TMI Blog2016 (8) TMI 504X X X X Extracts X X X X X X X X Extracts X X X X ..... vity. Here in this case, none of the conditions as stipulated in Article 5(4) is applicable because Taj India is acting independently qua its distribution rights and the entire agreement ostensibly is on principal to principal basis as analyzed and found by ld. CIT (A). When the entire relationship qua the distribution revenue is that of principal to principal basis and the Taj India is acting independently, then it moves out from the conditions laid down in Article 5(4). Thus the distribution income by the assessee cannot be taxed in India, because Taj India does not constitute an agency PE under the terms of Article 5(4) - Decided in favour of assessee Royalty payment - Disallowance of various expenses under section 40(a)(i) like, ‘transponder charges’ and ‘uplinking charges’ - payments has been paid to PanAmSat International Systems Inc. USA for providing facility of transponder for telecasting ‘Ten Sports’ channel in various countries including India - Indo-US-DTAA - Held that:- Payment made to the non-resident outside India for rendering the services of equipment outside India is not taxable in India. Hon’ble Delhi High Court in the case of Asia Satellite Telecommunication ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the period of 9 months and in the subsequent years. The same income cannot have two treatments, one as royalty and other as business income.- Decided in favour of assessee Disallowance of programming cost - Held that:- The programming cost is paid to the assessee to various nonresident outside India for acquiring right brought on sports events taking place outside India. Thus, such programming cost cannot be deemed to arise in India as liability to pay programming cost as assumed by the assessee company outside India and it cannot be held to be borne by any PE in India. - Decided in favour of assessee - ITA No. : 4678/Mum/2007, ITA No.: 412/Mum/2008, ITA No.: 4176/Mum/2009, ITA No.: 5537/Mum/2008, ITA No.: 5536/Mum/2008, ITA No.: 4706/Mum/2009 - - - Dated:- 5-7-2016 - SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Assessee : Percy Pardiwalla, Shri Madur Agrawal, Shri Hiten K Chande For The Revenue : Shri Jasbir Chouhan ORDER PER AMIT SHUKLA, JM: The aforesaid cross appeals have been filed by the revenue as well as by the assessee, against separate impugned orders passed by CIT (Appeals)-31, Mumbai for the quantum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broadcasting of sports channel namely, Ten Sports all across the globe including India. Since it did not had any branch or business premises in India, therefore, it had formed a subsidiary, Taj Television India Private Limited (Taj India) as its advertising sales agent to sell commercial advertisement slot to prospective advertisers and other parties in India, in connection with the business of programming and telecasting sports events and programs on Ten Sports Channel. An agreement dated 08.05.2002 was entered into by the Assessee Company and Taj India for collection of advertising revenue in India for which a commission of 10% of the total advertisement revenue secured for Taj TV was paid to Taj India. A distribution agreement was also entered into on 1st March, 2002 by the Assessee with Taj India for the distribution of the pay channel to the various cable operators and ultimately to the consumers in India. The distribution revenue collected by Taj India is to be shared between Taj TV and Taj India in the ratio of 60:40, that is, 60% of revenue goes to Taj TV and balance 40% is retained by Taj India. Both the agreements were approved by Reserve Bank of India (RBI). F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution revenue collected by Ta]-India will be split in the ratio of 60:40 between Taj-TV and Taj-India. The amount payable by Taj-India to Ta]-TV shall be net of Indian Income Tax. Taj-TV is registered in Mauritius and also it does not have any branch or office in India. Further, the telecasting is being done from outside India. 4. In view of the complexity of the issues involved in determining taxability of the Foreign Telecasting Companies ('FTC.$) and the extent of income that could be said to accrue or arise to them from their operations in India, the Central Board of Direct Taxes (CBDT) has issued a Circular No. 742 dated 2nd May, 1996 read with Circular No. 6 of 2001 dated 5 March 2001 with effect from 1 April 2001. The Circular No. 742 has prescribed or presumptive taxation by treating 10% of the advertisement revenue from India meant for remittance abroad (excluding the commission of Indian agent and advertising agent) as the income of the FTCs. In view of withdrawal of Circular No. 742, the presumptive taxation system is not applicable now. 5. India and Mauritius have entered into the Double Taxation Avoidance Agreement (DTAA) on 24 August 1982 which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertain to revenue derived from the Indian operations and costs attributable to the same (including apportionment of common costs). 10. The TDS Certificate for certain parties are not attached herewith as the same are not received till the date of filing return of income. The Company is in the process of collecting the said TDS certificates. The same shall be submitted on receiving from the parties. 4. The assessee also as an alternative to the above claim that its income is not taxable in India had also prepared specific account for the income earned in India, that is, pertaining to its Indian operations and got them audited under section 44AB which was filed along with the return of income. It was reported that, the profit and loss account revealed revenue earned US $ 6,168,155 on which cost of sale was US $ 7,978,788 resulting into gross loss of US $ 1,810,633. The assessee had computed the total income in the return as per its India account at loss of US$ 6,726,450. Thus, it was stated that, there was a huge loss in Indian operations and which fact has not been disputed or rebutted by the AO also. 5. However, the AO after detailed discussion in his assessment orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransponder fees of US $ 3,29,966 paid to PanAmSat International Systems Inc. USA (hereinafter referred to as the PanAmSat ) for rendering services through satellite, located outside India, in telecasting the sports channel 'Ten Sports' to various countries under section 40(a)(i) of the Act as no tax was deducted at source from such payment. According to him, it is in the nature of 'Royalty' and falls under clause (iv a) of Explanation 2 to Section 9(1)(vi) of the Act; and Lastly , he also disallowed the up-linking charges of US $ 3,05,347 paid to PanAmSat and various other nonresidents for rendering services in the form of up linking the signal in respect of live events, taking place outside India, from the venue of the event to the satellite under section 40(a)(i) of the Act as no tax was deducted at source from such payment as according to him, it is in the nature of 'Royalty' and falls under clause (iva) of Explanation 2 to Section 9(1)(vi) of the Act. 6. First of all it is noted that the AO has accepted the business loss computed by the assessee as per its Profit Loss Account computed for the income from Indian operation. Thereafter he has proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee in India and, therefore, there was an agency PE within the meaning and scope of Article 5(4). It is on this finding assessee had filed its appeal which is belated. 8. In respect of the Distribution Income , Ld. CIT(A) noted that, the agreement between the assessee and Taj TV is an agreement on principal to principal basis and it is not acting as an agent of the assessee company albeit it has obtained the right of distribution of TV channel for itself and subsequently it enters into sub-distribution agreement with other parties in its own name to which the assessee company is not a party at all. The assessee had given exclusive right to Taj India for distribution of TV Channel and for such right it had agreed to pay 40% of the total subscription income earned as a consideration. Further, the agreement clearly stipulates that, Taj India shall be solely responsible for the marketing and promotion of the services to help drive cable operator sales and marketing support shall be at the discretion of Taj India. From the perusal of entire terms and conditions, he held that it is apparent that Taj India is an independent contractor. During the course of the Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. The business carried on by the channel companies is an indivisible and wholesome chain of activities, which cannot be segregated and packed as independent modules. All the players involved in the business take part simultaneously in carrying on of the telecasting business which runs instantly. In support the assessee has referred and relied upon the decision of ITAT, Mumbai Bench in the case of Satellite Television Asian Region Ltd. in ITA No.5066/Mum/2004 dated 18.01.2006. Thus, it was submitted by the assessee that, subscription/distribution revenue earned does not fall in the nature of royalty as defined in section 9(1)(vi). The Ld. CIT(A) after examining the definition of royalty as given in Explanation 2 to section 9(1)(vi) held that, the distribution income even up to 12th July, 2002 cannot to be taxed as a royalty under section 9(1)(vi) of the Act, as copyright over the programs belong to the Assessee Company, whereas the distributors or cable operators only transmit the signals received from the Assessee Company. They do not modify, alter, or replace the content of the telecast but broadcast the content as it is received by them from the Assessee Company. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in connection with the PE nor is it borne by the PE in India, therefore, even if the payments are characterized as 'Royalty' it will not be taxable as per Article 12(7) of DTAA. Hence, there was no obligation to deduct tax at source on programming cost paid to acquire live telecast rights. Thus, after detailed discussion, ld. CIT(A) held that none of the payments would be taxable in India even if it is deemed to be royalty , because the payment made to the parties do not have their PE in India, therefore, by virtue of article 12(7) the same cannot be taxed in India. Regarding programming fee also, he has relied upon the decision of CIT(A) in the order passed under section 201/(201A) dated 17.03.2004. 11. Against the aforesaid finding, the revenue has come in appeal on the grounds which has been incorporated in the earlier part of the order, as well as by the assessee where it has mainly challenged the observations and finding of the ld. CIT(A) qua the advertisement revenue, that Taj India is a dependent agency PE of the assessee and hence, the income from advertisement revenue is chargeable to tax in India as business income. 12. Before us, the Ld. CIT(A) DR submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y way of retrospective amendment which is clarificatory in nature. Thus, he summarized that the income from distribution as well as all the payments are covered under the definition of royalty. 13. Before us, the Ld. Senior Counsel, Mr. Percy Pardiwalla submitted that, so far as distribution agreement between Taj India and the assessee is concerned, clearly there is no principal-agent relationship, because Taj India has obtained the right of distribution for its own business and subsequently entered into the contract with sub-distributors on its own. This fact is evident from the Distribution agreement , dated 11th March, 2002 placed in the paper book at pages 8 to 17 and drew our attention to various clauses given in paras 1, 2 3. This aspect of the matter has been appreciated by the Ld. CIT(A) also, who has analyzed the terms of the distribution agreement and came to a conclusion that the agreement between assessee and Taj India is on principal to principal basis. In any case, under Article 5(4) of India-Mauritius DTAA the first and foremost condition which needs to be seen that, the agent must habitually exercise the authority to conclude contracts in the name of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore) Pte Ltd, reported in [2014] 269 CTR 197. 14 As regards the argument of Ld. DR that, now in wake of newly inserted Explanation (v) and (vi) to section 9(1)(vi) by the Finance Act, 2012 w.r.e.f. 1st April, 1976, he submitted that, first of all the said definition under the Act cannot be read into the Treaty because the definition of royalty in the India-US DTAA has been clearly defined. The enlargement of definition of Royalty under the amended provision of domestic law cannot be imported in Treaty and this view now founds support by a latest decision of Hon ble Delhi High Court in the case of DIT vs. New Skies Satellite BV and others, reported in [2016] 95 CCH 0032 wherein the Hon ble High Court after taking note of various provisions of the Act, decisions of various High Court and relevant provision of the DTAA held that the amendment brought by the Finance Act, 2012 would apply to the payments chargeable to tax under the Act, and such an amendment does not alter the definition under the DTAA, therefore, the benefits under the Treaty are available even after the retrospective amendment w.r.e.f. 1.04.1976. He pointed out that, similar view was upheld by the Tribunal in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income for the balance 9 months. In any case, under the distribution agreement, the assessee has not granted any license to use or any copyright to the distributor or to the cable operators. The assessee company makes available the content to the cable operator which is transmitted by them to the ultimate consumer. The distributor or the cable operator cannot add, modify, delete or replace the contents of the channel transmitted to them. Thus, it is nothing but a business income only and in support he relied upon the following decisions:- i) DDIT(IT) v Set India Pvt. Ltd (ITA No.4372/Mum/2004); ii) DDIT(IT) vs. MSM Satellite (Singapore) Pte Ltd.(ITA No.2870/Mum/2010); and iii) MSM Satellite (Singapore) Pte Ltd vs ADIT (IT) (ITA No. 8478/Mum/2011) 16. Lastly, coming to disallowance under section 40(a)(i) for programming was paid to various non-resident, he submitted that this issue is squarely covered in favour of the assessee by the order of the Tribunal in assessee s own case in ITA No. 109/Mum/2008 and ITA No.3702/Mum/2008. 17. We have carefully considered the entire gamut of facts as discussed in the impugned orders, rival submissions made bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any manner. This finding of fact of the Ld. CIT(A) is corroborated by the terms and conditions of the distribution agreement as well as sub-distributor agreement as placed in the paper book. Thus, such a finding of fact by the Ld. CIT(A) without there being any rebuttal by way of any contrary material, is affirmed. Even if we independently examine the facts of the case vis-a-vis the provisions contained in Article 5(4) to 5(6) which deals with the agency PE, it can be seen that there is no agency PE of the Assessee in India. Relevant Article 5 dealing with the agency PE is reproduced here under:- 4. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State (other than an agent of an independent status to whom the provisions of paragraph 5 apply) shall be deemed to be a permanent establishment of that enterprise in the firstmentioned State if: i. he has and habitually exercises in that first mentioned State, an authority to conclude contracts in the name of the enterprise unless his activities are limited to the purchase of goods or merchandise for the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal basis and the Taj India is acting independently, then it moves out from the conditions laid down in Article 5(4). Thus the distribution income by the assessee cannot be taxed in India, because Taj India does not constitute an agency PE under the terms of Article 5(4). Thus, the order of the CIT (A) is upheld and ground No.1 as raised by the revenue is dismissed. 18. Now, coming to the issue of disallowance of various expenses under section 40(a)(i) like, transponder charges and uplinking charges as raised in ground No.2(i) and 2(ii), it is seen that these, payments has been paid to PanAmSat International Systems Inc. USA for providing facility of transponder for telecasting Ten Sports channel in various countries including India. The assessee entered into an agreement with PanAmSat to utilize the transponder facility providing by the said US based company for telecasting its sports channel which are on the footprint of transponder of PanAmSat. The Revenue s case before us is that, firstly, it is taxable under section 9(1)(vi) as royalty and also under Article 12(3)(b) of Indo-US-DTAA. Similarly, the up linking charges paid for up linking the channels to PanAmSat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof; and b) payments of any kind received as consideration for the use of or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8 . The article gives exhaustive definition of the term royalty and therefore, the definition and scope of royalty is to be seen from the Article alone and no definition under the domestic Act or law is required to be considered or seen or any amendment made in such definition whether retrospective or prospective which can be read in a manner so as to extend any operation to the terms as defined or understood in the Treaty. The Legislature or Parliament while carrying out amendment to inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied upon by the ld. DR including that of the Verizon Communications Singapore Pte Ltd s. The Hon ble High Court has specifically clarified as to why the said decieion of Madras High Court cannot be applied in such cases after observing as under:- 31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. V. The Income Tax Officer, International Taxation I, [2014] 361 ITR 575 (Mad), the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today, supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon, supra note 23 cites no reason for the extension of the amendments to the DTAA. Thus, respectfully following the ratio laid down by the Hon ble Delhi High Court, we hold that, the definition of royalty as enlarged by Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , prior to period 12th July, 2002, also when assessee was not registered under the Laws of Mauritius then also it will not affect the nature of income. In any case, as stated earlier, under the distribution agreement, the assessee company has not granted any license to use any copyright to the distributor or to the cable operators. The assessee only makes available the content to the cable operators which are transmitted by them to the ultimate customer/viewers. Further, rights over the content at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute royalty . 22. So far as the reliance placed by the Ld. DR on the decision of ITAT Mumbai Bench in the case of NGC Network ( supra ), we find that in that case the issue of distribution income was set aside to the file of the AO to examine whether it falls within the ambit of royalty as defined under the Income-tax Act or not. Here in this case, as pointed out by the Ld. Sr. Counsel, the AO himself has treated the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source on such expenses. 3. The Appellant prays that the order of CIT(A) on the above grounds he set aside and that of the A.O. restored. 4. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary . (Assessment year: 2005-06) : 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that Taj India does not constitute an agency PE of the assessee within the meaning of Article 5(4) of the DTAA with regard to the distribution income received by it. 2.(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowances made by the Assessing Officer u/s.40(a)(i) of the I.T. Act in respect of claims of transponder charge expenses amounting to US$ 2,63,149 and uplinking charges of US $ 4,57,939. 2.(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the income received from the assessee by M/s. PanAmSat being in the nature of transponder charges and received by other non-residents being in the nature of uplinking charges have arisen in India and accordingly tax should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred an appeal against the said CIT (A) order. The copy of Form 36 filed by the income-tax Department is attached herewith for your ready reference. Further, no hearing for the appeal filed by the tax department has been taken place till date. In view of the appeal preferred by the Income-tax Department and in view of certain recent judicial pronouncements, which is applicable in the present case of Taj, Taj would like to prefer an appeal against the order of CIT (A) for A Y 2003-04. Certain relevant judicial pronouncements on arms length principle as similar to the facts of case of Taj, are as under:- DIT V Morgan Stanley Co Inc (2007) 79 lTD 417 (Supreme Court) Galileo International Inc. V DCIT (2008) 19 SOT 257 (Delhi Tribunal) Amadeus Global Travel Distribution S A Vs DCIT, Delhi (2008) TA Nos. 2143, 2144 2145 IDeII2000 (Unreported) In the aforesaid judicial pronouncements, the Honorable Apex Court / Honorable Tribunal had observed as under: the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken: there is no further need to attribute pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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