Payments received for leasing of transponder capacity

Delhi bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Intelsat Corporation (ITA No.5443/D/2010) (Judgment Date: 4 March 2011, Assessment Year: 2007-08) held that income received by the non-resident taxpayer from leasing of transponder capacity and bandwidth cannot be taxed as ‘royalty’ under the provisions of Income-tax Act, 1961 (the Act).

Facts of the Case

The taxpayer, a tax resident of USA, was owner and operator of global network of telecommunication satellites located in outer space. It was engaged in the business of transmitting telecommunication signals to and from the earth stations. The taxpayer entered into contracts with TV Channels, NICNET and Internet Service providers to lease its transponder capacity and bandwidth to various customers in India and outside India, who used the transponders for their business in India.

For the assessment years 1996-97 to 2004-05, the assessment of the taxpayer was completed based on the Mutual Agreement Procedure. However, the taxpayer for the year under consideration filed nil return of income after claiming its income not taxable in India. The Assessing Officer (AO), based on the terms of the MAP, completed the assessment and raised demand of INR 112.34 million.

The taxpayer relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. v. DIT (201 1-TII-05-HC-DEL-INTL) (Judgement Date: 31 January 2011) where it was held that the payments made for using capacity in a transponder for uplinking/downlinking data do not constitute ‘royalty’ under the provisions of the Act.

Tribunal’s ruling

The Tribunal relied on the decision of the Delhi High Court in the case of Asia Satellite Communication Co. Ltd. and held that the payments received by the taxpayer cannot be considered as ‘royalty’ under the provisions of Section 9(1)(vi) of the Act. The Tribunal also held that since the receipts are not taxable under the Act, in view of the provisions of Section 90(2) of the Act there is not need to apply the provisions of the India-USA tax treaty.

Hyderabad Tribunal Ruling on the 80IA set off

 

Notional brought forward losses and depreciation should be set off in the current year while calculating the deduction u/s. 80-IA even though they have been set off against other income in earlier years

Hyderabad bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of Hyderabad Chemicals Supplies Limited v. ACIT (ITA No. 352/Hyd/2005) (Judgment date: 21 January 2011) held that as per the provision of Section 80-IA(5) of the Income-tax Act, 1961 (the Act) profit from the eligible undertaking has to be computed after deduction of the notional brought forward losses and depreciation of eligible undertaking even though they have been allowed to set off against other income in earlier years.

Facts of the case

The taxpayer, an eligible undertaking to claim benefits of Section 80-IA of the Act, was engaged in manufacture and trading of agro-chemicals and generation, distribution and sale of power. The taxpayer started its windmill unit on 31 March 1999. For the year under consideration, the taxpayer calculated the benefit under Section 80-IA of the Act without considering the notional brought forward losses or depreciation of the eligible undertaking already set off against the profits of other business income in that year.

The Assessing Officer (AO) accepted the claim of the taxpayer. However, the Commissioner of Income-tax (CIT) invoked the revisionary power under Section 263 of the Act and directed AO to work out the correct amount of depreciation and business losses of the earlier years relating to the eligible undertaking and to carry forward the same and set off against the income of the undertaking in the current year treating the undertaking as if the only business of the taxpayer for the purpose of computing benefits under Section 80-IA of the Act.

Contentions of the taxpayer

The taxpayer contended that real intention behind Section 80-IA(5) of the Act is to ensure that there is no overlapping of any other income of the undertaking or other undertakings and even if there is any reorganisation of that unit subsequent to the claim, the profits of the undertaking should be arrived treating it as a separate unit.

If loss was intended to be set off against the profits in a succeeding year, the law would have certainly provided explicitly as it had provided under earlier Section 80J of the Act which is now deleted. Further, Section 80-IA of the Act nowhere in explicit terms provides that past losses already absorbed needs to be notionally brought back while working out benefit under Section 80-IA of the Act for the current year.

The taxpayer relied on the decision of the Rajasthan High Court in the case of CIT v. Merwer Oil and General Mills Ltd. [2004] 271 ITR 31 1(Raj)

where, while dealing with similar issue, the High Court held that the set off of earlier year’s losses already absorbed is not allowed.

The taxpayer contended that in the case of M.Pallonji & Co. (P) Ltd. v. JCIT [2006] 6 SOT 287 (Mum), notional adjustment was not called for and not contemplated in the claim of deduction provided in Section 80-IA of the Act and therefore the taxpayer’s claim was allowed on the basis of profit of the windmill project, unfettered by any notional amount of unabsorbed depreciation pertaining to the preceding assessment year.

The taxpayer also relied on various other decisions (Mohan Breweries & Distilleries Ltd. [2009] 116 ITD 241 (Chennai) Rangamma Steels & Malleables v. ACIT [2010] 132 TTJ 365 (Chennai) Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT [2010] 38 DTR 57(Mad)) and contended that the taxpayer should be allowed to compute benefit under Section 80-IA of the Act without setting off earlier year’s losses.

Tax department’s contentions

The tax department after relying on the decision of the Ahmadabad Special Bench decision in the case of ACIT v. Gold Mine Shares & Finance (P) Ltd. [2008] 113 ITD 209 (Ahd) (SB) and contended that as per the provisions of Section 80-IA(5) of the Act the income of any eligible undertaking unit shall be computed as if it is the only source of income. Accordingly, earlier year’s losses of the eligible unit should be set off in the current year while calculating benefits under Section 80-IA of the Act even if it was already set off against the profits of the other business units.

Tribunal’s ruling

The Tribunal observed that the Special Bench of the Ahmadabad Tribunal in the case of Gold Mine Share & Finance (P) Limited, after considering similar arguments placed by the taxpayer, held that the losses had to be notionally brought forward and set off against the profits for computing the deduction. The Special Bench observed that the decision of the Rajasthan High Court in the case of Merwar Oil & General Mills Ltd did not consider the non-obstante provisions of Section 80-IA of the Act.

Though the decision of the Rajasthan High Court prevails over an order of the Special Bench, the decision of the High Court has been rendered without having been informed about certain statutory provisions that are directly relevant. Accordingly, the decision of the Rajasthan High Court cannot be followed.

Accordingly, the Tribunal, following the decision of the Special Bench of the Ahmadabad Tribunal in the case of Gold Mine Shares & Finance (P) Ltd, held that the profit from the eligible undertaking for the purpose of determination of the quantum of benefit under Section 80-IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible undertaking even though they have been allowed to set off against other income in earlier years.

Our Comments

In the present case the Hyderabad Tribunal has held that for the purpose of determination of the quantum of benefit under Section 80-IA of the Act, the notional brought forward losses and depreciation should be set off against the profits of the eligible undertaking even though they have been allowed to set off against other income in earlier years.

The Tribunal has followed the Special Bench decision of the Ahmadabad Tribunal in the case of Gold Mine Shares & Finance (P) Ltd. even though the decision of the Rajasthan High Court was available on similar issue. The Tribunal observed that the decision of the High Court was rendered without having been informed about certain statutory provisions that were directly relevant at the point of time.