2016-TII-INSTANT-ALL-355
08 August 2016   

CASE LAWS

ADDIT Vs TAJ TV LTD: MUMBAI ITAT (Dated: July 5, 2016)

Income tax - Sections 9(1)(vi), 40(a)(i) & 195 - India-Mauritius DTAA - Article 5(4) & India-USA DTAA - Article 12.

Keywords - advertising sales agent - agency PE - business income - distribution income - programming fees - residential status - royalty - re registration of company - TDS & uplinkling charges

Whether transponder fees paid by a non-resident entity to a foreign entity for telecasting live programmes to various countries, through satellite, located outside India, warrants deduction of tax at source on such payments - NO: ITAT

Whether the distribution income earned by a Mauritius resident can be taxed in India, when its subsidiary does not constitute an agency PE under the terms of Article 5(4) of the Indo Mauritius DTAA - NO: Mumbai ITAT

Whether any retrospective/prospective amendment made in the definition of a term, which is already exhaustively defind under the DTAA, can be read in a manner so as to extend any operation to the terms as defined or understood in the DTAA - NO: Mumbai ITAT

Whether re-registeration of a company in Mauritius can be a ground to deny benefits of India-Mauritius DTAA in respect of distribution income earned by such entity before the date of such re-registration - NO: Mumbai ITAT

Whether programming cost can be deemed to arise in India, when the liability to pay programming cost has assumed by the non-resident assessee company outside India - NO: Mumbai ITAT

The assessee, a tax resident of Mauritius, is engaged in the business of broadcasting of sports channel namely, 'Ten Sports'. 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 programmes on Ten Sports Channel. Accordingly, the assessee entered into an agreement with 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 by assessee with Taj India for distribution of pay channel to the various cable operators and ultimately to the consumers in India. The distribution revenue collected by Taj India was to be shared between 'Taj TV' and 'Taj India' in the ratio of 60:40. For the A.Y 2003-04, the assessee had filed its return declaring NIL income on the basis that advertising and distribution revenue earned by it was not taxable in India because it did not have any PE in India. The AO however held that Taj India was a 'dependent agent' of the assessee and, therefore treated it as PE within the scope of Article 5(4) of India-Mauritius DTAA. He also observed that the encrypted signal was the property of the assessee and by allowing it to be commercially exploited, it was partially transferring the rights to the cable operators. Therefore, distribution income would be taxable as 'royalty' u/s 9(1)(vi). Since the assessee was incorporated in British Virgin Islands and was re-registered as a company in Mauritius w.e.f. 12th July, 2002, therefore it was not entitled to treaty benefits of India-Mauritius DTAA in respect of distribution income earned up to 12 July 2002. However, he held that distribution income earned after 13th July, 2002 was connected with the PE in India and hence, taxable under Article- 7 of India-Mauritius-DTAA. He also disallowed the programming cost paid to various cricket boards and other sports association for acquiring live telecast rights in respect of events taking place outside India, u/s 40(a)(i), as no tax was deducted at source. The AO further disallowed the Transponder fees of US $ 3,29,966 paid to PanAmSat International Systems Inc. USA for rendering services through satellite, located outside India, in telecasting the sports channel 'Ten Sports' to various countries u/s 40(a)(i) as no tax was deducted at source from such payment.

Having heard the parties, the Tribunal held that,

Distribution income/Agency PE

+ an agent is deemed to be a PE of a foreign enterprise, if he is not independent and has habitually exercises an authority to conclude contracts in the name of the enterprise unless the activities of such person are limited 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. 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. In the present 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 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);

Transponder charges/Uplinking charges

+ it is seen that these payments has been made 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 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 Satellite for delay in transmission and for up linking signals for live events from the venue of the events to the satellite have been treated to be ‘royalty’. Since, the assessee had not deducted TDS u/s 195, disallowance u/s 40(a)(i) has been made. The assessee’s case is that, firstly, PanAmSat is a USA based company, therefore, Indo- US DTAA is applicable and since it does not have any PE or business connection in India, therefore, the payment made to a non-resident outside India for availing service of equipment placed outside India cannot be taxed in India. It is to be noted that Article 12 of Indo US DTAA 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 payment of transponder charges to PanAmSat and up linking charges cannot be treated as a consideration for ‘use’ or ‘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 or in any manner relates to any patent or trademark, design, secret formula or process. It is also not use or right to use any industrial, commercial, or scientific equipment. There is no such kind of right to use which is given by PanAmSat to assessee. Thus, the said payment does not fall within the ambit of the terms used in Article 12;

Royalty vis-a-vis Busines income

+ as far as taxability of distribution of income as ‘royalty’ u/s 9(1)(vi) up to 12th July, 2002, we are unable 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, 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 confirmed that even for the first period 1st April 2002 to 12th July, 2002 the said income will not constitute ‘royalty’.

Revenue's appeal dismissed

2016-TII-413-ITAT-MUM-TP

ITO Vs DANIA ORO JEWELLERY PVT LTD: MUMBAI ITAT (Dated: July 29, 2016)

Income tax - allowance of credit period - delay in sale proceeds & notional interest from AE.

Whether any addition of notional interest can be made on account of belated realization of export proceeds by an assessee from its AE, when there is uniformity in the act of assessee in not charging interest from both AE and Non-AEs for delayed realization of export proceeds - NO: ITAT

The assessee during the subject A.Y, had entered into international transaction with its AE for sale of studded jewellery and purchase of diamonds. During TP proceedings, the TPO noted that the assessee had received the sale proceeds of studded jewellery after considerable delay and did not charge any interest from the AE. Accordingly, the TPO computed the interest recoverable from the AE on such delayed recovery after allowing the credit period. The interest was charged @ 15.41% per annum. Accordingly AO proposed an addition of Rs.33,90,931/- in the draft assessment order passed u/s 143(3) r.w.s. 144C(1). On appeal, the DRP held that since no interest was charged from the Non-AEs in respect of the credit period, therefore no interest would be chargeable from the AE also. Accordingly the adjustment made by the TPO was directed to be deleted.

Having heard the parties, the Tribunal held that,

+ the counsel for assessee has placed reliance on the judgment of Bombay High Court in the case of CIT-9 vs. Indo American Jewellery Ltd., wherein it was observed that: "....In TP proceedings, the TPO while determining ALP of international transactions, noticed that outstanding balance from AES was amounting to Rs.8.76 crores and said amount was outstanding for more than year and, thus, taking rate of interest at 10 per cent, the TPO determined interest receivable at Rs.87.66 lakhs and added same to international transaction cost. The Tribunal noted that there was complete uniformity in act of assessee in not charging interest from both AEs and non-AE debtors for delay in realization of export proceeds. Therefore, it deleted addition of notional interest on outstanding amount of export proceeds realized belatedly...." The above decision squarely applies to the present case. In the present case also, there is uniformity in the act of the assessee in not charging interest from both AE and Non-AE debtors for delayed realization of export proceeds. Respectfully following the judgment of Bombay High Court in the case of Indo American Jewellery Ltd. the issue is answered in favour of assessee.

Revenue's appeal dismissed

 

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