TAJ TV LTD,MAURITIUS vs. DCIT (INTERNATIONAL TAXATION)- 4 (1) (2), MUMBAI

For the sake of brevity aforesaid cross appeals bearing common question of law and facts are being disposed of by way of composite order.

“Grounds of Revenue A.Y. 2014-15 & ITA No.1717/M/2021 A.Y. 2014-15 “i. On the facts and circumstance of the case and in law, the Ld CIT(A) erred in holding that Taj India does not constitute an Agency PE of the assessee within the meaning of Article 5(4) of the India- Mauritius DTAA with regard to the distribution income received by it. ii. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in holding that there was no Distribution Agency PE in the form of Taj India with regard to the Distribution Revenues without appreciating that the Dependent Agency PE exists for Advertisement Revenues & same has been upheld by the IT AT in earlier years. If Taj India constitutes DAPE of assessee in India for one stream of income of assessee (Advertisement Revenues), it will constitute DAPE of assessee in India for another stream of income of assessee (Distribution Revenue) also & two streams of income should not be seen in isolation. iii. On the facts and circumstance of the case and in law, the Ld CIT (A) erred in holding that if the arm's length price of international transactions between the assessee and Taj India has & ors. 3 M/s. Taj TV Ltd been accepted by the TPO, no further profit can be attributed to the DAPE in India, without considering the fact that no such analysis of functions and risks undertaken by the PE on behalf of the assessee has been undertaken in the year under consideration. iv. On the facts and circumstance of the case and in law, the Ld CIT(A) erred in holding that if the arm's length price of international transactions has been accepted by the TPO, between the assessee and Taj India, no further revenue/profit is attributable to the assessee's PE in India for offering for taxation in India, by relying on the decision of the ITAT in the assessee's case in earlier years without considering, that while the Hon'ble ITAT had decided the issue in favour of the assessee in earlier years by placing reliance on the Hon'ble Supreme Court's decision in Morgan Stanley [292 ITR 416], the case of the assessee is distinguishable on facts from the case of Morgan Stanley (supra). v. On the facts and circumstance of the case and in law, the Ld CIT (A) erred in not considering that the ratio of Morgan Stanley shall be applicable only when arm's length price has been determined for all the functions and risks undertaken by Taj India, whereas in the case of the assessee, only the marketing function of the PE for generating advertising revenue had been benchmarked in earlier years and no such benchmarking has been done in the year under consideration. vi. On the facts and circumstance of the case and in law, the Ld CIT(A) erred in not considering that the consideration paid by the assessee to Taj India was only for carrying out marketing services related to advertising, and not for the profit accruing to the assessee from core activities of the assessee in India carried on by Taj India as the assessee's dependent agent, and therefore the TPO, by accepting the ALP of advertising revenue, had only benchmarked the marketing functions and not other functions carried out by Taj India as assessee's agency PE in earlier years. vii. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that payment of programming fees in respect of live programmes does not constitute Royalty as provided under Article 12 of DTAA between India and Mauritius? viii. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the assessee did not have any liability to deduct tax on the payments of programming fees made to the residents of treaty countries, even if taken as royalty? ix. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the income received from the assessee by M/s. Intelsat being in the nature of transponder & ors. 4 M/s. Taj TV Ltd charges have arisen in India and accordingly tax should have been deducted at source on this payment? x. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the income received from the assessee by other non-residents being in the nature of up-linking charges have arisen in India and accordingly tax should have been deducted at source on this payment? xi. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in holding that section 40 (a) (i) of the Act was not applicable on payments made to non-residents for programming rights, transponder charges and up-linking charges on the ground that these payments did not constitute royalty u/s 9(1)(vi) of the Act or under the respective DTAAs; xii. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that the payment made for programming rights, transponder charges and uplinking charges by the assessee to non-residents are specifically covered by Explanations 2, 5 and 6 and hence fall under definition of royalty as per section 9(1)(vi) of the Act; xiii. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that Explanation 5 and 6 to section 9(1)(vi) of the Act was inserted by the Indian Parliament by way of Finance Act, 2012 as a declaratory and clarificatory amendment with retrospective effect from the day the source rule on royalty came into effect to specify the intent of the law and does not provide a new law; xiv. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that the insertion of Explanation 5 and 6 to section 9(l)(vi) of the Act by the Indian Parliament by way of Finance Act, 2012 fulfils all the tests laid down by a Constitution Bench of Hon'ble Supreme Court in the case of CIT (Central)-1, New Delhi vs Vatika Township Pvt Ltd, 2015 (1) SCC 1, for being declaratory and clarificatory in nature and hence explaining and clarifying the existing law; xv. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that the terms 'use or right to use', 'copyright', 'process'etc are not defined in Article 12 of India-USA DTAA or similar Articles of other DTAAs and hence their meaning has to be derived from the domestic law of India as required by Article 3(2) of India-USA DTAA and similar Articles of other DTAAs; & ors. 5 M/s. Taj TV Ltd xvi. Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in not taking into account that the meaning of the term 'process' as provided in Explanation 6 to section 9(l)(vi) of the Act is the domestic law meaning of the that term from 1.6.1976 as clarified by the Finance Act, 2012 and hence the meaning for purposes of Article 12 of India-USA DTAA or other DTAAs as prescribed by Article 3(2) of India-USA DTAA and similar Article of other DTAAs?”

Grounds of Assessee A.Y. 2014-15 ITA No.1461/M/2021 A.Y. 2015-16 & ITA No.1462/M/2021 A.Y. 2016-17 “Ground No 1 On the facts and in circumstances of the case and in law, the Hon'ble Commissioner of Income-tax (Appeal)-58 erred in concluding that Appellant has a Permanent Establishment in India In respect of advertisement revenue. Your appellants crave to leave, add, amend, alter, change or cancel any of the above grounds of appeal before or at the time of hearing.”

(USD)

Profit (Loss) as per Computation of Income 3,218,512 Add: Disallowance of Expenditure u/s. 40(a)(ia) of the IT Act eligible for deduction payment 1. Programming Cost (Refer Para 15.7) 4,000,056 2. Transponder Fees (Refer 15.16) 937,286 3. Uplinking Charges (Refer 15.16) 2,290,150 7,227,492 Gross Income / (Loss) (in USD) 10,446,004 Gross income / (Loss) (in Rs.) equivalent (In INR)

Indian Rupees @ Rs.59.35 per USD……. 619,970,337 (A) (75% of A) Total Income (INR) 464,977,753 & ors. 8 M/s. Taj TV Ltd

(2) As to whether the Ld. CIT(A) has erred in allowing transponder fees and uplinking charges disallowed by the AO by invoking provisions contained under section 40(a)(ia) of the Act?”

Service consistent with the terms thereof. Taj India shall enter into Agreements with third parties on its own behalf and in its own name. Upon Taj’s request, Taj India shall inform Taj in advance and regularly update Taj regarding the negotiations of any proposed License Agreements with Permitted Systems.”

Thus the clause as it existed in the aforesaid Distribution Agreement specifically provided that all the agreements entered into by Taj India with third parties shall be on its own behalf and in its own name. The aforesaid clause of the Distribution Agreement was replaced by the Addendum dated 28.12.2007 and the new clause 1.3 reads as under:

“1.3 Taj-India shall have the distribution rights for distribution of the Service in India to Distributor and Permitted Systems and negotiate and procure cable distribution license Agreements with Permitted Systems for the Service consistent with the terms thereof. Taj-India shall have the authority to enter into Agreements with third parties on behalf of the Taj. Upon Taj’s request, Taj –India shall inform Taj in advance and regularly update Taj regarding the negotiations of any proposed License Agreements with Permitted Systems.”

“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.”

& ors. 11 M/s. Taj TV Ltd

14. As per the provisions of Article 5(4)(i) of the DTAA, it is only when the person in a Contracting State has and habitually exercises the authority to conclude contracts in the name of the other enterprise, such person shall be deemed to be the P.E. of the other enterprise. Thus in order to invoke the provisions of Article 5(4)(i) of the DTAA, both the conditions i.e. (a) person has concluded the contract and (b) person habitually exercise the authority to conclude the contract, need to be satisfied. However, in the present case, the Revenue, except merely referring to the aforesaid clause of the Addendum, has neither established nor brought anything on record, either at the assessment stage or before us, that Taj India had habitually exercised the authority to conclude the contract on behalf of the assessee. Thus, the Revenue has failed to discharge the burden casted on it to prove that the twin conditions provided in Article 5(4)(i) of the DTAA are satisfied in the facts of the present case. As held by the Special Bench of the Tribunal in the case of Motorola Inc. v. Dy. CIT: [2005] 95 ITD 269 that DTAA is only an alternative tax regime and not an exemption regime and therefore, the burden is first on the Revenue to show that the assessee had a taxable income under the DTAA, and then the burden is on the assessee to show that its income is exempt under DTAA. Similarly, was held by the Co- ordinate Bench of the Tribunal in ITO v. Right Florists (P) Ltd. [2013] 143 ITD 445 (Kol-Trib.). In view of the above, Taj India cannot be held to be dependent agent P.E. of the assessee in India under Article 5(4)(i) of the India Mauritius DTAA with respect to the distribution revenue. Accordingly, to this extent order passed by the CIT(A) is upheld and the grounds raised by the Revenue are dismissed.

“9………..Thus, if admittedly Taj India is being remunerated at arm's length, then, no further income/profit can be said to be attributable to the assessee in India from PE. It is an undisputed fact that the TPO has accepted the transaction between the assessee and Taj India at an arm's length price. Hence, respectfully following the law laid down by the Hon'ble Apex Court and followed by the Hon'ble jurisdictional High Court, we also hold that if the arm's & ors. 12 M/s. Taj TV Ltd length price of the transaction has been accepted, between the assessee and Taj India, then nothing further should be attributable to the assessee which is to be taxed in India. Thus, on this reasoning we allow the assessee's ground No.1.” The legal principle followed by the Co-ordinate Bench of Tribunal is equally applicable to the facts of the present case. Thus, respectfully following the decision of the Co–ordinate Bench rendered in assessee’s own case cited supra, we accept the alternative plea of the assessee and held that as Taj India was remunerated at arm’s length price in respect of advertisement revenue, no further profit needs to be attributed to same for the purpose of taxation in India. Further, as regards the issue of existence of P.E. with respect to advertisement revenue, same is left open. Accordingly to this extent, order passed by the CIT(A) is set aside and addition made by Assessing Officer with respect to advertisement revenue is directed to be deleted. As a result, the appeal filed by the assessee is allowed on the alternative plea.

“19. First of all, let us examine the definition of "royalty" as been defined under Article 12 of the Indo-US-DTAA, which has been defined in the following manner:

'3. The term "royalties" as used in this Article means:

(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 Article 8.'

The article gives exhaustive definition of the term 'royalty' and therefore, the definition and scope of 'royalty' is to be seen from the Article alone and no definition under the domestic Act or law is required to be considered or seen or any amendment made in such definition whether retrospective or prospective which can be read in a manner so as to extend any operation to the terms as defined or understood in the Treaty. The Legislature or Parliament while carrying out amendment to interpret or define a given provision under the Domestic Law of the country cannot supersede or control the meaning of the word which has been expressly defined in a Treaty negotiated between executives of two sovereign nations. The payment of transponder charges to PanAmSat and uplinking charges cannot be treated as a consideration for 'use' or 'right to use' any copyright of various terms used in para 3(a) like 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 or in any manner relates to any patent or & ors. 14 M/s. Taj TV Ltd trademark, design, secret formula or process. It is also not use or right to use any industrial, commercial, or scientific equipment. There is no such kind of right to use which is given by Pan Am Sat to assessee. Thus, the said payment does not fall within the ambit of the terms used in para 3 of Article 12. So far as the reading of amended definition of 'royalty' as given in section 9(1)(vi) into treaty, Hon'ble Delhi High Court in its latest judgment in the case of New Skies Satellite BV (supra), wherein it has considered Hon'ble Madras High Court decision in the case of Verizon Communications Singapore Pte Ltd. (supra) also, have discussed the issue threadbare and came to the conclusion in the following manner:—

"60. Consequently, since we have held that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word "royalty" in Asia Satellite, supra note 1, when the definitions were in fact pari materia (in the absence of any contouring explanations), will continue to hold the filed for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both partners to incorporate income from data transmission services as partaking of the nature of royalty, or amend the definition in a manner so that such income automatically becomes royalty. It is reiterated that the Court has not returned a finding on whether the amendment is in fact retrospective and applicable to cases preceding the Finance Act of 2012 where there exists no Double Tax Avoidance Agreement."

The aforesaid decision takes care of all the arguments relied upon by the ld. DR including that of the Verizon Communications Singapore Pte Ltd's. The Hon'ble High Court has specifically clarified as to why the said decision of Madras High Court cannot be applied in such cases after observing as under:—

"31. In a judgment by the Madras High Court in Verizon Communications Singapore Pte Ltd. v. The Income Tax Officer, International Taxation I, [2014] 361 ITR 575, the Court held the Explanations to be applicable to not only the domestic definition but also carried them to influence the meaning of royalty under Article 12. Notably, in both cases, the clarificatory nature of the amendment was not questioned, but was & ors. 15 M/s. Taj TV Ltd instead applied squarely to assessment years predating the amendment. The crucial difference between the judgments however lies in the application of the amendments to the DTAA. While TV Today, supra note 22 recognizes that the question will have to be decided and the submission argued, Verizon, supra note 23 cites no reason for the extension of the amendments to the DTAA.”

Thus, respectfully following the ratio laid down by the Hon'ble Delhi High Court, we hold that, the definition of royalty as enlarged by Finance Act, 2012 with retrospective effect will not have any affect in Article 12 of DTAA.

13. We have perused the facts of the case at hand with the assistance of Ld. A.R. for the assessee and Ld. D.R. for the Revenue. Though the Ld. D.R. vehemently relied upon the order passed by the AO but failed to bring on record any distinguishable facts qua the case at hand vis.-a-vis. case of the assessee in earlier years. So following the order passed by the co-ordinate Bench of the Tribunal, we are of the considered view that transponder fee and uplinking charges paid by the assessee are not in the nature of royalty within the meaning of Article 12 of India USA DTAA. So & ors. 17 M/s. Taj TV Ltd we are inclined to agree with the findings returned by the Ld. CIT(A) that the disallowance made under section 40(a)(ia) of the Act by AO is not sustainable in the eyes of law, hence rightly deleted by the Ld. CIT(A). Consequently grounds raised by the Revenue in both the appeals are dismissed.

Order pronounced in the open court on 13.05.2022.