Citation : SET Satellite (Singapore Pte Ltd.) Vs. ADIT, ITA No. 7349/Mum/2004
Court: Income Tax Appellate Tribunal, Mumbai
In a recent case of SET Satellite Singapore Pvt. Ltd. the Income Tax Appellate Tribunal, Mumbai (“ITAT”) has held that royalty payments made by a resident of Singapore to another Singaporean entity, as consideration of rights to transmit and broadcast matches etc. in India, are not subject to Indian withholding tax requirements. The ITAT in this case relied on Article 12(7) of the India-Singapore Tax Treaty (“Treaty”), which provides that royalty payments will be considered to arise in India, only if the royalty is paid by a resident of India or incurred in connection with its permanent establishment (“PE”) in India and such royalty is borne by such PE.
Tribunal Ruling: Royalty paid by a non-resident does not arise in India if there is no economic nexus between a permanent establishment of the non-resident and the royalty paid [Set Satellite (Singapore) Pte. Ltd. – I.T.A. No. 7349/Mum/2004].
Set Satellite (Singapore) Pte. Ltd. (‘Assessee’), a tax resident of Singapore, is engaged in the business of acquiring television programs, motion pictures and sports events; and exhibits the same on its television channel from Singapore. The assessee entered into an agreement with Global Cricket Corpn. Pte. Ltd. (‘GCC’), a tax resident of Singapore, and acquired rights to transmit, broadcast, exhibit, perform, include in cable programs and / or otherwise distribute, make available to the public any moving visual or audio visual representations and / or images of matches, players or play in any event, the feed, the highlights, package and any recording and other material by means of any media throughout the licensed territory viz. India, Pakistan, Sri Lanka, Bangladesh, Malaysia and Singapore.
The Assessing Officer (‘AO’) initiated the proceedings under section 201 of the Income Tax Act, 1961 (‘Act’) for non- deduction of tax at source for the payments made by the assessee to GCC and held that the said payments were in the nature of royalty as per explanation 2 to section 9(1 )(vi) of the Act and were deemed to arise in India.
On appeal, the Commissioner of Income Tax (Appeals) [‘CIT(A)’] decided the matter in favour of the asses see by holding that even if the said payment is assumed to be in the nature of royalty, such royalty income does not arise in terms of Article 12(7) of the India – Singapore Double Taxation Avoidance Agreement (‘Indo-Singapore DTAA’) and thus, the same is not chargeable to tax in India. Accordingly, the assessee was not liable to deduct tax at source for the payments made to GCC.
Aggrieved by the order of the CIT(A), the Revenue preferred an appeal before the Income Tax Appellate Tribunal (‘Tribunal’).
Contention of the Revenue before the Tribunal:
· The source of revenue of the asses see is from the advertisement telecast ed on the Set Satellite channel in India and paid for mainly by the persons in India. The other source of revenue is the subscription income collected from the cable operators in India.
· GCC granted exhaustive rights to the assessee throughout the licensed territory for a fee for an authorized number of exhibitions during the exhibition period.
· The assessee has also been given right to edit the feed i.e. reconfigure, recombine or repackage, to copy and store the feed on any storage device in any medium, to dub and subtitle the feed. The assessee has also been given a guarantee that GCC shall not make available live feed to any other persons in any part of the licensed territory except as provided in the agreement in a limited way. Thus, the assessee has exclusive broadcasting rights for distribution in the licensed territory. The assessee has also been given nonexclusive right to use logo of GCC.
· Sale of airtime on Set Satellite channel to Indian persons and collection of subscription from the Indian cable operators amounts to doing business in India.
· The assessee has the permanent establishment (‘PE’) in India in the form of Set India being an Agency PE, who is performing marketing activities for the assessee.
· There is the direct nexus between collection of advertisement revenue by the asses see from India and payment for acquisition of broadcasting rights of the cricket matches in India.
· The payment made by the assessee to GCC for transfer of telecasting rights are in the nature of royalty as per explanation 2 to section 9(1)(vi)(c) of the Act and are deemed to accrue or arise in India.
· The provisions of section 195 are applicable even to the transaction made by two nonresidents outside India.
· Telecasting rights received by the assessee from GCC are in nature of property similar to a patent, invention, model, design, trade-mark, etc. as mentioned in clause (i) of explanation 2 to section 9(1)(vi) of the Act.
· The rights to be transferred by GCC to assessee are in the nature of copyrights as mentioned in clause (v) of explanation 2 to section 9(1 )(vi) of the Act.
· GCC is not entitled to any benefit under Indo-Singapore DTAA under the limitation clause (Article 24) as the payment has been received in Jersey and not in Singapore.
Contention of Assessee before the Tribunal:
· Even if the payments by assessee are assumed to be royalty under Article 12(3) of the Indo-Singapore DTAA, the same does not arise in view of the provisions of Article 12(7).
· Two limbs governing article 12(7) are as under:
o The first limb is that the payer should be resident of India in order to be taxed under Article 12(7);
o The second limb is that when the payment is made by one non-resident to another non-resident, royalty would arise only if:
· The non-resident has a PE in India;
· The liability to pay royalty is incurred ‘in connection with’ such PE or fixed base; and
· Royalty is ‘borne’ by such a PE or fixed base.
· In earlier previous years, AO himself held that the assessee had an agency PE. Article 12(7) is still not attracted as the assessee only has an agency PE and it doesn’t have a physical presence in India.
· The broadcasting business is being carried out from Singapore and it does not carry out the same from India. The liability for payment is incurred by the assessee in connection with the broadcasting operations in Singapore and has no connection with the marketing activities carried through the PE in India.
· The financial burden of the payment for broadcasting of live cricket rights is borne by the assessee and not by the PE of the assessee in India.
· Relying on the opinion of Mr. Philip Baker, assessee contended that the source of the royalties under article 12(7) of the Indo-Singapore DTAA would be in Singapore, since the same has been paid by the assessee which is the resident of Singapore and therefore, the same cannot be deemed to arise in India.
· Further, the payments made by the assessee to GCC are not in connection with and are not borne by the PE in India. Also, such payment to GCC does not have any economic link with the PE of the asses see in India.
Observation and decision of the Tribunal
· The payment made by the assessee to GCC cannot be said to arise in India under Article 12(7) of the Indo-Singapore DTAA since the payer is not a resident of India. Such royalties arise in Singapore as the payer is resident of Singapore.
· Mere existence of a PE in India cannot lead to a conclusion that royalties arise in India. It is essential that liability to pay such royalties has to be ‘incurred in connection with’ and should be ‘borne by’ the PE of the payer in India.
· An existence of the economic link between the liability for such payment of royalties and the PE of the payer is necessary in India. The PE of the payer was not involved in any way with the acquisition of the broadcasting rights nor did the PE bear the cost of payments to GCC. Accordingly, the payments cannot be said to have been borne by the assessee’s PE in India. Further, assessee has not recovered any amount for such royalty payments from its PE in India.
· The payment even if assumed to be royalty, does not arise or deem to arise in India within the meaning of provisions of Article 12(7) of the Indo-Singapore DTAA.
The Ruling has correctly point out that mere existence of a PE in India cannot lead to a conclusion that royalties arise in India. It is essential that liability to pay such royalties has to be ‘incurred in connection with’ and should be ‘borne by’ the PE of the payer in India. An existence of the economic link between the liability for payment of royalties and the PE of the payer is necessary in India in order to apply the DTAA as well as to determine the tax ability of such income.
The Revenue has contended that as per the Article on Limitation of Benefit (in this case Limitation of Relief as per India-Singapore DTAA) GCC is not entitled to claim the benefit of India-Singapore DTAA as the income is not received in Singapore. It appears that the Tribunal has, without dealing with this specific argument of the Revenue, come to the conclusion that the royalty is not taxable in India under the DTAA.