The Author, in this article, discusses a bold decision of ITAT regarding changing nature of judiciary to keep up time with the changing face of manner of doing business and interpretation of law accordingly.
It has resulted in Nicholas Cage [an international celebrity] having an income tax liability in India under the Income Tax Act, 1961 because of his appearance in an event in Dubai.
Read: Tax on payment by Indian company to foreign celebrity for appearance outside India
“Gone in 60 seconds” is a popular movie of Nicholas Cage. Here the international celebrity losing a substantial portion thereof by way of India Income tax on the same. Hence the title.
The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.
PART – I Case in brief
Citation of the case
Entering the subject
The decision revolves around very narrow compass of facts but which are quite specific.
Nicholas Cage, an international Celebrity, performed in an event at Dubai for launch of Audi 8L car which is meant exclusively for Indian market.
Consequentially, it was held that the amount [$4.40 lakhs] paid by VolksWagen to him is chargeable to tax in India. Hence it is necessary for Volks Wagen to do TDS u/s 195 r.w.s 201.
Issues and Answer
The questions are in the language of the author.
|1. Whether on facts and circumstances of the case and in law,
|2. payment made to Nicholas Cage is chargeable to tax in India?
|3. consequentially, whether company should have made TDS u/s 195 r.w.s 201
|4. ITAT can go beyond the question posed before it?
|ITAT has authority to re-draft the question to cull out the real question beyond only outer words of Grounds of Appeal?
Facts of the case
Regarding the assessee
- The assessee is an entity by the name of Audi India, a division of Volkswagen Group Sales India Ltd, and the assessee jointly planned an event in Dubai for launch of Audit A8L facelift model (Dubai Audi A8L launch event, in short).
- The assessee is a captive finance Company. Audi India and VWFPL are part of the same group – Volkswagen group. Such promotional events generate inquires of potential customers who in turn would like to purchase Audi cars and finance the same from VWFPL. In order to support mutual business VWFPL was part of this event.
Regarding the product-:
- Audi India launched the 2014 A8L facelift for exclusive Indian customers for special invite in Dubai. The Company had flown about 150 people mostly prospective buyers and some journalists to the launch ceremony.
- Audi A8L is a luxury brand and holds a prestigious status or brand value in the market. Hence the launch was a lavish event which was held in the world’s tallest building with Vegas style fountain shows, a world class illusionist and guest appearance by a celebrity.
- This model is imported from Germany as a completely built unit with customization in line with customer’s requirements. It takes around 4-5 months for cars to be shipped from Germany to India.
Regarding the event-:
- The entire event was designed in a manner to give a feeling of luxury and exclusiveness to Indian customers.
- Audi India invests significantly in branding through marketing initiatives. It was a marketing strategy to call customers/dealers from India to Dubai for this event and also to call celebrities for the event.
- New model of Audi A8 was available in Dubai and hence the launch event was planned in Dubai for showcasing to potential customers.
- It is an agreed position that the Audi A8L facelift launch event was India-centric and the entire expenses of the launch event were treated as expenses of Indian entities, namely this assessee and Audi India.
Regarding the customers-:
- Majority of the customers were HNI individuals or existing customers already driving a different variant of the Audi car.
- The company had taken around 150 existing / potential customers to Dubai.
Regarding IP rights
- The assessee and Audi India were, as a part of this arrangement, had full rights to use “free non-exclusive promotional (e.g, not in connection with paid advertising, including, without limitation, in TV commercials, bill boards, and paid advertising etc) usage of all the event footage / material / films / stills / interviews etc of the above mentioned launch event capturing celebrity’s presence across all platform for below the line publicity on internet, in press releases, news reports, social media, Audi Magazine etc for a period of 6 months from the date of launch event, and for an unlimited period of time only for internal usage with the Volkswagen Group”.
- The audio visual clips were available for use exclusively for Audi India and VWFPL.
Regarding transaction under dispute
- The assessee paid US $ 4,40,000/- plus other incidentals to the international Celebrity without any with-holding taxes under Indian Income Tax Law.
- Learned CIT(A) not only confirmed the action of the Assessing Officer but also proceeded to hold that the whole purpose of organizing an India centric event at Dubai was to avoid “attraction of clause regarding income accruing or arising in India”, and referred to the provisions of Section 9(1)(i). The impugned tax withholding demand u/s 195 r.w.s. 201 was thus confirmed.
Contention of the Assessee
- The event took place in Dubai, UAE, and the celebrity made his appearance at the event in Dubai, it was claimed that this event did not rise to any tax implications in India so far as the event and the celebrity appearance was concerned.
- The celebrity or his agent were not carrying out any activities in India, and as such the appearance fee could not be treated as accruing or arising in India, or deemed to be accruing or arising in India.
- It was also claimed that as the income was not taxable under the Income-tax Act, 1961, there was no occasion to claim any treaty benefits.
- ITAT is not at liberty to change the argument from section 9(1)(vi) to 9(1)(i).
Contention of the Revenue
- The Assessing Officer, unimpressed with these arguments, proceeded to hold that the payment made to the celebrity was taxable in India, more particularly as royalty under section 9(1)(vi) of the Income-tax Act, 1961.
- He also examined the provisions of article 12 of the India USA Double Taxation Avoidance Agreement [(1991) 187 ITR (Stat) 102]; Indo US tax treaty, in short) and held that even this tax treaty provisions do not come to the rescue of the assessee either.
- CIT(A) applied the provisions of section 9(1)(i) not only to payment to the international celebrity but to the whole of event.
- CIT(A) enhanced the addition by holding that the whole of the income as generated by the event accrues or arises in India.
Observations of the bench
- Though the event has physically taken place in Dubai, UAE, but, beyond any dispute or controversy, the benefits of this event were to accrue to the assessee and Audi India.
- Obviously, the cost of event was so high, admittedly running into tens of crores of rupees, that this expense could not have been justified for influencing car purchasing decisions of these less than 150 persons.
- To put a question to ourselves, what were the benefits of this event, held in Dubai, to the Indian assesses. In our humble understanding, and as the MoU with celebrity’s agent unambiguously indicates in so many words- as noted earlier in this order, the predominant benefit of this event was “below the line publicity on internet, in press releases, news reports, social media” for Audi 8L facelift in India.
- The target audience was in India, the potential customers were in India, the intended benefits were in India, and yet the event was in Dubai UAE. The question then arises whether the income on account of this launch event in Dubai can be said to accrue or arise in India.
- Let us not forget the fact that the celebrity was to make an appearance in UAE event but admittedly the event was for below the line publicity in India. The expression ‘below the line publicity’ has been variously described as targeting “a specific group of potential consumers”, “highly targeted, with advertisements being created keeping in mind the demographic and psychographic characteristics of particular customer segment”, and “an advertising strategy where products are promoted in media other than mainstream radio, television, billboards, print, and film formats”.
- These activities are not in vacuum. These activities have, as their targets, Indian customers- and certainly some more customers than the potential customers if at all included in the contingent of 150 persons flown to Dubai for being present at the launch event.
- Of course, the scheme of this below the line publicity event seems to be that even the Indian socialites and guests, directly or indirectly, ended up being the instruments of influencing the potential customer behaviour-rather than being potential customers in their own right.
- It was thus a unique situation in the sense that while the event, in which appearance was made by the celebrity, was held outside India, all the benefits accrued to the assessee in India, and it was on account of these benefits to the assessee that the international celebrity was paid for his participation in the Dubai Audi 8 L facelift event.
- The income thus cleared accrues and arises, on the facts of this case, by the reason of business connection in India. We find, as the assessee has admitted in so many words in the written note, that the event in Dubai was India centric, that the event was for the purpose of promoting business in India, that such promotional events generate enquires of potential customers in India who in turn would like to purchase Audi cars in India and finance the same from the assessee company, and that it was for this reason that the assessee company was a part of this event.
- It is also an admitted position that “the audio-visual clips were available for use exclusively for Audi India and VWFPL”. When these audio-visual clips were for exclusive use of the assessee and the Audi India, and both of these entities have operations only in India, the use of this event, as a tool of marketing, was only in India.
- We have also noted that in the terms of MoU signed between the assessee and celebrity’s agent, predominant benefit to the assessee was “usage of all the event footage / material / films / stills / interviews etc of the above mentioned launch event capturing celebrity’s presence across all platform for below the line publicity on internet, in press releases, news reports, social media, Audi Magazine etc”.
- There is also no dispute about the position that all expenses are borne by the assessee, and its associate Audi India, and claimed as a deduction under section 37(1), which essentially implies that the expenses, even by assessee’s admission, has been incurred “wholly and exclusively for the purposes of business” of the assessee and the business of the assessee is only in India.
- Viewed thus, when we examine relation between Indian business and participation in an event by the celebrity at Dubai launch event, we have no doubt that it is because of this relationship between event in Dubai and business of the assessee in India that the income has accrued and arisen to the celebrity making appearance in Dubai launch event.
- There cannot be any justification for an assessee in India, doing business only in India, paying money to a celebrity to make an appearance in an event in Dubai unless such an appearance benefits the business of the assessee in India, and the fact that it did benefit the business interests of the assessee in India is not even in doubt or controversy.
- As a matter of fact, there is an inherent dichotomy in the approach of the assessee inasmuch as, on one hand, he claims the expenses in the Dubai launch event as expenses incurred for the purposes of business in India, which is the only geographical location where the assessee does business, and yet he claims that the Dubai launch event does not have business connection in India.
- Once the expenses for holding this event is in connection with business in India, it is only a natural corollary thereto that income from participation, in this event, to a non-resident has a business connection in India. As we hold so, we need not influenced by the observations in available judicial precedents on what constitutes business connection in India, for the simple reason that none of these judicial precedents deals with a situation like one that we are dealing with, and, as very aptly put by Hon’ble Supreme Court in R D Agarwal’s case (supra), that the review of the judicial precedents is “not for evolving a definition applicable generally to all cases but with a view to illustrate what relations between the non-resident and activity in the taxable territories which contributed to the earnings of the income may or may not be regarded as business connections”. None of the judicial precedents before us had an occasion to examine an intangible business connection, and, there is thus no guidance available on this issue. The business connection in India, on the facts of the present case, is intangible inasmuch as it is a relationship rather than an object, but it is a significant business connection which has resulted in income accruing and arising to the non-resident, but for which there would not have been any business expediency in making the impugned payment to the non-resident celebrity.
- I will be commenting upon judgment of one of my very favorite judge of tribunal.
- I hold him in high respect [that does not mean I don’t respect others].
- I generally follow his orders and get enlightened and educated in terms of wisdom by reading his orders.
- At the first blush, with deep humility towards the H’ble bench, the judgement appears to be a far outcry of the concept of “income accruing or arising in India”.
- One of the observations resembles that once the expenditure is debited to P&L and allowed u/s 37(1), the logical consequence is that, benefit from that expenditure will accrue or arise in India.
- This is a fallacious and inadequate logic. If you observe, the CIT(A) has held that not only the payment made to Mr. Nicholas Cage but everybody to whom payment is made [which is to the tune of 10 crores] is liable to Indian Income Tax.
- It was also an accepted fact that the services of Nicholas Cage are not covered by article 12.
- A consequential corollary will be all the small and medium size enterprises providing electrical equipments, doing printing jobs, photographers, video shooting, caterers will have a business connection with India.
- Another corollary is that, a person comes to attend the party and his suit has some problem and the assessee obtains the services of a tailor. In such a case, the services by tailor putting 2-3 stitches will be chargeable to tax in India.
- The decision appears to be influenced by the amendments made by the Finance Act, 2020. Refer relevant portion of section 5 of the Finance Act, 2020.
(iii) after Explanation 3, the following Explanation shall be inserted with effect from the 1st day of April, 2021, namely:––
“Explanation 3A.––For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from––
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
The relevant notes on clauses read as follows:
It is also proposed to insert a new Explanation 3A so as to declare that the income attributable to operations carried out in India, as referred to in Explanation 1 of clause (i ) of sub-section (1) of said section, shall include income from––
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and
(iii) sale of goods and services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.
This amendment will take effect from 1st April, 2021 and will, accordingly, apply in relation to the assessment year 2021-2022 and subsequent assessment years. It is also proposed to insert a proviso to Explanation 3A to provide that the provisions of the said Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A. This amendment will take effect from the 1st April, 2022 and will, accordingly, apply in relation to the assessment year 2022-2023 and subsequent assessment years.
- The relevant change in the law was not there as far as the year under consideration is concerned.
- On perusal of this amendment, firstly, neither it is not retrospective nor is it clarificatory.
- Just because it has been inserted by way of an “explanation”, it can-not become either clarificatory.
- The Finance Act, 2020 itself also gives a specific date of the amended law coming into force.
- There is no specific discussion of this amendment in the judgement.
On second thought
- It is a very bold decision reflecting practical implementations of concept of business connection / permanent establishment i.e. virtual foot prints of a foreign entity on Indian Soil.
- It resembles to the philosophy of section 115BBA. Section 115BBA requires a physical presence. This decision goes beyond and recognises that when the internet and electronic media is so powerful and effective where it has a similar effect of physical presence, the same should get reflected in tax treatment. It has the effect as if the performance is made in India.
- Paragraph 7, 8 and 9 are the backbone of the judgment which are given in the annexure.
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