Flagging Off Some Tax Issues On Sale Of Digital Capacity

• Income from sale of digital capacity treated as business income
• However, Tribunal warns that the characterization is case specific and would depend on whether the transferee exercises the rights of an owner or a licensee
• In this case, the transferee was considered to be an owner as it had the right to lease or on sell the digital capacity, and ability to participate in management decisions
• Limited clarity provided on situs of digital capacity

In a judgment that is particularly relevant for the telecom and broadcasting industries, the Mumbai ITAT has recently held that the sale of digital capacity should be characterized as "sale" (and result in business income) and not the "right to use" (which would result in royalty income).