TaxTMI 
TaxTMI 
2025 (10) TMI 905
X X X X Extracts X X X X
X X X X Extracts X X X X
....aw. the assessment order of Ld. AO is bad both in law and on facts. The Ld. AO based on surmises/ conjectures, and in violation of the principles of natural justice, has grossly erred in assessing the income of WBDI for the subject AY at INR 35,08,29,170 vis-à-vis INR 29,44,140 per Return of Income (Rol') filed by the Appellant. 2. Grounds relating to Permanent Establishment ('PE") 2.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that WBDI has a Dependent Agent PE ('DAPE)) in India in the form of Warner Bros. Pictures (India) Private Limited (WBPIPL") and has grossly erred in holding that a sum of INR 53,52,07,748 (being 65% of the gross revenues relating to distribution of films in India as earned by WBPIPL) is attributable as business income of the alleged DAPE of the Appellant; 2.2. That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in not appreciating that where the agreement between WBDI and WBPIPL is on principal-to-principal basis (as also captured in clause 25.1 of the intercompany agreement), WBPIPL will not constitute a DAPE of WBDI in India....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of the case and in law, the Ld. AO. has grossly erred in alleging that revenues received by the Appellant from WBPIPL for distribution of theatrical movies in India can be alternatively taxed as Royalty under section 9(1)(vi) of the Act and the Treaty: 4.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering that the provisions of section 9(1)(vi) of the Act as applicable for the subject AY, specifically excludes sale, distribution and exhibition of cinematographic films from the ambit of Royalty; and 4.3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the decision of the jurisdictional Mumbai bench of the Hon'ble ITAT in the Appellant's own case for AY 2007-08 to AY 2014-15 and AY 2017-18 to AY 2019- 20 wherein it was held that distribution revenues received by WBDI from India are not Royalty under the Act or the Treaty. 5. Grounds relating to income tax refund 5.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the decision of the Special Bench of the Hon'ble ITAT in the case of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ments of royalty as per the agreement. It was further observed that during the year under consideration, the assessee received Rs. 53,52,07,748/-, which was characterised by it as "Royalty Income", and the same was claimed as exempt both under the Act and the India-USA Double Taxation Avoidance Agreement ("DTAA"). Since the issue was a recurring one and in every assessment order, the receipts from Warner Bros. India were treated as business income by the Revenue, as against the treatment by the assessee as Royalty, the assessee was asked to submit its explanation/justification for not treating the receipts as business receipts. In response, the assessee submitted that Warner Bros. India is not acting on behalf of the assessee and it does not have any authority to conclude contracts on behalf of the assessee. Further, the assessee submitted that Warner Bros. India did not maintain any stock of goods or merchandise on behalf of the assessee, and no orders were secured in India for the assessee. Thus, it was submitted that all the transactions between the assessee and Warner Bros. India are at arm's length price. The assessee also submitted that Warner Bros. India is legally, economic....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assessee on the Tribunal's decisions rendered in its own case for the preceding assessment years. By allocating 35% of the Indian revenue to outside India activities, the AO considered it fair and reasonable to attribute 65% of the profits to the DAPE in India. Accordingly, the AO made an addition of Rs. 34,78,85,036/- (i.e. 65% of Rs. 53,52,07,748/-) as the business profits of the assessee taxable in India. 7. The DRP vide its directions dated 28.06.2023 issued under section 144C(5) of the Act, rejected the detailed objections filed by the assessee on this issue and held that Warner Bros. India habitually exercised the authority to conclude contract on behalf of the assessee. It was further held that the assessee is carrying out its entire operation of distribution of cinematography films in India through Warner Bros. India, and in the year under consideration, the only business of Warner Bros. India is the distribution of films in India on behalf of the assessee. Further, it was held that Warner Bros. India performed the core functions related to the distribution of films in India on behalf of the assessee. It was also held that Warner Bros. India habitually secured order....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reement entered way back on 01.04.2009 between the assessee and Warner Bros. India, was the subject matter of transfer pricing assessment in the past as well as in subsequent years, wherein such transaction was found to be at arms' length. 10. On the other hand, the learned Departmental Representative ("learned DR") vehemently relied upon the directions issued by the learned DRP. 11. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a non-resident company incorporated in the USA. Its activity, inter alia, includes the export of films from the USA, produced either by its group studios or by third parties. Vide agreement dated 01.04.2009 entered into between the assessee and Warner Bros. India, the latter was granted exclusive theatrical rights and the non-exclusive theatrical rights in the theatrical cinematographic films released, inter alia, in Indian territory. As a consideration, under this agreement, the assessee was entitled to 70% of gross theatrical receipts after reducing the allowable distribution expenses, as per the agreement. Under the agreement, Warner Bros. India was given the righ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntity based in the Territory, trains that operate exclusively within the Territory or operate within the Territory and are controlled by an entity based in the Territory, mental health facilities; nursing homes; religious organizations; libraries; camps; daycare centers; parks and recreation facilities; but excludes airlines, spacecraft, and cruise ships. Limitation of Rights: This Agreement does not grant Licensee rights in or to any assets or rights of WBPl other than Theatrical Rights and Non-Theatrical Rights (collectively, the "Rights") and the right to collect and retain proceeds in connection with the exercise of such rights as set forth in this License Agreement. All other assets and rights are expressly reserved by WBPI." 12. From the perusal of clause 25.1 of the agreement, it is further evident that the parties agreed that nothing contained in this agreement shall in any way create any association, partnership, joint venture or the relation of principal and agent between the parties. Accordingly, in exercise of the rights granted vide aforementioned agreement, Warner Bros. India entered into an agreement dated 31.05.2019 with Pen Marudhar Cine Entertainment P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the state on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise." 13. From the perusal of the provisions of Article 5(4) of the India-USA DTAA, it is evident that a person, other than an agent of an independent status, acting in a contracting state (say India) on behalf of an enterprise of other contracting state (say USA) shall be deemed to be a permanent establishment of that enterprise in the first-mentioned state (i.e. India), if: - (a) he has and habitually exercises authority to conclude contract on behalf of the enterprise in the first-mentioned state (i.e. India); or (b) if he has no such authority but he habitually maintain a stock of goods or merchandise from which he re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ision was upheld by the Tribunal, examined the various terms and clauses of the distribution agreement entered into by Taj India in India and also considered the conduct of the parties for coming to the conclusion that Taj India was not acting as an agent of the taxpayer but it had obtained the right of distribution of channel for itself and subsequently it entered into contract with other parties in its own name in which the assessee was not a party. 16. From the perusal of the record, it is evident that the agreement dated 31.05.2019 entered into between Warner Bros. India and Pen Marudhar Cine Entertainment Pvt. Ltd., Mumbai, India, a copy of which was furnished by the learned counsel during the hearing, was neither called for nor examined by any of the lower authorities. Thus, even though the learned counsel vehemently argued that like in the case of Taj TV Ltd. (supra), Warner Bros. India was transacting with independent Indian parties on a principal-to-principal basis and the assessee was not a party to such arrangement, and the decision of the Hon'ble Jurisdictional High Court in Taj TV Ltd. (supra) squarely covers the instant case, it is pertinent to note that in Taj TV ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... considered an agent of independent status within the meaning of this paragraph." 19. From the perusal of the provisions of Article 5(5) of the India-USA DTAA, it is evident that when the activities of such an agent are wholly or almost wholly on behalf of the enterprise and the transaction between the agent and the enterprise are not made under the arms' length conditions, the agent cannot be considered as an agent of independent status. Referring to the provisions of Article 5(5) of the India-USA DTAA, it is without prejudice plea of the assessee that, assuming without admitting, the DAPE of the assessee exists in India, no further attribution is warranted once the transaction between the assessee and Warner Bros. India is at an arm's length price. In this regard, the assessee placed reliance upon the decision of the Hon'ble Supreme Court in DIT vs. Morgan Stanley and Company, reported in (2007) 292 ITR 416. 20. From the perusal of the record, we find that in the year under consideration, Warner Bros. India duly declared the transaction of payment of royalty to the assessee for granting the distribution rights of cinematography films and other related rights in Form no.3CEB....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Act, the transaction has been accepted as such by the Revenue. Therefore, without going into the question whether the assessee has a DAPE in India in the form of Warner Bros. India in this year, once the transaction between the Warner Bros. India and the assessee has been at arms' length price, respectfully following the decision of the Hon'ble Supreme Court in Morgan Stanley and Co. (supra), we are of the considered view that there is no further need to attribute profits. Accordingly, we direct the AO to delete the addition of Rs. 34,78,85,036/-. As a result, the Grounds No. 2.1 and 2.2 are kept open, and Grounds No. 3.1 and 3.2 are allowed. In view of our above findings, Grounds No. 2.3 and 3.3 need no separate adjudication. 21. The issue arising in Grounds No. 4.1-4.3, raised in assessee's appeal, pertains to the taxability of distribution revenue as royalty. 22. The brief facts of the case pertaining to this issue are that during the year under consideration, the distribution revenue received by the assessee pursuant to the agreement dated 01.04.2019 was characterised as "Royalty Income" and the same was claimed as exempt by the assessee both under the Act and the Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ct and there is no need to deviate from such findings. In view of this the amount received by the assessee cannot be considered as royalty within the meaning of Indian Income Tax Act or under the DTAA." 24. The Revenue could not show us any reason to deviate from the aforesaid decision rendered in the assessee's own case, and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the orders passed by the Co-ordinate Bench of the Tribunal in assessee's own case cited supra, we are of the considered view that the revenue received by the assessee from Warner Bros. India cannot be taxed as royalty in India. As a result, Grounds No. 4.1-4.3 raised in assessee's appeal are allowed. 25. The issue arising in Grounds No. 5.1 and 5.2, raised in assessee's appeal, pertain to the rate of tax on interest earned on income tax refund. 26. The brief facts of the case pertaining to this issue are that the assessee, in its computation of income, offered interest amounting to Rs. 29,44,134/- on income tax refund @15% as per the India-USA DTAA. The AO, vide draft assessment order, held that the benefit of 15% tax on interest income cannot be given....