Turner Broadcasting System Asia Pacific Inc. Vs DDIT (ITAT Delhi)
Conclusion: Since distributor of the products did not have any right to change the content hence, the revenue derived on account of distribution of the products was business income and under no circumstance, could be held to be royalty. Assessee had already offered income as business income in terms of the MAP, therefore, the income as declared by assessee in accordance with the MAP and accepted by the Department in the earlier years had to be accepted.
Held: Appellant-company was a tax resident of the USA. During the relevant assessment years, appellant derived advertisement and distribution revenue from grant of exclusive rights to Turner International India Private Limited (“TIIPL”), an Indian Company, to sell advertising on the products and to distribute the products. TIIPL (Indian Company) acted as an exclusive distributor of the above mentioned products to the cable operators and other permitted systems on ‘principal to principal basis’. The ‘distribution agreement’ allowed TIIPL (Indian Company) to distribute the products to various cable operators and ultimately to the consumers in India. The distribution revenue collected by TIIPL was to be shared between TBSAP and TIIPL (Indian Company). However, vis-à-vis TIIPL (Indian Company) the copyright in the content always remained with the Appellant and at no point of time; same was transferred either to TIIPL or the sub distributor. AO on relevant facts in all the earlier years wherein assessment was concluded under section 143(3) had accepted the nature of distribution revenue as Business Income as declared by appellant, however in the current years treated the distribution revenue to be ‘Royalty’ as per section 9(1)(vi) and Article 12 of the DTAA between India and the USA. It was held that the subscription charges or distribution revenue was derived by TIIPL (Indian Company) from distribution of the products through the cable operators and TIIPL (Indian Company) shares the revenue with the Appellant as agreed under the agreement. While distributing the products (i.e. Cartoon Network Channel, etc.), all rights in the product remained vested with the appellant. The distributor of the products did not have any right to change the content. Hence, the revenue derived on account of distribution of the products was business income and under no circumstance, could be held to be royalty. The distribution revenue earned by assessee could not be taxed as royalty albeit as a business income. Since, assessee had already offered income as business income in terms of the MAP, therefore, the income as declared by the assessee in accordance with the MAP and accepted by the Department in the earlier years had to be accepted. Accordingly, the additions made by AO were deleted.
FULL TEXT OF THE ITAT JUDGEMENT
The aforesaid appeals have been filed by the assessee against the impugned orders passed by the learned DRP/AO for the quantum of assessment for the assessment years 2009-10, 2010-11, 2012-13 and 2013-14. Since common issues are involved in all the appeals arising out of identical set of facts, therefore same were heard together and are being disposed of by this consolidated order.
2. In the grounds of appeal for AY 2009-10, the assessee has raised following grounds: –
“1. That on the facts and in circumstances of the case and in law, the impugned assessment order passed under Section 143(3) read with Section 144C(1) of the Income-tax Act, 1961 (`the Act’) is bad in law.
2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel (“Ld. DRP) and the Learned Deputy Director of Income-tax (“Ld. AO”) grossly erred in treating the amounts derived by the Appellant on account of Distribution revenue as royalty income without appreciating that Distribution revenue derived by the Appellant is neither Royalty under Section 9(1)(vi) of the Act nor Royalty under the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA’).
3. That on the facts and in circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in holding that the Appellant has a Permanent Establishment (`PE’) under Article 5(4) of the DTAA.
4. That on the facts and hi circumstances of the ease and in law, the Ld.AO erred in not allowing complete credit of taxes deducted at source without assigning any reason.
5. That on the facts and in circumstances of the case and in law, the Ld.AO erred in not allowing appropriate amount of interest under Section 244A of the Act.
6. That on the facts and in circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.”
Similar grounds have been raised in subsequent years as well, which sake of reference is reproduced herein below:-
Grounds of Appeal for AY 2010-11
1. That on the facts and circumstances of the case and in law, the impugned assessment order passed under Section 143(3) r.w.s. 144C(1) of the Income-tax Act, 1961 (`the Act’) is bad in law.
2. That on the facts and in circumstances of the case and in law, the Learned Dispute Resolution Panel-II (`Ld. DRP’) and the Learned Deputy Commissioner of Income-tax, Circle 3(1)(2), Intl. Taxation, New Delhi (“Ld. AO”) grossly erred in treating the amounts derived by the Appellant on account of Distribution revenue as royalty income without appreciating that Distribution revenue derived by the Appellant is neither Royalty under Section 9(1)(vi) of the Act nor Royalty under the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA’).
3. That on the facts and circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in holding that the Appellant has a Permanent Establishment (PE’) under Article 5(4) of the DTAA.
4. That on the facts and circumstances of the case and in law, the Ld.AO erred in not allowing complete credit of taxes deducted at source without assigning any reason.
5. That on the facts and circumstances of the case and in law, the Ld.AO erred in not allowing appropriate amount of interest under Section 244A of the Act.
6. That on the facts and circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.
Grounds of Appeal for AY 2012-13
1. That on the facts and circumstances of the case and in law, the impugned assessment order passed by the Learned Deputy Commissioner of Income-tax, Circle 3(1)(1), Intl. Taxation, New Delhi (“Ld. AO”) pursuant to the directions issued by the Learned Dispute Resolution Panel-II (`Ld. DRP’) under Section 143(3) read with section 144C(3) of the Income-tax Act, 1961 (`the Act’) is wrong and bad in law.
2. That on the facts and circumstances of the case and in law, the Ld. AO as well as the Ld. DRP grossly erred in treating the amount derived by the Appellant on account of distribution revenue from Turner International India Private Limited (`TIIPL’) as royalty under Section 9(1)(vi) of the Act and also as per the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA’).
3. That on the facts and circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in treating TIIPL as the Permanent Establishment (TE’) of the Appellant in India under Article 5(4) of the DTAA.
4. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP, having held that Appellant has a PE in India, ought to have taxed the distribution revenue under Article 7 of the DTAA instead of royalty in terms of Article 12(6) of the DTAA.
5. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP, erred in disregarding the resolution arrived at between the competent authorities of India and the USA for earlier year with regard to the taxability of distribution revenue as business profits.
6. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234B of the Act.
7. That on the facts and circumstances of the case and in law, the Ld.AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act.
Grounds of Appeal for AY 2013-14
1. That on the facts and circumstances of the case and in law, the impugned assessment order passed by the Learned Deputy Commissioner of Income-tax, Circle 3(1)(1), Intl. Taxation, New Delhi (“Ld. AO”) pursuant to the directions issued by the Learned Dispute Resolution Panel-2 (‘Ld. DRP’) under Section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (`the Act’) is wrong and bad in law.
2. That on the facts and in circumstances of the case and in law, the Ld. AO as well as the Ld. DRP grossly erred in treating the amount derived by the Appellant on account of distribution revenue from Turner International India Private Limited (‘TIIPL’) as royalty under Section 9(1)(vi) of the Act and also as per the provisions of India-USA Double Taxation Avoidance Agreement (`DTAA’).
3. That on the facts and circumstances of the case and in law, the Ld. DRP and the Ld. AO erred in treating TIIPL as the Permanent Establishment (`PE’) of the Appellant in India under Article 5(4) of the DTAA.
4. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP, having held that Appellant has a PE in India, ought to have taxed the distribution revenue under Article 7 of the DTAA instead of royalty, in terms of Article 12(6) of the DTAA.
5. That without prejudice to the grounds above, on the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP, erred in disregarding the resolution arrived at between the competent authorities of India and the USA for earlier year with regard to the taxability of distribution revenue as business profits.
6. That on the facts and circumstances of the case and in law, the Ld. AO/Ld. DRP erred in not allowing credit of taxes deduced at source of INR 175,334/- wrongly withheld on revenue not chargeable to tax in India as per Section 9 of the Act.
7. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234A and 234B of the Act.
3. Brief facts pertaining to the captioned matter are that the Appellant is a company incorporated under the laws of the United States of America (‘USA’) and is a tax resident of the USA during the captioned assessment years. During the relevant assessment years, the Appellant derived advertisement and distribution revenue from grant of exclusive rights to Turner International India Private Limited (“TIIPL”), an Indian Company, to sell advertising on the products and to distribute the products namely –
a) Satellite delivered television services called ‘Cartoon Network’, ‘TCM Turner Classic Movies’, ‘POGO’ and ‘Boomerang’;
b) From interactive entertainment services known as ‘CartoonNetworkIndia.com’ and `POGO.tv; and
c) From entertainment mobile telecommunications services ‘Cartoon network Mobile and Boomerang Mobile’ Any other television, interactive and/or telecommunications service for which TBSAP holds or acquires advertising and distribution rights for the Territory in the future.
4. TIIPL (Indian Company) acted as an exclusive distributor of the above mentioned products to the cable operators and other permitted systems on ‘principal to principal basis’. The ‘distribution agreement’ allowed TIIPL (Indian Company) to distribute the products to various cable operators and ultimately to the consumers in India. The distribution revenue collected by TIIPL was to be shared between TBSAP and TIIPL (Indian Company). However, vis-à-vis TIIPL (Indian Company) the copyright in the content always remained with the Appellant and at no point of time; same was transferred either to TIIPL or the sub distributor. The same is evident from Clause 5 of the Agreement concluded between the Appellant Company and TIIPL which clarifies that all copyrights and other propriety rights in the products (channels) shall vest solely in the appellant company.
5. In the earlier assessment years 2001-02 to 2004-05, the competent authorities of India and the USA reached an agreement and held that 10% of the advertising and subscription revenue received from Indian sources during the relevant year(s) was deemed to be the net profit chargeable to tax in India. Copy of order of US competent authority (CA) has been placed before us, the relevant extract of the order is reproduced below:
“Although we do not agree on the technical merits that the TW group had PEs in India, we reached a mutual agreement with a view to avoid double taxation. Per the terms of the mutual agreement, the TW group will report deemed net profit of 10% of the advertising and subscription revenue received from Indian sources and India will withdraw the balance of the PE adjustments…”
6. The Appellant in AYs 2007-08 & 2008-09 returned its income on the same basis as had been agreed to by the India and USA competent authorities. Full disclosure of the said fact giving the basis of declaration was made by the Appellant in its computation of income statement and notes to tax computation filed during the assessment proceedings. Copy of Computation and Notes to Computation for all AY 2007-08, 2008-09, 2009-10, 2010-11, 2012-13 and 2013-14 have placed on record.
7. It has been pointed out before us that on perusal of computation and the notes thereto, will clearly elucidate that for all assessment years mentioned above, income has been returned on exactly on same basis. In relation to the nature of income, the facts for all the assessment years remain to be the same as accepted by the Assessing Officer (‘AO’) in the assessment orders for AY 2007-08 and AY 2008-09. It has been clarified that the Appellant does not have any office, branch or place of management in India. Further, transactions with TIIPL are on a principal to principal basis. However, even if TIIPL is considered as an agent, then TIIPL is an agent of independent status and remuneration paid to TIIPL is at arm’s length. Accordingly, TIIPL cannot be considered as a Permanent Establishment (‘PE’) of the Appellant in India. Notwithstanding the afore-stated facts, it has been stated that the Appellant in order to avoid prolonged litigation and to buy peace and bring finality to Income-tax proceedings declared the income as per the MAP order.
8. The AO while concluding the assessment for the two preceding assessment years i.e. AY 2007-08 and AY 2008-09, made note of the basis on which the income was returned by the Appellant. Subsequently order under section 143(3) of the Income tax Act, 1961 (‘the Act’) was passed by the AO whereby the return position was accepted.
9. In re: the nature of income it has been stated by the assessee that despite the facts remaining the same, the Assessing Officer in all the assessment years i.e. AY 2001-02 to AY 2015-16, has consistently held Advertisement revenue to be Business Income following the MAP order. The Assessing Officer has also held distribution revenue to be Business Income and has accepted the attribution of 10% suo-moto made by the Appellant following the MAP Order in AY 2007-08 and AY 2008-09 in orders passed u/s 143(3) of the Act. However, he has digressed from the settled position in the captioned assessment years.
10. Though, the AO on relevant facts in all the earlier years wherein assessment was concluded under section 143(3) of the Act has accepted the nature of distribution revenue as Business Income as declared by the Appellant, however in the current years treated the distribution revenue to be ‘Royalty’ as per section 9(1)(vi) of the Act and Article 12 of the DTAA between India and the USA. Ld. Assessing Officer from the perusal of the distribution in sales agreement which has been reproduced in the assessment order from pages 6 to 8 came to the conclusion that as per the terms of agreement, in consideration for the rights license to TIIPL and TENA, TIIPL shall pay TENA a sum of 50% of the net revenue generated from the distribution and advertisement sales on channels subject to the minimum guarantee set out under the “distribution fee” and “advertisement sales fee” which is nothing but royalty both under the Income Tax Act and DTAA. He has also explained the process involved during the broadcasting to come to the conclusion that the revenue received by the assessee company by granting of license for viewership in India in the nature of royalty income
11. Thereafter after analyzing the relevant provision of Article 3(3) of the term royalties as defined in India USA DTAA and definition provided in the domestic law i.e., u/s.9(1)(vi) and held that the payment received by the assessee for grant of right or licenses to distribute the channel in India amounting to consideration for the transfer of or any rights ‘including the granting of license’ in respect of any copyright literally, artistic or scientific but work including films or video tapes for using connection with telephone……………….. ” would amount to royalty.
12. Thus, Assessing Officer in the impugned orders passed for captioned AYs observed that the Appellant had granted various rights relating to its products including the right to sub-license. He further held that in allowing TIIPL (Indian Company) to sub-distribute the encrypted television signals for commercial exploitation, the Appellant has granted the right to ‘communicate the work to public’ which is defined under Section 2(ff) of the ‘Copyright Act, 1957’. The subscription/ distribution revenue derived by the Appellant for granting right or license to distribute the products in India amounts to consideration for ‘the transfer of all or any right (including the granting of licenses) in respect of any copyright, literary, artistic or scientific work and therefore, held that the subscription/ distribution revenue derived by the Appellant is assessable to tax as royalty both under the domestic law and the DTAA. Relevant Extract of the order passed by the Ld. AO is reproduced herein below:
“The issues for consideration are, therefore, whether and in what circumstances can the assessee company claim to own a copyright (right to broadcast) over the work it broadcasts, and whether there is a transfer, by grant of a license or otherwise, of this right to broadcast under the distribution agreements entered into by the assessee company with the Indian entity.
…
Going by this principle, the assessee company can certainly claim authorship and copyright in a television program produced by it, even if the program is based on subject matter which is sourced from elsewhere. Thus, for example a programme produced by BBC World on any nature related event that is put together and presented in a certain original form and manner, could be a work authored by the assessee company and protected by a copyright vested in the assessee company. Similarly, a live telecast of a sporting event, where the filming, editing, special effects and supply of commentary are carried out by the assessee company, could constitute an artistic work in which the assessee company has copyrights.
Such copyrights would include the right to communicate the work to the public, or the right to broadcast the work. By entering into the distribution agreement with an Indian entity, the assessee company may transfer this right to communicate the work, to the Indian entity. The definition of the term ‘communication to the public’ in the copyright Act makes it clear that such communication is complete only when the work is made available for being seen or heard by the public. More specifically, the definition states that ‘communication through satellite or cable or any other means of simultaneous communication to more than one household or place or residence, including residential room of any hotel, shall be deemed to be communication.
As per the in operation MIB Guidelines the Indian Company “should also have the authority to conclude contracts on behalf of the channel for advertisements, subscription and programme content”.
In view of above it is clear that the subscription revenue received by the assessee company for granting right or license to distribute the channel in India would amount to consideration for “the transfer of all or any right (including the granting of licenses) in respect of any copyright, literary, artistic or scientific work “. Hence assessable to tax as royalty both under domestic law as well as DTAA.
The consideration of account of distribution rights is actually license of rights and the income cannot be held to be derived from sale revenue as in the above paragraph it has been demonstrated that assessee has not granted exclusive rights which is evident from the ‘grants of right ‘ clause of the agreement. Therefore, the assessee’s contention that such revenue amounts to business income is rejected.”
13. The draft orders of the AO have been confirmed by the Ld. Dispute Resolution Panel (‘DRP’) and in pursuant thereof, final assessment orders were passed by the AO.
14. At the outset Ld. Counsel for the appellant assessee, Sri Kunchan Kaushal submitted that the decision reached by the Indian Competent Authorities which, is a representative of the highest income tax authority (Central Board of Direct Taxes) as defined under section 119 of the Act, determining the nature/ character of income and then its acceptance by a Competent Authority of another country amounts to an agreement by two governments and should therefore, be adhered too. Such an agreement reached by the highest authority under the Act, was accepted by the Appellant and the Revenue Department in the earlier years after due application of mind by passing order under section 143(3) of the Act, without change in relevant and material facts. This makes the acceptance of the treatment of revenue from distribution activities as business income a fundamental aspect permeating through the different assessment years starting from AY 2001-02 to AY 2008-09 and it being found to be a fact one way or the other (either by the competent authorities or by the AO), it is therefore not appropriate to allow the position to be changed in a subsequent year. It was on similar set of facts that the Supreme Court in the case of Radhasoami Satsang v. CIT [[1991] 100 CTR 267 (SC)] had held that “where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.”
15. Accordingly, he submitted that in the absence of any material change justifying the revenue to take a different view of the matter in the current appeals, no contrary view to what had been decided by the AO in the earlier proceedings, should be taken and prayed that the income declared by the Appellant in its return of income on the basis of the MAP order may be accepted and the addition made by the AO without there being a change in the factual pattern/ character of income from the earlier years may kindly be deleted on this ground alone.
16. Without prejudice to the above submissions on merits, Ld. Counsel drew our attention to section 9(1)(vi) of the Act, which stipulates that income deemed to accrue or arise in India includes income by way of ‘royalty’ payable by –
“..(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ;..”
Explanation 2 defines ‘royalty’ as follows:
“Explanation 2 -For the purposes of this clause, “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for- ………………………………………………………………….
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or..”
17. He submitted that the Appellant being a tax resident of the United States of America (‘USA’) is eligible to opt for taxability of its income under India-USA DTAA as per the beneficial provisions of Section 90(2) of the Act. Article 12(3) of the DTAA defines royalty as:
‘(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof, and
18. He submitted that the term “copyright” as referred above has been defined in Section 14 of the Copyright Act, 1957 as an exclusive right, subject to the provisions of the Copyright Act, to do or authorise to doing of any of the acts specified in the said provision in respect of a work or any substantial part thereof. The term “work” is defined under Section 2(y) of the Copyright Act, 1957, as to mean any of the works namely a literary, dramatic, musical or artistic work or a cinematograph film and a sound recording. Sub-section (1) of Section 14 of the Copyright Act, 1957 lists several Acts in respect of a work in relation to which exclusive right would be termed as copyright. He further submitted that Section 37 of Copyright Act, 1957 separately defines broadcast reproduction right. Sub-section (1) of Section 37 of the said Act provides that every broadcasting organisation shall have special rights known as ‘broadcast reproduction right’ in respect of its broadcasts. Sub-section (2) of Section 37 provides that the broadcast reproduction right shall subsist until twenty-five years from the beginning of the calendar year next following the year in which the broadcast is made. It is further provided that during the aforesaid period, if any person performs any act specified in sub-section (3) of Section 37, then such person shall be deemed to have infringed ‘broadcast reproduction right’. In view of the above provisions of Section 14 and 37 of the Copyright Act, 1957, it is apparent that the ‘Copyright’ and ‘Broadcast reproduction right’ are two distinctive rights as specifically provided in the Copyright Act, 1957 itself. In the present facts of the case, the Appellant had merely granted rights to TIIPL (Indian Company) to “receive, promote, market, license, distribute and sub-distribute the products to cable, satellite, broadcast, hotel, interactive and telecommunication entities and other users”, “sell advertising” and performing ancillary activities such as billing, collection etc. It is further evident from Clause 5 of the agreement pertaining to Ownership that the Appellant “has the sole right to determine the content of the Products and reserves the right to change such content from time to time” and “subject to the licence granted in Paragraph 4 above, all copyright and other proprietary rights in the Products and in any promotional material relating to them are vested in and shall remain vested in” the Appellant. Accordingly, TIIPL (Indian Company) has no right to copy, modify or alter the content therein.
19. Thus, he submitted that the rights granted by the Appellant under the agreement is purely a commercial right for distribution of products to the ultimate viewers which clearly falls under the ‘Broadcast reproduction right’ given under Section 37 of the Copyright Act, 1957.
20. In light of the facts of the case stated above he submitted that in the present case, the subscription charges or distribution revenue is derived by TIIPL (Indian Company) from distribution of the products through the cable operators and TIIPL (Indian Company) shares the revenue with the Appellant as agreed under the agreement. While distributing the products (i.e. Cartoon Network Channel, etc.), all rights in the product remains vested with the Appellant. The distributor of the products does not have any right to change the content. The content can only be changed by the Appellant and no other party. Hence, the revenue derived on account of distribution of the products is business income and under no circumstance, can be held to be royalty. In support he placed reliance on the decision of the Hon’ble Income Tax Appellate Tribunal, Mumbai in the case of Dy. CIT v. Set India (P.) Ltd. [IT Appeal No. 4372 (Mum.) of 2004, dated 25-4-2012], wherein the Hon’ble Tribunal dealt with a similar question. Explaining the facts of the aforesaid case he pointed out that:
