WARNER BROS DISTRIBUTING INC.,UNITED STATES OF AMERICA V. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE INTERNATIONAL TAXATION 4(3)(2), MUMBAI

ITA 3411/MUM/2023

AI Insights

The case involves Warner Bros Distributing Inc., a non-resident company from the USA, appealing against the final assessment order by the Assistant Commissioner of Income Tax, which treated certain income as business income taxable in India. The primary issues were the existence of a Dependent Agent Permanent Establishment (DAPE) in India and the taxability of distribution revenues as royalty or business profits. The Tribunal examined whether Warner Bros. India acted as a DAPE for the assessee and whether the income received from Warner Bros. India should be classified as royalty or business income. The Tribunal concluded that the transactions were at arm's length and thus, no further attribution of profits was required. It also found that the income should not be taxed as royalty under the Indian Income Tax Act or the India-USA DTAA.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 779822 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: misc
• Appeal Filed On: 26-09-2023
• Other Referred Cases: CIT (International Taxation) v. Taj TV Ltd., DIT (International Taxation), Mumbai v. Morgan Stanley & Co., ACIT v. Clough Engineering Ltd, Bechtel International Inc. vs. ADIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SATYAPAL KUMAR
• Assessee Lawyers: DEEPAK CHOPRA VIRTUALLY PRESENT
• Keywords: Business income; Transfer pricing; International transaction; Principle of natural justice; Initiation of penalty proceedings; Double taxation relief; Permanent establishment
• Section: 143(3); 142(1); 234B; 92E; 5(2)

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI VIKRAM SINGH YADAV, ACCOUNTANT MEMBER SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.3411/MUM/2023 (Assessment Year 2020-21) Warner Bros Distributing Inc., 4000 Warner Boulevard, Burbank, California - 91522, United State of America PAN: AAACW6559R ............... Appellant v/s Assistant Commissioner of Income Tax, – Circle International Taxation 4(3)(2), Mumbai ……………… Respondent Assessee by : Shri Deepak Chopra (virtually present) Shri Rohan Khare Revenue by : Shri Satya Pal Kumar, CIT (DR) Date of Hearing – 16/07/2025 Date of Order - /10/2025 O R D E R PER SANDEEP SINGH KARHAIL, J.M. The assessee has filed the present appeal against the impugned final assessment order dated 30.07.2023, passed under section 143(3) read with section 144C of the Income Tax Act, 1961 (“the Act”) pursuant to the directions issued by the learned Dispute Resolution Panel – 2, Mumbai, [“learned DRP”] under section 144C(5) of the Act, for the assessment year 2020-21. 2. In this appeal, the assessee has raised the following grounds: - Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 2 “The following grounds are independent of each other and without any prejudice to one another: 1. General 1.1. That on the facts and circumstances of the case and in law. the assessment order of Ld. AO is bad both in law and on facts. The Ld. AO based on surmises/ conjectures, and in violation of the principles of natural justice, has grossly erred in assessing the income of WBDI for the subject AY at INR 35,08,29,170 vis-à-vis INR 29,44,140 per Return of Income (Rol') filed by the Appellant. 2. Grounds relating to Permanent Establishment ('PE\") 2.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in alleging that WBDI has a Dependent Agent PE ('DAPE)) in India in the form of Warner Bros. Pictures (India) Private Limited (WBPIPL\") and has grossly erred in holding that a sum of INR 53,52,07,748 (being 65% of the gross revenues relating to distribution of films in India as earned by WBPIPL) is attributable as business income of the alleged DAPE of the Appellant; 2.2. That on the facts and circumstances of the case and in law, the Ld. AO has grossly erred in not appreciating that where the agreement between WBDI and WBPIPL is on principal-to-principal basis (as also captured in clause 25.1 of the intercompany agreement), WBPIPL will not constitute a DAPE of WBDI in India following the decision of Hon'ble High Court of Bombay in the case of CIT (International Taxation) v. Taj TV Ltd. (2020] 115 taxmann.com 305 (Bombay); and 2.3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the principles upheld by the jurisdictional Mumbai bench of the Hon'ble ITAT in case of the Appellant's predecessor company for AY 2006-07 and the Appellant's own case for AY 2007-08 to AY 2014-15 and AY 2017-18 to AY 2019-20 wherein it was held that WBPIPL is not a DAPE of the Appellant in India; 3. Grounds relating to taxability of distribution revenues as business profits 3.1. Without prejudice to the above, that on the facts and circumstances of the case and in law, the Ld. AO has erred in disregarding that even where WBDI is assumed to be a DAPE of the Appellant under the India-United States of America ('USA') Double Taxation Avoidance Agreement ('DTAA\" or the Treaty'), the same is already compensated at an arm's length price and accordingly the question of further attribution of profits to such DAPE does not arise: 3.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the binding circulars issued by the Central Board of Direct Taxes ('CBDT*) (i.e. Circular No. 23 dated July 23, and Circular No.5 dated September 28, 2004) and in not following the judicial pronouncements of the Indian courts including that of Hon'ble Supreme Court of India in the case of DIT (International Taxation), Mumbai v. Morgan Stanley & Co. [2007) 162 Taxman 165 (SC) wherein it was held that where a PE has been remunerated at an arm's length price, no further attribution of profits can be done for such PE; and 3.3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the decision of the jurisdictional Mumbai bench of the Hon'ble ITAT in the Appellant's own case for AY 2007-08 to AY 2014-15 and AY 2017-18 to AY 2019- 20 wherein it was held that WBDI does not have a PE in India and accordingly the question of attribution of profits does not arise. 4. Grounds relating to taxability of distribution revenues as Royalty under the Income Tax Act, 1961 ('Act') / the Treaty Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 3 4.1. That on the facts and circumstances of the case and in law, the Ld. AO. has grossly erred in alleging that revenues received by the Appellant from WBPIPL for distribution of theatrical movies in India can be alternatively taxed as Royalty under section 9(1)(vi) of the Act and the Treaty: 4.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering that the provisions of section 9(1)(vi) of the Act as applicable for the subject AY, specifically excludes sale, distribution and exhibition of cinematographic films from the ambit of Royalty; and 4.3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the decision of the jurisdictional Mumbai bench of the Hon'ble ITAT in the Appellant's own case for AY 2007-08 to AY 2014-15 and AY 2017-18 to AY 2019- 20 wherein it was held that distribution revenues received by WBDI from India are not Royalty under the Act or the Treaty. 5. Grounds relating to income tax refund 5.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in not considering the decision of the Special Bench of the Hon'ble ITAT in the case of ACIT v. Clough Engineering Ltd [2011] 11 taxmann.com 70 (Delhi) (SB) and taxed income tax refund amounting to INR 29,44,134 at the rate of 40% (plus applicable surcharge and health and education cess) under the Act (instead of the beneficial tax rate of 15% under the Treaty) even though such interest income is not effectively connected to WBDI's alleged PE in India; and 5.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in taxing income tax refund amounting to IN 29,44,134 twice in the computation sheet annexed to the assessment order issued for the subject AY, as business profits at the rate of 40% (plus applicable surcharge and health and education cess) under the Act as well as interest income at the rate of 15% as per Article 11(2)(b) of the Treaty. 6. Other Grounds 6.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A and 234B of the Act; and 6.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act on account of under- reporting and misreporting of income by the Appellant for subject AY.” 3. Ground No. 1 is general in nature and, therefore, the same needs no separate adjudication. 4. Grounds No. 2.1-2.3 and 3.1-3.3, raised in the assessee’s appeal, pertain to the existence of Dependent Agent Permanent Establishment (“DAPE”) of the assessee in India and the taxability of distribution income as business income. Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 4 5. The brief facts of the case pertaining to this issue as emanating from the record are: The assessee is a tax resident of the USA, and is engaged in the distribution of films from the USA produced either by itself or produced by other third parties. For the year under consideration, the assessee filed its return of income on 20.01.2021, declaring a total income of Rs.29,44,140/-. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, it was observed that the assessee entered into an agreement with Warner Bros. Pictures (India) Pvt. Ltd. (“Warner Bros. India”) on 01.04.2019, granting exclusive rights to distribute cinematographic films in exchange for payments of royalty as per the agreement. It was further observed that during the year under consideration, the assessee received Rs. 53,52,07,748/-, which was characterised by it as “Royalty Income”, and the same was claimed as exempt both under the Act and the India–USA Double Taxation Avoidance Agreement (“DTAA”). Since the issue was a recurring one and in every assessment order, the receipts from Warner Bros. India were treated as business income by the Revenue, as against the treatment by the assessee as Royalty, the assessee was asked to submit its explanation/justification for not treating the receipts as business receipts. In response, the assessee submitted that Warner Bros. India is not acting on behalf of the assessee and it does not have any authority to conclude contracts on behalf of the assessee. Further, the assessee submitted that Warner Bros. India did not maintain any stock of goods or merchandise on behalf of the assessee, and no orders were secured in India Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 5 for the assessee. Thus, it was submitted that all the transactions between the assessee and Warner Bros. India are at arm’s length price. The assessee also submitted that Warner Bros. India is legally, economically, and commercially independent of the assessee and bears its own entrepreneurial and business risks. Thus, it was submitted that Warner Bros. India is not authorised to act nor is it acting on behalf of the assessee in any manner, and all the acts done by Warner Bros. India, pursuant to the aforesaid agreement, are in their own capacity. The assessee also relied on the Tribunal's decision in its own case for earlier years, wherein it was held that Warner Bros. India is not a permanent establishment of the assessee in India. 6. The Assessing Officer (“AO”), vide draft assessment order dated 29.07.2022 passed under section 144C(1) of the Act, disagreeing with the submissions of the assessee, and by referring to the agreement dated 01.04.2009 entered into between the assessee and Warner Bros. India held that the income earned by the assessee is dependent on the revenue which was generated from the distribution and exhibition of films in India. Thus, the AO held that the nature of income earned by the assessee is business income and not Royalty as claimed by the assessee. The AO further held that the income from the distribution/exhibition of films in India by the assessee through Warner Bros. India would directly accrue or arise in India, and therefore, fall within the purview of section 5(2) of the Act. The AO also held that the activities are performed within the territory of India by Warner Bros. India on behalf of the assessee, thus creating distinct and real business action as per the meaning of section 9(1)(i) of the Act, which cannot be doubted. As Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 6 regards the issue of the existence of DAPE of the assessee in India, the AO held that the Indian entity performs all functions and carries out all activities on behalf of the assessee, which are reasonably required for the exhibition of the theatrical rights. It was also held that the assessee is directly controlling and supervising all activities of Warner Bros. India, and more so, the manner in which the business of distribution of films is being carried out in India, with the obvious purpose of maximising revenues. Accordingly, the AO held that the assessee has a DAPE in India in the form of Warner Bros. India, and accordingly, the profits attributable to the activities of DAPE would be subject to taxation in India under the head “Business Profits”. The AO also rejected the reliance placed by the assessee on the Tribunal's decisions rendered in its own case for the preceding assessment years. By allocating 35% of the Indian revenue to outside India activities, the AO considered it fair and reasonable to attribute 65% of the profits to the DAPE in India. Accordingly, the AO made an addition of Rs. 34,78,85,036/- (i.e. 65% of Rs. 53,52,07,748/-) as the business profits of the assessee taxable in India. 7. The DRP vide its directions dated 28.06.2023 issued under section 144C(5) of the Act, rejected the detailed objections filed by the assessee on this issue and held that Warner Bros. India habitually exercised the authority to conclude contract on behalf of the assessee. It was further held that the assessee is carrying out its entire operation of distribution of cinematography films in India through Warner Bros. India, and in the year under consideration, the only business of Warner Bros. India is the distribution of films in India on behalf of the assessee. Further, it was held that Warner Bros. India performed Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 7 the core functions related to the distribution of films in India on behalf of the assessee. It was also held that Warner Bros. India habitually secured orders in India wholly for the assessee during the year under consideration. Accordingly, the learned DRP upheld the findings of the AO that Warner Bros. India constitutes a DAPE of the assessee as per the provisions of Article 5(4) of the India–USA DTAA and the income received from Warner Bros. India is taxable as “Business Income”. Alternatively, the learned DRP held that the formula-based royalty income arising to the assessee in India from the grant of a license and the transfer of the right to use of a copyright and artistic work (films) is taxable in India under section 9(1)(vi) of the Act. The learned DRP also found the attribution of 65% to be the profits attributable to the DAPE in India as a fair and reasonable percentage. 8. In conformity with the directions issued by the learned DRP, the AO passed the impugned final assessment order, inter alia, making the addition of Rs. 34,78,85,036/- to be the income of the assessee assessable as business income. Being aggrieved, the assessee is in appeal before us. 9. During the hearing, the learned counsel, appearing for the assessee, submitted that the transaction between the assessee and Warner Bros. India was on a principal-to-principal basis. It was further submitted that the agreement entered into by Warner Bros. India with independent Indian parties was also on a principal-to-principal basis, and the assessee was not a party to such arrangement. Further, the learned counsel submitted that Warner Bros. India was not securing orders on behalf of the assessee and was granting sub-license rights in its own accord. It was also submitted that the Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 8 business model of the assessee revealed that Warner Bros. India was not maintaining any stock of goods. Thus, it was submitted that none of the conditions of Article 5(4) of the India-USA DTAA are satisfied in the present case. On a without prejudice basis, the learned counsel submitted that in terms of Article 5(5) of the India-USA DTAA, if the transaction between a non- resident and an agent is found to be at arm’s length, assuming without admitting, a DAPE exists, no further attribution is warranted. In this regard, the learned counsel submitted that although, for the year under consideration, no reference was made to the Transfer Pricing Officer (“TPO”) for determination of arms’ length price of such transaction, however, the said transaction, in terms of the agreement entered way back on 01.04.2009 between the assessee and Warner Bros. India, was the subject matter of transfer pricing assessment in the past as well as in subsequent years, wherein such transaction was found to be at arms’ length. 10. On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the directions issued by the learned DRP. 11. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee is a non- resident company incorporated in the USA. Its activity, inter alia, includes the export of films from the USA, produced either by its group studios or by third parties. Vide agreement dated 01.04.2009 entered into between the assessee and Warner Bros. India, the latter was granted exclusive theatrical rights and the non-exclusive theatrical rights in the theatrical cinematographic films released, inter alia, in Indian territory. As a consideration, under this Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 9 agreement, the assessee was entitled to 70% of gross theatrical receipts after reducing the allowable distribution expenses, as per the agreement. Under the agreement, Warner Bros. India was given the right to distribute, exhibit and exploit or cause the distribution, exhibition and exploitation of the theatrical picture in the Indian territory. The rights granted to Warner Bros. India under the aforesaid agreement, which forms part of the Paper Book-II, from page 44 to 77, are reproduced as follows: - “6. The \"Rights\": 6.1 Theatrical Rights: Subject to the terms and conditions of this License Agreement, WBP1 hereby licenses to Licensee, in the Territory and during the Term, the right: (A) to distribute the Theatrical Pictures to exhibitors for exhibition in commercial motion picture theatres which are open to the public for the payment of an admission fee; an (B) to advertise, promote and publicize the Theatrical Pictures and trailers thereof, and in connection therewith to use and perform simultaneously and in synchronization with the Theatrical Pictures any and all music and lyrics contained in the Theatrical Pictures and/or recorded in the soundtrack thereof (\"Theatrical Rights\"). 6.2 Non-Theatrical Rights: Subject to the terms and conditions of this License Agreement, WBPI hereby licenses to License, on a non-exclusive basis, in the Territory and during the Term, the right t0 distribute or sub-distribute the Theatrical Pictures to Non-Theatrical Venues and to advertise, promote, and publicize the availability of the Theatrical Pictures for licensing for exhibition in Non-Theatrical Venues (\"Non-Theatrical Rights\"). \"Non-Theatrical Venues\" includes all such venues as generally understood in the motion picture industry including. by way of example without limitation. hotels (to the extent not licensed on a pay television basis); hospitals; schools; India's military (including bases and remote locations wherever they are located both inside and outside of the Territory); national parks; ferries operating exclusively within the Territory or operating in and serviced out of the Territory; merchant ships serviced out of the Territory; oil rigs; penal institutions; retirement communities and assisted living communities which are not part of, or operate in conjunction with, or are affiliated with an acute care hospital, if the facility has conventional theatre seating and/or scheduled screenings; museums; buses that operate exclusively within the Territory or operate within the Territory and are controlled by an entity based in the Territory, trains that operate exclusively within the Territory or operate within the Territory and are controlled by an entity based in the Territory, mental health facilities; nursing Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 10 homes; religious organizations; libraries; camps; daycare centers; parks and recreation facilities; but excludes airlines, spacecraft, and cruise ships. Limitation of Rights: This Agreement does not grant Licensee rights in or to any assets or rights of WBPl other than Theatrical Rights and Non-Theatrical Rights (collectively, the \"Rights\") and the right to collect and retain proceeds in connection with the exercise of such rights as set forth in this License Agreement. All other assets and rights are expressly reserved by WBPI.” 12. From the perusal of clause 25.1 of the agreement, it is further evident that the parties agreed that nothing contained in this agreement shall in any way create any association, partnership, joint venture or the relation of principal and agent between the parties. Accordingly, in exercise of the rights granted vide aforementioned agreement, Warner Bros. India entered into an agreement dated 31.05.2019 with Pen Marudhar Cine Entertainment Pvt. Ltd., Mumbai, India, granting sole and exclusive theatrical rights for theatrical exhibition of the motion picture titled “Annabelle Comes Home”. In terms of the agreement dated 01.04.2009, the assessee received an amount of Rs. 53,52,07,748/- from Warner Bros. India, which was characterised as royalty income and claimed to be exempt both under the Act and the India-USA DTAA. It is evident from the perusal of the record that this issue is recurring in nature. Accordingly, the lower authorities treated the income received by the assessee from Warner Bros. India as business income, following the approach adopted in preceding years, and treated Warner Bros. India as DAPE of the assessee in India. Further, from the perusal of the record, we also notice that in preceding years, Warner Bros. India entered into distribution arrangements with third parties apart from the assessee. As in the assessment year 2006- 07, Warner Bros. India entered into a distribution agreement not only with the assessee but also with another company, namely, 20th Century Fox. Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 11 During the hearing, the learned counsel admitted to this factual position and fairly agreed that, to this extent, the decision of the Co-ordinate Bench in previous years, which consistently held that Warner Bros. India does not constitute DAPE of the assessee in India, would not apply to the present case. However, the learned counsel vehemently argued that, even in the year under consideration, Warner Bros. India cannot be considered as DAPE of the assessee in India, as none of the conditions of Article 5(4) of the India–USA DTAA are satisfied in the present case. In order to analyse this submission, it is relevant to note the provision of Article 5(4) of the India – USA DTAA, which reads as follows: - “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 a permanent establishment in the first-mentioned State, if: (a) he has and habitually exercises in the first-mentioned State an authority to conclude 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 provisions 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 the enterprise, and some additional activities conducted in the state on behalf of the 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.” 13. From the perusal of the provisions of Article 5(4) of the India-USA DTAA, it is evident that a person, other than an agent of an independent status, acting in a contracting state (say India) on behalf of an enterprise of other Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 12 contracting state (say USA) shall be deemed to be a permanent establishment of that enterprise in the first-mentioned state (i.e. India), if: - (a) he has and habitually exercises authority to conclude contract on behalf of the enterprise in the first-mentioned state (i.e. India); or (b) if he has no such authority but he habitually maintain a stock of goods or merchandise from which he regularly delivers goods or merchandise, and some additional activities in the first-mentioned state (i.e. India) on behalf of the enterprise contributing to the sale of the goods or merchandise, or (c) he habitually secures orders in the first-mentioned state (i.e. India) wholly or almost wholly for the enterprise. 14. At the outset, it is evident that Warner Bros. India was granted distribution rights for cinematographic films by the assessee. Thus, there was no sale of goods or merchandise in India by Warner Bros. India. Therefore, we do not find any merit in the findings of the lower authorities regarding the applicability of clause (b) of Article 5(4) of the India-USA DTAA in the present case. Insofar as the applicability of clause (a) and clause (c) of Article 5(4) of the India-USA DTAA is concerned, even if it is accepted that Warner Bros. India had the authority to conclude contract in India, which it habitually exercised in India, as from the assessment year 2006-07 Warner Bros. India entered into similar agreements, it is relevant to examine whether such contracts were concluded “on behalf” of the assessee or whether such orders was secured “for” the assessee. Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 13 15. During the hearing, the learned AR placed reliance upon the decision of the Hon’ble Jurisdictional High Court in CIT vs. Taj TV Ltd., reported in (2020) 425 ITR 141 (Bom.) and submitted that, on more or less similar facts, the issue of the existence of DAPE was examined by the Hon’ble High Court. From the perusal of the aforesaid decision, we find that in the facts of the case, the taxpayer appointed Taj India as its distributor to distribute the channel “Ten Sports” to cable systems for exhibition to subscribers in India and in this regard, an agreement was entered into between the taxpayer and Taj India. After examining the provisions of the India-Mauritius DTAA, the Hon’ble High Court agreed with the findings of the Tribunal that Taj India was not acting as an agent of the taxpayer but had obtained the rights of distribution of the TV Channel for itself. It was also noted that Taj India had independently entered into contract with other parties for the purpose of distribution of channels and in such contract, the taxpayer did not figure at all. It is pertinent to note that the Hon’ble Court also took into consideration the fact that the First Appellate Authority, whose decision was upheld by the Tribunal, examined the various terms and clauses of the distribution agreement entered into by Taj India in India and also considered the conduct of the parties for coming to the conclusion that Taj India was not acting as an agent of the taxpayer but it had obtained the right of distribution of channel for itself and subsequently it entered into contract with other parties in its own name in which the assessee was not a party. 16. From the perusal of the record, it is evident that the agreement dated 31.05.2019 entered into between Warner Bros. India and Pen Marudhar Cine Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 14 Entertainment Pvt. Ltd., Mumbai, India, a copy of which was furnished by the learned counsel during the hearing, was neither called for nor examined by any of the lower authorities. Thus, even though the learned counsel vehemently argued that like in the case of Taj TV Ltd. (supra), Warner Bros. India was transacting with independent Indian parties on a principal-to- principal basis and the assessee was not a party to such arrangement, and the decision of the Hon’ble Jurisdictional High Court in Taj TV Ltd. (supra) squarely covers the instant case, it is pertinent to note that in Taj TV Ltd. (supra), the lower authorities not only examined the distribution agreement entered into by the Indian entity with third parties but also took into consideration the conduct of the parties, and accordingly, came to the conclusion that Indian entity was not acting as an agent of the taxpayer. 17. Therefore, we are of the considered view that even though an Indian entity has the authority to conclude contracts, which it has habitually exercised overall the years, however, in order to constitute a DAPE under Article 5(4) of India-USA DTAA, it is imperative that such authority should be exercised either “on behalf of” or “for” the foreign enterprise. Thus, in order to arrive at such a conclusion, it is necessary not only to examine the terms and clauses of the agreement entered into by the Indian entity with the third parties but also to take into consideration the conduct of the parties. Thus, we are of the considered view that for deciding the issue, the mere terms of the agreement may not be the sole criterion. In the present case, even though the lower authorities held that Warner Bros. India was the DAPE of the assessee in India, they failed to examine whether the contract entered into Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 15 by Warner Bros. India with a third party in India was on behalf of the assessee and also failed to examine the conduct of the parties for entering into such an agreement. Therefore, a thorough examination of the aforesaid aspects is relevant to determine whether Warner Bros. India was the DAPE of the assessee in India in the year under consideration. Hence, in the facts and circumstances noted above, due to a lack of proper enquiry by the lower authorities, this issue cannot be conclusively decided, and accordingly, we are leaving our findings on the same open. 18. Be that as it may, at this stage, it is also relevant to note the provisions of Article 5(5) of the India – USA DTAA, which reads as follows: - “5. An enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise and the transactions between the agent and the enterprise are not made under arm's length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph.” 19. From the perusal of the provisions of Article 5(5) of the India-USA DTAA, it is evident that when the activities of such an agent are wholly or almost wholly on behalf of the enterprise and the transaction between the agent and the enterprise are not made under the arms’ length conditions, the agent cannot be considered as an agent of independent status. Referring to the provisions of Article 5(5) of the India-USA DTAA, it is without prejudice plea of the assessee that, assuming without admitting, the DAPE of the assessee exists in India, no further attribution is warranted once the transaction between the assessee and Warner Bros. India is at an arm’s length price. In this regard, the assessee placed reliance upon the decision of the Hon’ble Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 16 Supreme Court in DIT vs. Morgan Stanley and Company, reported in (2007) 292 ITR 416. 20. From the perusal of the record, we find that in the year under consideration, Warner Bros. India duly declared the transaction of payment of royalty to the assessee for granting the distribution rights of cinematography films and other related rights in Form no.3CEB as per the provisions of section 92E of the Act. Further, from the documents placed in the paper book, we find that the assessee also made a similar declaration in Form no.3CEB. However, no reference for the determination of the arms’ length price of such an international transaction was made by the AO under section 92CA(1) of the Act to the TPO. We further find that in the assessment year 2018-19, pursuant to reference by the AO under section 92CA(1) of the Act for determination of arms’ length price of the international transaction entered into by Warner Bros. India, the TPO vide order dated 28.07.2021 passed under section 92CA(3) of the Act after examining the details and documents filed by Warner Bros. India found the international transactions to be at arms’ length, and accordingly, no adjustment was proposed. Similarly, in the assessment year 2022-23, the international transactions entered into by Warner Bros. India were found to be at arm’s length by the TPO vide its order dated 24.01.2025 passed under section 92CA(3) of the Act. It is undisputed that the payment of royalty by Warner Bros. India to the assessee for granting distribution rights of cinematography films and other related rights was pursuant to the agreement, which has been in existence since 01.04.2009. Further, all the functions performed, assets employed, and risk assumed between the parties Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 17 have all been in pursuance of the agreement dated 01.04.2019. Therefore, it cannot be disputed that the arrangement between the parties pursuant to this agreement remained the same throughout the years, including in the year under consideration. It is also pertinent to note that the remuneration model for payment to the assessee has also remained consistent pursuant to this agreement. Accordingly, in the peculiar facts of the present case, we are of the considered view that once the transaction between Warner Bros. India and the assessee has been found to be at arms’ length by the TPO in the preceding years as well as in the subsequent assessment years, the fact that there was no reference to the TPO for determination of the arms’ length price of this transaction in the year under consideration cannot go against the assessee and it can be safely assumed that, even in the year under consideration, such a transaction is at arms’ length and by not referring the same to the TPO under section 92CA of the Act, the transaction has been accepted as such by the Revenue. Therefore, without going into the question whether the assessee has a DAPE in India in the form of Warner Bros. India in this year, once the transaction between the Warner Bros. India and the assessee has been at arms’ length price, respectfully following the decision of the Hon’ble Supreme Court in Morgan Stanley and Co. (supra), we are of the considered view that there is no further need to attribute profits. Accordingly, we direct the AO to delete the addition of Rs.34,78,85,036/-. As a result, the Grounds No. 2.1 and 2.2 are kept open, and Grounds No. 3.1 and 3.2 are allowed. In view of our above findings, Grounds No. 2.3 and 3.3 need no separate adjudication. Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 18 21. The issue arising in Grounds No. 4.1-4.3, raised in assessee’s appeal, pertains to the taxability of distribution revenue as royalty. 22. The brief facts of the case pertaining to this issue are that during the year under consideration, the distribution revenue received by the assessee pursuant to the agreement dated 01.04.2019 was characterised as “Royalty Income” and the same was claimed as exempt by the assessee both under the Act and the India-USA DTAA. The AO, vide the draft assessment order, rejected the assessee's claim and treated the revenue received from Warner Bros. India as business income, considering Warner Bros. India as the DAPE of the assessee in India. In further proceedings, the learned DRP , rejecting the objections filed by the assessee, upheld the findings of the AO. However, alternatively, the learned DRP held that the formula-based royalty income arising to the assessee in India from the grant of a license and the transfer of the right to use a copyright and artistic work (films) is taxable in India as royalty under section 9(1)(vi) of the Act. Being aggrieved, the assessee is in appeal before us. 23. We have considered the submissions of both sides and perused the material available on record. We find that this issue is no longer res integra and the Co-ordinate Bench of the Tribunal in assessee’s own case in ADIT vs. Warner Bros. Pictures Inc., in ITA No. 3160/Mum./2010, vide order dated 30.12.2011, for the assessment year 2006-07, after considering the specific exclusion envisaged under Explanation-2(v) to section 9(1)(vi) of the Act, observed as follows: - Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 19 “9) We have considered the rival contentions and examined the facts on record. There is no dispute with reference to the fact that the assessee has entered into agreement with Warner Brothers Pictures India (P) Ltd outside India and the amounts were also received outside India. There is also no dispute with reference to the fact that the definition of royalty under section 9(1)(vi) Explanation 2 to (v) excludes the payment received with reference to sale, distribution and exhibition of cinematographic films. There is also no dispute with reference to the provisions of DTAA entered into by India with USA, notified on 20th December, 1990, that the term royalty used in the Article 12 does not include payment of any gain received as consideration for the use of any copyright or literary, artistic or scientific work including cinematographic films or work on films, tape or other means of production for use in connection with Radio or T.V. broadcasting. In view of this specific provisions, the amount received by the assessee cannot be considered as royalty as was done by the Assessing Officer while invoking the Article 12(2) of the DTAA for taxing the amounts. To that extent the findings of the CIT (A) are correct and there is no need to deviate from such findings. In view of this the amount received by the assessee cannot be considered as royalty within the meaning of Indian Income Tax Act or under the DTAA.” 24. The Revenue could not show us any reason to deviate from the aforesaid decision rendered in the assessee’s own case, and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the orders passed by the Co–ordinate Bench of the Tribunal in assessee’s own case cited supra, we are of the considered view that the revenue received by the assessee from Warner Bros. India cannot be taxed as royalty in India. As a result, Grounds No. 4.1-4.3 raised in assessee’s appeal are allowed. 25. The issue arising in Grounds No. 5.1 and 5.2, raised in assessee’s appeal, pertain to the rate of tax on interest earned on income tax refund. 26. The brief facts of the case pertaining to this issue are that the assessee, in its computation of income, offered interest amounting to Rs.29,44,134/- on income tax refund @15% as per the India-USA DTAA. The AO, vide draft assessment order, held that the benefit of 15% tax on interest income cannot be given if the interest arises through a Permanent Establishment in the Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 20 contracting state as per Article 11 of the India-USA DTAA. It was further held that since it has been held that the assessee has a DAPE in India, therefore, the interest income received from the income tax department arises through the DAPE in India and the same is taxable as per the normal provisions of the Act. Accordingly, the AO proposed to tax the interest on income tax refund at 40% instead of 15% as claimed by the assessee. Vide impugned final assessment order, the AO, in conformity with the directions issued by the learned DRP, taxed the interest on income tax refund at 40%. Being aggrieved, the assessee is in appeal before us. 27. We have considered the submissions of both sides and perused the material available on record. We find that the Co-ordinate Bench of the Tribunal in Bechtel International Inc. vs. ADIT, reported in [2013] 21 ITR(T) 404 (Mum.), following the decision of the Special Bench of the Tribunal in Asstt. CIT v. Clough Engineering Ltd. [2011] 130 ITD 137 (Delhi) (SB), observed as follows: - “10. We have given a careful consideration to the rival submissions. We are of the view that in the light of the commentary of Klaus Vogel on the reason for use of the word \"attributable\" in the US conventions, they are in no way different from the expression \"effectively connected\". US Model convention deviates from OECD and UN Model Conventions (MCs) because the term \"effectively connected\" is a technical term of US domestic tax law and that it is defined in detail in I.R.C. Sec.864 (c) whereas \"attributable\", though used in US domestic tax law as well, is not defined. If US MC were to refer to \"effectively connected\", the question would arise whether that term would be required by Article 3(2) MC to be interpreted on the US side in accordance with its definition under US tax law, Use of the term \"attributable\" avoids that problem and that is the reason the expression \"Attributable\" is used in US Model Conventions. Therefore the term appearing in US Model Conventions have the same meaning as the expression \"Effectively Connected\". The expression \"Attributable\" as used in Article 11(5) of the India-USA DTAA has therefore to be construed as equivalent to \"Effectively connected\". The technical explanation referred to by the learned counsel for the Assessee whereby it has been observed that the term \"Attributable\" is to be given a Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 21 narrower meaning than the expression \"Effectively Connected\", we find that the said technical explanation is in the context of attribution of profits of the PE and is relevant to taxation of an Indian enterprise having PE in USA. Nevertheless, the expression \"attributable\" even if held to be equivalent to the expression \"effectively connected\" in the light of the commentary by Klaus Vogel, referred to above, then the case of the Assessee would stand squarely covered in favour of the Assessee by the decision of the Special Bench in the case of Clough Engineering Ltd. (supra). Following the same, we hold that the interest income on income tax refund is to be charged to tax only under Article 11 (2) of the Indo-USA DTAA and not under Article 11(5) thereof.” 28. The Revenue could not show us any reason to deviate from the aforesaid decision rendered in the assessee’s own case, and no change in facts and law was alleged in the relevant assessment year. Thus, respectfully following the orders passed by the Co–ordinate Bench of the Tribunal cited supra, we direct the AO to tax the interest income on income tax refund @15%. As a result, Ground Nos.5.1 and 5.2 raised in assessee’s appeal are allowed. 29. Ground no.6.1, raised in assessee’s appeal, pertains to levy of interest under section 234A and section 234B of the Act, which are consequential in nature. Therefore, the same needs no separate adjudication. 30. Ground no.6.2, raised in assessee’s appeal, pertains to initiation of penalty proceedings under section 270A of the Act, which is premature in nature. Therefore, the same is dismissed. 31. In the result, the appeal by the assessee is partly allowed. Order pronounced in the open Court on 13/10/2025 Sd/- VIKRAM SINGH YADAV ACCOUNTANT MEMBER Sd/- SANDEEP SINGH KARHAIL JUDICIAL MEMBER MUMBAI, DATED: 13/10/2025 Printed from counselvise.com ITA No.3411/Mum/2023 (A.Y. 2020-21) 22 Prabhat Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order Assistant Registrar ITAT, Mumbai Printed from counselvise.com "