The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the distribution revenue received from the US Broadcasting Company towards granting of distribution rights cannot be taxed as ‘royalty’.
The bench of Yogesh Kumar U.S. (Judicial Member) and B. R. R. Kumar (Accountant Member) has observed that the subject distribution revenue earned by the since the assessee has already offered the income as business income in terms of Mutual Agreement Procedure (MAP) and the income as declared by the assessee in accordance with the MAP which has been accepted by the Department in earlier years has been accepted, we delete the additions made by the Assessing Officer for the Assessment Year 2020-21 and 2021-22.
Background
The appellant/assessee is a tax resident of USA within the meaning of Article 4 of the India-USA Double Taxation Avoidance Agreement (DTAA) and holds a valid Tax Residency Certificate for the Financial Year relevant to Assessment Year 2020-21 as well as 2021-22. The assessee entered into an agreement with WarnerMedia India Private Limited (WMIPL) effective from April 01, 2011, as amended from time to time, wherein the assessee granted WarnerMedia India Private Limited the rights to sell advertising and distribution of television and interactive platforms namely Cartoon Network, Cartoon Network HD (CN HD+) and POGO, and any other television, interactive television, and/or telecommunication services for viewership in India.
As per the agreement, WarnerMedia India Private Limited is to retain 50 percent of revenues earned from sale of advertisement inventory for the channels in India and from distribution of channels in India as an Arm’s Length Price consideration for services rendered to the assessee subject to an annual minimum guarantee.
The assessee filed return of income in respect of assessment years under consideration offering the above-mentioned revenues to tax on the basis of erstwhile Mutual Agreement Procedure (MAP)
The resolution arrived at between the Competent Authorities of USA and Competent Authorities of India under Article 27 of the Treaty, for earlier years (i.e. A.Y 2001-02 to 2004-05) by which 10% of both the advertising and distribution revenues were held as business income in India.
The case of the assessee was selected for scrutiny and a draft assessment order came to be passed by determining total income distribution revenues were held as royalty and taxed at 10% as per Article 12 of the Treaty/Section 9(1)(vi) of the Act. The 15% of net advertising revenues received by TBSAP from WMIPL are attributable to the alleged Permanent Establishment (PE) of TBSAP in India.
The assessee filed the objections before Resolution Panel (DRP) and the DRP directed the AO to examine the order of the Tribunal in Assessee’s own case for Assessment Year 2009-10 to 2017-18 in respect of taxability of distribution revenues and held that altering the attribution based on a factor which had no bearing in FAR profile is against the law, and not warranted.
The DRP directed the AO to incorporate the findings on evidence if any for altering the attribution and pass speaking order for the years under consideration. The AO, without taking into consideration the directions of the DRP, passed the final Assessment Orders for Assessment Years 2020-21 and 2021-22 respectively under section 143(3) read with Section 144C (13) in line with the draft assessment order.
Conclusion
The tribunal while allowing the appeal held that assessee cannot be taxed as Royalty albeit as a business income. Since the assessee has already offered the said income as business income in terms of MAP and the income as declared by the assessee in accordance with the MAP which has been accepted by the Department in earlier years has been accepted. The tribunal deleted the additions made by the Assessing Officer for the Assessment Year 2020-21 and 2021-22.
Case title: Turner Broadcasting System Asia Pacific, Inc. United States of America v/s Deputy Commissioner of Income-tax
Citation: I.T.A. No. 2432/DEL/2023 (A.Y 2020-21)
Counsel for the Petitioner: Sh. Manuj Sabharwal, Adv & Sh. Drona Negi, Adh & Sh. Ayush Kumar, Adv
Counsel for the Respondent: Sh. Vijay B Vasanta, CIT DR
