TaxTMI 
TaxTMI 
2016 (1) TMI 131
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....lty" under Article 12 of India-USA DTAA and also u/s 9(1)(vi) of the Act and hence the same is also taxable in India. 3. The facts relating to the case are discussed in brief. The assessee herein, viz., M/s NGC Network Asia, LLC ('NGC Asia); is a Delaware, US incorporated entity. The assessee is a subsidiary of "Fox Entertainment Group Inc". The assessee holds 100% shares in NGC Network (Mauritius) Holden Ltd, which in turn, holds 99% shares in M/s NGC Network (India) Private Limited (hereinafter "NGC India"). All these companies are either subsidiaries/affiliate companies of M/s News Corporation, USA. 4. The assessee is the owner of two television channels viz., The National Geographical Channel and Fox International Channel. It is engaged in the business of broadcasting of its channels in various Countries including Indian sub-continent. As per Article 4 of the India - US Double Taxation Avoidance Agreement ('India - US Treaty), the assessee is eligible for the benefits of the India - US treaty by virtue of being a resident of USA. The assessee company has appointed M/s NGC India as its distributor to distribute its television channels and also to procure advertisem....
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...., the assessee has given Commission @ 15% to NGC India for the month of April, 2006 and retained 85% of the advertisement revenue for that month. As per the new agreement entered between the parties, it has received fixed sum of US $ 22,80,000/- from NGC India for giving contract of procuring advertisements for the period from May, 2006 to 31.3.2007. In respect of second source of revenue, viz., for giving distribution rights, the assessee has received US $ 32,00,000 during the year relevant for AY 2007-08. It is pertinent to note that, with regard to the various international transactions entered into by the assessee, a reference was made to the Transfer Pricing Officer (TPO) and the TPO has accepted the Arm‟ length Price of the international transactions entered into by the assessee with its Associated Enterprises (AE). The assessee took the view that both types of income, cited above, are not taxable in India and accordingly did not offer them in the return of income filed for AY 2007-08. The assessing officer/DRP, on the contrary, held that the advertisement revenues as well as distribution revenues are taxable in India, since the tax authorities considered M/s NGC India ....
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.... India at arms length basis, no further income can be attributed to the assessee. In this regard, the assessee placed reliance on the decision rendered by Hon‟ble Supreme Court in the case of DIT Vs. Morgan Stanley and Co. (292 ITR 416) and the Hon‟ble Bombay High Court in the case of SET Satellite (Singapore) Pte Ltd (supra). 7. The assessing officer examined the nature of activities carried on by NGC India and also explanations furnished by the assessee. The submissions made by the assessee and the observations of the AO are extracted below:- "Further, a brief overview of some of the activities of NGC India upon purchasing of advertisement airtime from NGC Asia have been stated below: ---NGC India decides the pricing strategy, the target market segment etc. for the advertisement revenues. ---NGC India decides whether it should sell the advertisement airtime through its own sales force or through agents and accordingly, the advertising airtime is sold by NGC India ---Further, NGC India also solely decides the price and other terms at which it should sell advertising airtime to any customer NGC India (directly or through it agent) ....
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....ngs with third persons. In this connection, we would like to draw your honour's attention to the following clauses of the agreement Clause 1) a) "NGC Asia agrees to sell to NGC India and NGC India agrees to acquire from NGC Asia upon the terms and conditions set out in this agreement, the Ad time on the Channel (s)" Clause 1) d) "For the avoidance of doubt it is clarified that while NGC India may deal with the Ad time and/or additional Ad time in its own right and in such manner as it deemed fit, onwards sale, if any, of Ad time and additional Ad time by NCG India to its customers will be entirely at its own risk, at price agreed between NGC India and such customers an and on such terms as it may consider appropriate. Further, no customer shall have privity of contact with NGC Asia and the entire risk and responsibility in all respect regarding such customers shall rest exclusively with NGC India." Clause 2)ii) "NGC India shall alone be responsible for its acts or omissions and shall not be deemed to be acting for and on behalf of NGC Asia." The agreement does not require or provide for NGC India under the ....
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.... earlier modules. It involves up-linking the programmes to a satellite which may be owned, hired or taken on lease by the NGC Asia (assessee). Thereafter down-loading has to be done through decoders provided to the cable operators for which prescribed fee are levied. 5. The next step, as the main source of revenue, NGC Asia (assessee) have to procure advertisements from customers. 6. All the above activities are present in India out of which the NGC Asia (assessee) along with its associates earn the revenue. 7. The above scheme of the operations carried out by the NGC Asia (assessee) through the NGC India company and its associates and agents are nothing but business operations carried out in India in which NGC Asia (assessee) do occupy the leading role. 8. The telecasting business being a continuous and flowing process, the entire activities are carried out by the NGC India through the help of agents, sub-agents and other concerns and subsidiaries." During the course of arguments, the Ld A.R submitted that the observations made by the AO in point no.5 and 6 are wrong, i.e., he submitted that the assessee does not procure advertisements ....
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....the same to the viewers. Hence there is direct relationship between the assessee and cable operators. NGC India is procuring advertisement material and sent the same to the assessee and it does not have any role in uplinking/downlinking activities. The Assessing officer further reiterated his view that the advertisement content is inseparable part of flow of telecast contents and hence it cannot be segregated and sold. Accordingly the assessing officer held that NGC India is only a functional agent of the assessee. 11. The assessing officer further observed that the procurement of advertisement as well as its telecast takes place in India, i.e., the purchase, sales, delivery and consumption of advertisements are generated as well as concluded in India. Hence the source of advertisement revenues is India. The AO also observed that the NGC India procures advertisement by using the brand name of the assessee and hence all telecast contents are identified with the brand name of the assessee only. Accordingly the assessing officer held that NGC India is only a functional agent of the assessee and further the assessee has earned advertisement revenue through its business connection in....
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.... Since the relationship between NGC India and the assessee is on principal to principal basis, NGC India cannot be considered as dependent agent and hence NGC India cannot be considered to be the PE of the assessee. In support of these contentions, the Ld A.R submitted that (a) the "Advertisement air time" falls in the category of "goods" and hence it can be transferred like any other "goods". (b) the Transfer Pricing Officer, having certified that the international transactions have been entered at arms length, no further income can be attributed to the assessee so as to make anything taxable in India. 16. In the instant case, the assessee is in the business of broadcasting of television programmes and advertisements. The time limit available to the assessee in a day is 24 hours. This time limit appears to have been segregated into "Advertisement airtime" and "Programme air time", meaning thereby, the assessee has prefixed the time limit for telecasting advertisements. For soliciting the advertisements, the assessee is required to appoint persons and the assessee has appointed M/s NGC India to solicit advertisements from India. Under the old agreement entered ....
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....city‟ was „goods‟ for the purpose of imposition of sales tax under the Madhya Pradesh General Sales tax Act, 1959, wherein the characteristics of „goods‟ was explained as under:- "..... It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. are „goods‟ for the purposes of sales tax..." Based on the above said reasoning, it was held in the case of Ambient Space sellers Ltd Vs. Asia Industrial Technology Pvt Ltd 1998 PTC (18) (Bom) that "Signals" shall constitute goods, since they can also be transmitted, transferred, delivered, stored and possessed. In the case of CIT Vs. Sun TV Ltd (296 ITR 274)(Mad), it was held that the "right assigned to telecast the programmes" in foreign countries either by sale of video cassettes or with the help of satellites are having attributes required for bringing the property involved within the meaning of "goods" are satisfied with reference to its utility, capability of being bought and sold; and capable of being transmitted, transferred, delivered stored and possessed. 19. The "advertisement....
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....to M/s NGC India to procure advertisements. Though the "right to procure advertisements" for particular "airtime" may be capable of being transferred, but the same cannot be consumed/used by the buyer of the right, without the assistance from the assessee by way of telecasting the same in the television channels. 20. The next question that arises is about the nature of relationship between the assessee and NGC India. In the new agreement, it is provided that the relationship between them is that of "principal to principal", whereas the tax authorities have taken the view that they still continue the "principal to agent" relationship even under the new agreement also. The nature of Principal- agent relationship came to be examined by the Hon‟ble Delhi High Court in the case of CIT Vs. Idea Cellular Ltd (325 ITR 148), wherein the Hon‟ble High Court has observed as under:- "19. This Court in Commissioner of Income Tax, New Delhi Vs. Singapore Airlines Ltd. [2009-ITOL-183-HC-DEL-IT] analyses the aforesaid definition in the following manner: "16. It is clear from the definition that an agency comes into existence where one person is vested with the autho....
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....ourt in the case of Idea cellular Ltd (supra) as under:- "In contrast, the legal position when the goods are sold by principal to its distributors creating "principal and principal" relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. Another Vs. Union of India and Others [AIR 2006 SC 1383], the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof Sales Tax Act is not attracted, though the decision was rendered in the context of liability of sales tax." 22. In a principal to principal relationship in respect of sale of goods, the ma....
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....r the form and hence even if the new agreement states that the relationship between the assessee and NGC India is that of "principal to principal" basis, in view of the foregoing discussions, we are of the view that the relationship between them actually exists on "principal to agent" basis only. Under the old agreement, the assessee has paid 15% of the revenue as commission to NGC India and under the new agreement; it has sold advertisement airtime for a fixed consideration. In our view, the assessee has only changed the method of giving compensation to NGC India or method of generating revenue from the broadcasting of advertisements. Under the old agreement, the compensation given to NGC India as well as the revenue generated by the assessee was agreed to be shared in a fixed proportions, whereas under the new agreement, it has been determined at the consolidated figure. In our view, the methodology adopted by the parties to share the revenue or to give compensation to NGC India for services rendered may not be the determining factor to decide about the nature of relationship between the parties. 23. The next question that arises is as to whether the assessee is having "perman....
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....eement support this view:- Clause 1) d) "For the avoidance of doubt it is clarified that while NGC India may deal with the Ad time and/or additional Ad time in its own right and in such manner as it deemed fit, onwards sale, if any, of Ad time and additional Ad time by NCG India to its customers will be entirely at its own risk, at price agreed between NGC India and such customers an and on such terms as it may consider appropriate. Further,no customer shall have privity of contact with NGC Asia and the entire risk and responsibility in all respect regarding such customers shall rest exclusively with NGC India". Though in clauses 2 of the new agreement, which contains certain restrictions with regard to the advertisements procured by the NGC India, in our view, they have been provided for in order to ensure that the NGC India complies with the Rules and regulations framed by the Government. Subject to the said obligations, the assessee is otherwise required to telecast the advertisements procured by NGC India, which is clear from the following clause:- "3(a)(iii) NGC Asia agrees to insert the advertisements provided by NGC India, as per schedule provid....
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.... company is liable to be assessed in India in respect of payments made to the Indian Company for the services availed from Indian company. We may reiterate here that the foreign company only paid service charges and did not generate or receive any money from Indian companies. The Transfer Pricing Officer has certified the payments made by the foreign company to be at Arms Length Price. Under these set of facts, the Hon‟ble Supreme Court has observed as under:- "32. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under art. 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of IT Act. All provisions of IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are als....
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....te any further income, since the India has already received its due share of income. We wish to clarify here that the ratio laid down in the above said case has application while examining the existence of PE under Article 5(5) of the Act. Once the foreign company is held to have PE in India, then the taxability of business income is required to be determined in terms of Article 7 of the India-US treaty. 28. In the case of B4U International Holdings Ltd (supra), there was clear finding that the assessee therein carried on all activities from Mauritius and all the contracts were concluded in Mauritius. The activities carried out from India was found to be incidental or auxiliary /preparatory in nature and further the Indian company received only 4.69% of its total income from the assessee before the High Court. The assessee also placed strong reliance in the case of Set Satellite (singapore) Pte Ltd (307 ITR 205). However, in the said case also, there is a clear finding that the contracts were concluded in Mauritius. Hence paragraph 5 of Article 5 of treaty was applied. In the instant case, we have held that the paragraph 4 of Article 5 of the treaty shall apply and hence, we are....
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....eparate right by name "Broadcasting Reproduction Right" and the same is different from copyright. The AO however did not accept the contentions of the assessee. He observed that the agreement entered between the assessee and NGC India provide for restrictions on the use of Trade mark of the assesee. Further, the assessee holds full control over the channels and NGC India is allowed to only exploit the channels. He further held that the definition of term "royalty" given in Explanation 2 to sec. 9(1)(vi) of the Act is wider in scope that the definition given in the Indo-US treaty Further, the AO analyzed some of the clauses of the agreement and observed as under:- (a) As per the definition, the broadcast has been defined as broadcasting distribution and redistribution of the channels in the territory. (b) Channels means programme channels in digital, encrypted format comprising of channels as specified. (c) Intermediaries mean any person, including redistributors, cable operators and other media intermediaries authorized by NGC India to distribute the channels. (d) The assessee company has granted licenses to NGC India. It can be seen that NGC ....
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....hence taxable as "royalty" under the Treaty with U.S. The AO also observed that the United States has considered the broad casting reproduction rights as copyright. Accordingly, the assessing officer has assessed the fee received for giving distribution rights as "royalty" income. The Ld DRP also confirmed the same. 32. The ld A.R submitted that the assessee has transferred the distribution rights to NGC India to distribute the channels in India. The assessee does not have any control over the activities undertaken by NGC India nor does it undertake any activity in India as regards the distribution rights granted. M/s NGC India has carried on the distribution activity on its own and the entire revenue from the activity accrues to NGC India only. Further, neither the NGC India nor any of the intermediaries can modify or delete anything in the course of Channel, i.e., the programmes shall be transmitted in its entirety without making any amendment. Further NGC India or any of the intermediaries cannot copy any of the programmes included on the Channel for the purpose of re-transmitting them later or for any other reason. Accordingly, the Ld A.R submitted that the assessee has gran....
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....the assessee from M/s NGC India is not payment towards copyright, but it is towards broadcasting re-production rights. 34. Alternatively, the ld A.R submitted that, even if it is contended that the Channel as a copyright, what NGC India is paying for is the right to use the copyrighted article (i.e., if the channel could be considered to be so) by virtue of being permitted to distribute the channel. Accordingly the ld A.R submitted that the NGC India does not acquire any right in the underlying copyright (i.e., right to modify/reproduce the channel/content) and hence it cannot be said that NGC India is making payment for a copyright. 35. The Ld A.R submitted that the assessee has permitted NGC India to use its trade marks only for limited purpose of using the same for marketing activities. He submitted that the incidental use of trademark/trade name/log cannot be held to be royalty. In this regard, the Ld A.R placed reliance on the decision rendered by the Mumbai bench of Tribunal in the case of Sheratorn International Inc. Vs. Deputy Director of Income tax (107 ITD 120)(Delhi). The ld A.R also placed reliance on the decision rendered in the following cases in this regard:- ....