Income received by a foreign company for granting film distribution rights not ‘royalty’

ADIT (IT) Vs. Warner Brother Pictures Inc (ITAT Mumbai)- even if income arises to the Non-Resident due to the business connection in India, the income accruing or arising out of such business connection can only be taxed to the extent of the activities attributed to permanent establishment. In this case, the assessee does not have any permanent establishment in India. Since the Indian company who obtained the rights is acting independently, Agency PE provisions are not applicable to the assessee company. The assessee relied on the decision of Ishikawajma-Harima Heavy Industries Ltd vs. Director of Income Tax 2007-(158)-TAXMAN 0259-SC that incomes arising to a Non-Resident cannot be taxed as business income in India, without a PE. As the assessee does not have any permanent establishment in India, the incomes arising outside Indian Territories cannot be brought to tax. Therefore, there is no need to differ from the findings of the CIT (A) and accordingly the Revenue Appeal is dismissed.

In the cross objection, the assessee is contesting about the findings of the CIT (A) that the general principles of section 9(1)(i) will apply in the absence of inclusion under section 9(1)(vi) and relied on the two decisions of the Gujarat and Madras High Courts referred (supra). Even though the cross objection was raised on findings of CIT(A), in view of the observations given above, we are of the opinion that the issue is only academic and does not require any specific adjudication.

The Mumbai Tribunal in this decision examined the definition of royalty under Section 9(1)(vi) of the Act as well as under the India-USA tax treaty. The Tribunal held that the payment made for sale, distribution or exhibition of cinematography films is exempt from Royalty income under Section 9(1)(vi) of the Act. Further this payment is not covered under the India-USA tax treaty also.

Income Tax Appellate Tribunal, Mumbai

ADIT (IT) Vs. Warner Brother Pictures Inc

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