2020 (10) TMI 245 - AT - Income Tax

Income accrue in India - PE in India - nature of income - payment received by the assessee for grant of right or licenses to distribute the channel in India - income declared by the Appellant in its return of income as Business Income on the basis of the MAP order - distribution revenue as Business Income as declared by the Appellant or to be Royalty as per section 9(1)(vi) of the Act and Article 12 of the DTAA between India and the USA - HELD THAT - Appellant-assessee is a US based Company and is tax resident of US. During the relevant assessment years, it has derived advertisement and distribution revenue from grant of exclusive rights to an Indian Company TIIPL to sale advertisement on the products and to distribute the products as incorporated above. The Indian Company has an exclusive distributor of the said products to the cable operators on principle to principle basis. The distribution agreement allowed the TIIPL to distribute the products to various cable operators and ultimately to consumers in India. The distribution revenue collected by the TIIPL was to be shared between the appellant. Said agreement the appellant had the sole right to determine the content of the products and also the right to change such content from time to time and secondly, all the copyrights and other priority rights in the products and in any promotional material vested in the appellant company alone. It is a copyright of the content in the product which always remained with the appellant-assessee and was never transferred. The clause merely provides right to distribute the product. As brought on record that in all the years and in subsequent years also Assessing Officer has held the advertisement revenue to be the business income following the MAP order. However, during the impugned assessment years, the said position has been digressed by the Assessing Officer without there being any material change in the facts and circumstances or the terms of agreement or the business mutual - as a rule of consistency, the same position should not be altered or should be allowed to be changed. In this case, appellant never granted any licenses to use any copyright, either to distributor or to the cable operator albeit it has only granted right for purpose of selling advertisement on the product that are channels, etc. and distribution of such products in India. The Indian company is carrying out the distribution and selling of the advertisement and it does not have any kind of right to edit, interpret, add the products distributed by it. The assessee company only granted commercial rights in the nature of broadcast reproduction right to the TIIPL, which has been separately defined u/s. 37 of the Copyright Act and therefore, it cannot be held that revenue derived by the assessee for distribution of products is taxable as royalty albeit it is a business income of the assessee. AO has tried to justify the tax the distribution revenue in the nature of royalty by applying the retrospective amendment made in Explanation-6 of Section 9(1)(vi) of the Act. Such an approach cannot be upheld because there is no similar amendment in the definition of royalty under the DTAA and it has been well settled in the case of New Skies Satellite BV 2016 (2) TMI 415 - DELHI HIGH COURT that amendment in the domestic law cannot be imported or read into DTAA. Thus, we hold that the distribution revenue earned by the appellant-assessee cannot be taxed as royalty albeit as a business income. Since, assessee has already offered income as business income in terms of the MAP, therefore, the income as declared by the assessee in accordance with the MAP and accepted by the Department in the earlier years has to be accepted. Accordingly, the additions made by the Assessing Officer are deleted. - Decided in favour of assessee.

Issues Involved:
1. Legality of the assessment order under Section 143(3) read with Section 144C(1) of the Income-tax Act, 1961.
2. Classification of distribution revenue as royalty under Section 9(1)(vi) of the Act and the India-USA DTAA.
3. Determination of Permanent Establishment (PE) under Article 5(4) of the DTAA.
4. Credit of taxes deducted at source.
5. Interest under Section 244A of the Act.
6. Initiation of penalty proceedings under Section 271(1)(c) of the Act.
7. Taxability of distribution revenue under Article 7 of the DTAA.
8. Impact of the resolution between competent authorities of India and the USA on taxability.
9. Charging of interest under Section 234B of the Act.

Detailed Analysis:

1. Legality of the Assessment Order:
The assessee contested the legality of the assessment orders passed under Section 143(3) read with Section 144C(1) of the Income-tax Act, 1961, arguing that the orders were bad in law. The tribunal did not find merit in this argument and proceeded to analyze the substantive issues.

2. Classification of Distribution Revenue as Royalty:
The core issue was whether the distribution revenue should be classified as royalty under Section 9(1)(vi) of the Act and the India-USA DTAA. The Assessing Officer (AO) treated the distribution revenue as royalty, arguing that the right to distribute the channels amounted to a transfer of rights in respect of any copyright. However, the tribunal held that the appellant merely granted rights to distribute the products (channels) and did not transfer any copyright. The tribunal emphasized that the ownership of the copyright remained with the appellant and was never transferred to the Indian entity (TIIPL). The tribunal relied on several judicial precedents, including the decisions in Set India, Taj TV Ltd., and MSM Satellite, to conclude that the distribution revenue should be classified as business income, not royalty.

3. Determination of Permanent Establishment (PE):
The AO held that the appellant had a PE in India under Article 5(4) of the DTAA. The tribunal noted that the appellant’s transactions with TIIPL were on a principal-to-principal basis and that TIIPL could not be considered a PE of the appellant in India. The tribunal also referred to the decision in Morgan Stanley, which held that if the arm’s length principle is satisfied, no further profits would be attributable to the PE.

4. Credit of Taxes Deducted at Source:
The appellant argued that the AO erred in not allowing complete credit of taxes deducted at source. The tribunal did not specifically address this issue in detail but allowed the appeal in favor of the appellant, implying that the credit should be allowed.

5. Interest under Section 244A of the Act:
The appellant contended that the AO erred in not allowing the appropriate amount of interest under Section 244A of the Act. The tribunal's decision to allow the appeal in favor of the appellant suggests that the interest should be granted as per the provisions of the Act.

6. Initiation of Penalty Proceedings:
The appellant challenged the initiation of penalty proceedings under Section 271(1)(c) of the Act. The tribunal did not delve into this issue in detail, but the favorable outcome for the appellant on the substantive issues likely impacts the penalty proceedings.

7. Taxability of Distribution Revenue under Article 7 of the DTAA:
The appellant argued that the distribution revenue should be taxed under Article 7 of the DTAA as business profits and not as royalty under Article 12. The tribunal agreed, noting that the appellant had no PE in India and that the distribution revenue was business income.

8. Impact of the Resolution Between Competent Authorities:
The appellant highlighted that a resolution between the competent authorities of India and the USA for earlier years deemed 10% of the advertising and subscription revenue as net profit chargeable to tax in India. The tribunal noted that the AO had accepted this position in earlier years and should not deviate from it without any material change in facts or circumstances.

9. Charging of Interest under Section 234B:
The appellant contested the charging of interest under Section 234B of the Act. The tribunal's decision to allow the appeal suggests that the interest should not be charged in the manner done by the AO.

Conclusion:
The tribunal concluded that the distribution revenue should be classified as business income and not royalty. The appellant’s income declaration based on the MAP order was accepted, and the additions made by the AO were deleted. The tribunal emphasized the consistency in the treatment of similar issues in earlier years and the absence of any material change justifying a different view. The appeals were allowed in favor of the appellant.

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