TMI Blog2008 (10) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... developing satellite technology and the application of space technology for socio-economic development and space research. It has entered into a contract with M/s. Inmarsat Global Ltd., UK (hereafter referred to as IGL) for "leasing of the Inmarsat navigation transponder capacity" for its GAGAN* TDS** project. Under this contract, the applicant has taken on lease the space segment capacity consisting of L1 L5 transponder centered on an "Inmarsat 4th Generation Satellite". The Inmarsat satellite which is located at 64 degrees east makes an orbit at 36,000 KM altitude which is far above the Earth's atmosphere. The capacity is utilized through data commands sent from a ground station set up by the applicant. Out of the many transponders the satellite carries, the transponder for navigation purposes is meant to dispatch Satellite Based Augmentation System (SBAS) signals in space on two specified frequencies which are accessed for GAGAN. The corrected or augmented data sent from INLUS and transmitted by the said transponder will be used for better navigational accuracies. The applicant pays under the contract a fixed annual charge regardless of the actual use of transponder capac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Inmarsat Navigation Transponder Capacity for GAGAN TDS project" entered into between the applicant and IGL on 31/1/2007. The nature and substance of the contract is set out in Article 1 which is extracted hereunder: "ARTICLE 1 PROVISION OF NAVIGAION TRANSPONDER CAPAICTY A. The Lessee has agreed to take by way of Lease, and pay for the navigation transponder space segment capacity consisting of L1 and L5 Transponder centered at 1575.42 MHz and 1176.45 MHz respectively ("the Capacity") on an Inmarsat 4th Generation Satellite at 64 Degrees East through a Navigation Land Earth Station ("INLUS") to be designated by the Lessee, on the terms and conditions of this Agreement, including the Inmarsat System Definition Manual …… B. The INLUS shall be operated by the Lessee or by another entity under direct contract with the Lessee ("INLUS Operator"). Article 2 bears the heading "USE OF THE CACPACITY FOR DESIGNATED PURPOSES". It states that the Capacity shall be used only for the purposes either of providing, or for developing, an augmentation to global satellite navigation systems, including a ranging signal valid over the entire coverage footprint of the satellite. It also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 20-30 mtrs. which is inadequate to meet the accuracy of aircraft landing. It requires accuracy below 7.5 mtrs. which can be met by GAGAN when it is put into operation. GAGAN - a Satellite Based Augmentation System can provide the much needed accuracy and integrity of the data by means of differential corrections. The addition of SBAS@ to GPS allows the integrated GPS-SBAS system to be used as primary means of navigation for better accuracy of position and time. As to how the satellite based augmentation of data received from GPS is carried out to achieve the accuracy is explained in the following para : 5.3. The GAGAN - TDS System primarily comprises of the ground-based elements inclusive of 8 Indian reference stations (INRES) located at different places in India, one Indian Navigation Land Uplink Station (INLUS), one Indian Master Control Centre (IMCC) collocated in Bangalore and one Geo-stationery satellite as a passive space segment (Inmarsat - 4F 1). The INRES are connected to IMCC through dedicated communication links. Each INRES can receive data simultaneously from a maximum of 14 GPS satellites, and GEO satellites, in view. INRES receives and forwards all distance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to taxes on income and capital gains" (hereinafter referred to as 'Treaty') and Section 9(1)(vi) of Income-tax Act, 1961. 6.1. The relevant portion of Article 13 is extracted below: Article 13: Royalties and fees for technical services: 1. Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for technical services may also be taxed in the Contracting State in which they arise and according to the law of that State; but if the beneficial owner of the royalties or fees for technical services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties within paragraph 3(a) of this Articles, and fees for technical services within paragraph 4(a) and (c) of this Article,- x x x x x x x x x x x x (b) in the case of royalties within paragraph 3(b) of this Article and fees for technical services defined in paragraph 4(b) of this Article, 10 per cent of the gross amount of such royalties and fees for technical services. 3. For the purposes of this Article, the term "roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the 'charges' paid by the applicant - ISRO under the terms of the agreement is in the nature of consideration paid for the 'use of' or 'right to use' the scientific equipment within the meaning of clause (b) of Article 13(3) of the Treaty. 7.1. The crucial question that needs to be addressed, therefore, is whether the payment made to IGL under the aforementioned contract constitutes consideration for the use of or right to use equipment of IGL. To answer this question, we have to discern the substance and essence of the contract as revealed from the terms of the contract document, the technical report and other facts furnished by the applicant. The first Article in the contract makes it clear that the payment is for the "lease of' navigation transponder segment capacity". From the designated transponder (L1 and L5) of Inmarsat satellite, this capacity at a particular frequency is made available to the applicant through INLUS (Navigation Land Uplink Station) which is set up and operated by the applicant. The capacity is meant to be used for the purpose of providing an augmentation to global satellite navigation system. The capacity will be utilized through data command ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough which the data passes is allocated to the applicant so that it could be utilized for the specific purpose of making available the augmented data sent by the applicant through its ground station to the users extensively. The substance of the contract is the facility given to the applicant for the utilization of space segment capacity of the transponder for transmitting the augmented data as to the position of an object on land, air or water so that the end user can have access to it through SABS receiver. The use of capacity, as clarified by the applicant involves the use of bandwidth, that is to say, a particular bandwidth in the transponder meant exclusively for navigational purposes is linked to the earth station (INLUS). The expression 'use of space segment capacity' of transponder has no reference to any operations performed by means of the transponder. The use or operation of transponder as such is not at all contemplated under the Contract. What really happens is that the augmented data sent by INLUS reaches the transponder and it is transmitted back to the Earth and the same is accessed by SBAS user receivers in the coverage area. In response to a query, the applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als sent through INLUS are uplinked to the transponder at a particular frequency and then downlinked. The control of satellite and transponder exclusively lies with IGL. The satellite itself is not a customized one. The applicant is only one of the customers who derives the benefit of navigational transponder capacity. The reservation of a particular capacity or bandwidth for the purpose of providing the augmentation to global satellite navigation system is only a facility which is offered by IGL out of the satellite infrastructure it possesses. The charges paid by the applicant cannot be, therefore, regarded as payment made for the use of IGL's equipment. 8. We are spared of the need to enter into a discussion on the connotation of the expression "use" or "right to use" occurring in clause (iv.a) of Explanation 2 to section 9(1)(vi) of Income-tax Act in view of our recent ruling in the case of Dell International Service (P) Limited [ AAR/735/2006]. The relevant passages which have significant bearing on the issue involved in the present case will be referred to hereinafter. That was a case in which the applicant - Dell International entered into an agreement with BTA, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taken from sophisticated equipment installed and provided by another, it is difficult to say that the recipient/customer uses the equipment as such. The customer merely makes use of the facility, though he does not himself use the equipment. (Para 12.8.) 8.2. At para 13.1 and 13.2 it was observed: There is no doubt that the entire network consisting of under-sea cables, domestic access lines and the BT equipment - whichever is kept at the connecting point, is for providing a service to facilitate the transmission of voice and data across the globe. One of the many circuits forming part of the network is devoted and earmarked to the applicant. Part of the bandwidth capacity is utilized by the applicant. From that, it does not follow that the entire equipment and components constituting the network is rented out to the applicant or that the consideration in the form of monthly charges is intended for the use of equipment owned and installed by BTA. The questions to be asked and answered are: Does the availment of service involve user of equipment belonging to BT or its agent by the applicant Is the applicant required to do some positive act in relation to the equipment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m and substance, it is a case of BTA utilizing its own network and providing a service that enables the applicant to transmit voice and data through the media of telecom bandwidth. (Para 13.2) 8.3. What is stated in para 13.3 is also relevant for the purpose of this case: "In cases where the customers make use of standard facility like telephone connection offered by the service provider, it does not admit of any doubt that the customer does not use the network or equipment of the service provider. But, where the service provider, for the purpose of affording the facility, has provided special infrastructure/network such as a dedicated circuit (as in the instant case), controversies may arise as to the nature of payment received by the service provider because it may not stand on the same footing as standard facility. However, even where an earmarked circuit is provided for offering the facility, unless there is material to establish that the circuit/equipment could be accessed and put to use by the customer by means of positive acts, it does not fall under the category of 'royalty' in clause (iv.a) of Explanation 2". [para 13.3] 8.4. At para 13.5, this Authority referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project related contract is over. The phrase "make available", it is fairly well settled by a series of decisions of this Authority as well as the ITAT implies that the technical knowledge, skill, etc. remains with the person utilizing the services even after the particular transaction is over. Merely enabling the use of services or products into which technical inputs have gone does not amount to "making available" technical knowledge, skills, etc. The recipient of service must be able to absorb and apply the technology on its own in its future activities. That criterion is not satisfied in the instant case. 10. An alternative contention has been raised by the applicant that even if it be held that the consideration stipulated in the Agreement is for the use of or right to use the scientific equipment, it cannot be subjected to tax under the Act for the reason that the use of transponder takes place in the space and the taxable event has no territorial nexus with 'India' as defined in Sec.2 (25A) of the Act. In this regard, reliance has been placed on some of the observations in the decision of the Supreme Court in Ishikawajima - Harima Heavy Industries v. DIT##. In reply, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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