Cinematographic film distribution receipts excluded from royalty; no permanent establishment meant no Indian tax on business profits.

Consideration for the sale, distribution or exhibition of cinematographic films falls within the carve-out in Explanation 2(v) to section 9(1)(vi) of the Income-tax Act and is not taxable as royalty in India. The same receipts, treated as business profits, could be taxed in India only if the non-resident had a permanent establishment there. The Indian company was found to act independently and was not a dependent agent permanent establishment, so the business profits also remained outside Indian tax net.

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Issues: Whether royalty received for distribution and exhibition rights of cinematographic films was taxable in India under the Income-tax Act, 1961 and whether the Indian entity constituted a permanent establishment of the non-resident assessee.

Analysis: The income was held to fall within the carve-out in Explanation 2(v) to section 9(1)(vi) of the Income-tax Act, 1961, which excludes consideration for the sale, distribution or exhibition of cinematographic films from the ambit of royalty. The same income was also examined as business profit. On that footing, taxability in India could arise only if the assessee had a permanent establishment in India. The Indian company was found to be acting independently and was not a dependent agent permanent establishment of the assessee. In the absence of a permanent establishment, the business profits could not be brought to tax in India.

Conclusion: The royalty/distribution receipts were not taxable in India and the Indian company was not the assessee's permanent establishment.

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