2022 (12) TMI 287 - AT - Income Tax

Subscription Revenue Not Taxable as Royalty in India; Permanent Establishment Issue Deemed Academic

BBC World Distribution Ltd. Versus ADIT, Circle-1 (1), Intl. Taxation, New Delhi

The Tribunal held that the subscription/distribution revenue earned by the assessee is not taxable as royalty in India. It was determined that the revenue ... Income accrued in India - subscription/distribution revenue earned by the assessee - royalty receipt - Permanent Establishment (PE) in India so as to attribute any part of the profit to such PE - HELD THAT:- We are of the view that the approach of the departmental authorities in taxing the royalty income in these two assessment years is quite baffling. When, it is a fact on record that the entire distribution revenue generated in India from distribution of BBC World News Channel has been accounted for in the books of Indian entity and offered to tax in India, how a part of such income can be notionally attributed to the assessee and taxed in India. Firstly, as held by us earlier, the distribution revenue is not in the nature of royalty and secondly when the assessee has not received any part of such revenue, which has been offered to tax at the hands of BWIPL, no part of such income can again be attributed to the assessee notionally and taxed in India. Therefore, the addition made has to be deleted. Thus the issue, whether the assessee had a PE in India in these two assessment years is purely academic in the nature, as, the entire income has been offered to tax by Indian entity. Before we part, for the sake of completeness, we must deal with the submission of learned Departmental Representative that the distribution revenue earned by the assessee would otherwise qualify as equipment royalty and process royalty under Explanation 2(iva) of section 9(1)(vi) of the Act. In our view, such argument of learned Departmental Representative is preposterous as no such finding has been recorded either by the Assessing Officer or by learned Commissioner (Appeals) and DRP. - Decided in favour of assessee. Issues Involved:1. Whether the subscription/distribution revenue earned by the assessee is chargeable to tax as royalty.2. Whether the assessee has a Permanent Establishment (PE) in India so as to attribute any part of the profit to such PE.Detailed Analysis:Issue 1: Taxability of Subscription/Distribution Revenue as RoyaltyThe primary issue was whether the subscription/distribution revenue earned by the assessee (BBCWD) from distributing the BBC World News Channel in India constitutes royalty under domestic law and the India-UK Double Taxation Avoidance Agreement (DTAA).- Assessing Officer's View: The Assessing Officer asserted that the revenue is in the nature of royalty, both under domestic law and the DTAA, arguing that the right to distribute the channel amounted to the transfer of the right to use copyright. Consequently, the revenue was taxed at 15% on a gross basis.- Assessee's Argument: The assessee contended that the revenue should not be treated as royalty because the distribution agreement only conferred broadcasting reproduction rights, not copyright. The assessee emphasized that it did not own the copyright over the channel's content, which remained with BBC World News Ltd., and thus could not transfer any copyright to BWIPL. The assessee cited several judicial precedents, including MSM Satellite (Singapore) Pte. Ltd. and ESPN Star Sports Vs. Global Broadcast News Ltd., to support its position.- Tribunal's Decision: The Tribunal agreed with the assessee, concluding that the distribution revenue is not in the nature of royalty. It held that the agreement only granted broadcasting reproduction rights, not copyright, and thus could not be taxed as royalty under section 9(1)(vi) of the Act or the India-UK DTAA. The Tribunal referenced multiple decisions, including those by the Bombay High Court and other Coordinate Benches, to reinforce this conclusion.Issue 2: Existence of Permanent Establishment (PE) in IndiaThe second issue was whether the assessee had a PE in India through BWIPL, which would necessitate attributing part of the profit to such PE.- Assessing Officer's View: The Assessing Officer argued that BWIPL constituted a PE of the assessee in India, based on guidelines from the Ministry of Information and Broadcasting. Consequently, the revenue was taxable in India.- Assessee's Argument: The assessee contended that the relationship with BWIPL was on a principal-to-principal basis, and BWIPL did not have the authority to conclude contracts on behalf of the assessee. The assessee argued that no part of the revenue should be attributed to it, as the entire distribution revenue was received and taxed in India by BWIPL.- Tribunal's Decision: The Tribunal found the issue of PE to be academic for assessment years 2007-08 and 2008-09, as the entire distribution revenue was accounted for and taxed in India by BWIPL. The Tribunal noted that attributing notional income to the assessee when the revenue was already taxed in India was unjustified. The Tribunal also rejected the Departmental Representative's new argument regarding equipment and process royalty, as it was not previously raised by the departmental authorities.Conclusion:The Tribunal concluded that the subscription/distribution revenue earned by the assessee is not in the nature of royalty and thus not taxable in India. Additionally, the existence of a PE in India was deemed academic for the relevant assessment years, as the entire revenue was already taxed in India by BWIPL. Consequently, the Tribunal deleted the additions made by the Assessing Officer and allowed the appeals.