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TMI Blog2016 (1) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... rtunity 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are either subsidiaries/affiliate companies of M/s News Corporation, USA. 4. The assessee is the owner of two television channels viz., The National Geographical Channel and Fox International Channel. It is engaged in the business of broadcasting of its channels in various Countries including Indian sub-continent. As per Article 4 of the India - US Double Taxation Avoidance Agreement ('India - US Treaty), the assessee is eligible for the benefits of the India - US treaty by virtue of being a resident of USA. The assessee company has appointed M/s NGC India as its distributor to distribute its television channels and also to procure advertisements for telecasting in the channels. Hence the assessee company generates two streams of revenues from India, viz., (a) Fee for giving distribution rights for telecasting of its channels. and (b) Advertisement revenues. We shall first proceed to deal with both the issues for assessment year 2007-08 and the decision taken by us in that year can be applied to AY 2008-09. The assessing officer has explained the details of the same as under in AY 2007-08:- a) The assessee company has executed a distribution agreement dated 21s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous international transactions entered into by the assessee, a reference was made to the Transfer Pricing Officer (TPO) and the TPO has accepted the Arm‟ length Price of the international transactions entered into by the assessee with its Associated Enterprises (AE). The assessee took the view that both types of income, cited above, are not taxable in India and accordingly did not offer them in the return of income filed for AY 2007-08. The assessing officer/DRP, on the contrary, held that the advertisement revenues as well as distribution revenues are taxable in India, since the tax authorities considered M/s NGC India as the dependent agent Permanent Establishment of the assessee. The AO accordingly assessed 25.34% of the advertisement revenues as income of the assessee attributable to India, i.e. in the ratio of worldwide profits to worldwide revenue, in accordance with Rule 10B(ii) of the I.T Rules. The assessing officer held that the revenue generated on granting of Distribution rights is in the nature of Royalty and accordingly assessed 15% of thereof as income of the assessee as per Article 12 of India US DTAA. The DRP also confirmed the same. 6. We shall first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther, a brief overview of some of the activities of NGC India upon purchasing of advertisement airtime from NGC Asia have been stated below: ---NGC India decides the pricing strategy, the target market segment etc. for the advertisement revenues. ---NGC India decides whether it should sell the advertisement airtime through its own sales force or through agents and accordingly, the advertising airtime is sold by NGC India ---Further, NGC India also solely decides the price and other terms at which it should sell advertising airtime to any customer NGC India (directly or through it agent) directly negotiates and agrees to the terms with the advertisers/agencies (customers) ---NGC India enters into contracts for sale of advertising airtime with the various customers on its own account and entirely at its own risk. (for eg the risk of bad debts if the customer does not pay is entirely that of NGC India) ---Further NGC India raises invoices and follows up (either directly or through its agent) for collection of the amounts due from its customers ---NGC India deals with, discusses and addresses any concerns/disputes with its customers. ----The entire business and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en NGC India and such customers an and on such terms as it may consider appropriate. Further, no customer shall have privity of contact with NGC Asia and the entire risk and responsibility in all respect regarding such customers shall rest exclusively with NGC India. Clause 2)ii) NGC India shall alone be responsible for its acts or omissions and shall not be deemed to be acting for and on behalf of NGC Asia. The agreement does not require or provide for NGC India under the direct or indirect control or supervision of NGC Asia. Accordingly, an important aspect for existence of an agency relationship, wherein an agent is required to conduct the business according to the directions of the principal is not satisfied. Therefore, based on the terms of the contract, the intention of the parties and the above analysis of the provisions of the Contract Act, the nature of arrangement between NGC Asia and NGC India is on a principal-to-principal basis. Taxability under India-US tax treaty Without prejudice to above that the advertisement revenues earned by NGC Asia are not taxable in India under the Act, we further submit that the revenue with respect to outright sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the leading role. 8. The telecasting business being a continuous and flowing process, the entire activities are carried out by the NGC India through the help of agents, sub-agents and other concerns and subsidiaries. During the course of arguments, the Ld A.R submitted that the observations made by the AO in point no.5 and 6 are wrong, i.e., he submitted that the assessee does not procure advertisements directly. However, we are of the view that the assessing officer has discussed only the business module of the assessee and has not given any finding that the assessee procures advertisements directly, which is evident in the observations made in point No.6, wherein the AO observes that the assessee along with its associates earn the revenue. 8. We have earlier noticed that the assessee has sold the Advertisement Airtime (Ad airtime) to NGC India with effect from 1.5.2006 and accordingly claimed that the agreement was on Principal to Principal basis. Accordingly, it was claimed that NGC India is an agent of independent status and hence NGC India cannot be considered to be PE of the assessee. The assessing officer did not accept the said submissions of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tisement revenues is India. The AO also observed that the NGC India procures advertisement by using the brand name of the assessee and hence all telecast contents are identified with the brand name of the assessee only. Accordingly the assessing officer held that NGC India is only a functional agent of the assessee and further the assessee has earned advertisement revenue through its business connection in India. The various observations made by the assessing officer has been summarized by him in paragraph 4.4.15 of his order passed for assessment year 2007-08. 12. The Assessing officer further held that there is no material changes in the rights and obligations of the assessee under the old agreement (principal to agent agreement) and the new agreement (principal to principal agreement). Accordingly, the AO held that NGC India is dependent agent of the assessee in terms of paragraph 4(c) of Article 5 of India-USA DTAA. Consequently, he held that the assessee is having PE in India. In this regard, the assessing officer took support of the decision rendered by the co-ordinate bench of Tribunal in the case of ACIT Vs. DHL Operations B.V.Netherlands (ITA No.7987 and 7988/Bom/92 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. This time limit appears to have been segregated into Advertisement airtime and Programme air time , meaning thereby, the assessee has prefixed the time limit for telecasting advertisements. For soliciting the advertisements, the assessee is required to appoint persons and the assessee has appointed M/s NGC India to solicit advertisements from India. Under the old agreement entered by the assessee with NGC India, the assessee has paid 15% of advertisement revenues to the Indian company. Further the advertisement revenue would depend upon the number of advertisements received and also quantity of air time used. There should not be any dispute that M/s NGC India has acted as agent of the assessee company under the old agreement. 17 Under the new agreement, the assessee has sold the entire advertisement air time to M/s NGC India for a fixed consideration. The new agreement states that the said agreements have been entered on Principal to Principal basis. Accordingly, it was contended that the Advertisement air time is goods capable of being transferred and hence the agreement has been entered on Principal to Principal basis. If the contention of the assessee is acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther by sale of video cassettes or with the help of satellites are having attributes required for bringing the property involved within the meaning of goods are satisfied with reference to its utility, capability of being bought and sold; and capable of being transmitted, transferred, delivered stored and possessed. 19. The advertisement air time is an item that can be identified and abstracted, since the telecasting time limit is predetermined. The right over the advertisement air time may also be capable of being possessed till the time of its expiry. For example, if a person purchases the right over the advertisement airtime of say, 30 minutes to be used before the expiry of a particular month, then the said can possess the right till the expiry of that month. Accordingly, after the expiry of the that month, the said right would automatically lapse and hence the characteristic of capable of being stored would have limited application in this case. Another important question is - whether the advertisement air time, per se, can be used independently by the transferee? One of the main characteristics of goods is that it should be capable of being consumed or used . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 223;ble High Court has observed as under:- 19. This Court in Commissioner of Income Tax, New Delhi Vs. Singapore Airlines Ltd. [2009-ITOL-183-HC-DEL-IT] analyses the aforesaid definition in the following manner: 16. It is clear from the definition that an agency comes into existence where one person is vested with the authority or capacity to create a legal relationship between person referred to as a principal and an outside third party. Therefore, the basic and essential requisites of an agency ordinarily would be that: The agent makes the principal answerable to third persons whereby the principal can sue third parties directly and renders himself, that is, the principal, liable to be sued directly by the third parties. - Varsha Engg. (P.) Ltd. v. Vijay Traders AIR 1983 Guj. 168 at pages 168-169, para 5. The person who purports to enter into a transaction on behalf of the principal would have the power to create, modify or terminate contractual relationship between his principal, that is, the person whom he represents, and the third parties. - P. Krishna Bhatta v. Mundila Ganapathi Bhatta AIR 1955 Mad. 648 at page 651, para 36. An agent, though bound by instruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof Sales Tax Act is not attracted, though the decision was rendered in the context of liability of sales tax. 22. In a principal to principal relationship in respect of sale of goods, the manufacturer does not come in the picture in respect of further sale of goods. We have earlier noticed that the advertisement airtime referred to here does not give to anybody the right of universal use and the same is restricted to the channels owned by the assessee only. Even after the sale of advertisement airtime by the assessee, the purchaser gets only a right to enforce the assessee herein to telecast the advertisement material of the purchaser, i.e., assessee‟s concurrence to telecast the advertisements and also actual telecasting alone brings value to the advertisement airtime . Hence assessee‟s involvement till the completion of telecasting of advertisement material is essential in order to maintain the value of advertisement airtime. Hence advertisement airtime cannot be categorized as goods within the legal meaning of the said term. Accordingly, what is being s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... methodology adopted by the parties to share the revenue or to give compensation to NGC India for services rendered may not be the determining factor to decide about the nature of relationship between the parties. 23. The next question that arises is as to whether the assessee is having permanent establishment in terms of India-USA DTAA. In this regard, the assessing officer has taken the view that the assessee is having Permanent Establishment in India in terms of Article 5(4)(c), para 1 of Article 5, para 2(i) of Article 5 of the India-US tax treaty. Since we have held that NGC India should be considered as an agent of the assessee for the detailed reasoning given above, we agree with the tax authorities that the new agreement entered between the parties altering the terms and conditions would not make it materially different from the old agreement. There may be some modification with regard to the rights and obligations, but in essence, the assessee has retained control in connection with the advertisements procured by NGC India. 24. The dependent agent PE is specified in Article 5(4) of India-USA DTAA as under:- 4. Notwithstanding the provisions of paragraphs 1 and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obligations, the assessee is otherwise required to telecast the advertisements procured by NGC India, which is clear from the following clause:- 3(a)(iii) NGC Asia agrees to insert the advertisements provided by NGC India, as per schedule provided by NGC India, into the Channel(s) for broadcasting. On a combined reading of the various clauses of the new agreement coupled with the view expressed by us in the previous paragraphs, we are of the view that M/s NGC India has and habitually exercises in India an authority to conclude contracts on behalf of the assessee and the same is binding on the assessee, since it has agreed to broadcast the advertisements procured by NGC India. Hence NGC India should be classified as dependent agent of the assessee herein in terms of Article 5(4)(a) of the India-US DTAA. Accordingly, in our view, the assessee is having PE in India through its dependent agent M/s NGC India in terms of Article 5(4)(a) of the treaty, since NGC India has been given full authority to conclude the contracts in India. We may recall that the assessing officer had held that the provisions of Article 5(4)(c) is applicable to the assessee and in rebuttal of the same, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set off losses etc. However, deviations are made by DTAA in cases of royalty, interest etc. Such deviations are also made under the IT Act (for example : ss. 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm‟s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm‟s length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the said case also, there is a clear finding that the contracts were concluded in Mauritius. Hence paragraph 5 of Article 5 of treaty was applied. In the instant case, we have held that the paragraph 4 of Article 5 of the treaty shall apply and hence, we are of the view that the assessee cannot take support of this decision. The department also took a contention that the decision in the case of Set Satellite (Singapore) Pte Ltd (supra), which was considered in the case of B4U International Holdings Ltd (supra) have been rendered by taking into account the Circular No.23 of 1969 issued by the CBDT and since the said circular has been withdrawn by the CBDT, vide Circular No.07 of 2009 dated 22.10.2009, the ratio of the both the decisions are distinguishable. However, in our view, the said contentions of the revenue need not be considered, since we have distinguished both the decisions on facts. 29. Hence the certification of ALP by the TPO and the decision of the Hon‟ble Supreme Court and other High Courts cited above would be applicable only in respect of the payments made by a foreign company to its Indian AE in respect of services availed by it. On the contrary, if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an any person, including redistributors, cable operators and other media intermediaries authorized by NGC India to distribute the channels. (d) The assessee company has granted licenses to NGC India. It can be seen that NGC India cannot modify or delete anything from the transmission of the channels and that it has to ensure that the channels are transmitted in their entirety. The assessee company has also restricted NGC India and the intermediaries from modifying, replacing or copying any copyright, trademarks, trade names, logos and names. The assessee has also prohibited NGC India and its intermediaries from copying any programs included on the channels. 5.7 Royalty can be said to be a compensation paid under the license granted by the owner to the other who wishes to make use of the license. In this case, the ownership remains with the licensor, i.e., the assessee and from terms of the agreement it can be seen that NGC India is allowed distribute channels with so many restrictions as mentioned above. From the terms of the agreement it is clear that NGC India is allowed to distribute the channels during the contractual period and according to the terms laid down in the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the intermediaries cannot copy any of the programmes included on the Channel for the purpose of re-transmitting them later or for any other reason. Accordingly, the Ld A.R submitted that the assessee has granted NGC India non-exclusive license to use the trade marks associated with the Channel solely for the purpose of marketing and distribution. Hence, NGC India does not have rights to commercially exploit these trade marks in any manner. 33. The Ld A.R further submitted that the definition of term Royalty given in Explanation 2 to section 9(1)(vi) of the Act covers the payment received towards transfer of any rights in respect of copyright of a literary, artistic, scientific work. However, the payment received by the assessee does not fall in that category. He further submitted that the term Copy right‟ is not defined under the Act. Adverting our attention to the definition of the term Copyright‟ given under the Copyright Act, the Ld A.R submitted that the payment received by the assessee does not fall under any of the clauses given therein. He further submitted that, based on combined reading of Section 37 and 39A with section 2(dd) of the Copyright Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Sheratorn International Inc. Vs. Deputy Director of Income tax (107 ITD 120)(Delhi). The ld A.R also placed reliance on the decision rendered in the following cases in this regard:- (a) JDIT Vs. Harvard medical International, USA (16 taxmann.com 69) (b) Harvard Medical International Inc. Vs. DCIT (33 taxmann.com 50) 36. The ld A.R further submitted that the distribution rights given by it is only a Commercial right and is also not covered by the definition of royalty or fee for included services given under Article 12 of India-USA treaty. He submitted that the tax treaties entered with some countries like Hungary, United Mexican States, Croatia etc., the definition of royalty specifically covers payment for transmission by satellite, cable, optic fibre or similar technology. However, the definition of the term royalty under India-US treaty does not include broadcast reproduction right. Accordingly he submitted that the distribution right is a separate commercial right and the payment received is not towards use of copyright. 37. He further submitted that the payment received for giving distribution right is taxable as per the provisions of Article 7 of Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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