2006 (1) TMI 172 - ITAT BOMBAY-G

Income deemed to accrue or arise in India - deduction of tax at source u/s 195 - non-resident company - business connection with India Or Not - Channel companies liability to tax in India - payments received against the cost of Ad Airtime - advertisement revenues - disallowance of payments u/s 40(a)(i) - HELD THAT:- In the present case what is sold by the channel companies and bought by the assessee company is "Ad Airtime" in India, i.e. in a commercial expression "Indian Time". The distinguishing feature of "time" is that it cannot be procured or stocked as such. It is born and exhausted instantly. Therefore, the subject-matter of agreements between the assessee and the channel companies cannot be in any way agreements based on the delivery of goods abroad. The "Ad Airtime" conceived in the agreements entered into between the assessee and the channel companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and consumption of the subject-matter of "Ad Airtime" is in India. Therefore, the contention of the assessee that the entire activities were carried out abroad is not found acceptable.

The "Ad Airtime" is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers. The advertisements are telecast as part of the regular programmes of the channel companies. The advertisements form part of the mainstream of the telecasting activities carried on by the channel companies. The sale, if any, of the "Ad Airtime" is only a part of the sale of other programme contents. Sale is made as the "time" of the channel companies. The "Ad Airtime" described in the present case is the telecasting time of the channel companies in their brand names. As far as the ultimate customers and viewers in India are concerned, these advertisements embedded in the telecasting contents are always identified with the brand name of channel companies.

Conclusions are to be reached on the basis of the facts of the case and not on the basis of agreements alone. If the real nature of activities carried on by the parties to the agreements do not fit in the frame of the agreements entered into between the parties, those agreements could be considered only in the light of the real nature of the activities and the terms of the agreements will not have any preference over the actual affairs of the business. The agreements are entered into between the parties as enforceable instruments in law but the terms enshrined in those agreements may not be sufficient to come to proper conclusions. Therefore, after examining the various aspects of the case we hold that the channel companies are earning taxable income in India and, therefore, the assessee company was bound to deduct tax at source u/s 195 when payments were made to the channel companies.

We have come to a finding that the channel companies do have business operations in India resulting in a business connection. They are sufficient to hold that the channel companies are bound by the taxable income earned in India. The assessee and the channel companies are 100 per cent subsidiaries of a mother holding company. They are collectively engaged in the business of telecasting throughout the world and the business relations and business activities are inter-connected and inter-laced. Therefore, the assessee company is working as a functional agent, as a facilitator, as an associate and as a supporter of the channel companies. The essence of our finding is that as far as the business carried on by the channel companies and the assessee is concerned, the assessee company does not have an independent existence different from the channel companies. Therefore, the above alternate argument of the assessee is liable to be dismissed.

Only a portion of the payments could be legitimately treated as the income of the channel companies. Therefore, the amount of tax required to be deducted at source while making the payments to the channel companies would be very less and correspondingly the quantum of disallowance u/s 40(a)(i) would be reduced. In the present case, we are not dealing with the assessments of the channel companies. We are examining the obligation of the assessee company to deduct tax at source while making the payments to the non-resident. It is by way of a consequence that the taxability of the channel companies has been examined by us. But it is to be seen that the obligation of the assessee company to deduct tax at source and the chargeability of income to tax in the case of channel companies are entirely two different issues.

The Supreme Court in the case of Transmission Corporation of A.P Ltd. v. CIT [1999 (8) TMI 2 - SUPREME COURT] and Hyderabad Bench of ITAT in Cheminor Drugs Ltd. v. ITO [1999 (12) TMI 111 - ITAT HYDERABAD-A] have held that it is the duty of the assessee to approach the assessing authority u/s 195(2) on matters regarding deduction or non-deduction of tax u/s 195(1). The quantum of deduction to be made by the assessee could be determined only in a process initiated u/s 195(2). As the assessee has not used the facility provided u/s 195(2), which is a legal obligation on its part, the contention regarding the quantum of deduction does not have locus standi in the present appeal. Therefore the said contention fails.

We have considered all the arguments advanced by the assessee against the orders of the lower authorities. This case involves myriad of facts and complex question of law as argued and re-argued by both sides. All of them, except certain legal grounds have been considered by the assessing authority and the CIT(A) in a very extensive manner.

In result we find that the channel companies are liable for taxation in India for that part of income earned by them and as such, the assessee company was obliged to deduct tax u/s 195 while making payments to the channel companies against the purchase of "Ad Airtime". In the circumstances, the Assessing Officer is justified in disallowing those payments u/s 40(a)(i) of the Income-tax Act, 1961.

In result, this appeal filed by the assessee is dismissed.