Section 9 of the Act, Article 5, 12 of India Mauritius DTAA – (i) in absence of principalagent relationship and authority to habitually conclude contract in India, Indian advertising agent did not create a Dependent Agency PE in India; (ii) transponder charges and uplinking charges did not constitute royalty under the DTAA , and retrospective amendment to the royalty definition under the Act cannot be read into the DTAA ; (iii) programming charges for acquiring telecasting rights of live events conducted outside India did not represent income accruing or arising in India.
Facts 1
The Taxpayer was incorporated as a company in British Virgin Islands (BVI) in the year 2000. However, it was subsequently registered as a company in Mauritius in July 2002.
The Taxpayer was engaged in the business of telecasting a sports channel across the globe including India. The Taxpayer had entered into following two contracts with its Indian subsidiary (“ICo”), with the prior approval of Reserve Bank of India (RBI).
Advertising Sales agreement for sale of commercial slot or spot to the prospective advertisers and other parties in India for which a commission at a flat rate of 10% was paid to ICo
Distribution agreement for distribution of the channel to cable operators who ultimately distribute to consumers in India. The distribution revenue collected by ICo was to be shared between the Taxpayer and ICo in the ratio of 60:40.
The Taxpayer contended that advertising and distribution revenue earned by it is not taxable in India because income is business income and is not taxable in absence of Permanent Establishment (PE) in India.
However, Assessing Officer (AO) considered that ICo constituted a ‘dependent agent PE’ (DAPE) of the Taxpayer in India. Also, the distribution income was characterised as ‘Royalty’ u/s. 9(1)(vi) of the Act.
For F.Y. 2002, Taxpayer was registered in BVI as a company for part of the year and in Mauritius for the residuary period. Hence, it was suggested that Taxpayer was not eligible to claim treaty benefits for such part of the year during which it was registered in BVI. As a consequence, it was held that distribution income for that part of the year was taxable as royalty income under the Act, while for the balance period where the Taxpayer was registered in Mauritius, as the royalty income was attributable to the DAPE of Taxpayer, it would be taxable in India as per Article 7 of India Mauritius DTAA .
Held 1
Taking note of the terms of the distribution agreement and the actual conduct of the parties, it was held that ICo was not acting as an agent of Taxpayer in India. ICo merely obtained the right of distribution of channel for itself and subsequently entered into contract with other parties (sub-distributors) in its own name. Thus it was held that the transactions between the Taxpayer and ICo were on principal-to-principal basis.
As per Article 5(4) of the India Mauritius DTAA, an agent is considered to be creating a PE of a foreign enterprise in India if he is a dependent agent and habitually exercises any authority to conclude contract or habitually maintains stock of goods or merchandise in India on behalf of such foreign enterprise. Moreover, an agent is treated as dependent only if it is subject to instructions or comprehensive control of the foreign enterprise and no entrepreneurial risk is borne by the agent.
Thus, even if ICo is considered as an agent of the Taxpayer, since ICo did not satisfy any of the above conditions, it did not constitute DAPE of the Taxpayer in India.
The Taxpayer had not granted any license to use any copyright to the distributor or to the cable operators but merely made available the content to the cable operator which was transmitted to the ultimate viewer. In fact, the rights over the content were always held by the Taxpayer and were never made available to distributors or cable operators. Thus, the income from such arrangement would not constitute royalty.
Also, the contention of the AO that the income from distribution agreement be considered as royalty for some part of the year and as business income for the balance year was not acceptable.
Facts 2
Taxpayer made payments to a US Co for providing facility of transponder for telecasting its sports channel. Additionally certain ‘up-linking’ charges were paid to USCo for up-linking the signals of live events from the venue of the events to USCo’s satellite.
Taxpayer did not withhold taxes on such payments. AO contended that the payments made to USCo qualified as royalty under the Act as well as the India-USA DTAA and hence, were subject to withholding tax in India. Accordingly, AO disallowed such expenses for failure to withhold taxes.
Held 2
Article 12 of the India – USA DTAA exhaustively defines the term ‘royalty’ and therefore, the definition and scope of ‘royalty’ should be as provided in the DTAA not the Act. Hence, the definition of royalty as enlarged by Finance Act 2012 with retrospective effect cannot be read into the DTAA . Reliance in this regard was placed on the Delhi HC ruling in DIT vs. New Skies Satellite [2016] 95 CCH 0032 (Del).
Payment for transponder charges and up linking charges were not in the nature of any consideration in the nature of “use” or “right to use” any copyright of a literary or artistic or scientific work, patent, trademark or process etc., as referred to in Article 12 nor is it for the use of or right to use any industrial, commercial or scientific equipment. Hence, they did not qualify as royalty under the DTAA .
Even otherwise, applying the maxim of “lex non cogit ad impossplia”, since the retrospective amendment was not in place when the payment was made by the Taxpayer, the Taxpayer cannot be held liable for failure to withhold taxes.
In absence of PE of the NR in India, the payment made to a NR outside India for availing service of equipment in relation to transponder and up-linking activity outside India cannot be taxed in India.
Facts 3
Taxpayer paid certain programming cost to various NR cricket boards and other sports associations for acquiring live telecast rights in relation to sport events taking place outside India.
AO contended that such payments were in the nature of acquiring copyrights and hence qualified as royalty under the Act. Taxpayer, however, contended that telecasting such live events did not constitute royalty as it did not involve any copyright.
Held 3
Programming cost was paid by Taxpayer to various nonresidents outside India for acquiring rights of sports events taking place outside India.
Further as liability to pay programming cost is assumed by the Taxpayer outside India and is not borne by any PE of NRs in India, such programming cost cannot be deemed to arise in India.
