2012 (12) TMI 370 - AT - Income Tax

US Film Distributor Found Without Permanent Establishment in India, Tax Appeal Succeeds

Warner Bros. Distributing Inc. Versus Additional Director of Income-tax (IT), Range 2, Mumbai

The Tribunal held that the appellant, a US tax resident engaged in film distribution in India, lacked a Permanent Establishment (PE) in India. Therefore, ... Royalty received on account of distribution of films - DRP directing income being generated by the distribution and exhibition of the films in India by the Agent of the assessee WIPL on behalf of the assessee in India, income accrues and arises in India is tenable or not - held that:- even if income arises to the Non-Resident due to the business connection in India, the income accruing or arising out of such business connection can only be taxed to the extent of the activities attributed to permanent establishment. In this case, the assessee does not have any permanent establishment in India. Since the Indian company who obtained the rights is acting independently, Agency PE provisions are not applicable to the assessee company. Incomes arising to a Non-Resident cannot be taxed as business income in India, without a PE. As the assessee does not have any permanent establishment in India, the incomes arising outside Indian Territories cannot be brought to tax. Therefore, there is no need to differ from the findings of the CIT (A) and accordingly Revenue Appeal is dismissed - in favor of assessee. Decision in the case of Ishikawajma-Harima Heavy Industries Ltd v. Director of Income Tax [2007 (1) TMI 91 - SUPREME COURT] followed. Issues:Assessment of royalty income as business profit attributable to PE in India.Analysis:The appellant, a US tax resident, engaged in film distribution in India, challenged the taxability of royalty income under section 9(1)(vi) of the IT Act. The Assessing Officer proposed to assess the royalty as business income attributable to PE in India. The DRP upheld this view, considering income generated by film distribution in India as accruing in India. The key issue was whether the royalty income is taxable in India as business profit attributable to the PE.The appellant contended that a previous Tribunal decision favored their position, while the Revenue argued that the issue of PE was not examined for the previous assessment year. The Tribunal noted that for the earlier year, the Assessing Officer did not consider PE due to applying DTAA provisions. However, the Tribunal concurred with the view that the amount received could not be considered royalty, as done by the Assessing Officer. It was held that the appellant lacked a PE in India, and income arising outside Indian territories could not be taxed as business income in India.Referring to the earlier Tribunal decision, it was established that the appellant had no PE in India, as the Indian company acted independently. Consequently, Agency PE provisions did not apply. As the facts remained unchanged, the Tribunal held that the appellant had no PE in India, and the income from the distribution agreement was not taxable in India.The Tribunal concluded that the other issues raised by the appellant were consequential and thus dismissed. Ultimately, the appeal by the assessee was allowed based on the findings regarding the taxability of royalty income as business profit attributable to PE in India.