Turner Broadcasting System Asia Pacific Vs DCIT (ITAT Delhi)
Conclusion: Distribution revenue received by Turner Broadcasting System Asia Pacific, Inc. ( TBSAP ), a U.S.-based company, from its Indian affiliate was not taxable as “royalty” under the Income Tax Act, 1961, or the India-U.S. Double Taxation Avoidance Agreement ( DTAA ) but as business income and there was no justification for deviating from this consistent approach without any change in facts or law.
Held: TBSAP, a tax resident of the United States, had entered into an agreement with Warner Media India Private Limited (WMIPL). Under this agreement, TBSAP granted WMIPL the rights to sell advertising and distribute television channels like Cartoon Network and POGO in India. WMIPL was entitled to retain 50% of the revenues earned from the sale of advertisement inventory and distribution of channels as consideration for the services rendered to TBSAP. TBSAP filed its income tax returns offering these revenues to tax based on a Mutual Agreement Procedure (MAP) resolution between the competent authorities of India and the USA for earlier years (AY 2001-02 to 2004-05). According to the MAP, 10% of both advertising and distribution revenues were deemed as business income taxable in India. AO issued draft assessment orders proposing to treat the distribution revenues as “royalty” under Section 9(1)(vi) and Article 12 of the India-U.S. DTAA, thereby taxing them at 10%. Additionally, AO sought to attribute 15% of the net advertising revenues received by TBSAP from WMIPL to a purported Permanent Establishment (PE) in India. TBSAP objected to these proposals, arguing that the issues were already settled in its favour in earlier years and that the revenues should continue to be taxed as business income. The Dispute Resolution Panel (DRP) directed the AO to consider the ITAT’s earlier order in TBSAP’s own case for AY 2009-10 to 2017-18, where similar issues were decided in favour of the assessee. However, AO without adequately considering the DRP’s directions, finalized the assessments in line with the draft orders, prompting TBSAP to appeal to the ITAT. It was held that payments received for the use of, or the right to use, any copyright were characterized as ‘royalty’. Since there was no such transfer of copyright, the revenues could not be taxed as royalty under Article 12 of the DTAA. Department had accepted the MAP and the taxation of these revenues as business income in earlier years. There was no justification for deviating from this consistent approach without any change in facts or law. Tribunal deleted the additions made by AO for both AY 2020-21 and 2021-22. The ruling reinforces the principle of consistency in tax assessments and adherence to international tax treaties. It clarified that distribution revenues arising from granting distribution rights of television channels, without the transfer of copyrights, did not constitute ‘royalty’ under the Income Tax Act or the India-U.S. DTAA.
