Payments made under distribution agreement not taxable in India: Delhi HC

CIT – International Taxation Vs. ESPN Star Sports Mauritius S.N.C ET Compagnie (Delhi High Court)

The Delhi HC affirms the order of ITAT that ESPN Distribution does not constitute a PE in India and income earned from sports channel distribution cannot be taxed as royalty under provisions of the ITA read with India-Mauritius DTAA.

Background

The Delhi High Court (“Delhi HC”) affirms the order of Income Tax Appellate Tribunal (“ITAT”) holding that ESPN Distribution (Mauritius) SNC ET Compagnie (“Taxpayer”) does not have a permanent establishment (“PE”) in India i.e., neither fixed place PE nor a Dependent Agent PE (“DAPE”), from distribution of Star Sports and ESPN channels in India. The Delhi HC also affirmed that the subscription and distribution revenues generated pursuant under the distribution contracts is not taxable as royalty under section 9 of the Income-tax Act, 1961 (“ITA”) read with the Article 12 of the India-Mauritius Double tax avoidance agreement (“DTAA”).

Facts of the case  

Taxpayer, a Mauritius based company entered into two distribution agreements with ESPN Star Sports and ESPN Software India Private Limited [“ESPN India”] (collectively, with ESPN Start Sports referred to as “Indian Distributors”), for the distribution of Star Sports and ESPN channels in India. The distribution agreement between the Taxpayer and the Indian distributors, inter-alia, provided as under:

• The transaction is on a principal to principal basis between the Taxpayer and the Indian Distributors and is limited only to conferring the right of distribution of sport channels in India through the cable operators.
• No privity of contract between the Taxpayer and the end customers/cable operators, wherein only the Indian Distributors can enter into contracts with them and are responsible to initiate any legal action for any breach of contract against them.

• The Taxpayer does not convey, confer, grant, assign or otherwise provide Distributor with copyright, title or any other proprietary or ownership interest in or to the ESPN Service or any elements thereof.
• The Indian Distributors undertakes to distribute the ESPN Service provided by the Taxpayer in its entirety, without any alteration, editing, dubbing, scrolling or ticker tape, substitution or any other modification, addition, deletion or any other variation whatsoever.

The Assessing Officer (“AO”) held that the Taxpayer had a fixed place PE in India and consequently assessed 70% of the gross distribution revenue as business income of the Taxpayer in India. For other assessment years under consideration, the AO treated the said revenue as royalty. On appeal by the Taxpayer, the Commissioner of Income Tax (Appeals) [“CIT(A)”] not only confirmed the view taken by the AO, it additionally held that ESPN India constituted a DAPE of the Taxpayer.

On appeal before the ITAT, the Tribunal reversed the findings of CIT(A) and noted that in accordance with the terms of the distribution agreement between the Taxpayer and the Indian Distributors, there exists no fixed place PE or DAPE of the Taxpayer in India and further, the payments made to such distributors cannot be considered as royalty.

The matter reached before the Delhi HC on further appeal by the tax department.

Decision of the HC

The Delhi HC affirmed the findings of the ITAT and held that:

Taxpayer does have a fixed place PE in accordance with Article 5(2) of India-Mauritius DTAA

• No material has been bought on record to show that the Taxpayer has control over the business of the Indian Distributors or the premises of the Indian Distributors have been given at the disposal of Taxpayer or the Taxpayer carries on any kind of business through the premises of such distributors.
• Indian Distributors only renders support services which enable the Taxpayer in turn to render services to the end customers.
• In accordance with the ruling of the Supreme Court of India (“SC”) in the case of E-Funds IT Solution Inc.,[1] functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business is not a proper and appropriate test for determination of PE.

Taxpayer does not have a DAPE in accordance with Article 5(4) of India-Mauritius DTAA

• Indian Distributors stood conferred with an independent right to enter into contracts with cable operators for channel distribution and the Taxpayer was not privy to those agreements
• The Indian Distributors bear associated distribution costs and expenses
• The agreements unequivocally establish that the Taxpayer is in no manner connected with the contracts executed by the Indian Distributors with cable operators and other intermediaries. Even the right to initiate legal action by the latter is available to be exercised only against the Indian Distributors.

The Delhi HC, further concluded that since there is no PE in the present case, the issue of profit attribution would clearly not arise in light of judgements like E-Funds IT Solution Inc., BBC Worldwide Ltd.,[2] and Set Satellite (Singapore) Pte. Ltd.[3]

Payments made to Taxpayer were not in the nature of royalty under Section 9 of the ITA read with Article 12(3) of the DTAA

• On a prima-facie reading of the text of Article 12(3) of the DTAA, for classifying subscription and distribution revenue as royalty, the tax authorities would have to establish that the payments received by the Taxpayer was “consideration for the use of or the right to use any copyright or a literary, artistic or scientific work”.
• Mere re-transmission of services received to the subscribers will clearly not amount to a transfer of a right to use a copyright. On a careful analysis of the agreement conditions between the Taxpayer and Indian Distributors, there was no transfer of copyright.
• The HC in addition relied on the case of Engineering Analysis,[4] that also dealt with this issue and re-emphasized that there exists a clear distinction between a broadcasting right and a copyright and in the present case, there was neither a transfer of copyright nor broadcasting right.

Analysis

Appeals to High Court is maintainable only on a substantial question of law (not a question of fact or only a question of law). However, this Delhi HC framing the “substantial question of law” questions the rationale behind allowing such appeals on account of their being a “substantial question of law”. The phrase “substantial question of law” was defined by SC in the case of Sir Chunilal Mehta & Sons v. Century Spinning and Mfg. Co. Ltd.,[5] stating that a question of law can be considered to be substantial in two instances:

• Firstly, whether the question “is of general public importance” or of inter-party importance?
• Secondly, if the question substantially affects the rights of the parties, then can the question still admit alternative judicial views?

In addition, Courts have regularly stated that a Second Appeal in a High court would only subsist if there is a substantial question of law, and in so far as the question of facts is concerned the first appellant court is the final court.[6] A finding of fact may also give rise to a substantial question of law, inter alia, in the event, the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration.[7]

Taxation of payments made under distribution agreements has undergone a lot of litigation, which is primarily contingent upon the factual intricacies inherent to each case and not a question of law. Historically, the courts have noted that such payments are in the nature of business income,[8] which could not be taxed in accordance with the terms of the relevant tax treaty, in the absence of PE. However, there are contrary rulings on this issue. Notably, the case of Google India (P.) Ltd.,[9] wherein the ITAT Bangalore applied the ratio of Synopsis International Ltd.,[10] and held that the payment made under distribution contracts can be considered as royalty if it involves the incidental use of intellectual property. However, the same ITAT Bangalore in Google Ireland Ltd.,[11] and Google India (P.) Ltd.,[12] dealing with the same factual question held that the incidental use of intellectual property cannot be a ground to characterise an income as royalty and affirmed the ruling of Sheraton International Inc.[13]

Further, in the case of BBC World Distribution Ltd.,[14] the Delhi HC dealing with the question of affirmed with the ITAT Delhi view and noted that assessee itself had no right over copyright of content of news channel and it had only transferred broadcasting reproduction right and thus, distribution fee could not be construed as royalty.

This ruling of Delhi HC also favoured this jurisprudence, that the payment of distribution services not involving the transfer of copyright, cannot be considered as royalty, following the important precedent cited by SC in Engineering analysis, which clearly differentiated between the transfer of copyright and broadcasting reproduction rights.

Additionally, this ruling has a significant importance in regards to the fact that it considers the issue of whether the Taxpayer has a fixed place PE or DAPE in India before addressing the issue of whether subscription and distribution revenue can be considered as royalty or not, establishing a uniform tax approach to address such issues. With regards to the issue of PE specifically, this ruling is consistent with many favourable rulings,[15] holding that for a fixed place PE or DAPE to arise, following considerations must be noted:

• Authority to conclude contracts on behalf of the Taxpayer.
• Must be at the disposal and control of the taxpayer.

In view of the above precedents, it is noted that the taxability of distribution agreements has a finding of fact-based analysis, the determinants of the taxability of which i.e., royalty and fixed place PE have a settled position of law before the SC. Thus, bereft to be applicable under the ambit of substantial question of law in this Delhi HC ruling, since the finding of fact by the ITAT was not based on inadmissible evidence which was even affirmed by this HC.[16]

Time has come for the high courts to approach these parameters to interpret substantial question of law in great detail before approaching the stage of formulating such questions,[17] (which the High Court failed in the present case) and for the tax authorities to conduct a proper tax assessment and scrutiny for a predictable tax environment and to reduce pendency of appeals.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. The Commissioner of Income Tax impugns the decision rendered by the Income Tax Appellate Tribunal¹ dated 21 November 2022 in ITA 382/2023 for Assessment Year² [AY 2003­2004], ITA 381/2023 [AY 2004-2005], ITA 380/2023 [AY 2009­2010], ITA 344/2023 [AY 2011-2012], ITA 336/2023 [AY 2012-­2013], ITA 773/2023 [AY 2014-2015] and ITA 333/2023 [AY 2014­2015]. The following questions are proposed for our consideration: –

“2.1 Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT is correct in holding that assessee did not have a dependent agent PE (DAPE) in India by observing that the transaction between the assessee and ESPN India is limited to conferring of right to distribute the channels of ESPN Star Sport in India through cable operators in an independent manner when it has been brought out that the assessee had complete control over sale of agent, bore commercial risk on behalf of the agent thereby not appreciating the principle of substance over form?

2.2. Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT is correct in holding that the assessee did not have a fixed place PE in India by observing that there was nothing to suggest that the assessee had any control over the business/premises of ESPN India when it has been clearly brought out that the assessee and ESPN India has common management and identical functions and for all practical purposes the distinction between the two was insignificant?

2.3 Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT is correct in holding that assessee has no business connection in India and is not taxable in terms of section 9(1) of the Income Tax Act when the assessee had complete control over sale of the agent and bore commercial risk on behalf of the agent?

2.4 Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT is correct in holding that if the purported PE is remuneration on arm’s length as subsidiary company, no further attribution of profit be made on foreign company, when the functions performed by the subsidiary company are much more what has been reported before TPO Analysis?

2.5 Whether on the facts and in the circumstances of the case and in law, the Ld. ITAT is correct in holding that no further attribution of profit be made on foreign company when the TP analysis did not adequately reflect the FAR borne by the Indian enterprise, for additional functions/risk performed by it as DAPE?”

2. The appeals emanate from agreements entered into between ESS Distribution (Mauritius) S.N.C. ET Compagnie³, ESPN Star Sports and ESPN Software India Private Limited⁴. ESS Distribution (Mauritius) holds a valid Tax Residency Certificate⁵ and claims benefits in terms of the provisions contained in the India -Mauritius Double Taxation Avoidance Agreement⁶ . The subject matter of the agreements executed by it with ESPN Star Sports and ESPN India pertain to distribution of Star Sports and ESPN channels in India. Both ESPN Star Sports and ESPN India are designated as Distributors under the two agreements.

3. The appellants invoke Articles 5 and 12 of the India – Mauritius DTAA asserting that ESS Distribution (Mauritius) has a fixed place Permanent Establishment ⁷ and / or in the alternative by virtue of the distribution agreements with the Indian entities, the Court should recognise the existence of a Dependent Agent PE⁸ . They additionally raise the issue of subscription and distribution revenues generated pursuant under the aforenoted contracts as being liable to be viewed as royalty.

4. Insofar as the issue of a fixed place PE and DAPE is concerned, the ITAT has returned compelling findings of fact to hold that there is no fixed place PE. It becomes pertinent to note at this stage that when assessment was undertaken under Section 143(1) of the Income Tax Act, 1961⁹, the Assessing Officer¹⁰ had while dealing with the facts as they obtained for AY 2003-2004 held that ESS Distribution (Mauritius) had a fixed place PE in India and consequently 70% of the gross distribution revenue was liable to be treated as business income of the assessee in India. On the appeal which was taken by ESS Distribution (Mauritius), the Commissioner of Income Tax (Appeals)¹¹ had not only confirmed the view taken by the AO, it additionally held that ESPN India constituted a DAPE of the assessee. It was the aforesaid decision which was thereafter taken in appeal before the ITAT.

5. We note that insofar as the issue of fixed place PE is concerned, the ITAT has held as under: –

“22. We have considered rival submissions and perused the materials on record. At the outset, we need to examine, whether the  assessee has a fixed place PE in India. The distribution agreement  between the assessee and ESPN India clearly stated that the  transaction is on principal to principal basis. The agreement further  allowed ESPN India to enter into agreement with sub-distributors/cable operators so that the channels can be distributed to end consumers in India. As per the terms of the agreement, the  revenue earned from distribution of channels has to be shared between the assessee and ESPN India in certain ratio. The materials  on record demonstrate that ESPN India is carrying on its  distribution activity as well as other activities, such as, acquisition  and allotment of air time for advertisement and sale/leasing of decoders. No material has been brought on record by the Revenue  to suggest that the assessee has any kind of control over the  business of ESPN India or the premises of ESPN India have been  given at the disposal of the assessee or the assessee carries on any kind of business through the premises of ESPN India.

ADIT Vs. E Funds IT Solutions Inc. (supra), the Hon’ble Supreme Court while deciding the issue of existence to fixed place PE has held as under:

“5. As against this, Shri S. Ganesh, learned senior counsel for the respondents, has argued that the tests for whether there is a fixed place PE have now been settled by the judgment of this Court in Formula One (supra), and that it is clear that for a fixed place PE, it must be necessary that the said fixed place must be “at the disposal” of the assessees, which means that the assessees must have a right to use the premises for the purpose of their own business, which has not been made out in the facts of this case. He further argued that, on the facts of this case, both the US companies as well as the Indian company pay income tax, and the Transfer Pricing Officer by his order dated 22nd February, 2006, has specifically held that whatever is paid under various agreements between the US companies and the Indian company are on arm’s length pricing and that, this being the case, even if a fixed place PE is found, once arm’s length price is paid, the US companies go out of the dragnet of Indian taxation. He also adverted to Article 5(6) to state that the mere fact that a 100% subsidiary may be carrying on business in India does not by itself means that the holding company would have a PE in India. Further, according to learned counsel, so far as the service PE is concerned, even the assessing officer did not find that such a PE existed.

According to him, under Article 5(2)(l), it is necessary that the foreign enterprises must provide services to customers who are in India, which is not Revenue’s case as all their customers exist only outside India. Further, according to the learned counsel, the entire personnel engaged in the Indian operations are employed only by the Indian company and the fact that the US companies may indirectly control such employees is only for purposes of protecting their own interest. Ultimately, there are four businesses that the assessees are engaged in, namely, ATM Management Services, Electronic Payment Management, Decision Support and Risk Management and Global Outsourcing and Professional Services. Since all these businesses are carried on outside India and the property through which these businesses are carried out, namely ATM networks, software solutions and other hardware networks and information technology infrastructure were all located outside India, the activities of e-Funds India are independent business activities on which, as has been noticed by the High Court, independent profits are made and income assessed to tax under the Income Tax Act. According to the learned counsel, “agency PE” was never argued before the assessing officer and even before the ITAT. Therefore, no factual foundation for the same has been laid. Equally, according to the learned counsel, the settlement procedure availed for the assessment years in question cannot be said to be binding for subsequent years as they were without prejudice to the assessees’ contention that they have no PE in India. He also relied upon the OECD Commentary, paragraph 3.6 in particular, to demonstrate that the so-called admissions made and relied upon by the three authorities below were correctly overturned by the High Court.

Learned counsel also stated that the ground of adverse inference was never argued or put before any of the authorities below, and the only place that it could be found is in the assessment order for the year 2003-04, which order became non-est as it was substituted by the agreement entered into between the parties ending in withdrawal of appeals before the CIT (Appeals). Thus, according to the learned counsel, the view of the High Court is absolutely correct and should not be interfered with. Learned counsel also argued that the cross- appeals of the Revenue were correctly dismissed in that, even though the ITAT decided the case in law against the assessees, yet it found on facts, differing from the calculation formula by the authorities below, that nil tax was payable. This is the only part of the ITAT judgment upheld by the High Court, and should not, therefore, be disturbed in any case.

6. Before we deal with the submissions made on both sides, it is necessary to first set out the statutory background. This is contained in Section 90 of the Income Tax Act, before it was amended in 2009. Section 90(1) and 90(2) of the Income Tax Act, as it then stood, read as under:

“Section 90. Agreement with foreign countries.—

1) The Central Government may enter into an agreement with the Government of any country outside India—

(a) for the granting of relief in respect of—

(i) income on which have been paid both income-tax under this Act and income-tax in that country; or

(ii) income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or

(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or

(d) for recovery of income-tax under this Act and under the corresponding law in force in that country, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.”

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12. Thus, it is clear that there must exist a fixed place of business in India, which is at the disposal of the US companies, through which they carry on their own business. There is, in fact, no specific finding in the assessment order or the appellate orders that applying the aforesaid tests, any fixed place of business has been put at the disposal of these companies. The assessing officer, CIT (Appeals)and the ITAT have essentially adopted a fundamentally erroneous  approach in saying that they were contracting with a 100%  subsidiary and were outsourcing business to such subsidiary, which resulted in the creation of a PE. The High Court has dealt with this aspect in some detail in which it held:

“49. The Assessing Officer, Commissioner (Appeals) and the tribunal have primarily relied upon the close association  between e-Fund India and the two assessees and applied functions performed, assets used and risk assumed, criteria to determine whether or not the assessee has fixed place of business. This is not a proper and appropriate test to determine location PE. The fixed place of business PE test is different. Therefore, the fact that e-Fund India provides  various services to the assessee and was dependent for its  earning upon the two assessees is not the relevant test to determine and decide location PE. The allegation that e-Fund India did not bear sufficient risk is irrelevant when deciding whether location PE exists. The fact that e-Fund India was reimbursed the cost of the call centre operations plus 16% basis or the basis of margin fixation was not known, is not relevant for determining location or fixed place PE.

Similarly what were the direct or indirect costs and corporate allocations in software development centre or BPO does not help or determine location PE.  Assignment or sub-contract to e-Fund India is not a factor or rule which is to be applied to determine applicability of Article 5(1). Further whether or not any provisions for intangible software was made or had been supplied free of cost is not the relevant criteria/test. e-Fund India was/is a separate entity and was/is entitled to provide services to the assessees who were/are independent separate taxpayers. Indian entity i.e. subsidiary company will not become location PE under Article 5(1) merely because there is interaction or cross transactions between the Indian subsidiary and the foreign Principal under Article 5(1). Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location PE. The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place PE exists.”

13. It further went on to hold that the ITAT’s finding that the assessees were a joint venture or sort of partnership with the Indian subsidiary was wholly incorrect. Also, none of these arguments have been invoked by the Revenue and such a finding would, therefore, be perverse. After citing Klaus Vogel on Double Taxation Conventions, Arvid A. Skaar in Permanent Establishment: Erosion of a Tax Treaty Principle and Bollinger vs. Commissioner, 108 S.Ct.1173, the High Court found against the Revenue, holding that there is no fixed place PE on the facts of the present case. We agree with the findings of the High Court in this regard.

14. Reliance placed by the Revenue on the United States Securities and Exchange Commission Form 10K Report, as has been correctly pointed out by the High Court, is also misplaced. It is clear that the report speaks of the e-Funds group of companies worldwide as a whole, which is evident not only from going through the said report, but also from the consolidated financial statements appended to the report, which show the assets of the group worldwide.

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16. This report would show that no part of the main business and revenue earning activity of the two American companies is carried on through a fixed business place in India which has been put at their disposal. It is clear from the above that the Indian company only renders support services which enable the assessees in turn to render services to their clients abroad.

This outsourcing of work to India would not give rise to a fixed place PE and the High Court judgment is, therefore,  correct on this score.”

6. It is thus manifest and as would be evident from the definitive findings of fact recorded, the appellant had woefully failed to adduce any evidence which may have lent credence to its contention of a fixed place PE. Proceeding to deal with the argument of DAPE, the ITAT has held as follows:-

“23. As per the ratio laid down in the aforesaid decision of the Hon’ble Supreme Court, burden is on the revenue to establish the existence of fixed place PE. Insofar as the issue, the ESPN Indian  is a dependent agent of the assessee, the agreement between the  parties does not make out a case of DAPE. There is no privity of contract between the assessee with the cable operators or end  customers in India. It is ESPN India who has entered into  contracts with cable operators for distribution of the channels in  India and responsible for breach of contract with cable operators.  The transaction between the assessee and ESPN India is limited to conferring of right to distribute the channels of ESPN Star Sports in India through cable operators. How, ESPN India does such  distribution activity is not the concern of the assessee. The  assessee is only concerned with share in distribution revenue  depending on the total amount received by ESPN India from sub-distributors. We have also noted that in certain instances of alleged breach of contract between ESPN India and cable  operators, it is ESPN India, which is liable and not the assessee.

Further, other factors, such as, acquisition of air time and sale of decoders clearly indicate that ESPN India has its independent  business and cannot be called as dependent agent of the assessee.  Though, the Revenue has alleged that ESPN India is a DAPE,  however, it has failed to demonstrate that in terms with Article  5(4) of India – Mauritius Tax Treaty, ESPN India habitually exercises authority to conclude contracts on behalf of the  assessee.

24. That being the factual position emerging on record, in our view, ESPN India cannot even be considered to be a DAPE of the assessee. The decisions cited before us, particularly the decision of the Coordinate Bench in case of TAJ TV Ltd. (supra) and Turner Broadcasting Systems Asia Pacific Inc (supra) squarely apply to the facts of the present appeal. Therefore, following them, we hold that the assessee does not either had a fixed place PE or dependant agent PE in India under Article 5 of the India-Mauritius Tax Treaty. In any case of the matter, it is an undisputed factual position that ESPN India has been remunerated at arm’s length and there are no adjustments suggested by the TPO in any of the assessment years under dispute. That being the case, no further attribution of profit can be made to the PE. In this regard, we rely upon the decisions cited by learned counsel for the assessee. Thus, we hold that the distribution revenue received by the assessee is not taxable in India.”

7. The aforesaid conclusions of the ITAT clearly merit no interference nor do they give rise to any substantial question of law.

8. While dealing with the issue of royalty, the ITAT has on a detailed review of the contract terms and the facts as placed before it recorded the following conclusions:-

“13. A reading of the aforesaid Article would make it clear that the  expression royalty means consideration received for the use of or right to use of any copyright of literary, artistic or scientific work (including cinematograph films and films or tapes for radio or television broadcasting, any patent trade-mark design, model plan,  secret formula plan etc. Admittedly, the expression copyright has not been defined either under the Income Tax Act or under the India–Mauritius Tax Treaty. Therefore, we have to find the meaning of copyright in the Copyright Act. As discussed earlier, section 14 of the Copyright Act defines copyright as under:

14. Meaning of copyright.— For the purposes of this Act, copyright means the exclusive right subject to the provisions of this Act, to do or authorise the doing of any of the following acts in respect of a work or any substantial part thereof, namely–

(a) in the case of a literary, dramatic or musical work, not being a computer programme,–

(i) to reproduce the work in any material form including the storing of it in any medium by electronic means;

(ii) to issue copies of the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public;

(iv) to make any cinematograph film or sound recording in respect of the work;

(v) to make any translation of the work;

(vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-clauses (i) to (vi);

(b) in the case of a computer programme:

(i) to do any of the acts specified in clause (a);

2[(ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programmer:

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.]

(c) in the case of an artistic work,–

3[(i) to reproduce the work in any material form including–

(A) the storing of it in any medium by electronic or other means; or

(B) depiction in three-dimensions of a two-dimensional work; or

(C) depiction in two-dimensions of a three-dimensional work;]

(d) in the case of a cinematograph film,–

4[(i) to make a copy of the film, including–

(A) a photograph of any image forming part thereof; or

(B) storing of it in any medium by electronic or other means;]

5[(ii) to sell or give on commercial rental or offer for sale or for such rental, any copy of the film.]

(iii) to communicate the film to the public;
(e) in the case of a sound recording,–

(i) to make any other sound recording embodying it 6[including storing of it in any medium by electronic or other means];

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15. It is further relevant to observe, the consequences for infringement of copyright and broadcast reproduction right have been dealt with differently under the Copyright Act. Thus, on a conjoint reading of section 14 and 37 of the Copyright Act, a holistic view can be taken that broadcast reproduction right is distinct and separate from Copyright Act.  In case of DDIT Vs. SET India Pvt. Ltd (supra), the Coordinate Bench, while dealing with aforesaid aspect, has held as under:

“16. Having heard both the sides, we observe that Id CIT(A) while examining the issue has stated that the Non­resident 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 Non­resident 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 Id 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 Id 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 that the cable operator only retransmits the television signals transmitted to it by a broadcaster without any editing, delays, interruptions, deletions, or additions and, therefore the 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 Acts well as Article 12 of the Treaty. Accordingly, the payment is not in the nature of Royalty but in the nature of business income.”

9. In order to appreciate the arguments which were addressed before us, we deem it apposite to briefly notice the following salient clauses as they appear in the agreement between ESPN Star Sports and ESS Distribution (Mauritius):-

“1(a) ESS hereby appoints Distributor as distributor to distribute and, or make available for distribution (subject to ESS’s prior written approval, not to be unreasonably withheld or delayed) the international ESPN network programming service (the “E$PN Service”) throughout the Area effective April 1, 2002 through March 31, 2003(the “Term”) and Distributor hereby, accepts such appointment.  The Term shall automatically renew for successive periods of one year each unless ES5 gives written notice to Distributor of its intent not to renew at least forty-five days prior to the scheduled expiration of the original or then applicable renewal Term.

(b) Distributor acknowledges and agrees that the above appointment is limited and qualified to the extent of solely making the ESPN Service available in the Area to approved sub distributors in strict accordance ‘With the terms and conditions herein. Distributor further agrees that nothing in this Agreement shall provide Distributor with any rights whatsoever to the ESPN Service, nor convey, confer, grant, assign or otherwise provide Distributor with copyright, title or any other proprietary or ownership interest in or to the ESPN Service or any elements thereof.  All rights in the content of the ESPN Service are expressly reserved by ESS. Distributor shall not use, authorize or permit the use of the FSPN Service, or any element thereof, for any purpose other than the purpose expressly specified under this Agreement. Notwithstanding anything contained in this Agreement, if the Distributor becomes aware of any infringement or threatened infringement in the Area, of the. rights and entitlements of ESS in the ESPN Service, the Distributor shall inform ESS of such infringement. ESS may require Distributor to take, either by itself or through a person authorised by it, all reasonable steps to end such infringement, including initiating appropriate legal action on behalf of ESS.

(c) Distributor agrees and undertakes to distribute the ESPN Service provided by ESS in its entirety, without any alteration,  editing, dubbing, scrolling or ticket tape, substitution or any other modification, addition, deletion or any other variation whatsoever .

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(2) Neither Distributor nor ESS shall have, or shall hold itself out as having, the right or authority to bind the other or to assume,  create or incur any liability or any obligation of any kind, express  or implied, against or in the name of or on behalf of the other.

3(a) Distributor shall comply with all laws, rules and regulations, and &hall obtain all necessary licenses and permits.

(b)  Distributor acknowledges that the names and marks of ESPN STAR Sports and ESPN (and the names of certain programs  which appear in the ESPN Service) are the exclusive property of ESPN, Inc., ESS and its program suppliers and that Distributor has  not acquired and will not acquire any proprietary rights therein by reason of this Agreement. Subject thereto and to the terms of this  Agreement, ESS grants to the Distributor a non exclusive license to  use the said names and marks on advertising and promotional  material, notepapers, stationery and related materials used by the  Distributor for its business activities under the Agreement. ESS  shall have the right to approve any of Distributor mentioning or  using of such names or marks and publicity about ESS or the  programming included in the ESPN Service.  Distributor shall not publish or disseminate any material which violates any restrictions imposed by ESS or ESPN, Inc. program suppliers and disclosed to Distributor by ESS Distributor shall be entitled to allow sub-distributors appointed by it to distribute the ESPN Service to use the names and marks of ESPN STAR Sports and ESPN to the extent permitted hereunder. Upon ESS’s request, Distributor shall promptly discontinue, and sha11 procure all sub-distributors to promptly discontinue, use of any material or material containing any of the names and marks of ESPN STAR Sports and ESPN.

4(a) In consideration of the appointment of the Distributor to distribute the ESPN Service in the Area, Distributor shall pay ESS (subject to deduction, if required, of all applicable taxes), the aggregate of the following amounts :

(i) a minimum guaranteed amount of USD 9,500,000 (United States Dollars Nine Million Five Hundred Thousand only) per annum; and

(ii) an amount which is equal to 88% of the excess of the total gross revenues of the Distributor per annum over and above USD 9,500,000. For this purpose gross revenues shall mean the amount due to the Distributor from distributing the ESPN Service in the Area as reduced by any taxes that are withheld in the Area.

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7(c) ESS will indemnify Distributor from and against any and all claims, damages, liabilities, costs and expenses arising out of the distribution, pursuant to this Agreement, of the ESPN Service  to the extent that such claims, damages, liabilities, costs and expenses are: (i) based upon alleged libel slander, defamation or  invasion of the right of privacy (as such concepts are limited and defined by New York and United States federal law), or violation  or infringement of copyright or literary or dramatic rights or the  requirements of applicable laws within the Area arising out of the  content of the ESPN Service (other than music performing or music  synchronization rights); and (ii) based upon the distribution of the  ESPN Service as furnished by ESS without alterations,  modifications, variations, additions or deletions by Distributor. It is  hereby agreed and declared that ESS makes no representation or  warranty as to whether or not the ESPN Service or any of its  content requires any governmental consent or approval within the  Area to distribute.

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(e) Except as herein provided to the contrary, neither Distributor nor ESS shall have any rights against the other party hereto for claims by third persons or for the non operation of facilities or the non-furnishing of the ESPN Service if such non operation or non-furnishing is due to failure of equipment, action or claims by any third person, labour dispute or any cause beyond such party’s  reasonable control.”

10. A similar agreement came to be executed between ESS Distribution (Mauritius) and ESPN India. That agreement incorporates the following salient clauses:-

“1(a) ESS Distribution hereby appoints Distributor as distributor to  distribute and, or make available for distribution (subject to ESS  Distribution’s prior written approval, not to be unreasonably withheld or delayed) the international ESPN network programming  service (the “ESPN Service”) throughout the Area effective April 1,  2002 through March 31, 2003 (the “Term”) and Distributor hereby,  accepts such appointment. The Term shall automatically renew for successive periods of one year each unless ESS Distribution gives written notice to Distributor of its intent not to renew at least thirty days prior to the Scheduled expiration of the original or then applicable renewal Term.

(b) Distributor acknowledges and agrees that the above  appointment is limited and qualified to the extent of solely making  ESPN Service available in the Area to approved sub-distributors in  strict accordance with the terms and conditions herein. The terms  of appointment of each sub-distributor shall provide that if this Agreement is terminated, then at ESS Distribution’s election, (i) the arrangement with such sub-distributor may be terminated; or (ii)  the rights and obligations of distributor under the arrangement with such sub-distributor may, automatically, be assigned to ESS  Distribution. Distributor further agrees that nothing in this agreement shall provide Distributor with any rights whatsoever to the ESPN Service, nor convey, confer, grant, assign or otherwise provide Distributor with copyright, title or any other proprietary or ownership interest in or to the ESPN Service or any elements thereof. Distributor shall not use, authorize or permit the use of the ESPN Service or any element thereof, for any purpose other than the purpose expressly specified under this Agreement. Notwithstanding anything contained in this Agreement, if the Distributor becomes aware of any infringement or threatened infringement in the Area of-any intellectual property in the ESPN Service, the Distributor shall inform ESS Distribution of such infringement. ESS Distribution may require Distributor to take, either by itself or through a person authorised by it, all reasonable steps to end such infringement including initiating appropriate legal action on behalf of ESS Distribution.

(c) Distributor agrees and undertakes to distribute the ESPN Service provided by ESS Distribution in its entirety, without any alteration, editing, dubbing, scrolling or ticker tape, substitution or any other modification, addition, deletion or any other variation whatsoever.

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2. Neither Distributor nor ESS Distribution shall have, or shall hold itself out as having, the right or authority to bind the other or  to assume, create or incur any liability or any obligation of any kind, express or implied, against or in the name of or on behalf of the other.

3(a) Distributor shall comply with all laws, rules and regulations, and shall obtain all necessary licenses and permits.

(b) Distributor acknowledges that the names and marks of ESPN STAR Sports and ESPN (and the names of certain programs  which appear in the ESPN Service) are the exclusive property of ESPN, Inc., ESPN STAR Sports and their program suppliers and  that Distributor has not acquired and will not acquire any proprietary rights therein by reason of this Agreement. Subject  thereto and to the terms of this Agreement, ESS Distribution grants  to the Distributor a non exclusive license to use the said names and marks on advertising and promotional material, notepapers,  stationery and related materials used by the Distributors for its  business activities under the Agreement. ESS Distribution shall have the right to approve any of Distributor mentioning or using of such names or marks and publicity about ESPN STAR Sports or the programming included in the ESPN Service. Distributor shall not publish or disseminate any material which violates any restrictions imposed by ESPN STAR Sports or ESPN, Inc. program suppliers and disclosed to Distributor by ESS Distribution. Upon ESS’s request, Distributor shall promptly discontinue the use of any material or material containing any of the names and marks of ESPN STAR Sports and ESPN.”

11. Pursuant to the rights conferred, ESPN India entered into distribution agreements with various affiliates in India. One of the Service Contracts so executed and which forms part of our record contains the following stipulations pertaining to the license:-

“B. THE SERVICE

The Licensor is offering two services viz. ESPN Network Programming Service (“ESPN Service)” and Star Sports International Programming Service (“STAR Sports Service”). The Services are available In two packages to the Affiliate namely, a Bouquet, In which both ESPN Service’ as well as Star Sports  Service will be provided (“Bouquet”) and Alacarte under which package the Affiliate can choose to take either ESPN Service or Star Sports Service. The rates for both these packages have been fully communicated to and understood by the Affiliate. The Affiliate has indicated his choice by ticking the relevant box.

VI. GENERAL TERMS AND CONDITIONS

1. NON EXCLUSIVE RIGHT

The Licensor grants to the affiliate the non-exclusive right to distribute the Service in the area for reception by subscribers of the Distribution System(s) (referred to in Article II) whether directly, or through its sub operators and sub affiliates/cable operators of the Affiliate listed at Annexure I, collectively referred to as the Affiliate’s  Subscribers. For purposes of this Agreement, sub-operators’, ‘sub affiliates/ cable operators’ shall mean and include and person or entity that receives the service from the affiliate or from a person permitted by the affiliate to provide the service and who re-transmits the same for reception by subscribers. The licensor may terminate this Agreement, at any lime, without liability, upon prior written notice to the affiliate, if he believes in good faith and reasonable judgment that it is threatened by or may be subject to legal, governmental or other adverse action under applicable treaties, tariffs, laws, Rules, regulations or orders, that may restrict the right of the licensor to provide the Service or any part thereof to the Affiliate, or limit the licensor’s right or authorization to offer the service. The  Licensor may deactivate/ disconnect the Service hereunder  provided and/or terminate this Agreement at any time  without liability, by prior written notice to the Affiliate. If the Licensor exercises its discretion to discontinue the  Service in the area. For purposes of this Agreement,  subscriber shall include any person or entity that receives  the Service for exclusive viewership at a location within the  area from the affiliate, or from sub-operators, sub-affiliate/ cable operators of the Affiliate and does not further transmit  the Service to any other person.

2. OBLIGATIONS OF THE AFFILIATE

The Affiliate shall at its own cost and expense cause the  service to be received only from the designated satellite(s) and shall ensure distribution Systems on a separate,  dedicated channel(s) (the ‘Channel(s)’) for reception by all  its Subscribers. The Affiliate shall be responsible, at its sole cost and expenses for obtaining all licenses and permits necessary for the foregoing. The Affiliate shall use its best efforts to maintain a high quality of signal transmission for the service and shall take all other necessary steps to ensure that (i) the service is received only by subscribers who pay the full applicable subscription fees for such Service and (ii)  no location for which the applicable, subscription fees is not paid shall be capable of viewing the service. The Affiliate  further agrees and undertakes that it shall cause continuous distribution of the service to all its Subscribers during Its  telecast without blacking it out or interfering with it in any manner whatsoever.

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4. REPRESENTATIONS AND WARRANTIES OF THE LICENSOR

The Licensor represents and warrants the Affiliate that it has the requisite power and authority to enter into this Agreement and to fully perform its obligations hereunder. It is clarified that licensor’s authority to Licence the Service is derived from agreements granted to the Licensor by ESPN Star Sports (‘ESS’) for the ESPN Service and for the Star Sports Service (the ESS Agreements”). 

Affiliate expressly acknowledges and agrees that upon termination of either of the ESS Agreements by ESPN Star Sports, this agreement shall stand terminated as concerns the service for which the ESS Agreement(s) has been terminated.

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15.3 No Agency

Neither Affiliate nor Licensor shall be or hold itself out as the agent of the other under this Agreement. No Sub-operators/Subscribers shall be deemed to have any privity of contract or direct contractual or other relationship with Licensor by virtue of this Agreement or by Licensor’s delivery of the Service of the Affiliate.”

12. We also deem it apposite to notice Articles 5 and 12 as contained in the India – Mauritius DTAA and which are reproduced hereinbelow: –

“Article 5 — Permanent establishment

1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

2. The term “permanent establishment” shall include—

(a) a place of management;

(b) a branch;

(c) an office;

(d) a factory;

(e) a workshop;

(f) a warehouse, in relation to a person providing storage facilities for others;

(g) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources;

(h) a firm, plantation or other place where agricultural, forestry, plantation or related activities are carried on;

(i) a building site or construction or assembly project or supervisory activities in connection therewith, where such site, project or supervisory activity continues for a period of more than nine months.

[(j) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) for a period or periods aggregating more than 90 days within any 12 month period.]

3. Notwithstanding the preceding provisions of this article, the term “permanent establishment” shall be deemed not to include:

(a) the use of facilities solely for the purpose of storage or display of merchandise belonging to the enterprise;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise;

(e) the maintenance of a fixed place of business solely—

(i) for the purpose of advertising,

(ii) for the supply of information,

(iii) for scientific research, or

(iv) for similar activities,

which have a preparatory or auxiliary character for the enterprise.

4. Notwithstanding the provisions of paragraphs (1) and (2) of this article, a person acting in a Contracting State for or on behalf of an enterprise of the other Contracting State [other than an agent of an independent status to whom the provisions of paragraph (5) apply] shall be deemed to be a permanent establishment of that enterprise in the first-mentioned State if:

(i) he has and habitually exercises in that first-mentioned State, an authority to conclude contracts in the name of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; or

(ii) he habitually maintains in that first-mentioned State a stock of goods or merchandise belonging to the enterprise from which he regularly fulfils orders on behalf of the enterprise.

5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted exclusively or almost exclusively on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.

6. The fact that a company, which is a resident of a Contracting State controls or is controlled by a company which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise) shall not, of itself, constitute either company a permanent establishment of the other.

Article 12 — Royalties

1. Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.

2. However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the royalties.

3. 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, any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The provisions of paragraphs (1) and (2) shall not apply if the recipient of the royalties, being a resident of a Contracting State carries on business in the other Contracting State in which the  royalties arise, through a permanent establishment situated therein,  or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties are paid is effectively connected with such  permanent establishment or fixed base. In such a case, the  provisions of article 7 or article 14, as the case may be, shall apply.

5. Royalties shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that State, where, however, the person paying the royalties whether he is a resident of a Contracting State, or not, has in a Contracting State a permanent establishment in connection with which the liability to pay the royalties was incurred, and such royalties are borne by such permanent establishment, then such royalties shall be deemed to arise in the Contracting State in which the permanent establishment is situated.

6. Where, by reason of a special relationship between the payer and the recipient or between both of them and some other person, the amount of royalties paid, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the recipient in the absence of such relationship, the provisions of this article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.”

13. Taking up the issue of royalty first, it is manifest from a reading of Article 12(3) that payments would fall within its ambit provided they represent “consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work………… ”. As is evident from a reading of the agreement conditions extracted hereinabove, there was no transfer of copyright. The agreement that ESS Distribution (Mauritius) came to execute conferred no right with respect to copyright upon the Indian entities. This aspect, in any case, is liable to be answered in favour of the assessee bearing in mind the decision of the Supreme Court in Engineering Analysis Centre of Excellence Private Limited vs. Commissioner of Income Tax and Another¹² and which had clearly held and recognized the distinction between a broadcasting right and a copyright as flowing from Sections 14 and 37 of the Copyright Act, 1957¹³ . This quite apart from the undisputed fact that insofar as the present respondent is concerned, even the question of broadcasting rights does not arise since it was in no manner connected therewith.

14. Insofar as the issue of fixed place PE is concerned, the same clearly stands concluded against the appellants by virtue of the findings of fact returned by the ITAT. The case of a DAPE appears to have been raised in the backdrop of Article 12(4)(i) of the India-Mauritius DTAA. However, the contract stipulations would unerringly point towards a manifest absence of a right having been conferred or an authority granted to conclude contracts in the name of ESS Distribution (Mauritius). The ITAT has found that the Indian entities stood conferred with an independent right to enter into contracts with cable operators for channel distribution and that ESS Distribution (Mauritius) was not privy to those agreements. In terms of those agreements, it is the Indian entities which bear associated distribution costs and expenses. The agreements unequivocally establish that ESS Distribution (Mauritius) is in no manner connected with the contracts executed by the Indian entities with cable operators and other intermediaries. Even the right to initiate legal action by the latter is available to be exercised only against the Indian entities.

15. As far as the additional issue of profit attribution is concerned, we note that since there is no PE, the issue of profit attribution would clearly not arise. This issue, in any case, stands concluded in light of the judgment rendered by the Supreme Court in Commissioner of Income Tax vs. E-Funds IT Solution Inc.¹⁴

16. In view of the aforesaid, we find no merit in the instant appeals.

They shall stand dismissed.

Notes:

¹ ITAT

² AY

³ ESS Distribution (Mauritius)

⁴ ESPN India

⁵ TRC

⁶ DTAA

⁷ PE

⁸ DAPE

⁹ Act

¹⁰ AO

¹¹ CIT(A)

¹² (2022) 3 SCC 321

¹³ 1957 Act

¹⁴ (2018) 13 SCC 294

Notes:

[1] (2018) 13 SCC 294.

[2] [2011] 16 taxmann.com 162 (Delhi).

[3] [2008] 173 Taxman 475/307 ITR 205 (Bom.)

[4] (2022) 3 SCC 321.

[5] AIR 1962 SC 1314 (para 12).

[6] Hemavathi & Ors. v. Hombegowda, Civil Appeal No (s). 5780-5781/2023 (@ SLP (C) No. (s) 19975-19976/2022), Sept 11,2023.

[7] Vijay Kumar Talwar v. Commissioner of Income-tax, New Delhi [2011] 196 Taxman 136 (SC).

[8] ITO v. Right Florist (2013) 25 ITR (T.) 639; Pinstrom Technology Ltd., v. ITO (2012) 54 SOT 78 (Mum. Trib.) and Yahoo India Pvt. Ltd., v. CIT 140 TTJ 195 (Mum. Trib.).

[9] [2018] 93 taxmann.com 183 (Bangalore – Trib.).

[10] [2013] 212 Taxman 454 (Karnataka).

[11] [2023] 148 taxmann.com 106 (Bengaluru – Trib.).

[12] [2023] 154 taxmann.com 427 (Bangalore – Trib.).

[13] [2009] 178 Taxmann 84/313 ITR 267 (Delhi).

[14] [2024] 158 taxmann.com 4 (Delhi).

[15] International Global Networks BV v. ADIT, International Taxation [2017] 84 taxmann.com 188 (Mum.); Turner Broadcasting System Asia Pacific Inc. v. Deputy Director of Income Tax, International taxation, New Delhi, [2020] 120 taxmann.com 155 (Delhi – Trib.); Taj TV Ltd. v. Additional Director of Income-tax (International Taxation), Range-2, Mumbai, [2017] 77 taxmann.com 355 (Mumbai – Trib.).

[16] Affirmed by the Delhi HC at para 6 and 7.

[17] Section 260A (3) of the Income Tax Act, 1961.

Source: CIT – International Taxation Vs. ESPN Star Sports Mauritius S.N.C ET Compagnie (Delhi High Court); ITA 333/2023; 13/02/2024; 2003-2004, 2009-2010, 2012-13, 2014-15