TaxTMI 
TaxTMI 
2021 (1) TMI 125
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....TA No.3834/Mum/2007 A.Y.2001-02 (Assessee Appeal) This appeal in ITA No.3834/Mum/2007 for A.Y.2001-02 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XXXIII, Mumbai in appeal No.CIT(A)XXXIII/Intl.Tax/IT/53-N/04-05 dated 14/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2004 by the ld. Asst. Director of Income Tax (International Taxation)-3(2), Mumbai (hereinafter referred to as ld. AO). ITA No.3835/Mum/2007 A.Y.2002-03 (Assessee Appeal) This appeal in ITA No.3835/Mum/2007 for A.Y.2002-03 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XXXIII, Mumbai in appeal No.CIT(A)XXXIII/Intl.Tax/IT/53-N/04-05 dated 14/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.147 r.w.s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/11/2005 by the ITO (International Taxation)-3(1), Mumbai (hereinafter referred to as ld. AO). ITA No.3836/Mum/2007 A.Y.2003-04 (Assessee Appeal) This appeal in ITA No.3836/Mum/2007 for A.Y.2003-04 arises out of the order by the ld. Commissioner of Income Tax ....
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....e for which SIPL was remunerated commission at 15%. We find that the assessee had submitted during the course of assessment proceedings that the income from advertisement air time is business income and in the absence of a Permanent Establishment (PE) of the assessee in India, the same is not taxable. The ld. AO however, held that SIPL constitutes PE of the assessee by holding it as a dependant agent as per para 4(c) of the Article 5 of India-USA DTAA and taxed the advertisement revenue earned by the assessee as business income on a net basis. In this regard, it would be pertinent to reproduce the relevant extracts of Article 5(4) and Article 5(5) of India-USA DTAA which deals with agency PE:- "4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies-is acting in one of the States on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first mentioned State, if (a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to....
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....cable from A.Y.2002-03 onwards. From A.Yrs 2002-03 onwards transfer pricing assessments were framed on the assessee u/s.92CA(3) of the Act wherein the ld. TPO had confirmed the international transaction between SIPL and the assessee for commission income @15% and accepted the same to be at arm's length. This is evident from TPO orders passed u/s.92CA(3) of the Act for A.Yrs. 2002-03, 2003-04 and 2004-05 on 29/10/2010, 30/12/2005, 06/12/2006 respectively. We find that the assessee had pleaded before the ld. AO that once arm's length payment has been made, nothing further remain to be taxed in the hands of the non-resident even if there is existence of PE in India. The ld. AO however, did not agree to the contentions of the assessee and proceeded to place reliance on the second part of the Circular No.742 dated 02/05/1996 by adding 10% of net revenues and accordingly determined the income at Rs. 20,35,202/- for A.Y.2000-01 which action was upheld by the ld. CIT(A). 3.2. At the outset, we find that the commission remunerated at 15% was accepted to be at arm's length by the ld. TPO for A.Yrs. 2002-03, 2003-04 and 2004-05 in the hands of SIPL. Though there was no transfer pricing ass....
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....ellant also entered into an arrangement entitling SET India to enter into agreements, collect and retain all subscription revenues. Considering all these aspects and the fact that the agent has a good profitability record, it held that the Appellant has remunerated the agent on an arm's length basis." (emphasis applied) b. Decision of Hon'ble Delhi High Court in the case of DIT vs. BBC Worldwide Ltd., reported 203 Taxmann 554 (Del), wherein the Hon'ble Delhi High Court by placing reliance on the decision of Hon'ble Bombay High Court in the case of Set Satellite Singapore Pte Ltd., supra upheld that 15% commission to Indian agents as per Circular No.742 of CBDT is normally accepted commission rate payable to agents of foreign telecasting companies. The relevant extract is in para 16 of the said order which is not reproduced herein for the sake of brevity. c. Decision of the Hon'ble Jurisdictional High Court in the case of DIt vs B4U International Holdings Limited reported in 374 ITR 453 (Bom) also expressed the similar view. The relevant extract is in para 12 of the said order which is not reproduced herein for the sake of brevity. d. Decision....
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....n we would hold that the rate of commission of 15% was accepted as ALP by the TPO for the AY 2003-04 to 2004-05, no further profit is attributable to the PE. This is the rate mentioned in the CBDT Circular No.742 of the order 1996. Similar rate is accepted by the Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte. Ltd. (supra). Thus we have no agitation in upholding the contention of the Assessee that the payment was at arms' length. When the payment is at ALP there is no further need to attribute profit to the PE as held by the Hon'ble Supreme Court in the case of Morgan Stanley &Co.( supra). " 6.4.2 We would also like to rely upon the matter of BBC Worldwide Ltd. (supra).In that matter also the Hon'ble Delhi High Court had referred to the case of Sat Satellite (Singapore) Pte. Ltd. (supra) and held that if correct ALP was applied and paid nothing further would be left to be taxed in the hands of the foreign enterprise. It also placed reliance on Circular No.742 and held that CBDT itself had considered 15% commission as normally accepted commission rate payable to the agents of telecasting companies. 7. Considering the above di....
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....taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to PE). 3.4. Similar views were also expressed by the Hon'ble Apex Court in yet another decision in the case of Honda Motor Ltd., vs. ADIT 255 Taxman 72. 3.5. We find that the ld. DR had filed the following written submissions before us:- "The above mentioned appeals were heard through Virtual Court today. The following is the ....
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....rtain clauses of DTAA to be examined and to restore the matter to AO/DRP, which the ITAT did not allow. 3. Distribution fees-Royalty Payment is made to assessee by Indian Sub for license to broadcast the channels of the assessee in India. This is a payment for the use of or right to use in connection with television broad casting. It is not necessary that all rights must be transferred for royalty to apply. Copyright is not defined in the DTAA and the definition of the term copyright is not to be construed in a limited restrictive sense. It encompasses rights of the nature which are protected and whose infringement attracts penal consequences. The CIT(A) order narrates the meaning and context of the statutory provisions in respect of copy rights in several countries including that of USA. Under the Copyright Act 1957, even in section 14, reference is made to communication to public in respect of cinematographic films and sound recordings. The owner has copyright on such contents. Further section 37 of the same Act provides similar rights and protections to Broadcasting rights, which is a species of genus of Copyright. Even the technical clarifica....
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....t distribution rights are business right and not royalty which was accepted by the ITAT. In the present case the CIT(A) has extensively narrated the statutory provisions in several countries and I have argued with support of the Technical Explanation to India US DTAA and similar facts in the case of Performing Rights Society Ltd. to support the decisions of the AO and the CIT(A) on the facts of this case. 4. On section 234B, the proviso to section 209 was highlighted to note the distinction that no TDS is actually paid. 3.6. We find that each of the argument of the ld. DR which is also reproduced in the written submission hereinabove were met by the ld. AR at the time of hearing as under:- a. The ld. DR vehemently opposed the reliance placed by the ld. AR on Circular No.742 dated 02/05/1996 issued by CBDT by stating that the ld. AR had placed reliance only on the first part of the Circular and not on the second part of the said Circular. We find that the said Circular No.742 dated 02/05/1996 issued by CBDT was issued in the form of guidelines for computation of Income Tax of foreign telecasting companies. We find that the second part of the said Circular states....
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....ntire business then the percentage will be even lower. Accordingly, SIPL as an agent is acting in the ordinary course of its business and by no stretch of imagination, the activities of SIPL could be considered to be 'wholly or almost wholly devoted to the assessee'. The ld. AR also placed reliance on the Co-ordinate Bench decision of Mumbai Tribunal in support of its contentions in the case of Varian India (P) Ltd., vs. ADIT reported in 142 ITD 692 wherein the Tribunal had noted that authorised foreign enterprises had engaged the assessee and the activities are not devoted wholly or almost wholly for any one enterprise. The relevant extract of the said decision is reproduced hereunder:- "...As stated in several places in this order that the Assessee is providing services to various VGCs namely Varian Inc. U.S.A., Varian Australia, Varian Italy, Varian Switzerland and Varian Netherlands. It has not devoted only for one foreign enterprise. The learned Counsel had submitted a statement representing the approximate value of sales made by these foreign enterprise in the calendar year 2001 & 2002, which for the sake of ready reference is reproduced below:- Supplying....
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....assessee had full control over the activity of SIPL and hence is a SIPL dependent agent PE of assessee in India. The ld. DR argued that control over the activities of the agent is a crucial point for the purpose of determining the independence of the agent under Article 5(5) of India-USA DTAA. This was duly rebutted by the ld. AR by placing reliance on the decision of this Tribunal in the case of Varian India (P) Ltd., vs. ADIT reported in 142 ITD 692 supra and also on the decision of Authority of Advance Ruling in the case of Speciality Magazines (P) Ltd., reported in 274 ITR 310 (AAR) wherein criteria for satisfaction of the condition of "wholly or almost wholly dependent" was laid down to meet anything less than 90% of income from that client. As the same is not satisfied in the instant case and also in addition that the conditions provided in Article 5(5) India-USA DTAA are satisfied, SIPL cannot be treated as dependent agent as per para 4. Thus, the allegation of existence of dependent agent PE by the ld. DR is hereby dismissed. We further find that the ld. AR also pointed out that Article 5 of India USA DTAA for agency PE provides that para....
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.... Hence, the argument made by the ld. DR in this regard is rejected. 3.7. In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that assessee has paid arm's length commission to SIPL @15% which has been accepted to be at arm's length also by the lower authorities by not disputing the same and also by the ld. TPO for subsequent assessment years i.e. A.Yrs. 2002-03, 2003-04, 2004-05 in the orders passed u/s.92CA(3) of the Act and also considering the fact that the commission rate of 15% is fair and reasonable in the light of the CBDT Circular No.742 dated 02/05/1996 and is accepted by the various Courts as mentioned above, no further attribution of profits should be done in the hands of the assessee as the agent has been remunerated on arm's length basis. Accordingly, the ground Nos. 1-3 raised by the assessee are allowed. 4. In the result appeal of the assessee for A.Y.2000-01 in ITA No.8671/Mum/2004 is allowed. ITA No.3834/Mum/2007 (A.Y.2001-02) - Assessee Appeal 5. Assessee has raised the following grounds:- "On the facts and circumstances of the case and in law, the learned CIT(A) erred ....
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....TD 269) to the effect that a non-resident, whose entire income is subject to Tax Deducted at Source (TDS) under section 195 is not liable for payment of advance tax and consequently not liable to interest under section 234 B. 5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding levy of interest under Section 234D of the Income Tax Act, 1961. Appellant craves leave to add, alter, amend or delete one or more grounds of appeal so as die Honourable Bench to decide this appeal according to law." 6. We find that the ground No.1 raised by the assessee for A.Y.2001-02 is exactly identical to that raised in A.Y.2000-01 and the decision rendered thereon would apply with equal force for this assessment year also except with variance in figures. 7. The ground Nos.2 & 3 raised by the assessee are challenging the action of the lower authorities in holding that the distribution revenues earned by the assessee falls within the meaning of "Royalty" under Article 12 of India USA DTAA and accordingly, such distribution revenues are taxable in India. 7.1. We have heard rival submissions and perused the materials available on record.....
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....otions from a television services other than the channel (s) forms part of or is associated with the channel (s), or (ii) any programme, advertisement or interstitial which is included in the channel (s) does not form part of the channel (s). (f) use any person, object or event appearing in any Channel(s) in a defamatory manner or in such a manner as to constitute an endorsement of any person, entity, product or service; and (g) allow or procure any other person or entity to do any of the acts listed in paragraphs (a) to (f) above. 7.2. In consideration of the transfer, lump sum payment of USD 1,00,000/- was made by NGC India to the assessee. We find that the assessee had granted to NGC India for a lump sum consideration, the distribution right to distribute the channel broadcasted by the assessee. NGC India inturn is allowed to independently enter into a contract with the media intermediaries / subscribers (i.e. cable operators) for distribution of channel in India. The fact that there are no copyrights in the channel or content that is transferred is clearly spelt out by para 2.3(b) of the agreement which provides that NGC India shall not and shall ensure ....
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....y; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 7.6. The ld. AR submitted that the payments received by NGC India are not towards th....
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.... (i) to make a copy of the film, including a photograph of any image forming part thereof; (ii) to sell or give on hire, or offer for sale or hire, any copy of the film, regardless of whether such copy has been sold or given on hire on earlier occasions; (iii) to communicate the film to the public; (e) in the case of a sound recording, (i) to make any other sound recording embodying it; (ii) to sell or give on hire, or offer for sale or hire, any copy of the sound recording regardless of whether such copy has been sold or given on hire on earlier occasions (iii) to communicate the sound recording to the public." 7.7. The ld. AR argued that from the aforesaid definition, right granted to NGC India, in respect of which it makes payments to the assessee cannot be classified under any of the above. It is merely a right to distribute the channel and it does not grant NGC India any right in respect of any work, telecasting of the channel. The ld. AR also argued that there is no doubt that NGC India does obtain distribution right from the assessee, but such a right is not in the nature of a copyright. In fact, Section 37 of the Cop....
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.... of royalty includes television Broad Casting in India. The relevant extract of the technical explanation as relied upon by the learned DR is reproduced below:- "The royalty definition in subparagraph (a) of paragraph 3 of the Convention differs from the comparable provision in the US Model in two respects. First, the Convention's royalty definition includes payments received in connection with the use or right to use cinematographic films or films or tapes used for radio or television broadcasting. Such payments are excluded from the royalty definition in the US Model. Second, the Convention's royalty definition does not include "other like right or property" at the end of its listing of the types of rights for which a use payment is considered to be a royalty." (emphasis applied) 7.12. Per contra, the ld. AR submitted that the reliance on technical explanation in the context of use or right to use of cinematographic films or films or tapes used for radio or television broadcasting, is erroneous. The provision is applicable only in case of channel owner who acquires rights for any cinematographic films or tapes that used for the radio or broadcasting. Howeve....
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....its stations in India, and hence, the source of income was held to be in India. However, in the present case of the assessee before us herein, we find that the telecast of the channel happens from outside India. All the other core activities such as procurement/aggregation of the content, editing, uplinking, etc. are conducted by the assessee from outside India. Hence, the source of income for the assessee, even based on the principle laid down in Performing Arts Society cannot be considered to be in India. Further, it is also a settled position that merely because the footprint of the satellite is in India and/or advertisers are in India, the source of income cannot be considered to be in India. Reliance in this regard is placed on the decision of the Hon'ble Delhi High Court in the case of Asia Satellite Tele Communications Ltd., vs. DIT reported in 332 ITR 340 (Del). Moreover, we find that the decision in the case of Performing Rights Society ltd., was relating to the existence of "business connection" of the non-resident in India, whereas in the present case, the issue before us is whether the distribution rights could be taxed as "Royalty" or not. The issue in dispute....
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....roadcast reproduction right. Subsection (1) of Section 37 of the said Act provides that every broadcasting organisation shall have special rights to be known as "broadcast reproduction right" in respect of its broadcasts. Subsection (2) of Section 37 provides that the broadcast reproduction right shall subsist until twentyfive years from the beginning of the calender year next following the year in which the broadcast is made. 12..... 13. In our opinion, these provisions would in no manner change the position. Only if the payment in the present case by way of a royalty as explained in explanation (2) below subsection (1) of Section 9 of the Act, the question of applicability of clause (vi) of subsection (1) of Section 9 would arise. Learned counsel for the revenue placed considerable tress on clause (v) of explanation (2) by virtue of 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 co....
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....distribution revenue is not Royalty income. The Hon'ble Bombay High Court in CIT Vs SET India Pvt Ltd (ITA No. 1347 of 2013) held that the distribution fee paid is not in the nature of royalty. Similar view was affirmed by Hon'ble Bombay High Court in CIT Vs MSM Satellite (Singapore) Pte Ltd (ITA No. 103 of 2017). Considering the decision of the Hon'ble Jurisdictional High Court and respectfully following the same, we are of the view that the payment of distribution fee cannot be termed as 'Royalty'. Since, we have held that distribution fee cannot be termed as 'Royalty' thus; discussion on the royalty agreement selected for comparability has become academic. 7.18. We further find that the Co-ordinate Bench of this Tribunal in the case of DDIT (IT) vs. SET India Pvt. Ltd., in ITA No.4372/Mum/2004 had held that the payment towards the right to distribution of channels is not in the nature of copy right. The relevant extract of the said decision is reproduced hereunder:- "6. Having heard both the sides, we observed that ld CIT(A) while examining the issue has stated the Non-resident company has granted non-exclusive distribution rights of the c....
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.... or the right to use, any copyright or 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, trade mark, 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 (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article 8. 7.21. From the aforesaid definition of royalty as per India-USA DTAA, in para 3(a), payment received by an enterprise can be construed as royalty only if, they are for the use or right to use of any copy right of a literary, artistic or scientific work. We had already held that no right in respect of any copy right is given to NGC India and i....
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....f hearing was inserted in the statute only w.e.f. A.Y.2013-14 onwards and the same is not applicable for the year under consideration. Accordingly, we hold that no interest u/s.234B of the Act could be charged in the hands of the assessee as the entire income is subject to deduction of tax at source. Accordingly, the ground No.4 raised by the assessee is allowed. 9. The ground No.5 raised by the assessee is with regard to chargeability of interest u/s.234D of the Act, which is consequential in nature and does not require any specific adjudication. 10. In the result, appeal of the assessee for A.Y.2001-02 in ITA No.3834/Mum/2007 is allowed. ITA No.3835/Mum/2007 (A.Y.2002-03) Assessee Appeal 11. The ground No.1 raised by the assessee for A.Y.2002-03 was challenging the validity of reopening of assessment was stated to be not pressed by the ld. AR at the time of hearing. Accordingly, the ground No.1 is dismissed as not pressed. 12. The ground No.2 raised by the assessee for A.Y.2002-03 is similar to the ground No.1-3 raised by the assessee for A.Y.2000-01 and the decision rendered thereon would apply with equal force for this assessment year also except with variance....