WARNER BROS. DISTRIBUTING INC.,MUMBAI vs. DCIT (IT) 4(3)(2), MUMBAI

2006-07 30/12/2011 2. 2007-08 10/10/2012 3. 2008-09 22/02/2013 4 2009-10 05/03/2014 5 2010-11 27/10/2016 6 2011-12 08/11/2016 7 2012-13 26/07/2017 8 2013-14 26/07/2017 3.1 Facts on record would reveal that that assessee being non-resident is stated to be engaged in distribution of cinematographic films. The assessee is stated to be tax resident of USA and entered into an agreement with another entity viz. Warner Bro. Pictures (India) Pvt. Ltd. [WBPIPL] in April, 2009 granting exclusive rights of distribution of cinematographic films on payment of royalty in terms of the agreement. The assessee submitted that 3 Warner Bros Distributing Inc. Assessment Year-2014-15 in terms of India-USA DTAA, the royalty is not taxable by relying upon the decision of this Tribunal rendered in AYs 2006-07 to 2009-10 and the orders of Ld. DRP for AYs 2010-11 to 2012-13. During the year under consideration, it received royalty of Rs.24.86 Crores. The assessee submitted that it does not have any permanent establishment in India, which position has been accepted by appellate authorities in earlier years and therefore, the aforesaid receipts were not taxable in India. However, Ld. AO, upon perusal of terms of agreement dated April,2009 observed that the income being earned by the assessee was dependent on revenue which were being generated from distribution of films in India and the assessee was entitled for certain percentage of gross revenues earned from distribution of films in India. Therefore, the income, in reality, would be business income and not royalty as contended by the assessee. In the above background, Ld. AO, after appreciating the provisions of Section 5(2), reached a conclusion that the provisions of Section 5 were clearly applicable to the facts of the case and stated income directly accrued in India from exhibition of films in the cinema halls / TV channels in India. 3.2 Additionally, the stated income, in the opinion of Ld. AO, would be deemed to have accrued in India in terms of Section 9(1)(i) read with explanation 2(v) to Section 9(1)(vi) which deals with transfer of rights, inter- alia, in respect of films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting but not including consideration of sale, distribution or exhibition of cinematographic films. Therefore, just because the consideration was excluded from the definition 4 Warner Bros Distributing Inc. Assessment Year-2014-15 of royalty as per explanation-2 to Section 9(1)(vi), the same would still be deemed to accrue in India in terms of Section 9(1)(i) of the Act. 3.3 Finally, a conclusion was drawn at para-12 that the income received by the assessee accrue or arise in India u/s 5(2) of the Act and therefore, taxable in India. Further, the assessee also have business connection in India within the meaning of Section 9(1)(i) of the Act. Since as per India- USA Double Taxation Avoidance Treaty (DTAA), business profits could be taxable only in the source state if there exist a permanent establishment. It was observed that the assessee was carrying out entire operations of distribution of films in India through WBPIPL which was quite evident from the contractual terms. Therefore, the assessee has a dependent agent PE (DAPE) in India and the profits attributable to the activities of the DAPE would be subject to taxation in India under the head business profits. The attribution was estimated @65% of revenue earned by the assessee and accordingly an amount of Rs.16.16 Crores was brought to tax as business profits of the assessee in draft assessment order dated 18/12/2017 which was subjected to objections before Ld. DRP.

Aggrieved, the assessee raised objections before Ld. DRP, inter-alia, by drawing attention to the fact that this issue was covered by the orders of Tribunal’s in assessee’s own case in earlier years. However, it was observed that the proceedings before Ld. DRP were continuation of assessment proceedings only and DRP was not an appellate authority and therefore, since the department was under appeal in earlier years before Hon’ble Bombay High Court, the view of Ld.AO was to be upheld.

As noted in the opening paragraphs, it is an admitted position that the issues stood squarely covered in assessee’s favor by the lead decision of this Tribunal in assessee’s own case for AY 2006-07, & Co.No.17/Mum/2011 dated 30/12/2011 wherein the bench has concluded the matter by observing as under: - 9) 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 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 done by the Assessing Officer while invoking the Article 12(2) of the DTAA for taxing the amounts. To that extent the findings of the 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. 10) The issue can be examined in another dimension whether the amount is taxable under the Indian Income Tax Act in India if not as royalty, but as business income. The CIT (A) finding is that assessee has a business connection in India. However, he considered that there is no PE to the assessee, the fact of which was also accepted by the Assessing Officer as he has invoked only Article 12(2) and not considered the amounts business income as per PE proviso. It was the contention of the learned Departmental Representative that the assessee having business connection, the findings of which was given by the CIT (A), the amount cannot be excluded without examining ‘PE proviso’ provisions of the DTAA. In this regard the learned Counsel’s submission that under the Income Tax Act as well as under the provisions of DTAA the transaction between the assessee and Indian Company to whom license was granted by virtue of the agreement cannot be considered as Agency PE as the Indian assessee 6 Warner Bros Distributing Inc. Assessment Year-2014-15 is not exclusively dealing with the assessee and referred to the receipts from another company 20th Century Fox to submit that the assessee is also dealing with the other Non Resident Companies, so assessee cannot be considered as Agency PE within the definition of Permanent Establishment. 11) We have examined this aspect also. As rightly held by the CIT (A) even if income arises to the Non-Resident due to the business connection in India, the income accruing or arising out of such business connection can only be taxed to the extent of the activities attributed to permanent establishment. In this case, the assessee does not have any permanent establishment in India. Since the Indian company who obtained the rights is acting independently, Agency PE provisions are not applicable to the assessee company. The assessee relied on the decision of Ishikawajma-Harima Heavy Industries Ltd vs. Director of Income Tax 2007-(158)-TAXMAN 0259-SC that incomes arising to a Non-Resident cannot be taxed as business income in India, without a PE. As the assessee does not have any permanent establishment in India, the incomes arising outside Indian Territories cannot be brought to tax. Therefore, there is no need to differ from the findings of the CIT (A) and accordingly the Revenue Appeal is dismissed. 12) In the cross objection, the assessee is contesting about the findings of the CIT (A) that the general principles of section 9(1)(i) will apply in the absence of inclusion under section 9(1)(vi) and relied on the two decisions of the Gujarat and Madras High Courts referred (supra). Even though the cross objection was raised on findings of CIT(A), in view of the observations given above, we are of the opinion that the issue is only academic and does not require any specific adjudication.

Resultantly, the appeal stands allowed.