2024 (9) TMI 640 - AT - Income Tax

Royalty receipt v/s business income - distribution revenues received by the assessee towards granting distribution rights of its channels - HELD THAT - As relying on Tribunal in 2020 (10) TMI 245 - ITAT DELHI Hon ble High Court of Delhi 2024 (3) TMI 1349 - DELHI HIGH COURT on we hold that the subject distribution revenue earned by the assessee cannot be taxed as Royalty albeit as a business income. Since the assessee has already offered the said income as business income in terms of MAP and the income as declared by the assessee in accordance with the MAP which has been accepted by the Department in earlier years has been accepted, we delete the additions made by the AO for the Assessment Year 2020-21 and 2021-22. Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Taxability of distribution revenues.
3. Taxability of advertisement revenues.
4. Taxability of advertisement revenues as Equalization Levy (EL).
5. Levying of interest under sections 234A and 234C.
6. Proposal to initiate penalty proceedings under Section 270A.

Issue-wise Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed by the AO, alleging that it was based on surmises and conjectures and violated principles of natural justice. The AO assessed the income at INR 1,51,71,99,007 against INR 34,96,99,010 as per the return filed by the assessee.

2. Taxability of Distribution Revenues:
The AO classified the net distribution revenues received from WarnerMedia India Private Limited (WMIPL) as 'Royalty' under section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA). The assessee contended that these revenues should be taxed as business income, citing previous MAP resolutions and ITAT decisions. The ITAT upheld the assessee's stance, referencing past rulings where distribution revenues were not considered royalty but business income. The ITAT also noted that the AO disregarded Circular No. 6/2001 and judicial precedents, including decisions in BBC World Distribution Ltd. and ESS Distribution (Mauritius) SNC et Companies Ltd., which distinguished distribution rights from copyright.

3. Taxability of Advertisement Revenues:
The AO alleged that the assessee had a Dependent Agent Permanent Establishment (DAPE) in India through WMIPL and attributed 15% of net advertisement revenues as business income of the alleged DAPE. The assessee argued that WMIPL operated on a principal-to-principal basis and should not constitute a DAPE. The ITAT referenced binding circulars and judicial pronouncements, including the Supreme Court's decision in DIT (International Taxation) v. Morgan Stanley and Co. Inc., which held that no further attribution of profits is required if a PE is remunerated at arm's length. The ITAT also noted that the AO deviated from the consistent position of attributing 10% of advertisement revenues without any cogent evidence, violating principles of consistency as established in Radhasoami Satsang vs. CIT.

4. Taxability of Advertisement Revenues as Equalization Levy (EL):
The AO referenced EL on advertisement revenues, but the assessee argued that EL, introduced as part of the Finance Act, 2016, is a separate statute and does not pertain to assessment proceedings. The ITAT did not find merit in the AO's application of EL.

5. Levying of Interest under Sections 234A and 234C:
The assessee contested the AO's decision to levy interest under sections 234A and 234C of the Act. The ITAT did not provide detailed reasoning on this issue, but the overall relief granted to the assessee implies that the interest levied was also annulled.

6. Proposal to Initiate Penalty Proceedings under Section 270A:
The AO proposed to initiate penalty proceedings under Section 270A for alleged under-reporting. The assessee argued that there was no under-reporting and that all relevant material was furnished during assessment proceedings. The ITAT's decision to allow the appeal suggests that the penalty proceedings were not warranted.

Conclusion:
The ITAT allowed the appeals for Assessment Years 2020-21 and 2021-22, holding that the distribution revenues should be taxed as business income and not as royalty. The ITAT also ruled against the attribution of 15% of advertisement revenues to the alleged DAPE, reaffirming the consistent attribution of 10% as business income. The ITAT's order aligns with previous judicial precedents and the principles of consistency. The AO's additions were deleted, and the appeals were allowed in favor of the assessee.