authority
of Advance Rulings (“Authority”),
in the case of Indian Space Research Organization (“ISRO”)1
was faced with questions of characterization and taxability of
income of a non-resident company, arising from leasing of
“Navigation Transponder Capacity” of its satellite to an Indian
resident.
In this case
ISRO Satellite Centre (“Applicant”)
had entered into a contract with one M/s Inmarsat Global Ltd., UK (“Lessor”)
for leasing the “navigation transponder capacity” of a satellite
owned by the Lessor. The navigation transponder capacity of the
satellite consists of certain transponders aboard the satellite,
which orbits the earth at an altitude of 36,000 kilometers. This
capacity can be used by the Applicant by sending data to the
transponders through its ground stations. The transponders in
turn transmit corrected and more accurate signals, which can be
used by the Applicant for better aeronautic navigation. In
consideration, the Applicant pays a fixed annual charge to the
Lessor irrespective of actual use.
The crux of
the controversy before the Authority related to the
characterization of the income of the Lessor. The question was
whether the above contractual arrangement resulted in the “use
of” or “right to use” any industrial,
commercial or scientific equipment of the Lessor, by the
Applicant, so as to characterize the consideration as ‘Royalty’,
as income taxable in India under Article 13.3(b) of the Double
Tax Avoidance Agreement between India and the United Kingdom and
Section 9(1)(vi) of the Income Tax Act, 1961.
The Applicant submitted that there was no use by or no right to
use vested with it pursuant to the arrangement, as the satellite
was controlled and operated by the Lessor and the Applicant had
no role to play in the same. The Income Tax Department (“Revenue”),
on the other hand, submitted that the Applicant indeed used the
transponders in a manner analogous to the operation of a
television remote controller.
The Authority, however found it difficult to accept the
contention of the Revenue. It held that merely because the
transponder automatically responds to data commands sent from a
ground station of the Applicant, it does not imply that the
Applicant controls or operates the transponders. In case of a
television set, it stated that the remote control device is a
mere accessory and the owner of the television set is the real
operator. It was observed that the ground station of the
applicant is an independent unit and not an accessory to the
satellite.
Relying on
its earlier ruling in the case of
Dell International Services (India)
Pvt. Ltd.2
the Authority noted
that
there was no positive act on the part of the Applicant in order
to control or operate the transponders or the satellite. It held
that neither was there any
“use of” nor
any “right to use” any industrial,
commercial or scientific equipment of the Lessor, by the
Applicant, so as to characterize the consideration as royalty
income as taxable in the hands of the Lessor.
With the successful launch of the Chandrayaan - I
3, India
is fast establishing itself as a major player in the
space industry, but cannot do so without creating
synergies with other nations.
In this era of
globalization there is a need for optimal
integration of national economies into the international
economy through trade, capital flows, migration, spread
of technology etc. However, taxation can distort this
equation of optimal integration.
This ruling is not only
correct in its interpretation of the law, but also goes
a long way in augmenting India’s spatial foray.
_________________________
1.AAR
No. 765 of 2008, dated October 22, 2008.
2.(2008) 218 CTR (AAR)
209;
http://www.nishithdesai.com/tax-hotline/2008/Tax-hotline-July-22-2008.html.
3.India’s maiden lunar exploration mission,
launched by ISRO on October 22, 2008.
