2018 (10) TMI 1261 - AT - Income Tax

Consideration received for providing Line production Services - India-South Africa DTAA - FTS or Royalty - amount received by the assessee for rendering of administrative services cannot be characterised as FTS - consideration received by the assessee for providing Line production Services as royalty and Fees for technical services - payments are neither taxable under Article 12 of the India- South Africa Tax Treaty nor under Section 9 of the Income Tax Act, 1961. Held that - As the various coordination/facilitation services rendered by the assessee viz. arranging for locational crew, producer, transportation, paper work for various stunts to be performed and other requirements for setting up and filming the series etc, are in the nature of Line Production Services, thus, the same cannot be termed as technical, managerial or consultancy services. Thus, the consideration received by the assessee for rendering of the aforesaid services, which are purely administrative in nature, cannot be brought within the sweep of the definition of FTS within the meaning of Explanation 2 to Sec.9(1)(vii) of the Act or Article 12 of the India-South Africa tax treaty. The amount received by the assessee for rendering of the aforesaid administrative services cannot be characterised as FTS . we have already observed that the services rendered by the assessee to Endemol India Pvt. Ltd. are not in the nature of a managerial, technical or consultancy services, therefore, we refrain from further adverting to and adjudicating upon the observations arrived at by the A.O/DRP in context of the rulings of the Hon ble AAR 2014 (2) TMI 902 - AUTHORITY FOR ADVANCE RULINGS . We are of the considered view that as the term royalty under Article 12 of the India-Sought Africa Tax Treaty, takes within its sweep only consideration received for the use or right to use, any copyright, thus, the observations of the lower authorities that the consideration received by the assessee was for transfer of the copyright to Endemol India Pvt. Ltd., in any way, would on the said count also fall beyond the sweep of the term royalty as defined in Article 12 of the India20 South Africa tax treaty. We thus, after deliberating on the contentions advanced by the assessee to buttress its claim that the lower authorities had wrongly characterised the amount received from Endemol India Pvt. Ltd. as royalty , are inclined to accept the same. In terms of our aforesaid observations, we are of the considered view that the lower authorities had erred in characterising the consideration received by the assessee for providing Line production Services as royalty and Fees for technical services . - Addition to be deleted - decided in favour of assessee.

Summary

Issues Involved:
1. Taxability of income received by the assessee for Line Production Services under Article 12 of the India-South Africa Tax Treaty.
2. Characterization of the income as "royalty" or "fees for technical services" (FTS) under the Income Tax Act, 1961 and the India-South Africa Tax Treaty.

Issue-wise Detailed Analysis:

1. Taxability of Income Under Article 12 of the India-South Africa Tax Treaty:

The assessee, a South African company, provided Line Production Services to Endemol India Pvt. Ltd. for the television series 'Fear Factor' filmed in South Africa. The income received for these services was ?9,60,23,838/-. The Assessing Officer (A.O) and the Dispute Resolution Panel (DRP) characterized this income as "royalty" and "fees for technical services" (FTS) under Article 12 of the India-South Africa Tax Treaty, subjecting it to a 10% tax rate.

The assessee argued that the services provided were purely administrative and logistical, such as arranging production facilities, local crew, and transportation, which do not qualify as managerial, technical, or consultancy services. The assessee cited rulings from the Authority for Advance Ruling (AAR) and a decision from the ITAT Mumbai in a similar case (Yashraj Films Pvt. Ltd. Vs. ITO) to support their claim that such services should not be taxed as FTS.

2. Characterization of Income as "Royalty" or "Fees for Technical Services" (FTS):

The A.O and DRP concluded that the services provided by the assessee involved managerial and technical inputs, thus qualifying as FTS. Additionally, they argued that the income received was for the use or right to use a copyright, thereby classifying it as "royalty."

Upon review, the ITAT found that the services rendered were administrative and logistical, not managerial or technical. The term "managerial services" involves controlling, directing, managing, or administering a business, which was not the case here. Similarly, "technical services" require expertise in technology, which was not applicable to the services provided. "Consultancy services" involve providing advice, which was also not relevant.

The ITAT also addressed the characterization of the income as "royalty." According to Article 12 of the India-South Africa Tax Treaty, "royalty" includes payments for the use or right to use any copyright. The ITAT concluded that the agreement between the assessee and Endemol India Pvt. Ltd. was for providing services, not for granting any rights in a copyright. The Indian and South African copyright laws state that the person commissioning a work is the first owner of the copyright, making Endemol India Pvt. Ltd. the owner of the copyright, not the assessee.

Conclusion:

The ITAT ruled that the income received by the assessee for Line Production Services does not qualify as "royalty" or "fees for technical services" under the Income Tax Act, 1961, or the India-South Africa Tax Treaty. The addition of ?9,60,23,838/- to the assessee's income was deleted, and the appeal was allowed.

Order:

The appeal of the assessee is allowed, and the order was pronounced in the open court on 03.10.2018.