NGC NETWORK ASIA LLC,MUMBAI vs. JDIT (IT) RG 4, MUMBAI

2 And ITA No.7631/Mum/12 2. The assessee is aggrieved by the decision of the AO/DRP in holding that (a) the assessee is having a Permanent Establishment (PE) in India in terms of India-USA DTAA and hence the revenue generated through advertisements is taxable in India. (b) the income generated through distribution of channels falls within the meaning of “Royalty” under Article 12 of India-USA DTAA and also u/s 9(1)(vi) of the Act and hence the same is also taxable in India.

The facts relating to the case are discussed in brief. The assessee herein, viz., M/s NGC Network Asia, LLC ('NGC Asia); is a Delaware, US incorporated entity. The assessee is a subsidiary of “Fox Entertainment Group Inc”. The assessee holds 100% shares in NGC Network (Mauritius) Holden Ltd, which in turn, holds 99% shares in M/s NGC Network (India) Private Limited (hereinafter “NGC India”). All these companies are either subsidiaries/affiliate companies of M/s News Corporation, USA.

The assessee is the owner of two television channels viz., The National Geographical Channel and Fox International Channel. It is engaged in the business of broadcasting of its channels in various Countries including Indian sub-continent. As per Article 4 of the India - US Double Taxation Avoidance Agreement ('India - US Treaty), the assessee is eligible for the benefits of the India - US treaty by virtue of being a resident of USA. The assessee company has appointed M/s NGC India as its distributor to distribute its television channels and also to procure advertisements for telecasting in the channels. Hence the assessee company generates two streams of revenues from India, viz., (a) Fee for giving distribution rights for telecasting of its channels. and (b) Advertisement revenues.

Thus, during the year relevant for AY 2007-08, two agreements entered by the assessee with NGC India were in vogue in respect of advertisement revenues. As per the old agreement, the assessee has given Commission @ 15% to NGC India for the month of April, 2006 and 4 And ITA No.7631/Mum/12 retained 85% of the advertisement revenue for that month. As per the new agreement entered between the parties, it has received fixed sum of US $ 22,80,000/- from NGC India for giving contract of procuring advertisements for the period from May, 2006 to 31.3.2007. In respect of second source of revenue, viz., for giving distribution rights, the assessee has received US $ 32,00,000 during the year relevant for AY 2007-08. It is pertinent to note that, with regard to the various international transactions entered into by the assessee, a reference was made to the Transfer Pricing Officer (TPO) and the TPO has accepted the Arm‟ length Price of the international transactions entered into by the assessee with its Associated Enterprises (AE). The assessee took the view that both types of income, cited above, are not taxable in India and accordingly did not offer them in the return of income filed for AY 2007-08. The assessing officer/DRP, on the contrary, held that the advertisement revenues as well as distribution revenues are taxable in India, since the tax authorities considered M/s NGC India as the “dependent agent Permanent Establishment” of the assessee. The AO accordingly assessed 25.34% of the advertisement revenues as income of the assessee attributable to India, i.e. in the ratio of worldwide profits to worldwide revenue, in accordance with Rule 10B(ii) of the I.T Rules. The assessing officer held that the revenue generated on granting of Distribution rights is in the nature of “Royalty” and accordingly assessed 15% of thereof as income of the assessee as per Article 12 of India US DTAA. The DRP also confirmed the same.

We shall first take up the issue relating to the taxability of advertisement revenue. The assessee contended that the new agreement was entered on “Principal to Principal” basis between the assessee and NGC India and hence NGC India cannot be considered to be a dependent agent of the assessee, i.e., it was contended that NGC India is an “agent 5 And ITA No.7631/Mum/12 of independent status”. Accordingly, it was contended that the assessee does not have a PE in India, in which case the business income of advertisement revenue was not taxable in India. It was further submitted that the payment made by the assessee to NGC India was held to be at Arms length by the TPO and hence no further income is required to be attributed to the assessee. We have earlier noticed that the new agreement took effect from 1.5.2006 and hence tor the month of April, 2006, the assessee had paid commission @ 15% of advertisement revenues to NGC India. It was submitted that the rate of commission of 15% was considered to be at arm‟s length by the Hon‟ble Bombay High Court in the case of SET Satellite (Singapore) Pte Ltd (218 CTR 452). Further, the TPO has accepted that the international transactions have been carried on at arms length price. Accordingly it was submitted by the assessee as under:- “To conclude, we would like to mention that NGC India is an agent of an independent status, it is acting in its ordinary course of business and its activities are not devoted wholly or almost wholly for NGC Asia. Without prejudice to this, the commission paid to NGC India is also at arm‟s length price. In view of this, NGC India should not be considered as a dependent agent of NGC Asia.”

The assessing officer examined the nature of activities carried on by NGC India and also explanations furnished by the assessee. The 6 And ITA No.7631/Mum/12 submissions made by the assessee and the observations of the AO are extracted below:- “Further, a brief overview of some of the activities of NGC India upon purchasing of advertisement airtime from NGC Asia have been stated below: ---NGC India decides the pricing strategy, the target market segment etc. for the advertisement revenues. ---NGC India decides whether it should sell the advertisement airtime through its own sales force or through agents and accordingly, the advertising airtime is sold by NGC India ---Further, NGC India also solely decides the price and other terms at which it should sell advertising airtime to any customer NGC India (directly or through it agent) directly negotiates and agrees to the terms with the advertisers/agencies (customers) ---NGC India enters into contracts for sale of advertising airtime with the various customers on its own account and entirely at its own risk. (for eg the risk of bad debts if the customer does not pay is entirely that of NGC India) ---Further NGC India raises invoices and follows up (either directly or through its agent) for collection of the amounts due from its customers ---NGC India deals with, discusses and addresses any concerns/disputes with its customers. ----The entire business and commercial risk as such lies with NGC India In view of the above, NGC Asia (assessee herein) submits that the above stated activities are undertaken by NGC India in its own right and on own its account and NGC Asia is not involved in any manner in respect of the sale of advertising airtime by NGC India. Further, NGC Asia does not have any control over the above stated activities undertaken by NGC India with respect to sale of advertisement nor does it undertake any activity in India as regards the advertisement and sponsorship time sold by it. Accordingly, we 7 And ITA No.7631/Mum/12 submit that no income can be said to accrue or arise to NGC Asia in India. Based on the above mentioned facts, it is clear beyond doubt that NGC Asia does not carry out any business operations in India. - From the above explanation, it is clear that if no operations are carried out by the NGC Asia in India, no income can be attributed and taxed in India. In view of the above discussion and judicial precedents we would, like to state that, NGC Asia does not carry out any operations or activities in India in relation to the sale of advertisement and sponsorship time. Explanation that NGC India should not be construed as an agent of NGC Asia under P2P arrangement NGC Asia reiterates that the arrangement between NGC Asia and NGC India with respect to sale of advertisement and sponsorship airtime is on a 'P2P' basis and the same are negotiated on arm's length basis. NGC Asia has sold the airtime inventory to NGC India. Based on the above, NOC Asia submits that the basic condition for a person to constitute an agent for another is that the person must be employed by the principal to act on his behalf and to represent him in dealings with third persons. In this connection, we would like to draw your honour's attention to the following clauses of the agreement Clause 1) a) "NGC Asia agrees to sell to NGC India and NGC India agrees to acquire from NGC Asia upon the terms and conditions set out in this agreement, the Ad time on the Channel (s)" Clause 1) d) "For the avoidance of doubt it is clarified that while NGC India may deal with the Ad time and/or additional Ad time in its own right and in such manner as it deemed fit, onwards sale, if any, of Ad time and additional Ad time by NCG India to its customers will be entirely at its own risk, at price agreed 8 And ITA No.7631/Mum/12 between NGC India and such customers an and on such terms as it may consider appropriate. Further, no customer shall have privity of contact with NGC Asia and the entire risk and responsibility in all respect regarding such customers shall rest exclusively with NGC India." Clause 2)ii) “NGC India shall alone be responsible for its acts or omissions and shall not be deemed to be acting for and on behalf of NGC Asia." The agreement does not require or provide for NGC India under the direct or indirect control or supervision of NGC Asia. Accordingly, an important aspect for existence of an agency relationship, wherein an agent is required to conduct the business according to the directions of the principal is not satisfied. Therefore, based on the terms of the contract, the intention of the parties and the above analysis of the provisions of the Contract Act, the nature of arrangement between NGC Asia and NGC India is on a principal-to-principal basis. Taxability under India-US tax treaty Without prejudice to above that the advertisement revenues earned by NGC Asia are not taxable in India under the Act, we further submit that the revenue with respect to outright sale of advertisement and sponsorship time earned by NGC Asia from NGC India would only be taxable as per the provisions of Article 7 of the lndia-US tax treaty. Without prejudice, even presuming without conceding that NGC Asia constitutes a PE in India, the advertisement revenues could not be said to be effectively connected to such a PE. The term 'effectively connected' is not defined under the Act, however, the same has been interpreted by various judicial precedents to mean that income results from PE's activities and arise economically from the business carried on by the PE. In view of this, we would like to mention that NGC India has purchased the advertisement and sponsorship time from NGC Asia on a P2P basis. Further, NGC India has not carried on any activities on behalf of NGC Asia and therefore, no income can be said to arise economically to NGC Asia from business carried on by NGC India."

We have earlier noticed that the assessee has sold the “Advertisement Airtime” (Ad airtime) to NGC India with effect from 1.5.2006 and accordingly claimed that the agreement was on “Principal to Principal” basis. Accordingly, it was claimed that NGC India is an agent of independent status and hence NGC India cannot be considered to be “PE” of the assessee. The assessing officer did not accept the said submissions of the assessee. The assessing officer took the view that “time” cannot be delivered in advance and hence the “Advertisement Airtime” cannot be considered to be “Goods”, capable of being sold. Since capability of using goods is absent in the case of Advertisement airtime, the AO held that the NGC India cannot use the Ad airtime independent of the assessee. He also observed that, unlike in the case of “goods‟, time cannot be stocked for future sale, since the time gets generated automatically and it also lapses automatically. Accordingly, the AO held that the “Ad airtime” cannot be considered to “goods” capable of being sold in advance.

He further noticed that NGC India supplies „ready to broadcast advertisement materials‟ to the assessee, but the assessee has reserved its right either to accept or reject the advertisement material. He further submitted that the telecasting of programs and advertisements are composite activities and they cannot be segregated into transferable 11 And ITA No.7631/Mum/12 modules. Accordingly the AO held that the NGC India is only functional agent of the assessee and accordingly held that the assessee has only granted “Permissive right” to NGC India. The AO further substantiated his view by stating that the advertisement procured by NGC India, per se, does not have any commercial value unless it is telecast by the assessee and hence the procurement of advertisement is part of telecasting activity only.

The assessing officer further observed that the program including advertisement is uplinked by the assessee and they are downloaded by the cable operators for broadcasting the same to the viewers. Hence there is direct relationship between the assessee and cable operators. NGC India is procuring advertisement material and sent the same to the assessee and it does not have any role in uplinking/downlinking activities. The Assessing officer further reiterated his view that the advertisement content is inseparable part of flow of telecast contents and hence it cannot be segregated and sold. Accordingly the assessing officer held that NGC India is only a functional agent of the assessee.

The assessing officer further observed that the procurement of advertisement as well as its telecast takes place in India, i.e., the purchase, sales, delivery and consumption of advertisements are generated as well as concluded in India. Hence the source of advertisement revenues is India. The AO also observed that the NGC India procures advertisement by using the brand name of the assessee and hence all telecast contents are identified with the brand name of the assessee only. Accordingly the assessing officer held that NGC India is only a functional agent of the assessee and further the assessee has earned advertisement revenue through its business connection in India. The various observations made by the assessing officer has been

The Assessing officer further held that there is no material changes in the rights and obligations of the assessee under the old agreement (principal to agent agreement) and the new agreement (principal to principal agreement). Accordingly, the AO held that NGC India is dependent agent of the assessee in terms of paragraph 4(c) of Article 5 of India-USA DTAA. Consequently, he held that the assessee is having PE in India. In this regard, the assessing officer took support of the decision rendered by the co-ordinate bench of Tribunal in the case of ACIT Vs. DHL Operations B.V.Netherlands (ITA No.7987 and 7988/Bom/92 dated 03-10- 2000). The AO further observed that the decision in the case of SET satellite (supra) has been rendered by Hon‟ble Bombay High Court by considering the Circular No.23 dated July 23, 1969 issued by CBDT. However, the said circular has since been withdrawn by the CBDT, vide its Circular No. 07 of 2009. Accordingly, the AO held that the assessee has carried on its activities through a PE in India and hence the profits attributable to PE are liable to be taxed in India under Article 7 of DTAA.

The AO then referred to a Circular issued by CBDT, wherein it is stated that the income attributable to PE shall be computed as per Rule 10 of I.T Rules, if separate accounts for Indian operations are not available.

The Ld D.R.P. also upheld the view taken by the assessing officer. Accordingly, the assessing officer computed income from advertisement revenue as per Rule 10(ii), as stated earlier. 15. The main contention of the Ld A.R is that the new agreement entered between the assessee and NGC India with effect from 01st May, 2006 (new agreement) state in clear terms that the agreement has been 13 And ITA No.7631/Mum/12 entered on “Principal to Principal” basis, meaning thereby the NGC India was acting as an agent of independent status. According to the new agreement, the assessee has sold entire air time to NGC India on „principal to principal‟ basis for a lump sum consideration. The revenue generated on sale of advertisement air time is in the nature of business income and hence the same can be taxed in India only if the assessee holds a Permanent Establishment (PE) in India. Since the relationship between NGC India and the assessee is on principal to principal basis, NGC India cannot be considered as dependent agent and hence NGC India cannot be considered to be the PE of the assessee. In support of these contentions, the Ld A.R submitted that (a) the “Advertisement air time” falls in the category of “goods” and hence it can be transferred like any other “goods”. (b) the Transfer Pricing Officer, having certified that the international transactions have been entered at arms length, no further income can be attributed to the assessee so as to make anything taxable in India.

In the instant case, the assessee is in the business of broadcasting of television programmes and advertisements. The time limit available to the assessee in a day is 24 hours. This time limit appears to have been segregated into “Advertisement airtime” and “Programme air time”, meaning thereby, the assessee has prefixed the time limit for telecasting advertisements. For soliciting the advertisements, the assessee is required to appoint persons and the assessee has appointed M/s NGC India to solicit advertisements from India. Under the old agreement entered by the assessee with NGC India, the assessee has paid 15% of advertisement revenues to the Indian company. Further the advertisement revenue would depend upon the number of advertisements received and also quantity of air time used. There should not be any dispute that M/s NGC 17 Under the new agreement, the assessee has sold the entire “advertisement air time” to M/s NGC India for a fixed consideration. The new agreement states that the said agreements have been entered on “Principal to Principal” basis. Accordingly, it was contended that the “Advertisement air time” is “goods” capable of being transferred and hence the agreement has been entered on “Principal to Principal” basis. If the contention of the assessee is accepted that M/s NGC Asia cannot be considered to be the dependent agent of the assessee, in which case, M/s NGC Asia cannot become “PE” of the assessee company and hence the advertisement revenue earned by the assessee company shall not be liable to taxation in India. When this contentions were put to the assessing officer, the AO has taken the view that the relationship between the assessee and M/s NGC India continues to be that of “principal and agent”, since the “advertisement air time” cannot be considered to be “goods” capable to being stocked, transferred and used. 18. In this context, it is imperative to first determine the question as to whether “advertisement air time” shall fall under the category of “goods” capable of being transferred. We have noticed that the assessing officer has taken the view that the same cannot fall in the category of “goods”, since it cannot be stocked or used independently. Before us, the Ld A.R placed reliance on the decision rendered by Hon‟ble Supreme Court in the case of Tata Consultancy Services Vs. State of Andhra Pradesh (271 ITR 401) to support his contentions that the advertisement air time is „goods”. In the case of Tata Consultancy services (supra), the question urged before the Hon‟ble Supreme Court was about the character of “software”, 15 And ITA No.7631/Mum/12 i.e, whether a „software‟ is goods or not. In this connection, the Hon‟ble Supreme Court referred to its earlier decision rendered in the case of CST v. Madhya Pradesh Electricity Board (1969) 1 SCC 200, wherein the question whether „electricity‟ was „goods‟ for the purpose of imposition of sales tax under the Madhya Pradesh General Sales tax Act, 1959, wherein the characteristics of „goods‟ was explained as under:- “….. It has been held that properties which are capable of being abstracted, consumed and used and/or transmitted, transferred, delivered, stored or possessed etc. are „goods‟ for the purposes of sales tax…”

The “advertisement air time” is an item that can be identified and abstracted, since the telecasting time limit is predetermined. The right over the advertisement air time may also be capable of being possessed till the time of its expiry. For example, if a person purchases the right over the advertisement airtime of say, 30 minutes to be used before the expiry of a particular month, then the said can possess the right till the expiry of that month. Accordingly, after the expiry of the that month, the said right would automatically lapse and hence the characteristic of “capable of 16 And ITA No.7631/Mum/12 being stored” would have limited application in this case. Another important question is - whether the advertisement air time, per se, can be used independently by the transferee? One of the main characteristics of “goods” is that it should be capable of being “consumed” or “used”. There should not be any doubt that the “advertisement air time” shall have value or capable of being used /consumed only, if the concerned advertisement material is telecast by the assessee herein, i.e., the advertisement air time gets is value only if the assessee agrees to telecast the concerned advertisement material. For example, if the assessee refuses to telecast the advertisements procured by M/s NGC India, then the advertisement airtime purchased by it under the agreement shall not have any value. In case of “goods”, it gets separated from its manufacturer and it can be used/consumed by anyone independent of or without any support from the manufacturer. Further, the “goods” shall be capable of universal use. However, the “advertisement air time”, in the instant case, is related to the television channels owned by the assessee only. The advertisement airtime sold by the assessee or NGC India shall not have any value with regard to other television channels, meaning thereby, the same cannot be separated from the assessee, in which case, the “advertisement air time” fails to satisfy the test that it is capable of being used/consumed independently, i.e., independent of the assessee herein. Hence, through the purchase of advertisement airtime, a person gets a right to get his advertisement material telecasted in the television channels owned by the assessee. Hence, we agree with the view taken by the assessing officer that the “advertisement air time” cannot fall under the category of “goods”. It is only a right given to M/s NGC India to procure advertisements. Though the “right to procure advertisements” for particular “airtime” may be capable of being transferred, but the same cannot be consumed/used by the buyer of the right, without the

The next question that arises is about the nature of relationship between the assessee and NGC India. In the new agreement, it is provided that the relationship between them is that of “principal to principal”, whereas the tax authorities have taken the view that they still continue the “principal to agent” relationship even under the new agreement also. The nature of Principal- agent relationship came to be examined by the Hon‟ble Delhi High Court in the case of CIT Vs. Idea Cellular Ltd (325 ITR 148), wherein the Hon‟ble High Court has observed as under:- “19. This Court in Commissioner of Income Tax, New Delhi Vs. Singapore Airlines Ltd. [2009-ITOL-183-HC-DEL-IT] analyses the aforesaid definition in the following manner:

The “principal to principal” relationship is explained as under by Hon‟ble Delhi High Court in the case of Idea cellular Ltd (supra) as under:- “In contrast, the legal position when the goods are sold by principal to its distributors creating “principal and principal” relationship would be entirely different. On the sale of goods, the ownership passes between the manufacturer and the distributors. It is the responsibility of the distributor thereafter to sell those goods further to the consumers - the ultimate users. The principal/manufacturer does not come in picture at all. Of course, he may be liable for some action by the consumer because of defective goods, etc., which is the result of other enactments conferring certain rights on the consumer or common law rights in his favour as against the 19 And ITA No.7631/Mum/12 manufacturer. We may also point out that in its classic judgment in the case of Bharat Sanchar Nigam Ltd. Another Vs. Union of India and Others [AIR 2006 SC 1383], the Supreme Court held that electromagnetic waves or radio of frequencies are not goods and with the sale thereof Sales Tax Act is not attracted, though the decision was rendered in the context of liability of sales tax.”

In a principal to principal relationship in respect of sale of goods, the manufacturer does not come in the picture in respect of further sale of goods. We have earlier noticed that the “advertisement airtime” referred to here does not give to anybody the right of universal use and the same is restricted to the channels owned by the assessee only. Even after the sale of “advertisement airtime” by the assessee, the purchaser gets only a right to enforce the assessee herein to telecast the advertisement material of the purchaser, i.e., assessee‟s concurrence to telecast the advertisements and also actual telecasting alone brings value to the “advertisement airtime”. Hence assessee‟s involvement till the completion of telecasting of advertisement material is essential in order to maintain the value of advertisement airtime. Hence “advertisement airtime” cannot be categorized as “goods” within the legal meaning of the said term. Accordingly, what is being sold by the assessee is only the facility of telecasting of advertisements through the advertisement materials given by the clients. Hence, the NGC India cannot be considered to be selling any “goods” and in effect, it is only canvassing the advertisements for the assessee herein. Thus M/s NGC India provides only agency services to the assessee and in turn, the assessee is providing advertisement services or telecasting services to the clients. Thus the concept of purchase and sale of goods, in our view, cannot be applied to the facts of the instant case. Accordingly, we are of the view that M/s NGC India is only enabling the assessee to procure the advertisements for telecasting them and hence 20 And ITA No.7631/Mum/12 the NGC India cannot be considered as selling advertisement airtime independent of the assessee. Accordingly, we agree with the view of the assessing officer that M/s NGC India cannot be considered to be “an independent principal/agent” in respect of dealing in advertisement airtime relating to the television channels owned by the assessee. In effect, the NGC India is only canvassing the advertisements for the assessee through the purchase and sale of advertisement airtime relating to the television channels owned by the assessee and the same makes NGC India a “agent” of the assessee, since the advertisement airtime, per se, does not have any value without the assessee agreeing to telecast the advertisement material. It is well settled proposition that the substance shall prevail over the form and hence even if the new agreement states that the relationship between the assessee and NGC India is that of “principal to principal” basis, in view of the foregoing discussions, we are of the view that the relationship between them actually exists on “principal to agent” basis only. Under the old agreement, the assessee has paid 15% of the revenue as commission to NGC India and under the new agreement; it has sold advertisement airtime for a fixed consideration. In our view, the assessee has only changed the method of giving compensation to NGC India or method of generating revenue from the broadcasting of advertisements. Under the old agreement, the compensation given to NGC India as well as the revenue generated by the assessee was agreed to be shared in a fixed proportions, whereas under the new agreement, it has been determined at the consolidated figure. In our view, the methodology adopted by the parties to share the revenue or to give compensation to NGC India for services rendered may not be the determining factor to decide about the nature of relationship between the parties.

The dependent agent PE is specified in Article 5(4) of India-USA DTAA as under:- “4. Notwithstanding the provisions of paragraphs 1 and 2, where a person – other than an agent of an independent status to whom paragraph 5 applies – is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the first mentioned State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to those mentioned in paragraph 3 which, if exercised through a fixed place of business, would not make that fixed place of business a permanent establishment under the provisions of that paragraph; (b) he has no such authority but habitually maintains in the first mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of that enterprise, and some additional activities conducted in the State on behalf of the 22 And ITA No.7631/Mum/12 enterprise have contributed to the sale of the goods or merchandise; or (c) he habitually secures orders in the first mentioned State, wholly or almost wholly for the enterprise.”

Under the new agreement, it is contended that the assessee and M/s NGC India have entered the agreement on „Principal to Principal‟ basis with regard to the sale of airtime, meaning thereby, the assessee has given full authority to M/s NGC India to conclude the contracts relating to the advertisements in India. The following clauses of the new agreement support this view:- Clause 1) d) "For the avoidance of doubt it is clarified that while NGC India may deal with the Ad time and/or additional Ad time in its own right and in such manner as it deemed fit, onwards sale, if any, of Ad time and additional Ad time by NCG India to its customers will be entirely at its own risk, at price agreed between NGC India and such customers an and on such terms as it may consider appropriate. Further,no customer shall have privity of contact with NGC Asia and the entire risk and responsibility in all respect regarding such customers shall rest exclusively with NGC India”.

The assessee had also taken another argument that the Transfer pricing officer has held that the international transactions have been transacted at Arms length Price and hence no further attribution of income is necessary. In this regard, the assessee placed reliance on various case laws, mainly the decision rendered by Hon‟ble Supreme Court in the case of Morgan Stanely & Co. Inc. (292 ITR 416) and also the decision rendered by Hon‟ble Delhi High Court in the case of DIT Vs. BBC Worldwide Ltd (2011)(203 Taxman 554) and the decision of Hon‟ble Bombay High Court rendered in the cae of DIT (IT)-II Vs. B4U International Holdings Ltd (2015)(57 taxmann.com 146).

In the case of B4U International Holdings Ltd (supra), there was clear finding that the assessee therein carried on all activities from 26 And ITA No.7631/Mum/12 Mauritius and all the contracts were concluded in Mauritius. The activities carried out from India was found to be incidental or auxiliary /preparatory in nature and further the Indian company received only 4.69% of its total income from the assessee before the High Court. The assessee also placed strong reliance in the case of Set Satellite (singapore) Pte Ltd (307 ITR 205). However, in the said case also, there is a clear finding that the contracts were concluded in Mauritius. Hence paragraph 5 of Article 5 of treaty was applied. In the instant case, we have held that the paragraph 4 of Article 5 of the treaty shall apply and hence, we are of the view that the assessee cannot take support of this decision. The department also took a contention that the decision in the case of Set Satellite (Singapore) Pte Ltd (supra), which was considered in the case of B4U International Holdings Ltd (supra) have been rendered by taking into account the Circular No.23 of 1969 issued by the CBDT and since the said circular has been withdrawn by the CBDT, vide Circular No.07 of 2009 dated 22.10.2009, the ratio of the both the decisions are distinguishable. However, in our view, the said contentions of the revenue need not be considered, since we have distinguished both the decisions on facts.

Hence the certification of ALP by the TPO and the decision of the Hon‟ble Supreme Court and other High Courts cited above would be applicable only in respect of the payments made by a foreign company to its Indian AE in respect of services availed by it. On the contrary, if the foreign company receives any money from the Indian soil and if it is held to be having a “Permanent Establishment”, then the taxability of the same have to be examined in accordance with the provisions of Indo-US treaty as well as under the provisions of Indian Income tax Act.

The next issue relates to the treatment of fee received by the assessee from giving distribution rights to M/s NGC India. As per the distribution agreement, M/s NGC India is given right to distribute the channels telecasted by the assessee through any means to intermediaries in the assigned territory. The assessing officer proposed to treat the same as “royalty” and accordingly assess the same. The assessee submitted that (a) the distribution right is not in the nature of copyright. (b) it is a separate right by name “Broadcasting Reproduction Right” and the same is different from copyright. The AO however did not accept the contentions of the assessee. He observed that the agreement entered between the assessee and NGC India provide for restrictions on the use of Trade mark of the assesee. Further, the assessee holds full control over the channels and NGC India is allowed to only exploit the channels. He further held that the definition of term “royalty” given in Explanation 2 to sec. 9(1)(vi) of the Act is wider in scope that the definition given in the Indo-US treaty Further, the AO analyzed some of the clauses of the agreement and observed as under:-

The ld A.R submitted that the assessee has transferred the distribution rights to NGC India to distribute the channels in India. The assessee does not have any control over the activities undertaken by NGC India nor does it undertake any activity in India as regards the distribution rights granted. M/s NGC India has carried on the distribution activity on its own and the entire revenue from the activity accrues to NGC India only. Further, neither the NGC India nor any of the intermediaries can modify or delete anything in the course of Channel, i.e., the programmes shall be 30 And ITA No.7631/Mum/12 transmitted in its entirety without making any amendment. Further NGC India or any of the intermediaries cannot copy any of the programmes included on the Channel for the purpose of re-transmitting them later or for any other reason. Accordingly, the Ld A.R submitted that the assessee has granted NGC India non-exclusive license to use the trade marks associated with the Channel solely for the purpose of marketing and distribution. Hence, NGC India does not have rights to commercially exploit these trade marks in any manner.

The Ld A.R further submitted that the definition of term “Royalty” given in Explanation 2 to section 9(1)(vi) of the Act covers the payment received towards transfer of any rights in respect of copyright of a literary, artistic, scientific work. However, the payment received by the assessee does not fall in that category. He further submitted that the term „Copy right‟ is not defined under the Act. Adverting our attention to the definition of the term „Copyright‟ given under the Copyright Act, the Ld A.R submitted that the payment received by the assessee does not fall under any of the clauses given therein. He further submitted that, based on combined reading of Section 37 and 39A with section 2(dd) of the Copyright Act, the consideration paid by NGC India is for Broadcast Re- reproduction and distribution rights causing the broadcast to be heard or seen by the subscribers on payment of any charges by the them. However, such a right is not a copyright as defined under the law and hence, not covered by the definition of royalty under the Act. By placing reliance on the decision rendered by Hon‟ble Delhi High Court in the case of ESPN Star Sports Vs. Global Broadcast News Limited & others (RFA(OS)No. 25/2008)(Del), the Ld A.R submitted that the Hon‟ble Delhi High Court has held that „copyright‟ and „broadcasting reproduction right‟ are two distinct and separate rights. He further submitted that identical 31 And ITA No.7631/Mum/12 view has been expressed by the Hon‟ble Delhi High Court in the case of Star India Pvt Ltd Vs. Piyush Agarwal & ors. (CS(OS) Nos.2722/2012, 3232/2012 and 2780/2012)(Del) and also by the co-ordinate bench of Mumbai Tribunal in the case of DDIT Vs. SET India Private Limited (ITA No.4372/Mum/2004). He further submitted that the Hon‟ble Bombay High Court has held in the case of SET Satellite (Singapore) Pte Ltd (2008)(307 ITR 205) that the distribution rights were a Commercial right, which was distinct and different from a copyright and consequently there was no question of payment of royalty. Accordingly, the Ld A.R submitted that the payment received by the assessee from M/s NGC India is not payment towards copyright, but it is towards broadcasting re-production rights.

Alternatively, the ld A.R submitted that, even if it is contended that the Channel as a copyright, what NGC India is paying for is the right to use the copyrighted article (i.e., if the channel could be considered to be so) by virtue of being permitted to distribute the channel. Accordingly the ld A.R submitted that the NGC India does not acquire any right in the underlying copyright (i.e., right to modify/reproduce the channel/content) and hence it cannot be said that NGC India is making payment for a copyright.

The Ld A.R submitted that the assessee has permitted NGC India to use its trade marks only for limited purpose of using the same for marketing activities. He submitted that the incidental use of trademark/trade name/log cannot be held to be royalty. In this regard, the Ld A.R placed reliance on the decision rendered by the Mumbai bench of Tribunal in the case of Sheratorn International Inc. Vs. Deputy Director of Income tax (107 ITD 120)(Delhi). The ld A.R also placed reliance on the decision rendered in the following cases in this regard:-

The ld A.R further submitted that the distribution rights given by it is only a Commercial right and is also not covered by the definition of “royalty or fee for included services” given under Article 12 of India-USA treaty. He submitted that the tax treaties entered with some countries like Hungary, United Mexican States, Croatia etc., the definition of royalty specifically covers payment for “transmission by satellite, cable, optic fibre or similar technology. However, the definition of the term “royalty” under India-US treaty does not include broadcast reproduction right. Accordingly he submitted that the distribution right is a separate commercial right and the payment received is not towards use of copyright.

He further submitted that the payment received for giving distribution right is taxable as per the provisions of Article 7 of India-US tax treaty and hence the same is taxable only if the assessee has a PE in India. He contended that the assessee does not have a PE and hence the payment received by the assessee for giving distribution rights is not taxable in India.

On the contrary, the Ld D.R submitted that the expression “Copyright” includes broadcasting rights. Further the assessee has permitted NGC India to use is trade mark and trade name. She further submitted that the assessee, through giving distribution rights, has granted M/s NGC India secondary transmission of primary transmission, which is actionable as an act of infringement subject to certain exceptions under the USA Act. Accordingly, the ld D.R submitted that the assessing

We have heard the rival contentions and on this issue and perused the record. We notice that the assessing officer has made a general observation that the Article 12 of the India-US DTAA shall be applicable without critically analyzing the provisions of the treaty. Though the assessing officer has also referred to the provisions of Explanation 2 to sec. 9(1)(vi) of the Act for examining the definition of the term “royalty”, yet he has not critically discussed about its applicability to the impugned payment. It is pertinent to note that the definition of the term “royalty” given in sec. 9(1)(vi) of the Act as well as in the Indo-USA treaty uses the expression “process”. The said expression has not been defined in the treaty, but the same has been defined in Explanation 6 to sec. 9(1)(v) of the Act as under:-

Since the facts prevailing in AY 2008-09 and the two issues urged therein are identical in nature, we apply our decision taken for AY 2007-08 on both the issues to AY 2008-09 also.

In the result, both the appeals filed by the assessee are treated as partly allowed for statistical purposes.