Sarang v. Kotwal, Jj

Priya Soparkar IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.103 OF 2017WITH INCOME TAX APPEAL NO.207 OF 2017 Commissioner of Income Tax (IT)-3… Appellant V/s. M/s MSM Satellite (Singapore) Pte. Ltd.… Respondent --- Mr.Tejveer Singh for the Appellant.Mr.Percy Pardiwalla, Senior Counsel with Mr.Nitesh Joshi i/byMr.Sameer Dalal for the Respondent. --- CORAM : AKIL KURESHI AND SARANG V. KOTWAL, JJ. DATE : APRIL 23, 2019. P.C.:- 1.Issues being identical, we may notice facts from Appeal No.103 of 2017. 2.This appeal is filed by the revenue to challenge the judgment of Income Tax Appellate Tribunal. Following questions arepresented for our consideration:- Priya Soparkar “a.Whether on the facts and circumstances ofthe case and in law, the tribunal is correct indeciding the issue in favour of the assesseerelating to the addition of income as per rule 10Aon account of “Advertisement Revenue” and“Distribution revenue” ignoring the fact that theassessee has a PE in India?b.Whether on the facts and circumstances ofthe case and in law, the ITAT is correct in nottreating M/s Multi Screen Media Pvt. Ltd. (MSMIndia as Permanent establishment of the assesseein terms of Article 5 of Double Taxation AvoidanceAgreement between India an Singapore?c.Whether on the facts and circumstances ofthe case and in law, the ITAT erred is notappreciating that the assessing officer has correctlyassessed as distribution receipt as ‘RoyaltyIncome’?” 3.Question Nos.a and b arise in following background.Respondent-assessee is a Singapore based company engaged inthe Telecasting of Channels in the Indian sub-continent. Theassessee operates through a local company called Multi ScreenMedia Private Limited. The assessee contends that said MultiScreen Media Private Limited is not a dependent agent whichthe revenue disputes. Question (a) raised by the revenue relatesto the advertisement revenue and distribution revenue generatedout of such activity by the assessee. The revenue wishes to 39 itxa 103-17 and 207-17-o tax such income of the assessee in India on the ground that theassessee has a permanent establishment in India. 4.It is undisputed that in case of this very assessee, such aquestion had come up for consideration before this Court in case of Set Satellite (Singapore) Private Limited Vs. Deputy Director of Income Tax[1]. The Court after a detailed discussion and examination of facts and law applicable, reversed thedecision of the Tribunal and allowed the assessee’s appealmaking following observations :- “13. Considering the above principle as may bediscerned from the judgment in DIT (InternationalTaxation 292 ITR 416 (supra) it would be clearthat - (1) Considering the CBDT Circular No.742 itwould be fair and reasonable that the taxableincome is computed at 10 percent of the grossprofits. In the instant case insofar as marketingservices are concerned by the arm’s lengthprinciple what has been paid is more than 10percent as can be seen from the order of CIT (A).This was not disputed by the revenue in its Appealbefore the ITAT. (2) The only contention advanced and which foundfavour with the Tribunal was that theadvertisement revenue received by the assesseewas also income liable to tax in India. The CIT(A) relied upon Circular No.23 of 1969. That Priya Soparkar Circular read with Article 7(1) would result inholding that advertisement revenue received bythe appellant are not taxable in India as long asthe treaty and Circular stands. (2) The only contention advanced and which foundfavour with the Tribunal was that theadvertisement revenue received by the assesseewas also income liable to tax in India. The CIT(A) relied upon Circular No.23 of 1969. That Priya Soparkar Circular read with Article 7(1) would result inholding that advertisement revenue received bythe appellant are not taxable in India as long asthe treaty and Circular stands. 14.In the light of the above Appeal filed by theAppellant herein is allowed and the order of theITAT is set aside. Merely because tax on incomewas paid for some assessment years would notestop the assessee from contending that its incomeis not liable to tax. The order of CIT is restoredexcept to the extent that it has said that it cannotinterfere because the Appellant had paid the tax.That part is set aside.” 5.It was in this context that the Tribunal in the impugnedjudgment had referred to the earlier assessments in case of thisvery assessee, in which the issue was decided in favour of theassessee. In that view of the matter, question No.a is not requiredto be entertained. Once we come to this conclusion, question (b)becomes academic. In any case, the Tribunal had proceeded on thebasis that the assessee has a permanent establishment in Indiadespite which it would have no tax liability in India. In thatview of the matter, it can also be stated that question (b) doesnot arise out of the judgment of the Tribunal. 6.So far as question (c) is concerned, we notice that the Priya Soparkar 59 itxa 103-17 and 207-17-o Tribunal in the impugned judgment has also made a reference tothe earlier assessment proceedings of this assessee. It appearsthat in the earlier occasion the Commissioner (Appeals) hadheld that the payment of distribution charges, cannot be termedas payment for copyright, but can at best be a business income.We notice that on earlier occasions the Tribunal had considered a similar issue which was framed as under :- “Whether on the facts and in the circumstances ofthe case and in law, the Ld. CIT(A) erred in notappreciating that the Assessing Officer has correctlytreated the distribution receipt as 'RoyaltyIncome'?.the case and in law, the Ld. CIT(A) erred in notappreciating that the Assessing Officer has correctlytreated the distribution receipt as 'RoyaltyIncome'?. The Tribunal had dealt with this issue, by making an extensive reference to the order of CIT (Appeals). Relevant portion of thisjudgment of the Tribunal dated 28[th] August, 2015 reads asunder :- “7.Regarding distribution revenue also, the Ld.CIT (A), though discussed the issue in detail that itis not “royalty”, decided the issue in favour of theassessee, following the past history of the assesseefrom assessment year 1999-2000 to 2004-05,wherein this issue was decided in favour of theassessee. The relevant observation and finding ofthe CIT (A) is as under:11. After considering the rival contention andabove facts, we find that, so far as the issuerelating to addition on account of 'advertisementCIT (A), though discussed the issue in detail that itis not “royalty”, decided the issue in favour of theassessee, following the past history of the assesseefrom assessment year 1999-2000 to 2004-05,wherein this issue was decided in favour of theassessee. The relevant observation and finding ofthe CIT (A) is as under:11. After considering the rival contention andabove facts, we find that, so far as the issuerelating to addition on account of 'advertisement revenue' and 'distribution revenue' the same standsdecided in favour of the assessee by the Tribunal,which has been affirmed by the Hon'ble High courtin AY 1999-2000 and also in subsequent years. Asregards the issue of 'distribution receipts' treated asroyalty income, we find that this has been treatedas business income and such a finding or conclusionnow have attained finality, as pointed out by theLd. Senior Counsel. Thus finding of the CIT (A) onboth the issues are affirmed and ground no.1 & 2are dismissed.” 7.From the documents supplied to us, we could not gatherany judgment of the High Court in case of this assessee or of anyother assessee, dealing with such an issue. We have thereforeapplied our mind independently and heard learned counsel for theparties on this question. 8.Broadly stated, the facts are that the assessee-MSM Satellite(Singapore) Private Limited is a Singapore based company andoperates T.V.Channels for exhibition of various programmes;entertainment, educational or otherwise. SET India PrivateLimited through layers of multi system operators and cableoperators collects subscription charges to enable individualcustomers to view the channels and the programmes telecast on Priya Soparkar 79 itxa 103-17 and 207-17-o such channels. The revenue so collected from large number ofcustomers would eventually reach the assessee after adjustmentof intermediary charges paid to the different agencies. Therevenue contends that these payments made to the assessee arein the nature of royalty for use of copyright. The assesseecontends that the same is a business income and under nocircumstances can be categorized as royalty payment. 9. We may notice that in case of SET India Private Limited,the Tribunal had addressed a similar question in its judgmentdated 25[th] April, 2012 in Income Tax Appeal No.4372 of 2004.The Tribunal while confirming the decision of CIT (Appeals), in the said judgment held and observed as under:- “6.Having heard both the sides, we observe thatld CIT (A) while examining the issue has statedthat the Non-resident company has granted non-exclusive distribution rights of the channels to theassessee and has not given any right to use orexploit any copyright. The assessee is no wayconcerned whether the programs broadcast by theNon-resident company are copyrighted or not. Thesaid distribution is purely a commercial right, whichis distinct from the right to use copyright. Weobserve that ld. CIT(A) has considered theprovisions of Section 14 and Section 37 of theCopyright Act, 1957. It is observed that Section 37 of the Copyright Act deals with BroadcastReproduction Rights (BRR) and same is coveredunder Section 37 of the Copy Right Act and notunder section 14 thereof. We observe that ld CIT(A) has also considered Clause 6.3 of thedistribution agreement entered into betweenassessee company and Non-resident company,which states that the right granted to the assesseeunder the agreement is not and shall not beconstrued to be a grant of any license or transfer ofany right in any copyright. Ld CIT(A) has statedthat the assessee submitted before him that thecable operator only retransmits the televisionsignals transmitted to it by a broadcaster withoutany editing, delays, interruptions, deletions oradditions and therefore payment made by theassessee to the Non-resident company is not for useof any copyright and consequently cannot becharacterized as Royalty. Ld CIT (A) has held thatBroadcasting Reproduction Right is not coveredunder the definition of Royalty under section 9(1)(vi) of the Income Tax Act as well as Article 12 ofthe Treaty. Accordingly, the payment is not in thenature of Royalty but in the nature of businessincome.” 10.In our opinion, the Tribunal has not committed any error.As noted, the assessee would receive a part of subscription chargespaid by a large number of customers through different agencies.The said subscription charges would enable the customers to viewchannels operated by such assessee. The assessee was thus notparting with any of the copyrights for which payment can be Priya Soparkar99 itxa 103-17 and 207-17-oconsidered as royalty payment. Term “copyright” has beendefined in Section 14 of the copy right Act, 1957. A glance at thesaid provision would show that the copyright means exclusiveright, subject to the provisions of this Act, to do or authorise thedoing of any of the following acts specified in the said provisionin respect of a work or any substantial part thereof. Term“work” is defined under Section 2(y) of the Copyright Act, 1957,as to mean any of the works namely a literary, dramatic, musicalor artistic work or a cinematograph film and a sound recording.Sub-section (1) of Section 14 of the Copyright Act, 1957 listsseveral Acts in respect of a work in relation to which exclusiveright would be termed as copyright. In the present case, theassessee had not created any literary, dramatic, musical orartistic work or cinematograph film and/or a sound recording. 11.Infact, Section 37 of Copyright Act, 1957 separately definesbroadcast reproduction right. Sub-section (1) of Section 37 of thesaid Act provides that every broadcasting organisation shall havespecial rights to be known as “broadcast reproduction right” inrespect of its broadcasts. Sub-section (2) of Section 37 provides that the broadcast reproduction right shall subsist until twenty-five years from the beginning of the calender year next followingthe year in which the broadcast is made. 12.Section 9 of the Act pertains to income deemed to accrue or arise in India. Clause (vi) of Section 9(1) pertains to income by way of royalty. Relevant portion reads as under:- “(vi) income by way of royalty payable by - (a) the Government; or (b) a person who is a resident, except where theroyalty is payable in respect of any right,property or information used or services utilisedfor the purposes of a business or profession carriedon by such person outside India or for the purposesof making or earning any income from any sourceoutside India; or (c) a person who is non-residnet, where the royaltyis payable in respect of any right, property orinformation used or services utilised for thepurposes of a business or profession carried on bysuch person in India or for the purposes ofmaking or earning any income from any source inIndia:” Explanation 2 below sub-section (1) of Section 9 describes the term “royalty” for the purpose of said clause, relevant portion of which reads as under:- “Explanation 2.- For the purposes of this clause,“royalty” means consideration (including any lump sum consideration but excluding any considerationwhich would be the income of the recipientchargeable under the head “Capital gains”)for-” 13.In our opinion, these provisions would in no manner changethe position. Only if the payment in the present case by way of aroyalty as explained in explanation (2) below sub-section (1) ofSection 9 of the Act, the question of applicability of clause (vi) ofsub-section (1) of Section 9 would arise. Learned counsel for therevenue placed considerable tress on clause (v) of explanation(2) by virtue of which the transfer of the rights in respect ofcopyright of a literary, artistic or scientific wok includingcinematograph film or films or tape used for radio or televisionbroadcasting etc. would come within the fold of royalty for thepurpose of Section 9(1) of the Act. We do not see how thepayment in the present case could be covered within the saidexpressions. As noted, this is not a case where payment of anycopyright in literary, artistic or scientific work was being made. 14.We may also notice that India Singapore Double TaxationAvoidance Agreement contains Article 12 pertaining to royalty and fees for technical service. Paragraph (3) of Article 12 defines the term “Royalty” as under:- “The term “royalties” as used int his Article meanspayments of any kind received as a considerationfor the use of, or the right to use:(a)any copyright of a literary, artistic orscientific work, including cinematograph film orfilms or tapes used for radio or televisionbroadcasting, any patent, trade mark, design ormodel, plan, secret formula or process or forinformation concerning industrial, commercial orscientific experience, including gains derivedfrom the alienation of any such right, property orinformation;(b)any industrial, commercial or scientificequipment, other than payments derived by anenterprise from activities described in paragraph4(b) or 4 (c) of Article8.” 15.Even going by this defination, the payment in question can not be categorized as royalty. 16.In the result, we do not find any reason to interfere. 17.Income Tax Appeals are dismissed. (SARANG V. KOTWAL, J.) (AKIL KURESHI, J.)