TaxTMI 
TaxTMI 
2016 (1) TMI 131
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....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 advertisements for telecasting in the channels. Hence the assessee compa....
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....ed 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 as the "dependent agent Permanent Establishment" of the assessee. The AO accordingly assessed ....
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....essee 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) directly negotiates and agrees to the terms with the advertisers/agencies (customers) ---NGC India enters into contracts for sale of ....
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....s 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 direct or indirect control or supervision of NGC Asia. Accordingly, an important aspect for existence of an agency relationship, wherein an agent is required to conduct the business according to the directions of the principal is not satisfied. Therefore, based on the....
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....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 directly. However, we are of the view that the assessing officer has discussed only the business module of the assessee and has not given any finding that the assessee procures advertisements directly, which is evident in the observations made in point No.6, wherein the AO observes that the assessee along with its associates earn the revenue. 8. We have e....
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....ecast 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 India. The various observations made by the assessing officer has been summarized by him in paragraph 4.4.15 of his order passed for assessment year 2007-08. 12. The Assessing officer further held that there is no material changes in the rights and obligations of the assessee under the old agreement (principal to agent agreement) and the new agreement (principal....
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.... 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 by the assessee with NGC India, the assessee has paid 15% of advertisement revenues to the Indian company. Further the advertisement revenue would depend upon the number of advertisements received and also quantity of air time used. There should not be any dispute that M/s NGC India has acted as agent of the assessee company under the old agreement. 17 Under the new agreement, the asses....
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....#8223; 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 air time" is an item that can be identified and abstracted, since the telecasting time limit is predetermined. The right over the advertisement air time may also be capable of being possessed till the time of its expiry. For example, if a person purchases the right over the advertisement airtime of say, 30 minutes to be used before the expiry of a particular month, then the said can possess the right ....
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....e 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 authority or capacity to create a legal relationship between person referred to as a principal and an outside third party. Therefore, the basic and essential requisites of an agency ordinarily would be that: The agent makes the principal answerable to third persons whereby the principal can sue third parties directly and renders himself, that is, the principal, liable to be sued directly by the third parties. - Varsha En....
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....cturer 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 manufacturer does not come in the picture in respect of further sale of goods. We have earlier noticed that the "advertisement airtime" referred to here does not give to anybody the right of universal use and the same is restricted to the channels owned by the assessee only. Even after the sale of "advertisement airtime" by the assessee, the purchaser gets only a right to enforce the assessee herein to telecast the advertisement material of the purchaser, i.e., ass....
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....onsideration. 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 "permanent establishment" in terms of India-USA DTAA. In this regard, the assessing officer has taken the view that the assessee is having Permanent Establishment in India in terms of Article 5(4)(c), para 1 of Article 5, para 2(i) of Article 5 of the India-US tax treaty. Since we have held that NGC India should be considered as an agent of the assessee for the detailed reasoning given above, we agree with the tax authorities that the new agreement entered between the par....
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....sia 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 provided by NGC India, into the Channel(s) for broadcasting." On a combined reading of the various clauses of the new agreement coupled with the view expressed by us in the previous paragraphs, we are of the view that M/s NGC India has and habitually exercises in India an authority to conclude contracts on behalf of the assessee and the same is binding on the assessee, since it has agreed to broadcast the advertisements procured by NGC India. Hence NGC India should be classified as "dependent agent" of the assessee herein i....
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....lations 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 also made under the IT Act (for example : ss. 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm‟s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associat....
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....ties 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 of the view that the assessee cannot take support of this decision. The department also took a contention that the decision in the case of Set Satellite (Singapore) Pte Ltd (supra), which was considered in the case of B4U International Holdings Ltd (supra) have been rendered by taking into account the Circular No.23 of 1969 issued by the CBDT and since the said circular has been withdrawn by the CBDT, vide Circular No.07 of 2009 dated 22.10.2009, the ratio of the both the decisions are distinguishable. However, in our view, the said c....
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....ven 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 India cannot modify or delete anything from the transmission of the channels and that it has to ensure that the channels are transmitted in their entirety. The assessee company has also restricted NGC India and the intermediaries from modifying, replacing or copying any copyright, trademarks, trade names, logos and names. The assessee has also prohibited NGC India and its intermediaries from copying any programs included on the channels." 5.7 Royalty can be said to be a compensation paid under the license granted by the owner to the other who wishes to make use of the license. In th....
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....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 granted NGC India non-exclusive license to use the trade marks associated with the Channel solely for the purpose of marketing and distribution. Hence, NGC India does not have rights to commercially exploit these trade marks in any manner. 33. The Ld A.R further submitted that the definition of term "Royalty" given in Explanation 2 to section 9(1)(vi) of the Act covers the payment received towards transfer of any rights in respect of copyright of a literary, artistic, scientific work. However, the payment received by the assessee does not fall in that category. He further submitted that the term „Co....
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....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:- (a) JDIT Vs. Harvard medical International, USA (16 taxmann.com 69) (b) Harvard Medical International Inc. Vs. DCIT (33 taxmann.com 50) 36. The ld A.R further submitted that the distribution rights given by it is only a Commercial right and is also not covered by the definition of "royalty or fee for included services" given under Article 12 of India-USA treaty. He submitted that the tax treaties entered with some countries like Hungary, United Mexican States, Croatia etc., the definition of royalty specifically covers payment for "transmission by satellite, cable, optic fibre or similar technology. Howe....