Article 5 & Article 12 of India-South Africa DTAA; Explanation 2 to section 9(1)(vii) of the Act – Payment for rendering line production services did not qualify as FTS/ royalty under the Act as well as the DTAA.

11. (2018) 98
taxmann.com 227 (Mum) Endemol South Africa (Proprietary) Ltd. vs. DCIT Date of
Order: 3^rd October, 2018 A.Y.: 2012-13

Article 5 & Article 12 of India-South Africa DTAA; Explanation 2 to
section 9(1)(vii) of the Act – Payment for rendering line production services
did not qualify as FTS/ royalty under the Act as well as the DTAA. 

Facts

The Taxpayer, a
company incorporated in South Africa, entered into an agreement with an Indian
Company (“ICo”) to carry out Line Production Services¹. Under the
said agreement, the Taxpayer was required to provide certain administrative
services for facilitating and coordinating filming of episodes of television
series by ICo at various locations in South Africa.

The Taxpayer filed its return of income declaring nil income on the
contention that the fees received for rendering the aforesaid services was not
in the nature of FTS u/s. 9(1)(vii) of the Act and accordingly, it was not
taxable in India.

However, the AO
was of the view that the role of the Taxpayer was not that of a mere
facilitator and the amount received was for the use of copyright as well as for
rendering the managerial and technical services to ICo and hence it qualified
as royalty and Fee for Technical services (FTS) under the Act as well as the
DTAA.

Aggrieved, Taxpayer filed an objection before the DRP. On perusal of the
terms of agreement, DRP held that the Taxpayer was engaged in the co-production
of the television series in South Africa by providing the technical inputs and
technical manpower to ICo. Thus, the fees received by the Taxpayer was for
rendering managerial and technical services which qualified as FTS under the
Act as well as the DTAA. Further, the DRP also held that the Taxpayer had
assigned all its copyrights in the television series to ICo. Thus, the payments
received by Taxpayer also qualified as royalty under the Act as well as Article
12 of DTAA.

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1.   Line production services which were provided
by the Taxpayer included services like (i) arranging for crew and support
personnel, as may be requisitioned; (ii) props and other set production
materials; (iii) safety, security and transportation; and (iv) filming and
other equipment, as may be requisitioned.

Aggrieved, the
Taxpayer appealed before the Tribunal.

Held

Whether line
production services can be characterised as services of a managerial, technical
or consultancy nature for FTS:

·        
            Under
the line production agreement, Taxpayer rendered various coordination/
facilitation services to ICo in producing the television series, such as
arranging of all production facilities; providing a line producer, production
staff, local crew for providing stunt services, provision of transportation
necessary for stunts/ production of the show; arranging for a director, staff,
art department and production staff to set up and film the series; providing
for all required paper work and declaration regarding fair treatment meted out
to animals, insects etc.

·        
            For the
following reasons, it was held that various coordination/facilitation services
rendered by the Taxpayer did not qualify as FTS:

   
           •        Managerial
Services– The term managerial services, ordinarily means handling
management and its affairs. As per the concise oxford dictionary, the term
managerial services mean rendering of services which involves controlling,
directing, managing or administering a business or part of a business or any
other thing. Since the services rendered by the Taxpayer were administrative
services (such as making logistic arrangements etc), it would not tantamount to
provision of any managerial or management functional services to ICo. It,
therefore, would not fall within the realm of the term ‘managerial services’.

   
           •        Technical
Services– The term ‘technical services’ takes within its sweep services
which would require the expertise in technology or special skill or knowledge
relating to the field of technology. As the administrative services, viz.
arranging for logistics etc., by the Taxpayer neither involved use of any
technical skill or technical knowledge, nor any application of technical
expertise on its part while rendering such services, it could not be treated as
technical services.

                
•      Consultancy Services– The
term consultancy services, in common parlance, means provision of advice or
advisory services by a professional requiring specialised qualification,
knowledge, expertise. Such services are more dependent on skill, intellect and
individual characteristics of the person rendering it. As the services rendered
by the Taxpayer did not involve provision of any advice or consultancy to ICo,
the same could not be brought within the ambit of “consultancy services”.

·        
            Since
the aforesaid services were purely administrative in nature, the consideration
received by the Taxpayer for rendering them could not be brought within the
sweep of the definition of “FTS” either under the Act or under DTAA.
Reliance was also placed on the ITAT decision in case of Yashraj Films Pvt.
Ltd. vs. ITO (IT) (2012) 231 ITR (T) 125 (Mum.) wherein on similar and
overlapping facts, the Tribunal had observed that as the services rendered by
the non-resident service providers for making logistic arrangements were in the
nature of commercial services, the same could not be treated as managerial, technical
or consultancy services within the meaning given in Explanation 2 to section
9(1)(vii) of the Act.

Whether the
consideration can be characterised as royalty income:

·        
            In sum
and substance, the agreement entered by the Taxpayer was for rendering of line
production services by the Taxpayer to ICo in order to facilitate and enable
ICo to produce the television series and not for grant of any licensing rights
in the television programme.

·        
            Further,
as ICo had commissioned the work to Taxpayer under the contract of service, ICo
qualified as the first owner of the work produced by the Taxpayer under the
South Africa Copyright Act No. 98 of 1978. Hence, it was incorrect to suggest
that there was an assignment of copyright by the Taxpayer in favour of ICo.