Warner Bros Distributing Inc. Vs ACIT (ITAT Mumbai)
Conclusion: Revenue from film distribution was specifically excluded from the definition of “royalty” under both the Act and the India-USA DTAA and interest earned on income tax refund was not effectively connected with any permanent establishment in India and should be taxed at 15% as per Article 11(2) of the India-US DTAA.
Held: Assessee, a tax resident of the USA, was engaged in the distribution of films and had entered into an agreement with Warner Bros. Pictures (India) Pvt. Ltd. (“WBPIPL”) granting exclusive distribution rights for India on a principal-to-principal basis.AO treated the receipts from WBPIPL as business income and held that WBPIPL constituted a Dependent Agent Permanent Establishment (DAPE) of the assessee in India and attributed 65% of the revenues as business income taxable in India. Dispute Resolution Panel (DRP) upheld the AO’s findings and, alternatively, treated the income as royalty under section 9(1)(vi). Assessee argued that its arrangement with WBPIPL was on a principal-to-principal basis and not as an agent. They further argued that WBPIPL was an independent entity conducting its own business and that all transactions were made at arm’s length, which had been accepted in earlier and subsequent transfer pricing assessments. It also argued that distribution income from cinematographic films could not be treated as royalty under the Income Tax Act or the India-US Double Taxation Avoidance Agreement (DTAA). It was held that relying on its earlier decision in the assessee’s own case for assessment year 2006-07 and explained that payments for film distribution were specifically excluded from the definition of royalty under section 9(1)(vi). Hence, it held that such income could not be taxed as royalty either under the Act or the DTAA. Further, following its own earlier orders and Explanation 2(v) to section 9(1)(vi), the Tribunal held that revenue from film distribution was specifically excluded from the definition of “royalty” under both the Act and the India-USA DTAA. Therefore, the alternate finding of the DRP taxing the same as royalty was also set aside. Tribunal also held that the interest earned on income tax refund was not effectively connected with any permanent establishment in India and should be taxed at 15% as per Article 11(2) of the India-US DTAA, following the decisions in Bechtel International Inc. and Clough Engineering Ltd.
