TaxTMI 
TaxTMI 
2016 (8) TMI 504
X X X X Extracts X X X X
X X X X Extracts X X X X
....e revenue read as under: "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that Taj India does not constitute an agency PE of the assessee within the meaning of Article 5(4) of the DTAA with regard to the distribution income received by it. 2.(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowances made by the Assessing Officer u/s.40(a)(i) of the I.T. Act in respect of claims of transponder charge expenses amounting to US$ 3,29,966 and up linking charges of US $ 3,05,347. 2. (ii) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the income received from the assessee by M/s. PanAmSat being in the nature of transponder charges and received by other non-residents being in the nature of up linking charges have arisen in India and accordingly tax should have been deducted at source on such expenses. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the distribution income earned by the assessee during the period when it was not a resident of Mauritius is not taxable in Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ice of the impugned appeal hinges upon the said note: "1 Taj TV Ltd. (Taj TV or 'The Company') is a foreign company registered under the Mauritian law. Taj-TV is engaged in the business of bringing to the Indian subcontinent and the Middle East the best in sports programming and production. Taj TV's primary focus is its sports channel programming and production. Taj TV's primary focus is its sports channel - Ten Sports. Taj is considered as resident for tax purposes in Mauritius as it is registered in Mauritius. We enclosed a copy of 'Tax Residency Certificate'.(TR of the company, marked a s Annexure-I 2. Taj-TV has appointed Ta] Television (India) Pvt. Ltd. ('Taj-India) as the advertising sales agent vide agreement dated 8 May 2002 to sell commercial advertising time to prospective advertisers and other parties in India, in connection with the business of programming and telecasting on "Ten Sports" Channel and to collect advertisement charges from India exporters and advertisers on behalf of Tai-TV. The said agreement has been approved by the Reserve Bank of India ('RB') vide their approval letter No. EC. CO, EPD/310/210. 16.08/02- 03 dated 19 August 2002. A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nterprise only if it carries business in India through a Permanent Establishment (PE) situated in India. If an enterprise carries on business in the other contracting state through a PE, the profit of the enterprise may be taxed in the other state but only so much of them as is directly attributable to the PE. Article 5 of the DTAA defines PE. 7. It is submitted that Taj-TV does not have a RE in India as the transactions entered into by Taj-TV are on a principal to principal basis and at arm's length prices. Taj-India does not have any authority to enter into any contract on behalf of Taj-TV and all the advertisement sales contracts are entered into between the advertisers and Taj-TV. The commission of 10% in respect of advertisement revenue is fair and consistent with industry practice, which has been approved by the RBI. In view of the same, it/s submitted that there is no RE in India resulting in any further tax implication. 8. The company humbly submits that it does not have any branch or place3 of business in India. Accordingly, in view of provisions of the Article 7 read with section 90(2) of the Act, the income of the Company is not subject to tax in India. The Company a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd video tapes. The said agreement involves the 'use of' or 'right to use' the copyright, trademark, etc. owned by the company. The assessee company is providing service through Taj India and Taj India could not have rendered any service to the subscribers and cable operators without the trademark, copyright, etc. transferred to it by the assessee Company; Thirdly, the assessee company allows the cable operators to use or access the encrypted signal for commercial exploitation by allowing them to distribute it to the viewers. The encrypted signal is the property of the assessee company and by allowing it to be commercially exploited, it is partially transferring the rights to the cable operators. Therefore, distribution income is taxable as 'Royalty' under section 9(1)(vi) of the Act. Since the assessee company was incorporated in British Virgin Islands and was re-registered as a company in Mauritius w.e.f. 12th July, 2002, therefore it is not entitled to treaty benefits of India-Mauritius DTAA in respect of distribution income earned up to 12 July 2002 (i.e. from 1.04.2002 to 12.07.2002) and such distribution income shall be taxable as 'Royalty'. However, he held that dis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TV and in any case merely being a wholly owned subsidiary, it does not follow that the subsidiary is the agent of parent company and in support, reference was made to para (6) of Article 5. It was further submitted that, under the meaning of Article 5(4) also, there cannot be an agency PE, because, the assessee has paid the commission of 10% which is at arm's length price to Taj India for the services rendered by it and the said payment of commission has been examined by the TPO both in the hands of the assessee as well as in the hands of the Taj India and no adjustment has been suggested. Thus, it was submitted that, once payment has been accepted to be at arm's length price then liability of the principal non-resident is extinguished in India. It was further submitted that, agent should have authority and also should have habitually exercised that authority to conclude contract in the name of non-resident principal, before any agent could be said to have constitute a PE under Article 5(4). Here Taj India does not have any authority to conclude contract in the name of Taj and, therefore, it cannot be said there existed an agency PE between assessee and Taj India under Article 5(4)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee to obtain TV Channel itself and secondly, it has entered into contract with other parties and that too in his own name. From the perusal of the sub-distribution agreement, he noticed that, 75% of the revenue belongs to Taj India and balance 25% belongs to sub-distributors. In any sub-distributors agreement, assessee does not figure anywhere. Thus, he concluded that, assessee has given distribution right to Taj India for permitting and distributing TV Channel in India on principal to principal basis and there is no evidence to show or hold that, Taj India is acting as an agent of the assessee qua the distribution business. Accordingly he concluded that, there is no agency PE for distribution income in terms of Article 5(4). 9. As regards the AO's conclusion and finding that Distribution income earned by the assessee for the period 01.04.2002 to 12.07.2002, that is, for the period of little over 3 months, the distribution income earned by the assessee is to be treated as 'royalty' income within the meaning of section 9(1)(vi), because prior to 13.07.2002, assessee was not resident of Mauritius and therefore, the benefit of DTAA will not be applicable and accordingly the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... any equipment, therefore, it did not amount to 'Royalty'. The Hon'ble Tribunal also held that fees paid for Transponder facility does not amount to 'Royalty' as it is not for a secret process; or 'Fees for Included Services' as it does not make available technical knowledge as per Article -12 of India-US DTAA. The ld. CIT(A) also held that the payment of 'transponder fees' was not borne by the PE in India, hence, even if payment is held to be 'Royalty', it is still not taxable as it is not borne by PE of US company in India therefore, there was no obligation to deduct tax at source in view of Article 12(7). In respect of allowance of payment of US $ 305,347, paid to PanAmSat and various other non-residents as Up linking charges which has been disallowed under section 40(a)(i) by the AO, the ld. CIT(A) held that Up linking charges paid by the assessee company are in connection with the events taking place outside India for sending the signal from the venue of the event to the Satellite. The payment is made for rendering services by PanAmSat to uplink the signal from the venue of the event to the Satellite therefore, it is not in the nature of 'Royalty' or 'Fees for included service....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d copyright transferred to it by the assessee. In support, he strongly relied upon the decision of ITAT Mumbai Bench in the case of NGC India Network LLc v DIT in ITA No. 7994 and 7631 of 2012 order dated 16th December, 2015, wherein, the Tribunal has held that such a distribution income amounts to "royalty" and has to be seen from the point of view of newly inserted Explanation (vi) to section 9(1)(vi). Regarding various disallowances on account of transponder charges, up linking charges to M/s PanAmSat he submitted that, now in view of the newly inserted Explanation (vi) by the Finance Act, 2012 with retrospective effect from 01.06.1976, such a payment will fall within the ambit of 'royalty' only. In support of this view, he strongly relied upon the decision of Hon'ble Madras High Court in Verizon Communications Singapore Pte Ltd. v ITO, reported in [2014] 361 ITR 575; Tribunal order in Atos Information Technology HK Ltd vs DCIT in ITAT Mumbai Bench in ITA No. 1464/Mum/2015; and also decision of Hon'ble Bombay High Court in the case of CIT. Vs. Siemens Aktiongesellschaft, reported in [2009] 310 ITR 320 which is in the context of Explanation 2 to section 9(1)(vii) brought by the F....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reciation of facts and also after analyzing the scope and meaning of Article 5(4), therefore, the same should be affirmed. Regarding treatment of distribution revenue as 'royalty', he submit that there is an inherent contradiction in the finding of the AO, because for the first three months, he is saying that the revenue from distribution would be treated as "royalty" and post July-2002, when assessee company got incorporated in Mauritius and India-Mauritius Treaty is applicable, then same distribution income is to be treated as "business income". There cannot be two treatment of one source of income, either it could be 'royalty income' or it could be 'business income'. Regarding other payments, like transponders fees paid to PanAmSat, he submitted that it needs to be examined from the angle of Article 12 of India-US DTAA (as PanAmSat is a US based company). The assessee does not get any right to use the transponder because it does not get any physical control or possession over the transponder to use it in its own manner. PanAmSat is mainly providing the services to the assessee company through the transponder and the assessee does not receive any knowhow in relation to the secret....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asoning also the decision of ITAT Mumbai Bench in the case of Viacom 18 Media Pvt. Ltd will not be applicable. As regards the decision of Hon'ble Bombay High Court in the case of CIT vs. Siemens Aktiongesellschaft (supra), the Hon'ble Delhi High Court has also dealt with this point that the issue and situation before the Hon'ble High Court was materially different and also the term 'royalty' was not defined in the German DTAA. Regarding the decision of ITAT in the case of Atos Information Technology HK Ltd (supra), he submitted that, first of all, this case pertains to HongKong based company wherein there is no DTAA and secondly, the issue involved therein was different. On the decision of ITAT Mumbai in the case of NGC Network (supra), he submitted that in that case matter was set-aside to AO and no final decision was taken by Tribunal qua the distribution income. In any case, here in this case AO for the period of 9 months and in subsequent years has himself held that the income from distribution is business income; therefore, this decision will not apply at all. 15. Without prejudice to the above submissions, he submitted that, even if the retrospective amendment brought by the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnection with the business of programming and telecasting of 'Ten Sports' Channel. As per the agreement, commission @ 10% of the advertisement revenue was paid to Taj India. The assessee has claimed that, such an income is not taxable in India, because there is no PE in India as Taj India is not a dependent agent of the assessee within the terms of Article 5(4). This contention of the assessee has been negated by the Ld. CIT(A) after discussing the issue in detail and holding that, there is no agency relationship between the assessee and the Taj India qua the advertisement income within the scope of Article 5(4). However, in the revenue's appeal, the main issue involved in ground no.1 is with regard to taxability of distribution revenue in terms of "Distribution Agreement" dated 1st March, 2002. Under the terms of the distribution agreement, the assessee has appointed Taj India as exclusive distributor in India and prohibits the assessee for entering into distribution agreement with anybody else. The Ld. CIT(A) after taking note of the 'Distribution Agreement' and examining various terms and clauses used therein and also taking into consideration the conduct of the parties, came to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph. 6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other". Thus, an agent is deemed to be a PE of a foreign enterprise, if he is not independent and has habitually exercises an authority to conclude contracts in the name of the enterprise unless the activities of such person are limited to those mentioned in paragraph 4 that is, to the purchase of goods or merchandise for the enterprise; or if he has no such authority, but habitually maintains a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Thus, the character of an agent, who can be said to be a dependent only if, firstly, the commercial activity for the enterprise is subject to instructions or comprehensive control....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of Hon'ble Bombay High Court in the case of DIT vs. Set Satellite (supra) has been relied upon. In any case, it has been submitted that, even otherwise also the definition of "royalty" under Article 12(3) of Indo-US-DTAA is also not applicable, because transponder charges is only use of facility and it is not an equipment and does not amount to use of any copyright effecting work, secret formula, process etc or any other term described in para 3 of Article 12. The Ld. CIT(A) has held that it is not a 'royalty' and secondly, even otherwise also by virtue of Article 12(7) such a royalty cannot be taxed in India, because it is not borne by PE or fixed place of the US company in India. The Ld. DR has strongly relied upon amended definition of the 'royalty' under the Act, wherein, the scope and definition of 'royalty' has been enlarged by the newly inserted Explanation (vi) and (vi) by the Finance Act, 2012 with retrospective effect from 01.06.1976 and has contended that the said definition is to be read into DTAA also, that is, the definition of 'royalty' has to be taken from the Domestic Law. In support, Ld. DR has strongly relied upon the decision of Madras High Court in the case o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ademark, design, secret formula or process. It is also not use or right to use any industrial, commercial, or scientific equipment. There is no such kind of right to use which is given by Pan Am Sat to asessee. Thus, the said payment does not fall within the ambit of the terms used in para 3 of Article 12. So far as the reading of amended definition of 'royalty' as given in section 9(1)(vi) into treaty, Hon'ble Delhi High Court in its latest judgment in the case of DIT vs. New Skies Satellite(supra), wherein it has considered Hon'ble Madras High Court decision in the case of Verizon Communications Singapore Pte Ltd. (supra) also, have discussed the issue threadbare and came to the conclusion in the following manner:- "60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, supra note 1, when the definitions were in fact pari material (in the absence of any contouring explanations), will continue to hold the filed for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ces of equipment outside India is not taxable in India. Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications vs. DIT, reported in (2011) 332 ITR 340 later on reiterated that there is no royalty payment in such cases under the domestic law, that is, section 9(1)(vi), prior to amendment. Thus judicial precedents supported the case of the assessee. Here, the maxim of "lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions including the ITAT Mumbai Benches in the case of Channel Guide India Ltd (supra) wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, we hold that assessee was not liable to deduct TDS at the time of making the payments. Accordingly, disallowance under section 40(a)(i) could not have been made by the AO and the order of the CIT(A) is affirmed. Ground No.2(a) & (b) raised by the rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bombay High Court in the case of DIT vs Set Satellite Singapore Pte Ltd (supra) on the ground that, the programming cost is paid to the assessee to various nonresident outside India for acquiring right brought on sports events taking place outside India. Thus, such programming cost cannot be deemed to arise in India as liability to pay programming cost as assumed by the assessee company outside India and it cannot be held to be borne by any PE in India. Thus, ground no.4 is also dismissed. 24. In the result, appeal of the revenue for AY 2003-04 stands dismissed. 25. Now we will take-up revenue's appeal for AYs 2004-05 and 2005-06 being ITA No. 412 of 2008 and ITA No. 4176 of 2009 respectively and grounds of appeal raised in these appeals are:- (Assessment year: 2004-05): "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that Taj India does not constitute an agency PE of the assessee within the meaning of Article 5(4) of the DTAA with regard to the distribution income received by it. 2.(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowances made by the Assessing Officer u/s....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... restored. 26. From the perusal of the grounds it can be seen that they are same and facts raised in the aforesaid appeals of the revenue are similar to the facts and issues involved in revenue's appeal which we have dealt and deliberated in detail and decided by us herein above for the AY 2003-04, which will apply mutatis mutandis to impugned appeals of the revenue also as the same facts are permeating in these years also. Accordingly, both the appeals of the revenue stands dismissed. 27. Now, we shall take up assessee's appeals being ITA No. 5537 of 2008; ITA No. 5536 of 2008 and ITA No.4706 of 2009 for AYs 2003-04, 2004-05 and 2005-06 respectively. In all these year, the assessee has raised identical grounds, thus we take-up grounds for AY 2003-04 for ready reference, which reads as under:- "On the facts and in the circumstances of the case, the Commissioner of Income Tax Appeals XXX [hereinafter referred to as learned CIT(A) has erred in law and in facts in concluding that Taj TV Ltd (Taj) has the income chargeable to tax in India on the grounds that it has Permanent Establishment In India" 28. At the outset, it is noticed that, appeal of the assessee are barred by limit....