TaxTMI 
TaxTMI 
2006 (1) TMI 172
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....ime" to various Indian advertisers. The assessee company makes the sale of air time in India through its advertising sales agent, M/s. Star India Pvt. Ltd. (hereinafter referred to as "SIPL"), a company incorporated in India. SIPL is marketing the advertisement time in India and collects the advertisement revenues. The assessee company acquires the air time meant for advertisement from television channel companies like Star Plus, Star Movies, Star World, Star News, Channel V, etc. These channel companies are the Television Content Aggregators. The Television Content Aggregators/channel companies earmark the air time to be allowed to advertisers in India which is sold to the assessee company, which in turn, sells the air time to Indian advertisers through its selling agent in India, M/s. SIPL. This time slot involved in the above transactions from channel companies to assessee company to advertising sales agents like SIPL is described as "Ad Airtime", which means air time earmarked for advertising. This sales content of air time is hereinafter referred to as "Ad Airtime". 4. The assessee company had granted the exclusive right to market, sell and distribute the channels of the St....
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....rough intimation dated 14-2-2002. Thereafter, the case was selected for scrutiny assessment and the assessment was completed under section 143(3) on a total income of Rs. 333,55,67,423. The assessment was completed on 28-3-2003. The Assessing Officer has discussed the nature of business carried on by the assessee and the nature of relation of the assessee with other inter-related companies in detail along with a detailed examination of the functional aspects of the assessee company in India. On the basis of the elaborate e discussion, the Assessing Officer has made certain additions as well as disallowances whereby he could determine a taxable income of Rs. 333,55,67,423 as against a returned income of Rs. 26,25,87,600. 6. One of the disallowances made by the assessing authority in the course of assessment proceedings was a sum of Rs. 160,40,10,000. This is the amount which was paid by the assessee company to various channel companies (Television Content Aggregators) towards the cost of Ad Airtime purchased from them. The Assessing Officer put a question across the board as to why the assessee company did not deduct tax at source while making the payment of Rs. 160,40,10,000 to ....
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.... and addition. 9. When the question was put across the table, the assessee company has filed a detailed reply in a very exhaustive manner upholding its stand that the sum paid by the assessee company to channel companies against the cost of airtime was not a sum chargeable to tax in India in the hands of the channel companies and, therefore, the assessee company was under no statutory obligation to deduct tax at source in the course of making those payments to the channel companies. The detailed reply filed by the assessee has been substantially reproduced by the assessing authority in the assessment order from pages 3 to 11. The explanations offered by the assessee company are summarized below: (i) The assessee had entered into agreements with various non-resident channel companies for the purchase of airtime on the channels of Star TV Network such as Star Television Entertainment Ltd., Star Television Industries Ltd., Channel V Music, Channel Television Suppliers Ltd., etc. Copies of the agreements executed between the assessee and the channel companies were enclosed along with earlier submissions. (ii) The obligation of the assessee under section 195 of the Income-tax A....
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.... income accruing or arising, whether directly or indirectly through or from a business connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India. (vi) The channel companies did not receive or deemed to receive in India any income so that clause (a) of section 5(2) is not attracted. (vii) The assessee did not have any business connection in India or any property in India or any asset in India or any source of income in India and, therefore, the provisions of section 9(1) also not attracted so as to implicate the channel companies under clause (b) of section 5(2). 10. Based on a series of judicial pronouncements and circulars issued by the CBDT, the assessee company submitted before the assessing authority, in short, its defence in the following manner: (a) The revenues are not received in India; (b) The revenues are not deemed to be received in India; (c) The revenues did not accrue or arise in India; (d) The revenues did not deem to accrue or arise in India. 11. The assessee submitted before the assessing authority that as the payments ma....
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....s company like assessee did not acquire any right or interest whatever in the channel companies privileges only for the reason of their acquisition of Ad Air Time from the channel companies and the sales companies, like assessee shall not promote their own commercial interest through the Ad Air Time except in such manner as provided and agreed upon between the parties. (h) Channel companies and sales companies like assessee jointly will indemnify defend and hold the other, harmless from any claims, costs, liabilities, judgments, expenses or damages arising out of any breach of the agreement. (i) The rights and privileges assigned to a party by virtue of the agreements, shall not be assigned or transferred to anybody without the approval of the other party except for the freedom of the sales companies, like assessee to appoint their own agents in respective countries for the direct sale of Ad Air Time to advertisers, which is, of course, subject to the approval of the channel companies. 13. The Assessing Officer has come to the following conclusions as a result of examination of the situations explained in above paragraphs; such as- (a) That the sale of Ad Airtime is sub....
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....ndia. (i) That the Ad Airtime is a time slot in between the programmes wherein the advertisements are relayed by the channel companies and the programmes managed by the channel companies are beamed into India and the telecast is also made in India and the predominant area in the footprint of the satellite is India and, therefore, it is to be held that the channel companies are undertaking business activities in India. (j) That the above activities carried out by the channel companies in India provide for their income which is essentially income earned out of India. (k) That it is not necessary that the profit or gain should directly flow from the business connection, but it is deemed to be the income of an assessee who may well be a nonresident even if it is arising indirectly through the business connection in the taxable territories of India. 14. The Assessing Authority finally concluded, therefore, that the payments made by the assessee company to channel companies would be covered by the provisions of law contained in section 40(a)(i) of the Act and, therefore, the payment of Rs. 160,40,10,000 could not be allowed as a deduction in computing the taxable income of th....
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....While adjudicating the above issues, as framed by him, the CIT(A) considered all the contentions raised by the assessee and arrived at the following conclusions : (i) The relationship between the channel companies and the assessee was that of a principal and agent prior to 1-4-1999 as manifestly agreed by the assessee itself in the respective agreements. It is only after April, 1999 that the face value of the relationship between the assessee and channel companies has been changed into a relationship of principal to principal. But in spite of that superficial change, the nature of activities carried out by the assessee company prior to and post after April, 1999 were practically the same. Earlier, the assessee was the exclusive worldwide agent of the channel companies and now the assessee is characterised as the exclusive distributor of the channel companies. In the arrangement for sale of Advertisement Airtime, even if picturised as outright sale of Ad Airtime, the commercial interest of the channel companies still continued in the sale of Ad Airtime made by the assessee as evident from the terms of payment reflected in the agreements entered into between the assessee and the c....
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....rrect. Sale of Ad Airtime is, in fact, taking place through SIPL in India, who enters into agreements with third party advertisers for and on behalf of Star TV group of channel companies. The CIT(A), therefore, held that the channel companies do have business connection in India and income could be deemed to accrue or arise to them from operations in India and thus making the income taxable under section 9(1)(i) of the Income-tax Act, 1961. 18. As stated above, after examining the factors such as agency -principal relation between assessee and channel companies, business connection in India, relationship between SIPL and channel companies, operations in India in detail on pages 1 to 49 of his order, the CIT(A) came to the view that the channel companies do have business connection in India and they are liable to tax in India for the proportionate income attributable to Indian operations. Therefore, he held that the assessee was bound to deduct tax at the time of payments made to channel companies and, therefore, the Assessing Officer was right in invoking the provisions of section 40(a)(i) of the Income-tax Act. 19. After upholding the view of the Assessing Officer, the CIT(A....
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....e whole of such sum. Accordingly, F the said argument was rejected. 20. Another argument raised by the assessee company was that the circular No. 742 issued by the Central Board of Direct Taxes should have been applied in the case wherein 90 per cent of the gross amount is to be treated as expenses and 10 per cent alone is deemed to be the income and if income is computed in the light of the said circular, the quantum of tax to be deducted at source, vis-a-vis disallowance under section 40(a)(i) of the Act would be drastically reduced. The assessee also argued that if the assessee is treated as the agent of the channel companies, it should be held that the advertisement revenues were collected on behalf of the principals, i.e. the channel companies, and therefore, the advertisement revenues could not be held to be taxable in the hands of the assessee and accordingly, the question of disallowance under section 40(a)(i) of the Act does not arise. 21. The CIT(A) again relied on the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. in considering this argument and held that the proceedings of deduction of tax at source are provisional and the final ....
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....ant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 5.- The learned CIT(A) has erred in holding that the Appellant has not refuted, inter alia, the following findings of the learned Assessing Officer, which are erroneous and contrary to facts: Predominant footprint of the satellite is only in India; The decoders are provided to the cable operators either by the Appellant or by the channel companies or their agents in India; Star India Private Limited ('SIPL') is a direct subsidiary of the Appellant. Majority of the business operations of the channel companies are in India. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 6.- The learned CIT(A) has erred in holding the Appellant to be an agent of the channel companies. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 7-The learned CIT(A) has erred in holding SIPL to be an agent of the channel companies. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 8.-The learned CIT(A) has erred in hol....
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....ction of territorial jurisdiction, raised by the learned senior counsel. The learned senior counsel has extensively argued on this point in the light of the relevant provisions of the Income-tax Act as well as in the light of both Indian and English judicial pronouncements. The relevant contentions of the learned senior counsel are summarised as follows: 1. That the payments for bulk purchase of the Ad Airtime were made by the assessee outside India; both the assessee as well as the channel companies are non-residents; that the relevant contracts have been executed outside India and in such circumstances, the provisions of section 195 would not apply; 2. That under the Constitution of India, the Legislature has the power to enact a law which may extend beyond India (Extra Territorial applicability); That if the Legislature wanted a statute to apply outside India, it has been expressly provided in the respective statute. One example is that of Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 ('TW Act'). The TW Act provides the legal framework specifying the nature and scope of India's rights and jurisdiction in relat....
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..... Section 1(2) of the Income-tax Act provides that it extends to the whole of India. The territorial operation of the Income-tax Act is confined to the whole of India and it does not operate outside India. 8. The Bombay High Court in the case of McDermott International Inc. (No. 1) v. Union of India [1988] 173 ITR 155 has held that taxation of income derived by the assessee in the Continental Shelf beyond the prescribed nautical miles before the issue of the notification mentioned earlier was invalid. The above decision of the Bombay High Court reiterates the scope of the provisions of the Income-tax Act beyond the territories of India, in the absence of an express provision made therein. 9. If the statute does not provide for extra territorial applicability of the Income-tax Act, the said position should be accepted as such and a casus omissus cannot be supplied by the court except in case of clear necessity and with reason to confine within four corners of the statute itself. 10. The Supreme Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 has observed that there is no scope for importing into the statute words which are not there. Such importation woul....
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.... India and, therefore, the question of deduction of tax under section 195 did not arise. The above line of argument was accepted by the ITAT in the following words: "Even otherwise, section 195 was not applicable as the payment was made outside India. The assessee transferred the funds to his account in the SBI and from that account the payment was made outside India. Therefore, if the payment was not made in India and the same was made out of India, provisions of section 195 could not be applied to such a payment and consequently there would be no liable to deduct tax by a non-resident out of the payment made to a non-resident outside India. On all these counts, the assessee was not liable to deduct tax under section 195 and consequently the payment made to the nonresident could not be disallowed under section 58(1)(a)(ii)." The above decision being the decision of a co-ordinate Bench, the present Bench hearing this appeal is bound to follow the said decision, that too, in the absence of any other contrary and binding decision. 16. The scope of section 195 is well illustrated in page 1391 in the commentary 'Kanga & Palkhiwala's Law & Practice of Income-tax' Ei....
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....ns in the same Act so as to make a consistent enactment of the whole statute. The Court must ascertain the intention of the Legislature by directing its attention not merely to the clauses to be construed but to the entire statute. Reliance was placed on the Supreme Court decision in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449. Therefore, the provisions of law contained in section 1(2), section 4(2), section 5, section 9, section 191 and section 195 need to be read and construed in a harmonious manner avoiding a head-on clash between the sections of the Act. Reliance placed on Sultana Begum v. Prem Chand Jain AIR 1997 SC 1006. 22. To interpret section 195 as being applicable to a payment entirely made outside India by one non-resident to another non-resident would mean an extra territorial extension of the Income-tax Act which would run counter to the express provisions of section 1(2) of the Act. Such an interpretation of section 195 would defeat the clear and express provisions of section 4(2) and hence, should be avoided. Reliance placed on the commentaries of NS Bindra and Maxwell. 23. In the course of argument, the learned departmental representative ha....
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....n the ground that section 195 of the Act is applicable. 3. The Bombay High Court in the case of CIT v. Tata Engg. & Locomotive Co. Ltd. [2000] 245 ITR 823 PP 825 has held that the provision under section 195 is only for tentative deduction of income-tax subject to regular assessment and the rights of the parties are not in any manner adversely affected. 4. That it is not proper to expect a payer to prove/establish whether or not the recipient of the amount is chargeable to tax in India. That could be decided only after hearing the recipient. The onus from the payee to the payer to determine the chargeability to tax in India cannot be shifted and the assessment proceedings of the payer cannot be used to establish the taxability of the payee. Reference placed on the decisions of Supreme Court in Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147, K. Govindan & Sons v. CIT [2001] 247 ITR 192, CWS (India) Ltd. v. CIT [1994] 208 ITR 649 and K.P. Varghese v. ITO [1981] 131 ITR 597. 26. The learned senior counsel further contended that section 195 as well as section 40(a)(i) of the Income-tax Act referred to 'chargeability to tax in India of the recipient'. Howeve....
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....at all. 3. Extra territorial jurisdiction is provided by the Income-tax Act through other provisions of the Act other than section 1(2). 4. The argument of the learned senior counsel that section 1(2) does not limit chargeability of non-resident to tax but limits collection of tax from him is wholly unsustainable in law for the reason that the basic proposition and premise governing any scheme of collection of tax is that charge of tax is not an academic issue but completely a practical and pragmatic code; that if taxes are to be levied, it should be collected. 5. Deduction of tax at source is not provided for all sources of income but if provided, the provisions of deductions would be attracted without any exception or exemption. 6. There is no conflict between the provisions of law contained in section 1(2) and section 195 as apprehended by the learned senior counsel. The most important point is that section 1(2) is not restrictive in nature and, therefore, not in conflict with any provisions of the Income-tax Act. This is very evident from the fact that the decisions relied upon by the learned senior counsel do not mention anything about section 1(2) which proves tha....
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....ubserve the object, and that object must be related to something in India." The court has also held therein that as far as the principle of international law is concerned, municipal courts can enforce to the degree permissible with the machinery available. 13. Section 1(2) cannot be read in isolation. Its extent and import have to be seen with reference to the subject-matter it seeks to regulate, that is taxation of income. Income is taxed world wide under the Income-tax Act on twin basis; residence and source. Section 5 of Indian Income-tax Act, 1961 deals with taxation on the basis of source in sub-sections (1) and (2) respectively. Both residence or source or either of the two has to be within the geographical limits of India which is the true intent of section 1(2). 14. The reliance placed by the learned counsel on other enactments to illustrate the scope of extra territorial jurisdiction, like FERA, FEMA, Passport Act, etc. is not relevant as the object of those enactments is different. The object is to regulate the conduct of Indian citizens and their activities outside the territorial area of India. Therefore, the extent and scope of the respective enactment have be....
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....refore, automatic. Any further enquiry regarding the chargeability of income in the hands of the recipient is not called for. That is not proposed in the scheme of law. The implication of section 195(2) has been considered by the Supreme Court in the case of Transmission Corporation of A.P. Ltd. v. CIT [1999] 239 ITR 587 and ITAT, Hyderabad Bench in Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37. 29. The learned CCIT further stated that reliance placed by the learned senior counsel on the decision of ITAT, Mumbai Bench in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 is not relevant to the present case. The learned CCIT relied on the decision of ITAT Delhi Bench "B" in the case of Babcock Power (Overseas Projects) Ltd. v. Asstt. CIT [2002] 81 ITD 29. In the said case, the assessee was a non-resident company incorporated in United Kingdom, having a project office in India. It had entered into a contract for setting up coal based thermal power plant in India. For execution of the contract, the assessee engaged foreign technicians who were deputed to the Indian project office. They were on the payroll of the UK office of the assessee and were paid salaries in foreign currency in UK off....
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....ons of law contained in sections 4, 5, 9 and 195, the court found that the effect of the deeming fiction that the income by way of interest payable by a person, who is resident would be that of income deemed to accrue or arise in India will be treated to be arisen in India irrespective of its being paid anywhere outside India. The court held that if it is permissible for a nonresident receiving interest income from a resident of India to contend that the amount has actually been disbursed outside India and, therefore, such interest income does not accrue or arise in India, the provisions of section 9(1)(ii) would become redundant. The court held that irrespective of the amount being paid to the non-resident in the country of his residence or elsewhere outside India, it is deemed to have accrued or arisen to him in India. The learned CCIT submitted that in principle, this decision has overruled the decision of the Tribunal in Shrikumar Poddar's case. 32. The learned CCIT continued his arguments on the second objection raised by the assessee that the disallowance under section 40(a)(i) was made by the assessing authority without first determining the chargeability of the payme....
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....oss to the assessee whatsoever. Further, if the tax deducted at source has been paid in any subsequent year, the deduction can be claimed in that subsequent year. If for any matter the payments were not chargeable to tax in the hands of the payee, even then the assessee can take recourse to section 154 to obtain the necessary remedies. The learned CCIT concluded that the consequences flowing out of the non-compliance of section 195 are final and the assessments to be made on the payer and the payee are independent and different proceedings. 34. Shri Dinesh Vyas, the learned senior counsel appearing for the assessee, while replying to the contentions of the learned CCIT, highlighted the following points: 1. That the charging provisions and machinery provisions like section 195 are completely distinct provisions and chargeability to tax does not necessarily mean that section 195 of the Income-tax Act would apply automatically. 2. The question is not regarding the scope of the definition of the term "person", which also includes a non-resident. The question is whether section 195 can be applied extra territorially. The contention of the learned departmental representative tha....
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..... 35. Shri Dinesh Vyas, the learned senior counsel alternatively submitted that if the Tribunal is not to follow the decision of Bombay Tribunal in the case of Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48, the legal objection may be placed before a Special Bench so that the clash between different points of view could be settled and a proper adjudication of the appeal could be made. 36. Regarding the second legal objection raised by the assessee on the invoking of section 40(a)(i) by the Assessing Officer without first determining the changeability in the hands of the channel companies, the reply of the learned senior counsel are as follows: 1. Even though section 195 deals with provisional collection of tax, the invoking of section 40(a)(i) is final whereby an eligible expenditure of the assessee is being disallowed. The chargeability need to be first determined in the hands of the channel companies without which the provisional nature of section 195 is not overcome and without overcoming the provisional nature and coming to a definite finding of fact, a final disallowance under section 40(a)(i) cannot be made. 2. Assessee has no power or authority to explain about the....
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....he ultimate power within one's own territories, it is non est beyond the territories. The writ of one country will not move in another country unless bilateral agreements are entered into between by the concerned States. This is because the writ of a State is ultimately to be executed by the strength of the force available at its command. The strength of the force cannot be exercised beyond one's own territorial limits. So there is no dispute in fact regarding the basic tenets of the "doctrine of territorial nexus". The doctrine is reflected in Article 245 of the Constitution. 40. The thrust of the argument of the learned senior counsel is that the chargeability to tax in India may even travel beyond the territorial limits because they are substantial provisions whereas the deductibility cannot go beyond the territorial limits as the provisions of deductibility are machinery provisions. This is the basic line of distinction emphasized by the learned senior counsel in the whole scheme of his arguments. It is his fervent opinion that where the payer and payee are non-residents and the payments are made abroad and the supporting contracts are executed abroad, the writ of th....
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....01(1A) are to be borne by the payer himself, if the liability cast under section 195 is not discharged. Therefore in the scheme of the Act, it is to be seen that the provisions of law contained in section 40(a)(i), section 195, section 201(1) and section 201(1A) need to be read and understood simultaneously, harmoniously and in togetherness. 44. The relevant portion of section 195 for the purpose of this case, as it stood for the assessment year under appeal, is reproduced below:- "195. Other sums.-(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: 45. The expression used in section 195 is "any person responsible for paying to a non-resident...". The expression has qualified the character of the recipient/payee as....
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....asuality in the administration of tax laws. Section 195 does not command the Assessing Officer to extent his hands beyond the territorial limits of India and enforce the deduction of tax at source in a foreign soil. The consequences of the failure on the part of the payer to comply with the requirements of section 195, as already stated earlier, are intelligently couched on the payer himself in section 40(a)(i), section 201(1) and section 201(1A). The Assessing Officer is insisting the compliance of section 195 not from the payee but from the payer, who is assessable to tax in India. When the Assessing Officer is dealing with a person, even if he is a nonresident, but an assessee to income-tax in India, there will not be any occasion for him to reach beyond the territorial limits of the country. All his actions are based on the consequences prescribed in the Act which are invariably to be felt in India itself. It is not possible to argue that since chargeability and deductibility are different, the non-enforcement of the provision relating to deductibility could defeat even the basic concept of chargeability. This is an anti-thesis of the tax law itself. 50. The learned senior c....
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....o such a payment and consequently there would be no liability to deduct D tax by a non-resident out of India. On all these counts, in our opinion, the assessee was not liable to deduct tax under section 195 and consequently the payment made to the non-resident cannot be disallowed under section 58(1)(ii) of the Act. We accordingly hold that the order of the CIT under section 263 is not in accordance with law. We accordingly vacate the same and restore that of the Assessing Officer." 54. The facts of the case relating to Shrikumar Poddar's case were that the assessee, a non-resident, raised loans from outside India and brought the money to India and utilized it in purchasing shares/securities. For the assessment year 1987-88, he paid interest at Rs. 6,82,140 and claimed deduction of that amount against the capital gains on the sale of the shares purchased from out of this borrowed money. The Assessing Officer only allowed deduction under section 57(iii). Invoking jurisdiction under section 263, the Commissioner held that the interest was not allowable under section 58(1)(a)(ii) as no tax therefrom was deducted or paid and section 195 was applied to the case of the assessee as....
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.... 195 and has come to an independent conclusion that where the payments were made outside India to a non-resident, the provision regarding the deductibility would not apply. 57. As held by the Supreme Court in the case of Union of India v. Dhanwanti Devi [1996] 6 SCC 44, a decision is only an authority for what it actually decides and not for what may logically follow from it. It is the rule deducible from the application of law to the facts and circumstances of the case which constitutes its ratio decidendi Therefore, the observation of the Tribunal in the last portion of its order regarding the scope of section 195 of the Income-tax Act, 1961 is in the nature of obiter dicta which, though may receive attention as being an opinion of importance, but no way binding or laying down a general proposition of law. 58. We, therefore, are of the considered opinion that the decision of ITAT, Mumbai Bench "C" in the case of Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 is not a source of precedence to decide the matter raised in the present appeal before us. 59. The decision of ITAT, Mumbai Bench "C" in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 was delivered on 30-4-1997 whereafte....
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....vant for the purpose of our decision. This is because the decisions arrived at in these two cases have not been made on the same plane of facts and circumstances. The legal propositions considered in these decisions are also handled in a different order of precedence and the decision of the recent Delhi Tribunal in the case of Babcock Power (Overseas Projects) Ltd. v. Asstt. CIT [2002] 81 ITD 29 is directly speaking on the issue considered in the present appeal. 63. As argued by the learned CCIT, there is no conflict between the provisions of law contained in section 1(2) and section 195. Section 1(2) is not restrictive in nature. At the same time, section 195 does not extend the Income-tax Act to territories outside India. But if any foreign entity falls into the tax net as defined in section 1(2), the entity is bound by all the provisions of the Income-tax law, wherever applicable. Section 195 is compatible with the provisions of chargeability under the Income-tax Act. The governing force of section 195 is not the payment as such, but the payment of income chargeable to tax. The factum of payment is not the crucial thing but the income character embedded in the payment is the ....
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....e of crediting of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft by any other mode, whichever is earlier, deduct income-tax thereon at the rate in force. This is the general scheme of things provided in section 195. Sub-section (1) of section 195 makes it obligatory for every person in India to deduct tax at source at the rates specified in the relevant Finance Act. The provisions of section 195(1) apply where the payment is that of 'any other sum chargeable under the provisions of this Act', not being salary income or interest on securities. The test for making deduction of income-tax is that the relevant payment should be chargeable under the provisions of the Act. Where the payer considers that the whole of the sums specified in sub-section 195(1) would not be chargeable in the hands of the recipient, he can make application to the Assessing Officer to determine the appropriate portion of the sum so chargeable. Once the Assessing Officer determines such appropriate portion of the sums so chargeable, the deduction of income-tax at source under sub-section 195(1) is only to be made on that portion of t....
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....r counsel that there was no finding by the Assessing Officer on the chargeability of tax of the payments before invoking the provisions of section 40(a)(i). The argument of the learned senior counsel is that the chargeability referred to in section 40(a)(i) is not a hypothetical, theoretical or notional chargeability but chargeability established in an assessment made on the recipient and such an established fact is the fundamental condition precedent for the applicability of section 40(a)(i) of the Act. 72. We are afraid that if the above contention is taken to its logical conclusion, the very provision of law contained in section 40(a)(i) would render otiose. There is no dispute regarding the A constitutionality of the provisions contained in section 40(a)(i). The law relating to the consequence flowing out of the violation of provisions contained in section 195(1) and sub-section (2) thereto have been already dealt in the above paragraphs in the light of the decision of ITAT, Hyderabad Bench "A" in the case of Cheminor Drugs Ltd v. ITO [2001] 76 ITD 37 and the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 wherein it....
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....of the channel companies are carried out inside India. The content on the channels is procured by the channel companies from a central content procurement company outside India. This entity procures content from all over the world including India. The channel companies do not enter into any contract with Indian Content Providers. The channels are up-linked outside India. Thereafter the channels are down linked in India by the cable operators, but on their own account. The entire Ad Airtime on the channels is sold by the channel companies to the assessee and the sale is made outside India on a principal to principal basis. The channel companies do not enter into any agreement with any Indian party for the sale of Ad Airtime in India. The channel companies are incorporated outside India and they do not have any office or agent or subsidiary in India. They do not have their men or material or machinery or combination thereof used in India. 77. The learned senior counsel further explained that the assessee company after purchase of the Ad Airtime from the channel companies undertakes various activities on its own account and at its own right and the channel companies are not involve....
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....ion" postulates a continuity of business relationship between the foreign and the Indian entities. There is no question of continuity of business relation where a person purchases machinery or good abroad and used them in India and earns profit. The part of the foreigner has been played wholly abroad so that there is no connection as such with any business in India. 4. The channels are up-linked from outside India and the channel companies are not involved in any activity thereafter. The activity of down-linking are carried on by the cable operators in India on their own account and as part of their business in India. 5. The Hon'ble Supreme Court in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 held that even assuming, however, that there was any business connection between the earning of the income in the shape of technical fee by the American company and the affairs of the Indian company, yet, no part of the activity or portion could be said to have been carried on by the American company in India and in the absence of such a sustainable finding by the High Court, the provisions of section 42, either of sub-section (1) or sub-section (3) (corresponding provision....
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.... contracts were also executed outside India and once the goods were to be on the ship there was no reservation of right of disposal of the goods by the nonresident and Indian company effect the sale of the products on its own account in India and was taxed on the profits so made by it on its turnover in India, the transaction between the non-resident company and the Indian subsidiary were on a principal to principal basis and the Indian subsidiary could not be regarded as the agent of the non-resident company so as to attract the provisions of "business connection". 11. The conclusion of the lower authorities that the channel companies have business connection in India is erroneous. (2) Channel companies do not carry out any operations in India 1. The CIT(A) has erred in holding that the channel companies carried out operations in India for the purposes of section 9(1)(i) read with Explanation 1(a) of the Income-tax Act. 2. All the activities of the channel companies are carried outside India; the channel companies do not have any office or establishment or manpower or material or machinery or combination thereof in India; all the activities of the channel companies are....
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....Reliance has also been placed on the following decisions: CIT v. Dunlop Ltd (UK) [1993] 201 ITR 534 (Cal.) Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.). CIT v. Good Year Tyre & Rubber Co. [1990] 184 ITR 369 (Delhi). Imperial Chemical Industries Ltd v. IAC [1986] 19 ITD 275 (Cal.). Asia Satellite Tele Commimication Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 (Delhi). ITO v. Raj Television Networks Ltd. (Mad.). (3) The assessee is not an agent of the channel companies. 1. The CIT(A) has erred in holding that the assessee is an agent of the channel companies. The facts and circumstances of the case will demonstrate that the assessee is not acting as the agent of the channel companies in India. 2. The agreement for the outright sale of Ad Airtime between the assessee and the channel companies is executed on a principal to principal basis, outside India. This is evidenced by the terms of the agreements and also by the conduct of the parties. 3. The consideration for the sale of Ad Airtime is paid by the assessee to the channel companies by way of a minimum guarantee amount and also as a specified percentage of the advertising revenues collected beyond ....
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.... restrictions on the buyer, example, fixation of price, settlement of accounts, selling in a particular area or territory or so on. These restrictions per se would not confer a contract of sale into one of agency because in spite of these restrictions the transaction would still be a sale and subject to all the incidence of a sale ...." 10. The Supreme Court has observed in Sri Tirumalu Venka-teswara Timber & Bamboo Firm v. CTO [1968] 21 STC 312 that as a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorized to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. 11. The Supreme Court has again held in the case of Gordon Woodroffe & Co. (Mad.) Ltd. v. Shaikh MA. Majid & Co. AIR 1967 SC 181 that the essence of agency to sell is the delivery of the goods to a person, who is to sell them not as his own property, but as the property of the principal, who continues to be the owner of the goods and who is, therefore, liable to account for the proceeds. 12. As the Ad Airtime in the present case passes from the channel companies to the assessee outside India,....
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....n and in no way purport to limit the general and exhaustive connotation of the expression "business-connection" in India. The learned CCIT has placed reliance on the Supreme Court decision in the case of CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 which has also been relied on by the learned senior counsel, who appeared for the assessee. The learned CCIT submitted that a business connection as elucidated in the above judgment involves a relation between a business carried on by a non-resident which yields profits and gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits and gains and this proposition is squarely applicable to the activities carried on by the channel companies through the medium of the assessee in India. The detailed contentions of the learned CCIT are summarized below: (1) The channel companies do have business connection and source of income in India. 1. The expression "business connection" has not been defined in the Act and Rules. But various judicial pronouncements have examined the true intent of the said expression and have laid down the necessary ingredients of "business connection" ....
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....sessee and the channel companies as both are 100 per cent subsidiaries of holding company. In the light of the decision of the A.P. High Court in the case of G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564, this makes out a clear case of business connection for the channel companies in India. 9. As per the agreement, there is a sharing of profits between the channel companies and the assessee at 80 per cent to 20 per cent which satisfies the test laid down by the Bombay High Court in the case of CIT v. Metro Goldwyn Mayer (India) Ltd. [1939] 7 ITR 176 to substantiate a case of business connection. 10. As seen above all the tests laid down by leading judgments in respect of the expression "business connection" are fulfilled in the case of the assessee and, therefore, it has necessarily to be held that the channel companies do have business connection in India. (2) Channel companies do carry out operations in India 1. Channel companies are the owners and operators of the channels. The activities involved in operating a channel center around the chain of an activity consisting of so many inter-related modules. 2. The first of such module is preparation of programmes me....
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.... by it. Apart from that right, there is no transfer of any property from channel companies to assessee. The said right is not greater than the right of the ultimate customer, who pays for the advertisement telecast by channel companies. 5. The channel companies do not loose ownership of any right transferred to assessee company. The position is clear when the difference between booking and sale is considered. Assessee is doing booking of advertisements and nothing more. In such circumstances, no property passes on to the assessee nor does any sale take place. 6. Booking of advertisement is only a service which cannot be sold as an asset or property. The Airtime does not have any right of property at attached to it. 7. As per section 18 of Sale of Goods Act, no property in goods gets transferred to the buyer until the goods are ascertained. In the present case, every time to be utilized for Airtime is a future time, goods cannot be held as ascertained and, therefore, there could not be any sale. 8. In an outright sale, the buyer does not have any obligation other than the payment of consideration. But in the present case, the channel companies do possess all sorts of int....
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....merit of the case. At the cost of repetition we state that the contention of the assessee is that the channel companies do not earn any taxable income in India for which the reasons pinpointed by the learned senior counsel are that the channel companies do not have any business connection with India; that the channel companies do not carry out any operations in India; and that the assessee is not an agent of the channel companies. On the other hand, the case of the Revenue is that in the nature of the telecasting activities carried on by the channel companies and in the light of the functional relationship existing among the channel companies, the assessee and other associate concerns, it is necessary to hold that the channel companies are having business connection with India for the reason of their business operations being carried out in India and further that the relationship existing between the channel companies and the assessee are nowhere near the relationship of principal to principal. 82. As far as the present case is concerned, the ultimate business carried on right from the channel companies to the advertisement procuring companies is the business of telecasting thro....
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....t today, but certainly some other day. The commercial life of the room runs out along with passage of time. This is true with almost all service industries. 4. It is difficult, therefore, to conceptualise the essence of "time" as a subject-matter of "outright sale". By its very nature "time" is borne and exhausted instantaneously, moment after moment. It cannot be delivered in advance. An outright sale is not complete without the delivery of the goods contracted for. Channel companies cannot make any "outright sale" of Ad Airtime to the assessee company, outside India. It is not, therefore, possible to hold that the assessee company has taken delivery of "Ad Airtime" outside India as a result of "outright sale" and in its turn, transferred to its agent for further down-line sales to the ultimate sponsors/customers in India. Even if, for the convenience of commercial expression one may use the term "sale of Ad Airtime", it does not fall under the legal concept of sale. 5. The business of telecasting is a continuous and non-stop process initiated by the channel companies and ultimately enjoyed by the viewers. It is a long chain of process involving engineering, technology, elec....
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....emed as a sale in the light of the constitutional amendment. In our opinion, the subject-matter of agreements entered into between the assessee and the channel companies on the subject of "Ad Airtime" is only a permissive right. The above mentioned permissive right conferred on the assessee company through the agreements entered into with the channel companies is borne, used and exhausted in Indian territories. There could be more than one countries other than India coming under the footprint of the satellite telecast made by the channel companies, as a result of which some programmes and advertisements telecast in India would be available in other countries also where they fall under the footprint of satellite telecast. But the fact that other countries also come under the very same telecasting network which applies to India as well is not a reason to hold a view that the activities of telecasting are not done in India. The correct reading of the situation is that the telecasting activities are operated not only in India but also in other countries falling under the footprint of the satellite telecasting. 85. The channel companies even after "sale of Ad Airtime" have maintained....
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....ed in India when the programmes are down-linked by the cable operations in India. Therefore, the end result of the agreements entered into by the assessee company and the channel companies with reference to "Ad Airtime" is undoubtedly outcome in India and within its territories. 86. The telecast of advertisements made through the medium of the assessee company is an integral part of the wholesome telecasting activity carried on by the channel companies. The off-shoot of the above finding is that, it is not practically possible for the channel companies to make the sale of any part or portion of the telecasting activities carried on by them. The advertisements telecast through the channels owned by the channel companies are in an inseparable part of the regular programmes telecast by them. The difference is that for the "Ad Airtime" exploited in the telecasting schedule, the channel companies are earning their revenue. Therefore, as far as the ultimate outcome of the channel companies by way of telecasting is concerned, the advertisements procured through the medium of the assessee company as well as other programme contents procured and telecast by the channel companies do form ....
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....and, therefore, it is to be stated that, "the sale is concluded in India". What is agreed and concluded outside India is the sale in a conceptual state and what is delivered and executed in India is the actual sale. The sale of "Ad Airtime" is, therefore, made by the channel companies within India, which is the source of revenue of the channel companies. The circumstances explained above are an eloquent testimony to establish that the channel companies do have business connection with India. In the light of this fundamental finding of fact of the other contentions advanced by the assessee are either logical or technical or academic. It is not possible to visualize a situation where all the programmes are delivered by the channel companies in India but the advertisements alone are delivered outside India. Even though we have already held that there is no sale of "Ad Airtime" as contemplated by the assessee, in the present discussion we are using the terms "sale of Ad Airtime" only for the sake of convenient expression. 89. The argument of the assessee company is that the telecast is ultimately delivered to the viewers at large by the cable operators in India, operating on their o....
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.... If we examine the nature of operations carried out by the channel companies in their business of telecasting as explained in the above paragraphs we do find that the ultimate delivery of programmes are made by the "channel companies in India and the outcome of all the agreements entered into between the assessee and the channel companies and that of the cable operators are all finally culminating in India. We have seen that the role of the channel companies in telecasting does not cease once the programmes are up-linked outside India. We find that the role continues till the ultimate delivery is made in India by way of the telecast being reflected in the screens of the ultimate viewers. Therefore, in the light of the above judicial pronouncements we have to hold that the assessee is having live, meaningful and continuing business relationship with India on account of their operations carried out through various supporting agents and those operations being carried out in India being the main source of income for those channel companies. In other words, the channel companies do have a continuous business relation supported by continuous business operation in India, which ultimately ....
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.... Carborundum Co. v. CIT [1977] 108 ITR 335. The Supreme Court has also held in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 that if no operations in India are carried out by non-resident, then there cannot be a case of business operation in India. Something further, the Karnataka High Court has held in VDO Tachometer Werke, West Germany v. CIT [1979] 117 ITR 804 that even if there is a business connection with India, operations also need to be carried out in India so as to make the non-resident liable for Indian taxation. 95. The nature of operations examined in the above paragraphs does not clash with any of the principles laid down by the courts in the judicial pronouncements cited above. As already held in paragraphs above, the channel companies are having substantial business connection with India; so also they do carry on telecasting operations not from outside India alone, but extend on such activities to India also till it reach the ultimate viewer. We, therefore, have to hold that along with a substantial business connection with India, the channel companies are having their business operations carried out in India in a continuing manner. 96. The Bombay High Cou....
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....of income to the channel companies or to one of the subsidiaries in a footprint country falling under the telecasting network of the channel companies is concerned, the propositions like principal to principal relationship, regimentation of activities, etc. are almost irrelevant and theoretical in nature. 98. If the arguments advanced by the assessee company that there is no business connection for the channel companies with India and that the channel companies do not have any place of business or source of income in India are accepted, it would necessary to examine what is the subject-matter of contract between the assessee and the channel companies in respect of "Ad Airtime". Indian "Ad Airtime" is a source of income for the channel companies. The ultimate telecast of the programmes is made in India. The ultimate delivery of the programme contents through telecast to Indian viewers is the soul and substance of the agreements entered into between the channel companies and the assessee company. Even though for the purpose of engineering and technology, the telecasting is transmitted through the satellites situated in the high sky, Indian space is a definite place of business. In....
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....me" is only a part of the sale of other programme contents. Sale is made as the "time" of the channel companies. The "Ad Airtime" described in the present case is the telecasting time of the channel companies in their brand names. As far as the ultimate customers and viewers in India are concerned, these advertisements embedded in the telecasting contents are always identified with the brand name of channel companies. 100. The ITAT, Delhi Bench "C" has considered a similar case like this in Asia Satellite Tele Communication Co. Ltd. v. Dy. CIT [2003] 85 ITD 478. In that case, the assessee was a non-resident company deriving income from lease of transponder capacity of its satellites. The Assessing Officer observed that according to a contract entered into by the assessee with Star TV channels, the assessee facilitated transmission and broadcasting of various programmes in India among other countries and the revenue of the Star TV channels was mainly from the advertisements procured from India. The Assessing Officer, therefore, held that the territory of commercial exploitation of the channel companies was India and, therefore, it was liable to tax under section 9(1)(i). The cont....
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....the channel companies had income accruing or arising in India. The said decision of the Delhi Tribunal is applicable to the present case. 101. Conclusions are to be reached on the basis of the facts of the case and not on the basis of agreements alone. If the real nature of activities carried on by the parties to the agreements do not fit in the frame of the agreements entered into between the parties, those agreements could be considered only in the light of the real nature of the activities and the terms of the agreements will not have any preference over the actual affairs of the business. The agreements are entered into between the parties as enforceable instruments in law but the terms enshrined in those agreements may not be sufficient to come to proper conclusions. As Oliver Wendells Holmes put it "the life of law is not logic but experience". Therefore, after examining the various aspects of the case we hold that the channel companies are earning taxable income in India and, therefore, the assessee company was bound to deduct tax at source under section 195 when payments were made to the channel companies. 102. The learned senior counsel has raised an alternate conten....
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.... of tax required to be deducted at source while making the payments to the channel companies would be very less and correspondingly the quantum of disallowance under section 40(a)(i) would be reduced. In the present case, we are not dealing with the assessments of the channel companies. We are examining the obligation of the assessee company to deduct tax at source while making the payments to the non-resident. It is by way of a consequence that the taxability of the channel companies has been examined by us. But it is to be seen that the obligation of the assessee company to deduct tax at source and the chargeability of income to tax in the case of channel companies are entirely two different issues. The Supreme Court in the case of Transmission Corporation of A.P Ltd. v. CIT [1999] 239 ITR 587 and Hyderabad Bench of ITAT in Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37 have held that it is the duty of the assessee to approach the assessing authority under section 195(2) on matters regarding deduction or non-deduction of lax under section 195(1). The quantum of deduction to be made by the assessee could be determined only in a process initiated under section 195(2). As the assessee ....