2023 (1) TMI 403 - AT - Income Tax

Income deemed to accrue or arise in India - Subscription/distribution revenue received by the assessee - royalty under India - Mauritius Double Taxation Avoidance Agreement (DTAA) - nature and character of the distribution revenue received by the assessee - assessee is a non-resident partnership firm established under the laws of Mauritius and a Tax Resident of Mauritius - HELD THAT - The distribution agreement between the assessee and ESPN Indian clearly stated that the transaction is on principal to principal basis. The agreement further allowed ESPN India to enter into agreement with sub-distributors/cable operators so that the channels can be distributed to end consumers in India. As per the terms of the agreement the revenue earned from distribution of channels has to be shared between the assessee and ESPN India in certain ratio. The materials on record demonstrate that ESPN India is carrying on its distribution activity as well as other activities such as acquisition and allotment of air time for advertisement and sale/leasing of decoders. No material has been brought on record by the Revenue to suggest that the assessee has any kind of control over the business of ESPN India or the premises of ESPN India have been given at the disposal of the assessee or the assessee carries on any kind of business through the premises of ESPN India. It is ESPN India who has entered into contracts with cable operators for distribution of the channels in India and responsible for breach of contract with cable operators. The transaction between the assessee and ESPN India is limited to conferring of right to distribute the channels of ESPN Star Sports in India through cable operators. How ESPN India does such distribution activity is not the concern of the assessee. Assessee is only concerned with share in distribution revenue depending on the total amount received by ESPN India from sub-distributors. We have also noted that in certain instances of alleged breach of contract between ESPN India and cable operators it is ESPN India which is liable and not the assessee. Other factors such as acquisition of air time and sale of decoders clearly indicate that ESPN India has its independent business and cannot be called as dependent agent of the assessee. Revenue has alleged that ESPN Indian is a DAPE however it has failed to demonstrate that in terms with Article 5(4) of India Mauritius Tax Treaty ESPN India habitually exercises authority to conclude contracts on behalf of the assessee. That being the factual position emerging on record in our view ESPN India cannot even be considered to be a DAPE of the assessee. The decisions cited before us particularly the decision of TAJ TV Ltd 2022 (3) TMI 1032 - ITAT MUMBAI and Turner Broadcasting Systems Asia Pacific Inc 2020 (10) TMI 245 - ITAT DELHI squarely apply to the facts of the present appeal. Therefore following them we hold that the assessee does not either had a fixed place PE or dependant agent PE in India under Article 5 of the India- Mauritius Tax Treaty. As undisputed factual position that ESPN India has been remunerated at arm s length and there are no adjustments suggested by the TPO in any of the assessment years under dispute. That being the case no further attribution of profit can be made to the PE. In this regard we rely upon the decisions cited by learned counsel for the assessee. Thus we hold that the distribution revenue received by the assessee is not taxable in India. Withdrawal of interest entitlement u/s 244A by learned Commissioner (Appeals) - HELD THAT - Before us it is the contention of learned counsel for the assessee that since no refund has been granted to the assessee question of withdrawal of interest under section 244A of the Act does not arise. Considering the aforesaid submission of the assessee we restore the issue to the Assessing Officer for factually verifying assessee s claim and deciding it afresh in accordance with law after providing opportunity of being heard to the assessee. Short grant of credit of TDS - HELD THAT - It is the claim of the assessee that TDS claimed in the revised return is reflected in form 26AS and appeal effect order passed by the AO. Therefore complete credit of TDS should be given. We direct the Assessing Officer to factually verify assesee s claim with reference to From 26AS and TDS certificate and thereafter allow credit for TDS in accordance with law.

Summary

Issues Involved:
1. Whether subscription/distribution revenue received by the assessee can be treated as royalty under India - Mauritius Double Taxation Avoidance Agreement (DTAA).
2. Whether the assessee has a Permanent Establishment (PE) in India under Indian - Mauritius Tax Treaty.
3. Assuming that there is a PE in India, if the PE is remunerated on arm's length basis, whether further profit can be attributed to the PE.
4. In case there is a PE, whether the attribution of income to the PE shall be on the basis of actual profit/loss as per profit and loss account or on estimation basis.
5. Non-disposal of assessee's ground pertaining to withdrawal of interest entitlement under section 244A.
6. Short grant of credit of TDS.

Detailed Analysis:

1. Treatment of Subscription/Distribution Revenue as Royalty:
The assessee, a non-resident partnership firm from Mauritius, engaged in distributing sports channels, received revenue from ESPN India for distribution rights. The Assessing Officer (AO) initially considered this revenue as business income but later treated it as royalty. The Commissioner (Appeals) upheld the AO's decision, referring to the definition of royalty under Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the India-Mauritius DTAA. However, the Tribunal found that the assessee did not transfer any copyright to ESPN India, only distribution rights. Citing various legal precedents, it concluded that the revenue was not royalty but business income.

2. Existence of Permanent Establishment (PE):
The AO and Commissioner (Appeals) held that ESPN India constituted both a dependent agent PE and a fixed place PE of the assessee in India. The Tribunal, however, found no evidence that ESPN India acted as an agent or that the assessee had control over ESPN India's business or premises. ESPN India entered contracts on its own account, not on behalf of the assessee. Thus, the Tribunal concluded that ESPN India was not a PE of the assessee.

3. Attribution of Profit to PE:
Assuming the existence of a PE, the Tribunal considered whether further profit could be attributed if the PE was remunerated on an arm's length basis. The Tribunal noted that ESPN India had been remunerated at arm's length, as confirmed by Transfer Pricing Officer (TPO) orders with no adjustments. Therefore, no further profit attribution was warranted.

4. Basis of Attribution of Income to PE:
Given the Tribunal's conclusion that ESPN India was not a PE and that it was remunerated at arm's length, the issue of whether income attribution should be based on actual profit/loss or estimation became redundant and was not adjudicated.

5. Withdrawal of Interest Entitlement under Section 244A:
In assessment year 2004-05, the assessee contended that no refund had been granted, so the question of withdrawing interest under Section 244A did not arise. The Tribunal restored the issue to the AO for factual verification and fresh decision.

6. Short Grant of Credit of TDS:
In ITA No. 6704/Del/2017, the assessee claimed short credit of TDS. The Tribunal directed the AO to verify the claim with reference to Form 26AS and TDS certificates and allow credit accordingly.

Conclusion:
The Tribunal ruled in favor of the assessee, concluding that the subscription/distribution revenue was not royalty but business income, and ESPN India did not constitute a PE. Consequently, the revenue's appeals were dismissed, and the assessee's appeals were partly allowed. The issues of interest entitlement under Section 244A and TDS credit were remanded to the AO for verification and fresh decision.