TaxTMI 
TaxTMI 
2020 (10) TMI 245
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....h Section 144C(1) of the Income-tax Act, 1961 (`the Act') is bad in law. 2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel ("Ld. DRP) and the Learned Deputy Director of Income-tax ("Ld. AO") grossly erred in treating the amounts derived by the Appellant on account of Distribution revenue as royalty income without appreciating that Distribution revenue derived by the Appellant is neither Royalty under Section 9(1)(vi) of the Act nor Royalty under the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA'). 3. That on the facts and in circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in holding that the Appellant has a Permanent Establishment (`PE') under Article 5(4) of the DTAA. 4. That on the facts and hi circumstances of the ease and in law, the Ld.AO erred in not allowing complete credit of taxes deducted at source without assigning any reason. 5. That on the facts and in circumstances of the case and in law, the Ld.AO erred in not allowing appropriate amount of interest under Section 244A of the Act. 6. That on the facts and in circumst....
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....unt of distribution revenue from Turner International India Private Limited (`TIIPL') as royalty under Section 9(1)(vi) of the Act and also as per the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA'). 3. That on the facts and circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in treating TIIPL as the Permanent Establishment (TE') of the Appellant in India under Article 5(4) of the DTAA. 4. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP, having held that Appellant has a PE in India, ought to have taxed the distribution revenue under Article 7 of the DTAA instead of royalty in terms of Article 12(6) of the DTAA. 5. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP, erred in disregarding the resolution arrived at between the competent authorities of India and the USA for earlier year with regard to the taxability of distribution revenue as business profits. 6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interes....
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....e Appellant is a company incorporated under the laws of the United States of America ('USA') and is a tax resident of the USA during the captioned assessment years. During the relevant assessment years, the Appellant derived advertisement and distribution revenue from grant of exclusive rights to Turner International India Private Limited ("TIIPL"), an Indian Company, to sell advertising on the products and to distribute the products namely - a) Satellite delivered television services called 'Cartoon Network', 'TCM Turner Classic Movies', 'POGO' and 'Boomerang'; b) From interactive entertainment services known as 'CartoonNetworkIndia.com' and `POGO.tv; and c) From entertainment mobile telecommunications services 'Cartoon network Mobile and Boomerang Mobile' Any other television, interactive and/or telecommunications service for which TBSAP holds or acquires advertising and distribution rights for the Territory in the future. 4. TIIPL (Indian Company) acted as an exclusive distributor of the above mentioned products to the cable operators and other permitted systems on 'principal to principal basis'. T....
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....and AY 2008-09. It has been clarified that the Appellant does not have any office, branch or place of management in India. Further, transactions with TIIPL are on a principal to principal basis. However, even if TIIPL is considered as an agent, then TIIPL is an agent of independent status and remuneration paid to TIIPL is at arm's length. Accordingly, TIIPL cannot be considered as a Permanent Establishment ('PE') of the Appellant in India. Notwithstanding the afore-stated facts, it has been stated that the Appellant in order to avoid prolonged litigation and to buy peace and bring finality to Income-tax proceedings declared the income as per the MAP order. 8. The AO while concluding the assessment for the two preceding assessment years i.e. AY 2007-08 and AY 2008-09, made note of the basis on which the income was returned by the Appellant. Subsequently order under section 143(3) of the Income tax Act, 1961 ('the Act') was passed by the AO whereby the return position was accepted. 9. In re: the nature of income it has been stated by the assessee that despite the facts remaining the same, the Assessing Officer in all the assessment years i.e. AY 2001-02 to AY 2015-16, ha....
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....an Company) to sub-distribute the encrypted television signals for commercial exploitation, the Appellant has granted the right to 'communicate the work to public' which is defined under Section 2(ff) of the 'Copyright Act, 1957'. The subscription/ distribution revenue derived by the Appellant for granting right or license to distribute the products in India amounts to consideration for 'the transfer of all or any right (including the granting of licenses) in respect of any copyright, literary, artistic or scientific work and therefore, held that the subscription/ distribution revenue derived by the Appellant is assessable to tax as royalty both under the domestic law and the DTAA. Relevant Extract of the order passed by the Ld. AO is reproduced herein below: "The issues for consideration are, therefore, whether and in what circumstances can the assessee company claim to own a copyright (right to broadcast) over the work it broadcasts, and whether there is a transfer, by grant of a license or otherwise, of this right to broadcast under the distribution agreements entered into by the assessee company with the Indian entity. ... Going by this pr....
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.... the agreement. Therefore, the assessee's contention that such revenue amounts to business income is rejected." 13. The draft orders of the AO have been confirmed by the Ld. Dispute Resolution Panel ('DRP') and in pursuant thereof, final assessment orders were passed by the AO. 14. At the outset Ld. Counsel for the appellant assessee, Sri Kunchan Kaushal submitted that the decision reached by the Indian Competent Authorities which, is a representative of the highest income tax authority (Central Board of Direct Taxes) as defined under section 119 of the Act, determining the nature/ character of income and then its acceptance by a Competent Authority of another country amounts to an agreement by two governments and should therefore, be adhered too. Such an agreement reached by the highest authority under the Act, was accepted by the Appellant and the Revenue Department in the earlier years after due application of mind by passing order under section 143(3) of the Act, without change in relevant and material facts. This makes the acceptance of the treatment of revenue from distribution activities as business income a fundamental aspect permeating through the different asses....
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....elevision or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or.." 17. He submitted that the Appellant being a tax resident of the United States of America ('USA') is eligible to opt for taxability of its income under India-USA DTAA as per the beneficial provisions of Section 90(2) of the Act. Article 12(3) of the DTAA defines royalty as: '(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof, and 18. He submitted that the term "copyright" as referred above has been defined in Section 14 of the Copyright Act, 1957 as an exclusive right, sub....
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....content therein. 19. Thus, he submitted that the rights granted by the Appellant under the agreement is purely a commercial right for distribution of products to the ultimate viewers which clearly falls under the 'Broadcast reproduction right' given under Section 37 of the Copyright Act, 1957. 20. In light of the facts of the case stated above he submitted that in the present case, the subscription charges or distribution revenue is derived by TIIPL (Indian Company) from distribution of the products through the cable operators and TIIPL (Indian Company) shares the revenue with the Appellant as agreed under the agreement. While distributing the products (i.e. Cartoon Network Channel, etc.), all rights in the product remains vested with the Appellant. The distributor of the products does not have any right to change the content. The content can only be changed by the Appellant and no other party. Hence, the revenue derived on account of distribution of the products is business income and under no circumstance, can be held to be royalty. In support he placed reliance on the decision of the Hon'ble Income Tax Appellate Tribunal, Mumbai in the case of Dy. CIT v. Set India (P.) Ltd....
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.... under the definition of Royalty under section 9(1) (vi) of the Income Tax Act as well as Article 12 of the Treaty. Accordingly, the payment is not in the nature of Royalty but in the nature of business income." 21. The key observations made by the Hon'ble ITAT are as under: * The only right granted under the agreement is right to distribute channels in India and no right to either use or exploit the content is granted. * The distribution right is a purely commercial right which is distinct from right to use copyright. * Section 37 of the Copyright Act, 1957 deals with Broadcasting Reproduction Right which is a distinctive right from Copyright defined under Section 14 of the Copyright Act, 1957. * The distributor merely retransmits the television signals received by it without any edits, delays, interruptions, deletions or additions, therefore, the payments made to it cannot be said to be for use of copyright and therefore, is not 'royalty' but in the nature of 'business income'. 22. Accordingly, he submitted that even in the present case, it cannot be disputed that the appellant has neither granted any copyright to the TIIPL (Indian Compan....
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....ith the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute 'royalty'." 24. The key observations made by the Tribunal were as under: * Taj India is not acting as agent of the Taj Mauritius but it had obtained the right of distribution of channel for itself and subsequently it is entering into contract with other parties in its own name in which the assessee is not a party. * On the issue pertaining to distribution income being taxable as 'royalty', it was held by the Hon'ble ITAT that under the distribution agreement, Taj Mauritius has not granted any license to use any copyright to the distributor or to the cable operators. Taj Mauritius only made available the content to the cable operators which are transmitted by them to the ultimate viewers. Rights over the content at all times remained with Taj TV and were never made available to the distributors or cable operators. Thus, the payment for such rights could not be taxed as 'royalty'. 25. Thus, like Taj TV, the appellant had appointed TIIPL (Indian C....
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.... have therefore applied our mind independently and heard learned counsel for the parties on this question. .... 10. ...As noted, the assessee would receive a part of subscription charges paid by a large number of customers through different agencies. The said subscription charges would enable the customers to view channels operated by such assessee. The assessee was thus not parting with any of the copyrights for which payment can be considered as royalty payment. Term "copyright" has been defined in Section 14 of the copy right Act, 1957. A glance at the said provision would show that the copyright means exclusive right, subject to the provisions of this Act, to do or authorise the doing of any of the following acts specified in the said provision in respect of a work or any substantial part thereof. Term "work" is defined under Section 2(y) of the Copyright Act, 1957, as to mean any of the works namely a literary, dramatic, musical or artistic work or a cinematograph film and a sound recording. Sub-section (1) of Section 14 of the Copyright Act, 1957 lists several Acts in respect of a work in relation to which exclusive right would be termed as copyrigh....
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....f which the transfer of the rights in respect of copyright of a literary, artistic or scientific wok including cinematograph film or films or tape used for radio or television broadcasting etc. would come within the fold of royalty for the purpose of Section 9(1) of the Act. We do not see how the payment in the present case could be covered within the said expressions. As noted, this is not a case where payment of any copyright in literary, artistic or scientific work was being made. 14. We may also notice that India Singapore Double Taxation Avoidance Agreement contains Article 12 pertaining to royalty and fees for technical service. Paragraph (3) of Article 12 defines the term "Royalty" as under- 'The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use: (a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for information concerning industrial, commercial or scientific experience, including ....
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....s only granted rights for the purpose of selling advertising on the product (Channels, interactive entertainment services and entertainment mobile telecommunications) and distribution of such products (Channels, interactive entertainment services and entertainment mobile telecommunications) in India. TIIPL (Indian Company) does not have any right to edit, delay, interrupt, delete or add the products distributed by it, in fact, as per clause 5 of the agreement, the Appellant retains the sole right to determine the content of the products (Channels, interactive news services and information mobile telecommunications) and also reserves the right to change such content from time to time. 32. In the present facts of the case, TIIPL (Indian Company) has entered into contracts with various parties in its own capacity on principal to principal basis and not on behalf of appellant. It is reiterated that 'copyright' and 'broadcast reproduction right' are distinctive rights as specified in the Copyright Act, 1957. The Appellant has granted commercial rights in the nature of broadcast reproduction right to TIIPL (Indian Company) and the rights of a broadcaster is defined separately under Se....
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....so, the distribution/subscription revenue is business income and cannot be characterized as royalty. 36. The AO in the impugned assessment order(s) has also alleged that the distribution revenue derived by the Appellant is in the nature of royalty in view of the retrospective amendment made in Explanation 6 in Section 9(1)(vi) of the Act. In this regard, it is reiterated that the Appellant has only granted rights to sell advertisement and distribute the products in India which does not fall under the purview of royalty income. Moreover, unless there is a similar change in the definition of royalty under the DTAA, the distribution revenue cannot be held to be royalty in view of the beneficial provisions of Section 90(2) of the Act. The Appellant places reliance on the decision of the Hon'ble High Court of Delhi in the decision of New Skies Satellite BV [2016] 68 taxmann.com 8 wherein it has been categorically held that: "This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less....
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....Article 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 the IT Act. All provisions of the 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 Sections 44-BB, 44-BBA, etc.). Under the impugned ruling delivered by 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 associated enterprise, that also constitutes a PE, has bee....
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....rther license (sublicense), distribute, sub-distribute and assign to other parties. * Under the agreement, TIIPL is authorized to conclude contracts on behalf of assessee protect copyrights in respect to such products and initiate legal action in case of infringement. Therefore, TIIPL is granted 'copyright' over such 'Programme Content'. * Reference has been made to the Policy Guidelines for down-linking of TV channels" dated 11.11.2015 issued by the Ministry of Information and Broadcasting which mandates the requirement of "exclusive marketing/distribution rights" for the channels and "authority to conclude the contracts on behalf of the channel for advertisements, subscription and programme content" for providing television satellite broadcasting service. Therefore, the argument that TIIPL does not have any right to edit, delay, interrupt or delete the products distributed by it is not tenable. * Reliance has been placed on the decision of the Hon'ble SC in Civil appeal no.s 7326-7327of 2018 in case of Star India Pvt. Ltd. Vs. Department of Industrial Policy and Promotion &Ors.to state that the distribution fees[tariff] as received by the assessee relat....
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....ight to distribute the product. 42. In the case of the assessee in the earlier assessment year, the competent authority of India and USA had reached the agreement that 10% of the advertisement and subscription revenue received from the Indian sources was deemed to be net profit from the business chargeable to tax in India. In line of such an agreement the assessee in Assessment Years 2007-08 and 2008-09 had related its income on the same basis as agreed by the competent authority of both the countries. Accordingly fully disclosed its computation of income along with notice to the tax computation filed during the return of income/assessment proceedings, the same has been accepted by the Department in the assessment orders for Assessment Years 2007-08 and 2009. Though assessee's case was throughout had been that it does not have any kind of plea and the transaction with TIIPL are on principle to principle basis and even if TIIPL is an agent of independent status, then remuneration paid to TIIPL was at arm's length, and therefore, TIIPL cannot be considered to be PE of assessee in India. It has been brought on record that in all the years and in subsequent years also Assessing Offi....
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....e Term copyright has not been defined in the DTAA albeit has been defined in Section 14 of the Copyright Act, 1957 as an exclusive right to do or authorize being of any of the acts specified in the said provision in respect of work or any substantial part thereof likewise work being defined in Section 2(y) of the said Act which is namely, literary, dramatic, musical or artistic work or a cinematograph film and a sound recording. Sub-section (1) of Section 14 of the Copyright Act, 1957 lists several Acts in respect of a work in relation to which exclusive right would be termed as copyright. Section 37 of the Copyright Act separately defines broadcast reproduction right. The Term 'Copyright' has defined in Section 14 and 'broadcast reproduction right' has been defined in Section 37 and both are two distinctive and separate rights. 'Broadcast reproduction right' is not reckoned as copyright. Here, in this case, appellant never granted any licenses to use any copyright, either to distributor or to the cable operator albeit it has only granted right for purpose of selling advertisement on the product that are channels, etc. and distribution of such products in India. The Indian company ....
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....lf of the channel for the programme content. TIIPL has been granted exclusive distribution rights by the Appellant Company with respect to the products (channels) in India. Surely, TIIPL can enter into an agreement with respect to the content of the programmes but this right does not allow them to take ownership of the content. The copyright within the product has always been vested with the Appellant Company. The clause must be seen from a business prospective and in a wholesome manner. What is streamed is uplinked and down linked without any change in the content. The Indian distributor cannot separate content from the channel stream. The product in the case at hand is a channel and what is streamed is the content, all of which gets distributed without any separation or dissection. Accordingly, the amount received from TIIPL cannot be brought to tax as 'royalty' in the hands of the Appellant Company. 47. Ld. DR has tried to distinguish the facts of the captioned matter from the case of MSM Satellite (Supra) and stressed heavily upon the ability of the consumer to 'store' and 'interact' with the content. However, the aforementioned factors cannot form basis for distinguishin....
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.... decidendi of the judgement i.e. the rule of law on which judgement is based, a judgment cannot be applied blindly on different set of facts. Thus, the reliance of the Ld. Departmental Representatives on the judgement of the Hon'ble Apex Court has no application in the case at hand. 50. However, if we read para 60 of the aforesaid decision, wherein the Hon'ble Apex Court while delivering the verdict has recognized that the broadcasting is a separate right from the Copyright. Relevant Paragraph for the sake of ready reference is reproduced hereunder: "60. A reading of the aforesaid provisions, according to the learned Senior advocate for the appellants, makes it clear that broadcasters may, in fact, be the owners of the original copyright of a work- for example, if they themselves have produced a serial. They may also be the copyright owners of the broadcast of this serial which is a separate right under the Copyright Act which they are able to exploit, and if there is a re-broadcast of what has already been copyrighted, this again is protected by Chapter VIII of the Copyright Act." The argument before the Hon'ble Apex Court on the interpretation of the Copyright Act,....