1. [2020] 118
taxmann.com 314 (Mumbai-Trib.) Next Gen Films (P)
Ltd. vs. ITO ITA Nos.: 3782,
3783/Mum./2016 A.Ys.: 2011-12 to
2012-13 Date of order: 11th
August, 2020
Article 5 of
India-UK DTAA – Section 195 of the Act – Payment for production and delivery of
film outside India is not taxable in India
FACTS
The assessee and another Indian Company (E1) were co-producers of a
feature film. They entered into a commission agreement with D, a UK-based
company which was to provide production services like pre-production,
production, post-production and delivery of the feature film. Key terms of the
agreement were as follows:
(a) Based on the story concept provided by the
assessee, development of storyboards and screenplay, selection of locations and
special and visual effects services. D was to consult and take consent of the
assessee over important aspects like the identity of all key cast members, budget,
production schedule, delivery materials, cash flow, screenplay, production
services companies to be engaged, etc., to ensure that the film was produced
and delivered in accordance with the material requirement.
(b) Ownership of the film was solely and
exclusively with the assessee.
(c) As a consideration for the
aforesaid services, D was paid 100% of the budget. This amount was to be
reduced by the amount of UK Tax Credit advance, any underspent amount, interest
accrued on monies held in the production account and any realisable value from
equipment / materials sale at the end of production of the film.
To execute the
Indian leg of the project, D entered into a production service agreement with
E2 (a subsidiary of the parent of E1). The services of E2 were subject to the
direction and control of D. The A.O. was of the view that D had a place of
management in India. He further held that the assessee, D and E2 were
associated enterprises in terms of Article 10. Accordingly, E2 had also created
a service PE of D in India. Since the assessee had not withheld tax on
remittance, the A.O. deemed it as ‘assessee in default’ and initiated
proceedings u/s 201/201(1A) of the Act.
In appeal, the
CIT(A) held against the assessee who, being aggrieved, appealed before the
Tribunal.
HELD
Associated
enterprise
+ The contract
between the assessee and D was on a principal-to-principal basis which required
D to produce the film in accordance with the specifications laid down by the
assessee.
+ D carried out its
activities in consultation with the assessee to ensure that the film was
produced as per specifications and in keeping with the storyline.
+ D acted
independently and was free to take decisions and also engage other service
providers.
+ D had borrowed
against expected UK tax credit1. Thus, it could not be said that D
was dependent upon the assessee for its financial requirement.
+ D also recorded
revenue received from the assessee and consequential loss in its books of
accounts.
Thus, it could not
be said that the assessee participated directly or indirectly in the
management, control or capital of D.
Permanent
Establishment
* The agreement
between D and E2 was that between a principal and an agent. E2 had provided
limited production services for a lump sum consideration of Rs. 3 crores.
* The gross
receipts of E2 were Rs. 133.55 crores (A.Y. 2011-12) and Rs. 76.27 crores (A.Y.
2012-13), respectively, as compared to the fees of Rs. 3 crores received from
D. Therefore, E2 was an agent of independent status. Consequently, D did not
create a PE in India.
Thus, D and E2 were
not associated enterprises in terms of Article 10 of the DTAA.
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1 Decision
does not mention nature or conditions qualifying for tax credit in UK
