2017 (7) TMI 1442 - AT - Income Tax

Income deemed to accrue or arise in India - Business profit attributable to the PE of the assessee in India - Royalty received by the assessee from Warner Bros Picture India Ltd in pursuance to the agreement for distribution and exhibition of the films in India - Whether Respondent does not have PE in India because the Indian company that has obtained the right is acting independently - HELD THAT - As decided in assessee own case 2016 (10) TMI 1372 - ITAT MUMBAI very issue of existence of PE in India has been considered by the Hon ble ITAT. The income of the assessee company does not qualify for the definition of Royalty in term of income tax Act 1961. The AO himself has accepted in the assessment order that the income of the assessee cannot be taxed as Royalty. Once the income of the assessee company does not qualify under the definition of Royalty the income has to be held as business income. The business income cannot be taxed in the absence of PE in India. We have seen that the Hon ble ITAT has categorically held that the WBPIPL is not the PE of the assessee company. Thus respectfully following the decision of the Hon ble ITAT in the assessee s own case we are of the view that the income of the assessee is not taxable in India and we direct the AO to delete the addition proposed on this account - Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Taxability of royalty received by the assessee from Warner Bros Picture India Ltd.
2. Applicability of Explanation 2(v) to section 9(1)(vi) of the Income Tax Act, 1961.
3. Determination of Permanent Establishment (PE) in India.
4. Precedence of substantive provisions of section 5(2) over deeming provisions of section 9.

Issue-wise Detailed Analysis:

1. Taxability of Royalty Received by the Assessee:
The primary issue was whether the royalty received by the assessee from Warner Bros Picture India Ltd. for the distribution and exhibition of films in India is taxable. The assessee argued that this royalty is not taxable as it falls under the exclusion provided in clause (v) of Explanation 2 to section 9(1)(vi) of the Income Tax Act, 1961. This clause excludes consideration for the sale, distribution, or exhibition of cinematographic films from the definition of royalty. The Tribunal had previously ruled in favor of the assessee for the assessment years 2006-07 to 2009-10, holding that such income is not taxable under the Income Tax Act or the Indo-US Double Taxation Avoidance Agreement (DTAA).

2. Applicability of Explanation 2(v) to Section 9(1)(vi):
The Revenue contended that the royalty received is taxable under the substantive provisions of section 5(2) of the Income Tax Act, which would take precedence over the deeming provisions of section 9. However, the Tribunal consistently held that the income from the distribution of cinematographic films is excluded from the definition of royalty as per Explanation 2(v) to section 9(1)(vi), and thus, it is not taxable under the Income Tax Act. The Tribunal also referenced the Indo-US DTAA, which supports the non-taxability of such income in India.

3. Determination of Permanent Establishment (PE) in India:
The Revenue argued that the assessee had a Dependent Agent Permanent Establishment (DAPE) in India through Warner Bros Picture India Pvt. Ltd. The Tribunal, however, found that Warner Bros Picture India Pvt. Ltd. was acting independently and was not exclusively dealing with the assessee. Therefore, it could not be considered a PE of the assessee in India. The Tribunal's earlier rulings for the assessment years 2006-07 to 2008-09 were cited, where it was determined that the assessee did not have a PE in India, and hence, the business income could not be taxed in the absence of a PE.

4. Precedence of Substantive Provisions of Section 5(2) Over Deeming Provisions of Section 9:
The Revenue's argument that the substantive provisions of section 5(2) should take precedence over the deeming provisions of section 9 was rejected by the Tribunal. The Tribunal upheld the view that since the income from the distribution of cinematographic films is excluded from the definition of royalty under section 9(1)(vi), it cannot be taxed under section 5(2) either. The Tribunal consistently dismissed the Revenue's appeals on this ground, following the judicial precedents set in earlier years.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the order of the Dispute Resolution Panel (DRP), which was in favor of the assessee. The Tribunal reaffirmed that the royalty received by the assessee from Warner Bros Picture India Ltd. is not taxable in India, neither under the Income Tax Act nor under the Indo-US DTAA, due to the exclusion provided in Explanation 2(v) to section 9(1)(vi). The Tribunal also confirmed that the assessee did not have a PE in India, and therefore, the business income could not be taxed in the absence of a PE. The cross-objections raised by the assessee were dismissed as infructuous, following the dismissal of the Revenue's appeal.