Case Law Details
Facts:- MSM Satellite Singapore Pte Ltd (SET), a tax resident of Singapore, is engaged in the business of acquiring television programs, motion pictures and sports events. It exhibits the same on its television channels from Singapore.
SET had entered into an agreement with Global Cricket Corporation (GCC), another tax resident of Singapore. GCC had granted rights to SET to transmit, broadcast, exhibit any moving or audio visual representations of cricket matches. The rights were for certain specified territories including India.
The Assessing officer (AO) treated the consideration paid to GCC in the nature of royalty under the Indian domestic tax law. Further, according to the AO since the consideration was deemed to accrue or arise in India, the payment received by GCC were subject to tax in India. Given that SET had failed to withhold taxes on payments made to GCC, the AO held SET as an „assessee in default? and sought to recover taxes from SET.
On appeal, the first appellate authority disagreed with the AO holding that the consideration does not arise in India by virtue of Article 12(7) of the India-Singapore Tax Treaty (Tax Treaty). Revenue filed an appeal against the order before the Income-tax Tribunal (Tax Tribunal).
Ruling of the Tribunal
- As per the Tribunal, under the Tax Treaty, royalty is said to arise in India only if the condition specified in Article 12(7) of the Tax Treaty are satisfied.
- Under the first limb of Article 12(7), the payment is said to arise in India if the payer is a resident of India. Given that in the present case, the payment was made by SET (a Singapore based company) therefore the royalty cannot arise in India.
- Under the second limb of Article 12(7), royalty could arise in India if the payment is made by a non-resident and such a non-resident has a Permanent Establishment (PE) in India.
- Mere existence of PE in India cannot lead to a conclusion that royalty arises in India.
- For royalty to arise in India, it is essential that liability to pay such royalty is “incurred in connection with” and is “borne by” the PE of the payer in India.
- An existence of an economic link between liability for such payment of royalty and PE is essential.
- In the facts of the given case, the Tribunal held that there is no economic link between the payment of royalties and the alleged PE of SET in India. The economic link is entirely with SET?s office in Singapore. Thus, the payment to GCC cannot be said to have been incurred „in connection? with SET?s alleged PE in India.
- The alleged PE in India was not involved with the acquisition of the right to broadcast the cricket matches, nor did the PE bear the cost of payment. Therefore royalty cannot be treated as borne by the PE.
- Even if is assumed that payment to GCC qualifies as royalty, by virtue of Article 12(7) of the Tax Treaty royalty paid by SET to GCC does not arise in India and hence not taxable in India.
Conclusion
This ruling is of importance to foreign media companies broadcasting their channels in India from an overseas jurisdiction. The Indian Revenue authorities have held that the foreign media companies have a PE in India. Given that many of these companies make significant payments to foreign vendors such as transponder fees, license fees etc, based on the principles of this decision, it could be contended that the foreign media companies are not liable to withhold Indian taxes on such payments.
Source: DDIT Vs. SET Satellite (Singapore Pte Ltd. Now known as MSM Satellite (Singapore) Pte Ltd. Mumbai, ITA Nos. 7574/Mum/2004 (Mumbai Tribunal) dated 25 June 2010
