Case Number: ITA 814/DEL/2021
Appellant: Turner Broadcasting System Asia Pacific, Inc, New Delhi
Respondent: DCIT Circle-3(1)(1), International Taxation, New Delhi
Assessment Year: 2016-17
Case Filed On: July 2, 2021
Order Type: Final Tribunal Order
Date of Order: December 26, 2022
Pronounced On: December 26, 2022
Result: The tribunal ruled in favor of the appellant, holding that the distribution revenue is to be taxed as business income and not as royalty.
This article discusses the case between Turner Broadcasting System Asia Pacific, Inc (the appellant) and the Deputy Commissioner of Income Tax, Circle-3(1)(1), International Taxation, New Delhi (the respondent). The central issue was the taxability of distribution revenue received by the appellant, whether it should be classified as royalty or as business income. The Income Tax Appellate Tribunal (ITAT) delivered its decision on December 26, 2022, in favor of the appellant.
The appellant, Turner Broadcasting System Asia Pacific, Inc, is a non-resident corporate entity incorporated under the laws of the USA and a tax resident of that country. During the assessment year 2016-17, the appellant derived income from granting exclusive rights to Turner International India Private Limited (TIIPL) to sell advertising on products and distribute products, including satellite-delivered television services, interactive entertainment services, and entertainment mobile telecommunication services.
The appellant earned revenue of Rs.1,780,000,000 from selling advertising rights and Rs.1,290,000,000 from distribution of products. This income was offered as business income. However, during the assessment proceedings, the Assessing Officer (AO) treated the distribution revenue as royalty both under Section 9(1)(vi) of the Income Tax Act, 1961, and under the India-USA Double Taxation Avoidance Agreement (DTAA). The AO applied a 10% tax rate on the distribution revenue, following the provisions of Section 115A of the Act.
The appellant contested the AO’s decision, and the matter was brought before the ITAT. The appellant’s representative argued that the distribution revenue should be classified as business income, as had been determined in previous assessment years (2009-10, 2010-11, 2012-13, and 2013-14) by the Tribunal, which was based on a Mutual Agreement Procedure (MAP) approved by the tax authorities of both countries.
The representative emphasized that the Tribunal’s previous rulings should be applied consistently, as the facts and circumstances had not changed. The Tribunal’s decisions in favor of the appellant in earlier assessment years had established that the distribution revenue was to be treated as business income and not royalty.
The Tribunal, comprising Shri G.S. Pannu (Hon’ble President) and Shri Saktijit Dey (Judicial Member), examined the submissions and material on record. The Tribunal observed that this issue had been consistently decided in favor of the appellant in earlier years, based on the MAP agreement between the tax authorities of India and the USA.
The Tribunal noted that the appellant’s income from distribution revenue had been accepted as business income in accordance with the MAP in previous assessment years. The Tribunal highlighted that the ownership of the copyright and other proprietary rights in the products remained with the appellant, and the rights granted to TIIPL were limited to distribution and selling advertising.
The Tribunal referred to its earlier decisions, which had held that the distribution revenue earned by the appellant could not be taxed as royalty under Article 12 of the India-USA DTAA, but should be treated as business income. The Tribunal cited the relevant clauses of the agreement between the appellant and TIIPL, which confirmed that the copyrights in the products were retained by the appellant.
In its detailed order, the Tribunal stated:
“The appellant-assessee is a US-based company and is a tax resident of the US. During the relevant assessment years, it derived advertisement and distribution revenue from granting exclusive rights to an Indian company (TIIPL) to sell advertisements and distribute products. The ownership of the copyright remained with the appellant, and the distribution revenue collected by TIIPL was to be shared between the appellant and TIIPL. The copyrights and other proprietary rights in the products were vested with the appellant company alone.”
The Tribunal further noted that the AO had applied the retrospective amendment in Explanation-6 of Section 9(1)(vi) of the Act, which could not be imported into the DTAA. The Tribunal referred to the Delhi High Court’s decision in the case of New Skies Satellite BV, which established that amendments in domestic law could not affect the DTAA’s provisions.
Based on these considerations, the Tribunal concluded that the distribution revenue should be taxed as business income and not as royalty. The Tribunal directed the AO to delete the addition made on this account.
In addition to the main issue of distribution revenue, the appellant also raised concerns about the short grant of TDS credit and an unexplained adjustment made by the AO. The Tribunal directed the AO to verify these claims factually and allow the appropriate relief.
In conclusion, the ITAT ruled in favor of Turner Broadcasting System Asia Pacific, Inc, holding that the distribution revenue earned in India should be taxed as business income and not as royalty. This decision reinforces the importance of consistent application of legal principles and agreements between tax authorities in international taxation matters.
This ruling provides significant clarity for taxpayers and tax authorities regarding the classification of distribution revenue and emphasizes the need to respect established agreements and judicial precedents in tax assessments.
Manage the increasing number of hearings effortlessly by leveraging the legal AI revolution We are India's Leading revolutionary AI-powered legal platform where you can get enough insights into top cases and judgements.
Research Platform