Section 9(1)(vi) of the Act and Article 12 of India-USA DTAA – Indian distributor selling advertisement airtime customers held to have authority to conclude contract on behalf of foreign company and consequently, treated as Dependent Agent Permanent Establishment.

Section 9(1)(vi) of the Act and Article 12 of India-USA DTAA – Indian distributor selling advertisement airtime customers held to have authority to conclude contract on behalf of foreign company and consequently, treated as Dependent Agent Permanent Establishment.

Facts 1

Taxpayer, a US Delaware LLC, was engaged in the business of broadcasting its channels in various countries including India. The Taxpayer appointed its Indian affiliate (ICo) as its distributor to distribute its television channels for which ICO paid a fixed distribution fee to the Taxpayer. The Tax Authority held that the revenue generated on granting of distribution rights was in the nature of “royalty” as per Act as well as Article 12 of the India-USA DTAA.

The taxpayer contended that payment received by it did not fall under any of the clauses of the definition of the term “Copyright under the Copyright Act, Further, based on combined reading of section 37 and 39A with section 2(dd) of the Copyright Act, the consideration paid by ICo for Broadcast Reproduction and distribution rights was in the nature of commercial rights which were distinct and different from copyright. The broadcast and distribution rights, enables the broadcast to be heard or seen by the subscribers on payment of certain charges. Such rights did not fall within the definition of copyright as provided under the copyright law. Hence, the payment did not amount to royalty. Reliance in this regard was placed on Delhi HC rulings in case of ESPN Star Sports [RFA (OS) NO. 25/2008 (Del)] and Star India Pvt. Ltd. [CS(OS) Nos. 2722/2012, 3232/2012 and 2780/2012 (Del)].

Facts 2

The taxpayer also entered into an ‘advertisement sale agreement’ (Agreement) to sell the ‘advertisement and sponsorship time on the channels’ (advertisement airtime) to ICo for a lump sum consideration. ICo, in turn, was to sell the advertisement airtime to its customers in India. While the Taxpayer was obliged to broadcast such advertisements on its channels, the Taxpayer could accept or reject any advertisement provided by ICo. The Agreement also clarified that there would be no privity of contract remain between Taxpayer and the customer, ICo would not be deemed to be acting on behalf of the Taxpayer and risk and responsibility of sale of advertisement airtime by ICo to its customers was that of ICo and on such terms and conditions as ICo may deem fit.

The Tax Authority contended that ICo qualifies as a Dependent Agent PE (DAPE) of the Taxpayer in India under the India-USA DTAA and hence the income from sale of advertisement time to ICo was taxable in India.

The Taxpayer contended that ICo did not qualify as DAPE of Taxpayer in India. Without prejudice, even in a case where ICo is held to be creating a DAPE of the Taxpayer in India, there cannot be any further attribution of profits to such DAPE as the transaction was accepted to be at ALP by the Transfer Pricing officer (TPO). Reliance in this regard was placed on Supreme Court ruling in the case of Morgan Stanely & Co. Inc. (292 ITR 416), Delhi HC in BBC Worldwide Ltd (2011)(203 Taxman 554) as well as Bombay HC decisions in the case of B4U International Holdings Ltd (2015)(57 taxmann.com 146) and Set Satellite (Singapore) Pte Ltd. (307 ITR 205).

Held 1

Definition of the term “royalty” under the Act as well as in the India-US DTAA uses the expression “process”. The term process has been defined under the Act to include ‘transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret’. This definition of process was inserted under the Act vide Finance Act 2012 whereas the decisions referred by the Taxpayer were rendered prior to such insertion by Finance Act 2012 and hence, they did not deal with the issue whether such rights would fall within the definition of “process”.

Hence, the matter was remanded back to the Tax Authority to examine if the payment towards granting of distribution rights would fall under the term ‘process’ so as to get covered by the definition of royalty.

Held 2

As per the judicial precedence, the properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. can be regarded as ‘goods’. The ‘advertisement airtime’ can be identified, abstracted, possessed or stored till the time of its expiry. However, in the instant case, the “advertisement air time” is related to the television channels owned by the Taxpayer only and same does not have any value independent of the Taxpayer. Thus, ‘advertisement airtime’ fails to satisfy the test that it is capable of being used/consumed independently, i.e., independent of the Taxpayer. Accordingly, ‘advertisement airtime’ is merely a “right to procure advertisements” and does not qualify as ‘goods’ within the legal meaning of the said term.

Tribunal held that advertisement airtime, per se, does not have any value without the Taxpayer agreeing to telecast the advertisement material. Thus, in substance, ICo is actually canvassing the advertisements for the Taxpayer through the purchase and sale of advertisement airtime relating to the television channels owned by the Taxpayer. Thus the transaction between Taxpayer and ICo was not on principal-to-principal basis.

ICo provides agency services to the Taxpayer and in turn, the Taxpayer provides advertisement services or telecasting services to the clients. Hence, the relationship between the Taxpayer and ICo is in the nature of principal-to-agent basis.

Further, as per the agreement, ICo could enter into agreement with the customers to sell the advertisement airtime and Taxpayer was obliged to telecast such advertisement on its channel as per the schedule given by ICo. Accordingly, ICo had an authority to conclude contracts with the customers on behalf of the Taxpayer. Therefore ICo constituted DAPE of the Taxpayer.

On attribution of profits, the tribunal distinguished the cases referred by the Taxpayer, on the grounds that:

• Certain rulings were delivered while examining the existence of PE under Article 5(5) of the DTAA, i.e., independent agent, whereas, in this case, DAPE is held to be created under article 5(4) and hence support cannot be drawn from these rulings;

• Also, in some of those cases, courts were concerned with the payment made by foreign entity to its Indian PE. It is in this context, the courts have held that once transactions are considered to be at ALP, there need not be any further attribution to the PE. However, in the facts of the present case payments were received by the foreign entity (i.e. the Taxpayer) from its Indian PE (i.e. ICo).

Accordingly, the Tribunal restored the matter back to Tax Authority for the limited purpose of computation of profit attribution to PE.