NGC NETWORK ASIA LLC, MUMBAI V. JDIT (IT) RG 4, MUMBAI

ITA 7994/MUM/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1888 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: L
• Assessment Year: 2007-2008
• Appeal Filed On: 28-11-2011
• Court: TRIBUNAL
• Assessee Lawyers: SHEETAL SHAH RSPONDENT MS VAND
• Keywords: Business income; Depreciation; Transfer pricing; Double taxation relief; Opportunity of being heard; Principle of natural justice; International transaction; Permanent establishment; Bad and doubtful debts; Arm length price
• Section: 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) . . , , ./ I .T.A. NO. 7994 / MUM/20 1 1 AND ITA NO.7631/MUM/2012 ( / ASSESSMENT YEAR : 2 007 - 08 AND 2008 - 09 ) NGC NETWORK ASIA LLC, C/O S R BATLIBOI AND CO., 14 TH FLOOR, THE RUBY, SENAPATI BAPAT MARG, TULSI PIPE ROAD, DADAR (W), MUMBAI - 400028 / VS. JOINT DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION ), RANGE - 4, SCINDIA HOUSE, BALLARD ESTATE, MUMBAI - 400038. ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN : AABCN3136G / APPELLANT BY SHRI PORUS KAKA AND MS.SHEETAL SHAH / RSPONDENT BY MS.VANDANA SAGAR / DATE OF HEARING : 4.9. 201 5 / DATE OF PRONOUNCEMENT : 16. 1 2 . 201 5 / O R D E R PE R B.R. BASKARAN (AM) THESE ARE THE TWO APPEALS FILED BY THE ASSESSEE AGAINST THE ASSESSMENT ORDERS PASSED FOR ASSESSMENT YEARS 2007 - 08 AND 2008 - 09 IN PURSUANCE OF DIRECTIONS ISSUED BY THE DISPUTE RESOLUTION PANEL (DRP). SINCE ISSUES URGED IN THESE TWO APPEALS ARE IDENTICAL IN NATURE, THEY ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 2 2. THE ASSESSEE IS AGGRIEVED BY THE DECISION OF THE AO/DRP IN HOLDING THAT (A) THE ASSESSEE IS HAVING A PERMANENT ESTABLISHMENT (PE) IN INDIA IN TERMS OF INDIA - USA DTAA AND HENCE THE REVENUE GENERATED THROUGH ADVERTISEMENTS IS TAXABLE IN INDIA. (B) THE INCOME GENERATED THROUGH DISTRIBUTION OF CHANNELS FALLS WITHIN THE MEANING OF ROYALTY UNDER ARTICLE 12 OF INDIA - USA DTAA AND ALSO U/S 9(1)(VI ) OF THE ACT AND HENCE THE SAME IS ALSO TAXABLE IN INDIA. 3. THE FACTS RELATING TO THE CASE ARE DISCUSSED IN BRIEF. THE ASSESSEE HEREIN, VIZ., M/S NGC NETWORK ASIA, LLC ('NGC ASIA); IS A DELAWARE, US INCORPORATED ENTITY. THE ASSESSEE I S A SUBSIDIARY OF FOX ENTERTAINMENT GROUP INC . THE ASSESSEE HOLDS 100% SHARES IN NGC NETWORK (MAURITIUS) HOLDEN LTD, WHICH IN TURN, HOLDS 99% SHARES IN M/S NGC NETWORK ( INDIA ) PRIVATE LIMITED (HEREINAFTER NGC INDIA) . ALL THESE COMPANIES ARE EITHER SUBSIDIARIES/ AF FILIATE COMPANIES OF M/S NEWS CORPORATION, USA. 4. THE ASSESSEE IS THE OWNER OF TWO TELEVISION CHANNELS VIZ., THE NATIONAL GEOGRAPHICAL CHANNEL AND FOX INTERNATIONAL CHANNEL. IT IS ENGAGED IN THE BUSINESS OF BROADCASTING OF ITS CHANNELS IN VARIOUS COU NTRIES INCLUDING INDIAN SUB - CONTINENT. AS PER ARTICLE 4 OF THE INDIA - US DOUBLE TAXATION AVOIDANCE AGREEMENT ('INDIA - US TREATY) , THE ASSESSEE IS ELIGIBLE FOR THE BENEFITS OF THE INDIA - US TREATY BY VIRTUE OF BEING A RESIDENT OF US A . THE ASSESSEE COMP ANY HAS APPOINTED M/S NGC INDIA AS ITS DISTRIBUTOR TO DISTRIBUTE ITS TELEVISION CHANNELS AND ALSO TO PROCURE ADVERTISEMENTS FOR TELECAST ING IN THE CHANNELS. HENCE THE ASSESSEE COMPANY GENERATES TWO STREAMS OF REVENUES FROM INDIA, VIZ., (A) FEE FOR GIVIN G DISTRIBUTION RIGHTS FOR TELECASTING OF ITS CHANNELS . AND (B) ADVERTISEMENT REVENUES . ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 3 WE SHALL FIRST PROCEED TO DEAL WITH BOTH THE ISSUES FOR ASSESSMENT YEAR 2007 - 08 AND THE DECISION TAKEN BY US IN THAT YEAR CAN BE APPLIED TO AY 2008 - 09. THE ASSESS ING OFFICER HAS EXPLAINED THE DETAILS OF THE SAME AS UNDER IN AY 2007 - 08 : - A) THE ASSESSEE COMPANY HAS EXECUTED A DISTRIBUTION AGREEMENT DATED 21ST FEBRUARY 2001 WITH NGC NETWORK (INDIA) PRIVATE LIMITED ('NGC INDIA') GIVING NGC INDIA THE RIGHT TO DISTRIB UTE 'NATIONAL GEOGRAPHIC CHANNEL' TO MEDIA INTERMEDIAR IES SUBSCRIBERS IN INDIA, NEPAL, BHUTAN, BANGLADESH AND SRILANKA. IN CONSIDERATION FOR THE RIGHT TO DISTRIBUTE THE SAID CHANNEL IN INDIA, NGC INDIA IS REQUIRED TO PAY A FIXED FEE AMOUNTING TO US$ 32,00, 000 FOR THE PERIOD 01.04.2006 TO 31.03.2007 TO THE ASSESSEE. B) FURTHER THE ASSESSEE, HAS ALSO SOLD ADVERTISING TIME ON THE NATIONAL GEOGRAPHIC CHANNEL DURING THE YEAR CORRESPONDING TO A.Y.2007 - 08. IN THIS REGARD, THE ASSESSEE COMPANY HAS SIGNED AN ADVE RTISING SALES REPRESENTATION A GREEMENT (AD SALE AGREEMENT) WITH NGC NETWORK INDIA PRIVATE LIMITED {'NGC INDIA'} ON 1/07 / 2004 EFFECTIVE FROM 1/09/2004 APPOINTING NGC INDIA AS THEIR EXCLUSIVE INDEPENDENT REPRESENTATIVE IN INDIA TO SOLICIT TELEVISION ADVERTIS ING FOR THE CHANNEL AND TO COLLECT AND REMIT ADVERTISEMENT CHARGES IN RELATION TO SUCH ADVERTISEMENTS TO THE ASSESSEE. THE ASSESSEE COMPANY HAS EARNED REVENUES IN RESPECT OF ADVERTISEMENTS PLACED BY THE INDIAN ADVERTISERS ON THE CHANNEL S . THE ASSESSEE COMP ANY RAISES INVOICES IN USD WITH RESPECT TO THESE ADVERTISEMENTS. THE REVENUES WERE COLLECTED B Y NGC INDIA AND REMITTED NET OF ALL COMMISSIONS AND TAXES TO THE ASSESSEE COMPANY. FURTHER, THE SAID AGREEMENT WAS TERMINATED AND THEREAFTER, WITH EFFECT FROM 01/ 05 / 2006, THE ASSESSEE HAS ENTERED INTO AN ADVERTISEMENT SALES AGREEMENT WITH NGC INDIA, WHEREIN THE ASSESSEE HAS SOLD THE ADVERTISEMENT AND SPONSORSHIP TIME ON THE CHANNELS TO NGC INDIA FOR A LUMP SUM CONSIDERA TION OF US $ 22,80,000. 5. THUS, DU RI NG THE YEAR RELEVANT FOR AY 2007 - 08, TWO AGREEMENTS ENTERED BY THE ASSESSEE WITH NGC INDIA WERE IN VOGUE IN RESPECT OF ADVERTISEMENT REVENUES . AS PER THE OLD AGREE M ENT, THE ASSESSEE HAS GIVEN C OMMISSION @ 15% TO NGC INDIA FOR THE MONTH OF APRIL , 2006 AND ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 4 RETAINED 85% OF THE ADVERTISEMENT REVENUE FOR THAT MONTH. AS PER THE NEW AGREEMENT ENTERED BETWEEN THE PARTIES, IT HAS RECEIVED FIXED SUM OF US $ 22,80,000/ - FROM NGC INDIA FOR GIVING CONTRACT OF PROCURING ADVERTISEMENTS FOR THE PERIOD FROM MAY, 2006 TO 3 1.3.2007 . IN RESPECT OF SECOND SOURCE OF REVENUE, VIZ., FOR GIVING DISTRIBUTION RIGHTS, THE ASSESSEE HAS RECEIVED US $ 32,00,000 DURING THE YEAR RELEVANT FOR AY 2007 - 08 . IT IS PERTINENT TO NOTE THAT, W ITH REGARD TO THE VARIOUS INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE, A REFERENCE WAS MADE TO THE TRANSFER PRICING OFFICER (TPO) AND THE TPO HAS ACCEPTED THE ARM LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES (AE). THE ASSESSEE TOOK THE VIEW THAT BOTH TYPES OF INCOME, CITED ABOVE, ARE NOT TAXABLE IN INDIA AND ACCORDINGLY DID NOT OFFER THEM IN THE RETURN OF INCOME FILED FOR AY 2007 - 08. THE ASSESSING OFFICER/DRP , ON THE CONTRARY, HELD THAT THE ADVERTISEMENT REVENUES AS WELL AS DISTRIBUT ION REVENUES ARE TAXABLE IN INDIA , SINCE THE TAX AUTHORITIES CONSIDERED M/S NGC INDIA AS THE DEPENDENT AGENT PERMANENT ESTABLISHMENT OF THE ASSESSEE . TH E AO ACCORDINGLY ASSESSED 25.34% OF THE ADVERTISEMENT REVENUES AS INCOME OF THE ASSESSEE ATTRIBUTABLE TO INDIA , I.E. IN THE RATIO OF WORLDWIDE PROFITS TO WORLDWIDE REVENUE, IN ACCORDANCE WITH RULE 10B(II) OF THE I.T RULES. THE ASSESSING OFFICER HELD THAT THE REVENUE GENERATED ON GRANTING OF DISTRIBUTION RIGHTS IS IN THE NATURE OF ROYALTY AND ACCORDING LY ASSESSED 15% OF THEREOF AS INCOME OF THE ASSESSEE AS PER ARTICLE 12 OF INDIA US DTAA. THE DRP ALSO CONFIRMED THE SAME. 6. WE SHALL FIRST TAKE UP THE ISSUE RELATING TO THE TAXABILITY OF ADVERTISEMENT REVENUE. THE ASSESSEE CONTENDED THAT THE NEW AGREE MENT WAS ENTERED ON PRINCIPAL TO PRINCIPAL BASIS BETWEEN THE ASSESSEE AND NGC INDIA AND HENCE NGC INDIA CANNOT BE CONSIDERED TO BE A DEPENDENT AGENT OF THE ASSESSEE, I.E., IT WAS CONTENDED THAT NGC INDIA IS AN AGENT ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 5 OF INDEPENDENT STATUS . ACCORDINGLY , IT WAS C ONTEND ED THAT THE ASSESSEE DOES NOT HAVE A PE IN INDIA , IN WHICH CASE THE BUSINESS INCOME OF ADVERTISEMENT REVENUE WAS NOT TAXABLE IN INDIA . IT WAS FURTHER SUBMITTED THAT THE PAYMENT MADE BY THE ASSESSEE TO NGC INDIA WAS HELD TO BE AT ARMS LENGTH BY THE TPO AND HENCE NO FURTHER INCOME IS REQUIRED TO BE ATTRIBUTED TO THE ASSESSEE. WE HAVE EARLIER NOTICED THAT THE NEW AGREEMENT TOOK EFFECT F ROM 1.5.2006 AND HENCE T OR THE MONTH OF APRIL, 2006, THE ASSESSEE HAD PAID COMMISSION @ 15% OF ADVERTISEMENT REVENUES TO NGC INDIA. IT WAS SUBMITTED THAT THE RATE OF COMMISSION OF 15% WAS CONSIDERED TO BE AT ARMS LENGTH BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD (218 CTR 452). FURTHER, THE TPO HAS ACCEPTED THAT THE INTERN ATIONAL TRANSACTIONS HAVE BEEN CARRIED ON AT ARMS LENGTH PRICE. ACCORDINGLY IT WAS SUBMITTED BY THE ASSESSEE AS UNDER: - TO CONCLUDE, WE WOULD LIKE TO MENTION THAT NGC INDIA IS AN AGENT OF AN INDEPENDENT STATUS, IT IS ACTING IN ITS ORDINARY COURSE OF BUSI NESS AND ITS ACTIVITIES ARE NOT DEVOTED WHOLLY OR ALMOST WHOLLY FOR NGC ASIA. WITHOUT PREJUDICE TO THIS, THE COMMISSION PAID TO NGC INDIA IS ALSO AT ARMS LENGTH PRICE. IN VIEW OF THIS, NGC INDIA SHOULD NOT BE CONSIDERED AS A DEPENDENT AGENT OF NGC ASIA. IT WAS FURTHER SUBMITTED THAT NGC INDIA DOES NOT CONSTITUTE SALES OUTLET OF THE ASSESSEE . IT WAS ALSO SUBMITTED THAT SINCE THE ASSESSEE HAS PAID COMMISSION TO NGC INDIA AT ARMS LENG T H BASIS, NO FURTHER INCOME CAN BE ATTRIBUTED TO THE ASSESSEE . IN THIS REGARD, THE ASSESSEE PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF DIT VS. MORGAN STANLEY AND CO. (292 ITR 4 1 6) AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD (SUPRA). 7. THE ASSESS ING OFFICER EXAMINED THE NATURE OF ACTIVITIES CARRIED ON BY NGC INDIA AND ALSO EXPLANATIONS FURNISHED BY THE ASSESSEE. THE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 6 SUBMISSIONS MADE BY THE ASSESSEE AND THE OBSERVATIONS OF THE AO ARE EXTRACTED BELOW: - FURTHER, A BRIEF OVERVIEW OF SOME OF THE ACTI VITIES OF NGC INDIA UPON PURCHASING OF ADVERTISEMENT AIRTIME FROM NGC ASIA HAVE BEEN STATED BELOW: --- NGC INDIA DECIDES THE PRICING STRATEGY, THE TARGET MARKET SEGMENT ETC. FOR THE ADVERTISEMENT REVENUES. --- NGC INDIA DECIDES WHETHER IT SHOULD SELL THE A DVERTISEMENT AIRTIME THROUGH ITS OWN SALES FORCE OR THROUGH AGENTS AND ACCORDINGLY, THE ADVERTISING AIRTIME IS SOLD BY NGC INDIA --- FURTHER, NGC INDIA ALSO SOLELY DECIDES THE PRICE AND OTHER TERMS AT WHICH IT SHOULD SELL ADVERTISING AIRTIME TO ANY CUSTOME R NGC INDIA (DIRECTLY OR THROUGH IT AGENT) DIRECTLY NEGOTIATES AND AGREES TO THE TERMS WITH THE ADVERTISERS/AGENCIES (CUSTOMERS) --- NGC INDIA ENTERS INTO CONTRACTS FOR SALE OF ADVERTISING AIRTIME WITH THE VARIOUS CUSTOMERS ON ITS OWN ACCOUNT AND ENTIRELY AT ITS OWN RISK. (FOR EG THE RISK OF BAD DEBTS IF THE CUSTOMER DOES NOT PAY IS ENTIRELY THAT OF NGC INDIA) --- FURTHER NGC INDIA RAISES INVOICES AND FOLLOWS UP (EITHER DIRECTLY OR THROUGH ITS AGENT) FOR COLLECTION OF THE AMOUNTS DUE FROM ITS CUSTOMERS -- - NGC INDIA DEALS WITH, DISCUSSES AND ADDRESSES ANY CONCERNS/DISPUTES WITH ITS CUSTOMERS. ---- THE ENTIRE BUSINESS AND COMMERCIAL RISK AS SUCH LIES WITH NGC INDIA IN VIEW OF THE ABOVE, NGC ASIA (ASSESSEE HEREIN) SUBMITS THAT THE ABOVE STATED ACTIVITIES AR E UNDERTAKEN BY NGC INDIA IN ITS OWN RIGHT AND ON OWN ITS ACCOUNT AND NGC ASIA IS NOT INVOLVED IN ANY MANNER IN RESPECT OF THE SALE OF ADVERTISING AIRTIME BY NGC INDIA. FURTHER, NGC ASIA DOES NOT HAVE ANY CONTROL OVER THE ABOVE STATED ACTIVITIES UNDERTAK EN BY NGC INDIA WITH RESPECT TO SALE OF ADVERTISEMENT NOR DOES IT UNDERTAKE ANY ACTIVITY IN INDIA AS REGARDS THE ADVERTISEMENT AND SPONSORSHIP TIME SOLD BY IT. ACCORDINGLY, WE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 7 SUBMIT THAT NO INCOME CAN BE SAID TO ACCRUE OR ARISE TO NGC ASIA IN INDIA. BA SED ON THE ABOVE MENTIONED FACTS, IT IS CLEAR BEYOND DOUBT THAT NGC ASIA DOES NOT CARRY OUT ANY BUSINESS OPERATIONS IN INDIA. - FROM THE ABOVE EXPLANATION, IT IS CLEAR THAT IF NO OPERATIONS ARE CARRIED OUT BY THE NGC ASIA IN INDIA, NO INCOME CAN BE ATTRI BUTED AND TAXED IN INDIA. IN VIEW OF THE ABOVE DISCUSSION AND JUDICIAL PRECEDENTS WE WOULD, LIKE TO STATE THAT, NGC ASIA DOES NOT CARRY OUT ANY OPERATIONS OR ACTIVITIES IN INDIA IN RELATION TO THE SALE OF ADVERTISEMENT AND SPONSORSHIP TIME. EXPLANATION THAT NGC INDIA SHOULD NOT BE CONSTRUED AS AN AGENT OF NGC ASIA UNDER P2P ARRAN GE MENT NGC ASIA REITERATES THAT THE ARRANGEMENT BETWEEN NGC ASIA AND NGC INDIA WITH RESPECT TO SALE OF ADVERTISEMENT AND SPONSORSHIP AIRTIME IS ON A 'P2P' BASIS AND THE SAME A RE NEGOTIATED ON ARM'S L ENGTH BASIS. NGC ASIA HAS SOLD THE AIRTIME INVENTORY TO NGC INDIA. BASED ON THE ABOVE, NOC ASIA SUBMITS THAT THE BASIC CONDITION FOR A PERSON TO CONSTITUTE AN AGENT FOR ANOTHER IS THAT THE PERSON MUST BE EMPLOYED BY THE PRINCIPAL TO ACT ON HIS BEHALF AND TO REPRESENT HIM IN DEALINGS WITH THIRD PERSONS. IN THIS CONNECTION, WE WOULD LIKE TO DRAW YOUR HONOUR'S ATTENTION TO THE FOLLOWING CLAUSES OF THE AGREEMENT CLAUSE 1) A) 'NGC ASIA AGREES TO SELL TO NGC INDIA AND NGC INDIA AGRE ES TO ACQUIRE FROM NGC ASIA UPON THE TERMS AND CONDITIONS SET OUT IN THIS AGREEMENT, THE AD TIME ON THE CHANNEL (S)' CLAUSE 1) D ) 'FOR THE AVOIDANCE OF DOUBT IT IS CLARIFIED THAT WHILE NGC INDIA MAY DEAL WITH THE AD TIME AND/OR ADDITIONAL AD TIME IN I TS OWN RIGHT AND IN SUCH MANNER AS IT DEEMED FIT , ONWARDS SALE, IF ANY, OF AD TIME AND ADDITIONAL AD TIME BY NCG INDIA TO ITS CUSTOMERS WILL BE ENTIRELY AT ITS OWN RISK, AT PRICE AGREED ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 8 BETWEEN NGC INDIA AND SUCH CUSTOMERS AN AND ON SUCH TERMS AS IT MAY CONSIDER APPROPRIATE. FURTHER, NO CUSTOMER SHALL HAVE PRIVITY OF CONTACT WITH NGC ASIA AND THE ENTIRE RISK AND RESPONSIBILITY IN ALL RESPECT REGARDING SUCH CUSTOMERS SHALL REST EXCLUSIVELY WITH NGC INDIA.' CLAUSE 2)II) NGC INDIA SHALL ALONE BE RESPONS IBLE FOR ITS ACTS OR OMISSIONS AND SHALL NOT BE DEEMED TO BE ACTING FOR AND ON BEHA LF OF NGC ASIA.' THE AGREEMENT DOES NOT REQUIRE OR PROVIDE FOR NGC INDIA UNDER THE DIRECT OR INDIRECT CONTRO L OR SUPERVISION OF NGC AS IA. ACCORDINGLY, AN I MPORTANT ASPECT FOR EXISTENCE OF AN AGENCY RELATIONSHIP, WHEREIN AN AGENT IS REQUIRED TO CONDUCT THE BUSINESS ACCORDING TO THE DIRECTIONS OF THE PRINCIPAL IS NOT SATISFIED. THEREFORE, BASED ON THE TERMS OF THE CONTRACT, THE INTENTION OF THE PARTIES AND THE ABOVE ANALYSIS OF THE PROVISIONS OF THE CONTRACT ACT, THE NATURE OF ARRANGEMENT BETWEEN NGC ASIA AND NGC INDIA IS ON A PRINCIPAL - TO - PRINCIPAL BASIS. TAXABILITY UNDER INDIA - US TAX TREATY WITHOUT PREJUDICE TO ABOVE THAT THE ADVERTISEMENT REVENUES EARNED BY NGC ASIA ARE N OT TAXABLE IN INDIA UNDER THE ACT, WE FURTHER SUBMIT THAT THE REVENUE WITH RESPECT TO OUTRIGHT SALE OF ADVERTISEMENT AND SPONSORSHIP TIME EARNED BY NGC ASIA FROM NGC INDIA WOULD ONLY BE TAXABLE AS PER THE PROVISIONS OF ARTICLE 7 OF THE LN DIA - US T AX TREATY . WITHOUT PREJUDICE, EVEN PRESUMING WITHOUT CONCEDING THAT NGC ASIA CONSTITUTES A PE IN INDIA, THE ADVERTISEMENT REVENUES COULD NOT BE SAID TO BE EFFECTIVELY CONNECTED TO SUCH A PE. THE TERM 'EFFECTIVELY CONNECTED' IS NOT DEFINED UNDER THE ACT , HOWEVER, T HE SAME HAS BEEN INTERPRETED BY VARIOUS JUDICIAL PRECEDENTS TO MEAN THAT INCOME RESULTS FROM PE'S ACTIVITIES AND ARISE ECONOMICALLY FROM THE BUSINESS CARRIED ON BY THE PE. IN VIEW OF THIS, WE WOULD LIKE TO MENTION THAT NGC INDIA HAS PURCHASED THE ADVERTISE MENT AND SPONSORSHIP TIME FROM NGC ASIA ON A P2P BASIS. FURTHER, NGC INDIA HAS NOT CARRIED ON ANY ACTIVITIES ON BEHALF OF NGC ASIA AND THEREFORE, NO INCOME CAN BE SAID TO ARISE ECONOMICALLY TO NGC ASIA FROM BUSINESS CARRIED ON BY NGC INDIA.' ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 9 4.2 THE CON TENTIONS OF THE ASSESSEE HAVE BEEN DULY CONSIDERED. NGC ASIA (ASSESSEE) CA R RIES OUT OPERATIONS IN INDIA AS FOLLOWS: 1 . NGC ASIA (ASSESSEE) IS THE OWNERS AND OPERATORS OF THE CHANNELS. THE ACTIVITIES INVOLVED IN OPERATING A CHANNEL CENTER A ROUND THE CHAI N OF AN ACTIVITY CONSISTING OF SO MANY INTER - RELATED MODULES. 2 . THE FIRST OF SUCH MODULE IS PREPARATION OF PROGRAMMES MEANT FOR TELECASTING. PROGRAMMES MAY BE PREPARED BY NGC ASIA (ASSESSEE) THEMSELVES OR MAY BE ACQUIRED OR OUTSOURCED. 3 . CREATING NETWORK F OR VIEWERS IS THE NEXT STEP , WHICH IS CARRIED OUT THROUGH THE CHAIN OF CABLE OPERATORS IN EVERY FOOTPRINT OF THE CHANNEL TELECAST . 4 . TELECASTING AND MARKETING OF THE PROGRAMMES FOLLOW THE EARLIER MODULES. IT INVOLVES UP - LINKING THE PROGRAMMES TO A SATELLIT E WHICH MAY BE OWNED , HIRED OR TAKEN ON LEASE BY THE NGC ASIA (ASSESSEE). THEREAFTER DOWN - LOADING HAS TO BE DONE THROUGH DECODERS PROVIDED TO THE CABLE OPERATORS FOR WHICH PRESCRIBED FEE ARE LEVIED . 5 . THE NEXT STEP, AS THE MAIN SOURCE OF REVENUE, NGC ASIA ( ASSESSEE) HAVE TO PROCURE ADVERTISEMENTS FROM CUSTOMERS. 6 . ALL THE ABOVE ACTIVITIES ARE PRESENT IN INDIA OUT OF WHICH THE NGC ASIA (ASSESSEE) ALONG WITH ITS ASSOCIATES EARN THE REVENUE. 7 . THE ABOVE SCHEME OF THE OPERATIONS CARRIED OUT BY THE NGC ASIA (ASSE SSEE) THROUGH THE NGC INDIA COMPANY AND ITS ASSOCIATES AND AGENTS ARE NOTHING BUT BUSINESS OPERATIONS CARRIED OUT IN INDIA IN WHICH NGC ASIA (ASSESSEE) DO OCCUPY THE LEADING ROLE. 8 . THE TELECASTING BUSINESS BEING A CONTINUOUS AND FL O WING PROCESS, THE ENTIR E ACTIVITIES A RE CARRIED OUT BY THE NGC INDIA THROUGH THE HELP OF AGENTS, SUB - AGENTS AND OTHER CONC ERNS AND SUBSIDIARIES. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 10 DURING THE COURSE OF ARGUMENTS, THE LD A.R SUBMITTED THAT THE OBSERVATIONS MADE BY THE AO IN POINT NO.5 AND 6 ARE WRONG, I.E., HE S UBMITTED THAT THE ASSESSEE DOES NOT PROCURE ADVERTISEMENTS DIRECTLY. HOWEVER, WE ARE OF THE VIEW THAT THE ASSESSING OFFICER HAS DISCUSSED ONLY THE BUSINESS MODULE OF THE ASSESSEE AND HAS NOT GIVEN ANY FINDING THAT THE ASSESSEE PROCURES ADVERTISEMENTS DIRE CTLY , WHICH IS EVIDENT IN THE OBSERVATIONS MADE IN POINT NO.6, WHEREIN THE AO OBSERVES THAT THE ASSESSEE ALONG WITH ITS ASSOCIATES EARN THE REVENUE . 8. WE HAVE EARLIER NOTICED THAT THE ASSESSEE HAS SOLD THE ADVERTISEMENT AIRTIME (AD AIRTIME) TO NGC IN DIA WITH EFFECT FROM 1.5.2006 AND ACCORDINGLY CLAIMED THAT THE AGREEMENT WAS ON PRINCIPAL TO PRINCIPAL BASIS. ACCORDINGLY, IT WAS CLAIMED THAT NGC INDIA IS AN AGENT OF INDEPENDENT STATUS AND HENCE NGC INDIA CANNOT BE CONSIDERED TO BE PE OF THE ASSESSE E. THE ASSESSING OFFICER DID NOT ACCEPT THE SAID SUBMISSIONS OF THE ASSESSEE. T HE ASSESSING OFFICER TOOK THE VIEW THAT TIME CANNOT BE DELIVERED IN ADVANCE AND HENCE THE ADVERTISEMENT AIRTIME CANNOT BE CONSIDERED TO BE GOODS , CAPABLE OF BEING SOLD . SINCE CAPABILITY OF US ING GOODS IS ABSENT IN THE CASE OF ADVERTISEMENT AIRTIME, THE AO HELD THAT THE NGC INDIA CANNOT USE THE AD AIRTIME INDEPENDENT OF THE ASSESSEE. HE ALSO OBSERVED THAT, U NLIKE IN THE CASE OF GOODS, TIME CANNOT BE STOCKED FOR FUTURE SALE, SINCE THE TIME GETS GENERATED AUTOMATICALLY AND IT ALSO LAPSES AUTOMATICALLY. ACCORDINGLY, THE AO HELD THAT THE AD AIRTIME CANNOT BE CONSIDERED TO GOODS CAPABLE OF BEING SOLD IN ADVANCE. 9. HE FURTHER NOTICED THAT NGC INDIA SUPPLIES READY TO BROADCAST ADVERTISEMENT MATERIALS TO THE ASSESSEE, BUT THE ASSESSEE HAS RESERVED ITS RIGHT EITHER TO ACCEPT OR REJECT THE ADVERTISEMENT MATERIAL. HE FURTHER SUBMITTED THAT THE TELECASTING OF PROGRAMS AND ADVERTISEMENTS ARE COMPOSITE ACTIVITIES AND THEY CANNOT BE SEGREGATED INTO TRANSFERABLE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 11 MODULES. A CCORDINGLY THE AO HELD THAT THE NGC INDIA IS ONLY FUNCTIONAL AGENT OF THE ASSESSEE AND ACCORDINGLY HELD THAT THE ASSESSEE HAS ONLY GRANTED PERMISSIVE RIGHT TO NGC INDIA . THE AO FURTHER SUBSTANTIATED HIS VIEW BY STATING THAT THE ADVERTISEMENT PROCURED BY NGC INDIA, PER SE, DOES NOT HAVE ANY COMMERCIAL VALUE UNLESS IT IS TELECAST BY THE ASSESSEE AND HENCE THE PROCUREMENT OF ADVERTISEMENT IS PART OF TELECASTING ACTIVITY ONLY. 10. THE ASSESSING OFFICER FURT HER OBSERVED THAT THE PROGRAM INCLUDING ADVERTISEMENT IS UPLINKED BY THE ASSESSEE AND THEY ARE DOWNLOADED BY THE CABLE OPERATORS FOR BROADCASTING THE SAME TO THE VIEWERS. HENCE THERE IS DIRECT RELATIONSHIP BETWEEN THE ASSESSEE AND CABLE OPERATORS. NGC IN DIA IS PROCURING ADVERTISEMENT MATERIAL AND SENT THE SAME TO THE ASSESSEE AND IT DOES NOT HAVE ANY ROLE IN UPLINKING/DOWNLINKING ACTIVITIES. THE ASSESSING OFFICER FURTHER REITERATED HIS VIEW THAT THE ADVERTISEMENT CONTENT IS INSEPARABLE PART OF FLOW OF TE LECAST CONTENTS AND HENCE IT CANNOT BE SEGREGATED AND SOLD. ACCORDINGLY THE ASSESSING OFFICER HELD THAT NGC INDIA IS ONLY A FUNCTIONAL AGENT OF THE ASSESSEE. 11. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE PROCUREMENT OF ADVERTISEMENT AS WELL AS ITS TELECAST TAKES PLACE IN INDIA, I.E., THE PURCHASE, SALES, DELIVERY AND CONSUMPTION OF ADVERTISEMENTS ARE GENERATED AS WELL AS CONCLUDED IN INDIA. HENCE THE SOURCE OF ADVERTISEMENT REVENUES IS INDIA. THE AO ALSO OBSERVED THAT THE NGC INDIA PROCURES ADVER TISEMENT BY USING THE BRAND NAME OF THE ASSESSEE AND HENCE ALL TELECAST CONTENTS ARE IDENTIFIED WITH THE BRAND NAME OF THE ASSESSEE ONLY. ACCORDINGLY THE ASSESSING OFFICER HELD THAT NGC INDIA IS ONLY A FUNCTIONAL AGENT OF THE ASSESSEE AND FURTHER THE ASS ESSEE HAS EARNED ADVERTISEMENT REVENUE THROUGH ITS BUSINESS CONNECTION IN INDIA. THE VARIOUS OBSERVATIONS MADE BY THE ASSESSING OFFICER HAS BEEN ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 12 SUMMARIZED BY HIM IN PARAGRAPH 4.4.15 OF HIS ORDER PASSED FOR ASSESSMENT YEAR 2007 - 08. 12. THE ASSESSING OFFI CER FURTHER HELD THAT THERE IS NO MATERIAL CHANGES IN THE RIGHTS AND OBLIGATIONS OF THE ASSESSEE UNDER THE OLD AGREEMENT (PRINCIPAL TO AGENT AGREEMENT) AND THE NEW AGREEMENT (PRINCIPAL TO PRINCIPAL AGREEMENT). ACCORDINGLY, THE AO HELD THAT NGC INDIA IS DEP ENDENT AGENT OF THE ASSESSEE IN TERMS OF PARAGRAPH 4(C) OF ARTICLE 5 OF INDIA - USA DTAA. CONSEQUENTLY , HE HELD THAT THE ASSESSEE IS HAVING PE IN INDIA. IN THIS REGARD, THE ASSESSING OFFICER TOOK SUPPORT OF THE DECISION RENDERED BY THE CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. DHL OPERATIONS B.V.NETHERLANDS (ITA NO.7987 AND 7988/BOM/92 DATED 03 - 10 - 2000). THE AO FURTHER OBSERVED THAT THE DECISION IN THE CASE OF SET SATELLITE (SUPRA) HAS BEEN RENDERED BY HONBLE BOMBAY HIGH COURT BY CONSIDERING THE CIRCULAR NO.23 DATED JULY 23, 1969 ISSUED BY CBDT. HOWEVER, THE SAID CIRCULAR HAS SINCE BEEN WITHDRAWN BY THE CBDT, VIDE ITS CIRCULAR NO. 07 OF 2009. ACCORDINGLY, THE AO HELD THAT THE ASSESSEE HAS CARRIED ON ITS ACTIVITIES THROUGH A PE IN INDIA AND HEN CE THE PROFITS ATTRIBUTABLE TO PE ARE LIABLE TO BE TAXED IN INDIA UNDER ARTICLE 7 OF DTAA. 13. THE AO THEN REFERRED TO A CIRCULAR ISSUED BY CBDT, WHEREIN IT IS STATED THAT THE INCOME ATTRIBUTABLE TO PE SHALL BE COMPUTED AS PER RULE 10 OF I.T RULES, IF SE PARATE ACCOUNTS FOR INDIAN OPERATIONS ARE NOT AVAILABLE. 1 4 . THE LD D.R.P. ALSO UPHELD THE VIEW TAKEN BY THE ASSESSING OFFICER. ACCORDINGLY, THE ASSESSING OFFICER COMPUTED INCOME FROM ADVERTISEMENT REVENUE AS PER RULE 10(II), AS STATED EARLIER. 15 . THE MAIN CONTENTION OF THE LD A.R IS THAT THE NEW AGREEMENT ENTERED BETWEEN THE ASSESSEE AND NGC INDIA WITH EFFECT FROM 01 ST MAY, 20 06 (NEW AGREEMENT) STATE IN CLEAR TERMS THAT THE AGREEMENT HAS BEEN ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 13 ENTERED ON PRINCIPAL TO PRINCIPAL BASIS, MEANING THE REBY THE NGC INDIA WAS ACTING AS AN AGENT OF INDEPENDENT STATUS. ACCORDING TO THE NEW AGREEMENT, THE ASSESSEE HAS SOLD ENTIRE AIR TIME TO NGC INDIA ON PRINCIPAL TO PRINCIPAL BASIS FOR A LUMP SUM CONSIDERATION. THE REVENUE GENERATED ON SALE OF ADVERTISE MENT AIR TIME IS IN THE NATURE OF BUSINESS INCOME AND HENCE THE SAME CAN BE TAXED IN INDIA ONLY IF THE ASSESSEE HOLDS A PERMANENT ESTABLISHMENT (PE) IN INDIA. SINCE THE RELATIONSHIP BETWEEN NGC INDIA AND THE ASSESSEE IS ON PRINCIPAL TO PRINCIPAL BASIS, NG C INDIA CANNOT BE CONSIDERED AS DEPENDENT AGENT AND HENCE NGC INDIA CANNOT BE CONSIDERED TO BE THE PE OF THE ASSESSEE. IN SUPPORT OF THESE CONTENTIONS, THE LD A.R SUBMITTED THAT (A) THE ADVERTISEMENT AIR TIME FALLS IN THE CATEGORY OF GOODS AND HENCE I T CAN BE TRANSFERRED LIKE ANY OTHER GOODS. (B) THE TRANSFER PRICING OFFICER, HAVING CERTIFIED THAT THE INTERNATIONAL TRANSACTIONS HAVE BEEN ENTERED AT ARMS LENGTH, NO FURTHER INCOME CAN BE ATTRIBUTED TO THE ASSESSEE SO AS TO MAKE ANYTHING TAXABLE IN I NDIA. 1 6 . IN THE INSTANT CASE, THE ASSESSEE IS IN THE BUSINESS OF BROADCASTING OF TELEVISION PROGRAMMES AND ADVERTISEMENTS. THE TIME LIMIT AVAILABLE TO THE ASSESSEE IN A DAY IS 24 HOURS. THIS TIME LIMIT APPEARS TO HAVE BEEN SEGREGATED INTO ADVERTISEME NT AIRTIME AND PROGRAMME AIR TIME, MEANING THEREBY, THE ASSESSEE HAS PREFIXED THE TIME LIMIT FOR TELE CASTING ADVERTISEMENTS. FOR SOLICITING THE ADVERTISEMENTS, THE ASSESSEE IS REQUIRED TO APPOINT PERSONS AND THE ASSESSEE HAS APPOINTED M/S NGC INDIA TO SOLICIT ADVERTISEMENTS FROM INDIA. UNDER THE OLD AGREEMENT ENTERED BY THE ASSESSEE WITH NGC INDIA, THE ASSESSEE HAS PAID 15% OF ADVERTISEMENT REVENUES TO THE INDIAN COMPANY . FURTHER THE ADVERTISEMENT REVENUE WOULD DEPEND UPON THE NUMBER OF ADVERTISEMENTS RECEIVED AND ALSO QUANTITY OF AIR TIME USED. T HERE S HOULD NO T BE ANY DISPUTE THAT M/S NGC ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 14 INDIA HAS ACTED AS AGENT OF THE ASSESSEE COMPANY UNDER THE OLD AGREEMENT. 17 UNDER THE NEW AGREEMENT, THE ASSESSEE HAS SOLD THE ENTIRE ADVERTISEMENT AIR TIME TO M/S NGC INDIA FOR A FIXED CONSIDERATION. THE NEW AGREEMENT STATES THAT THE SAID AGREEMENTS HAVE BEEN ENTERED ON PRINCIPAL TO PRINCIPAL BASIS. ACCORDINGLY, IT WAS CONTENDED THAT THE ADVERTISEMENT AIR TIME IS GOODS CAPABLE OF BEING TRANSFERRED AND H ENCE THE AGREEMENT HAS BEEN ENTERED ON PRINCIPAL TO PRINCIPAL BASIS. IF THE CONTENTION OF THE ASSESSEE IS ACCEPTED THAT M/S NGC ASIA CANNOT BE CONSIDERED TO BE THE DEPENDENT AGENT OF THE ASSESSEE, IN WHICH CASE, M/S NGC ASIA CANNOT BECOME PE OF THE AS SESSEE COMPANY AND HENCE THE ADVERTISEMENT REVENUE EARNED BY THE ASSESSEE COMPANY SHALL NOT BE LIABLE TO TAXATION IN INDIA. WHEN THIS CONTENTIONS WERE PUT TO THE ASSESSING OFFICER, THE AO HAS TAKEN THE VIEW THAT THE RELATIONSHIP BETWEEN THE ASSESSEE AND M /S NGC INDIA CONTINUES TO BE THAT OF PRINCIPAL AND AGENT, SINCE THE ADVERTISEMENT AIR TIME CANNOT BE CONSIDERED TO BE GOODS CAPABLE TO BEING STOCKED, TRANSFERRED AND USED. 18 . IN THIS CONTEXT, IT IS IMPERATIVE TO FIRST DETERMINE THE QUESTION AS TO WHETHER ADVERTISEMENT AIR TIME SHALL FALL UNDER THE CATEGORY OF GOODS CAPABLE OF BEING TRANSFERRED. WE HAVE NOTICED THAT THE ASSESSING OFFICER HAS TAKEN THE VIEW THAT THE SAME CANNOT FALL IN THE CATEGORY OF GOODS, SINCE IT CANNOT BE STOCKED OR US ED INDEPEN DEN TLY. BEFORE US, THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH (271 ITR 401) TO SUPPORT HIS CONTENTIONS THAT THE ADVERTISEMENT AIR TIME IS GOO DS. IN THE CASE OF TATA CONSULTANCY SERVICES (SUPRA), THE QUESTION URGED BEFORE THE HONBLE SUPREME COURT WAS ABOUT THE CHARACTER OF SOFTWARE, ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 15 I.E, WHETHER A SOFTWARE IS GOODS OR NOT. IN THIS CONNECTION, THE HONBLE SUPREME COURT REFERRED TO ITS EAR LIER DECISION RENDERED IN THE CASE OF CST V. MADHYA PRADESH ELECTRICITY BOARD (1969) 1 SCC 200, WHEREIN THE QUESTION WHETHER ELECTRICITY WAS GOODS FOR THE PURPOSE OF IMPOSITION OF SALES TAX UNDER THE MADHYA PRADESH GENERAL SALES TAX ACT, 1959, WHEREIN THE CHARACTERISTICS OF GOODS WAS EXPLAINED AS UNDER: - .. IT HAS BEEN HELD THAT PROPERTIES WHICH ARE CAPABLE OF BEING ABSTRACTED, CONSUMED AND USED AND/OR TRANSMITTED, TRANSFERRED, DELIVERED, STORED OR POSSESSED ETC. ARE GOODS FOR THE PURPOSES OF SALE S TAX BASED ON THE ABOVE SAID REASONING, IT WAS HELD IN THE CASE OF AMBIENT SPACE SELLERS LTD VS. ASIA INDUSTRIAL TECHNOLOGY PVT LTD 1998 PTC (18) (BOM) THAT SIGNALS SHALL CONSTITUTE GOODS, SINCE THEY CAN ALSO BE TRANSMITTED, TRANSFERRED, DELIVERED, STORED AND POSSESSED. IN THE CASE OF CIT VS. SUN TV LTD (296 ITR 274)(MAD), IT WAS HELD THAT THE RIGHT ASSIGNED TO TELECAST THE PROGRAMMES IN FOREIGN COUNTRIES EITHER BY SALE OF VIDEO CASSETTES OR WITH THE HELP OF SATELLITES ARE HAVING ATTRIBUTES REQUI RED FOR BRINGING THE PROPERTY INVOLVED WITHIN THE MEANING OF GOODS ARE SATISFIED WITH REFERENCE TO ITS UTILITY, CAPABILITY OF BEING BOUGHT AND SOLD; AND CAPABLE OF BEING TRANSMITTED, TRANSFERRED, DELIVERED STORED AND POSSESSED. 19. THE ADVERTISEMEN T AIR TIME IS AN ITEM THAT CAN BE IDENTIFIED AND ABSTRACTED, SINCE THE TELE CASTING TIME LIMIT IS PREDETERMINED. THE RIGHT OVER THE ADVERTISEMENT AIR TIME MAY ALSO BE CAPABLE OF BEING POSSESSED TILL THE TIME OF ITS EXPIRY. FOR EXAMPLE, IF A PERSON PURCHA SES THE RIGHT OVER THE ADVERTISEMENT AIRTIME OF SAY, 30 MINUTES TO BE USED BEFORE THE EXPIRY OF A PARTICULAR MONTH, THEN THE SAID CAN POSSESS THE RIGHT TILL THE EXPIRY OF THAT MONTH. ACCORDINGLY, AFTER THE EXPIRY OF THE THAT MONTH, THE SAID RIGHT WOULD AU TOMATICALLY LAPSE AND HENCE THE CHARACTERISTIC OF CAPABLE OF ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 16 BEING STORED WOULD HAVE LIMITED APPLICATION IN THIS CASE. ANOTHER IMPORTANT QUESTION IS - WHETHER THE ADVERTISEMENT AIR TIME, PER SE, CAN BE USED INDEPENDENTLY BY THE TRANSFEREE ? ONE OF THE M AIN CHARACTERISTICS OF GOODS IS THAT IT SHOULD BE CAPABLE OF BEING CONSUMED OR USED. THERE SHOULD NOT BE ANY DOUBT THAT THE ADVERTISEMENT AIR TIME SHALL HAVE VALUE OR CAPABLE OF BEING USED /CONSUMED ONLY, IF THE CONCERNE D ADVERTISEMENT MATERIAL IS TELE CAST BY THE ASSESSEE HEREIN, I.E., THE ADVERTISEMENT AIR TIME GETS IS VALUE ONLY IF THE ASSESSEE AGREES TO TELE CAST THE CONCERNED ADVERTISEMENT MATERIAL. FOR EXAMPLE, IF THE ASSESSEE REFUSES TO TELECAST THE ADVERTISEMENTS PROCURED BY M/S NGC INDIA, T HEN THE ADVERTISEMENT AIRTIME PURCHASED BY IT UNDER THE AGREEMENT SHALL NOT HAVE ANY VALUE. IN CASE OF GOODS, IT GETS SEPARATED FROM ITS MANUFACTURER AND IT CAN BE USED/CONSUMED BY ANYONE INDEPENDENT OF OR WITHOUT ANY SUPPORT FROM THE MANUFACTURER. FUR THER, THE GOODS SHALL BE CAPABLE OF UNIVERSAL USE. H OW E V E R , THE ADVERTISEMENT AIR TIME , IN THE INSTANT CASE, IS RELATED TO THE TELEVISION CHANNELS OWNED BY THE ASSESSEE ONLY . THE ADVERTISEMENT AIRTIME SOLD BY THE ASSESSEE OR NGC INDIA SHALL NOT HAVE A NY VALUE WITH REGARD TO OTHER TELEVISION CHANNELS, MEANING THEREBY, THE SAME CAN NOT BE SEPARATED FROM THE ASSESSEE , IN WHICH CASE , THE ADVERTISEMENT AIR TIME FAILS TO SATISFY THE TEST THAT IT IS CAPABLE OF BEING USED/CONSUMED INDEPENDENTLY, I.E., INDEPE NDENT OF THE ASSESSEE HEREIN. HENCE, THROUGH THE PURCHASE OF ADVERTISEMENT AIRTIME, A PERSON GET S A RIGHT TO GET HIS ADVERTISEMENT MATERIAL TELE CASTED IN THE TELEVISION CHANNELS OWNED BY THE ASSESSEE. HENCE, WE AGREE WITH THE VIEW TAKEN BY THE ASSESSING OFFICER THAT THE ADVERTISEMENT AIR TIME CANNOT FALL UNDER THE CATEGORY OF GOODS. IT IS ONLY A RIGHT GIVEN TO M/S NGC INDIA TO PROCURE ADVERTISEMENTS . THOUGH THE RIGHT TO PROCURE ADVERTISEMENTS FOR PARTICULAR AIRTIME MAY BE CAPABLE OF BEING TRANSF ERRED, BUT THE SAME CANNOT BE CONSUMED/USED BY THE BUYER OF THE RIGHT , WITHOUT THE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 17 ASSISTANCE F ROM THE ASSESSEE BY WAY OF TELE CASTING THE SAME IN THE TELEVISION CHANNELS. 20. THE NEXT QUESTION THAT ARISES IS ABOUT THE NATURE OF RELATIONSHIP BETWEEN THE ASSESSEE AND NGC INDIA. IN THE NEW AGREEMENT, IT IS PROVIDED THAT THE RELATIONSHIP BETWEEN THEM IS THAT OF PRINCIPAL TO PRINCIPAL, WHEREAS THE TAX AUTHORITIES HAVE TAKEN THE VIEW THAT THEY STILL CONTINUE THE PRINCIPAL TO AGENT RELATIONSHIP EVEN UNDER THE NEW AGREEMENT ALSO. THE NATURE OF PRINCIPAL - AGENT RELATIONSHIP CAME TO BE EXAMINED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. IDEA CELLULAR LTD (325 ITR 148), WHEREIN THE HONBLE HIGH COURT HAS OBSERVED AS UNDER: - 19. THIS COURT IN COMM ISSIONER OF INCOME TAX, NEW DELHI VS. SINGAPORE AIRLINES LTD. [2009 - ITOL - 183 - HC - DEL - IT] ANALYSES THE AFORESAID DEFINITION IN THE FOLLOWING MANNER: '16. IT IS CLEAR FROM THE DEFINITION THAT AN AGENCY COMES INTO EXISTENCE WHERE ONE PERSON IS VESTED WITH THE AUTHORITY OR CAPACITY TO CREATE A LEGAL RELATIONSHIP BETWEEN PERSON REFERRED TO AS A PRINCIPAL AND AN OUTSIDE THIRD PARTY. THEREFORE, THE BASIC AND ESSENTIAL REQUISITES OF AN AGENCY ORDINARILY WOULD BE THAT: THE AGENT MAKES THE PRINCIPAL ANSWERABLE TO TH IRD PERSONS WHEREBY THE PRINCIPAL CAN SUE THIRD PARTIES DIRECTLY AND RENDERS HIMSELF, THAT IS, THE PRINCIPAL, LIABLE TO BE SUED DIRECTLY BY THE THIRD PARTIES. - VARSHA ENGG. (P.) LTD. V. VIJAY TRADERS AI R 1983 GUJ. 168 AT PAGES 168 - 169, PARA 5. THE PERSON WHO PURPORTS TO ENTER INTO A TRANSACTION ON BEHALF OF THE PRINCIPAL WOULD HAVE THE POWER TO CREATE, MODIFY OR TERMINATE CONTRACTUAL RELATIONSHIP BETWEEN HIS PRINCIPAL, THAT IS, THE PERSON WHOM HE REPRES ENTS, AND THE THIRD PARTIES. - P. KRISHNA BHATTA V. MUNDILA GANAPATHI BHATTA AIR 1955 MAD. 648 AT PAGE 651, PARA 36. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 18 AN AGENT, THOUGH BOUND BY INSTRUCTIONS GIVEN TO HIM BY THE PRINCIPAL DOES NOT WORK UND ER THE DIRECT CONTROL AND SUPERVISION OF THE PRINCIPAL. THE AGENT THUS USES HIS OWN DISCRETION TO ACT ON BEHALF OF THE PRINCIPAL SUBJECT TO THE LIMITS TO HIS AUTHORITY PRESCRIBED BY THE PRINCIPAL - LAKSHMI NARAYAN RAM GOPAL & SON LTD. V. GOVERNMENT OF HYDERABAD : [1954]25ITR449(SC) . THIS CITED WITH THE APPROVAL IN QAMAR SHAFFI TYABJI V. COMMISSIONER OF EXCESS PROFITS TAX : [1960]39ITR611(SC) . THERE IS NO NECESSITY OF A FORMAL CONTRACT OF AGENCY, IT CAN BE IMPLIED WHICH COULD ARISE FROM THE ACT OF PARTIES OR SITUATIONS IN WHICH PARTIES ARE PUT. IN A PRINCIPAL AGENT RELATIONSHIP, AN AGENT MAKES THE PRINCIPAL ANSWERABLE TO THIRD PARTIES. THE AGENT MAY NOT ACT UNDER THE DIRECT CONTROL OF THE PRINCIPAL, THOUGH BOUND BY THE INSTRUCTIONS GIVEN BY THE PRINCIPAL, AND HE MAY USE ITS OWN DISCRETION . IN THE INSTANT CASE ALSO, M/S NGC INDIA , BY WAY OF SELLING ADVERTISEMENT AIRTIME, ONLY CANVASSE S ADVERTISEMENTS FOR BEING TELE CAST BY THE ASSESSEE IN ITS TELEVISION CHANNELS. THUS, M/S NGC INDIA ONLY ESTABLISHES A RELATIONSHIP BETWEEN THE ASSESSEE AND THE CLIENTS (WHO GAVE ADVERTISEMENT S ). IT IS ALSO PERTINENT TO NOTE THAT M/S NGC ASIA IS AUTHORISED TO USE THE TRA DE MARKS ASSOCIATED WITH THE CHANNELS FOR THE PURPOSE OF SELLING AD AIR TIME, WHICH IN EFFECT, ALLOWS M/S NGC INDIA TO CANVASS ADVERTISEMENTS IN THE NAME OF THE ASSESSEE ONLY. 21 . THE PRINCIPAL TO PRINCIPAL RELATIONSHIP IS EXPLAINED AS UNDER BY HON BLE DELHI HIGH COURT IN THE CASE OF IDEA CELLULAR LTD (SUPRA) AS UNDER: - IN CONTRAST, THE LEGAL POSITION WHEN THE GOODS ARE SOLD BY PRINCIPAL TO ITS DISTRIBUTORS CREATING PRINCIPAL AND PRINCIPAL RELATIONSHIP WOULD BE ENTIRELY DIFFERENT. ON THE SALE OF GOODS, THE OWNERSHIP PASSES BETWEEN THE MANUFACTURER AND THE DISTRIBUTORS. IT IS THE RESPONSIBILITY OF THE DISTRIBUTOR THEREAFTER TO SELL THOSE GOODS FURTHER TO THE CONSUMERS - THE ULTIMATE USERS. THE PRINCIPAL/MANUFACTURER DOES NOT COME IN PICTURE AT ALL. OF COURSE, HE MAY BE LIABLE FOR SOME ACTION BY THE CONSUMER BECAUSE OF DEFECTIVE GOODS, ETC., WHICH IS THE RESULT OF OTHER ENACTMENTS CONFERRING CERTAIN RIGHTS ON THE CONSUMER OR COMMON LAW RIGHTS IN HIS FAVOUR AS AGAINST THE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 19 MANUFACTURER. WE MAY ALSO POI NT OUT THAT IN ITS CLASSIC JUDGMENT IN THE CASE OF BHARAT SANCHAR NIGAM LTD. ANOTHER VS. UNION OF INDIA AND OTHERS [AIR 2006 SC 1383], THE SUPREME COURT HELD THAT ELECTROMAGNETIC WAVES OR RADIO OF FREQUENCIES ARE NOT GOODS AND WITH THE SALE THEREOF SALES TAX ACT IS NOT ATTRACTED, THOUGH THE DECISION WAS RENDERED IN THE CONTEXT OF LIABILITY OF SALES TAX. 22 . IN A PRINCIPAL TO PRINCIPAL RELATIONSHIP IN RESPECT OF SALE OF GOODS, THE MANUFACTURER DOES NO T COME IN THE PICTURE IN RESPECT OF FURTHER SALE OF GOODS. WE HAVE EARLIER NOTICED THAT THE ADVERTISEMENT AIRTIME REFERRED TO HERE DOES NOT GIVE TO ANYBODY THE RIGHT OF UNIVERSAL USE AND THE SAME IS RESTRICTED TO THE CHANNELS OWNED BY THE ASSESSEE ONLY. EVEN AFTER THE SALE OF ADVERTISEMENT AIRTIME BY THE ASSESSEE, THE PURCHASER GETS ONLY A RIGHT TO ENFORCE THE ASSESSEE HEREIN TO TELE CAST THE ADVERTISEMENT MATERIAL OF THE PURCHASER, I.E., ASSESSEES CONCURRENCE TO TELE CAST THE ADVERTISEMENT S AND ALSO A CTUAL TELE CASTING ALONE BRINGS VALUE TO THE ADVERTISEMENT AIRTIME. HENCE ASSESSEES INVOLVEMENT TILL THE COMPLETION OF TELECASTING OF ADVERTISEMENT MATERIAL IS ESSENTIAL IN ORDER TO MAINTAIN THE VALUE OF ADVERTISEMENT AIRTIME. HENCE ADVERTISEMENT AIRT IME CANNOT BE CATEGORIZED AS GOODS WITHIN THE LEGAL MEANING OF THE SAID TERM. ACCORDINGLY, WHAT IS BEING SOLD BY THE ASSESS EE IS ONLY THE FACILITY OF TELE CASTING OF ADVERTISEMENT S THROUGH THE ADVERTISEMENT MATERIAL S GIVEN BY THE CLIENTS. HENCE, THE NG C INDIA CANNOT BE CONSIDERED TO BE SELLING ANY GOODS AND IN EFFECT, IT IS ONLY CANVASSING THE ADVERTISEMENTS FOR THE ASSESSEE HEREIN. THUS M/S NGC INDIA PROVIDES ONLY AGENCY SERVICES TO THE ASSESSEE AND IN TURN, THE ASSESSEE IS PROVIDING ADVERTISEMENT S ERVICES OR TELECASTING SERVICES TO THE CLIENTS. THUS THE CONCEPT OF PURCHASE AND SALE OF GOODS, IN OUR VIEW, CANNOT BE APPLIED TO THE FACTS OF THE INSTANT CASE. ACCORDIN GLY, WE ARE OF THE VIEW THAT M/S NGC INDIA IS ONLY ENABLING THE ASSESSEE TO PROCURE T HE ADVERTISEMENTS FOR TELE CASTING THEM AND HENCE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 20 THE NGC INDIA CANNOT BE CONSIDERED AS SELLING ADVERTISEMENT AIRTIME INDEPENDENT OF THE ASSESSEE. ACCORDINGLY, WE AGREE WITH THE VIEW OF THE ASSESSING OFFICER THAT M/S NGC INDIA CANNOT BE CONSIDERED TO BE A N INDEPENDENT PRINCIPAL/AGENT IN RESPECT OF DEALING IN ADVERTISEMENT AIRTIME RELATING TO THE TELEVISION CHANNELS OWNED BY THE ASSESSEE. IN EFFECT, THE NGC INDIA IS ONLY CANVASSING THE ADVERTISEMENTS FOR THE ASSESSEE THROUGH THE PURCHASE AND SALE OF ADVER TISEMENT AIRTIME RELATING TO THE TELEVISION CHANNELS OWNED BY THE ASSESSEE AND THE SAME MAKES NGC INDIA A AGENT OF THE ASSESSEE, SINCE THE ADVERTISEMENT AIRTIME, PER SE, DOES NOT HAVE ANY VALUE WITHOUT THE ASSESSEE AGREEING TO TELE CAST THE ADVERTISEMENT MATERIAL. IT IS WELL SETTLED PROPOSITION THAT THE SUBSTANCE SHALL PREVAIL OVER THE FORM AND HENCE EVEN IF THE NEW AGREEMENT STATES THAT THE RELATIONSHIP BETWEEN THE ASSESSEE AND NGC INDIA IS THAT OF PRINCIPAL TO PRINCIPAL BASIS, IN VIEW OF THE FOREGOI NG DISCUSSIONS, WE ARE OF THE VIEW THAT THE RELATIONSHIP BETWEEN THEM ACTUALLY EXISTS ON PRINCIPAL TO AGENT BASIS ONLY. UNDER THE OLD AGREEMENT, THE ASSESSEE HAS PAID 15% OF THE REVENUE AS COMMISSION TO NGC INDIA AND UNDER THE NEW AGREEMENT; IT HAS SOLD ADVERTISEMENT AIRTIME FOR A FIXED CONSIDERATION. IN OUR VIEW, THE ASSESSEE HAS ONLY CHANGED THE METHOD OF GIVING COMPENSATION TO NGC INDIA OR METHOD OF GENERATING REVENUE FROM THE BROADCASTING OF ADVERTISEMENTS. UNDER THE OLD AGREEMENT, THE COMPENSATION GIVEN TO NGC INDIA AS WELL AS THE REVENUE GENERATED BY THE ASSESSEE WAS AGREED TO BE SHARED IN A FIXED PROPORTIONS, WHEREAS UNDER THE NEW AGREEMENT, IT HAS BEEN DETERMINED AT THE CONSOLIDATED FIGURE. IN OUR VIEW, THE METHODOLOGY ADOPTED BY THE PARTIES TO SHARE THE REVENUE OR TO GIVE COMPENSATION TO NGC INDIA FOR SERVICES RENDERED MAY NOT BE THE DETERMINING FACTOR TO DECIDE ABOUT THE NATURE OF RELATIONSHIP BETWEEN THE PARTIES. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 21 23 . THE NEXT QUESTION THAT ARISES IS AS TO WHETHER THE ASSESSEE IS HAVING PERMANENT ESTABLISHMENT IN TERMS OF INDIA - USA DTAA. IN THIS REGARD, THE ASSESSING OFFICER HAS TAKEN THE VIEW THAT THE ASSESSEE IS HAVING PERMANENT ESTABLISHMENT IN INDIA IN TERMS OF ARTICLE 5(4)(C), PARA 1 OF ARTICLE 5, PARA 2(I) OF ARTICLE 5 OF THE INDI A - US TAX TREATY. SINCE WE HAVE HELD THAT NGC INDIA SHOULD BE CONSIDERED AS AN AGENT OF THE ASSESSEE FOR THE DETAILED REASONING GIVEN ABOVE, WE AGREE WITH THE TAX AUTHORITIES THAT THE NEW AGREEMENT ENTERED BETWEEN THE PARTIES ALTERING THE TERMS AND CONDITI ONS WOULD NOT MAKE IT MATERIALLY DIFFERENT FROM THE OLD AGREEMENT. THERE MAY BE SOME MODIFICATION WITH REGARD TO THE RIGHTS AND OBLIGATIONS, BUT IN ESSENCE, THE ASSESSEE HAS RETAINED CONTROL IN CONNECTION WITH THE ADVERTISEMENTS PROCURED BY NGC INDIA. 24 . THE DEPENDENT AGENT PE IS SPECIFIED IN ARTICLE 5(4) OF INDIA - USA DTAA AS UNDER: - 4. NOTWITHSTANDING THE PROVISIONS OF PARAGRAPHS 1 AND 2, WHERE A PERSON OTHER THAN AN AGENT OF AN INDEPENDENT STATUS TO WHOM PARAGRAPH 5 APPLIES IS ACTING IN A CONTRACTING STATE ON BEHALF OF AN ENTERPRISE OF THE OTHER CONTRACTING STATE, THAT ENTERPRISE SHALL BE DEEMED TO HAVE PERMANENT ESTABLISHMENT IN THE FIRST - MENTIONED STATE, IF: ( A ) HE HAS AND HABITUALLY EXERCISES IN THE FIRST MENTIONED STATE AN AUTHORITY TO CON CLUDE CONTRACTS ON BEHALF OF THE ENTERPRISE, UNLESS HIS ACTIVITIES ARE LIMITED TO THOSE MENTIONED IN PARAGRAPH 3 WHICH, IF EXERCISED THROUGH A FIXED PLACE OF BUSINESS, WOULD NOT MAKE THAT FIXED PLACE OF BUSINESS A PERMANENT ESTABLISHMENT UNDER THE PROVISIO NS OF THAT PARAGRAPH; ( B ) HE HAS NO SUCH AUTHORITY BUT HABITUALLY MAINTAINS IN THE FIRST MENTIONED STATE A STOCK OF GOODS OR MERCHANDISE FROM WHICH HE REGULARLY DELIVERS GOODS OR MERCHANDISE ON BEHALF OF THAT ENTERPRISE, AND SOME ADDITIONAL ACTIVITIES CONDUCT ED IN THE STATE ON BEHALF OF THE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 22 ENTERPRISE HAVE CONTRIBUTED TO THE SALE OF THE GOODS OR MERCHANDISE; OR ( C ) HE HABITUALLY SECURES ORDERS IN THE FIRST MENTIONED STATE, WHOLLY OR ALMOST WHOLLY FOR THE ENTERPRISE. 25. UNDER THE NEW AGREEMENT , IT IS CONTENDED THAT THE ASSESSEE AND M/S NGC INDIA HAVE ENTERED THE AGREEMENT ON PRINCIPAL TO PRINCIPAL BASIS WITH REGARD TO THE SALE OF AIRTIME , MEANING THEREBY, THE ASSESSEE HAS GIVEN FULL AUTHORITY TO M/S NGC INDIA TO CONCLUDE THE CONTRACTS RELATING TO THE ADVERTIS EMENTS IN INDIA . THE FOLLOWING CLAUSE S OF THE NEW AGREEMENT SUPPORT THIS VIEW: - CLAUSE 1) D ) 'FOR THE AVOIDANCE OF DOUBT IT IS CLARIFIED THAT WHILE NGC INDIA MAY DEAL WITH THE AD TIME AND/OR ADDITIONAL AD TIME IN ITS OWN RIGHT AND IN SUCH MANNER AS IT DEEMED FIT , ONWARDS SALE, IF ANY, OF AD TIME AND ADDITIONAL AD TIME BY NCG INDIA TO ITS CUSTOMERS WILL BE ENTIRELY AT ITS OWN RISK, AT PRICE AGREED BETWEEN NGC INDIA AND SUCH CUSTOMERS AN AND ON SUCH TERMS AS IT MAY CONSIDER APPROPRIATE. FURTHER,NO CUSTO MER SHALL HAVE PRIVITY OF CONTACT WITH NGC ASIA AND THE ENTIRE RISK AND RESPONSIBILITY IN ALL RESPECT REGARDING SUCH CUSTOMERS SHALL REST EXCLUSIVELY WITH NGC INDIA . THOUGH IN CLAUSES 2 OF THE NEW AGREEMENT, WHICH CONTAINS CERTAIN RESTRICTIONS WITH REGAR D TO THE ADVERTISEMENTS PROCURED BY THE NGC INDIA, IN OUR VIEW, THEY HAVE BEEN PROVIDED FOR IN ORDER TO ENSURE THAT THE NGC INDIA COMPLIES WITH THE RULES AND REGULATIONS FRAMED BY THE GOVERNMENT. SUBJECT TO THE SAID OBLIGATIONS, THE ASSESSEE IS OTHERWISE REQUIRED TO TELECAST THE ADVERTISEMENTS PROCURED BY NGC INDIA, WHICH IS CLEAR FROM THE FOLLOWING CLAUSE: - 3(A)(III) NGC ASIA AGREES TO INSERT THE ADVERTISEMENTS PROVIDED BY NGC INDIA, AS PER SCHEDULE PROVIDED BY NGC INDIA, INTO THE CHANNEL(S) FOR BROADCA STING. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 23 ON A COMBINED READING OF THE VARIOUS CLAUSES OF THE NEW AGREEMENT COUPLED WITH THE VIEW EXPRESSED BY US IN THE PREVIOUS PARAGRAPHS, WE ARE OF THE VIEW THAT M/S NGC INDIA HAS AND HABITUALLY EXERCISES IN INDIA AN AUTHORITY TO CONCLUDE CONTRACTS ON B EHALF OF THE ASSESSEE AND THE SAME IS BINDING ON THE ASSESSEE, SINCE IT HAS AGREED TO BROADCAST THE ADVERTISEMENTS PROCURED BY NGC INDIA . HENCE NGC INDIA SHOULD BE CLAS SIFIED AS DEPENDENT AGENT OF THE ASSESSEE HEREIN IN TERMS OF ARTICLE 5(4)(A) OF THE I NDIA - US DTAA . ACCORDINGLY , IN OUR VIEW, THE ASSESSEE IS HAVING PE IN INDIA THROUGH ITS DEPENDENT AGENT M/S NGC INDIA IN TERMS OF ARTICLE 5(4)(A) OF THE TREATY, SINCE NGC INDIA HAS BEEN GIVEN FULL AUTHORITY TO CONCLUDE THE CONTRACTS IN INDIA . WE MAY RECAL L THAT THE ASSESSING OFFICER HAD HELD THAT THE PROVISIONS OF ARTICLE 5(4)(C) IS APPLICABLE TO THE ASSESSEE AND IN REBUTTAL OF THE SAME, THE ASSESSEE HAD DEMONSTRATED BEFORE THAT M/S NGC INDIA DOES NOT SECURE ORDERS WHOLLY OR ALMOST WHOLLY FOR THE ASSESSEE HEREIN BY FILING THE FINANCIAL DETAILS. SINCE, WE HAVE TAKEN THE VIEW THAT THE PROVISIONS OF ARTICLE 5(4)(A) IS APPLICABLE, WE DO NOT FIND IT NECESSARY TO CONSIDER ARTICLE 5(4)(C) OF THE INDO US TREATY. 2 6 . THE ASSESSEE HAD ALSO TAKEN ANOTHER ARGUMEN T THAT THE TRANSFER PRICING OFFICER HAS HELD THAT THE INTERNATIONAL TRANSACTIONS HAVE BEEN TRANSACTED AT ARMS LENGTH PRICE AND HENCE NO FURTHER ATTRIBUTION OF INCOME IS NECESSARY. IN THIS REGARD, THE ASSESSEE PLACED RELIANCE ON VARIOUS CASE LAWS, MAINLY T HE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF MORGAN STANELY & CO. INC. (292 ITR 416) AND ALSO THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF DIT VS. BBC WORLDWIDE LTD (2011)(203 TAXMAN 554) AND THE DECISION OF HONBLE BOMB AY HIGH COURT RENDERED IN THE CAE OF DIT (IT) - II VS. B4U INTERNATIONAL HOLDINGS LTD (2015)(57 TAXMANN.COM 146). ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 24 2 7 . THE FACTS PREVAILING IN THE CASE OF MORGAN STANELY & CO. INC (SUPRA) ARE THAT THE FOREIGN COMPANY THEREIN HAD ENGAGED THE SERVICES OF AN INDIAN COMPANY. IT IS PERTINENT TO NOTE THAT THE FOREIGN COMPANY PAID SERVICE CHARGES TO THE INDIAN COMPANY AND IT DID NOT RECEIVE ANY TYPE OF INCOME FROM ANY OF THE INDIAN PARTIES INCLUDING THE INDIAN COMPANY. THE QUESTION BEFORE THE HONBLE SUPREME COU RT WAS THAT WHETHER THE FOREIGN COMPANY IS LIABLE TO BE ASSESSED IN INDIA IN RESPECT OF PAYMENTS MADE TO THE INDIAN COMPANY FOR THE SERVICES AVAILED FROM INDIAN COMPANY. WE MAY REITERATE HERE THAT THE FOREIGN COMPANY ONLY PAID SERVICE CHARGES AND DID NOT GENERATE OR RECEIVE ANY MONEY FROM INDIAN COMPANIES. THE TRANSFER PRICING OFFICER HAS CERTIFIED THE PAYMENTS MADE BY THE FOREIGN COMPANY TO BE AT ARMS LENGTH PRICE. UNDER THESE SET OF FACTS, THE HONBLE SUPREME COURT HAS OBSERVED AS UNDER: - 32. THE OB JECT BEHIND ENACTMENT OF TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OF PROFITS OUTSIDE INDIA. UNDER ART. 7(2) NOT ALL PROFITS OF MSCO WOULD BE TAXABLE IN INDIA BUT ONLY THOSE WHICH HAVE ECONOMIC NEXUS WITH PE IN INDIA. A FOREIGN ENTERPRISE IS LIAB LE TO BE TAXED IN INDIA ON SO MUCH OF ITS BUSINESS PROFIT AS IS ATTRIBUTABLE TO THE PE IN INDIA. THE QUANTUM OF TAXABLE INCOME IS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF IT ACT. ALL PROVISIONS OF IT ACT ARE APPLICABLE, INCLUDING PROVISIONS RE LATING TO DEPRECIATION, INVESTMENT LOSSES, DEDUCTIBLE EXPENSES, CARRY FORWARD AND SET OFF LOSSES ETC. HOWEVER, DEVIATIONS ARE MADE BY DTAA IN CASES OF ROYALTY, INTEREST ETC. SUCH DEVIATIONS ARE ALSO MADE UNDER THE IT ACT (FOR EXAMPLE : SS. 44BB, 44BBA ETC. ). UNDER THE IMPUGNED RULING DELIVERED BY THE AAR, REMUNERATION TO MSAS WAS JUSTIFIED BY A TRANSFER PRICING ANALYSIS AND, THEREFORE, NO FURTHER INCOME COULD BE ATTRIBUTED TO THE PE (MSAS). IN OTHER WORDS, THE SAID RULING EQUATES AN ARMS LENGTH ANALYSIS (A LA) WITH ATTRIBUTION OF PROFITS. IT HOLDS THAT ONCE A TRANSFER PRICING ANALYSIS IS UNDERTAKEN; THERE IS NO FURTHER NEED TO ATTRIBUTE PROFITS TO A PE. THE IMPUGNED RULING IS CORRECT IN PRINCIPLE INSOFAR AS AN ASSOCIATED ENTERPRISE, THAT ALSO CONSTITUTES A P E, HAS BEEN REMUNERATED ON AN ARMS LENGTH BASIS TAKING INTO ACCOUNT ALL THE RISK - TAKING FUNCTIONS OF THE ENTERPRISE. IN SUCH CASES NOTHING FURTHER WOULD BE LEFT TO BE ATTRIBUTED TO THE PE. THE SITUATION WOULD BE DIFFERENT IF TRANSFER PRICING ANALYSIS DOES NOT ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 25 ADEQUATELY REFLECT THE FUNCTIONS PERFORMED AND THE RISKS ASSUMED BY THE ENTERPRISE. IN SUCH A SITUATION, THERE WOULD BE A NEED TO ATTRIBUTE PROFITS TO THE PE FOR THOSE FUNCTIONS/RISKS THAT HAVE NOT BEEN CONSIDERED. THEREFORE, IN EACH CASE THE DATA PLA CED BY THE TAXPAYER HAS TO BE EXAMINED AS TO WHETHER THE TRANSFER PRICING ANALYSIS PLACED BY THE TAXPAYER IS EXHAUSTIVE OF ATTRIBUTION OF PROFITS AND THAT WOULD DEPEND ON THE FUNCTIONAL AND FACTUAL ANALYSIS TO BE UNDERTAKEN IN EACH CASE. LASTLY, IT MAY BE ADDED THAT TAXING CORPORATES ON THE BASIS OF THE CONCEPT OF ECONOMIC NEXUS IS AN IMPORTANT FEATURE OF ATTRIBUTABLE PROFITS (PROFITS ATTRIBUTABLE TO THE PE). IN OUR CONSIDERED VIEW, THE ABOVE SAID OBSERVATIONS SHALL APPLY , QUA THE PAYMENTS MADE BY THE FORE IGN COMPANY TO THE INDIAN COMPANY FOR THE SERVICES AVAILED BY IT. WE MAY PREFER TO EXPLAIN OUR UNDERSTANDING BY WAY OF AN EXAMPLE. IF A FOREIGN COMPANY A AVAILS SERVICES OF AN INDIAN COMPANY AE B AND REMUNERATES THE INDIAN COMPANY, SAY BY PAYING RS.1 .00 LAKH. AS OBSERVED BY THE HONBLE SUPREME COURT, THE OBJECT OF TRANSFER PRICING REGULATION IS TO PREVENT SHIFTING OF PROFITS FROM INDIA TO AN OUTSIDE COUNTRY . IF THE TPO DETERMINES THE ALP OF THE TRANSACTIONS AT RS.1.50 LAKHS, THEN THERE IS SHIFTING OF INDIAN PROFITS TO THE FOREIGN SOIL TO THE EXTENT OF RS.0.50 LAC AND HENCE THE FOREIGN COMPANY IS LIABLE TO ASSESSED IN RESPECT OF THE ABOVE SAID AMOUNT OF RS.0.50 LAC. ON THE CONTRARY, IF THE TPO DETERMINES THE ALP AT RS.1.00 LAKH, THEN THERE IS NO NEC ESSITY TO ATTRIBUTE ANY FU R THER INCOME, SINCE THE INDIA HAS ALREADY RECEIVED ITS DUE SHARE OF INCOME. WE WISH TO CLARIFY HERE THAT THE RATIO LAID DOWN IN THE ABOVE SAID CASE HAS APPLICATION WHILE EXAMINING THE EXISTENCE OF PE UNDER ARTICLE 5(5) OF THE ACT . ONCE THE FOREIGN COMPANY IS HELD TO HAVE PE IN INDIA, THEN THE TAXABILITY OF BUSINESS INCOME IS REQUIRED TO BE DETERMINED IN TERMS OF ARTICLE 7 OF THE INDIA - US TREATY. 2 8 . IN THE CASE OF B4U INTERNATIONAL HOLDINGS LTD (SUPRA), THERE WAS CLEAR FIN DING THAT THE ASSESSEE THEREIN CARRIED ON ALL ACTIVITIES FROM ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 26 MAURITIUS AND ALL THE CONTRACTS WERE CONCLUDED IN MAURITIUS. THE ACTIVITIES CARRIED OUT FROM INDIA WAS FOUND TO BE INCIDENTAL OR AUXILIARY /PREPARATORY IN NATURE AND FURTHER THE INDIAN COMPANY RECEIVED ONLY 4.69% OF ITS TOTAL INCOME FROM THE ASSESSEE BEFORE THE HIGH COURT. THE ASSESSEE ALSO PLACED STRONG RELIANCE IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD (307 ITR 205). HOWEVER, IN THE SAID CASE ALSO, THERE IS A CLEAR FINDING THAT THE CO NTRACTS WERE CONCLUDED IN MAURITIUS. HENCE PARAGRAPH 5 OF ARTICLE 5 OF TREATY WAS APPLIED. IN THE INSTANT CASE, WE HAVE HELD THAT THE PARAGRAPH 4 OF ARTICLE 5 OF THE TREATY SHALL APPLY AND HENCE, WE ARE OF THE VIEW THAT THE ASSESSEE CANNOT TAKE SUPPORT OF THIS DECISION. THE DEPARTMENT ALSO TOOK A CONTENTION THAT THE DECISION IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD (SUPRA), WHICH WAS CONSIDERED IN THE CASE OF B4U INTERNATIONAL HOLDINGS LTD (SUPRA) HAVE BEEN RENDERED BY TAKING INTO ACCOUNT THE CIR CULAR NO.23 OF 1969 ISSUED BY THE CBDT AND SINCE THE SAID CIRCULAR HAS BEEN WITHDRAWN BY THE CBDT, VIDE CIRCULAR NO.07 OF 2009 DATED 22.10.2009, THE RATIO OF THE BOTH THE DECISIONS ARE DISTINGUISHABLE. HOWEVER, IN OUR VIEW, THE SAID CONTENTIONS OF THE REV ENUE NEED NOT BE CONSIDERED, SINCE WE HAVE DISTINGUISHED BOTH THE DECISIONS ON FACTS. 2 9 . HENCE THE CERTIFICATION OF ALP BY THE TPO AND THE DECISION OF THE HONBLE SUPREME COURT AND OTHER HIGH COURTS CITED ABOVE WOULD BE APPLICABLE ONLY IN RESPECT OF THE PAYMENTS MADE BY A FOREIGN COMPANY TO ITS INDIAN AE IN RESPECT OF SERVICES AVAILED BY IT. ON THE CONTRARY, IF THE FOREIGN COMPANY RECEIVES ANY MONEY FROM THE INDIAN SOIL AND IF IT IS HELD TO BE HAVING A PERMANENT ESTABLISHMENT , THEN THE TAXABILITY O F THE SAME HAVE TO BE EXAMINED IN ACCORDANCE WITH THE PROVISIONS OF INDO - US TREATY AS WELL AS UNDER THE PROVISIONS OF INDIAN INCOME TAX ACT. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 27 30 . WE HAVE NOTICED THAT THE ASSESSEE HAD CONTENDED BEFORE THE AO THAT IT IS NOT TAXABLE AT ALL IN RESPECT OF ADVERTISEMENT REVENUE AND HENCE WE NOTICE THAT THE ASSESSEE HAS NOT CHALLENGED THE INCOME WORKED OUT BY THE ASSESSING OFFICER. IN THE INTEREST OF NATURAL JUSTICE, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE PROVIDED AN OPPORTUNITY TO SUBMIT ITS CONTEN TIONS WITH REGARD TO THE COMPUTATION OF INCOME FROM ADVERTISEMENT REVENUES. HENCE, FOR THIS LIMITED PURPOSE, WE RESTORE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER. IF THE ASSESSEE DOES NOT HAVE TO SAY ANYTHING IN THIS REGARD, THE INCOME COMPUTED BY THE ASSESSING OFFICER SHALL STAND. 3 1 . THE NEXT ISSUE RELATES TO THE TREATMENT OF FEE RECEIVED BY THE ASSESSEE FROM GIVING DISTRIBUTION RIGHTS TO M/S NGC INDIA. AS PER THE DISTRIBUTION AGREEMENT, M/S NGC INDIA IS GIVEN RIGHT TO DISTRIBUTE THE CHANNE LS TELECASTED BY THE ASSESSEE THROUGH ANY MEANS TO INTERMEDIARIES IN THE ASSIGNED TERRITORY . THE ASSESSING OFFICER PROPOSED TO TREAT THE SAME AS ROYALTY AND ACCORDINGLY ASSESS THE SAME. THE ASSESSEE SUBMITTED THAT (A) THE DISTRIBUTION RIGHT IS NOT IN THE NATURE OF COPYRIGHT. (B) IT IS A SEPARATE RIGHT BY NAME BROADCASTING REPRODUCTION RIGHT AND THE SAME IS DIFFERENT FROM COPYRIGHT. THE AO HOWEVER DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE. HE OBSERVED THAT THE AGREEMENT ENTERED BETWEEN THE ASS ESSEE AND NGC INDIA PROVIDE FOR RESTRICTIONS ON THE USE OF TRADE MARK OF THE ASSESEE. FURTHER, THE ASSESSEE HOLDS FULL CONTROL OVER THE CHANNELS AND NGC INDIA IS ALLOWED TO ONLY EXPLOIT THE CHANNELS. HE FURTHER HELD THAT THE DEFINITION OF TERM ROYALTY GIVEN IN EXPLANATION 2 TO SEC. 9(1)(VI) OF THE ACT IS WIDER IN SCOPE THAT THE DEFINITION GIVEN IN THE INDO - US TREATY FURTHER, THE AO ANALYZED SOME OF THE CLAUSES OF THE AGREEMENT AND OBSERVED AS UNDER: - ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 28 ( A ) AS PER THE DEFINITION, THE BROADCAST HAS BEEN DEFI NED AS BROADCASTING DISTRIBUTION AND REDISTRIBUTION OF THE CHANNELS IN THE TERRITORY. ( B ) CHANNELS MEANS PROGRAMME CHANNELS IN DIGITAL, ENCRYPTED FORMAT COMPRISING OF CHANNELS AS SPECIFIED. ( C ) INTERMEDIARIES MEAN ANY PERSON, INCLUDING REDISTRIBUTORS, CABLE OPE RATORS AND OTHER MEDIA INTERMEDIARIES AUTHORIZED BY NGC INDIA TO DISTRIBUTE THE CHANNELS. ( D ) THE ASSESSEE COMPANY HAS GRANTED LICENSES TO NGC INDIA. IT CAN BE SEEN THAT NGC INDIA CANNOT MODIFY OR DELETE ANYTHING FROM THE TRANSMISSION OF THE CHANNELS AND THAT IT HAS TO ENSURE THAT THE CHANNELS ARE TRANSMITTED IN THEIR ENTIRETY. THE ASSESSEE COMPANY HAS ALSO RESTRICTED NGC INDIA AND THE INTERMEDIARIES FROM MODIFYING, REPLACING OR COPYING ANY COPYRIGHT, TRADEMARKS, TRADE NAMES, LOGOS AND NAMES. THE ASSESSEE HA S ALSO PROHIBITED NGC INDIA AND ITS INTERMEDIARIES FROM COPYING ANY PROGRAMS INCLUDED ON THE CHANNELS. 5.7 ROYALTY CAN BE SAID TO BE A COMPENSATION PAID UNDER THE LICENSE GRANTED BY THE OWNER TO THE OTHER WHO WISHES TO MAKE USE OF THE LICENSE. IN TH IS CASE, THE OWNERSHIP REMAINS WITH THE LICENSOR, I.E., THE ASSESSEE AND FROM TERMS OF THE AGREEMENT IT CAN BE SEEN THAT NGC INDIA IS ALLOWED DISTRIBUTE CHANNELS WITH SO MANY RESTRICTIONS AS MENTIONED ABOVE. FROM THE TERMS OF THE AGREEMENT IT IS CLEAR THA T NGC INDIA IS ALLOWED TO DISTRIBUTE THE CHANNELS DURING THE CONTRACTUAL PERIOD AND ACCORDING TO THE TERMS LAID DOWN IN THE AGREEMENT. THIS SHOWS THAT NGC INDIA IS NOT FREE TO MAKE USE OF THE CHANNELS AS PER THEIR WISH BUT STRICTLY IN ACCORDANCE WITH THE TERMS LAID DOWN BY THE ASSESSEE COMPANY. CONSIDERING THESE FACTS, THE ASSESSEE COMPANY ENJOYS THE RIGHTS OF OWNERS, WHEREAS NGC INDIA IS PAYING COMPENSATION FOR THE EXPLOITATION OF THE CHANNELS. ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 29 5.8 SINCE NGC INDIA IS PAYING FOR THE USE OF THE CHANNEL S AND SINCE MANY RESTRICTIONS ARE PLACED UPON IT, THE LICENSE FEE PAYMENT MADE IS COVERED WITHIN THE DEFINITION OF ROYALTY AS PER ARTICLE 12 OF THE U.S. TREATY AS BEING PAYMENTS MADE FOR USE OF ANY COPYRIGHT OR A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCL UDING CINEMATOGRAPH FILMS OR WORK ON FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING. THE AO PLACED RELIANCE ON THE DECISION RENDERED BY AAR IN THE CASE OF AMERICAN EXPRESS AND ALSO THE DECISION RENDE RED BY HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. AHMEDABAD MANUFACTURING & CALICO PRINTED CO. (139 ITR 806) AND HELD THAT THE ASSESSEE HAS GIVEN THE RIGHT TO EXPLOIT ITS TELEVISION CHANNELS AND ACCORDINGLY HELD THAT THE FEE RECEIVED BY THE ASSESSEE FOR GIVING DISTRIBUTION RIGHTS OF ITS CHANNELS IS TOWARDS USE OF ANY COPYRIGHT OF A LITERARY, ARTISTIC OR SCIENTIFIC WORK, INCLUDING CINEMATOGRAPH FILMS, TAPE OR OTHER MEANS OF REPRODUCTION FOR USE IN CONNECTION WITH RADIO OR TELEVISION BROADCASTING AND H ENCE TAXABLE AS ROYALTY UNDER THE TREATY WITH U.S. THE AO ALSO OBSERVED THAT THE UNITED STATES HAS CONSIDERED THE BROAD CASTING REPRODUCTION RIGHTS AS COPYRIGHT. ACCORDINGLY, THE ASSESSING OFFICER HAS ASSESSED THE FEE RECEIVED FOR GIVING DISTRIBUTION RI GHTS AS ROYALTY INCOME. THE LD DRP ALSO CONFIRMED THE SAME. 3 2 . THE LD A.R SUBMITTED THAT THE ASSESSEE HAS TRANSFERRED THE DISTRIBUTION RIGHTS TO NGC INDIA TO DISTRIBUTE THE CHANNELS IN INDIA. THE ASSESSEE DOES NOT HAVE ANY CONTROL OVER THE ACTIVITIE S UNDERTAKEN BY NGC INDIA NOR DOES IT UNDERTAKE ANY ACTIVITY IN INDIA AS REGARDS THE DISTRIBUTION RIGHTS GRANTED. M/S NGC INDIA HAS CARRIED ON THE DISTRIBUTION ACTIVITY ON ITS OWN AND THE ENTIRE REVENUE FROM THE ACTIVITY ACCRUES TO NGC INDIA ONLY. FURTHER , NEITHER THE NGC INDIA NOR ANY OF THE INTERMEDIARIES CAN MODIFY OR DELETE ANYTHING IN THE COURSE OF CHANNEL, I.E., THE PROGRAMMES SHALL BE ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 30 TRANSMITTED IN ITS ENTIRETY WITHOUT MAKING ANY AMENDMENT. FURTHER NGC INDIA OR ANY OF THE INTERMEDIARIES CANNOT COP Y ANY OF THE PROGRAMMES INCLUDED ON THE CHANNEL FOR THE PURPOSE OF RE - TRANSMITTING THEM LATER OR FOR ANY OTHER REASON. ACCORDINGLY, THE LD A.R SUBMITTED THAT THE ASSESSEE HAS GRANTED NGC INDIA NON - EXCLUSIVE LICENSE TO USE THE TRADE MARKS ASSOCIATED WITH T HE CHANNEL SOLELY FOR THE PURPOSE OF MARKETING AND DISTRIBUTION. HENCE, NGC INDIA DOES NOT HAVE RIGHTS TO COMMERCIALLY EXPLOIT THESE TRADE MARKS IN ANY MANNER. 33. THE LD A.R FURTHER SUBMITTED THAT THE DEFINITION OF TERM ROYALTY GIVEN IN EXPLANATION 2 TO SECTION 9(1)(VI) OF THE ACT COVERS THE PAYMENT RECEIVED TOWARDS TRANSFER OF ANY RIGHTS IN RESPECT OF COPYRIGHT OF A LITERARY, ARTISTIC, SCIENTIFIC WORK. HOWEVER, THE PAYMENT RECEIVED BY THE ASSESSEE DOES NOT FALL IN THAT CATEGORY. HE FURTHER SUBMITT ED THAT THE TERM COPY RIGHT IS NOT DEFINED UNDER THE ACT. ADVERTING OUR ATTENTION TO THE DEFINITION OF THE TERM COPYRIGHT GIVEN UNDER THE COPYRIGHT ACT, THE LD A.R SUBMITTED THAT THE PAYMENT RECEIVED BY THE ASSESSEE DOES NOT FALL UNDER ANY OF THE CLAU SES GIVEN THEREIN. HE FURTHER SUBMITTED THAT, BASED ON COMBINED READING OF SECTION 37 AND 39A WITH SECTION 2(DD) OF THE COPYRIGHT ACT, THE CONSIDERATION PAID BY NGC INDIA IS FOR BROADCAST RE - REPRODUCTION AND DISTRIBUTION RIGHTS CAUSING THE BROADCAST TO BE HEARD OR SEEN BY THE SUBSCRIBERS ON PAYMENT OF ANY CHARGES BY THE THEM. HOWEVER, SUCH A RIGHT IS NOT A COPYRIGHT AS DEFINED UNDER THE LAW AND HENCE, NOT COVERED BY THE DEFINITION OF ROYALTY UNDER THE ACT. BY PLACING RELIANCE ON THE DECISION RENDERED BY HONBLE DELHI HIGH COURT IN THE CASE OF ESPN STAR SPORTS VS. GLOBAL BROADCAST NEWS LIMITED & OTHERS (RFA(OS)NO. 25/2008)(DEL), THE LD A.R SUBMITTED THAT THE HONBLE DELHI HIGH COURT HAS HELD THAT COPYRIGHT AND BROADCASTING REPRODUCTION RIGHT ARE TWO D ISTINCT AND SEPARATE RIGHTS. HE FURTHER SUBMITTED THAT IDENTICAL ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 31 VIEW HAS BEEN EXPRESSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF STAR INDIA PVT LTD VS. PIYUSH AGARWAL & ORS. (CS(OS) NOS.2722/2012, 3232/2012 AND 2780/2012)(DEL) AND ALSO BY THE CO - OR DINATE BENCH OF MUMBAI TRIBUNAL IN THE CASE OF DDIT VS. SET INDIA PRIVATE LIMITED (ITA NO.4372/MUM/2004). HE FURTHER SUBMITTED THAT THE HONBLE BOMBAY HIGH COURT HAS HELD IN THE CASE OF SET SATELLITE (SINGAPORE) PTE LTD (2008)(307 ITR 205) THAT THE DISTRI BUTION RIGHTS WERE A COMMERCIAL RIGHT, WHICH WAS DISTINCT AND DIFFERENT FROM A COPYRIGHT AND CONSEQUENTLY THERE WAS NO QUESTION OF PAYMENT OF ROYALTY. ACCORDINGLY, THE LD A.R SUBMITTED THAT THE PAYMENT RECEIVED BY THE ASSESSEE FROM M/S NGC INDIA IS NOT PAYMENT TOWARDS COPYRIGHT, BUT IT IS TOWARDS BROADCASTING RE - PRODUCTION RIGHTS. 3 4 . ALTERNATIVELY, THE LD A.R SUBMITTED THAT, EVEN IF IT IS CONTENDED THAT THE CHANNEL AS A COPYRIGHT , WHAT NGC INDIA IS PAYING FOR IS THE RIGHT TO USE THE COPYRIGHTED A RTICLE (I.E., IF THE CHANNEL COULD BE CONSIDERED TO BE SO) BY VIRTUE OF BEING PERMITTED TO DISTRIBUTE THE CHANNEL. ACCORDINGLY THE LD A.R SUBMITTED THAT THE NGC INDIA DOES NOT ACQUIRE ANY RIGHT IN THE UNDERLYING COPYRIGHT (I.E., RIGHT TO MODIFY/REPRODUCE THE CHANNEL/CONTENT) AND HENCE IT CANNOT BE SAID THAT NGC INDIA IS MAKING PAYMENT FOR A COPYRIGHT. 3 5 . THE LD A.R SUBMITTED THAT THE ASSESSEE HAS PERMITTED NGC INDIA TO USE ITS TRADE MARKS ONLY FOR LIMITED PURPOSE OF USING THE SAME FOR MARKETING ACTIVI TIES. HE SUBMITTED THAT THE INCIDENTAL USE OF TRADEMARK/TRADE NAME/LOG CANNOT BE HELD TO BE ROYALTY. IN THIS REGARD, THE LD A.R PLACED RELIANCE ON THE DECISION RENDERED BY THE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF SHERATORN INTERNATIONAL INC. VS. DEPUTY DIRECTOR OF INCOME TAX (107 ITD 120)(DELHI). THE LD A.R ALSO PLACED RELIANCE ON THE DECISION RENDERED IN THE FOLLOWING CASES IN THIS REGARD: - ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 32 (A) JDIT VS. HARVARD MEDICAL INTERNATIONAL , USA (16 TAXMANN.COM 69) (B) HARVARD MEDICAL INTERNATIONAL INC . VS. DCIT (33 TAXMANN.COM 50) 3 6 . THE LD A.R FURTHER SUBMITTED THAT THE DISTRIBUTION RIGHTS GIVEN BY IT IS ONLY A COMMERCIAL RIGHT AND IS ALSO NOT COVERED BY THE DEFINITION OF ROYALTY OR FEE FOR INCLUDED SERVICES GIVEN UNDER ARTICLE 12 OF IN DIA - USA TREATY. HE SUBMITTED THAT THE TAX TREATIES ENTERED WITH SOME COUNTRIES LIKE HUNGARY, UNITED MEXICAN STATES, CROATIA ETC., THE DEFINITION OF ROYALTY SPECIFICALLY COVERS PAYMENT FOR TRANSMISSION BY SATELLITE, CABLE, OPTIC FIBRE OR SIMILAR TECHNOLOG Y. HOWEVER, THE DEFINITION OF THE TERM ROYALTY UNDER INDIA - US TREATY DOES NOT INCLUDE BROADCAST REPRODUCTION RIGHT. ACCORDINGLY HE SUBMITTED THAT THE DISTRIBUTION RIGHT IS A SEPARATE COMMERCIAL RIGHT AND THE PAYMENT RECEIVED IS NOT TOWARDS USE OF COPYR IGHT. 3 7 . HE FURTHER SUBMITTED THAT THE PAYMENT RECEIVED FOR GIVING DISTRIBUTION RIGHT IS TAXABLE AS PER THE PROVISIONS OF ARTICLE 7 OF INDIA - US TAX TREATY AND HENCE THE SAME IS TAXABLE ONLY IF THE ASSESSEE HAS A PE IN INDIA. HE CONTENDED THAT THE ASSES SEE DOES NOT HAVE A PE AND HENCE THE PAYMENT RECEIVED BY THE ASSESSEE FOR GIVING DISTRIBUTION RIGHTS IS NOT TAXABLE IN INDIA. 3 8 . ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE EXPRESSION COPYRIGHT INCLUDES BROADCASTING RIGHTS. FURTHER THE ASSESSEE HA S PERMITTED NGC INDIA TO USE IS TRADE MARK AND TRADE NAME. SHE FURTHER SUBMITTED THAT THE ASSESSEE, THROUGH GIVING DISTRIBUTION RIGHTS, HAS GRANTED M/S NGC INDIA SECONDARY TRANSMISSION OF PRIMARY TRANSMISSION, WHICH IS ACTIONABLE AS AN ACT OF INFRINGEMENT SUBJECT TO CERTAIN EXCEPTIONS UNDER THE USA ACT. ACCORDINGLY, THE LD D.R SUBMITTED THAT THE ASSESSING ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 33 OFFICER HAS JUSTIFIED IN TREATING THE PAYMENTS RECEIVED FOR GIVING DISTRIBUTION RIGHTS AS ROYALTY. 3 9 . WE HAVE HEARD THE RIVAL CONTENTIONS AND ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE ASSESSING OFFICER HAS MADE A GENERAL OBSERVATION THAT THE ARTICLE 12 OF THE INDIA - US DTAA SHALL BE APPLICABLE WITHOUT CRITICALLY ANALYZING THE PROVISIONS OF THE TREATY. THOUGH THE ASSESSING OFFICER HA S ALSO REFERRED TO THE PROVISIONS OF EXPLANATION 2 TO SEC. 9(1)(V I ) OF THE ACT FOR EXAMINING THE DEFINITION OF THE TERM ROYALTY, YET HE HAS NOT CRITICALLY DISCUSSED ABOUT ITS APPLICABILITY TO THE IMPUGNED PAYMENT. IT IS PERTINENT TO NOTE THAT THE DEFINI TION OF THE TERM ROYALTY GIVEN IN SEC. 9(1)(V I ) OF THE ACT AS WELL AS IN THE INDO - USA TREATY USES THE EXPRESSION PROCESS. THE SAID EXPRESSION HAS NOT BEEN DEFINED IN THE TREATY, BUT THE SAME HAS BEEN DEFINED IN EXPLANATION 6 TO SEC. 9(1)(V) OF THE ACT AS UNDER: - EXPLANATION 6. FOR THE REMOVAL OF DOUBTS, IT IS HEREBY CLARIFIED THAT THE EXPRESSION 'PROCESS' INCLUDES AND SHALL BE DEEMED TO HAVE ALWAYS INCLUDED TRANSMISSION BY SATELLITE (INCLUDING UP - LINKING, AMPLIFICATION, CONVERSION FOR DOWN - LINKING OF A NY SIGNAL), CABLE, OPTIC FIBER OR BY ANY OTHER SIMILAR TECHNOLOGY, WHETHER OR NOT SUCH PROCESS IS SECRET ; THE ABOVE SAID EXPLANATION HAS BEEN INSERTED BY THE FINANCE ACT, 2012. WE FURTHER NOTICE THAT THE VARIOUS CASE LAW RELIED UPON BY THE ASSESSEE HAS BE EN RENDERED PRIOR TO THE INSERTION OF THE ABOVE SAID EXPLANATION - 6 OR THE APPLICABILITY OF THE ABOVE SAID EXPLANATION HAS NOT BEEN EXAMINED THEREIN. HENCE, WE ARE OF THE VIEW THAT THE QUESTION WHETHER THE PAYMENT RECEIVED BY THE ASSESSEE FOR GIVING DISTRI BUTION RIGHTS SHALL FALL IN THE CATEGORY OF ROYALTY NEEDS TO BE EXAMINED AFRESH AT THE END OF THE ASSESSING OFFICER. FURTHER, WHILE DEALING WITH THE ISSUE RELATING TO THE ADVERTISEMENT REVENUE, WE HAVE TAKEN THE VIEW THAT ASSESSEE IS HAVING ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 34 DEPENDENT A GENT PE. THE SAID FACT ALSO NEEDS TO BE TAKEN INTO ACCOUNT WHILE EXAMINING THE ISSUE. 40 IN VIEW OF THE ABOVE, WE SET ASIDE THE ORDER OF THE AO ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THE SAME AFRESH IN THE LIGHT OF DISCUSSIONS MADE SUPRA AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 41. SINCE THE FACTS PREVAILING IN AY 2008 - 09 AND THE TWO ISSUES URGED THEREIN ARE IDENTICAL IN NATURE, WE APPLY OUR DECISION TAKEN FOR AY 2007 - 08 ON BOTH THE ISSUES TO AY 2008 - 09 ALSO. 4 2 . IN THE RESULT, BOTH THE APPEAL S FILED BY THE ASSESSEE ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDIN GLY ON 16TH DEC , 201 5. 16 DEC. , 2015 SD SD ( / AMIT SHUKLA) ( . . / B.R. BASKARAN) / JUDICI AL MEMBER / ACCOUNTANT MEMBER MUMBAI: 16TH DEC. 201 5 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE C IT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / ITA NO.7994/ MUM/20 11 AND ITA NO.7631/MUM/12 35 DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI