2021 (5) TMI 1074 - AT - Income Tax

Income taxable in India - dependent agency permanent establishment (DAPE) in India - profits of the DAPE on account of advertisement sale revenues - distribution revenues earned by the assessee are taxable under article 12 of the Indo-US tax treaty - whether profits on account of advertisement sale revenues can be brought to tax in the hands of such a DAPE? HELD THAT - We find that it is not even revenue s case that the dependent agent has not been paid an arm s length remuneration. As a matter of fact the assessee has filed the evidences in support of the stand that these transactions have been held to be arm s length transactions. Given this factual position we find that this issue is squarely covered in favour of the assessee by case of ADIT vs Asia Today Ltd 2021 (2) TMI 95 - ITAT MUMBAI - Thus we hold that as the dependent agent has been paid an arm s length remuneration nothing survives for taxation in the hands of the DAPE and therefore even existence of DAPE is wholly infractuous and tax neutral. To this extent we uphold the plea of the assessee and delete the impugned taxability of advertisement sale revenues. The assessee gets the relief accordingly. Taxability of distribution revenues under article 12 of the Indo-US tax treaty - The first settled proposition is that the distribution rights cannot be treated as copyrights as consistently held by the co-ordinate benches e.g. in the case of the DDIT vs SET India Pvt. Ltd. 2012 (4) TMI 604 - ITAT MUMBAI as stated that the assessee submitted before him that the cable operator only retransmits the television signals transmitted to it by a broadcaster without any editing delays interruptions deletions or additions and therefore the payment made by the assessee to the Non-resident company is not for use of any copyright and consequently cannot be characterized as Royalty. CIT(A) has held that Broadcasting Reproduction Right is not covered under the definition of Royalty under section 9(1)(vi) of the Income tax Act as well as Article 12 of the Treaty. Accordingly the payment is not in the nature of Royalty but in the nature of business income. Definition of term process as defined by the Finance Act 2012 w.e.f. 1st June 1976 - So far as assessment years prior to 2012-13 are concerned the issue is now settled by Hon ble Supreme Court s judgement in the case of Engineering Analysis Centre of Excellence Ltd 2021 (3) TMI 138 - SUPREME COURT wherein their Lorships have held that the insertion of explanation 6 dealing with definition of process is not retrospective in nature. Even so far as subsequent years are concerned it is well settled in law as was also held by Hon ble jurisdictional High Court in the case of CIT vs Siemens 2008 (11) TMI 74 - BOMBAY HIGH COURT and New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT a mere amendment in domestic law will not override the provisions in the applicable tax treaties. Revenue thus derives no advantage so far as present case is concerned from amendment by way explanation 6 to section 9(1)(vi). Also one argument adopted by the authorities below in support of taxability on royalty and that is for the assessee having given licence for use of trademarks associated with NGC Asia. Such as incidental use of trademark and trade name etc. is only incidental to rendition of broadcasting services and in the light of law laid down in the case of DIT vs Sheraton International Inc 2009 (1) TMI 27 - DELHI HIGH COURT it cannot result in taxation as royalty either. Learned Departmental Representative nevertheless relies upon the stand of the authorities below. On all the three aspects thus this issue regarding taxability of distribution revenues is also covered in favour of the assessee.

Summary

Issues Involved:
1. Determination of tax liability and total income.
2. Existence of a Permanent Establishment (PE) in India.
3. Taxability of advertisement sales revenue.
4. Attribution of additional profits to the Appellant.
5. Taxability of distribution revenues as 'Royalty.'
6. Taxation rate of content syndication income.
7. Reopening of assessment proceedings.
8. Levy of interest and initiation of penalty proceedings.
9. Granting of tax credits and taxability of refunds.

Issue-wise Detailed Analysis:

1. Determination of Tax Liability and Total Income:
The appellant challenged the determination of tax liabilities and total income by the Assessing Officer (AO) for various assessment years. The AO had determined significant sums as payable by the appellant and assessed the total income at high amounts. The Tribunal found that the AO had erred in these determinations, particularly in light of the resolution of other core issues.

2. Existence of a Permanent Establishment (PE) in India:
The appellant contested the AO's decision that it had a PE in India under the India-US Double Tax Avoidance Agreement (DTAA). The Tribunal, referencing the case of ADIT vs Asia Today Ltd, found that the appellant did not have a PE in India, as the Indian agents were remunerated at arm's length. Thus, the existence of a PE was deemed tax-neutral.

3. Taxability of Advertisement Sales Revenue:
The AO had held that advertisement sales revenue earned by the appellant was taxable in India. However, the Tribunal ruled that since the Indian agents were paid arm's length remuneration, no further profits could be attributed to the appellant in India. This decision was based on the principle that the existence of a dependent agency permanent establishment (DAPE) is tax-neutral if the agent is adequately compensated.

4. Attribution of Additional Profits to the Appellant:
The AO had attributed additional profits to the appellant in India without considering that the alleged PE was remunerated at arm's length. The Tribunal upheld the appellant's plea that no additional profits should be attributed as the agents were paid arm's length remuneration.

5. Taxability of Distribution Revenues as 'Royalty':
The AO had classified distribution revenues as 'Royalty' under Article 12 of the India-US tax treaty. The Tribunal, referencing the case of DDIT vs SET India Pvt. Ltd, concluded that distribution rights do not constitute copyrights and thus, cannot be taxed as royalty. The Tribunal also noted that amendments to domestic law do not override tax treaty provisions.

6. Taxation Rate of Content Syndication Income:
The appellant argued that content syndication income should be taxed at a lower rate as per section 115A of the Income Tax Act, 1961. The Tribunal found merit in this argument and directed the AO to tax such income at the rate of 10.56%.

7. Reopening of Assessment Proceedings:
The appellant contested the reopening of assessment proceedings for the assessment year 2004-05, arguing that there was no failure to disclose material facts. The Tribunal agreed, noting that the basis for reopening was decided in favor of the appellant, thus quashing the reassessment.

8. Levy of Interest and Initiation of Penalty Proceedings:
The AO had levied interest under Section 234D and initiated penalty proceedings under Sections 271(1)(c), 271A, and 271B of the Act. The Tribunal found these issues to be peripheral and rendered them infructuous, as the core issues were resolved in favor of the appellant.

9. Granting of Tax Credits and Taxability of Refunds:
The appellant raised grievances regarding the short credit of taxes deducted at source and the taxability of refunds not received. The Tribunal restored these issues to the AO for fresh adjudication by a speaking order in accordance with the law.

Conclusion:
The Tribunal allowed the appeals, holding that the appellant did not have a PE in India, and thus, the advertisement sales revenue and distribution revenues were not taxable in India. The reassessment proceedings were quashed, and the issues of tax credits and refunds were remanded to the AO for fresh adjudication. The levy of interest and initiation of penalty proceedings were deemed infructuous.