9911796707
TMI Blog2006 (1) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ery, purchase and consumption of the subject-matter of Ad Airtime is in India. Therefore, the contention of the assessee that the entire activities were carried out abroad is not found acceptable. The Ad Airtime is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers. The advertisements are telecast as part of the regular programmes of the channel companies. The advertisements form part of the mainstream of the telecasting activities carried on by the channel companies. The sale, if any, of the Ad Airtime is only a part of the sale of other programme contents. Sale is made as the time of the channel companies. The Ad Airtime described in the present case is the telecasting time of the channel companies in their brand names. As far as the ultimate customers and viewers in India are concerned, these advertisements embedded in the telecasting contents are always identified with the brand name of channel companies. Conclusions are to be reached on the basis of the facts of the case and not on the basis of agreements alone. If the real nature of activities carried on by the parties to the agreements do not fit in the frame of the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el companies are entirely two different issues. The Supreme Court in the case of Transmission Corporation of A.P Ltd. v. CIT [ 1999 (8) TMI 2 - SUPREME COURT] and Hyderabad Bench of ITAT in Cheminor Drugs Ltd. v. ITO [ 1999 (12) TMI 111 - ITAT HYDERABAD-A] have held that it is the duty of the assessee to approach the assessing authority u/s 195(2) on matters regarding deduction or non-deduction of tax u/s 195(1). The quantum of deduction to be made by the assessee could be determined only in a process initiated u/s 195(2). As the assessee has not used the facility provided u/s 195(2), which is a legal obligation on its part, the contention regarding the quantum of deduction does not have locus standi in the present appeal. Therefore the said contention fails. We have considered all the arguments advanced by the assessee against the orders of the lower authorities. This case involves myriad of facts and complex question of law as argued and re-argued by both sides. All of them, except certain legal grounds have been considered by the assessing authority and the CIT(A) in a very extensive manner. In result we find that the channel companies are liable for taxation in India for that p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, sell and distribute the channels of the Star TV Network in India to M/s. Indian Sky Broadcasting Ltd. ('ISKYB', for short), a company incorporated in Hong Kong with its principal place of business in the United Kingdom. The assessee allowed ISKYB to collect the subscription revenues in respect of the channels of Star TV Network in its own right. ISKYB did not make nor was required to make any payment to the assessee as consideration for those rights conferred on ISKYB. ISKYB was free to carry on the business as per the said rights without the interference of the assessee company. The said ISKYB, in turn, had executed another agreement with SIPL, granting the latter the right to distribute the channels through the Cable Distribution System and collect the respective subscription revenue, in its own right. Here also SIPL did not make nor was required to make any payment to ISKYB by way of consideration for those rights. The cable subscription revenues have been offered for taxation by SIPL as its income. At the same time, SIPL did not undertake any activity in India in respect of the subscription business carried on behalf of ISKYB. The contention of the assessee is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at source while making the payment of ₹ 160,40,10,000 to the channel companies by way of cost of Ad Airtime. As the detailed explanation offered by the assessee company was not acceptable to the assessing authority, he came to a conclusion that the assessee company was bound to make deduction of tax at source while making the payment of ₹ 160,40,10,000 to the channel companies. As the assessee has failed to do so, the Assessing Officer invoked the provisions of section 40(a)(i) of the Act and disallowed the said payment in computing the taxable income of the assessee company. In other words, the Assessing Officer disallowed the said payment and added the same back to the income of the assessee company under the provisions of section 40(a)(i) of the Act. 7. The text of the relevant law provided in section 40(a)(i), as edited for the purpose of this case, reads as below: 40. Amounts not deductible.- Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',- (a) in the case of any assessee- (i) any interest (not being int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 195 of the Income-tax Act is dependent on whether the recipient channel companies are liable to tax in India in respect of the payments received against the cost of Ad Airtime procured by the assessee company. The liability to tax in India would arise only when the income earned by the channel company is taxable in India. The proposition that the income of channel companies is liable to tax in India is against the facts and law of the case for the following reasons: (a) The agreement between the assessee and channel companies were signed and executed outside India. Accordingly the situs of the contracts for the purchase and sale of air time lie outside India. As a result, the right to receive the payments and the right to enforce the performance of the contract lie outside India; (b) Under the Agreement with the channel companies, the assessee has purchased outright, the world wide air time available on the channels of the Star TV Network and as a result of which and in pursuance of the agreements, all the rights to the airtime have been transferred to the assessee; (c) Therefore, the transaction between the assessee and the channel companies can be compared to an offshore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee, to the channel companies for purchase of air time are not chargeable to tax in India, the assessee was not liable to withhold tax from the payments. Therefore, it was contended before the assessing authority that the proposal to invoke the provisions of section 40(a)(i) was not called for. 12. The detailed submissions and explanations offered by the assessee were in turn exhaustively considered by the assessing authority in pages 12 to 44 of the assessment order. The Assessing Officer has gone through every agreement entered into by the assessee company with various channel companies individually and has considered the common features of those agreements. On going through the details of various companies involved in this case and coming under the Star TV Network, the Assessing c Officer found that the directors of all the companies are common. He also noticed that the relevant clauses of all the agreements are similar and analogous. On the basis of the said detailed examination of the agreements, the Assessing Officer came to the following findings: (a) The channel companies own and operate satellite television channels featuring various programmes, data and content. They ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of additional payment where the advertisement revenue increases more than 80 per cent of the threshold limit; (b) That the channel companies being registered in Hong Kong and India not having a double taxation agreement with Hong Kong, the liability of channel companies to be taxed needs to be examined as per the provisions of Indian Income-tax Act. (c) That the channel companies accrue or arise or deem to accrue or arise income in India as a result of the activities carried on by them in India through the medium of agreements entered into between the assessee company and, therefore, the argument of the assessee that the agreements being executed and enforceable outside India does not take away the channel companies from the ambit of taxation. (d) That the contention of the assessee that there is outright purchase of Ad Air Time is not correct for the reason that the agreements provided for Minimum Guarantee Amount to channel companies and a further provision of sharing of additional revenue generated in India by way of advertisements, which means the channel companies have a definite commercial interest in the Ad Airtime managed by the assessee company in India even after the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company. 15. Among other disputes, this issue was also taken by the assessee in appeal before the CIT(A). The assessee company raised and reiterated the following grounds and contentions before the CIT(A): (i) That the relationship between the assessee and the various channel companies is on a principal to principal basis which does not tantamount to a business connection in India; (ii) That no portion of the revenue earned by the channel companies could be held as taxable in India; (iii) That the essence of the business relationship between the assessee and the channel companies is evidenced by the express terms and conditions of the respective agreements for the sale of Ad Airtime. As the agreement is a principal to principal contract, the agreement does not cast any responsibility on the assessee to and on behalf of the channel companies. That therefore, the transaction entered into between the assessee and the channel companies is that of a sale. 16. The assessee further argued before the CIT(A) as follows: (i) The agreements between the assessee and the channel companies have been signed and executed outside India; (ii) Channel companies have sold their worldwide Ad Airt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is nothing but its remuneration/commission characterised as profit margin of the assessee company. But for the formats of the contract and usage of expressions, the activities carried on by the assessee remained the same e before April, 1999 and thereafter and the relationship of the assessee company with the channel companies also remained the same throughout and, therefore, the contention of the assessee that under the new dispensation, the assessee company and the channel companies had a relation of principal to principal is against the facts of the case. (ii) The TV signals are beamed to India by the channel companies and the programmes are continuously shown through the TV channels and the sale of Advertisement Airtime is made with reference to such activities in India, therefore, it has to be held that the channel companies do have business connection in India. The CIT(A) has extensively relied on the decision of ITAT, Delhi Bench in the case of Asia Satellite Tele Communication Co. Ltd. v. Dy. CIT [2003] 85 ITD 478 to come to the above conclusion. (iii) The relationship between SIPL and the channel companies as seen from the agreements is in such a way that SIPL has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40(a)(i) of the Act. One of the other grounds raised by the assessee A company before the CIT(A) was that the Assessing Officer has erred in applying the provisions of seclion 40(a)(i) to the entire payments made to the channel companies instead of confining to that portion of the payments which represented income in the hands of the channel companies and chargeable to tax in India. It was argued before the CIT(A) that of the total payments made to the channel companies towards the purchase of Ad Airtime only so much of the revenues that represented profits/income in the hands of the channel companies would alone attract income-tax withholding and subsequently the applicability of provisions of section 40 (a)(i) of the Act. The assessee also argued that if the channel companies are held eligible for the benefits of circular No. 742 issued by the CBDT, then only 10 per cent of the payments need to be disallowed as the presumptive income as the said circular No. 742 has pegged the income at 10 per cent of the gross payments. The CIT(A) did not accept the above arguments of the assessee company, in the light of and relying on the decision of the Supreme Court in the case of Transmissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... close the right of the assessing authority to examine the issue of taxability of a transaction in the assessment proceedings. As the assessing authority has found at the assessment stage that the payments made to channel companies are liable to tax in India he has rightly applied the provisions of law contained in section 40(a)(i) of the Act. Regarding the applicability of circular No. 742 issued by the CBDT, the CIT(A) held that the circular deals with the taxation of foreign telecasting companies whereas the assessee is not a telecasting company. Accordingly, the CIT(A) rejected all the remaining contentions raised by the assessee company with reference to the question of disallowance under section 40(a)(i) of the Act. The relevant discussion made by the CIT(A) on these grounds are reflected on pages 49 to 55 of his order. 21A. It is against the above decision of the CIT(A) in confirming the disallowance of ₹ 160,40,10,000 under section 40(a)(i) that the assessee company has raised the following grounds before us: Ground No. 1.- The learned Commissioner of Income-tax (Appeals) - XXXI['CIT(A)'] has erred in disallowing the payment made by the Appellant to various non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has erred in holding that the provisions of section 40(a)(i) of the Act apply to the payment made by the Appellant to the channel companies despite treating the Appellant as an agent of the channel companies. The Appellant respectfully submits that the above basis of assessment is erroneous and should be set aside. Ground No. 10.-The learned CIT(A) has erred in not applying the provisions of section 40(a)(i) of the Act to only that portion of the payment made to the channel companies that represents income that has been considered to be chargeable to tax in India. The Appellant prays that the disallowance be restricted accordingly. Ground No. 11.-Without prejudice to Grounds 9 and 10 above, the learned CIT(A) has erred in holding that the provisions of section 40(a)(i) of the Act apply to the Appellant despite the entire sums received by the appellant having been processed under section 195 of the Act in accordance with the order of the Income-tax Department itself issued under section 197 of the Act. The Appellant therefore prays the disallowance be deleted. Ground No. 12.-Without prejudice to Grounds 1 to 11 above, the margin retained by the Appellant, as an agent, from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 6 and sub-section (7) of section 7 of TW Act create a fiction by which the Continental Shelf and Exclusive Zone are to be deemed to be part of India for the purposes of such enactments, which are extended to those areas by the Central Government by the notification in the Official Gazzette. In exercise of such powers, the Central Government has extended the scope of Income-tax Act to the Continental Shelf of India and the Exclusive Economic Zone of India (i.e., from 12 nautical miles to 200 nautical miles) in respect of assessees undertaking specific activities. This has been provided in notification No. GS 304(E), dated March 31, 1983. The matters specified therein are activities like drilling and extraction of mineral oils, providing of any services and facilities for ships, aircrafts, etc. 4. Another example is that of Foreign Exchange Regulation Act, 1971 ('FERA') where it has been stated that it applies to all citizens of India outside India and to branches of agencies outside India all companies or corporates, registered or incorporated in India. This theme of extra territorial jurisdiction has been followed in the subsequent Foreign Exchange Management Act, 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the cases of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 and CIT v. National Taj Traders [1980] 121 ITR 535. 11. That section 4 of the Income-tax Act provides for the charge of income-tax in the hands of a person in accordance with and subject to the provisions of the Income-tax Act and section 5 provides for the scope of total income chargeable to tax. In the case of a non-resident, section 5(2) provides that the total income chargeable to tax will include income which is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise in India. Section 9 provides for income to be deemed to accrue or arise in India. The deeming provision, by a fiction treats income which does not in fact accrue or arise in India, to be deemed to accrue or arise in India. 12. The most important distinction to be seen at this juncture is that the fiction created by section 9 only deems income to accrue or arise in India and not deemed income to be received in India. 13. In the present case, the payment has been made by the assessee company to the channel companies entirely outside India and not even deemed to be received in India . The transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a foreign country, bound to make the payment under a contract governed by the laws of that land, were to seek to deduct Indian income-tax, the payee would be entitled to object to the deduction on the ground that no deduction can be made in that country, which is not authorized by the laws of that country or by the terms of the agreement. 17. Due recognition should be given to the fact that there could be situations where although income is chargeable to tax in India, in the absence of machinery to deduct tax at source, deducibility cannot be prescribed from the payments. In such situations, the law provides that taxes shall be payable by the recipient of the income. This is clear from section 4(2) and section 191 of the Income-tax Act. Section 4(2) provides that in respect of any income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act. The words where it is so deductible clearly indicate that the requirement to deduct tax at source does not mandatorily follow in every case where income is chargeable to tax and the requirement of deduction of tax at source can ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appeal (Civil Division) in Agassi v. Robinson (Inspector of Taxes) and reported in Times LRs on 27-11-2004. The Court of Appeal has held that section 555(2) of the Income and Corporation Taxes Act, 1988 which provides for deduction of taxes should not be given extra territorial effect. In the same judgment, the Court of Appeal has confirmed that chargeability of income and deducibility of tax are independent of each other. 25. The contentions of the learned counsel on the second legal objection raised by him, that there was no finding by the Assessing Officer on the chargeability to tax of the payments before invoking the provisions of section 40(a)(i) are as follows: 1. That the payments made by the assessee to the channel companies are entitled for deduction under the provisions of section 37 of the Income-tax Act and all the requirements under that section have been fulfilled in this case. Section 40(a)(i) of the Income-tax Act provides for disallowance in the hands of the payer of the sums chargeable to tax in India in the hands of the recipient. The chargeability of such payments to tax in India in the hands of the recipient has to be shown as a matter of established fact and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections of the Income-tax Act and their meaning is governed by the context and setting in which the word or term is used. Reliance placed on the decisions of Supreme Court in AN Laxman Shenoy v. ITO [1958] 34 ITR 275 and K.L. Varadarajan v. CIT [1975] 98 ITR 182. The learned counsel also relied on the decision of the Privy Council in Seth Badridas Daga v. CIT [1949] 17 ITR 209. He submitted that the chargeability referred to in section 40(a)(i) cannot be meant a hypothetical or notional chargeability but can only mean actual chargeability which is established as a fact in the assessment proceedings of the recipient. 27. Shri G.C. Srivastava, the learned Chief Commissioner of Income-tax at Surat appeared for the Revenue and argued the case in detail. The learned CCIT submitted that the legal objection raised by the assessee on the ground of territorial jurisdiction in the context of section 195 is wholly misconceived. He submitted that the reasons pointed out by the learned senior counsel are rather logical than legal. The contentions of the learned CCIT on the issue of territorial jurisdiction are summarized below: 1. The expression whole of India provided in section 1(2) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income from India have to follow the domestic taxation laws of India and if this basic principle is not accepted, the whole concept of chargeability itself is defeated. 9. Section 195 is conducive with the chargeability of income to tax in India. 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. Emphasis provided in section 195 is on chargeability and not on payment. 10. The thrust given by the learned counsel on the harmonious construction of a statute should not defeat the very purpose of law. The decision relied on by the learned senior counsel in CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 (SC) applies only to a case where there is head-on clash between two provisions whereas in the present case there is no such clash between chargeability and deductibility. 11. Section 195 does not make any distinction between the payment within India and the payment made outside India. It is very important to note that situs of payment or the source of payment is not the relevant consideration in the implementati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payments also include payments made outside India. No distinction has been made in the law regarding payments made inside India and outside India. Section 195 makes no exception either with regard to the residential status of the person or the situs of the payment. Deduction is contemplated at the time of credit itself, i.e., even before the payment. Either on crediting or on payment, the only condition to be looked into is whether the income is chargeable to tax in India. 16. This position brings section 195 in harmony with section 1(2) read with sections 4(1), 4(2) and section 5(2). 17. This free operation of section 195 has to be read along with section 40(a)(i). Section 40(a)(i) clearly speaks of 'payment outside India for TDS' under Chapter XVII-B. The operational scope of section 195 is further illuminated by the specific provision contained in section 40(a)(i). 18. The provisions not being ultra vires and they being express, there being no ambiguity, no divergent view possible, there could be no conflict between the relevant sections as argued by the learned senior counsel. Reliance placed on the decision of the Supreme Court in the case of Padmasundara Rao v. Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eable to tax in India under the head 'Salaries' and consequently, the provisions of section 192 become applicable. The fact that the employees as well as employer are non-resident, the fact that the payment was made outside India and the fact that contract of employment was also out of India are not relevant for deciding the issue. What is relevant is the place where the services were rendered. The learned CCIT further pointed out that the Delhi Tribunal has referred to the decision of the Mumbai Tribunal in the case of Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48, while delivering the said judgment. 30. The learned CCIT further submitted that the factual matrix considered by the Tribunal in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 (Mum.) is by and large different from the facts of the present case. He submitted that an additional fact or a different fact could make a world of difference between the conclusions to be arrived at in two cases. The language of the provisions of sections 192 and 195 are identical and the Delhi Tribunal has categorically held that in a case of section 192, the situs of payment is not relevant in deciding the applicability of the provisions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The obligations cast on the payer and the payee cannot be mixed up to make a proposition by which it could be argued that section 40(a)(i) is otiose or inoperative. 2. The law has cast the onus under section 195 on the person, who makes the payment. The person, who makes the payment has to accord a satisfaction regarding the chargeability or otherwise of the payments for compliance of section 195(1). This satisfaction need not to be made in isolation. Section 195(2) provides for the person to move the assessing authority for the appropriate direction. 3. The person, who makes the payment, without adhering to the above procedures laid down, commits the default under section 195, the consequence would follow automatically. The consequences are not only the application of sections 201 and 201(1A) but section 40(a)(i), as well. 4. The opportunity to be provided before completing the assessment in the context of section 40(a)(i) is to be extended not to the payee, but to the person who makes the payment. 33. The learned CCIT further contended that the opportunity extendable to the person, who makes the payment, is limited to hearing him on his judgment and belief regarding the charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Ltd. v. CIT [1990] 183 ITR 43 is also not applicable to the facts of the present case because the question considered by the Supreme Court in that case was entirely different. The question considered by the court was whether the Indian Legislature was competent to enact provisions of section 9(1)(vii) having extra territorial operation whereas the issue in the present case is whether provisions of section 195 of the Act being machinery provision, could be applied or not. 5. The reliance placed by the learned departmental representative on the ruling of the Authority for Advance Ruling in P. No. 13 of 1995, In re [1997] 228 ITR 487 is also not relevant as advance rulings are judgment in personam and not in rent He has also relied on the decision of the ITAT, Mumbai Bench in the case of Dy. CIT v. Boston Consulting Group (P.) Ltd. [2005] 93 TTJ (Mum.) 293 where it has been held that the ruling of Authority for Advanced Ruling is not binding on Income-tax Appellate Tribunal. 6. Even if some different judgments are available against the assessee directly or indirectly, the favourable decision in Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 (Mum.) need to be followed in the light of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is propositions advanced in respect of the disallowance under section 40(a)(i): CIT v. Tata Engg. Locomotive Co. Ltd. [2000] 245 ITR 823(Bom.) AN Laxman Shenoy v. ITO [1958] 34 ITR 275 (SC) K.L. Varadarajan v. CIT [1975] 98 ITR 182 (SC) Tin Box Co. v. CIT [2001] 249 ITR 216 (SC) Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC). 37. The learned senior counsel finally concluded his arguments on the legal objections that income-tax law does not provide extra territorial jurisdiction to apply section 195 in the present case and that the decision of the co-ordinate Bench in the case of Shrikumar Poddar v. Dy. CIT [1998] 65 ITD 48 is binding on this Bench so long as the said decision is not either overruled or disapproved and that the provisions of section 40(a)(i) have been applied by the Assessing Officer without first ascertaining the chargeability of payments received by channel companies to tax in their hands in India. 38. The learned senior counsel has further placed reliance on the following decisions: CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.) Sayaji Iron Engg. Co. v. CIT [2002] 253 ITR 749 (Guj.) Agarwal Warehousing Leasing Ltd. v. CIT [2002] 257 ITR 235 (MP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law is reflected in the interpretation of the provisions relating thereto. There cannot be a distinction between these two as far as the final application of the provisions is concerned. This is because the substantial provisions of charge-ability and the machinery provisions of deductibility are having a navel relationship of cause and effect with the result that one cannot survive without the other and they are inseparable pillars of an integral tax code. If the collection machinery cannot be initiated in a case even after chargeability is established, the substantial provisions of law governing the chargeability themselves become redundant. If the collection machinery is not authorized by the substantial provisions of chargeability, the collection process would be unlawful. They are, in fact, two sides of the same coin. 42. This genetic character of the deductibility of tax at source is apparent and clear in the heading given to Chapter XVII of the Income-tax Act as Collection and Recovery of Tax . The collection and recovery of tax is the end result of the administration D of the substantial provisions of law governing the chargeability to tax. Deduction of tax at source is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plain reading of the law. 46. The learned senior counsel in the course of argument has contended that the law does not contemplate deduction of tax in all circumstances and this position is evident from the language of section 191. Under the same Chapter of Collection and Recovery of Taxes , section 191 provides as below: In the case of income in respect of which provision is not made under this Chapter for deducting income-tax at the time of payment, and in any case where income-tax has not been deducted in accordance with the provisions of this Chapter, income-tax shall be payable by the assessee direct. 47. The above provision does not in any way dilute the rigours of the liability cast under section 195 on the person who makes the payment. A tax assessed is ultimately to be collected. There are various modes prescribed in the Act to recover and collect such taxes. The law does not guarantee that all such taxes shall be invariably collected/recovered in the manner in which provisions are made. In such circumstances, the law has spread its net further in section 191 stating that in such circumstances, the tax shall be paid by the payee direct. 48. In fact, section 191 is a safe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x at source is any person . The principle of casus omissus explained by the learned senior counsel in the light of Supreme Court decisions in Smt. Tarulata Shyam v. CIT [1977] 108 ITR 345, Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 and CIT v. National Taj Traders [1980] 121 ITR 535 has to be aptly considered at this point. It is not necessary to provide any qualification for the expression where the expression provided is unqualified. 52. There may be some circumstances that the demand raised by income-tax authorities in India strictly in accordance with law against a foreign party in foreign soil could not be executed as the machinery could not collect it for obvious reasons of territorial jurisdiction. That failure is a fail accompli. This cannot be confused with the situation in the present case where the contention of the assessee is that it was not responsible for deducting tax for the reason that all the ingredients of the payments were made in a foreign country. A possible failure of the machinery to collect the tax from a foreigner is not a defence for an assessee in India to plead exoneration from the application of section 195. 53. It is very important to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s was a prima facie indication of the assessee indulging in the business venture. But the most important observation of the Tribunal is that the assessee being a non-resident could not carry on and was debarred to carry on any business in India without any approval of the Reserve Bank of India under the provisions of law contained in sections 28 and 29 of the Foreign Exchange Regulation Act, 1973. The Tribunal further observed that the assessee in that case had not obtained or being granted any such approval and it was not the assessee's line of business; no business either in India or abroad was stated to have been carried on by the assessee for dealing in shares/securities/debentures. The Tribunal held that the solitary transaction of two scrips in the concerned year did not give an impression of any business venture undertaken by the assessee in violation of the provisions of FERA. Ultimately the Tribunal held that section 9(1)(v) did not make the interest payment chargeable to tax in India. 56. It is in the light of the above finding of fact with reference to the applicability of section 9(1)(v) that the Tribunal has primarily come to the conclusion that the assessee in tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the UK office of the assessee and were paid salaries in foreign currency by UK office which were credited directly to their bank accounts. These contracts of employment were approved by the Ministry of Mines for the purposes of section 10(6). However, the assessee did not deduct the tax at source while paying the salaries to these persons on the ground that the provisions of section 192 were not applicable. 60. While examining the applicability of section 192 in the above circumstances, the Tribunal held that if the salary is paid for the services rendered in India, then such payment become chargeable to tax in India as salaries and consequently the provisions of section 192 become applicable. The Tribunal further held that the fact that the employees as well as the employer are nonresidents, the fact that the payment is made outside India and the fact that contract of employment is also extended out of India, are not relevant for deciding the issue. What is relevant is the place where the services were rendered. 61. The above decision of ITAT, Delhi Bench B in the case of Babcock Power (Overseas Projects) Ltd. v. Asstt CIT [2002] 81 ITD 29 is a recent decision built on the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut by the learned CCIT, income is taxed on twin basis; on the basis of residence and on the basis of source. Section 5 of the Indian Income-tax Act, 1961 deals with taxation of the income 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). We agree with the argument of the learned CCIT in this regard. 66. Further as pointed out by the learned CCIT, the difficulties that may arise in the administration of section 195 is remedied in sub-section (2) of that section. Section 195(2) provides that the assessee may approach the Assessing Officer to decide upon the rate at which tax is to be deducted or for that matter whether tax is to be deducted or not. The option given to the assessee under section 195(2) is part and parcel and subversive to section 195(1). Assessee cannot unilaterally jump into a conclusion that the payments made by the assessee are not liable for deduction under section 195. If the assessee finds that tax is to be deducted, tax must be deducted and if there is a doubt that tax need not be q deducted, then the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the person making the payments to a non-resident cannot take a unilateral decision that the payments made by him are not sums chargeable to income-tax and, therefore, he could make the payments without deduction of tax at source, without the concurrence of the Assessing Officer as provided in sub-section (2) of section 195.... The provisions of section 195(2) are not provisions of convenience which the assessee may use or may not use. If a person wants to make payments to a non-resident and those payments are not explicitly declared exempt by the provisions of the Act, the person making the payment has to deduct tax at source as he can free himself of the liability to deduct tax at source only if he gets the concurrence of the Assessing Officer under sub-section (2) of section 195. 68. The view taken by the ITAT, Hyderabad Bench A in the case of Cheminor Drugs Ltd. v. ITO [2001] 76 ITD 37 has been literally endorsed by the decision of the Supreme Court in the case of Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587. The Apex Court has held therein that if the assessee has made no application under section 195(2), tax must be deducted under section 195(1). 69. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s treated as the defaulter. 74. Therefore, in the facts and circumstances of the case we find that the second legal objection also is equally unsustainable and, therefore, liable to be rejected. 75. We have considered the vires of the legal objections raised by the learned senior counsel at the outset of the opening of the case. The legal objections have been considered in a detailed manner as discussed in the above paragraphs. When the legal objections were raised for the first time before the Tribunal at the time of hearing, the learned CCIT has raised a formal objection against its admissibility. We would like to place on record the said formal objection of the Revenue. But, at the same time, the learned CCIT was fair enough to admit in the court that the objections raised by the learned senior counsel being pure questions of law, it is for the Tribunal to decide whether to admit those objections or not. As we found that the objections raised by the learned senior counsel are legal in nature, we admitted those objections and considered them in a detailed manner. Finally we have come to a conclusion that those legal objections, are not sustainable in law. Accordingly they have be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n agent of the channel companies. 79. The learned senior counsel after explaining the preamble to the merits of the case as above, dealt with in detail the various elements which should be present to hold that the channel companies had income chargeable to tax in their hands in India. This item-wise arguments made by the learned senior counsel are summarized below: (1) The channel companies do not have any business connection with India. 1. The business connection is a concept which can be viewed only from a bilateral angle. Business connection presupposes existence of two elements. Business connection, as contemplated by section 9 of the Income-tax Act, requires that there exists a real and intimate connection with the business activity of the non-resident in the taxable territories. The channel companies do not have any business activities whatsoever in India. Therefore, it cannot be held that the channel companies do have business connection in India. 2. Reliance placed on the decision of the Karnataka High Court in the case of VDO Tachometer Werke, West Germany v. CIT [1979] 117 ITR 804 wherein the court has examined the provisions of section 9 to deal with the issue of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies which contributes directly or indirectly to the earning of those profits and gains. The court further held that the expression business connection postulates a real and intimate relation between a trading activity carried on outside the taxable territories and an activity carried on within the taxable territories, the relation between the two contributing to the earning of income by the non-resident. 8. The agreement for the sale of Ad Airtime between the assessee and the channel companies is entered into and executed on a principal to principal basis entirely outside India. Therefore, there cannot be any business connection with the channel companies in India. 9. The CBDT in circular No. 23, dated 23-7-1969 has stated that where a non-resident parent company sells goods to its Indian subsidiary, the income from the transaction will not be deemed to accrue or arise in India under section 9, provided that- (a) the contracts to sell are made outside India; (b) the sales are made on a principal to principal basis and at arm's length; and (c) the subsidiary does not act as an agent of the parent company. The mere existence of a business connection arising out of the parent/subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in its own account. 4. Explanation 1(a) to section 9(1)(i) of the Income-tax Act provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India which make it clear that if no operations are carried out by the channel companies in India, no income can be attributed and taxed in India. 5. The Bombay High Court in the case of CIT v. Tata Chemicals Ltd. [1974] 94 ITR 85 has held that where every activity was done outside the taxable territory of India, it cannot be held that the non-resident company had any operations in India. 6. The Supreme Court in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 has held that if all the operations are not carried out in the absence of any activity or operation carried on by the foreign company in India, the business connection does not become effective so as to hold the foreign company taxable in India. 7. The Supreme Court in the case of CIT v. Toshoku Ltd. [1980] 125 ITR 525 has held that if no operations of business are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference is made to section 182 of the Indian Contract Act, 1872 and the commentary of Pollock Mulla - Indian Contract and Specific Relief Acts, Twelfth Edition at pages 2062 and 2063. 7. As per clause (2) of the agreement for the sale of Ad Airtime, the assessee has the discretion to - (a) determine the terms of the agreements with advertisers, programme sponsors and other third parties; (b) enter into and barter sale of Ad Airtime; and (c) decide with whom it shall enter into agreements with. 8. The agreement does not require or provide for the assessee to act under the direct or indirect control or supervision of the channel companies. An important aspect for existence of an agency relationship is that an agent is required to conduct the business according to the direction of the principal. Such a binding is not incorporated in the sale agreement. 9. The Supreme Court in the case of Bhopal Sugar Industries Ltd, v. STO [1977] 40 STC 42 has held as follows: Thus, the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens, the buyer becomes the owner of the property a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not earn any income in India. The case of the assessee is even stronger as the sales by the non-resident channel companies to the appellant which itself is also a non-resident foreign company. Therefore, the payments made by it to the channel companies for the purchase of Ad Airtime are not taxable in India. 80. Shri G.C. Srivastava, the learned CCIT, in return, contended that the channel companies do earn taxable income within the territories of India by way of their telecasting activities. He explained that the contentions of the assessee that the channel companies did not have any business connection within India, no business operations carried out in India are not true in the light of the activities carried on by the channel companies in association with the assessee and its associates in India. The assessment under appeal is not of the channel companies but that of the assessee, who had paid the amounts to the channel companies. Therefore, the issue of taxability of income in the hands of the channel companies in India is to be examined only to the extent of ascertaining whether the assessee was justified in its stand that the channel companies did not have taxable income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness connection is to avoid to confine within a precise definition. But it can be ascertained that the essence of business connection is the existence of a close, real and intimate relationship and commonness of interest between the non-resident company and the Indian entity. 3. Where there is control of management or finances or substantial holding of equity shares or sharing of profits by the non-resident company of the Indian person, the requirements necessary for establishment of the business connection are fulfilled. 4. Purchases from non-resident at assessee's own risk are not good enough to hold that no business connection existed for the non-resident in India. 5. The Bombay High Court has held in CIT v. Evans Medical Supplies Ltd. [1959] 36 ITR 418 that where the Indian entity earlier carried the business as authorized agents and later on of its own, a business connection would exist if commission is paid for propaganda or advertisement allowance is given. 6. In the light of the above principles, if the facts of the present case are examined, there is no doubt that the channel companies have a business connection in India. 7. All major activities are in India includin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out by the channel companies through the assessee company and its associates and agents are nothing but business operations carried out in India in which channel companies do occupy the leading role. 8. The telecasting business being a continuous and flowing process, the entire activities are carried out by the assessee through the help of agents, sub-agents and other associates concerns and subsidiaries. (3) Assessee is the agent of the channel companies 1. Channel companies are the owners of the channels and channels are operated by channel companies. They determine the content of every channel. Telecast of advertisement is the responsibility of the channel companies. 2. Therefore, the performance of the contract relating to the sale of Airtime is done by the channel companies and, therefore, it is not possible to hold that the agreements entered into between the channel companies and the assessee are entered into in the status of independent principals. 3. The essential ingredients of a sale are an agreement of sale, transfer of title in goods and a price paid or to be paid. In the present case, there is no transfer of Air Time to the seller. Even the 10 minutes prescribed for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incipal relation, all the functions carried out by the assessee company remained the same as it were prior to 1999. Except for the cosmetic changes brought into the agreement, the functional relationship between the assessee and the channel companies remained the same. Such a relation is necessary for the accomplishment of the business activities carried on by the channel companies. The nature of the existing relationship cannot be disturbed either by the channel companies or by the assessee. The assessee is the de facto agent of the channel companies for all practical purposes. 11. M/s. SIPL is designated as the agent of the assessee company. According to the assessee, the Airtime procured from channel companies is marketed through M/s. SIPL. But in fact SIPL is the agent of channel companies. On the basis of the agreements entered into between the assessee and SIPL, M/s. SIPL is supposed to discharge a number of obligations in favour of the channel companies. The channel companies do not make any payment to M/s. SIPL for obtaining such services. This is a clear ground to hold that even though SIPL and channel companies are distanced in between by the assessee company, M/s. SIPL i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el companies do make an outright sale of Ad Airtime to the assessee company, who in turn, sell them to the ultimate customers through duly appointed agents. The case of the assessee is that the transaction of outright sale is made between the channel companies and the assessee on a principal to principal basis. 2. Ad Airtime is the telecasting time utilized for commercial advertisements for and on behalf of the clients. The subject-matter of outright sale contemplated by the assessee in any way is TIME . 3. Time as a subject-matter is not something like an ordinary commodity, merchandise, property or asset. It is not goods in the ordinary parlance. In commercial sense, time is paramount but at the same time difficult to define as saleable goods. Time , even if conceived as goods, cannot be stocked or traded like other ordinary goods. There are certain industries in which time is most important as a single element. A classic example is that of a hotel industry. Even if a particular hotel is ready to offer a number of appointed rooms for its guests, those rooms as a trading commodity cannot be stocked beyond time . If a particular room could not be let out on a particular day, remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as an associate or as an outsourcer or like. The assessee, as one of the players can reserve its right to use the Ad Airtime for the advertisement procured by it from various clients. This right of the assessee is to be used along with the process of telecasting itself. Channel companies are carrying on the process of telecasting in a continuous manner in which a specified Airtime can be reserved and used by the assessee company for the commercials. Still, it is a part of the telecasting carried out by the channel companies. 6. The above discussion on the subject-matter of the sale contemplated, between channel companies and the assessee leads us to state that Ad Airtime does not come under the legal framework of sale as the telecasting activities carried on by the channel companies are a sort of incessant flow of events in which the concerned players can take part but cannot take away segment by segment by way of outright sale. 84. The most important outcome of the above discussion is the identification of the nature of relation existed between channel companies and the assessee in the light of the agreements entered into by them. As the subject-matter of the agreements is the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The telecast up-linked by channel companies outside India are down-linked by the cable operators by using the decoders, in India. The flow of the telecasting begins with the up-linking done by the channel companies outside India and terminates with down-linking done by the cable operators in India and ultimately reaching to the screens of the viewers at large. In the above scheme of operation what is the role of the assessee company? Does it purchase anything out of that telecast offer? Do the channel companies sell and deliver anything to the assessee in their process of telecasting? No. In fact, it is the direct connection between the channel companies and the cable operators that is involved in the actual operation of the process of telecasting. The cable operators stand in India. They down-link the programmes in India. The advertisements procured by the assessee company also form part of the telecasting done by the channel companies and simultaneously down-linked by the cable operators in India. In the above scheme of things, the role of the assessee company is that of a procuring agent of advertisements for the channel companies through the agreements of Ad Airtime . As alr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the channel companies is unacceptable and those contentions are in fact not relevant in deciding the issue before us. 88. Another important argument of the assessee is that the channel companies do not have any business connection with India. The basis of the said argument is that the Ad Airtime given by the channel companies is a matter of outright sale concluded outside India. As already stated, time is always a future commodity and there cannot be any advance delivery of time as in the case of other goods. Therefore, there cannot be a contract executed between the channel companies and the assessee company on the basis of delivery of goods. When the agreements are executed by the assessee and the channel companies, the sale of Ad Airtime , contemplated by the parties thereto, is only in a conceptual state. The sale in that conceptual state is converted into an actual sale, when the delivery is made. When and where the delivery is made in the present case? The Ad Airtime is inseparable from the total telecast schedule of the channel companies. The delivery of the Ad Airtime is along with the telecast of the programmes scheduled by the channel companies. The advertisements broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he medium of satellite and transponders. All the other technical and operational aspects of the business explained by the assessee do not affect the legal character of the relationship of the parties inter se. 90. As argued by both the parties, there are a number of judicial pronouncements which have examined the legal concept aspects of business connection with India , in the context of the arising or accruing of income to a non-resident in India. The Karnataka High Court in the case of VDO Tachometer Werke, West Germany v. CIT [1979] 117 ITR 804 has held that in order to establish a case of business connection with India, it is necessary that the nonresident should carry on some operations in India. The Madras High Court in the case of CIT v. Fried Krupp Industries [1981] 128 ITR 27 has held that the business connection postulates a continuity of a business relationship between foreign and Indian entities. The Supreme Court has held in the case of Carborandum Co. v. CIT [1977] 108 ITR 335 that for the purpose of business connection with India, it is necessary that some part of the activities need to be carried on by the non-resident in India. The Supreme Court has held in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng their base operation in Hong Kong or telecasting throughout the Asian region, India being only one of the footprint areas of the telecasting network, and that the channel companies are not delivering anything special to India, are all arguments of no relevance in examining the question of business connection with India and the business operations carried out in India. The telecasting network may be spread over the skies of the whole of Asia. But as far as the present case is concerned, we are concerned only with those operations related to reflect in India as one of the footprint area falling under the telecasting network. Other countries also may have a similar case; but that is not the point of discussion here. The only test to be seen is whether such final delivery of goods or service coming out of the telecasting business is made in India or not? If it is made in India as one of the footprints area falling under the telecasting network, it is sufficient to conclude that the channel companies do earn that much of income from India. 94. The Bombay High Court in the case of CIT v. Tata Chemicals Ltd. [1974] 94 ITR 85 has held that there cannot be any business operation for a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the light of the discussions made in the above paragraphs with reference to the business connection and business operations, we come to the following findings: (i) The channel companies are having business connection with India; and they are having continuous business operations in India and that the relationship between the assessee company and the channel companies is not that of principal to principal. (ii) The assessee company, the channel companies and other-players in the field, other than the cable operators in India are 100 per cent subsidiaries of a mother holding company. The players are not strangers. The subsidiaries are engaged in managing the various aspects of the telecasting business carried out by the channel companies through their brand names, but ultimately controlled by the mother holding company. The directors are common; the business line is common; the business operations are intimately interconnected; inter-linked and inter-laced. Even though responsibilities are assigned to different subsidiaries, the functions carried out by all the subsidiary companies are towards the commonness of interest involved in carrying out the telecasting industry as transn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness connection with India. But the above-mentioned common place analogy cannot be applied in the present case. In the present case what is sold by the channel companies and bought by the assessee company is Ad Airtime in India, i.e. in a commercial expression Indian Time . The distinguishing feature of time is that it cannot be procured or stocked as such. It is born and exhausted instantly. Therefore, the subject-matter of agreements between the assessee and the channel companies cannot be in any way agreements based on the delivery of goods abroad. The Ad Airtime conceived in the agreements entered into between the assessee and the channel companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and consumption of the subject-matter of Ad Airtime is in India. Therefore, the contention of the assessee that the entire activities were carried out abroad is not found acceptable. 99. The Ad Airtime is not detachable from the flow of the total telecast time used by the channel companies for Indian viewers. The advertisements are telecast as part of the regular programmes of the channel companies. The advertisements form part of the mainstream of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to relay their programmes in India. If India was not in the footprint, then the entire exercise became futile. Responsibility of the assessee was to make available programmes of the TV channels in India through transponder on its satellite. If the assessee had only amplified the programmes and passed over to its customer outside India, who, in turn, would have made arrangement for sending the same to cable operators for use in India, it would have been the case of no business connection of the assessee in India . Since the signals were provided by the assessee for direct use in India, it was certainly the case of the assessee having business connection in India. The Tribunal observed that in that case it was not merely the user of any goods sold by the TV channels in India, but a continuous process through which the TV channels are showing their programmes in India by the medium of the assessee. The Tribunal held, therefore, that the assessee had business connection in India. The Tribunal further held that as far as the revenue of the TV channels from the advertisers and the cable operators in India was concerned it was the relaying of programmes in India and hence constituted a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relations and business activities are inter-connected and inter-laced. Therefore, the assessee company is working as a functional agent, as a facilitator, as an associate and as a supporter of the channel companies. The essence of our finding is that as far as the business carried on by the channel companies and the assessee is concerned, the assessee company does not have an independent existence different from the channel companies. Therefore, the above alternate argument of the assessee is liable to be dismissed. 104. Another argument advanced by the learned senior counsel is regarding the applicability of CBDT circular No. 23, dated 23-7-1969. In the light of our findings that the operations and business of the channel companies are very much carried out in India and the relationship between the assessee and the channel companies is not that of principal to principal, the said circular has no application in the present case. 105. Another important argument advanced by the learned senior counsel, though alternate in nature is that the entire payments made to the channel companies could not be treated as their income. Only a portion of the payments could be legitimately treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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