2016 (8) TMI 504 - AT - Income Tax

Tribunal dismisses revenue appeals, rules in favor of Taj India on PE & income tax issues

ADDIT (IT) /DDIT (IT) -2 (2) /2 (1), Mumbai Versus M/s Taj TV Ltd and Vica-Versa

ADDIT (IT) /DDIT (IT) -2 (2) /2 (1), Mumbai Versus M/s Taj TV Ltd and Vica-Versa - TMI Issues Involved:1. Determination of whether Taj India constitutes an agency Permanent Establishment (PE) of the assessee under Article 5(4) of the DTAA.2. Deletion of disallowances made by the Assessing Officer (AO) under section 40(a)(i) of the IT Act for transponder charges and uplinking charges.3. Taxability of distribution income earned by the assessee before and after becoming a resident of Mauritius.4. Classification of programming fees for live programs as 'royalty' under Article 12 of the DTAA.Issue-Wise Detailed Analysis:1. Agency Permanent Establishment (PE):The CIT(A) concluded that Taj India did not constitute an agency PE of the assessee under Article 5(4) of the India-Mauritius DTAA. The CIT(A) found that Taj India was an independent contractor acting on a principal-to-principal basis, not as an agent of the assessee. The CIT(A) examined the distribution agreement and sub-distribution agreements, noting that Taj India entered into contracts in its own name and retained a significant portion of the revenue. This finding was upheld by the Tribunal, affirming that Taj India did not habitually exercise authority to conclude contracts on behalf of the assessee, thus not meeting the criteria for an agency PE under Article 5(4).2. Disallowances under Section 40(a)(i):The CIT(A) deleted the disallowances made by the AO under section 40(a)(i) for transponder charges and uplinking charges. The CIT(A) referred to the Delhi Tribunal's decision in DCIT vs. PanAmSat International System, which held that payments for transponder facilities were for services and not for the use of equipment, thus not amounting to 'royalty.' The CIT(A) also noted that such payments were not borne by a PE in India, and therefore, there was no obligation to deduct tax at source under Article 12(7) of the DTAA. The Tribunal upheld this view, emphasizing that the payments did not fall within the definition of 'royalty' under the DTAA and that retrospective amendments to the domestic law could not alter the treaty provisions.3. Taxability of Distribution Income:The CIT(A) held that the distribution income earned by the assessee before becoming a resident of Mauritius (up to July 12, 2002) could not be treated as 'royalty' under section 9(1)(vi) of the IT Act. The CIT(A) found that the distribution income did not involve the transfer of any right over the copyright or granting any license over the copyright to the cable operators. The Tribunal agreed, stating that the distribution income was business income and not 'royalty,' and there could not be two different treatments for the same income. The Tribunal also noted that the AO had treated the distribution income as business income in subsequent years.4. Programming Fees as 'Royalty':The CIT(A) held that programming fees paid for acquiring live telecast rights of events were not in the nature of 'royalty' as there was no copyright involved in live telecast events. The CIT(A) further noted that such payments were not connected with a PE in India and therefore, even if characterized as 'royalty,' they would not be taxable under Article 12(7) of the DTAA. The Tribunal upheld this finding, relying on the decision of the Bombay High Court in DIT vs. Set Satellite (Singapore) Pte Ltd, which supported the view that programming costs paid to non-residents for events outside India were not taxable in India.Conclusion:The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s findings on all issues, affirming that Taj India did not constitute an agency PE, the disallowances under section 40(a)(i) were correctly deleted, the distribution income was business income and not 'royalty,' and the programming fees were not taxable as 'royalty.' The Tribunal also dismissed the assessee's appeals on the ground of limitation, noting that the assessee could raise the issue of PE in subsequent years if necessary.