2022 (3) TMI 68 - AT - Income Tax

Tribunal classifies revenue as business income, not royalty, upholds MAP agreements. Assessee appeals successful.

Cable News Network Inc. Versus The Dy. C.I.T., Circle-2 (2) (1), International Taxation New Delhi

The Tribunal ruled in favor of the assessee, determining that the subscription/distribution revenue should be classified as business income, not royalty. ... Income accrued in India - subscription/distribution revenue derived by the assessee as assessable to tax as royalty - as per AO assessee had granted various rights relating to its products including the right to sub-license. The Assessing Officer further observed that in allowing TIIPL to sub-distribute the encrypted television signals for commercial exploitation, the assessee has granted the right to communicate the work to public which is defined u/s. 2(ff) of the Copyright Act, 1957 - HELD THAT:- A careful perusal of the clause by clause comparison shows that the terms and clauses are pari materia same except the difference in channels that have been distributed. A similar comparison of the assessment order in the case of TBSAP [2020 (10) TMI 245 - ITAT DELHI] and the assessee has been furnished by the assessee. A perusal of the same shows that the wordings and findings are identical. Tribunal at Bombay in the case of MSM Satellite (Singapore) Pte Limited [2015 (9) TMI 793 - ITAT MUMBAI]had the occasion to consider a similar quarrel in respect of subscription charges collected by MSM which were taxed as royalty for use of copyright and the co-ordinate bench held that the amount received by the Singaporean company cannot be brought to tax in India as royalty and the same is in the nature of business income.This decision has been approved by the Hon'ble High Court of Bombay [2019 (4) TMI 1621 - BOMBAY HIGH COURT] as emphatically observed that there is difference in copyright and broadcast reproduction right As per Circular No. 6/2001, it has been clarified that subscription charges receivable for Foreign Telecasting Companies (FTCs) shall continue to be taxed in accordance with guidelines prescribed for advertisement revenue, i.e. as business income. - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts received by a non-resident for granting exclusive distribution and advertising rights in relation to television channels to an Indian distributor constitute 'royalty' under domestic law and the India-USA Double Taxation Avoidance Agreement (DTAA), or are taxable as business income. 2. Whether the grant of rights to an Indian distributor which permits distribution, sub-distribution and sale of advertising amounts to transfer of copyright or 'use of, or right to use' copyright as envisaged under Article 12 (royalty) of the DTAA and section 9(1)(vi) of the Income-tax Act. 3. Whether reliance can be placed on a prior Mutual Agreement Procedure (MAP) outcome (competent authority agreement) and consistent tax treatment accepted in earlier assessment years, including application of consistency principle across assessment years. 4. Whether retrospective amendment in domestic law (Explanation to Sections 47/9(1)(vi)) can be imported into the DTAA to characterize receipts as royalty. 5. Whether decisions of coordinate fora, the High Court (on distinction between copyright and broadcast reproduction right), and the Supreme Court (on regulatory reach between TRAI and Copyright Act) are applicable or distinguishable in characterising the receipts. ISSUE-WISE DETAILED ANALYSIS Issue 1-2: Characterisation of distribution/ subscription/advertising receipts - royalty v. business income Legal framework: Article 12 of the DTAA defines 'royalties' to include payments for use of, or the right to use, any copyright of a literary, artistic or scientific work including works for use in connection with radio or television broadcasting. Domestic law (s.9(1)(vi)) taxes income deemed to be royalties arising from transfer/ licensing of copyright. Copyright Act defines 'copyright' (Section 14) and separately defines 'broadcast reproduction right' (Section 37). Precedent treatment: A coordinate bench and a High Court have held subscription/distribution receipts of foreign telecasting companies to be business income, distinguishing broadcast reproduction rights from copyright. A Tribunal decision in a group-company matter reached the same conclusion on materially identical agreements. The Supreme Court's decision on TRAI vs. Copyright primarily concerns regulatory jurisdiction but recognizes broadcast rights as distinct from copyright in its observations. Interpretation and reasoning: The Court examined the distribution and advertising sales agreements and found (a) explicit clause reserving ownership of copyrights and all proprietary rights in the channel content with the non-resident; (b) the Indian distributor was granted commercial rights to receive, promote, market, license, distribute and sub-distribute channels and to sell advertising, but not rights to copy, edit, modify or exploit the underlying copyrighted work; and (c) the distributor's activities relate to distribution/broadcast reproduction rather than transfer or license of copyright as defined in the Copyright Act. The Court emphasized the statutory distinction between copyright (Chapter III) and broadcast reproduction right (Chapter VIII), and held that granting distribution/broadcasting rights without transfer of copyright does not equate to granting the 'use of, or right to use' copyright under the DTAA. The practical nature of the product (a channel stream where content is not separable by distributor) and the commercial, principal-to-principal distribution model reinforced that receipts are business income for distribution/advertising services, not royalties for copyright use. Ratio vs. Obiter: Ratio - where an agreement reserves copyright and grants only distribution/broadcast reproduction rights, receipts for distribution/subscription/advertising are business income and not 'royalty' under the DTAA or domestic law. Obiter - observations about jurisprudential treatises and general principles of legal right creation expand doctrinal support but are not dispositive beyond the factual matrix. Conclusions: Distribution, subscription and advertising receipts received under the agreements in issue are business income, not royalty, because the copyright remained with the non-resident and only broadcast reproduction/distribution rights were conferred. Issue 3: Reliance on MAP outcome and consistency in assessment years Legal framework: Competent authority MAP outcomes between treaty countries resolve treaty interpretation and can be relied upon by taxpayers; consistent tax treatment across assessment years is a relevant principle unless material facts or law change. Precedent treatment: The assessee had previously reported income in accordance with a MAP outcome (10% deemed net profit rule) for earlier years and those positions had been accepted by the Revenue. A co-ordinate bench in related group cases accepted such treatment. Interpretation and reasoning: The Court noted full disclosure of the MAP basis by the assessee and acceptance by the Department in prior years. Absent material change in facts, agreements or business model, a departure by the Assessing Officer is inconsistent. The Court found no basis to disregard the MAP-based declaration and prior accepted assessments. Ratio vs. Obiter: Ratio - MAP-determined treatment and consistent prior acceptance are persuasive; where facts and agreements are unchanged, reassessment characterisation should not be altered to the taxpayer's detriment without new material. Conclusions: The MAP outcome and consistent prior acceptance support treating the income as business income; the Court followed the co-ordinate bench decision applying the same reasoning. Issue 4: Effect of retrospective amendment in domestic law - can it be read into DTAA? Legal framework: Domestic amendments do not alter the meaning of treaty terms absent renegotiation; established principle prevents importing retrospective domestic statutory changes into DTAA interpretation. Precedent treatment: Higher-court authority holds that domestic amendments cannot be read into a treaty to change treaty obligations or definitions. Interpretation and reasoning: The Assessing Officer relied upon retrospective amendments to domestic provisions to characterise receipts as royalty. The Court rejected this approach because the DTAA's definition remained unchanged and domestic amendments cannot be used to redefine treaty terms. Thus, reliance on retrospective domestic amendments to recharacterise income under the treaty is impermissible. Ratio vs. Obiter: Ratio - retrospective domestic amendments cannot be imported into or substituted for DTAA definitions; treaty interpretation governs treaty-taxation questions. Conclusions: The Assessing Officer's attempt to apply domestic retrospective amendment to alter treaty characterisation cannot be upheld. Issue 5: Applicability of higher-court decisions relied upon by Revenue (including regulatory/ copyright rulings) Legal framework: Binding precedents are applicable when their ratio covers similar legal questions and factual matrices; care is required before transposing decisions on regulatory jurisdiction or different statutory contexts into income-tax characterization. Precedent treatment: The Supreme Court decision invoked concerned regulatory scope (TRAI v. Copyright) and the Supreme Court acknowledged multiple distinct rights (original copyright, broadcast and re-broadcast) but did not decide income-tax characterisation. The Bombay High Court decision distinguishing broadcast reproduction right from copyright was directly on point and supports business-income characterisation. Interpretation and reasoning: The Court found the Supreme Court decision factually and legally peripheral to the tax characterisation issue; its ratio concern was regulatory authority, not taxation. The Supreme Court's recognition of broadcast rights being distinct actually supports the conclusion that broadcast reproduction rights are separate from copyright. The Bombay High Court and coordinate bench decisions directly support the assessee's position and were followed. Ratio vs. Obiter: Ratio - decisions distinguishing copyright from broadcast reproduction right are applicable and binding on the issue of whether distribution receipts constitute royalties; reliance on judgments addressing regulatory jurisdiction without relevant ratio on tax characterisation is misplaced. Conclusions: The higher-court authority cited by Revenue on regulatory issues does not alter the tax characterisation; authorities distinguishing copyright and broadcast reproduction rights are followed in holding the receipts to be business income. OVERALL CONCLUSION The Court holds that, on the facts and contractual terms examined (copyright expressly retained by the non-resident, grant of distribution/broadcast reproduction rights to an Indian distributor on principal-to-principal basis, MAP outcome and consistent prior acceptance), the distribution/subscription/advertising receipts are business income and not royalty under the DTAA or domestic law. The Assessing Officer's additions characterising the receipts as royalty and attempts to rely on retrospective domestic amendments are rejected; the assessments are set aside accordingly and the appeals allowed.