Transponder payments: Are they royalty or not?

By Pranay Bhatia and Hardik Choksi, Economic Laws Practice

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.

Pranay Bhatia
Pranay Bhatia


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.

Legal aspects

To settle the long-standing controversy, the Finance Act, 2012, made a retrospective amendment to the definition of “royalty” by adding two explanations to section 9(i)(vi) of the Income Tax Act. As per explanation (v), royalty included any consideration in respect of any right, property or information irrespective of whether the possession or control of such right or property or information is with the payer, or whether such right, property or information is used directly by payer, or whether such right, property or information is situated in India. Explanation (vi) clarified that the term “process” in the definition of royalty, includes “transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret”.

The proposed Direct Tax Code (DTC) also includes payments for “the use of or right to use of transmission by satellite, cable, optic fibre or similar technology” within the definition of “royalty”. Thus, payments for transponder capacity are taxable under the DTC regime.

In contrast, the commentary on the OECD Model Tax Convention states that payments by customers under typical transponder leasing arrangements are in the nature of business profits and not royalty as there is no leasing of any industrial, commercial or scientific equipment because customers do not acquire the physical possession of the transponder, but simply its transmission capacity.

In a 2012 decision in the case of Channel Guide (I), the Mumbai Income Tax Appellate Tribunal (ITAT), reiterating the Delhi High Court decision discussed above, held that transponder fees for satellite uplink for telecasts were neither royalty nor fees for technical services. The ITAT observed that the taxpayer could not be held be liable to deduct tax in earlier years based on the subsequent amendment which is applicable retrospectively.

Hardik Choksi
Hardik Choksi

In a recent decision involving Zee Telefilms, the Mumbai ITAT held that payment by Zee to its non-resident subsidiary company which then made payment to a foreign satellite company for use of transponder bandwidth was liable to tax in India as the payment was a separate contractual payment. Further, even though the tribunal sent the matter back to lower authorities, it distinguished the Delhi High Court decision firstly because Zee had entered into contracts with Asia Sat through its foreign subsidiary as opposed to a direct contract and secondly because the foreign subsidiary had a business connection in India and a permanent establishment through its holding company, i.e. Zee.


Contrary to the globally followed principle, the legislature, through an amendment with retrospective effect, has demonstrated its intension to tax transponder payments, thereby nullifying the principles laid down by Delhi High Court in the Asia Sat case. In spite of such an unfavourable treatment of taxing foreign satellite operators under the tax laws of India, it is always imperative to take the initiative to analyse the relevant tax treaty to check the possibility of taking advantage of any beneficial provisions.

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.


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