Case Law Details
Fox International Channels (US) Inc Vs DCIT (ITAT Mumbai)
ITAT Mumbai held that Broadcasting Reproduction Right is not covered under the definition of Royalty under the Income Tax Act as well as Article 12 of the India-USA DTAA.
Facts- The assessee, Fox International Channels (FIC) is a non-resident foreign company, incorporated in the US. It is primarily engaged in the media industry, and its business consists of broadcasting its channels over various countries, including the Indian sub-continent. FIC is eligible for the benefits of the India – USA Double Taxation Avoidance Agreement and has filed a copy of the Tax residency certificate (TRC) to that effect which is placed on record.
During assessment proceedings, AO observed that the assessee has entered into a distribution representation agreement with NGC Network (India) Private Limited appointing NGC India as FIC’s exclusive agent for distribution of the Channels to media intermediaries’ subscribers in India, Nepal, and Bhutan. With effect from 01.10.2009, NGC India, acted on behalf of the assessee, has entered into separate agreements with Star India Pvt. Ltd., (SIPL) for the distribution of the Channels.
AO observed that the transaction with the SIPL is a license fee payment which is covered within the definition of royalty under the Act as well as under Article 12 of the U.S. Treaty, as being payments made for use of any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting.
By relying on the Authority for Advance Rulings (AAR) and other Tribunal decisions he came to the conclusion that the distribution license would fall within the ambit of royalty and accordingly, the distribution receipt of ₹.43,73,44,337/- is treated as royalty income. Accordingly, he brought to tax 15% with applicable surcharge and education cess u/s. 115A of the Act. DRP sustained the addition.
Conclusion- Held that Broadcasting Reproduction Right is not covered under the definition of Royalty under section 9(1) (vi) of the Income Tax Act as well as Article 12 of the Treaty. Accordingly, the payment is not in the nature of Royalty but in the nature of business income.
Held that the Broadcasting Reproduction Right is different from the copyright as mention in the Copyright Act. Therefore, respectfully following the decisions of Hon’ble Bombay High Court and decision of the ITAT Delhi Bench, we are inclined to allow the grounds raised by the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the assessee against the final Assessment Order and directions of the Dispute Resolution Panel of Learned Commissioner of Income Tax (DRP-2), Mumbai -1 [hereinafter in short “Ld. DRP”] dated 27.12.2022 for the A.Y.2015-16 passed u/s. 144C(5) of Income-tax Act, 1961 (in short “Act”).
2. At the time of hearing, Ld. AR of the assessee submitted that assessee has raised several grounds of appeal, however, he submitted that relevant ground for adjudication would be Ground Nos. 6 and 7 and other grounds raised by the assessee are merely academic in nature.
3. The relevant grounds raised by the assessee are as under: –
“Ground number 6
On the facts and in the circumstances of the case and in law, the Hon’ble DRP and the learned AO have erred in holding that the distribution revenues earned by the Appellant fall within the meaning of the term ‘Royalty’ under Article 12 of the India-USA Double Taxation Avoidance Agreement (“India-USA DTAA) and accordingly, such distribution revenues are taxable in India.
Ground number 7
On the facts and in the circumstances of the case and in law, the Hon’ble DRP and the learned AO have erred in holding that the distribution revenues earned by the Appellant fall within the meaning of the term ‘Royalty’ under Explanation 2 of Section 9(1)(vi) of the Act and accordingly, such distribution revenues are taxable in India.”
4. The relevant facts relating to the above grounds are; the case of the assessee was reopened u/s. 147 of Income-tax Act, 1961 (in short “Act”) and notices u/s. 148 of the Act was issued on 31.03.2021 and served on the assessee along with the reasons for reopening by obtaining proper approval u/s. 151 of the Act. Subsequently, notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee.
5. The assessee, Fox International Channels (US) Inc (in short ‘FIC’), is a non-resident foreign company, incorporated in the US. It is primarily engaged in the media industry, and its business constitutes of broadcasting of its channels over various countries, including over the Indian sub-continent. FIC is eligible for the benefits of the India – USA Double Taxation Avoidance Agreement and has filed a copy of TRC to that effect which is placed on record. FIC primarily had two streams of revenues from India i.e. revenues from advertisement and revenues from distribution in India. The issue before us is relating to distribution income.
6. During the assessment proceedings, Assessing Officer observed that Assessee has entered into a distribution representation agreement with NGC Network (India) Private Limited (hereinafter “NGC India”) appointing NGC India as FIC’s exclusive agent for distribution of the Channels to media intermediaries’ subscribers in India, Nepal, and Bhutan. With effect from 01.10.2009, NGC India, acted on behalf of the assessee, has entered into separate agreements with Star India Pvt. Ltd., [in short “SIPL”] for the distribution of the Channels. By observing the various clauses in the agreement and in particular Clause (16) of the agreement Assessing Officer observed that SIPL will procure each authorized purchase platform to telecast each of the channel, however, with lot of restrictions. It shows that assessee retains the complete rights over the programs. Assessing Officer observed that assessee through NGC India has granted license to SIPL to distribute the channels. It can be seen that SIPL cannot modify or delete anything from the transmission of the channels and it has to ensure that channels are transmitted in their entirety. The assessee has also restricted SIPL and the intermediaries from modifying, replacing or copying any copyright, trademarks, trade names, logos and names. The assessee has also prohibited SIPL and its intermediaries from copying any programs included on the channels.
7. The Assessing Officer observed that Royalty can be said to be a compensation paid under the license granted by the owner to the other who wishes to make use of the license. In this case, the ownership remains with the licensor, i.e. assessee and from the terms of the agreement it can be seen that SIPL is allowed to distribute the Channels with so many restrictions as mentioned above. From the terms of the agreement it is clear that SIPL is allowed to distribute the Channels during the contractual period and according to the terms laid down in the agreement. This shows that SIPL is not free to make use of the Channels as per their wish but strictly in accordance with the terms laid down by the assessee. Considering these facts, the assessee enjoys the rights of owners, whereas SIPL is paying compensation for the exploitation of the Channels.
8. Assessing Officer observed that the transaction with the SIPL is license fees payment and which is covered within the definition of royalty under the Act as well as under Article 12 of the U.S. Treaty, as being payments made for use of any copyright of a literary, artistic or scientific work, including cinematograph films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting. By relying on the Authority for Advance Rulings (AAR) and other Tribunal decisions he came to the conclusion that the distribution license will fall within the ambit of royalty and accordingly, the distribution receipt of ₹.43,73,44,337/- is treated as royalty income. Accordingly, he brought to tax 15% with applicable surcharge and education cess u/s. 115A of the Act.
9. Aggrieved with the above order, assessee preferred objection before Ld. DRP. After considering the detailed submissions before Ld. DRP, Ld.DRP sustained the additions made by the Assessing Officer, however, they have directed the Assessing Officer to exclude the distribution revenue received form Srilanka and Bangladesh since the assessee has received this distribution revenue outside India. Accordingly, Ld. DRP partly allowed the objections raised by the assessee.
10. Aggrieved with the above directions and final Assessment Order, assessee is in appeal before us and raised the above said grounds of appeal.
11. At the time of hearing, Ld. AR of the assessee brought to our notice findings of the Tax Authorities and brought to our notice Page No. 1 of the Paper Book which is Channel License and AD Sales agreement entered by NGC India (on behalf of the assessee) with SIPL. He brought to our notice background, he also brought to our notice Specific Terms – I wherein the assessee entered Grant of Distribution Rights which is Clause (3) of the terms of agreement, for the sake of clarity it is reproduced below: –
