SPE INDIA FILMS HOLDING LLC,MUMBAI vs. ACIT (INTL TAX) -4(2) (2) , MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “I”, MUMBAI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No. 457/Mum/2022 (A.Y. 2018-19) SPE India Films Holding LLC C/o, Deloitte Haskins & Sells LLP One International Centre, Tower No.3, 27th Floor-32nd Floor, Senapati Bapat Marg, Elphinstone Road (W), Mumbai-400013. PAN: AAOCS1827L ...... Appellant Vs. ACIT (International Taxation)-4(2)(2) 16th Floor, Air India Building, Narimaon Point, Mumbai-400021. ..... Respondent Appellant by : Sh. P.j. Pardiwala/Paras Savla Respondent by : Sh. A.K. Keshari Date of hearing : 27/06/2022 Date of pronouncement : 21/09/2022 ORDER PER GAGAN GOYAL, A.M: This appeal by the assessee is directed against the order of Dispute Resolution Panel-2, Mumbai [hereinafter referred to as [‘DRP’] dated 06.01.2022 for the Assessment Year (AY) 2018-19. The assessee has raised the following grounds of appeal: “The Appellant, objects to the order dated 19 January 2022 passed under section 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (Act) passed by the learned Assistant Commissioner of Income-tax (International Taxation) - 4(2)(2), Mumbai

2 ITA No. 457 Mum 2022-SPE India Films Holding LLC

(learned ACIT), for the aforesaid assessment year on the following among other grounds: 1. Royalty received amounting to INR 30,16,00,346 on account of distribution of theatrical rights in India, considered as taxable in India. 1.1. The learned ACIT erred in considering royalty income amounting to INR 30,16,00,346 received on account of distribution of theatrical rights in India as taxable in India. 1.2. The learned ACIT failed to appreciate that the consideration received by the Appellant on account of distribution of theatrical rights in India, is covered under the specific exemption provided by Explanation 2 to section 9(1)(vi) of the Act, pertaining to consideration received for the sale, distribution or exhibition of cinematographic films and accordingly, not taxable in India. 1.3. The Appellant prays that the learned AD be directed to delete the addition of INR 30,16,00,346 in respect to distribution of theatrical nights as the same is not taxable in India as per section 9(1)(vi) of the Act. 2. Interest income of INR 28,48,508 taxed twice and at a higher rate 2.1. The learned ACIT erred in considering total income at INR 2,78,50,51,642 while computing the tax payable instead of INR 278,22,03,134 as determined in the aforesaid assessment order. 2.2 The error described in 2.1 above resulted from the learned ACIT including the INR 28,48,508 of interest on income tax refund twice in the Computation Sheet dated 19 January 2022 attached to the aforesaid assessment order, thereby resulting in double taxation. 2.3. The learned ACIT further erred in taxing the additional interest income at a higher tax rate of 30% (plus surcharge and education cess) while computing the tax liability in case of the Appellant. 2.4. The Appellant prays that the learned ACIT be directed to delete the additional (double counted) interest of INR 28,48,508 and the additional tax computed thereon, and determine the total income of the Appellant and its tax liability accordingly. 3. Short credit for tax deducted at source

3 ITA No. 457 Mum 2022-SPE India Films Holding LLC

3.1. The learned ACIT has erred in not granting appropriate credit for Taxes Deducted at Source ("TDS') amounting to INR 11,97,057 in relation to interest on income tax refund of INR 28,48,508 pertaining to AY 2013-14. 3.2. The learned ACIT failed to appreciate the fact that TDS on interest on income tax refund was reflected in the "Part D' of the Form 26AS of the AY 2018-19. 3.3. The Appellant prays that the learned ACIT be directed to grant the credit of TDS amounting to INR 11,97,057 on interest on income tax refund as claimed by the Appellant in its return of income. 4. Levy of Interest under section 234B and 234C of the Act 4.1. The learned ACIT erred in computing additional interest of INR 8,56,002 and INR 6,65,056 payable by the Appellant, under section 234B and section 234C of the Act respectively. 4.2 The learned ACIT erred in not appreciating that once the credit of the abovementioned TDS is granted and the income on account of distribution of theatrical rights in India is considered as not taxable, the question of levy of additional interest under section 234B and section 234C of the Act would not arise. 4.3 The Appellant prays that the learned ACIT be directed to delete the levy of additional interest under section 234B and 234C of the Act. 5. Initiation of penalty proceedings under section 270A of the Act. 5.1. The learned ACIT erred in initiating penalty proceedings under section 270A of the Act. 5.2. The learned ACIT erred in not appreciating the fact that the Appellant has not under reported or misreported any income. 5.3. The Appellant prays that the learned ACIT be directed to drop the penalty proceedings initiated under section 270A of the Act. 6. General 6.1 Each of the above grounds of appeal is without prejudice to the other.” 2) Brief facts of the case are that the assessee has filed return of income declaring a total income of Rs. 248,06,02,790/-. The assessee company is a non-

4 ITA No. 457 Mum 2022-SPE India Films Holding LLC

resident corporate entity. It is incorporated and a tax resident of the United States of America (USA). During the year under consideration the assessee company was involved in licencing of theatrical rights and TV syndication rights from outside India. The assessee company received licence fees in exchange for the same. In this case the draft assessment order u/s 143(3) r.w.s 144C(1) of the act was issued on 21-04-2021, the assessee had filed objections along with form no 35A. The directions of the DRP u/s 144C(5) were received on 10-01-2022 based on this directions given by the DRP this final order u/s 143(3) r.w.s. 144C(13) was passed. 3. Assessee raised total 6 grounds of appeal out of these we are adjudicating ground no-1,2,3, and 4 only as ground no-5 is premature and ground no-6 is general in nature, requires no adjudication. 4. GROUND NO-1 We have gone through the draft AO’s order, objection of the assessee filed in response to the draft AO’s order, order of DRP and final assessment order. The only issue involved in the assessment of this entity is the treatment of the receipts of Rs. 30,16,00,346/- under a particular head receipt from SPE Films India Pvt Ltd on account of distribution of theatrical rights. The same was claimed to be non-taxable as royalty income by the assessee based on the exception provided in explanation 2(v) to sec 9(1)(vi) of the Act. However, the AO has held that the royalty income received in India is taxable u/s 5(2) of the Income Tax Act 1961 and also taxable as royalty income u/s 9(1)(vi) of the act and article 12(3) of the India -U. S DTAA as well. We are reproducing herein below the submissions of the assessee for the sake of ready reference and clarity on issue.

5 ITA No. 457 Mum 2022-SPE India Films Holding LLC

“Assessee’s Submission The assessee has submitted that during the year under consideration, a sum of Rs. 30,16,00,346/- was received from SPE Films on account of distribution of theatrical rights and that the said royalty income has been received from SPE Films under the Distribution Agreement dated 01.05.2007. The assessee has thereafter referred to clause 1 of the distribution agreement dated 01.05.2007 between assessee and SPE Films, to contend that the license was granted to SPE Films to exhibit and distribute cinematographic films, and since the royalty on account of distribution of theatrical rights is not covered under the scope of royalty as defined under Explanation 2 to section 9(1)(vi) of the Act, the same is specifically covered within the exclusion to section 9(1)(vi) of the Act, the amount of Rs. 30,16,00,346/received by the assessee from SPE Films on such distribution is not taxable in India under the Act. The aforesaid clause 1 of the distribution agreement reads as under: 1. Rights granted: Licensor hereby grants to licensee and licensee hereby accepts from Licensor, upon the terms and conditions of this agreement, the right to (i) project, exhibit, reproduce, print, transmit, perform, distribute, advertise, promote and market and (ii) authorize and license others to project, exhibit, reproduce, transmit and perform, by means of theatrical and non-theatrical distribution (excluding non-theatrical distribution on airlines and ships) throughout the "Territory" (as hereinafter defined), all of those motion pictures and any trailers, clips and excerpts, therefrom, (individually a "film" and collectively the "films"), which Licensor has or shall have the right to so distribute during the "term".... In support of the above arguments, the assessee has also placed reliance on the decision of the Hon'ble Mumbai Tribunal in its own case for AY 2013-14 [2019]ITA No. 6480/Mum/ 2017 (Mumbai) where in the Hon'ble Tribunal has held as under: "13 ... According to us, the consideration received by assessee on account of distribution of theatrical rights in India is not in the nature of royalty as defined by clause (v) of explanation 2 to section 9(1 )(vi) of the Act and hence, not taxable in India." Reliance was also placed on the decision of the Mumbai Tribunal in the case of Warner Brother Pictures Inc. [2012] 49 SOT 438 wherein it is held that "the definition of royalty under section 9(1)(vi) Explanation 2 to (v) excludes the payment received with reference to sale, distribution and exhibition of

6 ITA No. 457 Mum 2022-SPE India Films Holding LLC

cinematographic films" and further on the decision of the Chennai Tribunal in the case of Indo Overseas Films [2017] 81 taxmann.com 378 wherein it is held that , the consideration paid by the assessee to the non-residents does not fall within the ambit of "royalty" u/s 9(1)(vi) of the Act. To conclude, the assessee has submitted that the royalty on account of distribution of theatrical rights is not covered within the definition of royalty as defined under Explanation 2(v) to section 9(1)(vi) of the Act and hence, the amount of Rs. 30,16,00,346/- received by the assessee from SPE Films is therefore not taxable in India. Discussion and Direction of the DRP : We have considered the facts of the case and submissions made before us. We find that this issue has been adjudicated by the Hon'ble Tribunal in assessee's own case for AY 2013-14 [2019] ITA No. 6480/Mum/ 2017 (Mumbai) as under We have heard rival contentions and facts of the case on the issue of admissibility of additional evidences. We noted that the agreement field before the AO during the course of assessment proceedings vide letter dated 10.10.2016 is sufficient to decide this issue. Hence, in view of the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra), we admit the ground and decide the issue. The learned counsel for the assessee first of all drew our attention to the provisions of sub clause (v) of explanation 2 section 9(1)(vi) and the same reads as under: - "Explanation 2-For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for- (v) The transfer of all or any rights (including the granting of a licence) in transfer of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting television or tapes for use in connection with radio broadcasting but not including consideration for the sale, distribution or exhibition of cinematographic films; or."

7 ITA No. 457 Mum 2022-SPE India Films Holding LLC

The learned Counsel for the assessee stated that the consideration received for sale, distribution or exhibition of cinematographic films does not include in the income of royalty. He drew our attention to the specific at page 6 of assessee's paper book, wherein form No. 3 CEB is enclosed (which were filed before the AO) and the relevant details are as under: - Name and address of Description of intangible Amount paid/received or Method the associated property and nature of payable/receivable for used for enterprise with transaction purchase/sale/transfer/lease/use of determining whom the the arm’s each category of intangible property international length price transaction has been (see section entered into 92C(1) Name Address Descriptio Nature Type As per As computed n books of by the account assessee having regard to the arm’s length price SPE 503, Alpha, Providing Receipt of Received/ 17630256 17630256 Transaction Films Hira Nandani license for Royalty receivable net margin India Gradense, audio- from SPE method Powai, visual India for Mumbai- content providing 400706, (Also refer license for Maharashtra Exhibit to audio- , India hand copy visual form 3CEB) content SPE 503, Alpha, Providing Receipt of Received/ 195896161 195896161 Transaction Films Hira Nandani license for Royalty receivable net margin India Gradense, audio- from SPE method Pvt. Powai, visual India for Ltd. Mumbai- content providing 400706, (Also refer license for Maharashtra Exhibit to audio- hand copy visual , India form 3CEB) content

Further, the learned Counsel for the assessee took us through the letter dated 10.10.2016 filed before the AO whereby the copy of agreement entered into by the assessee with SPE films India Pvt. Ltd. and Tata Sky was enclosed and the relevant Para 3 read as under: - “Copies of agreement entered into by the assessee company with SPE Films India Pvt. Ltd. (SPE Films) and tata sky

8 ITA No. 457 Mum 2022-SPE India Films Holding LLC

The copies of agreement entered into by the assessee company with SPE Films and tata Sky are enclosed herewith as Annexure-l" According to the learned Counsel for the assessee rights are granted vide agreement dated 01.05.2007 and the relevant rights granted are as under: - "Rights granted: Licensor hereby grants to licensee and licensee hereby accepts from Licensor, upon the terms and conditions of this agreement, the right to (i) project, exhibit, reproduce, print, transmit, perform, distribute, advertise, promote and market and (ii) authorize and license others to project, exhibit, reproduce, transmit and perform, by means of theatrical and non-theatrical distribution (excluding non-theatrical distribution on airlines and ships) throughout the "Territory" (as hereinafter defined), all of those motion pictures and any trailers, clips and excerpts, therefrom, (individually a "film" and collectively the "films"), which Licensor has or shall have the right to so distribute during the “term” (as hereinafter defined”. In the Territory collectively the rights). Distributors shall have the right to authorize and sub license others to exploit the rights in accordance with the terms and conditions of this agreement. All rights not herein granted to licensee are specifically reserved to Licensor and Licensor shall have the right, concurrently during the Term, to exploit and dispose of all such reserved rights. Licensor shall have the right to (a) reject and exclude from this agreement and its obligations hereunder, from time to time, such Films as it may reasonably deem unsuitable for distribution in the Territory, and (b) exploit and otherwise deal with any such Films free and clear of this Agreement. Notwithstanding anything to the contrary contained herein, during the Term, Licensee shall be entitled to engage in the production and distribution of motion pictures other than those embraced by this Agreement. The grant of rights pursuant to this paragraph 1 shall be exclusive for each territory within the Territory. Further, the terms is also defined in Para 3 of the agreement as under: - "3. Term The term hereof shall commence on May 1, 2007 and shall continue until either party gives the other party thirty (30) days, notice that it wishes to terminate this Agreement (“the term)". In view of the above, the learned Counsel for the assessee referred to the decision of co-ordinate Bench of ITAT of Chennai Bench in the case of Indo Overseas Films vs. ITO (2017) 81 taxmann.com 378 (Chennai-Trib), wherein it is held that as per sub-clause (v) of explanation 2 to section 9(1)(vi) there is a specific exclusion for Cinematographic films from the purview of royalty. The learned Counsel for the assessee referred to the findings given in Para 7 which read as under: - "We have heard the rival submissions and perused the materials available on record. We find that the short issue for our consideration is whether the

9 ITA No. 457 Mum 2022-SPE India Films Holding LLC

payments made by the assessee to those parties constitutes "royalty" u/s. 9(1)(vi) of the Act and whether tax ought to have been deducted at source u/s 195 of the Act. The assessee has made payments for the cost of rights in the cinematographic films to exhibit them in India through various mediums. From a perusal of the deal memos and agreements entered with the parties reproduced in the order u/s 201 and 201(1A) of the Act, it is clear that the assessee is only a distributor who has been granted licensed rights by the parties to exhibit those cinematographic films in India. From a plain reading of clause (v) to Explanation 2 to section 9(1)(vi) it is clear that there is a specific exclusion for exhibition of cinematographic films from the purview of "royalty". While in the first part of the clause there is reference to films or video tapes for use in connection with television and video tapes for use in connection with radio broadcasting, there is a specific mention of cinematographic films in the last part of the clause that excludes certain transactions from the purview of "royalty". Therefore it is abundantly clear that the law has expressly excluded consideration paid for exhibition of cinematographic films from the ambit of section 9(1)(vi). Further, irrespective of the medium in which the cinematographic films have been exhibited, the same only constitutes "exhibition of cinematographic films". Hence, the consideration paid by the assessee to the non-residents does not fall within the ambit of "royalty" u/s. 9(1)(vi) of the Act. We find that section 90(2) of the Income tax Act which states that either the provisions of the Income tax Act or the DTAA, whichever is more beneficial to an assessee, would be applicable to the assessee. Further, CBDT Circular No.728 dated 30.10.1995 clarifies that tax should be deducted at source as per the provisions of the Act or DTAA whichever is more beneficial to the assessee. Since the provisions of the Act are beneficial to the assessee, the same would apply and consequently the sums are not chargeable to tax in India and do not warrant deduction of tax at source u/s 195 of the Act. In this regard, we find that the Hon'ble Supreme Court in the case of GE India Technology Cen. (P.) Ltd. v. CIT [2010] 327 ITR 456/193 Taxman 234/7 taxmann.com 18 had held that TDS obligation would arise on the assessee only when the sum is chargeable to tax in India u/s 4, 5 & 9 of the Act.' The learned Counsel for the assessee also relied on the decision of another co- ordinate Bench in the case of ADIT vs. Warner Brother Pictures Inc. (2012) taxmann.com 171 (Mumbai), wherein identical issue was considered and Tribunal held in Para 9 as under: - "We have considered the rival contentions and examined the facts on record. There is no dispute with reference to the fact that the assessee has entered into agreement with Warner Brothers Pictures India (P) Ltd outside India and the amounts were also received outside India. There is also no dispute with reference to the fact that the definition of royalty under section 9(1)(vi) Explanation 2 to (v) excludes the payment received with reference to sale, distribution and exhibition of cinematographic films. There is also no dispute with reference to the provisions

10 ITA No. 457 Mum 2022-SPE India Films Holding LLC

of DTAA entered into by India with USA, notified on 20th December, 1990, that the term royalty used in the Article 12 does not include payment of any gain received as consideration for the use of any copyright or literary, artistic or scientific work including cinematographic films or work on films, tape or other means of production for use in connection with Radio or T.V. broadcasting. In view of this specific provisions, the amount received by the assessee cannot be considered as royalty as was for done by the Assessing Officer while the invoking the of Article 12(2) of the DTAA FOR TAXING THE AMOUNTS. TO THAT EXTENT THE FINDINGS OF CIT(A) are correct and there is no need to deviate from such findings. In view of this the amount received by the assessee cannot be considered as royalty within the meaning of Indian Income Tax Act or under the DTAA." In view of the above, the learned Counsel for the assessee Shri P.J. Pardiwala, argued that for verification purpose as to how much amount and what is the quantum of deduction, the matter can be referred back to the file of the CIT(A). On the other hand, the learned Counsel for the assessee objected to the admission of the additional evidences as noted above and also stated in that all new facts are to be enquired into but he could not negate the argument of the assessee as regards to the decision to be taken on principle. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the above additional grounds raised by assessee and issue arising out of the same whether the royalty income received by assessee on account of distribution of theatrical rights in India is admissible or not. According to us, the consideration received by assessee on account of distribution of theatrical rights in India is not in the nature of royalty as defined by clause (v) of explanation 2 to section 9(1)(vi) of the Act and hence, not taxable in India. We direct the AO to verify the quantum of deduction on the basis of the documents to be furnished by assessee. As the issue is covered by is co-ordinate decided in Bench favour decisions of assessee cited in above term of in the favour above of assessee, directions. The Hon'ble Mumbai Tribunal held that the consideration received by assessee on account of distribution of theatrical rights in India is not in the nature of royalty as defined under Explanation 2(v) to section 9(1)(vi) of the Income Tax Act, 1961 and hence, not taxable in India. However, the Department has filed an appeal before the Hon'ble Bombay High Court against the above order of the Hon'ble Mumbai Tribunal.” A.O’s ARGUMENTS In any international transaction, first and foremost, domestic law must be applied without regard to tax treaties so as to determine whether the transaction is taxable at all within the domestic tax domain. If domestic law does not impose

11 ITA No. 457 Mum 2022-SPE India Films Holding LLC

tax on the transaction, treaties need not be normally considered. However, if the domestic law does impose a tax liability then there is need to proceed to the next stage which involves the application of the relevant Tax Treaty (if applicable) so as to determine the allocation of tax rights to the respective contracting states. Even here, domestic law would continue to apply unless specifically precluded by the Tax Treaty. This brings us then to the third stage where the provisions of domestic law are again applied within the limits prescribed by the Tax Treaty, so as to determine the tax liability in the domestic jurisdiction. Applicability of the provisions of domestic law Section 5(2) of the Act outlines the scope of total income in the case of a non- resident as all income derived from any source during the previous year which is either received or deemed to be received in India by the non-resident or on his behalf, or which accrues or arises or is deemed to accrue or arise in India to the non-resident during such year. Section 9 of the Act defines the incomes that are deemed to accrue or arise in India. Clause (i) of sub-section (1) of section 9 specifically states that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in Indian or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. Whether the receipts from distribution/ exhibition of cinematographic films are covered by the provisions of Section5: Section 5 provides for the scope of total income under the Act and, in the case of a non-resident, sub section (2) provides that the total income of any previous year of person who isa non-resident includes all income from whatever source derived which- a. is received or is deemed to be received in India in such year by or on behalf of such person; or b. accrues or arises or is deemed to accrue or arise to him in India during such year. In the present case it is apparent that the income from the distribution/ exhibition of films in India by the assessee through SPE Films India Pvt Ltd would directly accrue or arise in India. The revenue generated by the films at the respective cinema halls/theatres would fall within the category of income which is received by the assessee in India or deemed to be received in India by the assessee or deemed to be received on its behalf. It is more than evident that the payments to be made on account of distribution/ exhibition of the films in India clearly fall within the purview of section 5(2) of the Act.

12 ITA No. 457 Mum 2022-SPE India Films Holding LLC

Having held that the substantive provisions of section 5(2) of the Act are directly applicable, there is no need, therefore, to look to the deeming provision of section 9 which outlines the determination of income which is "deemed to accrue or arise in India". Since Section 5 is the substantive provision defining the scope of total income whereas section 9 only seeks to enlarge the scope of section 5 by creating certain deeming fictions whereby incomes which ordinarily would not be held to be taxable in India, are brought within the Indian tax net by virtue of these deeming fictions. Accordingly, if a certain income were to be covered by virtue of section5(2) it would be absurd to then render it non taxable by virtue of a deeming provision appearing in section 9. Thus, there would be no need to go to the deeming provision is such a case. The relationship between section 9 and section 5(2) of the Act has been dwelt upon by the Authority for Advance Ruling in the case of Mushtaq Ahmed A.A.R 743 of 2007 wherein the AAR has ruled as under: " Let us now turn our attention to two important decisions of the Supreme Court which interpreted Section 4(1) and 42 of the 1922 Act. In the case of Turner Morrison Co. vs. CIT, 23 ITR 152, the question arose whether a company in U.K. could be subjected to tax in India in respect of the sale of salt sent by the company to its agent in India for sale. One of the questions considered by the Supreme Court was whether the income/profits from the sale of salt were chargeable to tax in British India only under S.42 (i. e ., deemed accrual provision). It was answered in the following words: "Mr. Mitra's second main point is that assuming that there was receipt of income, profit and gains within India, such income, profits and gains clearly arose through or from a business connection in India and, therefore, the provisions of Section 42 (I) would apply and such income, profits and gains should be dealt with as income, profits and gains deemed to accrue or arise in India and consequently the inclusion of such income, profits and gains in the total income should be under Section 4 (I) for the Association is non-resident. Mr. Mitra urges that the charging under Section 3 is to be "in accordance with and subject to the provisions of this Act." Likewise, section 4(I) is also "subject to the provisions of this Act": This, according to Mr. Mitra at once attracts Section 42 and such income, profit and gains being within Section 42 must be included in Section 4 (I)(c ) and the other alternative, i. e ., Section 4(I)(a), is no longer applicable. In other words, according to Mr. Mitra's contention, section 4(1)(a) becomes a dead letter so far as income, profits and gains arising or accruing to a non-resident are concerned. We are unable to accede to this contention. Section 42 only speaks of deemed income. The whole object of that section is to make certain income, profits and gains to be deemed to arise in India so as to bring them to charge. The receipt of the income, profits and gains being one of the tests of liability, where the income profits and gains are actually received in India it is no longer necessary for the revenue authorities to have recourse to the fiction and this has

13 ITA No. 457 Mum 2022-SPE India Films Holding LLC

been held quite clearly in Hira Mills Ltd. vs. Income Tax Officer, Cawnpore, (p.160) [Emphasis supplied] We shall now refer to the decision of the Supreme Court in Performing Right Society LTD. vs. CIT, 106 ITR 11 in which the question of accrual of income was considered from the standpoint of the charging provisions of the present Act. The argument on behalf of the assessee was that any income for the purpose of section 5(2)(b) relating to a non resident must be income as could be found in section 9(1)(i). Before any liability can be fixed by virtue of section 9(1)(i), it must be an income accruing or arising through or from any asset or source of income in India and not merely from a source in India. This argument was rejected by the Calcutta High Court which held thus: 'In the present case the source of income admittedly is broadcasting of western music by All India Radio. That being so, it is quite clear that the royalties which the society receives from All India Radio should be deemed to accrue or arise in India within the meaning of section 9(1)(i) of the Income-tax Act, 1961 ": Though the judgment of the High Court was affirmed, the Supreme Court negated the applicability of section 9 and concluded that the income accrued or arose in India and, therefore, the question of resorting to section 9 does not arise. The following passage from the said decision at page 22 is relevant: "The society is a non-resident company, and though it receives the income out of the agreement executed not in India but in England, the income undoubtedly accrues or arises in India. On behalf of the appellants it was contended that the source of income was really the agreement which was entered into in England. We do not think that the question as to the source of the income is relevant because sub-section (2) of section 5 provides that all income “ from whatever source derived" is to be included in the total income of the non-resident assessee if the income accrues or arises in India during the relevant year. Reference was also made to section 9 of the Act which enumerates the incomes that shall be "deemed to accrue or arise in India " though actually accruing elsewhere, to establish that the income in question could not be deemed to accrue or arise in India. But the income in this case has in fact accrued in India and no question arises whether it should be "deemed "to accrue or arise in India". Whether a certain income accrued or arose in India within the meaning of section 5(2) is a question of fact "which should be looked at and decided in the light of common sense and plain thinking" as the Calcutta High Court considering a similar question under section 4(1) of the Indian Income- tax Act, 1922, observed: V. G. Every, In re [193715 ITR 216 (Cal)" [Emphasis supplied] "The dicta and observations in the said decisions fully support the Revenue's stand that if the income primarily falls under Section 5(2), the resort to Section 9 is impermissible. Apart from what was laid down in those cases, we would like to

14 ITA No. 457 Mum 2022-SPE India Films Holding LLC

further clarify that the expression "subject to the provisions of this Act" occurring in section 5(2) does not lead to the conclusion that the charging provision in section 5(2) is controlled by another charging provision in section 9(1). What all the phrase conveys is that the total income of a non-resident from whatever source derived on account of (a) actual receipt or deemed receipt in India, (b) accrual or deemed accrual in India shall be computed and worked out in accordance with other provisions of the Act. In fact, the expression "subject to the provisions of this Act" occurring in section 5(2) will have to be projected into section 9 also so that the deemed income will also be computed in conformity with the other provisions of the Act. Section 5(2) and section 9(1) shall be read harmoniously so that the charge under both the provisions could be effectively enforced. The clash between the two provisions ought not to be created by a process of interpretation. The legal position that emerges, on a conspectus of the authoritative pronouncements of the apex Court and the disquisition in the well-known Commentaries, is that where the income is actually received or has accrued in India, the resort to deeming provision is not warranted. In such a case, the provision contained in section 5(2) is sufficient to create a charge in respect of non-resident's income. We may add that the ratio of the decisions referred to supra remain unaffected by the addition of clause (b) to Explanation 1 in the present Act. The principle enunciated in the decisions will apply with equal vigor, irrespective of Explanation 1(b). In the assessee's case, it is evident that the provisions of section 5 of the Act are clearly applicable in the given facts. This has been discussed in detail in the preceding paragraphs wherein it has been stated that the income is directly accruing or arising in India from the exhibition of the films in the cinema halls/TV Channels etc. in India. Therefore, by virtue of the provisions of section 5 the same is taxable in India in the hands of the assessee company. Accordingly, as has been stated earlier, there is no need therefore to go the deeming provisions of Section 9. Whether the receipts from distribution/ exhibition of cinematographic films are covered by the provisions of Section 9: Taxability u/s 9(1)(vi) of the Income Tax Act From Explanation 2 to section 9(1)(vi) of the Act, it is evident that royalty includes any consideration for the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting. Thus, prima facie, from a plain reading of the Act, it is apparent that 1. it is a consideration

15 ITA No. 457 Mum 2022-SPE India Films Holding LLC

16 ITA No. 457 Mum 2022-SPE India Films Holding LLC

(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof ; and (b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment, other than payments derived by an enterprise described in paragraph 1 of Article 8 (Shipping and Air Transport) from activities described in paragraph 2(c) or 3 of Article8." The meaning of this paragraph has been explained in the Technical Explanation issued by the US Treasury on the USA-India DTAA. It mentions in relation to paragraph 3 of Article 12 that: "The royalty definition in subparagraph (a) of paragraph 3 of the Convention differs from the comparable provision in the U.S. Model in two respects. First, the Convention's royalty definition includes payments received in connection with the use or right to use cinematographic films or films or tapes used for radio or television broadcasting. Such payments are excluded from the royalty definition in the U.S. Model. Second, the Convention's royalty definition does not include "other like right or property" at the end of its listing of the types of rights for which a use payment is considered to be a royalty." This explanation is of immense importance. It shows that paragraph 3 of Article 12 of the India USA DTAA contains something which is not in the US Model Convention. Thus, this is on account of accommodation to the India domestic law contained in section 9(1)(vi) of the Act. Secondly, it clearly distinguishes between use or right to use cinematographic films on the one hand and use or right to use films or tapes used for radio or television broadcasting. This is clearly identical to the meaning derived from Explanation 2 to section 9(1)(vi) of the Act, which has been demonstrated above.9.In view of the above, payments amounting to Rs.30,16,00,346 received by the assessee company from SPE Films India Private Limited on account of distribution of the theatrical rights is held to be Royalty Income under Section 9(1)(v) of the Income Tax Act and Article 12(3) of the India- USA DTAA.” 5. We have deliberated upon the submissions of the assessee and basic thrust of the AO in framing the assessment order. In addition to this we have gone through the order of the coordinate bench in ITA NO 6430/Mum/2017 in

17 ITA No. 457 Mum 2022-SPE India Films Holding LLC

assessee’s own case for AY 2013-14. We observed that AO found force in his contentions from sec 5(2) of the act, whereas counsel of the assessee is vehemently considered and argued with reference to explanation 2(v) to sec 9(1)(vi) of the act. During the course of hearing before us, submissions made by the assessee (verbally and through written submissions) assessee nowhere countered the base made out by the AO u/s. 5(2) of the act. Moreover we haven’t found any submissions by the assessee before the forum of DRP and AO any counter submission with reference to sec. 5(2) of the Act. 6. In the given situation and the facts of the case we found that the precedent in its own case over which assessee relied upon vide ITA NO 6430/Mum/2017 is also not dealing with the applicability of sec 5(2) in the case of assessee. So to that extent the decision of coordinate bench with reference to explanation 2(v) to sec 9(1)(vi) of the Act is distinguishable. In the year under consideration, base of the matter is not sec 9(1)(vi) of the act rather AO made the whole case getting force from sec. 5(2). We have referred the grounds of appeal raised by the assessee, those are also silent with reference to applicability of sec. 5(2) of the Act. 7. In our considered opinion, it will be just and fair to restore the matter back to the file of AO for de-novo evaluation of the matter by giving a reasonable opportunity to the assessee. In the result, ground no-1 of the assessee is allowed for statistical purposes. 8. Ground No.2 During the year under consideration, we have gone through the returned filed by the assessee vide paper-book, Pg no-5, interest of Rs 28,48,508/- is already offer

18 ITA No. 457 Mum 2022-SPE India Films Holding LLC

to tax in the return of income filed by the assessee. However, as per the computation sheet annexed to the assessment order the interest income has been added again and this tantamount to double taxation. In this situation with the given facts, we direct the AO to delete the additional interest of Rs. 28,48,508/- from the total income already declared by the assessee. In addition to this we further observed that the assessee being a tax resident of the USA it is entitled to be governed by the provisions of the act or DTAA whichever is more beneficial as per the provision of sec 90(2). As per article-11 of the India -US treaty, interest arising in India in the case of such type of assessee is taxable @ 15% instead of normal rate of 30%. This rate of 15% is to be applied in the case of assessee being more beneficial (without considering surcharge and cess). In view of above AO is directed to delete amount of interest on income tax refund amounting to Rs. 28,48,508/- doubly added. The AO is further directed to recompute the tax liability on interest income @15% in view of article-11 of India -US treaty. In the result ground no-2 raised by the assessee- is fully allowed. 9. Ground No-3 We have perused the assessment order and the computation sheet along with form 26AS. It is observed that the TDS has been considered @Rs. 27,41,25,969/- as against Rs. 27,53,23,026/- resulting in a short credit of Rs. 11,97,057/-. In view of the above we direct the AO to reverify the figures as mentioned in form no 26AS and grant a refund to the assessee for the figure of difference. In the result Ground No-3 is raised by the Assessee is allowed. 10. Ground No-4

19 ITA No. 457 Mum 2022-SPE India Films Holding LLC

Interest u/s 234B is consequential in nature and its quantification depends on the outcome of directions given supra against ground no-1. As far as interest u/s 234C is concerned that can’t be consequential to any addition made by AO, and the same is based on the returned figure hence, the same is liable to be deleted. AO is directed to delete the interest u/s 234C and recompute the interest u/s 234B keeping in view our findings in Ground 1, 2 and 3. In the result Ground raised by the assessee is partly allowed. 11. In the result, appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 21st day of September, 2022.

Sd/- Sd/- (AMIT SHUKLA) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, िदनांक/Dated: 21/09/2022 SK, Sr.PS Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. 3. आयकर आयु�(अ)/ The CIT(A)- 4. आयकर आयु� CIT 5. िवभागीय �ितिनिध, आय.अपी.अिध., मुबंई/DR, ITAT, Mumbai 6. गाड� फाइल/Guard file. BY ORDER, //True Copy// (Dy. /Asstt. Registrar) ITAT, Mumbai