Income from product distribution taxable as ‘business income’ not ‘Royalty’

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:

• Set Satellite (Singapore) Pte. Ltd. (‘SET Singapore’) was a tax resident of Singapore operating TV channels namely SET and SETMAX in India. Similar to the present facts of the case, SET Singapore entered into agreement with SET India for distribution of TV channels in India.
• Upon application made by SET Singapore, a withholding tax certificate was issued by the tax department holding distribution revenue as royalty income taxable chargeable to tax @ 15% on gross basis. Upon appeal before the CIT(A), the distribution revenue was held as business income and not royalty.

The Mumbai Tribunal held as under:

“6. Having heard both the sides, we observe that ld CIT (A) while examining the issue has stated that the Non­ resident company has granted non-exclusive distribution rights of the channels to the assessee and has not given any right to use or exploit any copyright. The assessee is no way concerned whether the programs broadcast by the Non-resident company are copyrighted or not. The said distribution is purely a commercial right, which is distinct from the right to use copyright. We observe that ld. CIT(A) has considered the provisions of Section 14 and Section 37 of the Copyright Act,  1957.It is observed that Section 37 of the Copyright Act deals with Broadcast Reproduction Rights (BRR) and same is covered under Section 37 of the Copy Right Act and not under section 14 thereof.We observe that ld CIT (A) has also considered Clause 6.3 of the distribution agreement entered into between assessee company and Non-resident company, which states that the right granted to the assessee under the agreement is not and shall not be construed to be a grant of any license or transfer of any right in any copyright. Ld CIT(A) has stated that the assessee submitted before him thatthe cable operator only retransmits the television signals transmitted to it by a broadcaster without any editing, delays, interruptions, deletions or additions and therefore payment made by the assessee to the Non-resident company is not for use of any copyright and consequently cannot be characterized as Royalty. Ld CIT (A) has 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.”

21. The key observations made by the Hon’ble ITAT are as under:

• The only right granted under the agreement is right to distribute channels in India and no right to either use or exploit the content is granted.
• The distribution right is a purely commercial right which is distinct from right to use copyright.
• Section 37 of the Copyright Act, 1957 deals with Broadcasting Reproduction Right which is a distinctive right from Copyright defined under Section 14 of the Copyright Act, 1957.
• The distributor merely retransmits the television signals received by it without any edits, delays, interruptions, deletions or additions, therefore, the payments made to it cannot be said to be for use of copyright and therefore, is not ‘royalty’ but in the nature of ‘business income’.

22. Accordingly, he submitted that even in the present case, it cannot be disputed that the appellant has neither granted any copyright to the TIIPL (Indian Company) nor has it allowed the distributor to change the content of the Channel. Accordingly, the receipt of income by the appellant can only be taxed as business income. Reliance was further placed on the decision of the Hon’ble Income Tax Appellate Tribunal, Mumbai in the case of Taj TV Ltd. v. ADIT [2016] 72 taxmann.com 143 (Mumbai). Wherein the facts of the aforesaid case were as follows:

• Taj TV Ltd. was a Mauritian company engaged in the business of broadcasting of sports channel, namely, ‘Ten Sports’ all across the globe including India.
• Taj TV had appointed its subsidiary, Taj India as an advertising sales agent to sell commercial slot/spot to the prospective advertisers and other parties in India in connection with the business of programming and telecasting of ‘Ten Sports’ Channel. Taj India was also appointed as an exclusive distributor of the TV Channel to the cable operators and other permitted systems on ‘principal to principal basis’.
• A ‘distribution agreement’ was entered by Taj Mauritius with Taj India for distribution of the channel to various cable operators and ultimately to the viewers in India. The distribution revenue collected by Taj India was to be shared between Taj Mauritius and ‘Taj India.
• Taj India entered into sub-distribution agreement independently with other parties in India. The Assessing Officer held that Taj Mauritius had income chargeable to tax in India on the ground that it had Permanent Establishment (‘PE’) in India in the form of its subsidiary.
• The issue before the Hon’ble ITAT was whether Taj India constituted an agency PE of Taj Mauritius in terms of article 5(4) of DTAA and whether Taj Mauritius has partially transferred the rights to the cable operators and therefore the revenue generated from such exploitation will be taxable as ‘Royalty’.

23. The Mumbai tribunal on the aforesaid facts held as under:

“…as stated earlier, under the distribution agreement, the assessee company has not granted any license to use any copyright to the distributor or to the cable operators. The assessee only makes available the content to the cable operators which are transmitted by them to the ultimate customer/viewers. Further, rights over the content at all times lies with the Assessee Company and are never made available with the distributors or cable operators. Thus, the finding of the CIT(A) on this score is also confirmed that even for the first period 01.04.2002 to 12th July, 2002 the said income will not constitute ‘royalty’.”

24. The key observations made by the Tribunal were as under:

• Taj India is not acting as agent of the Taj Mauritius but it had obtained the right of distribution of channel for itself and subsequently it is entering into contract with other parties in its own name in which the assessee is not a party.
• On the issue pertaining to distribution income being taxable as ‘royalty’, it was held by the Hon’ble ITAT that under the distribution agreement, Taj Mauritius has not granted any license to use any copyright to the distributor or to the cable operators. Taj Mauritius only made available the content to the cable operators which are transmitted by them to the ultimate viewers. Rights over the content at all times remained with Taj TV and were never made available to the distributors or cable operators. Thus, the payment for such rights could not be taxed as ‘royalty’.

25. Thus, like Taj TV, the appellant had appointed TIIPL (Indian Company) as an exclusive distributor of TV Channels (like Cartoon Network Channel, etc.) to the cable operators and other permitted systems on ‘principal to principal basis’. In other words, the Indian company i.e. TIIPL in the present case had acquired rights to distribute the channels/products and the Indian Company subsequently entered into contract with cable/DTH operator in its own name in which the appellant was not a party. It is in these contracts that the Indian company had the right to conclude contracts for each channel on its own behalf and not on the behalf of the appellant.

26. Similarly, in the present case as well, the Appellant much like, Taj TV Ltd maintained rights over the products at all times. Further, broadcasting was the sole responsibility of the Appellant and even the content on the TV Channelcould not be changed by any party except for the Appellant. As the facts of the present case are similar to that of Taj TV, it is therefore, respectfully submitted that the Ld. AO/ DRP were not at all justified in taxing the receipt of income earned by the Appellant from distribution of channel as royalty instead of business income.

27. He also invited to another decision of the Income Tax Appellate Tribunal in the case of MSM Satellite (Singapore) Pte Limited v. Dy DIT [ITA No. 2523/Mum/2010] wherein the facts of the case were as follows:

• MSM Satellite was a Singapore based company engaged in the Telecasting of Channels in the Indian sub­continent. M/s Multi Screen Media Pvt. Ltd. (‘MSM India’) through layers of multi system operators and cable operators collected subscription charges to enable individual customers to view the channels and the programmes telecast on such channels.
• The assessing officer contended that the subscription charges so collected by MSM satellite are in the nature of royalty for use of copyright.

28. The Tribunal on the aforesaid facts held that the amount received by the Singaporean company cannot be brought to tax in India as ‘Royalty’ and the same is in the nature of Business Income.

29. The aforesaid decision stands approved by the Hon’ble High Court of Bombay also wherein it has been held that:

“7. From the documents supplied to us, we could not gather any judgment of the High Court in case of this assessee or of any other assessee, dealing with such an issue. We have therefore applied our mind independently and heard learned counsel for the parties on this question.

….

10. …As noted, the assessee would receive a part of subscription charges paid by a large number of customers through different agencies. The said subscription charges would enable the customers to view channels operated by such assessee. The assessee was thus not parting with any of the copyrights for which payment can be considered as royalty payment. Term “copyright” has been defined in Section 14 of the copy right Act, 1957. A glance at the said provision would show that the copyright means exclusive right, subject to the provisions of this Act, to do or authorise the doing of any of the following acts specified in the said provision in respect of a work or any substantial part thereof. 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. In the present case, the assessee had not created any literary, dramatic, musical or artistic work or cinematograph film and/or a sound recording.

11. In fact, 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 to be 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.

12. Section 9 of the Act pertains to income deemed to accrue or arise in India. Clause (vi) of Section 9(1) pertains to income by way of royalty. Relevant portion reads as under:—

‘(vi) income by way of royalty payable by —

(a) the Government; or

(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; or

(c) a person who is non-resident, 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 in India or for the purposes of making or earning any income from any source in India:

Explanation 2 below sub-section (1) of Section 9 describes the term “royalty” for the purpose of said clause, relevant portion of which reads as under:—

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 ‘

13. In our opinion, these provisions would in no manner change the position. Only if the payment in the present case by way of a royalty as explained in explanation (2) below sub-section (1) of Section 9 of the Act, the question of applicability of clause (vi) of sub-section (1) of Section 9 would arise. Learned counsel for the revenue placed considerable stress on clause (v) of explanation (2) by virtue of which the transfer of the rights in respect of copyright of a literary, artistic or scientific wok including cinematograph film or films or tape used for radio or television broadcasting etc. would come within the fold of royalty for the purpose of Section 9(1) of the Act. We do not see how the payment in the present case could be covered within the said expressions. As noted, this is not a case where payment of any copyright in literary, artistic or scientific work was being made.

14. We may also notice that India Singapore Double Taxation Avoidance Agreement contains Article 12 pertaining to royalty and fees for technical service. Paragraph (3) of Article 12 defines the term “Royalty” as under—’The term “royalties” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use:

(a) any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, 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, property or information;

(b) any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4 (c) of Article8. ‘

15. Even going by this definition, the payment in question cannot be categorized as royalty.”

30. The key observations made by the Hon’ble High Court are as under:

• The Hon’ble bench of Bombay High Court specifically mentioned that it could not find any precedents to the present issue except in case of SET India (referred at para 18 above) and therefore, the Hon’ble Court has independently heard and applied their mind to the questions raised before it.
• It was observed by the Hon’ble High Court that the revenue from subscription charges received by MSM Satellite was for only viewing of the channels operated by it and it cannot be said that such revenue was for parting of any copyright.
• The Hon’ble High Court considered both Section 14 read with Section 2(ff) and Section 37 of the Copyright Act, 1957 dealing with both ‘Copyright’ and ‘Broadcasting Reproduction Right’ respectively.
• Section 14 read with Section 2(y) of the Copyright Act, 1957 defines copyright to mean an exclusive right to do or authorise to do any of the specified acts in respect of a work namely a literary, dramatic, musical or artistic work or a cinematograph film and a sound recording or any substantial part thereof. It was held that the telecasting of channels cannot be said to fall under the purview of the aforesaid definition.
• It was further observed that Section 37 of the Copyright Act, 1957 separately defines the rights of a broadcaster known as Broadcasting Reproduction Right proving that copyright is distinct from rights of a broadcaster and therefore, the rights provided by MSM Satellite does not fall under the ambit of royalty provided under Explanation 2 to Section 9(1)(vi) of the Act or Article 12 of the DTAA.

31. In light of the abovementioned decisions, he submitted that it is pertinent to note that even in the present case, the rights over the products and the content at all times lies with the Appellant. The Appellant had not granted any license to use any copyright, either to the distributor or to the cable operators. The Appellant has only granted rights for the purpose of selling advertising on the product (Channels, interactive entertainment services and entertainment mobile telecommunications) and distribution of such products (Channels, interactive entertainment services and entertainment mobile telecommunications) in India. TIIPL (Indian Company) does not have any right to edit, delay, interrupt, delete or add the products distributed by it, in fact, as per clause 5 of the agreement, the Appellant retains the sole right to determine the content of the products (Channels, interactive news services and information mobile telecommunications) and also reserves the right to change such content from time to time.

32. In the present facts of the case, TIIPL (Indian Company) has entered into contracts with various parties in its own capacity on principal to principal basis and not on behalf of appellant. It is reiterated that ‘copyright’ and ‘broadcast reproduction right’ are distinctive rights as specified in the Copyright Act, 1957. The Appellant has granted commercial rights in the nature of broadcast reproduction right to TIIPL (Indian Company) and the rights of a broadcaster is defined separately under Section 37 of the Copyright Act, 1957.

33. Therefore, the AO is not justified in taxing the revenue derived by the Appellant from distribution of products (Channels, interactive entertainment services and entertainment mobile telecommunications) as royalty instead of business income as also held by the Hon’ble Bombay High Court and Mumbai ITAT in the decisions cited above.

34. Ld. Counsel also drew our attention to Circular No. 6/2001 (Taxation of foreign telecasting companies – Guidelines for computation of income-tax, etc.) dated March 5, 2001 wherein the Central Board of Direct taxes (‘CBDT’) clarified that incomes like subscription charges receivable from affiliates in respect of pay channels and income from the sale or lease of decoders, etc., of a FTC shall continue to be taxed in accordance with guidelines prescribed for advertisement revenues. The relevant extract of the said Circular is reproduced below for sake of reference:

“2. The total income of FTCs from advertisements, hitherto computed on a presumptive basis shall now be determined by the Assessing officers in accordance with the other provisions of the Income-tax Act, 1961 in relation to the assessment year 2002-2003 and subsequent assessment years. In case, accounts for Indian operations are not available, the provisions of rule 10 of the Income-tax Rules, 1962 may be invoked. Where an FTC is a resident of a country with whom India has a Double Taxation Avoidance Agreement (DTAA), its business income (including receipts from advertisement) can be taxed only if it has a Permanent Establishment in India. Therefore, the taxability of an FTC in this regard shall be determined on the facts and circumstances of each case. Taxation of FTCs who are residents of countries with whom India does not have a DTAA, shall be governed by the provisions of section 5, read with section 9 of the Income-tax Act, 1961.

3. It may be reiterated that the guidelines for computation of profits of FTCs in Circular Nos. 742 and 765 were applicable only to the income stream from advertising. Other kinds of income like subscription charges receivable from cable operators in respect of pay channels and income from the sale or lease of decoders, etc., shall continue to be taxed in accordance with the paragraph 2 above.”

35. Therefore, in accordance with guidelines prescribed by the CBDT also, the distribution/subscription revenue is business income and cannot be characterized as royalty.

36. The AO in the impugned assessment order(s) has also alleged that the distribution revenue derived by the Appellant is in the nature of royalty in view of the retrospective amendment made in Explanation 6 in Section 9(1)(vi) of the Act. In this regard, it is reiterated that the Appellant has only granted rights to sell advertisement and distribute the products in India which does not fall under the purview of royalty income. Moreover, unless there is a similar change in the definition of royalty under the DTAA, the distribution revenue cannot be held to be royalty in view of the beneficial provisions of Section 90(2) of the Act. The Appellant places reliance on the decision of the Hon’ble High Court of Delhi in the decision of New Skies Satellite BV [2016] 68 taxmann.com 8 wherein it has been categorically held that:

“This Court is of the view that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach,  it is nevertheless a failure to give effect to the intended trajectory of the treaty. Employing interpretive amendments in domestic law as a means to imply contoured effects in the enforcement of treaties is one such attempt, which falls just short of a breach, but is nevertheless, in the opinion of this Court, indefensible.”

Therefore, he submitted that the income of the Appellant can only be classified as Business Income. The assertion made by the assessing officer regarding the amendment being retrospective in nature will under no circumstance effect the definition under DTAA. Accordingly the receipt cannot be characterised as Royalty.

37. Further, by virtue of Article 7(1) of the DTAA, the distribution revenue derived by the Appellant from TIIPL (Indian Company) shall not be taxable in India unless the Appellant has a PE in India and in such a case, only such income which is attributable to the PE in India shall be taxable. At this juncture, he placed reliance on the principle laid down by the Hon’ble Supreme Court in the decision of DIT v. Morgan Stanley [2007] 292 ITR 416/162 Taxman 165 (SC) wherein it was held that where arm’s length principle has been satisfied, no further profits would be attributable even if there exists a PE in India. The relevant extract of the decision is reproduced below:

“29. As regards determination of profits attributable to a PE in India (MSAS) is concerned on the basis of arm’s length principle we have quoted Article 7(2) of DTAA. According to AAR where there is an international transaction under which a non-resident compensates a PE at arm’s length price, no further profits would be attributable in India. In this connection, AAR has relied upon Circular No. 23 of 1969 issued by CBDT as well as Circular No. 5 of 2004 also issued by CBDT. This is the key question which arises for determination in these civil appeals.

….32. The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with PE in India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the PE in India. The quantum of taxable income is to be determined in accordance with the provisions of the IT Act. All provisions of the IT Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry forward and set-off losses, etc. However, deviations are made by DTAA in cases of royalty, interest, etc. Such deviations are also made under the IT Act (for example Sections 44-BB, 44-BBA, etc.). Under the impugned ruling delivered by AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm’s length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken, there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE,  has been remunerated on an arm’s length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of economic nexus is an important feature of attributable profits (profits attributable to PE).”

38. The aforesaid principle was also upheld by the Hon’ble Supreme Court in the decision of ADIT v. E-Funds IT Solution Inc. [2017] 86 taxmann.com 240 (SC).

39. In the present facts of the case also, the Appellant’s transactions with TIIPL (Indian Company) have been accepted at arm’s length by virtue of orders of this Tribunal for AYs 2009-10, 2010-11 and 2012-13 in TIIPL’s case. Copy of relevant orders was also filed before us. Therefore, in view of the decision of the Hon’ble Supreme Court (supra), since the arm’s length principle is satisfied, no further attribution should be made even if the Appellant is said to have PE in India.

ARGUMENTS ADVANCED BY THE LD. DEPARTMENTAL REPRESENTATIVE

40.   During the course of the hearing the Ld. DR handed over his detail submissions before us. In sum and substance the arguments of the Ld. DR can be summarised as under, which we shall dwell upon in detail:

• The Ld. DR has contended that that subscription/distribution fees received by assessee relates to ‘content’ protected by the Copyright Act in the form of “Copyright”, “Broadcast Right” and /or “Re­broadcast Rights/Broadcast Reproduction Rights” and therefore, such subscription fees is in the nature of royalty.
• It has been further contended that as per the Distribution and Advertising Sales Agreement between TBSAP and TIIPL, ‘Programme Content’ developed and owned by the assessee are incorporated in the products licensed to TIIPL with right to further license (sub­license), distribute, sub-distribute and assign to other parties.
• Under the agreement, TIIPL is authorized to conclude contracts on behalf of assessee protect copyrights in respect to such products and initiate legal action in case of infringement. Therefore, TIIPL is granted ‘copyright’ over such ‘Programme Content’.
• Reference has been made to the Policy Guidelines for down-linking of TV channels” dated 11.11.2015 issued by the Ministry of Information and Broadcasting which mandates the requirement of “exclusive marketing/distribution rights” for the channels and “authority to conclude the contracts on behalf of the channel for advertisements, subscription and programme content” for providing television satellite broadcasting service. Therefore, the argument that TIIPL does not have any right to edit, delay, interrupt or delete the products distributed by it is not tenable.
• Reliance has been placed on the decision of the Hon’ble SC in Civil appeal no.s 7326-7327of 2018 in case of Star India Pvt. Ltd. Vs. Department of Industrial Policy and Promotion & Ors. to state that the distribution fees[tariff] as received by the assessee relate to “content” which is protected and covered by the Copyright Act in form of “Copyright”, “Broadcast Right” and/or “Rebroadcast Right”
• The Ld. DR also placed reliance upon “Reference Interconnect Officer (‘RIO’) of Turner International India Private Limited – for digital addressable platform(s)” between Indian company and the distributor in India (cable operator/MSO/DTH operator) and alleged that equipment (IRD/CAM/boxes) given to Indian distributor is in the nature of ‘industrial, commercial or scientific equipment’ which constitutes royalty under DTAA.

DECISION

41. We have heard the rival submissions, perused the relevant finding given in the impugned orders as well as material referred to before us. The appellant-assessee is a US based Company and is tax resident of US. During the relevant assessment years, it has derived advertisement and distribution revenue from grant of exclusive rights to an Indian Company TIIPL to sale advertisement on the products and to distribute the products as incorporated above. The Indian Company has an exclusive distributor of the said products to the cable operators on principle to principle basis. The distribution agreement allowed the TIIPL to distribute the products to various cable operators and ultimately to consumers in India. The distribution revenue collected by the TIIPL was to be shared between the appellant. The ownership of copyright was stipulated in clause 5 of the agreement which is reproduced hereunder:

“5 Ownership

As between TBSAP and Company:

(a) TBSAP has the sole right to determine the content of the Products and reserves the right to change such content from time to time;

(b) Subject to the license granted in Paragraph 4 above, all copyrights and other proprietary rights in the Products and in any promotional material relating to them are vested in and shall remain vested in TBSAP.”

Thus, in view of the said agreement the appellant had the sole right to determine the content of the products and also the right to change such content from time to time and secondly, all the copyrights and other priority rights in the products and in any promotional material vested in the appellant company alone. It is a copyright of the content in the product which always remained with the appellant-assessee and was never transferred. The clause merely provides right to distribute the product.

42. In the case of the assessee in the earlier assessment year, the competent authority of India and USA had reached the agreement that 10% of the advertisement and subscription revenue received from the Indian sources was deemed to be net profit from the business chargeable to tax in India. In line of such an agreement the assessee in Assessment Years 2007-08 and 2008-09 had related its income on the same basis as agreed by the competent authority of both the countries. Accordingly fully disclosed its computation of income along with notice to the tax computation filed during the return of income/assessment proceedings, the same has been accepted by the Department in the assessment orders for Assessment Years 2007-08 and 2009. Though assessee’s case was throughout had been that it does not have any kind of plea and the transaction with TIIPL are on principle to principle basis and even if TIIPL is an agent of independent status, then remuneration paid to TIIPL was at arm’s length, and therefore, TIIPL cannot be considered to be PE of assessee in India. It has been brought on record that in all the years and in subsequent years also Assessing Officer has held the advertisement revenue to be the business income following the MAP order. However, during the impugned assessment years, the said position has been digressed by the Assessing Officer without there being any material change in the facts and circumstances or the terms of agreement or the business mutual. Therefore, we are in tandem with the contention of the ld. counsel that when this fundamental aspect is permeating through different assessment years which have been accepted by the parties, then as a rule of consistency, the same position should not be altered or should be allowed to be changed.

43. Be that as may be, now we will independently analyse, whether distribution revenue on the facts of the present case can be considered as ‘royalty’ in terms of Article 12 of the DTAA between India and USA. Ld. Assessing Officer had applied the provision of domestic law u/s.9(1)(vi) and held that payment received by the assessee for grant of right or license to distribute the channel in India tantamount to transfer of rights including the granting of license in respect of any copyright, etc. would amount to royalty. The relevant finding and observation of the Assessing Officer has already been dealt above. On perusal of the material placed on record and the facts of the case it is quite evident that the appellant-assessee has merely granted rights to TIIPL 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. Clause 5 as reproduced above provides the sole ownership of the rights and the contents of the products to the assessee company and Indian Company had no right to copy, modify or alter the content therein. The definition of royalty as given in Article 12(3) which has been reproduced above, envisages that “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 ” The Term copyright has not been defined in the DTAA albeit has been defined in Section 14 of the Copyright Act, 1957 as an exclusive right to do or authorize being of any of the acts specified in the said provision in respect of work or any substantial part thereof likewise work being defined in Section 2(y) of the said Act. which is namely, 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. Section 37 of the Copyright Act separately defines broadcast reproduction right. The Term ‘Copyright’ has defined in Section 14 and ‘broadcast reproduction right’ has been defined in Section 37 and both are two distinctive and separate rights. ‘Broadcast reproduction right’ is not reckoned as copyright. Here, in this case, appellant never granted any licenses to use any copyright, either to distributor or to the cable operator albeit it has only granted right for purpose of selling advertisement on the product that are channels, etc. and distribution of such products in India. The Indian company is carrying out the distribution and selling of the advertisement and it does not have any kind of right to edit, interpret, add the products distributed by it. The assessee company only granted commercial rights in the nature of ‘broadcast reproduction right’ to the TIIPL, which has been separately defined u/s. 37 of the Copyright Act and therefore, it cannot be held that revenue derived by the assessee for distribution of products is taxable as ‘royalty’ albeit it is a business income of the assessee.

44. The Assessing Officer has tried to justify the tax the distribution revenue in the nature of royalty by applying the retrospective amendment made in Explanation-6 of Section 9(1)(vi) of the Act. Such an approach cannot be upheld because there is no similar amendment in the definition of royalty under the DTAA and it has been well settled by the Hon’ble Delhi High Court in the case of New Skies Satellite BV (supra), that amendment in the domestic law cannot be imported or read into DTAA.

45. The Ld. Departmental Representative has relied upon various clauses of the agreement between the Appellant Company and TIIPL to state that the content in the product was licensed to TIIPL. Accordingly, the amount received by the Appellant Company from TIIPL (Indian Concern) needs to be brought to tax as Royalty and not business income. However, the Ld. DR has completely ignored Clause 5 of the agreement (reproduced above). Considering the specific clause, no inference to the effect that the copyright of the content in the product has been transferred can be drawn. The clause makes it clear that the copyright in the content of the product always remains with the Appellant and is never transferred. The Appellant merely provides right to distribute the product. The ability to initiate legal action against the infringer of the copyright by TIIPL is merely a commercial term incorporated in the agreement to safeguard the interest of the appellant company which is situated in the United States.

46. The Ld. DR has also relied upon the down linking guidelines to state that in order to ensure that the channels are down linked in India an application must be made to the concerned authority in India by a company located in India. The assessee company must be an exclusive distributor of the channel and should have the ability to conclude contracts in India on behalf of the channel for the programme content. TIIPL has been granted exclusive distribution rights by the Appellant Company with respect to the products (channels) in India. Surely, TIIPL can enter into an agreement with respect to the content of the programmes but this right does not allow them to take ownership of the content. The copyright within the product has always been vested with the Appellant Company. The clause must be seen from a business prospective and in a wholesome manner. What is streamed is uplinked and down linked without any change in the content. The Indian distributor cannot separate content from the channel stream. The product in the case at hand is a channel and what is streamed is the content, all of which gets distributed without any separation or dissection. Accordingly, the amount received from TIIPL cannot be brought to tax as ‘royalty’ in the hands of the Appellant Company.

47. Ld. DR has tried to distinguish the facts of the captioned matter from the case of MSM Satellite (Supra) and stressed heavily upon the ability of the consumer to ‘store’ and ‘interact’ with the content. However, the aforementioned factors cannot form basis for distinguishing the judgement rendered by the Hon’ble Bombay High Court. The crux and the core issue involved in the decision rendered by Hon’ble Bombay High Court and the impugned issue remains to be the same, i.e., whether the amounts received by a non­resident company for granting distribution rights to an Indian Company could be brought to tax as royalty or not. The Hon’ble Bombay High Court has categorically held that subscription charges received by MSM Satellite was for only viewing of the channels operated by it and it cannot be said that such revenue was for parting of any copyright. Accordingly, if the aforesaid principle of the Hon’ble Bombay High Court is to be followed, then the amount received by the appellant company from the Indian concern is to be brought to tax as Business Income.

48. Lastly, the Ld. DR has relied heavily upon the decision rendered by the Hon’ble Supreme Court in the case of Star India Private Limited v. Department of Industrial Policy and Promotions & Others. [ C.A. Nos. 7326-7327 of 2018] to contend that the distribution fees[tariff] as received by the assessee relate to “content” which is protected and covered by the Copyright Act in form of “Copyright”, “Broadcast Right” and/or “Rebroadcast Right”. Accordingly, the amounts received by the Appellant Company needs to be brought to tax as Royalty.

49. If we go through judgment, it is seen that the issue before the Hon’ble Supreme Court was, whether the TRAI only had the power to regulate the means of transmission and did not have the authority to regulate the content of the program. The Petitioners in the concerned case wanted to be covered under the Copyright Act instead of the TRAI Act. However, the Hon’ble Supreme Court had held otherwise. Further, the question and the Act that were considered in the aforesaid decision has nothing to do with levy of Income-tax and characterization of income in the Income-tax Act, 1961. Accordingly, the ratio of Star India does not have any direct application in the case at hand. The issue before the Hon’ble Apex Court was on the regulatory powers of TRAI and whether the same is inconsistent with the Copyright Act. Therefore, the legal question as well as the judgement of the Apex Court relate to a subject which is alien to the issue involved in the case at the hand. It is a settled position of law that without appreciating the ratio decidendi of the judgement i.e. the rule of law on which judgement is based, a judgment cannot be applied blindly on different set of facts. Thus, the reliance of the Ld. Departmental Representatives on the judgement of the Hon’ble Apex Court has no application in the case at hand.

50. However, if we read para 60 of the aforesaid decision, wherein the Hon’ble Apex Court while delivering the verdict has recognized that the broadcasting is a separate right from the Copyright. Relevant Paragraph for the sake of ready reference is reproduced hereunder:

“60. A reading of the aforesaid provisions, according to the learned Senior advocate for the appellants, makes it clear that broadcasters may, in fact, be the owners of the original copyright of a work- for example, if they themselves have produced a serial. They may also be the copyright owners of the broadcast of this serial which is a separate right under the Copyright Act which they are able to exploit, and if there is a re-broadcast of what has already been copyrighted, this again is protected by Chapter VIII of the Copyright Act.”

The argument before the Hon’ble Apex Court on the interpretation of the Copyright Act, 1957 was that, in case of a broadcaster there may be three different rights. First right when the broadcaster has produced the serial and second when they broadcast the serial and third again re broadcast. The Hon’ble Apex Court has concluded the same in para 64 as hereunder:

“The picture that, therefore, emerges is that copyright is meant to protect the proprietary interest of the owner, which in the present case is a broadcaster, in the “work”, i.e. the original work, its broadcast and/or its re­broadcast by him.”

51. Consequently, even the observations of the Hon’ble Apex Court in fact supports the case of assessee and its reliance on Bombay High Court that the broadcasting right a separate right which cannot come within the purview of copyright gets fortified. Even at the cost of repetition, it is again reiterated that even as per the agreement the copyrights in the product/channel has not been transferred to the Appellant and therefore it would not fall in the first category i.e. wherein the broadcaster himself has produced the serial.

52. The Ld. DR was not correct to compare with the first example wherein the broadcaster himself has produced the serial which is not the case of the Appellant Company In fact the case of the Appellant is covered by the judgement of the Hon’ble Bombay High Court in the case of MSM Satellite (Singapore) Pte Ltd, (Supra) wherein the Hon’ble Bombay High Court emphatically observed that there is a difference in copyright and “broadcast reproduction rights”. The Hon’ble High Court has observed that Section 37 of the Copyright Act, 1957 separately defines the broadcast reproduction right and therefore it is different from the payment of any copyright in literary, artistic or scientific work.

53. Just by way of reference, the famous treaty of Salmond on Jurisprudence, it is explained how a legal right is created. While explaining the jurisprudence behind the concept of right, it is mentioned as hereunder:

“It is to be noticed that in order that an interest should become the subject of a legal right, it must obtain not merely legal protection, but also legal recognition.”

Meaning thereby, a right can become a legal right only if it is recognized by law and also protected by law. It is further supported by the Latin maxim, Ubi Jus Ibi Remedium i.e. for every wrong there is a remedy. If one applies the same principle in the present case, the copyright and broadcasting reproduction right has been separately recognized in different chapters of the Copyright Act, 1957. The Copyright is defined in Chapter III of the Copyright Act while the broadcasting reproduction rights are a part of Chapter VIII of the same Act. This means the law has recognized separately these two rights. Again separate legal protection is provided for these two different rights. Accordingly, even following the jurisprudential principle it may be observed that the law has itself recognized two different right and exploitation of one cannot be confused with the use of other.

54. Thus, we hold that the distribution revenue earned by the appellant-assessee cannot be taxed as royalty albeit as a business income. Since, assessee has 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 has to be accepted. Accordingly, the additions made by the Assessing Officer are deleted.

55. In the result, all the appeals of the assessee are allowed.

Order pronounced in the open Court on 30th September, 2020.