2016 (8) TMI 504 - AT - Income Tax

TDS u/s 195 - income from Indian operation - whether the assessee did had an agency PE in the form of Taj India within the meaning of Article 5(4) of the India-Mauritius-DTAA? - Held that - An agent is deemed to be a PE of a foreign enterprise, if he is not independent and has habitually exercises an authority to conclude contracts in the name of the enterprise unless the activities of such person are limited to those mentioned in paragraph 4 that is, to the purchase of goods or merchandise for the enterprise; or if he has no such authority, but habitually maintains a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise. Thus, the character of an agent, who can be said to be a dependent only if, firstly, the commercial activity for the enterprise is subject to instructions or comprehensive control and secondly, he does not bear the entrepreneur risk. It is sufficient for the establishment of an agency PE that the agent has sufficient authority to bind the enterprise s participation in the business activity. Here in this case, none of the conditions as stipulated in Article 5(4) is applicable because Taj India is acting independently qua its distribution rights and the entire agreement ostensibly is on principal to principal basis as analyzed and found by ld. CIT (A). When the entire relationship qua the distribution revenue is that of principal to principal basis and the Taj India is acting independently, then it moves out from the conditions laid down in Article 5(4). Thus the distribution income by the assessee cannot be taxed in India, because Taj India does not constitute an agency PE under the terms of Article 5(4) - Decided in favour of assessee Royalty payment - Disallowance of various expenses under section 40(a)(i) like, transponder charges and uplinking charges - payments has been paid to PanAmSat International Systems Inc. USA for providing facility of transponder for telecasting Ten Sports channel in various countries including India - Indo-US-DTAA - Held that - Payment made to the non-resident outside India for rendering the services of equipment outside India is not taxable in India. Hon ble Delhi High Court in the case of Asia Satellite Telecommunications vs. DIT, reported in (2011 (1) TMI 47 - DELHI HIGH COURT ) later on reiterated that there is no royalty payment in such cases under the domestic law, that is, section 9(1)(vi), prior to amendment. Thus judicial precedents supported the case of the assessee. Here, the maxim of lex non cogit ad impossplia, that is, the law of the possibly compelling a person to do something which is impossible, that is, when there is no provision for taxing an amount in India then how it can be expected that a tax should be deducted on such a payment. This view has been upheld by in catena of decisions including the ITAT Mumbai Benches in the case of Channel Guide India Ltd (2012 (9) TMI 95 - ITAT MUMBAI ) wherein, it has been held that, assessee cannot held to be liable for deducting TDS in view of the retrospective amendment which has come at a much later date. Thus, we hold that assessee was not liable to deduct TDS at the time of making the payments. Accordingly, disallowance under section 40(a)(i) could not have been made by the AO - Decided in favour of assessee Distribution of income taxable as royalty under section 9(1)(vi) up to 12th July, 2002 - Held that - We are unable to concur with the divergent stand taken by the AO that for three months the payment will constitute royalty and for balance nine months, the payment will constitute business income . It has also been brought to our knowledge that in the subsequent years the AO has treated distribution income as business income and not as royalty. Thus, prior to period 12th July, 2002, also when assessee was not registered under the Laws of Mauritius then also it will not affect the nature of income. In any case, as stated earlier, under the distribution agreement, the assessee company has not granted any license to use any copyright to the distributor or to the cable operators. The assessee only makes available the content to the cable operators which are transmitted by them to the ultimate customer/viewers. Further, rights over the content at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute royalty . AO himself has treated the income from distribution activity as business income for the period of 9 months and in the subsequent years. The same income cannot have two treatments, one as royalty and other as business income.- Decided in favour of assessee Disallowance of programming cost - Held that - The programming cost is paid to the assessee to various nonresident outside India for acquiring right brought on sports events taking place outside India. Thus, such programming cost cannot be deemed to arise in India as liability to pay programming cost as assumed by the assessee company outside India and it cannot be held to be borne by any PE in India. - Decided in favour of assessee

Summary

Issues Involved:
1. Determination of whether Taj India constitutes an agency Permanent Establishment (PE) of the assessee under Article 5(4) of the DTAA.
2. Deletion of disallowances made by the Assessing Officer (AO) under section 40(a)(i) of the IT Act for transponder charges and uplinking charges.
3. Taxability of distribution income earned by the assessee before and after becoming a resident of Mauritius.
4. Classification of programming fees for live programs as "royalty" under Article 12 of the DTAA.

Issue-Wise Detailed Analysis:

1. Agency Permanent Establishment (PE):
The CIT(A) concluded that Taj India did not constitute an agency PE of the assessee under Article 5(4) of the India-Mauritius DTAA. The CIT(A) found that Taj India was an independent contractor acting on a principal-to-principal basis, not as an agent of the assessee. The CIT(A) examined the distribution agreement and sub-distribution agreements, noting that Taj India entered into contracts in its own name and retained a significant portion of the revenue. This finding was upheld by the Tribunal, affirming that Taj India did not habitually exercise authority to conclude contracts on behalf of the assessee, thus not meeting the criteria for an agency PE under Article 5(4).

2. Disallowances under Section 40(a)(i):
The CIT(A) deleted the disallowances made by the AO under section 40(a)(i) for transponder charges and uplinking charges. The CIT(A) referred to the Delhi Tribunal's decision in DCIT vs. PanAmSat International System, which held that payments for transponder facilities were for services and not for the use of equipment, thus not amounting to 'royalty.' The CIT(A) also noted that such payments were not borne by a PE in India, and therefore, there was no obligation to deduct tax at source under Article 12(7) of the DTAA. The Tribunal upheld this view, emphasizing that the payments did not fall within the definition of 'royalty' under the DTAA and that retrospective amendments to the domestic law could not alter the treaty provisions.

3. Taxability of Distribution Income:
The CIT(A) held that the distribution income earned by the assessee before becoming a resident of Mauritius (up to July 12, 2002) could not be treated as 'royalty' under section 9(1)(vi) of the IT Act. The CIT(A) found that the distribution income did not involve the transfer of any right over the copyright or granting any license over the copyright to the cable operators. The Tribunal agreed, stating that the distribution income was business income and not 'royalty,' and there could not be two different treatments for the same income. The Tribunal also noted that the AO had treated the distribution income as business income in subsequent years.

4. Programming Fees as "Royalty":
The CIT(A) held that programming fees paid for acquiring live telecast rights of events were not in the nature of 'royalty' as there was no copyright involved in live telecast events. The CIT(A) further noted that such payments were not connected with a PE in India and therefore, even if characterized as 'royalty,' they would not be taxable under Article 12(7) of the DTAA. The Tribunal upheld this finding, relying on the decision of the Bombay High Court in DIT vs. Set Satellite (Singapore) Pte Ltd, which supported the view that programming costs paid to non-residents for events outside India were not taxable in India.

Conclusion:
The Tribunal dismissed the revenue's appeals and upheld the CIT(A)'s findings on all issues, affirming that Taj India did not constitute an agency PE, the disallowances under section 40(a)(i) were correctly deleted, the distribution income was business income and not 'royalty,' and the programming fees were not taxable as 'royalty.' The Tribunal also dismissed the assessee's appeals on the ground of limitation, noting that the assessee could raise the issue of PE in subsequent years if necessary.