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TMI Blog2020 (10) TMI 245X X X X Extracts X X X X X X X X Extracts X X X X ..... Act') is bad in law. 2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel ("Ld. DRP) and the Learned Deputy Director of Income-tax ("Ld. AO") grossly erred in treating the amounts derived by the Appellant on account of Distribution revenue as royalty income without appreciating that Distribution revenue derived by the Appellant is neither Royalty under Section 9(1)(vi) of the Act nor Royalty under the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA'). 3. That on the facts and in circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in holding that the Appellant has a Permanent Establishment (`PE') under Article 5(4) of the DTAA. 4. That on the facts and hi circumstances of the ease and in law, the Ld.AO erred in not allowing complete credit of taxes deducted at source without assigning any reason. 5. That on the facts and in circumstances of the case and in law, the Ld.AO erred in not allowing appropriate amount of interest under Section 244A of the Act. 6. That on the facts and in circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of India-USA Double Taxation Avoidance Agreement (`DTAA'). 3. That on the facts and circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in treating TIIPL as the Permanent Establishment (TE') of the Appellant in India under Article 5(4) of the DTAA. 4. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP, having held that Appellant has a PE in India, ought to have taxed the distribution revenue under Article 7 of the DTAA instead of royalty in terms of Article 12(6) of the DTAA. 5. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP, erred in disregarding the resolution arrived at between the competent authorities of India and the USA for earlier year with regard to the taxability of distribution revenue as business profits. 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234B of the Act. 7. That on the facts and circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion revenue from grant of exclusive rights to Turner International India Private Limited ("TIIPL"), an Indian Company, to sell advertising on the products and to distribute the products namely - a) Satellite delivered television services called 'Cartoon Network', 'TCM Turner Classic Movies', 'POGO' and 'Boomerang'; b) From interactive entertainment services known as 'CartoonNetworkIndia.com' and `POGO.tv; and c) From entertainment mobile telecommunications services 'Cartoon network Mobile and Boomerang Mobile' Any other television, interactive and/or telecommunications service for which TBSAP holds or acquires advertising and distribution rights for the Territory in the future. 4. TIIPL (Indian Company) acted as an exclusive distributor of the above mentioned products to the cable operators and other permitted systems on 'principal to principal basis'. The 'distribution agreement' allowed TIIPL (Indian Company) to distribute the products to various cable operators and ultimately to the consumers in India. The distribution revenue collected by TIIPL was to be shared between TBSAP and TIIPL (Indian Company). However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tus and remuneration paid to TIIPL is at arm's length. Accordingly, TIIPL cannot be considered as a Permanent Establishment ('PE') of the Appellant in India. Notwithstanding the afore-stated facts, it has been stated that the Appellant in order to avoid prolonged litigation and to buy peace and bring finality to Income-tax proceedings declared the income as per the MAP order. 8. The AO while concluding the assessment for the two preceding assessment years i.e. AY 2007-08 and AY 2008-09, made note of the basis on which the income was returned by the Appellant. Subsequently order under section 143(3) of the Income tax Act, 1961 ('the Act') was passed by the AO whereby the return position was accepted. 9. In re: the nature of income it has been stated by the assessee that despite the facts remaining the same, the Assessing Officer in all the assessment years i.e. AY 2001-02 to AY 2015-16, has consistently held Advertisement revenue to be Business Income following the MAP order. The Assessing Officer has also held distribution revenue to be Business Income and has accepted the attribution of 10% suo-moto made by the Appellant following the MAP Order in AY 2007-08 and AY 2008-09 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant for granting right or license to distribute the products in India amounts to consideration for 'the transfer of all or any right (including the granting of licenses) in respect of any copyright, literary, artistic or scientific work and therefore, held that the subscription/ distribution revenue derived by the Appellant is assessable to tax as royalty both under the domestic law and the DTAA. Relevant Extract of the order passed by the Ld. AO is reproduced herein below: "The issues for consideration are, therefore, whether and in what circumstances can the assessee company claim to own a copyright (right to broadcast) over the work it broadcasts, and whether there is a transfer, by grant of a license or otherwise, of this right to broadcast under the distribution agreements entered into by the assessee company with the Indian entity. ... Going by this principle, the assessee company can certainly claim authorship and copyright in a television program produced by it, even if the program is based on subject matter which is sourced from elsewhere. Thus, for example a programme produced by BBC World on any nature related event that is put together and presented in a certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unchan Kaushal submitted that the decision reached by the Indian Competent Authorities which, is a representative of the highest income tax authority (Central Board of Direct Taxes) as defined under section 119 of the Act, determining the nature/ character of income and then its acceptance by a Competent Authority of another country amounts to an agreement by two governments and should therefore, be adhered too. Such an agreement reached by the highest authority under the Act, was accepted by the Appellant and the Revenue Department in the earlier years after due application of mind by passing order under section 143(3) of the Act, without change in relevant and material facts. This makes the acceptance of the treatment of revenue from distribution activities as business income a fundamental aspect permeating through the different assessment years starting from AY 2001-02 to AY 2008-09 and it being found to be a fact one way or the other (either by the competent authorities or by the AO), it is therefore not appropriate to allow the position to be changed in a subsequent year. It was on similar set of facts that the Supreme Court in the case of Radhasoami Satsang v. CIT [[1991] 100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. Article 12(3) of the DTAA defines royalty as: '(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, trademark, 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 18. He submitted that the term "copyright" as referred above has been defined in Section 14 of the Copyright Act, 1957 as an exclusive right, subject to the provisions of the Copyright Act, to do or authorise to doing of any of the acts specified in the said provision in respect of a work or any substantial part thereof. The term "work" is defined under Section 2(y) of the Copyright Act, 1957, as to mean any of the works namely a literary, dramatic, musical or artistic work or a cinematograph film and a sound recording. Sub-section (1) of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n charges or distribution revenue is derived by TIIPL (Indian Company) from distribution of the products through the cable operators and TIIPL (Indian Company) shares the revenue with the Appellant as agreed under the agreement. While distributing the products (i.e. Cartoon Network Channel, etc.), all rights in the product remains vested with the Appellant. The distributor of the products does not have any right to change the content. The content can only be changed by the Appellant and no other party. Hence, the revenue derived on account of distribution of the products is business income and under no circumstance, can be held to be royalty. In support he placed reliance on the decision of the Hon'ble Income Tax Appellate Tribunal, Mumbai in the case of Dy. CIT v. Set India (P.) Ltd. [IT Appeal No. 4372 (Mum.) of 2004, dated 25-4-2012], wherein the Hon'ble Tribunal dealt with a similar question. Explaining the facts of the aforesaid case he pointed out that: * Set Satellite (Singapore) Pte. Ltd. ('SET Singapore') was a tax resident of Singapore operating TV channels namely SET and SETMAX in India. Similar to the present facts of the case, SET Singapore entered into agreement wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution right is a purely commercial right which is distinct from right to use copyright. * Section 37 of the Copyright Act, 1957 deals with Broadcasting Reproduction Right which is a distinctive right from Copyright defined under Section 14 of the Copyright Act, 1957. * The distributor merely retransmits the television signals received by it without any edits, delays, interruptions, deletions or additions, therefore, the payments made to it cannot be said to be for use of copyright and therefore, is not 'royalty' but in the nature of 'business income'. 22. Accordingly, he submitted that even in the present case, it cannot be disputed that the appellant has neither granted any copyright to the TIIPL (Indian Company) nor has it allowed the distributor to change the content of the Channel. Accordingly, the receipt of income by the appellant can only be taxed as business income. Reliance was further placed on the decision of the Hon'ble Income Tax Appellate Tribunal, Mumbai in the case of Taj TV Ltd. v. ADIT [2016] 72 taxmann.com 143 (Mumbai). Wherein the facts of the aforesaid case were as follows: * Taj TV Ltd. was a Mauritian company engaged in the business of broadca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not a party. * On the issue pertaining to distribution income being taxable as 'royalty', it was held by the Hon'ble ITAT that under the distribution agreement, Taj Mauritius has not granted any license to use any copyright to the distributor or to the cable operators. Taj Mauritius only made available the content to the cable operators which are transmitted by them to the ultimate viewers. Rights over the content at all times remained with Taj TV and were never made available to the distributors or cable operators. Thus, the payment for such rights could not be taxed as 'royalty'. 25. Thus, like Taj TV, the appellant had appointed TIIPL (Indian Company) as an exclusive distributor of TV Channels (like Cartoon Network Channel, etc.) to the cable operators and other permitted systems on 'principal to principal basis'. In other words, the Indian company i.e. TIIPL in the present case had acquired rights to distribute the channels/products and the Indian Company subsequently entered into contract with cable/DTH operator in its own name in which the appellant was not a party. It is in these contracts that the Indian company had the right to conclude contracts fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said provision would show that the copyright means exclusive right, subject to the provisions of this Act, to do or authorise the doing of any of the following acts specified in the said provision in respect of a work or any substantial part thereof. Term "work" is defined under Section 2(y) of the Copyright Act, 1957, as to mean any of the works namely a literary, dramatic, musical or artistic work or a cinematograph film and a sound recording. Sub-section (1) of Section 14 of the Copyright Act, 1957 lists several Acts in respect of a work in relation to which exclusive right would be termed as copyright. In the present case, the assessee had not created any literary, dramatic, musical or artistic work or cinematograph film and/or a sound recording. 11. In fact, Section 37 of Copyright Act, 1957 separately defines broadcast reproduction right. Sub-section (1) of Section 37 of the said Act provides that every broadcasting organisation shall have special rights to be known as "broadcast reproduction right" in respect of its broadcasts. Sub- section (2) of Section 37 provides that the broadcast reproduction right shall subsist until twenty-five years from the beginning of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Paragraph (3) of Article 12 defines the term "Royalty" as under- 'The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for 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, property or information; (b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4 (c) of Article8.' 15. Even going by this definition, the payment in question cannot be categorized as royalty." 30. The key observations made by the Hon'ble High Court are as under: * The Hon'ble bench of Bombay High Court specifically mentioned that it could not find any precedents to the present issue except in case of SET India (referred at para 18 above) and therefore, the Hon'ble Court has independently heard and applied thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, TIIPL (Indian Company) has entered into contracts with various parties in its own capacity on principal to principal basis and not on behalf of appellant. It is reiterated that 'copyright' and 'broadcast reproduction right' are distinctive rights as specified in the Copyright Act, 1957. The Appellant has granted commercial rights in the nature of broadcast reproduction right to TIIPL (Indian Company) and the rights of a broadcaster is defined separately under Section 37 of the Copyright Act, 1957. 33. Therefore, the AO is not justified in taxing the revenue derived by the Appellant from distribution of products (Channels, interactive entertainment services and entertainment mobile telecommunications) as royalty instead of business income as also held by the Hon'ble Bombay High Court and Mumbai ITAT in the decisions cited above. 34. Ld. Counsel also drew our attention to Circular No. 6/2001 (Taxation of foreign telecasting companies - Guidelines for computation of income-tax, etc.) dated March 5, 2001 wherein the Central Board of Direct taxes ('CBDT') clarified that incomes like subscription charges receivable from affiliates in respect of pay channels and income from the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... places reliance on the decision of the Hon'ble High Court of Delhi in the decision of New Skies Satellite BV [2016] 68 taxmann.com 8 wherein it has been categorically held that: "This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible." Therefore, he submitted that the income of the Appellant can only be classified as Business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve any right to edit, delay, interrupt or delete the products distributed by it is not tenable. * Reliance has been placed on the decision of the Hon'ble SC in Civil appeal no.s 7326-7327of 2018 in case of Star India Pvt. Ltd. Vs. Department of Industrial Policy and Promotion &Ors.to state that the distribution fees[tariff] as received by the assessee relate to "content" which is protected and covered by the Copyright Act in form of "Copyright", "Broadcast Right" and/or "Rebroadcast Right" * The Ld. DR also placed reliance upon "Reference Interconnect Officer ('RIO') of Turner International India Private Limited - for digital addressable platform(s)" between Indian company and the distributor in India (cable operator/MSO/DTH operator) and alleged that equipment (IRD/CAM/boxes) given to Indian distributor is in the nature of 'industrial, commercial or scientific equipment' which constitutes royalty under DTAA. DECISION 41. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material referred to before us. The appellant-assessee is a US based Company and is tax resident of US. During the relevant assessment years, it has der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TIIPL are on principle to principle basis and even if TIIPL is an agent of independent status, then remuneration paid to TIIPL was at arm's length, and therefore, TIIPL cannot be considered to be PE of assessee in India. It has been brought on record that in all the years and in subsequent years also Assessing Officer has held the advertisement revenue to be the business income following the MAP order. However, during the impugned assessment years, the said position has been digressed by the Assessing Officer without there being any material change in the facts and circumstances or the terms of agreement or the business mutual. Therefore, we are in tandem with the contention of the ld. counsel that when this fundamental aspect is permeating through different assessment years which have been accepted by the parties, then as a rule of consistency, the same position should not be altered or should be allowed to be changed. 43. Be that as may be, now we will independently analyse, whether distribution revenue on the facts of the present case can be considered as 'royalty' in terms of Article 12 of the DTAA between India and USA. Ld. Assessing Officer had applied the provision of domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as copyright. Here, in this case, appellant never granted any licenses to use any copyright, either to distributor or to the cable operator albeit it has only granted right for purpose of selling advertisement on the product that are channels, etc. and distribution of such products in India. The Indian company is carrying out the distribution and selling of the advertisement and it does not have any kind of right to edit, interpret, add the products distributed by it. The assessee company only granted commercial rights in the nature of 'broadcast reproduction right' to the TIIPL, which has been separately defined u/s. 37 of the Copyright Act and therefore, it cannot be held that revenue derived by the assessee for distribution of products is taxable as 'royalty' albeit it is a business income of the assessee. 44. The Assessing Officer has tried to justify the tax the distribution revenue in the nature of royalty by applying the retrospective amendment made in Explanation-6 of Section 9(1)(vi) of the Act. Such an approach cannot be upheld because there is no similar amendment in the definition of royalty under the DTAA and it has been well settled by the Hon'ble Delhi High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant Company. 47. Ld. DR has tried to distinguish the facts of the captioned matter from the case of MSM Satellite (Supra) and stressed heavily upon the ability of the consumer to 'store' and 'interact' with the content. However, the aforementioned factors cannot form basis for distinguishing the judgement rendered by the Hon'ble Bombay High Court. The crux and the core issue involved in the decision rendered by Hon'ble Bombay High Court and the impugned issue remains to be the same, i.e., whether the amounts received by a non-resident company for granting distribution rights to an Indian Company could be brought to tax as royalty or not. The Hon'ble Bombay High Court has categorically held that subscription charges received by MSM Satellite was for only viewing of the channels operated by it and it cannot be said that such revenue was for parting of any copyright. Accordingly, if the aforesaid principle of the Hon'ble Bombay High Court is to be followed, then the amount received by the appellant company from the Indian concern is to be brought to tax as Business Income. 48. Lastly, the Ld. DR has relied heavily upon the decision rendered by the Hon'ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Copyright Act which they are able to exploit, and if there is a re-broadcast of what has already been copyrighted, this again is protected by Chapter VIII of the Copyright Act." The argument before the Hon'ble Apex Court on the interpretation of the Copyright Act, 1957 was that, in case of a broadcaster there may be three different rights. First right when the broadcaster has produced the serial and second when they broadcast the serial and third again re broadcast. The Hon'ble Apex Court has concluded the same in para 64 as hereunder: "The picture that, therefore, emerges is that copyright is meant to protect the proprietary interest of the owner, which in the present case is a broadcaster, in the "work", i.e. the original work, its broadcast and/or its rebroadcast by him." 51. Consequently, even the observations of the Hon'ble Apex Court in fact supports the case of assessee and its reliance on Bombay High Court that the broadcasting right a separate right which cannot come within the purview of copyright gets fortified. Even at the cost of repetition, it is again reiterated that even as per the agreement the copyrights in the product/channel has not been transferr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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