No Withholding Tax If Intelsat Not Liable | Bombay High Court Directs CIT(A) To Rigorously Examine Tax Treaties And Domestic Law In Satellite Payment Dispute
Isabella Mariam
The High Court of Bombay Division Bench of Justice M.S. Sonak and Justice Jitendra Jain held that if it is established through a final determination that the foreign payee, Intelsat Corporation, is not liable to tax in India for the relevant assessment years, there would be no withholding tax obligation on the payer under Section 195 of the Income-tax Act, 1961. The Court remanded the matter to the Commissioner of Income Tax (Appeals) [CIT(A)] to determine whether the payments made by the assessee under the transponder service agreement constitute ‘royalty’ within the meaning of Section 9(1)(vi) of the Act and Article 12(3) of the India–USA Double Taxation Avoidance Agreement (DTAA). It directed the appellate authority to verify the existence of tax liability in the hands of Intelsat Corporation and to dispose of the remanded proceedings by 31 December 2025.
The matter pertains to multiple assessment years involving payments made by the assessee, a broadcasting company, to Intelsat Corporation, a US-based satellite service provider, under a transponder services agreement. The primary issue was whether the payments made for the transponder services constitute ‘royalty’ and thereby attract withholding tax under Section 195 of the Income-tax Act, 1961.
On 25 July 2012, the assessee filed an application under Section 195(2) of the Act for Assessment Year (AY) 2013–14, seeking a certificate for nil deduction of tax at source on payments to Intelsat Corporation. The assessee contended that the payment did not qualify as 'royalty' under Article 12 of the India-USA DTAA or the Act, and that Intelsat had no permanent establishment (PE) in India.
The application was rejected by the Assessing Officer on 11 December 2012, who held that the payment constituted 'royalty' under Section 9(1)(vi) of the Act, especially after the retrospective insertion of Explanations 4, 5, and 6 by the Finance Act, 2012. The officer also stated that Article 12 of the India–USA DTAA did not define the term ‘process,’ and thus its meaning as per the Act must be read into the treaty.
Subsequently, the assessee’s appeal under Section 248 of the Act was dismissed by the Commissioner of Income Tax (Appeals) on 27 February 2015, who upheld the earlier order relying on the assessee’s own case for earlier years and other precedents.
The Income Tax Appellate Tribunal (ITAT) also dismissed the appeal filed by the assessee on 7 August 2017, relying on its earlier decisions and judgments such as the Madras High Court decision in Verizon Communications Singapore Pte Ltd v. ITO, instead of the Delhi High Court’s ruling in New Skies Satellite BV.
The assessee then filed a further appeal under Section 260A of the Act before the Bombay High Court, raising the following key substantial questions of law:
- Whether the payment made for transponder services constitutes royalty under Section 9(1)(vi) of the Act or Article 12 of the DTAA?
- Whether the retrospective amendment by the Finance Act, 2012 can be read into the DTAA?
- Whether the assessee is liable to deduct tax at source under Section 195 when the payment is not taxable in the hands of the payee?
During the hearing, the assessee submitted that the services rendered did not involve the use of any process or secret process and thus could not be classified as ‘royalty.’ It also claimed that for prior years, the Tribunal had already ruled that Intelsat was not liable to pay tax in India, negating the need for withholding tax by the assessee.
The Revenue, in contrast, contended that the term 'process' could be interpreted using the domestic law as permitted under Article 3(2) of the DTAA and that the payment constituted royalty. It sought either affirmation of the appellate orders or remand for a factual determination of the nature of the services provided under the agreement.
The Court examined the statutory framework and treaty provisions in detail. It stated:
“If the Appellant-Assessee is able to show that in the case of Intelsat Corporation for the years for which the present appeals are filed, there is a final determination by the tax authorities that Intelsat Corporation is not liable to pay tax and such a determination is given after considering the payments made by the Appellant-Assessee to Intelsat Corporation, then there cannot be any withholding tax liability on the Appellant-Assessee.”
The Court noted the absence of factual determination by any authority regarding the nature of services rendered under the agreement. It recorded: “None of the authorities have examined and analysed various clauses of the agreement to ascertain what exactly does the Intelsat Corporation render the services to the Appellant-Assessee and how the definition of ‘royalty’ under the Act or under Article 12(3) of the Treaty can be made applicable to such services.”
The Court stated: “The questions raised by the Appellant-Assessee and admitted by this Court cannot be answered without there being the findings of the lower authorities on the nature of the services rendered under the agreement by Intelsat Corporation to the Appellant-Assessee and the analysis of the phrase ‘secret process/process’ used in the Act and the Treaty.”
On the retrospective nature of Explanation 6 to Section 9(1)(vi), the Court observed:
“For those assessment years where the payments have been made prior to the insertion of Explanation 6 to Section 9(1)(vi) of the Act same would not be exigible to withholding tax liability.”
It also recorded: “It was incumbent upon the authorities to have examined and analysed the nature of services as agreed upon by the parties in the agreement. It was also incumbent upon these authorities to thereafter give a finding of fact on this issue and then apply the definition of ‘royalty’ under the Act or under Article 12(3) of the Treaty.”
Regarding the application of DTAA, the Court reiterated the settled principle: “Where the Central Government has entered into an agreement with a foreign country for granting relief of tax or for avoidance of double taxation, then in relation to the Assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that Assessee.”
The Court remanded the appeals back to the file of the Commissioner of Income Tax (Appeals) with the direction that “if the Appellant-Assessee is able to show that there is a final determination of no taxability in the hands of Intelsat Corporation on payments made by the Appellant-Assessee, then there would be no withholding tax liability.”
It further directed that “if the payments are made prior to the Finance Act, 2012 then, then following decision of this Court in the case of Reliance Industries Limited (supra), no withholding tax liability can be imposed based on retrospective amendment.”
With respect to payments made after the enactment of the Finance Act, 2012, the Court instructed that “the CIT(A) to examine the nature of agreements for each assessment year and determine whether same constitutes ‘royalty’ under the domestic law or the Treaty and if same does not constitute ‘royalty’ then there would be no withholding tax liability after considering provisions of Section 90(2) of the Act.”
The Court further directed that “the CIT(A) is requested to dispose of the appeals as expeditiously as possible and in any case on or before 31 December 2025.” It clarified that “we have not expressed any opinion on the merits of the case and on the applicability of Article 12(3) to the nature of services under consideration is concerned.” It also stated that “it would be open to the Appellant-Assessee and the revenue to raise all the contentions on the taxability under the Act and the Treaty.”
The Court expressly recorded that “none of our observations in the present order should be considered as our views or findings on the adjudication under the Act or Article 12(3) of the Treaty on merits.”
Since the matter was being remanded, the Court stated that “we do not propose to answer the question on merits but keep it open for the CIT(A) to adjudicate.”
The Court concluded by disposing of the appeals with the statement that “the appeals of the Appellant-Assessee are disposed of in the above terms. No costs.”
Advocates Representing the Parties
For the Petitioners: Mr. Madhur Agrawal, Mr. Atul Jasani, Mr. Ketan Dave, Mr. Pratik Shah, Advocates
For the Respondents: Mr. Subir Kumar, Ms. Niyanta Trivedi, Ms. Akshata Chhabra, Mr. Darshil Desai, Advocates
Case Title: Viacom 18 Media Pvt. Ltd. v. Deputy Commissioner of Income Tax, International Taxation
Neutral Citation: 2025:BHC-OS:7774-DB
Case Number: Income Tax Appeal No. 1378 of 2018 and connected matters
Bench: Justice M.S. Sonak, Justice Jitendra Jain
[Read/Download order]
