WARNER BROS DISTRIBUTION INC, MUMBAI V. ADDL CIT (IT) RG 2, MUMBAI

ITA 8734/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8596 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 03-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 14-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S HASAN
• Keywords: Business income; Double taxation relief; Permanent establishment
• Section: 5(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI R S SYAL, AM & SHRI VIJAY PAL RAO, JM ITA NO. 8734/MUM/2010 (ASST YEAR 2007-08) WARNER BROS DISTRIBUTING INC C/O WARNNER BROS PICTURES(INDIA) PVT LTD EROS CINEMA BUILDING 4 TH FLOOR 42 M K ROAD MUMBAI 400 020 VS THE ADDL DIRECTOR OF INCOME TAX(IT) RANGE 2, MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AAACW6559R ASSESSEE BY SH S HASAN REVENUE BY SH MAHESH KUMAR DT.OF HEARING 3 RD OCT 2012 DT OF PRONOUNCEMENT 10 TH OCT 2012 PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER DATED 27 TH OCT 2010 PASSED IN PURSUANT TO THE DIRECTIONS OF T HE DRP U/S 144C (5) OF THE IT ACT DATED 30.9.2010 FOR THE ASSESSMENT YEAR 2007-08 . 2 THE ASSESSEE COMPANY IS TAX RESIDENCE OF USA AND IS ENGAGED IN THE DISTRIBUTION OF CINEMATOGRAPHIC FILMS. THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH WARNER BROS PICTURES INDIA PVT LTD, WHICH IS A N INDIAN COMPANY FOR THE DISTRIBUTION OF THE CINEMATOGRAPHIC FILMS IN INDIA AND RECEIPT OF ROYALTY AT SPECIFIED RATES. THE ASSESSEE SUBMITTED BEFORE THE ASSESSI NG OFFICER THAT THE ROYALTY RECEIVED FROM INDIA ON ACCOUNT OF DISTRIBUTION OF FILMS IS NOT TAXABLE UNDER THE INCOME TAX ACT BECAUSE CLAUSE (V) OF EXPLANATION 2 TO SECTION 9(1)(VI) OF THE IT ACT EXCLUDES CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBIT ION OF CINEMATOGRAPHIC FILMS FROM THE ITA NO.8374/M/2010 WARNER BROS DISTRIBUTING INC . 2 PURVIEW OF ROYALTY. IT WAS FURTHER CONTENDED THA T IF THE SAID RECEIPT IS HELD AS BUSINESS INCOME, THEN IN THE ABSENCE OF PE IN INDIA , THE SAME WOULD NOT BE TAXABLE AS WELL. THE ASSESSING OFFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND PROPOSED TO ASSESS THE ROYALTY RECEIVED AS BUSINE SS INCOME OF THE ASSESSEE BY TREATING THE SAME AS PROFIT ATTRIBUTABLE TO PE IN INDIA VIDE THE DRAFT ASSESSMENT ORDER U/S 144C(2) DATED 31.12.2009. 2.1 THE ASSESSEE FILED OBJECTIONS AGAINST THE DRAFT ORDER BEFORE THE DRP. THE DRP, WHILE PASSING THE DIRECTION U/S 114C(5) REJECTED TH E OBJECTIONS RAISED BY THE ASSESSEE WITH RESPECT TO THE TREATMENT OF THE ROYAL TY INCOME AS PROFIT FROM BUSINESS AND TAXABLE UNDER DOMESTIC LAW BY HOLDING THAT THE INCOME BEING GENERATED BY THE DISTRIBUTION AND EXHIBITION OF THE FILMS IN IND IA BY THE AGENT OF THE ASSESSEE WIPL ON BEHALF OF THE ASSESSEE IN INDIA. THUS, THE IN COME ACCRUES AND ARISES IN INDIA AS PER THE MEANING OF SECTION 5(2) OF THE ACT. THE DRP WAS ALSO OF THE VIEW THAT THE EXPLANATION TO SECTION 9(1)(I) IS NOT APPLICABLE IN THE CASE OF THE ASSESSEE SINCE THE ASSESSEE HAS A BUSINESS CONNECTION IN INDIA AND THE ASSESSEE HAS A DISTRIBUTION AGENT AND PE IN THE FORM OF INDIAN COMPANY. THE A SSESSING OFFICER CONSEQUENTLY PASSED THE IMPUGNED ASSESSMENT ORDER WHEREBY ASSESS ED THE ROYALTY INCOME AS BUSINESS INCOME OF THE ASSESSEE ATTRIBUTABLE TO THE PE BEING AGENCY PE. 3 THE ASSESSEE HAS RAISED VARIOUS GROUNDS IN THIS A PPEAL. HOWEVER, THE ONLY EFFECTIVE AND MAIN ISSUE ARISES FOR OUR CONSIDERATI ON AND ADJUDICATION IS WHETHER THE ROYALTY RECEIVED BY THE ASSESSEE IS ASSESSABLE TO T AX IN INDIA BEING BUSINESS PROFIT ATTRIBUTABLE TO THE PE OF THE ASSESSEE IN INDIA. ITA NO.8374/M/2010 WARNER BROS DISTRIBUTING INC . 3 3.1 THE OTHER GROUNDS RAISED BY THE ASSESSEE ARE ON LY CONSEQUENTIAL TO THE MAIN GROUND OF ASSESSABILITY OF ROYALTY INCOME. 4 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL A S THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07 VIDE ORDER DAT ED 30.12.2011 IN ITA NO.3160/MUM/2010. 4.1 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER ASSESSED THE ROYALTY INCOME BY TREATING THE SAME AS TAXABLE IN INDIA UNDER THE PROVISIONS OF DTAA OF I NDO US; WHEREAS FOR THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER HAS ASSESSED T HE ROYALTY RECEIPTS AS BUSINESS INCOME ATTRIBUTABLE TO PE IN INDIA. THEREFORE, THE LD DR HAS SUBMITTED THAT IN THE ASSESSMENT YEAR 2006-07, THE ASSESSING OFFICER HAS NOT AT ALL EXAMINED THE QUESTION OF PE AND THE OBSERVATIONS OF THE COMMISSIONER OF I NCOME TAX(APPEALS) AS WELL AS THE TRIBUNAL ON THIS ASPECT WOULD NOT CONSTITUTE A PRECEDENT. 4.2 IN REBUTTAL, THE LD AR OF THE ASSESSEE HAS SUBM ITTED THAT FOR THE ASSESSMENT YEAR 2006-07, THE DEPARTMENT HAS RAISED THIS ISSUE BEFORE THE TRIBUNAL , WHICH HAS BEEN CONSIDERED AND ADJUDICATED BY THE TRIBUNAL. H E HAS REFERRED PARA 7 OF THE DECISION OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 20 06-07 WHEREIN THE LD DR HAS REFERRED THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND CONTENDED THAT THE COMMISSIONER OF INCOME TAX(APPEALS) HAS ER RED IN NOT CONSIDERING THE PROVISIONS OF SEC. 5 OF THE ACT AND ARTICLE 7 OF TH E TREATY WHILE DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. THUS, THE LD AR HAS SUBMITTED THAT WHEN THE ISSUE ITA NO.8374/M/2010 WARNER BROS DISTRIBUTING INC . 4 RAISED BEFORE THE TRIBUNAL AND THE TRIBUNAL HAS DEC IDED THE SAME, THEN IN THE IDENTICAL FACTS, THE ORDER OF THE TRIBUNAL IN ASSES SEES OWN CASE IS BINDING. 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THOUGH, FOR THE ASSESSMENT YEAR 2006-07, T HE ASSESSING OFFICER HAS NOT EXAMINED THE ASPECT OF PE BECAUSE OF THE ROYALTY IN COME WAS ASSESSED BY THE ASSESSING OFFICER BY APPLYING THE PROVISIONS OF DTA A; HOWEVER, ALTERNATIVE PLEA WAS TAKEN BY THE LD DR THAT THE COMMISSIONER OF INCOME TAX(APPEALS) HAS NOT CONSIDERED THE PROVISIONS OF SEC 5 OF THE ACT AND A RTICLE 7 OF THE TREATY, WHICH HAS BEEN REFERRED BY THIS TRIBUNAL IN PARA 7 AS UNDER : 7) LEARNED DEPARTMENTAL REPRESENTATIVE REFERRING TO VA RIOUS FINDINGS OF THE CIT (A) SUBMITTED THAT THE CIT (A) ERRED IN NOT CON SIDERING THE PROVISIONS OF SECTION 5 OF THE ACT AND ARTICLE 7 OF READY WHILE DEL ETING THE ABOVE AS HE HAS HELD THAT THERE IS AS BUSINESS CONNECTION AND A CCORDINGLY THE INCOME IS TAXABLE UNDER THE INDIAN INCOME TAX ACT SEC. 9(1)(I ) R.W.S SECTION 5 (2). 5.1 THUS, IT IS CLEAR THAT FOR THE ASSESSMENT YEAR 2006-07, THE ISSUE OF BUSINESS INCOME AND PE WAS RAISED BEFORE THE TRIBUNAL. HOWEV ER, THE TRIBUNAL HAS CONCURRED WITH THE VIEW OF THE COMMISSIONER OF INCOME TAX(APP EALS) AND HELD THAT THE AMOUNT RECEIVED BY THE ASSESSEE CANNOT BE CONSIDERE D AS ROYALTY AS WAS DONE BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SEC. 12(2) OF THE DTAA FOR TAXING THE AMOUNT. 5.2 THE TRIBUNAL HAS FURTHER HELD IN PARAS 10 & 11 AS UNDER: 10 THE ISSUE CAN BE EXAMINED IN ANOTHER DIMENSION W HETHER THE AMOUNT IS TAXABLE UNDER THE INDIAN INCOME TAX ACT IN INDIA IF NOT AS ROYALTY, BUT AS BUSINESS INCOME. THE CIT (A) FINDING IS THAT ASSESS EE HAS A BUSINESS CONNECTION IN INDIA. HOWEVER, HE CONSIDERED THAT THE RE IS NO PE TO THE ASSESSEE, THE FACT OF WHICH WAS ALSO ACCEPTED BY TH E ASSESSING OFFICER AS HE HAS INVOKED ONLY 3 ARTICLE 12(2) AND NOT CONSIDERED THE AMOUNTS BUSINESS INCOME AS PER PE PROVISO. IT WAS THE CONTENTION OF TH E LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE HAVING BUSINESS CO NNECTION, THE FINDINGS OF ITA NO.8374/M/2010 WARNER BROS DISTRIBUTING INC . 5 WHICH WAS GIVEN BY THE CIT (A), THE AMOUNT CANNOT B E EXCLUDED WITHOUT EXAMINING PE PROVISO PROVISIONS OF THE DTAA. IN TH IS REGARD THE LEARNED COUNSELS SUBMISSION THAT UNDER THE INCOME TAX ACT AS WELL AS UNDER THE PROVISIONS OF DTAA THE TRANSACTION BETWEEN THE ASSE SSEE AND INDIAN COMPANY TO WHOM LICENSE WAS GRANTED BY VIRTUE OF THE AGREEMENT CANNOT BE CONSIDERED AS AGENCY PE AS THE INDIAN ASSESSEE IS NOT EXCLUSIVELY DEALING WITH THE ASSESSEE AND REFERRED TO THE RECEIPTS FROM ANOTHER COMPANY 20 TH CENTURY FOX TO SUBMIT THAT THE ASSESSEE IS ALSO DEA LING WITH THE NON RESIDENT COMPANIES, SO ASSESSEE CANNOT BE CONSIDERED AS AGENC Y PE WITHIN THE DEFINITION OF PERMANENT ESTABLISHMENT. 11) WE HAVE EXAMINED THIS ASPECT ALSO. AS RIGHTLY H ELD BY THE CIT (A) EVEN IF INCOME ARISES TO THE NON-RESIDENT DUE TO THE BUSINES S CONNECTION IN INDIA, THE INCOME ACCRUING OR ARISING OUT OF SUCH BUSINESS C ONNECTION CAN ONLY BE TAXED TO THE EXTENT OF THE ACTIVITIES ATTRIBUTED TO PERMANENT ESTABLISHMENT. IN THIS CASE, THE ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA. SINCE THE INDIAN COMPANY WHO OBTAINED THE RIGHTS IS ACTING INDEPENDENTLY, AGENCY PE PROVISIONS ARE NOT APPLICABLE TO THE ASSES SEE COMPANY. THE ASSESSEE RELIED ON THE DECISION OF ISHIKAWAJMA-HARI MA HEAVY INDUSTRIES LTD VS. DIRECTOR OF INCOME TAX 2007-(158)-TAXMAN 0259-SC THAT INCOMES ARISING TO A NON-RESIDENT CANNOT BE TAXED AS BUSINESS INCOME IN INDIA, WITHOUT A PE. AS THE ASSESSEE DOES NOT HAVE ANY PERMANENT ESTABLISHMENT IN INDIA, THE INCOMES ARISING OUTSIDE INDIAN TERRITORIES CANNOT BE B ROUGHT TO TAX. THEREFORE, THERE IS NO NEED TO DIFFER FROM THE FINDINGS OF THE C IT (A) AND ACCORDINGLY THE REVENUE APPEAL IS DISMISSED. 5.3 IT IS CLEAR FROM THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 2006-07 THAT THE TRIBUNAL HAS GIVEN A FINDING ON THE POINT THAT THE ASSESSEE DOES NOT HAVE ANY PE IN INDIA BECAUSE THE INDIAN COMPANY WHO OBTAINED TH E RIGHTS IS ACTING INDEPENDENTLY. THEREFORE, AGENCY PE PROVISIONS ARE NOT APPLICABLE TO THE ASSESSEE COMPANY. SINCE THERE IS NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE,; THEREFORE, BY FOLLOWING THE ORDER OF THE TRIBUNAL, WE HOLD THAT THE ASSESSEE HAS NO PE IN INDIA AND ACCORDINGLY, THE AMOUNT RECEIVED UN DER THE AGREEMENT OF DISTRIBUTION IS NOT TAXABLE IN INDIA. 6 THE OTHER ISSUES RAISED BY THE ASSESSEE IN THIS A PPEAL ARE CONSEQUENTIAL AND ACCORDINGLY BECOME INFRUCTUOUS. ITA NO.8374/M/2010 WARNER BROS DISTRIBUTING INC . 6 7 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 10 TH , DAY OF OCT 2012. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 10 TH OCT 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI