Whether the amounts received by a non-resident company for granting distribution rights to an Indian Company can be brought to tax as royalty or not?
Turner Broadcasting System Asia Pacific Inc. vs DDIT ITA Nos. 1343/Del/2014, 631/ Del/2015, 4087/Del/2016, 2610/ Del/2017
The taxpayer is a tax resident of the USA. During the year, it has derived advertisement and distribution revenue from the grant of exclusive rights to Turner International India Private Limited (TIIPL) to sell advertisements on the products such as Cartoon Network, POGO TV, etc. This distribution agreement allowed the TIIPL to distribute the products to various cable operators and ultimately to several consumers in India.
The distribution revenue collected by the TIIPL was to be shared between the appellant and TIIPL. For the Assessment Years (AYs) 2001-02 to 2004-05, the competent authorities of India and the USA reached an agreement and held that 10% of the advertising and subscription revenue received from Indian sources during the relevant year(s) was deemed to be the net profit chargeable to tax in India.
Subsequently, for AY 2007-08 and 2008- 09, the taxpayer filed a return on similar lines, and the same was accepted by the department.
However, for the AYs 2009-10 to 2013- 14, the Assessing Officer (AO) alleged that that subscription/distribution fees received by assessee relates to ‘content’ protected by the Copyright Act in the form of ‘Copyright,’ ‘Broadcast Right’ and/or ‘Rebroadcast Rights/Broadcast Reproduction Rights’ and therefore, such subscription fees are in the nature of royalty.
The draft orders were confirmed by the Dispute Resolution Panel (DRP), and in pursuant thereof, final assessment orders were passed by the AO. Aggrieved by the final assessment order, the taxpayer filed an appeal with the Delhi tribunal.
Ruling in the favor of the taxpayer, the tribunal held that in the earlier years, the department has considered the advertisement revenue to be the business income following the MAP order. When this fundamental aspect is permeating through all the impugned AYs, then as a rule of consistency, the same position should not be altered or should be allowed to be changed in the absence of any material change in the facts.absence of any material change in the facts. However, the tribunal has also independently evaluated the merits of the claim of the department.
Considering the material on record, the tribunal held that the taxpayer company has only granted commercial rights in the nature of ‘broadcast reproduction right’ to the TIIPL. The Term ‘Copyright’ is defined in Section 14, and ‘broadcast reproduction right’ has been defined in Section 37, and both are two distinctive and separate rights. ‘Broadcast reproduction right’ is not reckoned as copyright. Therefore, it cannot be held that revenue derived by the assessee for distribution of products is taxable as ‘royalty’ albeit it is a business income of the assessee.
Reliance was placed on MSM Satellite (Singapore) Pte Limited v. Dy DIT [ITA No. 2523/Mum/2010]
There are various judicial precedents available on a similar footing distinguishing the broadcasting rights from copyright. This decision of the Delhi tribunal is certainly a welcome one.
Whether explanation 6 and 7 to section 9(1)(i) has to be given a retrospective effect or prospective effect?
Augustus Capital PTE Ltd vs DCIT ITA No 8084/Del/2018
The taxpayer is in the business of incubation of companies, i.e., providing new businesses with necessary financial support and technical services. During the course of its business, the taxpayer made investments in Accelyst Pte Ltd, a tax resident of Singapore. In the year under consideration, the taxpayer sold its entire holding to an Indian company.
In light of the amended provisions of section 9(1)(i) of the Act, read with Explanations 5, 6, and 7, the taxpayer was of the firm belief that the transaction involving the sale of shares of a foreign company, which held an investment in India, was not taxable. Explanation 7 carves out’ exemption’ from the applicability of Explanation 5 to small investors holding no right of management or control of such company/entity and holding less than 5% of the total voting power, share capital, the interest of the company/ entity that directly or indirectly owns the assets situated in India.
However, the AO disregarded the submissions of the taxpayer on the ground that operation of Explanation 7 to section 9(1)(i) of the Act is prospective since it has been inserted by the Finance Act, 2015 and made effective from 1 April 2016 and, therefore, not applicable in the year under consideration.
The DRP confirmed the draft assessment order of the AO. Aggrieved by this, the assessee appealed before the Delhi tribunal.
While deciding on the matter, the Delhi tribunal took into consideration the judgment of the Hon’ble Delhi High Court (HC) pronounced before the insertion of explanation 6 and 7. The judgment held that expression ‘substantially’ occurring in Explanation 5 would necessarily have to be read as synonymous to ‘principally’, ‘mainly’ or at least’ majority.’ Thus, the HC was of the view that gains arising from the sale of a share of a company incorporated overseas can be taxed in India only if it derives more than 50% of its value from the assets situated in India.
Pursuant to the decision, explanation 6 and 7 to section 9(1)(i) were incorporated in the Act. Further, the tribunal highlighted that both Explanations 6 and 7 start with ‘For the purposes of this clause,’ and accordingly, they have to be read with Explanation 5 to understand the provisions of Section 9(1)(i) of the Act. Since Explanation 5 has been given retrospective effect and Explanations 6 and 7 have been inserted in furtherance of the object of insertion of Explanation 5, these two explanations cannot be read in isolation but have to be tagged along with Explanation 5 so that both the Explanations have to be given a retrospective effect.
Basis the aforementioned findings, the tribunal held the ruling in favor of the taxpayer.
The decision lays down the legal interpretation that any explanation introduced in furtherance of any existing provision has to be tagged along with the existing provision even if it is introduced at the later stage. Reading the provisions in isolation would make the law absurd.
Vedanta Ltd. ITA No. 12/DEL/2020 AY 2014-15
The taxpayer had entered into various international transactions, including ‘recovery of costs for SAP maintenance and other expenses.’ The taxpayer had stated that it had entered into a service agreement with a service provider for maintenance of the SAP accounting system that was used by the group entities as well. However, the TPO viewed the arrangement as a provision of IT-enabled services by the taxpayer on which mark-up should have been levied, which was upheld by the DRP as well.
The taxpayer had explained that the arrangement was undertaken for commercial expediency and not intended for any expectation of a return and that it had not provided any service/ value addition on which mark-up should be warranted. The SAP maintenance charges paid by the taxpayer were allocated among the group entities using the respective licenses on a cost-to-cost basis, depending on the number of licenses taken by each AE. Accordingly, the ITAT has recognized that the taxpayer was merely a facilitator, and these reimbursements are ‘pass-through costs,’ which cannot be compared with ITES. Placing reliance on the OECD guidelines and UN TP Manual and back to back supporting submitted; the ITAT deleted the adjustment.
Arrangements are to be seen in the light of the supporting documentation and value chain to assess if there exists an element of services or value-add that warrants a mark-up.
Pass-through costs incurred for commercial expediency are reimbursement of primary third party expenses that do not warrant any mark-up.
Danisco India Pvt. Ltd. ITA No. 2846 /DEL/2016 AY 2009-10
The taxpayer is engaged in the manufacturing and marketing of food ingredients and entered into various transactions with its AE, including availing intra-group services. The taxpayer stated that in order to avail the services of internal skills and experience, they had a centralized entity with identified employees that provided services to other AEs. Sample documentary evidence was also filed by the taxpayer and adopted TNMM as the most appropriate method on an aggregate basis.
The TPO, however, opined that the taxpayer had failed to provide service wise details and substantiate that services were actually rendered and benefit actually derived via appropriate documentary evidence. The TPO felt that in comparable circumstances, the independent enterprise would not have paid any third party without ascertaining a cost base and corroborating facts. Anyone not being able to demonstrate these facets can only be assumed not to have received these services. Further, TPO also observed that the taxpayer had availed corporate tax advice and legal service, indicating duplication of work as it did not specify how these services were different than the related party services availed. Accordingly, the TPO adopted the CUP method and determined the ALP of the transaction at NIL, and the same was also upheld by CIT(A), stating that it was a shareholder activity.
The taxpayer pointed out that there is no merit in shifting the profits to Denmark as the rates of taxation in Denmark were higher. He stressed that extensive details of the services received were filed, giving references to the paper book filed with the number of people involved, cost allocation, and nature into ‘administrative services,’ sales support service, technical services & support, and benefits thereon, etc. He was of the view that where expenses were intrinsically part of the trading and manufacturing segment, the same has to be aggregated with other international transactions placing reliance on the Delhi High Court Case of Sony Ericson Mobile Communication India Pvt. Ltd.
The ITAT, based on the documents brought on record, recognized that services were highly technical in nature and were actually rendered by the AE and used by the taxpayer. It is not the jurisdiction of the TPO to question the business decision as the same was outside the scope of transfer pricing provision. Further, relying on EKL Appliances Ltd., the ITAT held that benchmarking of cost to cost reimbursement of the services was not within the TPO’s jurisdiction while computing the ALP of international transactions.
In the context of availing intra-group services, taxpayers should maintain:
- Service-wise details;
- Evidence to showcase that services were availed;
- Evidence to showcase benefits and usage by the taxpayer.
It is not the jurisdiction of the TPO to question the business decision as the same was outside the scope of transfer pricing provision.
Whether the assessee is entitled to utilize and set off the accumulated unutilized amount of Education Cess (EC), Secondary and Higher Education Cess (SHEC), and Krishi Kalyan Cess (KKC) against the output GST liability?
Assistant Commissioner of CGST and Central Excise versus Sutherland Global Services Private Limited [2020 (10) TMI 804 – Madras HC]
- Earlier, a Single Judge Bench of the Madras HC had decided the matter in favor of the assessee, holding that the cesses should be allowed to be transitioned and utilized under the GST regime;
- The government made retrospective amendments in Section 140 of the CGST Act to clarify that cesses are not to be considered as ‘eligible duties’ for carrying forward to the GST regime.
Now, the Division Bench has set aside the decision of the Single Judge Bench and ruled the appeal in favor of the Revenue and observed as follows:
- Even though the imposition and collection of Cess may be loosely termed as Tax or Duty, the collection of Cess remains distinct, in as much as Cess amount collected by the government is liable to be spent for a dedicated purpose;
- Since the cross-utilization of EC and SHEC was not allowed against Excise Duty and other duties under erstwhile laws, once the levy itself ceased and dropped in 2015, the question of their carry forward and utilization becomes only academic;
- It is clear that CENVAT credit or Input Tax Credit under the GST Regime is a concession and a facility and not a vested right;
- The three types of Cesses involved before us were not subsumed in the new GST laws. Therefore, the question of transitioning them into the GST regime and utilizing them against output GST liability cannot arise.
The judgment is a big blow to taxpayers who had availed the CENVAT credit of cesses under the transitional provisions under the GST law. However, though the judgment pronounced by the Division Bench is detailed and well-reasoned, the issues of interpretation of the provisions of the GST law and validity of the retrospective amendment remains subjective. Therefore, it is highly likely that the matter will attain finality only once it is ruled upon by the Supreme Court.
Also, the judgment is restricted to the availment and utilization of cesses under the GST regime. However, the question of whether taxpayers can alternatively claim a refund of the unutilized balance of such cesses remains unanswered.
Fraunhofer-Gessellschaft Zur Forderung Der Angewwandten Forschung – Authority for Advance Ruling (AAR), Karnataka [2020 (10) TMI 809]
- The applicant has a Liaison Office(LO), which is acting as an extended arm of the Head Office(HO) to carry out activities as permitted by the Reserve Bank of India (RBI);
- As per the permission granted by RBI, the liaison office will not generate income in India and will not engage in any trade/commercial activity;
- The liaison office does not account for any form of income, with the only source of income being remittance from the Head office, which is purely to meet the working of the liaison office.
Based on the above facts, the AAR ruled as follows:
- The liaison activity of the applicant falls within the ambit of ‘business’ as defined under Section 2(17)(b) of the CGST Act;
- The applicant themselves have admitted that they are involved in promoting the business of the HO in India, and they act on behalf of the HO for its customers in India. Thus the applicant (LO) and their head office (HO) are deemed to be related persons;
- The applicant’s head office is outside India, and hence the applicant’s head office has an establishment outside India. Thus the applicant (LO) and their head office (HO) shall be treated as establishments of distinct persons in terms of Section 8, and the activities performed by them can’t be called export of services;
- Thus, the applicant is required to obtain GST registration in India and is liable to pay GST as its activities do not qualify as ‘export of services.’
Previously, AAR Tamil Nadu in Takko Holding Gmbh and AAR Rajasthan in Habufa Meubelen B.V. had ruled that a Liaison Office does not undertake any ‘business’ and therefore is not required to obtain GST registration. In this backdrop, the present ruling comes as a huge shock to the industry and once again brings to the fore the need for a Centralized AAR to provide finality in case of such contrary rulings.