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TMI Blog2021 (1) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... This appeal in ITA No.3834/Mum/2007 for A.Y.2001-02 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XXXIII, Mumbai in appeal No.CIT(A)XXXIII/Intl.Tax/IT/53-N/04-05 dated 14/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2004 by the ld. Asst. Director of Income Tax (International Taxation)-3(2), Mumbai (hereinafter referred to as ld. AO). ITA No.3835/Mum/2007 A.Y.2002-03 (Assessee Appeal) This appeal in ITA No.3835/Mum/2007 for A.Y.2002-03 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XXXIII, Mumbai in appeal No.CIT(A)XXXIII/Intl.Tax/IT/53-N/04-05 dated 14/03/2007 (ld. CIT(A) in short) against the order of assessment passed u/s.147 r.w.s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/11/2005 by the ITO (International Taxation)-3(1), Mumbai (hereinafter referred to as ld. AO). ITA No.3836/Mum/2007 A.Y.2003-04 (Assessee Appeal) This appeal in ITA No.3836/Mum/2007 for A.Y.2003-04 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-XXXIII, Mumbai in appeal No.CIT(A)XXXIII/Intl.Tax/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had submitted during the course of assessment proceedings that the income from advertisement air time is business income and in the absence of a Permanent Establishment (PE) of the assessee in India, the same is not taxable. The ld. AO however, held that SIPL constitutes PE of the assessee by holding it as a dependant agent as per para 4(c) of the Article 5 of India-USA DTAA and taxed the advertisement revenue earned by the assessee as business income on a net basis. In this regard, it would be pertinent to reproduce the relevant extracts of Article 5(4) and Article 5(5) of India-USA DTAA which deals with agency PE:- "4. Notwithstanding the provisions of paragraphs 1 and 2, where a person-other than an agent of an independent status to whom paragraph 5 applies-is acting in one of the States on behalf of an enterprise of the other State, that enterprise shall be deemed to have a permanent establishment in the first mentioned State, if (a) he has and habitually exercises in the first-mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee u/s.92CA(3) of the Act wherein the ld. TPO had confirmed the international transaction between SIPL and the assessee for commission income @15% and accepted the same to be at arm's length. This is evident from TPO orders passed u/s.92CA(3) of the Act for A.Yrs. 2002-03, 2003-04 and 2004-05 on 29/10/2010, 30/12/2005, 06/12/2006 respectively. We find that the assessee had pleaded before the ld. AO that once arm's length payment has been made, nothing further remain to be taxed in the hands of the non-resident even if there is existence of PE in India. The ld. AO however, did not agree to the contentions of the assessee and proceeded to place reliance on the second part of the Circular No.742 dated 02/05/1996 by adding 10% of net revenues and accordingly determined the income at Rs. 20,35,202/- for A.Y.2000-01 which action was upheld by the ld. CIT(A). 3.2. At the outset, we find that the commission remunerated at 15% was accepted to be at arm's length by the ld. TPO for A.Yrs. 2002-03, 2003-04 and 2004-05 in the hands of SIPL. Though there was no transfer pricing assessment applicable in the statute for A.Y.2000-01, the CBDT Circular No.742 dated 02/05/1996 had provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion revenues. Considering all these aspects and the fact that the agent has a good profitability record, it held that the Appellant has remunerated the agent on an arm's length basis." (emphasis applied) b. Decision of Hon'ble Delhi High Court in the case of DIT vs. BBC Worldwide Ltd., reported 203 Taxmann 554 (Del), wherein the Hon'ble Delhi High Court by placing reliance on the decision of Hon'ble Bombay High Court in the case of Set Satellite Singapore Pte Ltd., supra upheld that 15% commission to Indian agents as per Circular No.742 of CBDT is normally accepted commission rate payable to agents of foreign telecasting companies. The relevant extract is in para 16 of the said order which is not reproduced herein for the sake of brevity. c. Decision of the Hon'ble Jurisdictional High Court in the case of DIt vs B4U International Holdings Limited reported in 374 ITR 453 (Bom) also expressed the similar view. The relevant extract is in para 12 of the said order which is not reproduced herein for the sake of brevity. d. Decision of Mumbai Tribunal in the case of International Global Network BV reported in 84 Taxmann.com 188:- In this case, the assessee before the Mumbai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in the CBDT Circular No.742 of the order 1996. Similar rate is accepted by the Hon'ble Bombay High Court in the case of Set Satellite (Singapore) Pte. Ltd. (supra). Thus we have no agitation in upholding the contention of the Assessee that the payment was at arms' length. When the payment is at ALP there is no further need to attribute profit to the PE as held by the Hon'ble Supreme Court in the case of Morgan Stanley &Co.( supra). " 6.4.2 We would also like to rely upon the matter of BBC Worldwide Ltd. (supra).In that matter also the Hon'ble Delhi High Court had referred to the case of Sat Satellite (Singapore) Pte. Ltd. (supra) and held that if correct ALP was applied and paid nothing further would be left to be taxed in the hands of the foreign enterprise. It also placed reliance on Circular No.742 and held that CBDT itself had considered 15% commission as normally accepted commission rate payable to the agents of telecasting companies. 7. Considering the above discussion, we hold that the Assessee did not have a PE in India, that it was not carrying out any business activities in India and therefore no part of its revenue was attributable to India, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to PE). 3.4. Similar views were also expressed by the Hon'ble Apex Court in yet another decision in the case of Honda Motor Ltd., vs. ADIT 255 Taxman 72. 3.5. We find that the ld. DR had filed the following written submissions before us:- "The above mentioned appeals were heard through Virtual Court today. The following is the gist of arguments made by me in these appeals. 2. Taxability of advertisement income- This issue came up and was heard in this very case for AY 2007-08 and AY 2008-09 in ITA 7994/M/11 and ITA 7631/M/12 dated 16.12.2015. The MA 30/31/M/2016 was di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. It is not necessary that all rights must be transferred for royalty to apply. Copyright is not defined in the DTAA and the definition of the term copyright is not to be construed in a limited restrictive sense. It encompasses rights of the nature which are protected and whose infringement attracts penal consequences. The CIT(A) order narrates the meaning and context of the statutory provisions in respect of copy rights in several countries including that of USA. Under the Copyright Act 1957, even in section 14, reference is made to communication to public in respect of cinematographic films and sound recordings. The owner has copyright on such contents. Further section 37 of the same Act provides similar rights and protections to Broadcasting rights, which is a species of genus of Copyright. Even the technical clarifications issued in respect of India US DTAA clearly refers to broadcasting (pages 25 and 26) as part of royalty. This clearly shows that license for broadcasting is covered under royalty. In the recent decision of the Apex Court in PILCOM, which deals with location of the activity giving rise to income under section 5 and 9 of the IT Act, there is a reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to section 209 was highlighted to note the distinction that no TDS is actually paid. 3.6. We find that each of the argument of the ld. DR which is also reproduced in the written submission hereinabove were met by the ld. AR at the time of hearing as under:- a. The ld. DR vehemently opposed the reliance placed by the ld. AR on Circular No.742 dated 02/05/1996 issued by CBDT by stating that the ld. AR had placed reliance only on the first part of the Circular and not on the second part of the said Circular. We find that the said Circular No.742 dated 02/05/1996 issued by CBDT was issued in the form of guidelines for computation of Income Tax of foreign telecasting companies. We find that the second part of the said Circular states that in the absence of country-wise accounts and keeping in view the substantial capital cost, installation charges and running expenses etc., in the initial years of operation, it would be fair and reasonable if the taxable income is computed at 10% of the gross receipts (including the amount retained by the advertisement agent and the Indian agent of the non-resident foreign telecasting company as their commission / charges, made for the remittance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that authorised foreign enterprises had engaged the assessee and the activities are not devoted wholly or almost wholly for any one enterprise. The relevant extract of the said decision is reproduced hereunder:- "...As stated in several places in this order that the Assessee is providing services to various VGCs namely Varian Inc. U.S.A., Varian Australia, Varian Italy, Varian Switzerland and Varian Netherlands. It has not devoted only for one foreign enterprise. The learned Counsel had submitted a statement representing the approximate value of sales made by these foreign enterprise in the calendar year 2001 & 2002, which for the sake of ready reference is reproduced below:- Supplying Entity (VGCs) Rate of Commission Total Amount of Commission for 2001 & 2002 Total Amount of Sales (Approx.) for 2001 & 2002 Calendar Year (Rupees) (%) (Rupees) (%) 2001 2002 Varian Australia 33% 45% 47,16,563 8.69% 1,41,91,798 7.70% Varian Inc., U.S. A (average rates) 35% 29% 34,12,975 6.29% 1,03,47,529 5.61% Varian SPA, Italy 15% 15% 58,07.471 10.70% 3,87,16.473 21.00% Varian Chro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R) wherein criteria for satisfaction of the condition of "wholly or almost wholly dependent" was laid down to meet anything less than 90% of income from that client. As the same is not satisfied in the instant case and also in addition that the conditions provided in Article 5(5) India-USA DTAA are satisfied, SIPL cannot be treated as dependent agent as per para 4. Thus, the allegation of existence of dependent agent PE by the ld. DR is hereby dismissed. We further find that the ld. AR also pointed out that Article 5 of India USA DTAA for agency PE provides that para 4 of Article 5 shall apply only to those agents other than an independent agent. He argued that however, before examining whether an agent satisfied conditions laid down in para 4, it must be examined whether it satisfies the condition of independent agent laid down in para 5 of Article 5. He submitted that an agent is considered of having independent status if the activities are not devoted 'wholly or almost wholly' on behalf of foreign enterprises and the transactions between the agent and such enterprises are made at arm's length then it shall be regarded as an agent of independent status. We hold that age ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the various Courts as mentioned above, no further attribution of profits should be done in the hands of the assessee as the agent has been remunerated on arm's length basis. Accordingly, the ground Nos. 1-3 raised by the assessee are allowed. 4. In the result appeal of the assessee for A.Y.2000-01 in ITA No.8671/Mum/2004 is allowed. ITA No.3834/Mum/2007 (A.Y.2001-02) - Assessee Appeal 5. Assessee has raised the following grounds:- "On the facts and circumstances of the case and in law, the learned CIT(A) erred in: a) holding that the Appellant is taxable in India on the ground that it has a Permanent Establishment ("PE") in India in terms of Double Tax Avoidance Agreement ("DTAA") between India and USA. (b) assuming without admitting that the Appellant has a PE in India, the learned CIT(A) erred in holding that entire advertisement revenues collected by the alleged PE are taxable in India disregarding the fact that several key operations like content procurement up-linking and amplification in satellite are admittedly carried outside India and therefore, income attributable to those operations can not be taxed in India as per clear mandate of clause (a) of Explanation 1 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year also except with variance in figures. 7. The ground Nos.2 & 3 raised by the assessee are challenging the action of the lower authorities in holding that the distribution revenues earned by the assessee falls within the meaning of "Royalty" under Article 12 of India USA DTAA and accordingly, such distribution revenues are taxable in India. 7.1. We have heard rival submissions and perused the materials available on record. We find that assessee vide agreement dated 21/02/2001 had granted rights to distribute the channels in India to NGC Network (India) Pvt. Ltd., (NGC India). The assessee does not have any control over the activities undertaken by NGC India upon grant of distribution rights, nor does it undertake any activity in India as regards the distribution rights granted. In this regard, the relevant extracts of the distribution agreement that are pertinent are reproduced hereunder for the sake of convenience:- "2. RIGHTS GRANTED 2.1 NGC ASIA hereby grants NGC INDIA and NGC INDIA hereby accepts upon the terms and conditions set out in this Agreement, the right to, during the Contractual Period, distribute the channel (s) through any means to Intermediaries, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a inturn is allowed to independently enter into a contract with the media intermediaries / subscribers (i.e. cable operators) for distribution of channel in India. The fact that there are no copyrights in the channel or content that is transferred is clearly spelt out by para 2.3(b) of the agreement which provides that NGC India shall not and shall ensure that the intermediates do not modify or replace any copyrights trademarks, trade names, logos, names or likewise or any contents. Further it provides that NGC India or Intermediaries cannot modify or alter or delete anything in the content of the channel and that it has to ensure that the channel is transmitted in its entirety. In fact, it is an obligation for NGC India to distribute the channel on an 'as is' basis, without making any amendment to channel. Further, it provides that NGC India or intermediaries cannot cut, edit, dub, voice-over, subtitle or otherwise change or alter any of the channel(s) or any of the content thereof, as required by any applicable law, without informing the assessee of all the details regarding the mandated changes or alterations. It also provides explicitly that NGC India or intermediaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v). 7.6. The ld. AR submitted that the payments received by NGC India are not towards the transfer of any rights in respect of the copy right in respect of literary, artistic or scientific work. The term 'copyright' is not defined under the Act. Accordingly, the definition of copyright provided under the Copyright Act, 1957 needs to be considered. The ld. AR submitted that Section 14 of the Copyright Act clearly defines copyright as under:- "copyright means the exclusive right to do or authorise the doing of the following acts in respect of a work or any substantial part thereof, namely: (a) in the case of a literary, dramatic or musical work, not being a computer programme, (i) to reproduce the work in any material form including the storing of it in any medium by electronic means; (ii) to issue copies of the work to the public not being copies already in circulation; (iii) to perform the work in public, or communicate it to the public; (iv) to make any cinemat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, but such a right is not in the nature of a copyright. In fact, Section 37 of the Copyright Act separately deals with 'Broadcast Reproduction Right' of a broadcasting organization. Section 37 of the Copyright Act provides as under: 'any person who without the license of the owner of the right does any of the following acts of the broadcaster, namely: re-broadcasts the broadcast; or causes the broadcast to be heard or seen by the public on payment of any charges; or makes any sound recording or visual recording of the broadcast; or makes any reproduction of such sound recording or visual recording where suchinitial recording was done without license or where it was licensed, for any purpose not envisaged by such license; or * sells or hires to the public, or offers for such sale or hire any such sound recording or visual recording referred to in clause (c) or clause (d), shall, subject to the provisions of Section 39, be deemed to have infringed broadcast reproduction right.' 7.8. Section 2(dd) of the Copyright Act defines 'Broadcast' to mean - 'communication to the public by means of wireless di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or broadcasting. However, in the present case, the assessee has granted distribution rights of 'Channel' to NGC India and not the rights of any 'cinematographic films' or 'tapes'. As mentioned earlier, NGC India cannot copy any of the programmes included on the channel for the purpose of re-transmitting it later or it cannot modify or delete or cut or edit or otherwise, anything in the course of the distribution to the cable operators. In fact, it has to ensure that the channel is transmitted in its entirety. 7.13. We find lot of force in the rebuttal offered by the ld. AR as admittedly NGC India is not entitled as per the agreement to copy any of the programmes included in the channel for the purpose of re-transmitting the same at a later point of time by making any alterations thereon. Thus, we hold that the reliance placed by the ld. DR on the above technical explanation is misplaced and is hereby rejected. Moreover, we also find that the above technical explanation was issued by the tax authorities of United States of America and the same is not the official protocol or clarification which has been mutually agreed upon between the two countries. Hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in dispute is not related to the aspect of examining the existence of business connection or source of income of the assessee in India. 7.15. We find that the ld. AR had placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of MSM Satellite (Singapore) Pte Ltd., in ITA No.103/2017 with ITA No. 207/2017 dated 23/04/2019 wherein it has been held that the distribution rights granted by the Assessee to SET India Private Limited (an Indian group company) are not in the nature of 'Royalty' under the Act and the India- Singapore Tax Treaty (similar to the India- USA Tax Treaty). It is submitted that the facts of this case are similar to that of the assessee, wherein, the assessee has also granted distribution rights to the Indian company (NGC India). The Court held, the payments were not copyrights but were broadcast reproduction rights that cannot be royalty under the Act or treaty. The relevant operative portion of the said decision of the Hon'ble Jurisdictional High Court is reproduced hereunder:- "10. In our opinion, the Tribunal has not committed any error. As noted, the Assessee would receive a part of subscription charges paid by a large nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions. As noted, this is not a case where payment of any copyright in literary, artistic or scientific work was being made." (emphasis applied) 7.16. We find that the ld. DR also argued that the facts in the case of MSM Satellite (Singapore) Pte Ltd., referred to supra relied upon by the assessee are different from that of the facts of the assessee as in the case before us, the non-resident company received distribution revenue from various cable operators. We find the facts of the case of the assessee before us and the facts of the case before the Hon'ble Bombay High Court are identical as distribution receipts in the said case are collected by the Indian subsidiary Set India Private Limited through layers of cable operators which fact is mentioned in para 8 of the said decision and Set India Pvt. Ltd., paid distribution fees to MSM Satellite (Singapore) Pte Ltd.,, which is similar to the present case before us, wherein such distribution receipts are collected by Indian subsidiary NGC India through various cable operators. NGC India makes onward payments for assessee for grant of distribution rights by the assessee. 7.17. We also find that the Co-ordinate Bench of this Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to use or exploit any copyright. The Assessee is no way concerned whether the programs broadcasted by the Non-resident company are copyrighted or not. The said distribution is purely a commercial right, which is distinct from the right to use copyright. We observed that ld CIT(A) has considered the provisions of Section 14 and Section 37 of the Copyright Act, 1957. It is observed that Section 37 of the Copyright Act deals with Broadcast Reproduction Rights (BRR) and same is covered under Section 37 of the Copyright Act and not under Section 14 thereof. We observe that ld CIT(A) has also considered Clause 6.3 of the distribution agreement entered into between assessee company and Non-resident company, which states that the right granted to the Assessee under the agreement is not and shall not be constructed to be a grant of any license or transfer of any right in any copyright. Ld CIT(A) has started that the Assessee submitted to it by a broadcaster without any editing, delays, interruptions, deletions, or additions and, therefore the payment made by the Assessee to the Non-resident company is not for use of any copyright and consequently cannot be characterized as Royalty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. We also find that the term 'copy right' is not defined in the treaty. That is why we had to resort to the definition of copy right given under the Copy Right Act, 1957. 7.22. We also find the alternative argument advanced by the ld. AR to be fair and reasonable that even if it is contended that the channel has copy right, what NGC India is paying for is a right to use the copy righted article (i.e. if the channel could be considered to be so) by virtue of being permitted to distribute the channel. Accordingly, since NGC India does not acquire any right in the underlying copy right (i.e. right to modify / reproduce channel / content). Hence any contention that NGC India is making a payment for copy right would be erroneous. 7.23. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove that are relevant for adjudication of the issue in dispute before us, we hold that the distribution rights granted by the assessee to NGC India is only a commercial right / Broad Cast reproduction right and not copyright and consequently consideration received by the assessee for the same cannot be treated as royalty or fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fact the transfer pricing provisions are indeed applicable from A.Y.2002-03 onwards and transfer pricing order u/s.92CA(3) of the Act was passed by the ld. TPO for A.Y.2002-03 on 29/10/2010 in the hands of the SIPL wherein the ld. TPO had confirmed that the international transaction between SIPL and assessee for commission income is at arm's length price. Hence, once the agent i.e. SIPL has been remunerated at arm's length price by the assessee which is also confirmed and accepted by the ld. TPO, no further profits could be attributed in the hands of the foreign principal. Accordingly, ground No.2 raised by the assessee is allowed. 13. The ground Nos. 3 & 4 raised by the assessee for A.Y. 2002-03 are similar to ground Nos. 2-3 raised by the assessee for A.Y.2001-02 and the decision rendered thereon would apply with equal force for this assessment year also except with variance in figures. 14. In the result, appeal of the assessee for A.Y.2002-03 in ITA No.3835/Mum/2007 is partly allowed. ITA No.3836/Mum/2007 (A.Y.2003-04) Assessee Appeal 15. The ground No.1 raised by the assessee is exactly identical to ground No.2 raised by the assessee for A.Y.2002-03 and the decision rende ..... X X X X Extracts X X X X X X X X Extracts X X X X
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