Consideration received by non-resident taxpayer from Indian company, for granting exclusive rights of distribution of cinematographic films, not taxable as royalty u/s.9(1)(vi).
Business income of foreign company not taxable in absence of a PE in India.
Agency PE cannot be created by an Indian company acting independently.
Facts
Taxpayer, a non-resident company (FCO) of USA, is engaged in production and distribution of films.
FCO entered into an agreement with an Indian company (ICO) to grant exclusive rights of distribution of cinematographic films to ICO. The agreements were signed outside India. ICO had no right to broadcast films on TV or radio and it was an admitted fact that the consideration was for distribution of films. The payment was also made to FCO outside India.
According to FCO, the income was not taxable in India, as the payment was specifically excluded from royalty definition of ITA and once income was not taxable in terms of specific source rule of royalty taxation, the amount was not chargeable u/s.9(1)(i) of the Act.
The contentions were rejected by the Tax Department. Aggrieved by the order of CIT(A), Tax Department further appealed to ITAT.
Held:
ITAT accepted FCO’s contentions and concurred with the CIT(A)’s order for the following reasons:
The definition of royalty u/s.9(1)(vi) excludes payment received for sale, distribution and exhibition of cinematographic films. Hence amount received by FCO cannot be considered as royalty under ITA.
When there is a special source rule dealing with a specific type of income, such provision would exclude applicability of general provision dealing with the income accruing or arising out of any business connection in India.
Consideration received by FCO is also not taxable as business income, as FCO does not have business connection in India. Even if FCO has business connection, profits only to the extent attributable to PE can be taxed in India. However, since FCO does not have PE in India, such income will not be liable to tax in India.
ICO, to whom the licence was granted by virtue of agreement, cannot be considered as Agency PE as it is not exclusively dealing for FCO, but also for other non-residents.
