Indo-Singapore
DTAA : A mere existence of a PE in India
cannot lead to a conclusion that royalties arise in India
[2010] 6 taxmann.com 53 (Mum. - ITAT)
SET Satellite Singapore Pte. Ltd.
v.
Addl. DIT (Intl. Taxation)
ITA No. 7349/Mum/2004
June 25, 2010
FACTS
The facts of the case are that the assessee is a Singapore
based company engaged in the business of acquiring television programs, motion
pictures and sports events and exhibiting
the same on its television channels from Singapore. The assessee is a tax resident of Singapore
in terms of Article 4 of the India
Singapore Tax Treaty.
The assessee had entered into an agreement on January 25,
2002 with Global Cricket Corpn. Pte Ltd (GCC) (also a tax resident of Singapore
under the Treaty). Under the agreement,
GCC has granted ‘rights’ to the assessee throughout the licensed
territory. The term ‘rights’ under
Sch-I to the agreement has been defined as the right 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. The term ‘licensed territory’ has been
defined under Sch-I to the agreement as India, Pakistan, Srilanka, Bangladesh,
Singapore and Malaysia.
The ADIT initiated proceedings u/s. 201 of the I.T. Act
on the assessee for non deduction of tax at source from payments made to
GCC.
Vide order u/s. 201(1)/201(1A) of the
I.T. Act dt. Feb. 19, 2004, the ADIT held that the payments made by the
assessee to GCC were in the nature of ‘Royalty’ as defined in Explanation 2 to
Sec. 9(1)(vi) of the I.T. Act, which were deemed to arise in India and hence
taxable in India. Accordingly, the ADIT
raised a demand of Rs,.
32,94,06,000/- u/s. 201(1) and interest of Rs. 5,46,76,000/- u/s. 201(1A) of
the I.T. Act on the assessee for non-deduction of tax at source from payments
made to GCC.
The payment made by the assessee to GCC cannot be said to
arise in India under Article 12(7) of the Treaty since the payer ( i.e.
assessee) is not a resident of India. As per the first limb of Article 12(7) of
the Treaty, royalties cannot arise in India, since the payer is not a resident
of India. Such royalties under the
first limb of Article 12(7) of
the Treaty arise in Singapore since the payer (i.e. the assessee) is a resident
of Singapore. The second limb of
Article 12(7) of the Treaty deals with a scenario where the payments are made
by a non-resident, where such non-resident has a PE in India. However, a mere existence of a PE in India
cannot lead to a conclusion that royalties arise in India. In addition to the existence of PE, for
royalties to arise in India under Article 12(7) of the Treaty, it is essential
that liability to pay such royalties has been “incurred in connection with” and
is “borne by” the PE of the payer in India.
It is clearly evident that for royalties to arise in
India, an existence of an economic link between the liability for payment of
such royalties and PE is necessary.
However, in the present case there is no economic link between the
payment of royalties and the alleged PE of the assessee in India (i.e. SET
India ), the economic link is entirely with the assessee’s head office in Singapore. Thus, the payments to GCC cannot be said to
have been incurred “in connection” with the appellant’s PE in India (i.e. SET
India). Further, the alleged PE
in India (i.e. SET India) was also not involved in any way with the acquisition
of the right to broadcast the cricket matches, nor did the PE bear the cost of
payments to GCC. Thus the payments to
GCC cannot be said to have been “borne by” the assessee’s PE in India (i.e. SET
India).
_______RELEVANT
EXTRACTS_______
2. The facts
of the case are that the assessee is a Singapore based company engaged in the
business of acquiring television programs, motion pictures and sports events
and exhibiting the same on its
television channels from Singapore. The
assessee is a tax resident of Singapore in terms of Article 4 of the India Singapore Tax Treaty.
3. The
assessee had entered into an agreement on January 25, 2002 with Global Cricket
Corpn. Pte Ltd (GCC) (also a tax resident of Singapore under the Treaty). Under the agreement, GCC has granted
‘rights’ to the assessee throughout the licensed territory. The term ‘rights’ under Sch-I to the
agreement has been defined as the right 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. The term ‘licensed territory’ has been
defined under Sch-I to the agreement as India, Pakistan, Srilanka, Bangladesh,
Singapore and Malaysia.
4. The ADIT
initiated proceedings u/s. 201 of the I.T. Act on the assessee for non
deduction of tax at source from payments made to GCC. During the course of Sec. 201 proceedings, the assessee made
various written submissions before the ADIT, the gist of which is summarized
below:
1. The territorial jurisdiction of the I.T.
Act, 1961 is restricted to the Indian Territory and cannot be applied to a
transaction carried out outside India.
2. When payment is made outside India by a
non-resident to another non-resident, it is not covered by the provisions of
Sec. 195.
3. The payment cannot be considered as royalty
as defined under explanation 2 to Sec. 9(1) (vi) of the Act.
4. The payment is also not in the nature of
royalty as defined in article 12(3) of Indo Singapore Treaty.
5. The income does not accrue in India as
per article 12(7) of the treaty.
6. The limitation clause under article 24 of
the Treaty is not applicable to the case of the assessee.
5. Vide order
u/s. 201(1)/201(1A) of the I.T. Act dt. Feb. 19, 2004, the ADIT held that the
payments made by the assessee to GCC were in the nature of ‘Royalty’ as defined
in Explanation 2 to Sec. 9(1)(vi) of the I.T. Act, which were deemed to arise
in India and hence taxable in India. Accordingly, the ADIT raised
a demand of Rs,. 32,94,06,000/- u/s. 201(1) and interest of Rs.
5,46,76,000/- u/s. 201(1A) of the I.T. Act on the assessee for non-deduction of
tax at source from payments made to GCC.
6. Aggrieved
by the order of ADIT, assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) in his order dt. 2nd
July, 2004 inter alia discussed and decided the main issues in paragraph No.
8.42 as under:
“I have considered
the submissions of the appellant as well as the submissions made by the
ADIT. There are two aspects of the
matter.
Whether payment
for live cricket event rights constitutes Royalty within the meaning of Article
12(3) of the Tax Treaty.
Assuming that the
answer to the above is in the affirmative, whether such a Royalty arises in
India within the meaning of provisions of Article 12(7) of the Tax Treaty.
As is
apparent, if my answer to the second issue viz., that the Royalty does not
arise in India is in the affirmative, my answer to question No. 1 would become
redundant. Accordingly, while I find
substantial merit in the arguments canvassed by the appellant that the payment
for live feed rights does not constitute Royalty, I do not consider it
necessary to decide on this issue. This
is because I am in full agreement with the contention of the appellant that
even if one assumed that the payment was in the nature of Royalty, such
a Royalty does not
arise in India having regard to the provisions of Article 12(7) of the
Treaty. I concur with the opinion of
Mr. Phillip Baker on the subject and hold that unless there is a direct nexus
with the activities of the PE and the incurring of the said expenditure, the
Royalty cannot be said to arise in India. Since there is no such nexus in this
case, I hold that the payment to GCC cannot be said to arise in India with the
meaning of Article 12(7) of the Treaty.”
7. The Ld.
CIT(A) thus inter alia decided the main issue in favour of the assessee holding that even if it is assumed that the amount in question is in the nature
of royalty, such royalty income does not arise in India in terms of Article
12(7) of the relevant DTAA and thus the
same is not chargeable to tax in India. Accordingly he held that the assessee
was not liable to deduct tax at source from the payment made to GCC. The Ld. CIT(A) thus partly allowed the
appeal of the assessee by his impugned order against which the assessee and department has filed these
appeals before us.
8. The main
issue which arises for our consideration in this case is the one raised by the
Revenue in Ground No. 3 which reads as under:
“Whether the facts
and in the circumstances of case and in law, the CIT(A) erred in holding that
the royalty has not arisen I India having regarding to the provisions of
Article 12(7) of Indo-Singapore DTAA.”
9. The Ld.
Departmental Representative submitted the following arguments in support of
the Revenue’s case on this issue.
i) The source of Revenue for the assessee
is from advertisement which are telecasted on the SET Satellite channel and
paid for mainly by the persons in India.
The other sources of the Revenue of the assessee is the subscription
income collected from Cable Operators mainly in India.
ii) GCC as a Licensor granted ‘rights’ to the assessee as licensee
throughout the licenced territory
together with commentary in the authorized languages for a fee for a
authorized number of exhibitions during the exhibition period. The definition of rights is exhaustive.
iii) The assessee has also been given right to
edit the feed i.e. reconfigure, recombine or repackage, to copy and store the
feed on any storage device in any medium, to dub and sub-title the feed. The assessee is also given a guarantee that
the Licensor shall not make available live feed to any other persons in any
part of the licensed territory except as provided in the agreement in a limited
way. It shows that the assessee has
exclusive broadcasting rights for distribution in the licensed territory. The assessee has also been given
non-exclusive right to use, logo of GCC.
iv) Sale of Airtime on its channel to Indian persons,
collection of subscription from Cable Operators in India would amount to doing
business in India.
v) The assessee has a Permanent
Establishment in India in the form of
Set India who is doing the
marketing activity of the assessee namely M/s. Set satellite Singapore.
vi) There is a direct nexus between collection
of advertisement revenue from the assessee from India and payment for
acquisition of broadcasting rights of cricket matches.
vii) The payments made by the assessee to GCC
for transfer of telecasting rights are
in the nature of Royalty under Explanation-2 such payments are deemed to accrue
or arise in India u/s.
9(1)(vi)(c) of the Act.
10. The Ld.
Departmental Representative also contended that the provisions of I.T. Act 1961
are applicable to the transaction outside India if the same has any nexus in
India. In this context, he raised the following points:
a) The provisions of the Sec. 195 are
applicable even to a transaction made between two non-residents outside India.
b) The telecasting rights received by the
assessee from the GCC are in the nature of property similar to a patent,
invention, model, design, trade mark etc. as mentioned in clause (i) of
Explanation 2 to Sec. 9(1)(vi)
c) The rights to be transferred by the GCC
to the assessee are also copyright rights as mentioned in clause (v) of
Explanation 2 to Sec. 9(1)(vi).
d) The assessee is carrying on business in
India and the payments made to the GCC were for the purpose of business carried
out in India and also for making an earning from sources in India.
e) The payments made by the assessee to the
GCC are in the nature of royalty u/s. 9(1)(vi) of the Act and therefore
chargeable to tax in India.
f) The GCC is not entitled to any benefit
under Indo-Singapore Treaty under the limitation clause (article 24) as the
payments have been received in Jersey and not in Singapore.
11. The Ld. AR
countered the arguments of the DR stating that even if payments are assumed to
be royalty under article 12(3) of the Treaty such royalty does not arise in
India in view of the provisions of Article 12(7) of the treaty. The Ld. AR dissected Article 12(7) of the
Treaty and explained that the first condition is that the payer should be a resident
of India in order to come under Article 12(7) which has not been fulfilled in
the instant case. As per the first limb of Article 12(7) of the Treaty,
royalties would arise in contracting State, only where the payer is a resident
of that Contracting State. In this
connection, the Ld. AR relied on the
opinion of Mr. Phillip Baker
where he has opined that (even
assuming the payments to be in the nature of royalties), the source of
royalties under Article 12(7) of the Treaty would be in Singapore, since such
royalties are paid by the assessee, which is a resident of Singapore and
therefore cannot be said to arise in India under Article 12(7) of the Treaty.
12. Further
as per the second limb of Article 12(7) of the Treaty, where the payments are
made by one non-resident to another non-resident, royalty would arise in India
only if –
i) The non –resident payer (i.e. the
assessee) has a PE or fixed base in India
ii) the liability to pay royalty is incurred
‘in connection with’ such PE or fixed base and
iii) the Royalty is ‘borne’ by such PE or fixed
base.
13. Further
in the assessment order for the A.Y. 2001-02, the Ld. ADIT has held that the
assessee has an Agency PE in India in the form of SET India. The assessee has submitted that the
provisions of Article 12(7) are not attracted even if the assessee has only an
Agency PE because it does not have a physical presence in India. The Ld.
Counsel for the assessee Shri Dastur brought out that under Article 12(7), the
condition which needs to be satisfied is that the liability to pay Royalty has
been incurred ‘in connection with’ the payer’s PE in India. For this he produced a chart with diagrams
showing how the entire broadcasting business
is being carried out. He pointed out
that from the chart it could be easily understood that the collection by way of
advertisements and through negotiations with channel operators which are the
source of revenue for SET India has no direct nexus between the activities of
the payer’s PE in India and the royalty payment. He further submitted that its broadcasting business is being
carried out from Singapore and it does not carry out any such activity in
India. The payment for the cricket
rights is made only for the broadcasting operations of the assessee, which are
carried out from Singapore. Further,
the liability for the payment is incurred by the assessee in connection with
its broadcasting operations in Singapore and has no connection with the
marketing activities carried through its alleged PE in India.
14. The second aspect
which requires consideration is that Article 12(7) requires the Royalty must be
borne by the payers PE in India. The
assessee contended that in the present case, the financial burden of the
payment for live cricket rights is
borne by the Head Office of the assessee in Singapore and not by its alleged
agency PE in India and therefore the payment cannot be treated as ‘borne by’
the assessee’s PE in India. The wordings, viz., payments being ‘incurred in
connection with’ and ‘borne by’ by a PE in the other contracting state are also
found in Article 11(5) of the OECD Model Convention relating to
‘Interest”. The assessee has relied on
para 26 of the OECD commentary on Article 11 of the Model Convention, which deals
with the place where interest can be said to arise. It has been stated in para 26 that interest bearing loans should
have an obvious economic link with the PE in the other contracting state. Para 27 of the commentary further states
that in the absence of an economic link between the interest bearing loan and
the PE, the contracting state where such PE is situated cannot be regarded as
the State where the interest arises.
15. The Ld.
Counsel for the assessee also produced the copy of OECD commentary before
us. He contended that the aforesaid analogy should equally apply in
the present case with respect of Article 12(7) of the Treaty, which also deals
with the requirement of payments being “incurred in connection with” and “borne
by” a PE in India. He further contended
that since the payments to GCC do not
have any economic link with the assessee’s marketing/agency PE in India (i.e.
SET India), the said payments cannot be said to arise in India under Article
12(7) of the Treaty. The Ld. Counsel for the assessee furnished the opinion of
Mr. Phillip Baker at page 70 of the Paper Book.
16. The Ld.
Counsel for the assessee submitted Khaus Vogel commentary on Double Taxation
convention pointing out as follows:
“Generally
liability is not recognized as pertaining to PE unless it is shown in the PE
balance sheet.”
The Ld. Counsel
also produced the balance sheet and Sch. XV to prove that the amount has not been paid by SET India
Pvt. Ltd. to GCC to acquire the broadcasting rights.
17. We heard
both the parties. We find no infirmity
in the order of the Ld CIT(A). The
payment made by the assessee to GCC cannot be said to arise in India under
Article 12(7) of the Treaty since
the payer ( i.e. assessee) is not a resident of India. . As per the first limb of Article 12(7) of
the Treaty, royalties cannot arise in India, since the payer is not a resident
of India. Such royalties under the
first limb of Article 12(7) of
the Treaty arise in Singapore since the payer (i.e. the assessee) is a resident
of Singapore. The second limb of
Article 12(7) of the Treaty deals with a scenario where the payments are made
by a non-resident, where such non-resident has a PE in India. However, a mere existence of a PE in India cannot
lead to a conclusion that royalties arise in India. In addition to the existence of PE, for royalties to arise in
India under Article 12(7) of the Treaty, it is essential that liability to pay
such royalties has been “incurred in connection with” and is “borne by” the PE
of the payer in India.
18. Based on an
analogy from paragraph 26 and 27 of the OECD Commentary on Article 11, it is
clearly evident that for royalties to arise in India, an existence of an
economic link between the liability for payment of such royalties and PE is
necessary. However, in the present case
there is no economic link between the payment of royalties and the alleged PE
of the assessee in India (i.e. SET India ), the economic link is entirely with
the assessee’s head office in
Singapore. Thus, the payments to GCC
cannot be said to have been incurred “in connection” with the appellant’s PE in
India (i.e. SET India). Further,
the alleged PE in India (i.e. SET India) was also not involved in any way with
the acquisition of the right to broadcast the cricket matches, nor did the PE
bear the cost of payments to GCC. Thus
the payments to GCC cannot be said to have been “borne by” the assessee’s PE in
India (i.e. SET India).
19. We find that
the case laws cited by the Ld. Counsel for the assessee also supports the
assessee’s case. In the case of Stanley Keith Kinnett Vs CIT 278 ITR 155 and cit Vs Elitos S.P.A & Others 280 ITR 495 in which it has been
held that when the burden of payment is not borne by PE or fixed base , trade or business located in India,
the amount is not taxable in India.
Further on going through Schedule-XV, we find that SET Satellite
Singapore has not recovered any amount from the Indian PE, In the Royalty to arise in India as
envisaged under Article 12(7) of the Treaty, the condition which reads as follows:
“Royalties and
fees for technical services shall be deemed to arise in a Contracting State
when the payer is that State itself, a political sub-division, a local authority,
a statutory body or a resident of t.
Where, however, the person paying the royalties or fees for technical
services, whether he is a resident of a Contracting State or not, has in a Contracting State a
permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for
technical services was incurred, and such royalties or fees for technical
services are borne by such permanent establishment or fixed base, then such
royalties or fees for technical services shall be deemed to arise in the State
in which the permanent establishment or fixed base is situated.”
20. Firstly
the payer is not a resident of India.
Secondly the liability to pay such Royalty has not been incurred in
connection with and does not borne by the PE of the payer in India. Therefore there being no economic link
between the payment of Royalty and SET India hence the royalty does not arise
in India having regard to the provisions of Article 12(7) of the Treaty. Hence even if it is assumed that the payment
for broadcasting cricket constitutes Royalty, in our opinion such royalty does not arise in India within the meaning of provisions of Article
12(7) of the Tax Treaty and hence the second ground No. 3 raised by the revenue
is dismissed.
21. In view of
our decision rendered above on the main issue, other grounds raised in
Revenue’s appeal and assessee’s appeal have become only academic and we do not
deem it expedient to adjudicate upon the same.
22. As regards
the remaining appeals filed by the Revenue, the main issue involved therein is
similar to the one which has already been decided by us in the foregoing
portion of this order while disposing of the cross appeals filed for A.Y.
2003-04. Following the said decision, we dismiss all these appeals filed by the
Revenue. Consequently, the cross objection filed by the assessee have become
infructuous and the same are accordingly dismissed.
23. In the
result, the Revenue’s appeals as well as the appeal of the assessee and Cross
objections filed by the assessee are dismissed.
Order pronounced
on this 25th day of June, 2010