2006 (1) TMI 172 - AT - Income Tax

Income deemed to accrue or arise in India - deduction of tax at source u/s 195 - non-resident company - business connection with India Or Not - Channel companies liability to tax in India - payments received against the cost of Ad Airtime - advertisement revenues - disallowance of payments u/s 40(a)(i) - HELD THAT - In the present case what is sold by the channel companies and bought by the assessee company is Ad Airtime in India, i.e. in a commercial expression Indian Time . The distinguishing feature of time is that it cannot be procured or stocked as such. It is born and exhausted instantly. Therefore, the subject-matter of agreements between the assessee and the channel companies cannot be in any way agreements based on the delivery of goods abroad. The Ad Airtime conceived in the agreements entered into between the assessee and the channel companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and consumption of the subject-matter of Ad Airtime is in India. Therefore, the contention of the assessee that the entire activities were carried out abroad is not found acceptable. The Ad Airtime is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers. The advertisements are telecast as part of the regular programmes of the channel companies. The advertisements form part of the mainstream of the telecasting activities carried on by the channel companies. The sale, if any, of the Ad Airtime 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. 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. 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 u/s 195 when payments were made to the channel companies. We have come to a finding that the channel companies do have business operations in India resulting in a business connection. They are sufficient to hold that the channel companies are bound by the taxable income earned in India. The assessee and the channel companies are 100 per cent subsidiaries of a mother holding company. They are collectively engaged in the business of telecasting throughout the world and the business relations and business activities are inter-connected and inter-laced. Therefore, the assessee company is working as a functional agent, as a facilitator, as an associate and as a supporter of the channel companies. The essence of our finding is that as far as the business carried on by the channel companies and the assessee is concerned, the assessee company does not have an independent existence different from the channel companies. Therefore, the above alternate argument of the assessee is liable to be dismissed. Only a portion of the payments could be legitimately treated as the income of the channel companies. Therefore, the amount 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 u/s 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 (8) TMI 2 - SUPREME COURT and Hyderabad Bench of ITAT in Cheminor Drugs Ltd. v. ITO 1999 (12) TMI 111 - ITAT HYDERABAD-A have held that it is the duty of the assessee to approach the assessing authority u/s 195(2) on matters regarding deduction or non-deduction of tax u/s 195(1). The quantum of deduction to be made by the assessee could be determined only in a process initiated u/s 195(2). As the assessee has not used the facility provided u/s 195(2), which is a legal obligation on its part, the contention regarding the quantum of deduction does not have locus standi in the present appeal. Therefore the said contention fails. We have considered all the arguments advanced by the assessee against the orders of the lower authorities. This case involves myriad of facts and complex question of law as argued and re-argued by both sides. All of them, except certain legal grounds have been considered by the assessing authority and the CIT(A) in a very extensive manner. In result we find that the channel companies are liable for taxation in India for that part of income earned by them and as such, the assessee company was obliged to deduct tax u/s 195 while making payments to the channel companies against the purchase of Ad Airtime . In the circumstances, the Assessing Officer is justified in disallowing those payments u/s 40(a)(i) of the Income-tax Act, 1961. In result, this appeal filed by the assessee is dismissed.

Summary

Issues Involved:

1. Territorial jurisdiction in the context of Section 195 of the Income-tax Act, 1961.
2. Chargeability of payments to tax in India before invoking Section 40(a)(i).
3. Business connection of channel companies with India.
4. Operations carried out by channel companies in India.
5. Relationship between the assessee and channel companies.
6. Applicability of CBDT Circular No. 742.
7. Quantum of disallowance under Section 40(a)(i).

Detailed Analysis:

1. Territorial Jurisdiction in the Context of Section 195:

The primary contention was whether Section 195 of the Income-tax Act, 1961, which mandates tax deduction at source on payments to non-residents, applies to payments made outside India. The assessee argued that the payments were made outside India, and hence, Section 195 should not apply. The Tribunal, however, held that Section 195 applies to any person responsible for paying to a non-resident, irrespective of whether the payment is made inside or outside India. The Tribunal emphasized that the machinery provisions for tax collection, including Section 195, are integral to the substantive provisions of tax chargeability and must be read harmoniously. The Tribunal rejected the assessee's contention, affirming that the Income-tax Act extends to payments made outside India if the income is chargeable to tax in India.

2. Chargeability of Payments to Tax in India Before Invoking Section 40(a)(i):

The assessee argued that for disallowance under Section 40(a)(i), the chargeability of the payments to tax in India must first be established in the hands of the recipient. The Tribunal clarified that the obligation to deduct tax at source under Section 195 arises when the payment is chargeable to tax in India, and the failure to deduct tax results in disallowance under Section 40(a)(i). The Tribunal held that the chargeability of income in the recipient's hands need not be conclusively established in the payer's assessment proceedings. The Tribunal emphasized that the payer must comply with Section 195 and seek determination under Section 195(2) if there is any doubt about the chargeability of the payment.

3. Business Connection of Channel Companies with India:

The Tribunal examined whether the channel companies had a business connection in India. The assessee contended that the agreements were executed outside India on a principal-to-principal basis, and the channel companies did not have any business connection in India. The Tribunal, however, found that the channel companies had a substantial business connection with India. The Tribunal noted that the channel companies were involved in continuous business operations in India through various supporting agents, including the assessee. The Tribunal held that the channel companies' activities, including telecasting and marketing, were interconnected and contributed to their income, establishing a business connection in India.

4. Operations Carried Out by Channel Companies in India:

The Tribunal analyzed whether the channel companies carried out any operations in India. The assessee argued that all activities of the channel companies were conducted outside India, and the down-linking was done by cable operators in India on their own account. The Tribunal found that the channel companies' telecasting activities, including the delivery of programs and advertisements, were carried out in India through the cable operators. The Tribunal held that the channel companies' business operations extended to India, where the final delivery of telecast content occurred, generating revenue for the channel companies.

5. Relationship Between the Assessee and Channel Companies:

The Tribunal examined the nature of the relationship between the assessee and the channel companies. The assessee claimed that the relationship was on a principal-to-principal basis. However, the Tribunal found that the subject matter of the agreements, "Ad Airtime," did not fit the legal concept of an outright sale. The Tribunal concluded that the relationship was not that of principal to principal but that of an agent, with the assessee acting as a functional agent of the channel companies. The Tribunal emphasized that the telecasting activities were a continuous process, and the assessee's role was integral to the channel companies' operations.

6. Applicability of CBDT Circular No. 742:

The assessee argued for the applicability of CBDT Circular No. 742, which provides for presumptive taxation of foreign telecasting companies. The Tribunal rejected this argument, stating that the circular applies to foreign telecasting companies, whereas the assessee was not a telecasting company. The Tribunal held that the circular did not apply to the assessee's case.

7. Quantum of Disallowance Under Section 40(a)(i):

The assessee contended that the disallowance under Section 40(a)(i) should be limited to the portion of the payment representing the channel companies' income chargeable to tax in India. The Tribunal rejected this contention, emphasizing that the assessee must comply with Section 195 and seek determination under Section 195(2) if there is any doubt about the chargeability of the payment. The Tribunal held that the entire payment made to the channel companies was subject to disallowance under Section 40(a)(i) due to the assessee's failure to deduct tax at source.

Conclusion:

The Tribunal dismissed the assessee's appeal, affirming that the channel companies had business connections and operations in India, and the assessee was obliged to deduct tax at source under Section 195. The Tribunal upheld the disallowance under Section 40(a)(i) for the assessee's failure to deduct tax on payments made to the channel companies.