Tribunal: ESPN India not liable for tax on payments to ESPN UK

M/s. ESPN Digital Media (India) Pvt. Ltd. Versus International Taxation 1 (1), Chennai.

M/s. ESPN Digital Media (India) Pvt. Ltd. Versus International Taxation 1 (1), Chennai. - TMI Issues Involved:
1. Whether the payments made by ESPN India to ESPN UK for advertisement space constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act, 1961.
2. Whether ESPN India is liable for non-deduction of tax at source under Section 201(1) & 201(1A) of the Income Tax Act.
3. Applicability of the India-UK Double Taxation Avoidance Agreement (DTAA) to the payments made by ESPN India.
4. Impact of the unilateral amendments to Section 9(1)(vi) of the Income Tax Act on the definition of 'royalty'.
5. Relevance of the Equalisation Levy provisions introduced by the Finance Act, 2016.

Detailed Analysis:

1. Payments as 'Royalty':
The primary issue is whether the payments made by ESPN India to ESPN UK for purchasing advertisement space on its websites constitute 'royalty' under Section 9(1)(vi) of the Income Tax Act. The assessee argued that the payments were merely for the purchase of advertisement space and did not involve any transfer of rights, property, or information. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the payments were for the use of servers and thus constituted 'royalty'. The Tribunal noted that the reseller agreement did not provide any right to use any industrial, commercial, or scientific equipment, nor was the website or server under the control of ESPN India. The Tribunal relied on the decision in Engineering Analysis Centre for Excellence Pvt. Ltd. v. CIT, which held that mere usage of a facility does not constitute 'royalty'.

2. Non-Deduction of Tax at Source:
The AO and CIT(A) treated ESPN India as an 'assessee in default' for not deducting tax at source under Section 201(1) & 201(1A) of the Act. The Tribunal, however, held that since the payments did not constitute 'royalty', ESPN India was not liable to deduct tax at source. The Tribunal also noted that the unilateral amendments to Section 9(1)(vi) expanding the definition of 'royalty' could not override the more beneficial provisions of the India-UK DTAA.

3. Applicability of India-UK DTAA:
The Tribunal examined whether the payments fell under the definition of 'royalty' as per Article 13 of the India-UK DTAA. It concluded that the payments were not for the use of, or the right to use, any industrial, commercial, or scientific equipment, nor for any process. The Tribunal emphasized that the DTAA provisions would prevail over the unilateral amendments to the domestic law.

4. Unilateral Amendments to Section 9(1)(vi):
The AO and CIT(A) relied on Explanations 5 and 6 to Section 9(1)(vi), introduced retrospectively by the Finance Act, 2012. The Tribunal, citing the Supreme Court's decision in Engineering Analysis Centre for Excellence, held that such unilateral amendments could not apply to the Tax Treaties. The Tribunal also noted that the withholding obligation could not be imposed retrospectively, as it would lead to impossibility of performance.

5. Equalisation Levy Provisions:
The Tribunal addressed the introduction of the Equalisation Levy (EL) by the Finance Act, 2016, which aimed to tax online advertisements not chargeable under the Act or the Tax Treaties. The Tribunal noted that the consideration for advertisement space was subject to EL and not 'royalty'. It highlighted that treating the payments as 'royalty' would result in double taxation, contrary to legislative intent.

Conclusion:
The Tribunal concluded that the payments made by ESPN India to ESPN UK for advertisement space did not constitute 'royalty' under Section 9(1)(vi) or the India-UK DTAA. Consequently, ESPN India was not liable for non-deduction of tax at source. The Tribunal allowed the appeals filed by ESPN India and directed the AO to delete the demands raised under Section 201(1) & 201(1A) of the Act. The decision emphasized the precedence of Tax Treaties over unilateral amendments to domestic law and the relevance of the Equalisation Levy provisions.