9911796707
TMI Blog2006 (1) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company makes the sale of air time in India through its advertising sales agent, M/s. Star India Pvt. Ltd. (hereinafter referred to as "SIPL"), a company incorporated in India. SIPL is marketing the advertisement time in India and collects the advertisement revenues. The assessee company acquires the air time meant for advertisement from television channel companies like Star Plus, Star Movies, Star World, Star News, Channel V, etc. These channel companies are the Television Content Aggregators. The Television Content Aggregators/channel companies earmark the air time to be allowed to advertisers in India which is sold to the assessee company, which in turn, sells the air time to Indian advertisers through its selling agent in India, M/s. SIPL. This time slot involved in the above transactions from channel companies to assessee company to advertising sales agents like SIPL is described as "Ad Airtime", which means air time earmarked for advertising. This sales content of air time is hereinafter referred to as "Ad Airtime". 4. The assessee company had granted the exclusive right to market, sell and distribute the channels of the Star TV Network in India to M/s. Indian Sky ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, the case was selected for scrutiny assessment and the assessment was completed under section 143(3) on a total income of Rs. 333,55,67,423. The assessment was completed on 28-3-2003. The Assessing Officer has discussed the nature of business carried on by the assessee and the nature of relation of the assessee with other inter-related companies in detail along with a detailed examination of the functional aspects of the assessee company in India. On the basis of the elaborate e discussion, the Assessing Officer has made certain additions as well as disallowances whereby he could determine a taxable income of Rs. 333,55,67,423 as against a returned income of Rs. 26,25,87,600. 6. One of the disallowances made by the assessing authority in the course of assessment proceedings was a sum of Rs. 160,40,10,000. This is the amount which was paid by the assessee company to various channel companies (Television Content Aggregators) towards the cost of Ad Airtime purchased from them. The Assessing Officer put a question across the board as to why the assessee company did not deduct tax at source while making the payment of Rs. 160,40,10,000 to the channel companies by way of cost of Ad Ai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee company has filed a detailed reply in a very exhaustive manner upholding its stand that the sum paid by the assessee company to channel companies against the cost of airtime was not a sum chargeable to tax in India in the hands of the channel companies and, therefore, the assessee company was under no statutory obligation to deduct tax at source in the course of making those payments to the channel companies. The detailed reply filed by the assessee has been substantially reproduced by the assessing authority in the assessment order from pages 3 to 11. The explanations offered by the assessee company are summarized below: (i) The assessee had entered into agreements with various non-resident channel companies for the purchase of airtime on the channels of Star TV Network such as Star Television Entertainment Ltd., Star Television Industries Ltd., Channel V Music, Channel Television Suppliers Ltd., etc. Copies of the agreements executed between the assessee and the channel companies were enclosed along with earlier submissions. (ii) The obligation of the assessee under section 195 of the Income-tax Act is dependent on whether the recipient channel companies are liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India. (vi) The channel companies did not receive or deemed to receive in India any income so that clause (a) of section 5(2) is not attracted. (vii) The assessee did not have any business connection in India or any property in India or any asset in India or any source of income in India and, therefore, the provisions of section 9(1) also not attracted so as to implicate the channel companies under clause (b) of section 5(2). 10. Based on a series of judicial pronouncements and circulars issued by the CBDT, the assessee company submitted before the assessing authority, in short, its defence in the following manner: (a) The revenues are not received in India; (b) The revenues are not deemed to be received in India; (c) The revenues did not accrue or arise in India; (d) The revenues did not deem to accrue or arise in India. 11. The assessee submitted before the assessing authority that as the payments made by the assessee, to the channel companies for purchase of air time are not chargeable to tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reason of their acquisition of Ad Air Time from the channel companies and the sales companies, like assessee shall not promote their own commercial interest through the Ad Air Time except in such manner as provided and agreed upon between the parties. (h) Channel companies and sales companies like assessee jointly will indemnify defend and hold the other, harmless from any claims, costs, liabilities, judgments, expenses or damages arising out of any breach of the agreement. (i) The rights and privileges assigned to a party by virtue of the agreements, shall not be assigned or transferred to anybody without the approval of the other party except for the freedom of the sales companies, like assessee to appoint their own agents in respective countries for the direct sale of Ad Air Time to advertisers, which is, of course, subject to the approval of the channel companies. 13. The Assessing Officer has come to the following conclusions as a result of examination of the situations explained in above paragraphs; such as- (a) That the sale of Ad Airtime is subject to various conditions including the condition of additional payment where the advertisement revenue increases more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and the programmes managed by the channel companies are beamed into India and the telecast is also made in India and the predominant area in the footprint of the satellite is India and, therefore, it is to be held that the channel companies are undertaking business activities in India. (j) That the above activities carried out by the channel companies in India provide for their income which is essentially income earned out of India. (k) That it is not necessary that the profit or gain should directly flow from the business connection, but it is deemed to be the income of an assessee who may well be a nonresident even if it is arising indirectly through the business connection in the taxable territories of India. 14. The Assessing Authority finally concluded, therefore, that the payments made by the assessee company to channel companies would be covered by the provisions of law contained in section 40(a)(i) of the Act and, therefore, the payment of Rs. 160,40,10,000 could not be allowed as a deduction in computing the taxable income of the assessee. Accordingly the amount was added to the returned income of the assessee company. 15. Among other disputes, this issue was also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (i) The relationship between the channel companies and the assessee was that of a principal and agent prior to 1-4-1999 as manifestly agreed by the assessee itself in the respective agreements. It is only after April, 1999 that the face value of the relationship between the assessee and channel companies has been changed into a relationship of principal to principal. But in spite of that superficial change, the nature of activities carried out by the assessee company prior to and post after April, 1999 were practically the same. Earlier, the assessee was the exclusive worldwide agent of the channel companies and now the assessee is characterised as the exclusive distributor of the channel companies. In the arrangement for sale of Advertisement Airtime, even if picturised as outright sale of Ad Airtime, the commercial interest of the channel companies still continued in the sale of Ad Airtime made by the assessee as evident from the terms of payment reflected in the agreements entered into between the assessee and the channel companies. The revenue retained by the assessee company is effectively 25 per cent of the collection which is nothing but its remuneration/commission charac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... channel companies. The CIT(A), therefore, held that the channel companies do have business connection in India and income could be deemed to accrue or arise to them from operations in India and thus making the income taxable under section 9(1)(i) of the Income-tax Act, 1961. 18. As stated above, after examining the factors such as agency -principal relation between assessee and channel companies, business connection in India, relationship between SIPL and channel companies, operations in India in detail on pages 1 to 49 of his order, the CIT(A) came to the view that the channel companies do have business connection in India and they are liable to tax in India for the proportionate income attributable to Indian operations. Therefore, he held that the assessee was bound to deduct tax at the time of payments made to channel companies and, therefore, the Assessing Officer was right in invoking the provisions of section 40(a)(i) of the Income-tax Act. 19. After upholding the view of the Assessing Officer, the CIT(A) continued to examine the other arguments raised by the assessee against applying the provisions of law contained in section 40(a)(i) of the Act. One of the other grounds r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of Direct Taxes should have been applied in the case wherein 90 per cent of the gross amount is to be treated as expenses and 10 per cent alone is deemed to be the income and if income is computed in the light of the said circular, the quantum of tax to be deducted at source, vis-a-vis disallowance under section 40(a)(i) of the Act would be drastically reduced. The assessee also argued that if the assessee is treated as the agent of the channel companies, it should be held that the advertisement revenues were collected on behalf of the principals, i.e. the channel companies, and therefore, the advertisement revenues could not be held to be taxable in the hands of the assessee and accordingly, the question of disallowance under section 40(a)(i) of the Act does not arise. 21. The CIT(A) again relied on the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. in considering this argument and held that the proceedings of deduction of tax at source are provisional and the final liability would be determined only on regular assessment and, therefore, issuing any order under section 197 by the department does not foreclose the right of the assessing authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing findings of the learned Assessing Officer, which are erroneous and contrary to facts: Predominant footprint of the satellite is only in India; The decoders are provided to the cable operators either by the Appellant or by the channel companies or their agents in India; Star India Private Limited ('SIPL') is a direct subsidiary of the Appellant. Majority of the business operations of the channel companies are in India. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 6.- The learned CIT(A) has erred in holding the Appellant to be an agent of the channel companies. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 7-The learned CIT(A) has erred in holding SIPL to be an agent of the channel companies. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 8.-The learned CIT(A) has erred in holding that the channel companies are taxable in India. The Appellant respectfully submits that the above finding is erroneous and should be set aside. Ground No. 9.-The learned CIT(A) has erred in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of both Indian and English judicial pronouncements. The relevant contentions of the learned senior counsel are summarised as follows: 1. That the payments for bulk purchase of the Ad Airtime were made by the assessee outside India; both the assessee as well as the channel companies are non-residents; that the relevant contracts have been executed outside India and in such circumstances, the provisions of section 195 would not apply; 2. That under the Constitution of India, the Legislature has the power to enact a law which may extend beyond India (Extra Territorial applicability); That if the Legislature wanted a statute to apply outside India, it has been expressly provided in the respective statute. One example is that of Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 ('TW Act'). The TW Act provides the legal framework specifying the nature and scope of India's rights and jurisdiction in relation to matters concerning Maritime Zones and Maritime Boundaries and matters regarding the right to exploit and protect the resources of Continental Shelf and Exclusive Maritime Zones. 3. Sub-section (6) of section 6 and sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of McDermott International Inc. (No. 1) v. Union of India [1988] 173 ITR 155 has held that taxation of income derived by the assessee in the Continental Shelf beyond the prescribed nautical miles before the issue of the notification mentioned earlier was invalid. The above decision of the Bombay High Court reiterates the scope of the provisions of the Income-tax Act beyond the territories of India, in the absence of an express provision made therein. 9. If the statute does not provide for extra territorial applicability of the Income-tax Act, the said position should be accepted as such and a casus omissus cannot be supplied by the court except in case of clear necessity and with reason to confine within four corners of the statute itself. 10. The Supreme Court in the case of Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345 has observed that there is no scope for importing into the statute words which are not there. Such importation would be not to construe, but to amend the statute. Even if there be a casus omissus the defect can be remedied only by the legislation and not by judicial interpretation. The same principle is reflected in the decisions of the Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee transferred the funds to his account in the SBI and from that account the payment was made outside India. Therefore, if the payment was not made in India and the same was made out of India, provisions of section 195 could not be applied to such a payment and consequently there would be no liable to deduct tax by a non-resident out of the payment made to a non-resident outside India. On all these counts, the assessee was not liable to deduct tax under section 195 and consequently the payment made to the nonresident could not be disallowed under section 58(1)(a)(ii)." The above decision being the decision of a co-ordinate Bench, the present Bench hearing this appeal is bound to follow the said decision, that too, in the absence of any other contrary and binding decision. 16. The scope of section 195 is well illustrated in page 1391 in the commentary 'Kanga & Palkhiwala's Law & Practice of Income-tax' Eighth Edition, as follows: "The section does not apply to payments made outside India by one foreigner to another even if that other has rendered services in India. A country does not recognize or enforce the revenue laws of another country. Therefore, if a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t decision in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449. Therefore, the provisions of law contained in section 1(2), section 4(2), section 5, section 9, section 191 and section 195 need to be read and construed in a harmonious manner avoiding a head-on clash between the sections of the Act. Reliance placed on Sultana Begum v. Prem Chand Jain AIR 1997 SC 1006. 22. To interpret section 195 as being applicable to a payment entirely made outside India by one non-resident to another non-resident would mean an extra territorial extension of the Income-tax Act which would run counter to the express provisions of section 1(2) of the Act. Such an interpretation of section 195 would defeat the clear and express provisions of section 4(2) and hence, should be avoided. Reliance placed on the commentaries of NS Bindra and Maxwell. 23. In the course of argument, the learned departmental representative has placed reliance on the UK decision in the case of Agassi v. Robinson (Inspector of Taxes) [2004] Simon Tax Cases 610 EWHC 487 (Ch). The above decision of a single judge of the Chancery Division had already been reversed by a Three Member Bench of the Supreme Court of Judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and the rights of the parties are not in any manner adversely affected. 4. That it is not proper to expect a payer to prove/establish whether or not the recipient of the amount is chargeable to tax in India. That could be decided only after hearing the recipient. The onus from the payee to the payer to determine the chargeability to tax in India cannot be shifted and the assessment proceedings of the payer cannot be used to establish the taxability of the payee. Reference placed on the decisions of Supreme Court in Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147, K. Govindan & Sons v. CIT [2001] 247 ITR 192, CWS (India) Ltd. v. CIT [1994] 208 ITR 649 and K.P. Varghese v. ITO [1981] 131 ITR 597. 26. The learned senior counsel further contended that section 195 as well as section 40(a)(i) of the Income-tax Act referred to 'chargeability to tax in India of the recipient'. However, the term "chargeable" as appearing in section 40(a)(i) has to be interpreted/understood with reference to the context/setting in which it is used and does not necessarily have the same meaning as section 195 of the Act. He contended that a word or a term need not necessarily have the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is wholly unsustainable in law for the reason that the basic proposition and premise governing any scheme of collection of tax is that charge of tax is not an academic issue but completely a practical and pragmatic code; that if taxes are to be levied, it should be collected. 5. Deduction of tax at source is not provided for all sources of income but if provided, the provisions of deductions would be attracted without any exception or exemption. 6. There is no conflict between the provisions of law contained in section 1(2) and section 195 as apprehended by the learned senior counsel. The most important point is that section 1(2) is not restrictive in nature and, therefore, not in conflict with any provisions of the Income-tax Act. This is very evident from the fact that the decisions relied upon by the learned senior counsel do not mention anything about section 1(2) which proves that there is no conflict between section 1(2) and section 195. 7. Section 195 does not extend the Income-tax Act to territories outside India. But if any foreign entity falls into the tax net as defined in section 1(2), the entity is bound by all the provisions of the Income-tax law. 8. Non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and import have to be seen with reference to the subject-matter it seeks to regulate, that is taxation of income. Income is taxed world wide under the Income-tax Act on twin basis; residence and source. Section 5 of Indian Income-tax Act, 1961 deals with taxation on the basis of source in sub-sections (1) and (2) respectively. Both residence or source or either of the two has to be within the geographical limits of India which is the true intent of section 1(2). 14. The reliance placed by the learned counsel on other enactments to illustrate the scope of extra territorial jurisdiction, like FERA, FEMA, Passport Act, etc. is not relevant as the object of those enactments is different. The object is to regulate the conduct of Indian citizens and their activities outside the territorial area of India. Therefore, the extent and scope of the respective enactment have been provided in a wider expression whereas no such wider expression is called for in the administration of the Income-tax Act. 15. The Act provides for an exhaustive and express machinery for the recovery and collection of taxes in Chapter XVII. Sections 173, 195 and 192 lay down express provisions for deduction of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad Bench in Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37. 29. The learned CCIT further stated that reliance placed by the learned senior counsel on the decision of ITAT, Mumbai Bench in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 is not relevant to the present case. The learned CCIT relied on the decision of ITAT Delhi Bench "B" in the case of Babcock Power (Overseas Projects) Ltd. v. Asstt. CIT [2002] 81 ITD 29. In the said case, the assessee was a non-resident company incorporated in United Kingdom, having a project office in India. It had entered into a contract for setting up coal based thermal power plant in India. For execution of the contract, the assessee engaged foreign technicians who were deputed to the Indian project office. They were on the payroll of the UK office of the assessee and were paid salaries in foreign currency in UK office which was credited directly to their bank accounts. The assessee did not deduct the tax at source while paying the salaries to the persons on the ground that provisions of section 192 were not applicable. On a reading of the provisions of sections 192, 5(2) and section 9(1)(ii), the Tribunal held that if the salary was paid for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that if it is permissible for a nonresident receiving interest income from a resident of India to contend that the amount has actually been disbursed outside India and, therefore, such interest income does not accrue or arise in India, the provisions of section 9(1)(ii) would become redundant. The court held that irrespective of the amount being paid to the non-resident in the country of his residence or elsewhere outside India, it is deemed to have accrued or arisen to him in India. The learned CCIT submitted that in principle, this decision has overruled the decision of the Tribunal in Shrikumar Poddar's case. 32. The learned CCIT continued his arguments on the second objection raised by the assessee that the disallowance under section 40(a)(i) was made by the assessing authority without first determining the chargeability of the payments to tax in India, in the hands of the channel companies. The elaborate arguments presented by the learned CCIT are summarized below: 1. The Income-tax Act contemplates different obligations, on the part of the payer and on the part of the payee. These obligations are different in nature and initiate separate proceedings with different ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT concluded that the consequences flowing out of the non-compliance of section 195 are final and the assessments to be made on the payer and the payee are independent and different proceedings. 34. Shri Dinesh Vyas, the learned senior counsel appearing for the assessee, while replying to the contentions of the learned CCIT, highlighted the following points: 1. That the charging provisions and machinery provisions like section 195 are completely distinct provisions and chargeability to tax does not necessarily mean that section 195 of the Income-tax Act would apply automatically. 2. The question is not regarding the scope of the definition of the term "person", which also includes a non-resident. The question is whether section 195 can be applied extra territorially. The contention of the learned departmental representative that the Act has used the appropriate words in different sections like 193, 194, etc. on deduction of tax at source, does not bring out the real scheme of the law. 3. The reference made by the learned departmental representative to section 173 of the Income-tax Act is erroneous. 4. The reliance placed by the learned departmental representative on the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al could be made. 36. Regarding the second legal objection raised by the assessee on the invoking of section 40(a)(i) by the Assessing Officer without first determining the changeability in the hands of the channel companies, the reply of the learned senior counsel are as follows: 1. Even though section 195 deals with provisional collection of tax, the invoking of section 40(a)(i) is final whereby an eligible expenditure of the assessee is being disallowed. The chargeability need to be first determined in the hands of the channel companies without which the provisional nature of section 195 is not overcome and without overcoming the provisional nature and coming to a definite finding of fact, a final disallowance under section 40(a)(i) cannot be made. 2. Assessee has no power or authority to explain about the taxability of the payments received by the channel companies. 3. The disallowance made under section 40(a)(i) is quite premature as it puts a final liability on the assessee whereas the dispute of chargeability itself if disproved by the channel companies, it may even defeat the very application of section 40(a)(i), whereby the assessee is put to irreparable loss and injur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s own territorial limits. So there is no dispute in fact regarding the basic tenets of the "doctrine of territorial nexus". The doctrine is reflected in Article 245 of the Constitution. 40. The thrust of the argument of the learned senior counsel is that the chargeability to tax in India may even travel beyond the territorial limits because they are substantial provisions whereas the deductibility cannot go beyond the territorial limits as the provisions of deductibility are machinery provisions. This is the basic line of distinction emphasized by the learned senior counsel in the whole scheme of his arguments. It is his fervent opinion that where the payer and payee are non-residents and the payments are made abroad and the supporting contracts are executed abroad, the writ of the Income-tax department to enforce the deduction of tax at source cannot travel beyond the territories of India and, therefore, in the present case, the assessee was never liable to deduct any tax from the payments made to channel companies. 41. On a close examination of the scheme of taxation, we air afraid that the line of distinction drawn by the learned senior counsel is almost imaginary. The fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, as it stood for the assessment year under appeal, is reproduced below:- "195. Other sums.-(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force: 45. The expression used in section 195 is "any person responsible for paying to a non-resident...". The expression has qualified the character of the recipient/payee as "non-resident". But expression has not qualified, in any manner, the character of the payer. Payer means any person responsible for paying. No other fetters are added to the above expression of law. If the payment is made to a non-resident whether it is in India or outside India or in any manner, the person making the payment is liable for deducting the tax at source. This is the result of the plain reading of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) and section 201(1A). The Assessing Officer is insisting the compliance of section 195 not from the payee but from the payer, who is assessable to tax in India. When the Assessing Officer is dealing with a person, even if he is a nonresident, but an assessee to income-tax in India, there will not be any occasion for him to reach beyond the territorial limits of the country. All his actions are based on the consequences prescribed in the Act which are invariably to be felt in India itself. It is not possible to argue that since chargeability and deductibility are different, the non-enforcement of the provision relating to deductibility could defeat even the basic concept of chargeability. This is an anti-thesis of the tax law itself. 50. The learned senior counsel has referred to the decision of the Court of Appeal in UK in Agassi v. Robinson (Inspector of Taxes) as reported in Times Law Reports on 27-11-2004 to canvass the argument that the chargeability and deductibility are fundamentally different. But we understand that the said decision make out only a proposition that chargeability and deductibility are different in the functional and operational aspects. 51. As already s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same and restore that of the Assessing Officer." 54. The facts of the case relating to Shrikumar Poddar's case were that the assessee, a non-resident, raised loans from outside India and brought the money to India and utilized it in purchasing shares/securities. For the assessment year 1987-88, he paid interest at Rs. 6,82,140 and claimed deduction of that amount against the capital gains on the sale of the shares purchased from out of this borrowed money. The Assessing Officer only allowed deduction under section 57(iii). Invoking jurisdiction under section 263, the Commissioner held that the interest was not allowable under section 58(1)(a)(ii) as no tax therefrom was deducted or paid and section 195 was applied to the case of the assessee as he was engaged in the business of purchase and sale of shares/debentures. 55. While adjudicating the above case, the Tribunal examined the provisions of law contained in section 5(2), section 9(1)(v), section 58(1)(a)(ii) and section 195. But the decision in the said case has been arrived at by the Tribunal mainly on factual premises. The Tribunal found that the interest which is chargeable under section 9(1)(v) is that interest whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case which constitutes its ratio decidendi Therefore, the observation of the Tribunal in the last portion of its order regarding the scope of section 195 of the Income-tax Act, 1961 is in the nature of obiter dicta which, though may receive attention as being an opinion of importance, but no way binding or laying down a general proposition of law. 58. We, therefore, are of the considered opinion that the decision of ITAT, Mumbai Bench "C" in the case of Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 is not a source of precedence to decide the matter raised in the present appeal before us. 59. The decision of ITAT, Mumbai Bench "C" in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 was delivered on 30-4-1997 whereafter a recent judgment has been delivered by ITAT, Delhi Bench "B" on 21-11-2001 in the case of Babcock Power (Overseas Projects) Ltd. v. Asstt. CIT [2002] 81 ITD 29 (Delhi), which deals with the issue falling under the realm of sections 192 and 9(1)(ii). In that case, the assessee was a non-resident company incorporated in UK with project office in India. It had entered into a contract for setting up a coal based thermal power plant in India. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent appeal. 63. As argued by the learned CCIT, there is no conflict between the provisions of law contained in section 1(2) and section 195. Section 1(2) is not restrictive in nature. At the same time, section 195 does not extend the Income-tax Act to territories outside India. But if any foreign entity falls into the tax net as defined in section 1(2), the entity is bound by all the provisions of the Income-tax law, wherever applicable. Section 195 is compatible with the provisions of chargeability under the Income-tax Act. The governing force of section 195 is not the payment as such, but the payment of income chargeable to tax. The factum of payment is not the crucial thing but the income character embedded in the payment is the crucial thing. It is to be seen that the emphasis in section 195 is on chargeability and not on payment. 64. A plain reading of the law provided in section 195 makes it clear that the said section does not make any distinction between payment within India and the payment outside India. The situs, of the payment or the source of the payment is not a relevant consideration while applying the provisions of section 195. 65. Section 1(2) cannot be read in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 195(1) apply where the payment is that of 'any other sum chargeable under the provisions of this Act', not being salary income or interest on securities. The test for making deduction of income-tax is that the relevant payment should be chargeable under the provisions of the Act. Where the payer considers that the whole of the sums specified in sub-section 195(1) would not be chargeable in the hands of the recipient, he can make application to the Assessing Officer to determine the appropriate portion of the sum so chargeable. Once the Assessing Officer determines such appropriate portion of the sums so chargeable, the deduction of income-tax at source under sub-section 195(1) is only to be made on that portion of the sum which is to be determined. This is provided in sub-section (2) of section 195. Likewise, sub-section (3) of section 195 enables any non-resident in receipt of such payments to make an application to the Assessing Officer for a certificate entitling the non-resident to receive payments specified in section 195(1) without deduction of tax at source.... The consultation provided under sub-section (2) of section 195 is, therefore, to be mandatorily followed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of section 40(a)(i) of the Act. 72. We are afraid that if the above contention is taken to its logical conclusion, the very provision of law contained in section 40(a)(i) would render otiose. There is no dispute regarding the A constitutionality of the provisions contained in section 40(a)(i). The law relating to the consequence flowing out of the violation of provisions contained in section 195(1) and sub-section (2) thereto have been already dealt in the above paragraphs in the light of the decision of ITAT, Hyderabad Bench "A" in the case of Cheminor Drugs Ltd v. ITO [2001] 76 ITD 37 and the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587 wherein it has been held that the consequence under section 201(1) and 201(1A) are inherent consequences of the said violation and if that legal proposition is legitimately extended, the application of section 40(a)(i) is also one of the inherent consequences coming out of the violation of section 195. 73. As rightly pointed out by the learned CCIT, the obligations cast on the payer and payee under the provisions of the Income-tax Act are different in nature. This is very evident f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Airtime on the channels is sold by the channel companies to the assessee and the sale is made outside India on a principal to principal basis. The channel companies do not enter into any agreement with any Indian party for the sale of Ad Airtime in India. The channel companies are incorporated outside India and they do not have any office or agent or subsidiary in India. They do not have their men or material or machinery or combination thereof used in India. 77. The learned senior counsel further explained that the assessee company after purchase of the Ad Airtime from the channel companies undertakes various activities on its own account and at its own right and the channel companies are not involved in any manner in respect of that business of Ad Airtime carried on by the assessee. The business strategy, marketing and all other operational features are determined by the assessee company only. 78. The learned senior counsel thereafter submitted that in the light of the facts of the case, it is not possible to hold that the channel companies earned any income chargeable in their hands, in India. The learned senior counsel submitted that this is because as the facts of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of down-linking are carried on by the cable operators in India on their own account and as part of their business in India. 5. The Hon'ble Supreme Court in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 held that even assuming, however, that there was any business connection between the earning of the income in the shape of technical fee by the American company and the affairs of the Indian company, yet, no part of the activity or portion could be said to have been carried on by the American company in India and in the absence of such a sustainable finding by the High Court, the provisions of section 42, either of sub-section (1) or sub-section (3) (corresponding provisions of the Income-tax Act, 1922), were not attracted at all. 6. The Calcutta High Court in the case of CIT v. thus Steel Co. Ltd. [1987] 164 ITR 401 has held that a business connection contemplated under the Income-tax Act involves a relation between business carried on by a nonresident and some activity in the taxable territory which are attributable directly or indirectly to the earnings, profits or gains of such business. 7. The Supreme Court in the case of CIT v. R.D. Aggarwal & Co. [1965] 56 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y so as to attract the provisions of "business connection". 11. The conclusion of the lower authorities that the channel companies have business connection in India is erroneous. (2) Channel companies do not carry out any operations in India 1. The CIT(A) has erred in holding that the channel companies carried out operations in India for the purposes of section 9(1)(i) read with Explanation 1(a) of the Income-tax Act. 2. All the activities of the channel companies are carried outside India; the channel companies do not have any office or establishment or manpower or material or machinery or combination thereof in India; all the activities of the channel companies are undertaken outside India including the procurement of content play out and scheduling of channels, broadcasting operations, etc.; the channel companies have not entered into any contract with Indian Content Providers; the channels are up-linked entirely outside India and they are down-linked in India by the cable operators on their account. 3. The activities carried on by the assessee company in India are independent activities carried on by the assessee on its own account and not in the capacity of any representa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is an agent of the channel companies. The facts and circumstances of the case will demonstrate that the assessee is not acting as the agent of the channel companies in India. 2. The agreement for the outright sale of Ad Airtime between the assessee and the channel companies is executed on a principal to principal basis, outside India. This is evidenced by the terms of the agreements and also by the conduct of the parties. 3. The consideration for the sale of Ad Airtime is paid by the assessee to the channel companies by way of a minimum guarantee amount and also as a specified percentage of the advertising revenues collected beyond a threshold limit. 4. The assessee thereafter sells the Ad Airtime either by itself or through its agent, in and outside India. In India, the Ad Airtime is sold through its agent, M/s. Star India Pvt. Ltd. (SIPL). 5. The covenants reflected in clause (2) and its various sub-clauses clearly indicate that the channel companies have-entered into an agreement for selling Ad Airtime to the assessee on a principal to principal basis. 6. The condition for a person to constitute an agent of another is that the person must be employed by the principal to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is authorized to sell or buy on behalf of the principal and make over either the sale proceeds or the goods to the principal. 11. The Supreme Court has again held in the case of Gordon Woodroffe & Co. (Mad.) Ltd. v. Shaikh MA. Majid & Co. AIR 1967 SC 181 that the essence of agency to sell is the delivery of the goods to a person, who is to sell them not as his own property, but as the property of the principal, who continues to be the owner of the goods and who is, therefore, liable to account for the proceeds. 12. As the Ad Airtime in the present case passes from the channel companies to the assessee outside India, the income of the channel companies does not accrue or arise in India. Reliance has been placed on Seth Pushalal Mansinghka (P.) Ltd. v. CIT [1967] 66 ITR 159 (SC) and C.G. Krishnaswami Naidu v. CIT [1966] 62 ITR 686 (Mad.). 13. The revenue earned by a non-resident from sale of goods to a resident is not taxable in India if the sale takes place outside India. He has placed reliance on the decisions of Supreme Court in Mahabir Commercial Co. Ltd. v. CIT [1972] 86 ITR 417 and CIT v. Mewar Textile Mills Ltd [1973] 91 ITR 542. He has also relied on the decision of the Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontributes directly or indirectly to the earning of those profits and gains and this proposition is squarely applicable to the activities carried on by the channel companies through the medium of the assessee in India. The detailed contentions of the learned CCIT are summarized below: (1) The channel companies do have business connection and source of income in India. 1. The expression "business connection" has not been defined in the Act and Rules. But various judicial pronouncements have examined the true intent of the said expression and have laid down the necessary ingredients of "business connection" for the purpose of deeming of income in India. "Business connection" involves a business activity anywhere but yielding income and some activity in the taxable territories of India which contribute directly or indirectly to earning of such income in the hands of the non-resident. It is not necessary that the entire business operation of the non-resident should be in the taxable territory. What is required is a real and intimate relation. Section 9(1)(i) brings in the tax net the income arising outside taxable territory and not the income arising in India. But that income arising ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection. 10. As seen above all the tests laid down by leading judgments in respect of the expression "business connection" are fulfilled in the case of the assessee and, therefore, it has necessarily to be held that the channel companies do have business connection in India. (2) Channel companies do carry out operations in India 1. Channel companies are the owners and operators of the channels. The activities involved in operating a channel center around the chain of an activity consisting of so many inter-related modules. 2. The first of such module is preparation of programmes meant for telecasting. Programmes may be prepared by channel companies themselves or may be acquired or outsourced. 3. Creating network for viewers is the next step, which is carried out through the chain of cable operators in every footprint of the channel telecast. 4. Telecasting and marketing of the programmes follow the earlier modules. It involves up-linking the programmes to a satellite which may be owned, hired or taken on lease by the channel companies. Thereafter down-loading has to be done through decoders provided to the cable operators for which prescribed fee are levied. 5. The next step, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old as an asset or property. The Airtime does not have any right of property at attached to it. 7. As per section 18 of Sale of Goods Act, no property in goods gets transferred to the buyer until the goods are ascertained. In the present case, every time to be utilized for Airtime is a future time, goods cannot be held as ascertained and, therefore, there could not be any sale. 8. In an outright sale, the buyer does not have any obligation other than the payment of consideration. But in the present case, the channel companies do possess all sorts of interests, both commercial and financial in the advertisements telecast through the assessee company. 9. It is not correct to argue that the nature of transaction between channel companies and the assessee is that of principal to principal. The assessee is acting as the agent of the channel companies, even though the terms of the agreements are modulated in such a manner and the clauses of the agreements are so fine tuned to preach a theory of principal to principal relation. 10. The agreements entered into between the channel companies and the assessee prior to 1999 was a clear case of agency. Assessee company was appointed as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the assessee and other associate concerns, it is necessary to hold that the channel companies are having business connection with India for the reason of their business operations being carried out in India and further that the relationship existing between the channel companies and the assessee are nowhere near the relationship of principal to principal. 82. As far as the present case is concerned, the ultimate business carried on right from the channel companies to the advertisement procuring companies is the business of telecasting through different brand channels through the medium of satellite and transponders, along with the supporting network provided by the cable operators, operating within different footprints falling under the telecasting network. 83. In this scenario and within the legal framework contemplated by the channel companies and the assessee company, the question to be looked into is whether the channel companies do have any income out of the above activities, arising or accruing in India. If we go to the substance of the activities carried on by the assessee company, the three grounds raised by the assessee and said to be determinative of the issue, can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of "Ad Airtime" outside India as a result of "outright sale" and in its turn, transferred to its agent for further down-line sales to the ultimate sponsors/customers in India. Even if, for the convenience of commercial expression one may use the term "sale of Ad Airtime", it does not fall under the legal concept of sale. 5. The business of telecasting is a continuous and non-stop process initiated by the channel companies and ultimately enjoyed by the viewers. It is a long chain of process involving engineering, technology, electronics, communication, art, literature, glamour, etc. It is an incessant flow of events. Even if the channel companies treated the assessee company as a principal for the sake of their argument, the assessee has to invariably act as the functional agent of the channel companies while associating with the channel companies in carrying on its business. This is because, the chain of activities involving the business of telecasting cannot be divided and segregated into transferable modules from channel companies to assessee company and from assessee company to other selling agents. The business carried on by the channel companies is an indivisible and wholes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also where they fall under the footprint of satellite telecast. But the fact that other countries also come under the very same telecasting network which applies to India as well is not a reason to hold a view that the activities of telecasting are not done in India. The correct reading of the situation is that the telecasting activities are operated not only in India but also in other countries falling under the footprint of the satellite telecasting. 85. The channel companies even after "sale of Ad Airtime" have maintained their commercial and financial interest in the activities carried on by the assessee company. The total revenue collected by the assessee company does not go to its chest. The assessee company is bound to pay a minimum guaranteed amount to the channel companies plus a portion of the revenue where it exceeds the prescribed threshold limit. In effect, the revenue collected by the assessee company is shared both by the assessee company and the channel companies. This arrangement of sharing the revenue is a clear manifestation of the financial interest continued to be held by the channel companies even after the "sale of Ad Airtime". The channel companies do monit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... telecast through the channels owned by the channel companies are in an inseparable part of the regular programmes telecast by them. The difference is that for the "Ad Airtime" exploited in the telecasting schedule, the channel companies are earning their revenue. Therefore, as far as the ultimate outcome of the channel companies by way of telecasting is concerned, the advertisements procured through the medium of the assessee company as well as other programme contents procured and telecast by the channel companies do form an inseparable flow of telecast contents of the respective channels. In these circumstances, there cannot be an occasion at all for the channel companies to pick out a particular "segment of time" christened as "Ad Airtime" and make a sale of the same to the assessee company. 87. In the discussions made in paragraphs 84 to 87 above, we have considered the nature of relationship existed between the assessee company and the channel companies in the scheme of telecasting activities carried on by the channel companies. Even though the agreements entered into between the assessee and the channel companies contemplate a relationship of principal to principal, on an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation where all the programmes are delivered by the channel companies in India but the advertisements alone are delivered outside India. Even though we have already held that there is no sale of "Ad Airtime" as contemplated by the assessee, in the present discussion we are using the terms "sale of Ad Airtime" only for the sake of convenient expression. 89. The argument of the assessee company is that the telecast is ultimately delivered to the viewers at large by the cable operators in India, operating on their own account and not by the channel companies or the assessee company. This is not correct. The programmes and other contents of the telecast made by different channels are delivered in their respective brand name till it reached the ultimate viewer. The role of the cable operators is that of decoding the transmission and facilitating the exhibition through their cable network. This is in fact a service provided by the cable operators to the channel companies. It does not take away the authorship and responsibility of the telecasted programmes and contents from the channel companies and put on the cable operators. The channel companies themselves are delivering the progr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ultimate viewers. Therefore, in the light of the above judicial pronouncements we have to hold that the assessee is having live, meaningful and continuing business relationship with India on account of their operations carried out through various supporting agents and those operations being carried out in India being the main source of income for those channel companies. In other words, the channel companies do have a continuous business relation supported by continuous business operation in India, which ultimately turn into an important source of revenue for the channel companies. Therefore, we have to hold that the channel companies are having business connection with India. 91. We have seen that the relationship between the channel companies and the assessee company cannot be treated that of a principal to principal. We have also seen that the channel companies are having business connection with India. Now the question is whether the channel companies are having any business operation in India or not? 92. The final delivery of the programmes telecast by the channel companies are made for the ultimate viewers in India. When the delivery of the programmes is so important to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ements cited above. As already held in paragraphs above, the channel companies are having substantial business connection with India; so also they do carry on telecasting operations not from outside India alone, but extend on such activities to India also till it reach the ultimate viewer. We, therefore, have to hold that along with a substantial business connection with India, the channel companies are having their business operations carried out in India in a continuing manner. 96. The Bombay High Court in CIT v. Evans Medical Supplies Ltd. [1959] 36 ITR 418 and A.P. High Court in G.V.K. Industries Ltd. v. CIT [1997] 228 ITR 564 have held that yielding of income of nonresident coupled with some activities carried on in India make it liable for taxation of India to the extent of income accrue or arise or deemed to accrue or arise in India. The above two decisions support the arguments advanced by the learned CCIT. The telecasting operations carried out by the channel companies in India are the sure source of revenue for them. They are carrying out operations in India in the process of the telecasting carried out by them which results in yielding of income for them. The above two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Airtime" is a source of income for the channel companies. The ultimate telecast of the programmes is made in India. The ultimate delivery of the programme contents through telecast to Indian viewers is the soul and substance of the agreements entered into between the channel companies and the assessee company. Even though for the purpose of engineering and technology, the telecasting is transmitted through the satellites situated in the high sky, Indian space is a definite place of business. In the modern cyber age and particularly in the business of communication and telecasting through satellite and transponders, a business place or a permanent establishment does not mean a structure of bricks and mortar alone. It need not be a market place of usual concept. The business connection, business activity, place of business, permanent establishment and every such ingredient of a taxable relation between nonresidents and India are to be inferred from the nature of the business operations carried on by the concerned parties. If an assessee purchase a ship from a foreign seller for which sale contract was concluded outside India and payment was made outside India, and when the ship was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer observed that according to a contract entered into by the assessee with Star TV channels, the assessee facilitated transmission and broadcasting of various programmes in India among other countries and the revenue of the Star TV channels was mainly from the advertisements procured from India. The Assessing Officer, therefore, held that the territory of commercial exploitation of the channel companies was India and, therefore, it was liable to tax under section 9(1)(i). The contention of the assessee was that it was not liable to be taxed in India for the reason that no agreement was entered into with any company resident in India for leasing of transponder capacity of its satellites; satellites also not located in the orbital slot allotted to India. It was also contended that the assessee did not exercise any control over the signals up-linked by it and had no rights in the signals and as such no business connection in India. It was also submitted that the assessee did not carry out any business operation in India and, therefore, no income could be said to be deemed to accrue or arise in India. In first appeal, the CIT(A) held that the payments received by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shrined in those agreements may not be sufficient to come to proper conclusions. As Oliver Wendells Holmes put it "the life of law is not logic but experience". Therefore, after examining the various aspects of the case we hold that the channel companies are earning taxable income in India and, therefore, the assessee company was bound to deduct tax at source under section 195 when payments were made to the channel companies. 102. The learned senior counsel has raised an alternate contention that if the assessee company is treated as an agent of the channel companies, advertisement revenues received by the assessee cannot be assessed as the income of the assessee and only the amounts retained by the assessee could be regarded as the revenue for the purpose of assessment. Reliance has been placed in support of the above argument on the following decisions: Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.)(FB) CIT v. Arunachal Pradesh Forest Corpn. Ltd [1993] 201 ITR 129 (Gauhati) CIT v. Surat Cotton Spinning & Weaving (P.) Ltd [1993] 202 ITR 932 (Bom.). 103. We considered the above alternate contention raised by the learned senior counsel. As seen before, we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the case of Transmission Corporation of A.P Ltd. v. CIT [1999] 239 ITR 587 and Hyderabad Bench of ITAT in Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37 have held that it is the duty of the assessee to approach the assessing authority under section 195(2) on matters regarding deduction or non-deduction of lax under section 195(1). The quantum of deduction to be made by the assessee could be determined only in a process initiated under section 195(2). As the assessee has not used the facility provided under section 195(2), which is a legal obligation on its part, the g contention regarding the quantum of deduction does not have locus standi in the present appeal. Therefore the said contention fails. 106. Another argument, again alternate in nature made by the assessee is that the channel companies are assessable in terms of circular No. 742 issued by the CBDT and in that case, the income of the channel companies would be computed on a presumptive basis and, therefore, the quantum of the tax deductible would be much less. This contention is also liable to be dismissed for the very same reasons explained in the above paragraphs. 107. We have considered all the arguments ad ..... X X X X Extracts X X X X X X X X Extracts X X X X
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