*connectedthinking pwc
In Brief
In a recent decision, the Mumbai Appellate Tribunal (“the Tribunal”), in the matter of SET Satellite (Singapore) Pte. Ltd.1 (SET) (“the assessee”) held that payment made by the assessee for acquiring broadcasting rights cannot be deemed to be income arising in India since,
• the payer was not a resident of India, and,
• the liability to pay was not incurred in connection with, or borne by, the Permanent Establishment (“PE”) of the assessee in India.
Thus, there being no economic link between the payment made by the assessee and the PE in India, no
1DDIT v. Set Satellite (Singapore) Pte. Ltd.
[ITA No. 2691 / Mum / 2009] dated 25 June, 2010
income arose in India with regard to the provisions of Article 12(7) of the Double Tax Convention between India and Singapore (“the tax treaty”).
Accordingly, there was no liability to withhold tax under section 195 of the Income-tax Act, 1961 (“the Act”), while making the remittance, as there was no income chargeable to tax in India.
Facts
The assessee is a company based in, and a tax resident of, Singapore.
The assessee company was engaged in the business of acquiring television programs, motion pictures and sports events and exhibiting the same on television channels from Singapore.
Payment received by a non-resident outside India for broadcasting rights given to a non-resident – it was held that no income arose in India and hence was not chargeable to tax in India
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13 July, 2010
PricewaterhouseCoopers 2 The assessee entered into an agreement on 25 January, 2002 with Global Cricket
Corpn. Pte. Ltd. (“GCC”) (a tax resident of Singapore under the tax treaty). Under the agreement, GCC granted ‘rights’ to the assessee to transmit, broadcast, exhibit, perform, include in cable programs and/or otherwise distribute, make available to the public any moving visual or audio visual representations and/or images of matches, players or play in any event, the feed, the highlights, package and any recording and other material by means of any media, throughout the licensed territory (India, Pakistan, Sri Lanka, Bangladesh, Singapore and Malaysia).
As regards the payment made by the assessee to GCC, the Additional Director of Income Tax (International Taxation) (“the ADIT”), initiated proceedings under section 201 of the Income Tax Act, 1961 (“the Act”), for non-deduction of tax at source, and held that the payment made by the assessee was in the nature of ‘royalty’ as defined in Explanation 2 to section 9(1)(vi) of the Act, deemed to arise in India, and hence taxable in India.
Accordingly, the ADIT raised a tax demand of INR. 329.40 million under section 201(1) and interest of INR 54.68 million under section 201(1A) of the Act.
The Commissioner of Income-tax (“CIT(A)”), however, accepted the contention put forth by the assessee that without a direct connection between the activities of the PE in India and the incurring of the liability to pay to GCC, the payment made by the assessee cannot be deemed to arise in India. The Department filed an appeal before the Tribunal.
Issue
Did the CIT(A) err in holding that the royalty had not arisen in India having regard to the provisions of Article 12(7) of the tax treaty?
Revenue’s contentions
a) The assessee had a PE in India in the form of SET India, which was engaged in
undertaking marketing activities in India. For an earlier tax year, it was held by the ADIT that, the assessee had an agency PE in India in the form of SET India.
b) The assessee was carrying on business in India, and payments were made to GCC for the business carried on in India and for making an earning from sources in India based on the following:
- The assessee’s source of revenue was from airtime sold on its channels, advertisement telecast on SET Satellite channel paid for by persons in India and the subscription income from cable operators mainly in India.
- Rights (definition of which was exhaustive under the Agreement) were granted to the assessee as a licensee throughout the licensed territory for a fee for an authorised number of broadcasts, during the licence period.
- Exclusive broadcasting rights for the licensed territory with non-exclusive rights to use the logo of GCC were granted to the licensee with the right to edit the live feed to be telecast on the channel.
Thus, there was a direct connection between the collection of revenue from India and the payment for acquisition of broadcasting rights.
c) These payments were in the nature of royalty as consideration for property and copyright rights as provided in clauses (i) and (v) of Explanation 2 to section 9(1)(vi), and deemed to accrue or arise in India under section 9(1)(vi)(c) of the Act.
d) The provisions of section 195 of the Act are applicable even to transactions between two non-residents outside India.
e) As the payments were made in Jersey and not in Singapore, the benefits under the tax treaty were not available to GCC in terms of the Limitation clause under Article 24 of the tax treaty.
PricewaterhouseCoopers 3
Assessee’s contentions
a) Under the territorial jurisdiction test, the Act was to be applied to the Indian Territory and hence, the Act does not apply to transactions taking place outside India.
b) Payments made by one non-resident to another are not covered under section 195 of the Act.
c) The payment cannot be considered as royalty under Explanation 2 to section 9(1)(vi) nor was it in the nature of royalty in terms of Article 12(3) of the tax treaty.
d) No income arose in India under Article 12(7) of the tax treaty as none of the following conditions were fulfilled:
- The payer in this instant case was not a resident of India.
- Although the non-resident payer had a PE or fixed base in India, the liability to pay royalty (even if the payment is assumed to be in the nature of royalty) was not ‘incurred in connection with’ this PE or fixed base, and the payment was not ‘borne by’ this PE or fixed base in India.
- There was no direct connection between the activities of the PE in India and the payment made by the assessee to GCC. Hence, there was no connection between the advertisement revenue collected by the PE and the broadcasting rights paid for by the assessee. The payment for broadcasting rights was made only for broadcasting operations in Singapore.
- The financial burden of the payment for the rights was ‘borne by’ the assessee in Singapore and not by the PE in India. To this end, the assessee also produced a copy of the balance sheet and the relevant schedule of the Indian PE to prove that no amount was paid by the PE to acquire the broadcasting rights from GCC.
e) The Limitation clause under Article 24 of the tax treaty was not applicable in the assessee’s case.
Tribunal observations and Ruling
a) Under Article 12(7) of the tax treaty, royalties (if these payments are held to be so) arose in Singapore, since the payer (i.e., the assessee) was a resident of Singapore.
b) Even where the assessee had a PE in India, the existence per se of a PE cannot lead to a conclusion that the royalty arises in India as it was also essential that the liability to pay such a royalty should have been ‘incurred in connection with’ and was ‘borne by’ the PE of the assessee in India.
c) Based on an analogy of the OECD Commentary on Article 11 in respect of interest, it was evident that for royalties to arise in India, an existence of an economic link between the liability for payment of such royalties and PE was necessary. However, there was no such link between the payment of royalty and the PE in India. This economic link was only with the entity outside India, i.e. in Singapore. Hence, the payment cannot be said to have been ‘incurred in connection with’ the PE in India.
d) The PE was also not involved in any way with the acquisition of the broadcasting rights. The PE did not bear the cost of the payment to GCC. Hence, it cannot be said that payment to GCC was ‘borne by’ the PE in India. This was also evident from the Balance Sheet and the relevant schedules in the books of the PE as produced by the assessee, which did not show any liability recognised in the Indian books on account of the payments made to GCC outside India.
Conclusion
The Tribunal has provided guidance in respect of royalty payable by one non-resident to another and the chargeability to tax in the light of the terms ‘in connection with’ and ‘borne by’ used in most tax treaties. It may however be noted that the Tribunal has not analysed
PricewaterhouseCoopers 4 whether the payment for broadcasting rights was in the nature of royalty under the
provisions of the Act or the tax treaty.
This ruling specifically brings out that mere existence of a PE of a non-resident does not result in royalty becoming taxable in India in the absence of an economic link between the payment of royalty and the activities of the PE in India.
The relevance of the OECD commentaries while interpreting the tax treaties is also brought out in this decision.
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