2012 (5) TMI 503 - AT - Income Tax

Dis-allowance 40(a)(i) on payment of hiring charges for transponder by assessee(Mauritius company), to foreign companies on the ground that no tax has been deducted at source by the assessee u/s 195 - Revenue contending such hiring charges to be Royalty - DTAA between India and USA - Held that - As we have held that there is no PE, the question of a claim being made and disallowing such a claim for expenditure u/s. 40(a)(i) does not arise. However on merits it is held that issue stands covered in favour of the assessee by the decision of High Court in the case of Asia Satellite Communication Co. Ltd. Vs. DIT(2011 (1) TMI 47 (HC)) wherein it is held that payment made by the telecast operators situated abroad to the assessee which was also a non-resident did not represent income by way of royalty as defined in Explanation 2 to section 9(1)(vi). Further, in the case of DIT Vs. Guy Carpenter & Co. Ltd.(2012 (5) TMI 31 (HC)) it was held that to make available technical knowledge, mere provisions of service was not enough and the payer had to be enabled to perform services himself. The department s argument that the amendments by the Finance Act, 2012 changes the position is not acceptable, since there is no change in the DTAA between India and USA and the DTAA prevails where it is favorable to the assessee; Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, section 195 will not apply to such cases as held by in the case of Vodafone International Holdings B.V.(2012 (1) TMI 52 (SC)). Further, as prior to the insertion of Section 40(a)(i) in AY 2004-05, payments to a resident did not require TDS. Under the non-discrimination clause in the DTAA, the dis-allowance u/s 40(a)(i) in the case of non-residents cannot be made. See Herbalife International (2006 (2) TMI 220 (Tri)). Aforesaid view squarely apply in respect of payments made to Advanced Satellite( UK based company) for equipment and technical fees. As there is no change in the DTAA between India and UK, we have to hold that no dis-allowance can be made u/s 40(a)(i). No dis-allowance can be made in view of the nondiscrimination clause also. Dis-allowance u/s 40(a)(i) in respect of payments made to LMB(Mauritius) Ltd. for purchase of programmes - revenue contending the same to be payment for grant of broadcasting right - Held that - Following proposition laid down in case of CIT vs B. Suresh (2009 (3) TMI 4 (SC)) and others it is held that that there is a sale of programmes, section 195 cannot be invoked in case of purchases. Further, it is a payment by a non-resident to another non-resident and as nondiscrimination clause also applies.

Issues Involved:
1. Whether the assessee has a Permanent Establishment (PE) in India.
2. Applicability of Tax Deducted at Source (TDS) provisions under Section 195.
3. Disallowance under Section 40(a)(i) on payments for hiring charges for transponder to PanAmSat Limited.
4. Disallowance under Section 40(a)(i) on payments made to Advanced Satellite.
5. Disallowance under Section 40(a)(i) on payments made to LMB (Mauritius) Ltd.
6. Disallowance under Section 40(a)(i) on purchase of films from LMB Isle of Man.

Detailed Analysis:

1. Permanent Establishment (PE) in India:
The tribunal considered whether the assessee had a PE in India. Consistent with the view taken for the previous assessment year (A.Y. 2001-02), it was held that the assessee does not have a PE in India. The Indian Representative was not considered a dependent agent of the assessee. Even if a PE was assumed, the Indian agent was remunerated at Arm's Length Price (ALP), and no further attribution of profits was necessary. Thus, the assessee's contentions were upheld, and these grounds were allowed.

2. Applicability of TDS provisions under Section 195:
Since it was held that there is no PE, the question of disallowance of claims for expenditure under Section 40(a)(i) does not arise. However, the tribunal still considered the issue on merits.

3. Disallowance under Section 40(a)(i) on payments for hiring charges for transponder to PanAmSat Limited:
The Assessing Officer categorized the payments as 'Royalty' under the Double Taxation Avoidance Agreement (DTAA) between India and the U.S.A./U.K. The CIT(A) followed the ITAT Delhi Bench decision in the case of Asia Satellite Telecommunications Co. Ltd., which was reversed by the Delhi High Court. The tribunal held that the payment for the use of a standard facility provided to anyone willing to pay does not fall under 'Royalty' as per Article 12 of the India-USA/UK DTAA. The tribunal relied on the Delhi High Court decision in Asia Satellite Telecommunications Co. Ltd. and the Madras High Court decision in Skycell Communications Ltd., concluding that the payments were not for technical services or royalty. The retrospective amendment to the Finance Bill, 2012, did not affect the DTAA provisions. Thus, no disallowance under Section 40(a)(i) was warranted.

4. Disallowance under Section 40(a)(i) on payments made to Advanced Satellite:
Similar to the payments to PanAmSat Limited, the tribunal found no disallowance under Section 40(a)(i) was warranted for payments made to Advanced Satellite. The nature of services provided by Advanced Satellite was conceptually the same as those provided by PanAmSat Limited. The tribunal upheld that no disallowance could be made under the non-discrimination clause of the Indo-UK DTAA.

5. Disallowance under Section 40(a)(i) on payments made to LMB (Mauritius) Ltd.:
The tribunal examined whether the payments were for outright purchase of programmes or for broadcasting rights. The agreement indicated a sale of programmes, and the tribunal held that such payments did not fall under 'Royalty' as defined in Section 9(1)(vi) of the Act. The tribunal also noted that the payments were made from one non-resident to another non-resident outside India, and thus, Section 195 was not applicable. The non-discrimination clause also applied, preventing disallowance under Section 40(a)(i).

6. Disallowance under Section 40(a)(i) on purchase of films from LMB Isle of Man:
The tribunal held that payments for cinematographic films do not fall within the definition of 'Royalty' under Explanation 2 to Section 9(1)(vi). The agreement indicated a sale of films, and thus, the payments were not liable to tax in India. Consequently, Section 195 was not applicable, and no disallowance under Section 40(a)(i) was warranted.

Conclusion:
The tribunal allowed the appeal of the assessee, holding that no disallowance under Section 40(a)(i) was warranted for the payments made to PanAmSat Limited, Advanced Satellite, LMB (Mauritius) Ltd., and LMB Isle of Man. The tribunal also held that the assessee did not have a PE in India, and thus, the TDS provisions under Section 195 were not applicable.

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