Rushil Anand

Introduction

This article attempts to clearly lay out the implications of the Comprehensive Economic Partnership Agreement (CEPA) for parties interested in bringing Japanese Animation titles to Indian markets. CEPA is a Free Trade Agreement (FTA) entered between India-Japan, which came into effect in August 2011. It not only covers trade in goods but also trade in services as well as investment. The purpose of the agreement was to increase the bilateral trade in goods & services and increase cross border investment between the countries. CEPA’s chapter which concerns our scenario is based on GATS hence we will look into basics of GATS and CEPA to understand the restrictions placed as well as eased for importing such titles.

Background

Japanese animation industry is one of the largest industries in Japan and has played a prominent part in the country’s post World War 2 success story. With its global market size around $20 billion in the year 2019 according to The Association of Japanese Animations[1],it is obvious the industry enjoys a wide popularity and goodwill around the world. Just as in other major markets, the industry’s popularity has continued to rise in India. Japanese Animation was first introduced in India by Channel Animax in the year 2004, targeting teens and early adults and was soon adopted by children-oriented channels such as Hungama, POGO and Cartoon Network. The trend has continued as many Over-the-top (OTT) services (i.e. streaming services) have entered in deals with Japanese animation distributors to stream their animations on their websites.

The size of the Indian market too makes it an attractive market. While Indian OTT services subscribers were estimated to be around 29 million in July 2020[2], approximately 197 million Indian Households (out of approximate 298 million households) have a Television set[3]. Unsurprisingly, many companies are betting big on this market. Amazon Prime agreed a deal with popular Japanese TV network TV Asahi to stream popular anime shows Shin Chan, Ninja Hattori and Doraemon[4]. Akatsuki Inc a famous Japanese entertainment company intends to bring animation dubbed in local languages and produce Indian originals by hiring local artists and animators[5]. The deep admiration enjoyed by the Japanese Animation industry in India and the large Indian Television and OTT market makes it a profitable avenue.

The primary way a company acquires right to stream/telecast/show in theatres is through licensing. Licensing is an agreement where the licensee (usually a distributor) is granted some rights (such as right to stream the work in a specific country) in the intellectual property (i.e. the title) for a specific period. The ownership of the IP though is still with the licensor (the production house). As there is no permanent transfer of IP, it is considered a transfer of service rather than transfer of goods. Apart from selling licensing to foreign distributors, it is not uncommon for studios to open a representation office in countries that are its major markets to manage its licensing business and take up additional roles such as brand management etc.

India-Japan FTA CEPA

Transfer of service for audio-visual media falls under CPC no. 96113 (Motion picture or video tape distribution services) in Annex 6 of the agreement, which falls under Chapter 6 of the CEPA agreement, titled “Trade in Services”. CPC or United Nation’s Provisional Central Product Classification is a UN classification that has been adopted by both GATS and CEPA. Explanatory note of CPC no. 96113 defines it as –

“Distribution services of motion pictures and video tapes. This involves the sale or rental of movies or tapes to other industries for public entertainment, television broadcasting, or sale or rental to others.”

Chapter 6 of the agreement is based on the General Agreement on Trade in Services (GATS) treaty of the WTO which was entered into 1995. Aim of the GATS was to streamline and encourage trade in services between nations by ensuring there are certain principles that all nations apply and accept while encouraging further liberalization. All forms of services fall under GATS except services supplied in the exercise of governmental authority and “measures affecting air traffic rights and services” under Annex on Air Transport. As they do not conform to our scenario, they will not be discussed further.

Just like the GATS agreement, the CEPA identify the same four modes of delivery of services –

1) Cross border supply When only the service crosses national borders. For example, a lawyer in India providing services to his clients in Japan through video conferencing.

2) Consumption abroad – When a consumer from a host country travels abroad and avails services in the foreign territory. For example, an Indian Tourist in Japan availing bus service to travel from Tokyo to Kyoto.

3) Commercial presence When a foreign service provider establishes commercial presence in the host country to provide services. For example, Indian Banks providing services to Japanese customers through their branches in Japan.

4) Presence of natural persons When a person from a foreign country physically enters the host country to provides services. For example, a Japanese architect travelling to New Delhi to provide services to his Indian clients.

It is important to note the number allotted to listed modes of delivery of services because when we discuss horizontal and sectoral obligations, these modes will be mentioned by the number allotted to them rather than the term i.e. 1.) refers to the services listed as 1.) above.

There are two general commitments and two specific commitments under GATS (and the same is present in CEPA under chapter 6) for all members to apply. General obligations are to be granted to all sectors regardless though a member can make exceptions to MFN principle (one of the general obligations) under Article II-exemptions. Specific commitments, on the other hand, are granted in sectors that are mentioned in a member’s schedule of specific commitments. Each member is required to maintain this schedule where they mention the specific service sectors in which they will undertake two specific commitments and mention any limitation to the extent to which these commitments will be applied. Two general commitments and two specific commitments are as follows –

General Commitments

  • MFN treatment (Article II) – Most favored treatment means treating service providers from a foreign member country on equal footing to all other foreign service providers.
  • Transparency (Article III) – Members are required to publish all applicable laws and measures which may affect trade in services.

Specific Commitments

  • Market access (Article XVI) – Market access means allowing access to domestic markets for foreign service providers.
  • National treatment (Article XVII) – Principle of National treatment ensures that measures are not introduced which may lead to foreign competitors being discriminated in favor of domestic service suppliers

Countries are empowered, under Article XXI, to place limitations on specific commitments with respect to any modes of supply mentioned above. They can impose horizontal limitations, limitations which would be applicable to all service sectors mentioned in the schedule, and sectoral limitations, sectoral commitments which would be applicable to a specific sector as mentioned against their column.

India’s commitments in CEPA

Article 62 of the CEPA covers the specific commitment schedule (schedule based on the GATS specific commitment schedule). The article states –

1. With respect to sectors or sub-sectors where specific commitments are undertaken by each Party, its Schedule of Specific Commitments in Annex 6 shall specify:

(a) terms, limitations and conditions on market access;

(b) conditions and qualifications on national treatment;

(c) undertakings relating to additional commitments; and

(d) where appropriate, the time-frame for implementation of such commitments.

2. Measures inconsistent with both Articles 59 and 60 shall be inscribed in the column relating to Article 59. This inscription will be considered to provide a condition or qualification to Article 60 as well.

Article 59 and 60 mentioned above cover Market Access and National Treatment specific commitments. These articles have been directly picked up from the GATS treaty and are in substance the same as their counterparts in the GATS treaty. Annexure 6 of the agreement, as envisaged under Article 62, lays down sectors in which these two parties have agreed to undertake specific commitments along with any limitations placed i.e. Horizontal and sectoral limitations. Now we will be looking into horizontal and sectoral limitations adopted by India in its CEPA specific commitment schedule.

Horizonal limitation

India has adopted horizontal limitation for 3rd and 4th mode of supply under both national treatment and market access commitments. Horizontal limitation on Market Access under the 3rd mode of supply essentially states that to provide services through commercial presence, approval from Foreign Investment Promotion Board (FIPB) is required for sectors highlighted in FDI-policy Circular-2 2010. Upon receiving the approval, commercial presence can be established via Joint Ventures or Wholly Owned Subsidiaries, liaison office/representative office, project office

and branch office. Commercial presence of an entity can only undertake activity covered in FEMA[6]. Article 58 (b) of the CEPA agreement defines commercial presence as –

(b) the term “commercial presence” means any type of business or professional establishment, including through:

(i) the constitution, acquisition or maintenance of a juridical person; or

(ii) the creation or maintenance of a branch or a representative office, within the Area of a Party for the purposes of supplying a service;

It is important to note that FIPB was abolished in 2017 and has been replaced by Foreign Investment Facilitation Portal (FIFP). FIFP is an online window for investors to submit their proposals to the government. The portal then curates and sends proposal to concerned ministry. Furthermore FDI-policy circular 2020 has been released by government w.e.f 15th Oct 2020 and would be applicable instead of the 2010 circular. Horizontal limitation on National Treatment under 3rd mode states where there is a proposal to collaborate PSUs or government undertakings, preference in access will be given to Japanese firm giving the best terms for transfer of technology[7].

Limitation on Market access and National treatment under 4th mode of supply are more straight forwards and simple –

Market Access – Unbound except as per commitments in Chapter 7 on Movement of Natural Persons.

National Treatment – Unbound, except as in the MA column.

Specific Limitations

Unlike Horizontal Limitations, specific limitations are individually applied to each sector, hence we need to first identify under what service will our scenario fall in Annex 6. As stated above, licensing of Japanese Animation is covered under 96113 (Motion picture and video tape distribution services) of Audio-visual Services, which itself falls under Communication services. As Annex-6 of CEPA mentions CPC 96113, Motion picture and video tape distribution services are entitled to market access and national treatment, though certain limitations have been placed on certain modes of delivery on both the principles. The following reproductions list out the limitations placed on the four modes of delivery (which have been numbered according to the numbers allocated above) –

Limitation on Market access –

1) Unbound

2) Unbound*

3) (a) Only through representative offices which will be allowed to function as branches of companies incorporated outside India.

(b) Numerical ceiling in relation to the import of titles for this Agreement will be in accordance with the India’s Revised Offer at the GATS. The current limit is 100 titles per year.

4) Unbound except as in the horizontal section.

Limitation on National Treatment –

1) Unbound

2) Unbound*

3) None

4) Unbound except as in the horizontal section.

The terms “None” and “Unbound” do not have a separate definition in the GATS. However, to understand their implication we need to look into the dispute settlement case China – Electronic Payment Services where the GATS panel examined the meaning of both terms. Discussing the meaning of the word “None” –

“…we now examine the relevant entries in China’s Schedule. We start with China’s inscription for national treatment in mode 1. We recall that China has inscribed the term “None” in the column entitled “Limitations on National Treatment”. Although no specific definition exists in the GATS of the term “None”, its ordinary meaning is clear when read in conjunction with the title of the column in which the term appears. It indicates that China has undertaken “no” limitations – in other words, a full commitment – with respect to national treatment in this mode, unless otherwise inferred from its Schedule”[8].

Similarly, discussing the meaning of the word “Unbound” The panel stated –

“…the term ‘unbound’ would indicate an absence of constraint or obligation. In the same vein, the Scheduling Guidelines instruct a Member wishing to retain the freedom to introduce measures inconsistent with market access or national treatment to record the term ‘Unbound’ in its GATS Schedule”[9].

Following what the panel laid down in China – Electronic Payment Services, mention of the word “None” implies that India is not placing additional conditions and provides complete market access/national treatment if the services are provided in the mode of delivery written in the corresponding column. Similar “Unbound” implies that India has not placed any limitation on the specific commitments however it retains the full right to impose any conditions. Wherever the term “Unbound” is mentioned along with a * symbol, it implies that no condition has been imposed due to the technical unfeasibility of the same.

Reading the schedule, it is clear India has not, apart for the 3rd mode of supply, placed additional restrictions for national treatment and market access, though it retains the power to introduce restriction where the term “Unbound” is mentioned. However, for the 3rd mode of supply, i.e. services through commercial presence, it is essential that the service provider does it through representative offices for market access as the wording “only through representative offices” excludes Joint ventures with local companies.

Furthermore, a ceiling of 100 titles per year has been imposed. Under the National Treatment for 3rd mode of supply, India has mentioned “none” meaning that titles imported through representative offices will be on the same footing, bar the horizontal limitations, as the domestically produced titles and India cannot impose any limitation.

CEPA eases the restriction on CPC 96113 India has placed under its GATS additional commitment schedule for 3rd mode of supply. The India’s Schedule of Specific Commitments under GATS places an additional limitation for National Treatment for 3rd mode of supply –

3) Subject to the prescribed authority having certified that the motion picture has:

a) won an award in any of the international film festivals notified by the Ministry of Information & Broadcasting, Government of India; or

b) participated in any of the official sections of the notified international film festivals; or

c) received good reviews in prestigious film journals notified by the Ministry of Information & Broadcasting, Government of India.

With signing of CEPA the above-mentioned limitation will not be applicable for Japanese service providers. Such a limitation essentially limits by a big margin the titles that can be certified to be imported as vast majority of titles may not meet such a requirement. However, since such a limitation is not applicable for titles imported from Japan, from a business point of view, dedicating capital to open in a representational office in the host country i.e. India will be economically feasible as CEPA greatly widens the scope of titles that can be imported.

Conclusion –

From above we can conclude that importing licenses for audio-visual media from Japan through 1st mode i.e. cross border supply is essentially restriction free under CEPA. However, if the services are to be provided through 3rd mode of supply i.e. commercial presence, the interested party may have to dedicate substantial capital to open representational offices. Furthermore, a numerical ceiling has been placed on the number of titles that can be imported. Titles imported from Japan however do not require being certified of being awarded or participated in a notified international film festival or received good reviews from a notified film journal, vastly expanding the scope of titles that can be imported.

Due to its various commitments and how each may correlate to a particular mode of supply, GATS may come across as complex legislation. And since chapter 6 of CEPA is based on GATS, it was essentially to breakdown the fundamentals of GATS to understand the restrictions and limitations placed on importation of audio-visual media licenses from Japan. In the next article, we will look into the taxation of such imported services under GST.

[1] Hiromichi, M., & Tadashi, S. (2020, October 2). Anime Industry Report 2019 Summary. Retrieved November 20, 2020, from https://aja.gr.jp/download/anime-industry-report-2019-summary_

[2] India’s Ott Market: Witnessing A Rise In Number Of Paid Subscribers. (2020, October 15). Retrieved November 20, 2020, from https://www.ibef.org/blogs/india-s-ott-market-witnessing-a-rise-in-number-of-paid-subscribers

[3] Television Industry In India. (2020, January 29). Retrieved November 20, 2020, from https://www.ibef.org/blogs/television-industry-in-india

[4] K, B. (2017, January 09). Amazon Prime Video India to stream Doraemon, Shin Chan and Ninja Hattori. Retrieved November 20, 2020, from https://www.medianama.com/2016/11/223-amazon-prime-video-doraemon-ninja-hattori/

[5] Jha, L. (2020, June 21). Japan’s Akatsuki looks to tie up with Netflix, Amazon for Indian animation. Retrieved November 20, 2020, from https://www.livemint.com/news/india/japan-s-akatsuki-ties-up-with-netflix-amazon-for-indian-animation-11592716558569.html

[6] Foreign Investment Promotion Board (FIPB) approval will be required in sectors where such approval is specified under the Consolidated FDI Policy-Circular 2 of 2010. A foreign company can set up operations in India under the following routes:

(a) As an incorporated entity by incorporating a company under applicable laws through a Joint Ventures or Wholly Owned Subsidiaries. These entities can undertake activities permitted as per the Foreign Exchange Management Act (FEMA).

(b) As an office of a foreign entity through liaison office/representative office, project office and branch office. Such offices can undertake activities permitted under the FEMA.

In addition and without prejudice to equity and other restrictions specified in sectoral commitments of this Schedule, MA and NT restrictions specified in the Consolidated FDI Policy-Circular 2 of 2010, as revised and amended from time to time, shall be applicable, provided that any changes to the Consolidated FDI Policy-Circular 2 of 2010 shall not be applied in a manner so as to nullify or impair the benefits under the terms of a specific commitment.

[7] In case of collaboration with public sector enterprises or government undertakings as joint venture partners, preference in access will be given to Japanese service suppliers/entities which offer the best terms for transfer of technology.

Taxation laws for domestic and Japanese service suppliers, as per the provisions of the relevant applicable laws.

 Subsidies, where granted, shall be available only to domestic service suppliers.

In addition and without prejudice to equity and other restrictions specified in sectoral commitments of this Schedule, MA and NT restrictions specified in the Consolidated FDI Policy-Circular 2 of 2010, as revised and amended from time to time, shall be applicable, provided that any changes to the Consolidated FDI Policy-Circular 2 of 2010 shall not be applied in a manner so as to nullify or impair the benefits under the terms of a specific commitment

[8] Panel Report, China – Electronic Payment Services, para. 7.651

[9] Panel Report, China – Electronic Payment Services, para. 7.652

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Whatsapp

taxguru on whatsapp WHATSAPP GROUP LINK

Join Taxguru Group on Telegram

taxguru on telegram TELEGRAM GROUP LINK

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

December 2021
M T W T F S S
 12345
6789101112
13141516171819
20212223242526
2728293031