2016 (1) TMI 131 - AT - Income Tax

Taxability of revenue generated through advertisements in India - Taxability under India-US tax treaty - assessee having a Permanent Establishment (PE) in India in terms of India-USA DTAA - whether the income generated through distribution of channels falls within the meaning of Royalty under Article 12 of India-USA DTAA and also u/s 9(1)(vi) of the Act and hence the same is also taxable in India? - Held that - If the foreign company receives any money from the Indian soil and if it is held to be having a Permanent Establishment , then the taxability of the same have to be examined in accordance with the provisions of Indo-US treaty as well as under the provisions of Indian Income tax Act. We have noticed that the assessee had contended before the AO that it is not taxable at all in respect of advertisement revenue and hence we notice that the assessee has not challenged the income worked out by the assessing officer. In the interest of natural justice, we are of the view that the assessee should be provided an opportunity to submit its contentions with regard to the computation of income from advertisement revenues. Hence, for this limited purpose, we restore this issue to the file of the assessing officer. If the assessee does not have to say anything in this regard, the income computed by the assessing officer shall stand. We notice that the assessing officer has made a general observation that the Article 12 of the India-US DTAA shall be applicable without critically analyzing the provisions of the treaty. Though the assessing officer has also referred to the provisions of Explanation 2 to sec. 9(1)(vi) of the Act for examining the definition of the term royalty , yet he has not critically discussed about its applicability to the impugned payment. It is pertinent to note that the definition of the term royalty given in sec. 9(1)(vi) of the Act as well as in the Indo-USA treaty uses the expression process . The said expression has not been defined in the treaty, but the same has been defined in Explanation 6 to sec. 9(1)(v) of the Actinserted by the Finance Act, 2012. We further notice that the various case law relied upon by the assessee has been rendered prior to the insertion of the above said Explanation-6 or the applicability of the above said explanation has not been examined therein. Hence, we are of the view that the question whether the payment received by the assessee for giving distribution rights shall fall in the category of Royalty needs to be examined afresh at the end of the assessing officer. Further, while dealing with the issue relating to the advertisement revenue, we have taken the view that assessee is having dependent agent PE. The said fact also needs to be taken into account while examining the issue. In view of the above, we set aside the order of the AO on this issue and restore the same to the file of the assessing officer with the direction to examine the same afresh in the light of discussions made supra and take appropriate decision in accordance with the law, after affording necessary opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Taxability of advertisement revenue.
2. Treatment of fee received from giving distribution rights.

Detailed Analysis:

1. Taxability of Advertisement Revenue:

The assessee, M/s NGC Network Asia, LLC, contended that under the new agreement effective from 1.5.2006, the relationship with NGC India was on a "Principal to Principal" basis, thus NGC India should not be considered a dependent agent, and consequently, the assessee should not have a Permanent Establishment (PE) in India. The assessee argued that the advertisement revenue was not taxable in India, as NGC India was acting independently, and the transactions were at arm's length as certified by the Transfer Pricing Officer (TPO).

The assessing officer (AO) disagreed, holding that the "advertisement airtime" could not be considered "goods" capable of being sold independently. The AO noted that NGC India procured advertisements using the assessee's brand and that the telecasting of programs and advertisements were inseparable activities. Therefore, NGC India was deemed a functional agent of the assessee, making the assessee's advertisement revenue taxable in India.

The Tribunal examined whether "advertisement airtime" could be classified as "goods." It concluded that advertisement airtime does not meet the criteria of goods as it cannot be used independently without the assessee's involvement in telecasting. The Tribunal upheld the AO's view that NGC India was a dependent agent, thus constituting a PE for the assessee in India under Article 5(4)(a) of the India-US DTAA. Consequently, the advertisement revenue was taxable in India.

2. Treatment of Fee Received from Giving Distribution Rights:

The assessee received fees from NGC India for the distribution rights of its channels, which the AO treated as "royalty" under Article 12 of the India-US DTAA and Section 9(1)(vi) of the Income Tax Act. The AO argued that the distribution rights included restrictions on the use of trademarks and copyrights, thus falling under the definition of royalty.

The assessee contended that the distribution rights were not in the nature of copyright but were broadcasting reproduction rights, distinct from copyright. The assessee argued that the payment received was not for the use of any copyright but for the commercial right to distribute the channels.

The Tribunal noted that the AO had not critically analyzed the provisions of the treaty or the Income Tax Act. It highlighted the need to examine whether the payment for distribution rights falls under the definition of "royalty," especially considering the insertion of Explanation 6 to Section 9(1)(vi) by the Finance Act, 2012, which includes transmission by satellite or similar technology in the definition of "process."

The Tribunal set aside the AO's order on this issue, directing a fresh examination considering the new legal provisions and the Tribunal's findings on the existence of a dependent agent PE.

Conclusion:

The Tribunal concluded that NGC India was a dependent agent of the assessee, thus constituting a PE in India. The advertisement revenue was taxable in India, and the issue of distribution rights was remanded to the AO for a fresh examination. The Tribunal's decisions for AY 2007-08 were applied to AY 2008-09 as well. Both appeals were partly allowed for statistical purposes.