ITAT Special Bench decision on 'Royalty'

The ITAT Special Bench decision in New Skies Satellites v. ADIT has resolved the conflict between two earlier decisions – Asia Satellite (85 ITD 478) and PanAmSat (9 SOT 100) – on the issue of “Whether on the facts and circumstances of the above mentioned cases the income from Bandwidth/transmission charges for uplinking/downlinking signals/data transmission through the use of transponders in the satellite is taxable in the hands of above mentioned foreign companies in accordance with provisions of the Income Tax Act read with relevant provisions of Tax treaties with respective countries…”

Three specific questions were referred to the Special Bench:

1. Whether the services rendered by the assessees through their satellites amount to ‘secret process’ or only ‘process’.
2. Whether the term ‘secret’ occurring in the phrase ‘secret formula or process’ in Explanation 2 to Section 9(1)(vi) of the Income Tax Act, 1961 qualifies the word ‘process’ as well as ‘formula’.
3. Whether the payment received by the assessees from their customers on account of use of their satellites for telecommunication and broadcasting amounts to ‘royalty’; and if so, whether the same is taxable under Section 9(1)(vi) read with the relevant DTAA provisions involved.

Importantly, the Special Bench held that the word “secret” does not qualify “process”; and therefore, “to fall within the meaning of royalty as envisaged in these provisions, it is not necessary that the services rendered must be through “secret process” only. Even services rendered through simple process will also be covered within the meaning of royalty.” The decision in PanAmSat was accordingly overruled.

I will post a detailed note on the decision shortly. The decision can be downloaded from this link.