TMI Blog2016 (12) TMI 1291X X X X Extracts X X X X X X X X Extracts X X X X ..... Allowance u/s 40 (a) (i) - Held that:- We hold that no disallowance u/s 40 (a) (i) can be made on account of “programming cost” paid to various non-residents and also payments made to PanAmSat and other non-residents. - ITA No.9079/Mum/2010, ITA No.2065/Mum/2012, ITA No.456/Mum/2013, ITA No.2073/Mum/2012, ITA No.391/Mum/2013 - - - Dated:- 23-12-2016 - SRI AMIT SHUKLA,JM AND SRI ASHWANI TANEJA,AM For The Assessee : Shri P. J. Pardiwala, Shri Madhur Agarwal, AR For The Revenue : Shri Jassbir Chouhan, DR ORDER PER AMIT SHUKLA, JM: The aforesaid cross appeals have been filed by the assessee as well as by the Revenue against separate impugned orders passed by the learned DRP and the learned CIT (Appeals), Mumbai for quantum of assessment for the assessment years 2006-07, 2007-08 and 2008-09. Since, common issues are involved in all the appeals arising out of identical set of facts, therefore, same were heard together and are being disposed off by way of this consolidated order. 2. We will first take up assessee‟s appeal for the assessment year 2006-07, being ITA No.9079/Mum/2010 which has been preferred against the final assessment order dated 18- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee company, that is, Taj T V Limited‟ was registered under the laws of Mauritius and is a tax resident of Mauritius since 12th July, 2002. Prior to that, it was registered as a company in British Virgin Islands in the year 2000. It is engaged in the business of 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. The Advertising Sales Agency Agreement between the assessee and Taj TV (India) was entered into on 04-05-2002, and it was also appointed as exclusive distributor of the TV Channel Ten Sports , vide agreement dated 20-10-2005 for distributing it to the cable operators and other permitted systems. It has been stated that the said agreements have been entered into on principal to principal basis‟. For acting as a distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. (v) The A O also disallowed the Up-linking charges of $ 5,95,973 paid to PanAmSat and various other non-residents 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). 4. The DRP, by and large updated the order of the A O and restricted 75% of the assessable profits arising from Indian operation to be attributable for the functions performed by the independent agent PE‟ in India which has been held liable for taxable in India. 5. Before us, the learned Sr. Counsel, Shri Percy Pardiwala submitted that in assessee‟s own case for the assessment years 2003-04 to 2005-06, the Tribunal held that so far as the income from distribution activities, is conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. On the issue whether the Amendments/Explanations inserted in the Income Tax Act can be read into the DTAA or not, in my most respectful submissions, the Bombay high court decision in the case of CIT v. Siemens Aktiongesellschaft, 310 ITR 320) (Born HC) rendered in the facts peculiar to that case has not been appreciated in the proper perspective in various decisions of the Delhi high Court and Mumbai Tribunal relied upon by the assessee. While appreciating the Siemens AG, supra, the following facts may kindly be kept in mind: i) The exact question of law before the Hon'ble High court was NOT that whether Amendments in the l.T.Act can be read into the DTAA or not and therefore, the Hon'ble High Court cannot be said to have answered it as claimed. ii) In the said case, old DTAA (1960) between India and Germany was under consideration in which Royalty had not been defined.( Para 15). iii) Royalty under the l.T. Act has been defined in Explanation 2 to S.9(1)(vi), inserted by the Finance Act 1976 w.e.f 01-06-1976. iv) The agreements under consideration in the case of Siemens AG, supra which gave rise to the impugned income were entered into befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble HC has approved the insertion of Explanation below 5.9(2) inserted by the Finance Act 2007, thereby implying that the Clarificatory Explanations could be read into modern DTAAs. iv) Mumbai Tribunal In the case of Viacom 18 Media (P.) Ltd.(2014) 162 Ui 336 (Mum) has explained the import of Bombay HC decision in right perspective in paras 16 and 17 of its order while rejecting the assessee's argument that the HC has held that amendments in the Act cannot be read into DTAAs. V) The Bombay HC has approved ambulatory approach (para 22) to interpretation of treaties against Static approach adopted by the Delhi HC. Klaus Vogel in his commentary has also advocated ambulatory approach. 9. We have considered the rival submissions, perused the relevant findings in the impugned order, specifically in the context of arguments placed before us. From a perusal of the Tribunal order for the earlier years (supra), we find that so far as the issue relating to PE regarding distribution revenue/income is concerned, which was raked up in Revenue‟s appeal, it has been held that Taz India does not constitute agency PE in terms of India Mauritius DTAA. However, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the IT Act (for example: ss. 44BB, 44B8A etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, 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 profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective November, 1998, a revised arrangement was entered into between the parties whereby the aforesaid amount was reduced to 12.5 per cent of net ad revenue (i.e. gross ad revenues less agency commission). Simultaneously, the appellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenues. Considering all these aspects and the fact that the agent has a good profitability record, it held that the appellant has remunerated the agent on an arm's length basis. This finding of the Tribunal has not been disputed by the Revenue. The entire contention of the Revenue is that the advertisement revenue pertaining to its own channel and AXN channel are also taxable in India. 11. We may firstly point out that CIT(A) has dealt with the issue as to why the- advertisements received by the appellant were not liable for being taxed in India based on the CBDT Circular No. 23, dt. 23rd July, 1969 which clearly sets out that where a non-resident's sales to Indian customers are secured through the services of an agent in India, the assessment in India of the income arising out of the transaction will be limited t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years. 12. We may now consider the judgment in Director of IT (International Taxation) vs. Morgan Stanley Co. Inc. (supra). The appeals dealt with the DTAA between India and United States That treaty advocated application of the arm's length principle or provided a mechanism for avoiding double taxation on income. The issue involved, Morgan Stanley and Company (for short, MSCo ) and one of the group companies of Morgan Stanley, Morgan Stanley. Advantages Services (P) Ltd. (for short MSAS ). An agreement was entered into for providing certain support services to MSC0. MSC0. outsourced some of its activities to MSAS. MSAS was set up to support the main office functions in equity and fixed income research, account reconciliation and providing income-tax enabled services such as back office operations, data processing and support centre to MSCo. On 5th May, 2005 MSC0 filed its advance ruling application. The basic question related to the transaction between the MSCo and MSAS. The advance ruling was sought on two counts (I) whether the applicant was having PE in India under art. 5(1) of the DTAA on account of the services rendered by MSAS under the services agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quoted art. 7(2) of the DTAA. According to the AAR where there is an international transaction under which a non-resident compensates a PF at arm's length price, no further profits would be attributable in India. In this connection, the AAR has relied upon Circular No. 23 of 1969 issued by the CBDT. This is the key question which arises for determination in these civil appeals. After discussing the various issues the Court in its conclusion held as under As regards attribution of further profits to the PE of MSCo. where the transaction, between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also constitutes a PE) is remunerated on arm's length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. The situation would be different if the transfer of pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a case, there would be need to attribute profits to the PE for those functions/risks that have not been cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmanent establishment in India, it is not liable to tax in India under Article 7 of the DTAA between India and Mauritius. The argument further was that the agents of the assessee have marked the ad-time slots of the channels broadcasted by the assessee for which they have received remuneration on arm's length basis. Thus, in the light of the Central Board of Direct Taxes Circular No.23 of 1969, the income of the assessee is not taxable in India. The conditions of Circular 23 are fulfilled. Therefore, Explanation (a) to section 9(1)(i) of the IT Act will have no application. 9. The Assessing Officer did not accept the contentions of the assessee. He did not agree on both counts but the Tribunal noted that the DTAA and particularly paragraph 5 of Article 5 indicates that an enterprise of a contracting State shall not be deemed to have a permanent establishment in the other contracting State merely because it carries on business in that State through a broker, general commission agent, or any other agent of independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order under challenge. We do not find that the Tribunal's order and which also refers to the Hon'ble Supreme Court decision in Morgan Stanley Co. (supra) can raise any substantial questions of law. 11. We are not agreement with Mr. Tejveer Singh when he submits that the Supreme Court judgment in the case of Morgan Stanley Co. will not apply. In that regard he relies upon the conclusion rendered by the Hon'ble Supreme Court. That conclusion is that there being no need for attribution of further profits to the permanent establishment of the foreign company where the transaction between the two was held to be at arm's length but this was only provided that the associate enterprise was remunerated at arm‟s length basis taking into account all the risk taking functions of the multinational enterprise. Thus, Mr. Tejveer Singh's reliance on these observations in the Supreme Court judgment are strictly on the alternate argument canvassed by the assessee. That alternate argument was that assuming that B4U India is a dependent agent of the assessee in India it has been remunerated at arm's length price and, therefore, no profits can be attributed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon‟ble jurisdictional High Court, we also hold that if the arm‟s length price of the transaction has been accepted, between the assessee and Taj India, then nothing further should be attributable to the assessee which is to be taxed in India. Thus, on this reasoning we allow the assessee‟s ground No.1. We are making it clear that, so far as the issue of PE qua the advertisement revenue is concerned, same is kept open. 10. As regards the allowance u/s 40 (a) (i), raised vide ground Nos. 2 and 3, we find that the Tribunal has discussed this issue in assessment year 2003-04, 2004-05 and 2005-06 in the following manner:- 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(u), it is seen that these, payments has been paid to PanAmSat International Systems Inc. USA for providing facility of 29 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defined under Article 12 of the Indo-US-DTAA, which has been defined in the following manner: 3. The term royalties as used in this Article means: a) payments of any kind received as a consideration for the use of or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means 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 ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement . The aforesaid decision takes care of all the arguments relied upon by the Id. DR including that of the Verizon Communications Singapore Pte Ltd's. The Hon'ble High Court has specifically clarified as to why the said decision 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 j, [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 differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to concur with the divergent stand taken by the AO that for three months the payment will constitute 'royalty' and for balance nine months, the payment will constitute 'business income'. It has also been brought to our knowledge that in the subsequent years the AO has treated 'distribution income' as business income and not as royalty. Thus, 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 place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,,21,870 and uplinking charges of USD 2,64,285. (ii) On the facts and in the circumstances of the case and in law, the CIT (A) failed to appreciate that the income received from the assessee by the M/s. PanAmSat being in the nature of transponder charges and received by other non-resident4s being in the nature of up-linking charges have arisen in India and accordingly tax should have been deducted at source on such expenses. 3.(i) On the facts and in the circumstances of the case and in law, the CIT (A) erred in holding that payment of programming fees in respect of live programmes does not constitute Royalty as provided under Article 12 of the DTAA between India and Mauritius. (ii) On the facts and in the circumstances of the case and in law, the CIT (A) erred in law in holding that programming fees in respect of live programming even if taken as royalty would not be deemed to accrue or arise in India as per Article 12 (7) of the relevant treaty and accordingly would not be taxable in India. 12. As regards the grounds raised in assessee‟s appeal, it is seen that the same is similar to ground No.1 as raised in assessee‟s appeal for assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ope of Article 5(4). However, in the revenue's appeal, the main issue involved in ground no.1 is with regard to taxability of distribution revenue in terms of Distribution Agreement dated 1st March, 2002. Under the terms of the distribution agreement, the assessee has appointed Taj India as exclusive distributor in India and prohibits the assessee for entering into distribution agreement with anybody else. The Ld. CIT(A) after taking note of the 'Distribution Agreement' and examining various terms and clauses used therein and also taking into consideration the conduct of the parties, came to the conclusion that, Taj India is not acting as agent of the assessee but it had obtained the right of distribution of channel for itself and subsequently it is entering into contract with other parties in its own name in which the assessee is not party. The distribution of the revenue between the assessee and Taj India has been allocated in the ratio of 60:40 and the entire relationship is principal to principal basis. The Ld. CIT(A) has also noted that, there is no evidences on record to show that, Taj India was acting as agent of the assessee for the distribution business in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually exercises an authority to conclude contracts in the name of the enterprise unless the activities of such person are limited to those mentioned in paragraph 4 that is, to the purchase of goods or merchandise for the enterprise; or if he has no such authority, but habitually maintains a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Thus, the character of an agent, who can be said to be a dependent only if, firstly, the commercial activity for the enterprise is subject to instructions or comprehensive control and secondly, he does not bear the entrepreneur risk. It is sufficient for the establishment of an agency PE that the agent has sufficient authority to bind the enterprise's participation in the business activity. 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 id. CIT (A). When the entire relationship qua the distribution revenue is that of principal to principal basis and the Taj India is acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature as defined under Explanation 2 to section 9(1) (vi) of the IT Act and such income deemed to accrue or arise in India without appreciating the fact that disallowance of said expenses u/s. 40(a) (i) of the IT Act on account of non-deduction of tax under section 195 of the IT Act. 3. On the facts and in the circumstances of the case and in law, the CIT (A) failed to appreciate that the income received from the assessee by the M/s. PanAmSat being in the nature of transponder charges and received by other non-residents being in the nature of up-linking charges have arisen in India and accordingly tax should have been deducted at source on such expenses. 3.(i) On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in holding that payment of programming fees in respect of live programmes does not constitute Royalty as provided under Article 12 of the DTAA between India and Mauritius. 3.(ii) On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in holding that programming fee in respect of live programming even if taken as royalty would not be deemed to accrue or arise in India as per Article 12 (7) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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