Distribution Revenue from US Broadcasting Company not Taxable as “Royalty” under India-US DTAA [Read Order]

In a significant ruling, the Income Tax Appellate Tribunal ( ITAT ) Delhi Bench has ruled that the distribution revenue received by Turner Broadcasting System Asia Pacific, Inc. ( TBSAP ), a U.S.-based company, from its Indian affiliate is not taxable as "royalty" under the Income Tax Act, 1961, or the India-U.S. Double Taxation Avoidance Agreement ( DTAA ). Instead, such revenue should be taxed as business income.

TBSAP, a tax resident of the United States, had entered into an agreement with Warner Media India Private Limited (WMIPL) effective from April 1, 2011. Under this agreement, TBSAP granted WMIPL the rights to sell advertising and distribute television channels like Cartoon Network and POGO in India. WMIPL was entitled to retain 50% of the revenues earned from the sale of advertisement inventory and distribution of channels as consideration for the services rendered to TBSAP.

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For the Assessment Years (AY) 2020-21 and 2021-22, TBSAP received substantial revenues from WMIPL:

- AY 2020-21: Advertisement Revenue of ₹85 crore and Distribution Revenue of ₹125 crore.

- AY 2021-22: Advertisement Revenue of ₹52 crore and Distribution Revenue of ₹78 crore.

TBSAP filed its income tax returns offering these revenues to tax based on a Mutual Agreement Procedure (MAP) resolution between the competent authorities of India and the USA for earlier years (AY 2001-02 to 2004-05). According to the MAP, 10% of both advertising and distribution revenues were deemed as business income taxable in India.

The Assessing Officer (AO) issued draft assessment orders proposing to treat the distribution revenues as "royalty" under Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-U.S. DTAA, thereby taxing them at 10%. Additionally, the AO sought to attribute 15% of the net advertising revenues received by TBSAP from WMIPL to a purported Permanent Establishment (PE) in India.

TBSAP objected to these proposals, arguing that the issues were already settled in its favour in earlier years and that the revenues should continue to be taxed as business income. The Dispute Resolution Panel (DRP) directed the AO to consider the ITAT's earlier order in TBSAP's own case for AY 2009-10 to 2017-18, where similar issues were decided in favour of the assessee.

However, the AO, without adequately considering the DRP's directions, finalised the assessments in line with the draft orders, prompting TBSAP to appeal to the ITAT.

The Income Tax Second Appeal Tribunal observed that the issues in question were identical to those decided in the assessee’s own case for AY 2009-10 to 2017-18. In that case, it was held that distribution revenues are not taxable as "royalty" but as business income. The earlier ITAT order had also been upheld by the Delhi High Court on March 28, 2024.

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It was noted that the TBSAP did not transfer any copyright or grant any licence involving the use of copyright to WMIPL. The agreements only granted WMIPL the rights to distribute channels and sell advertising time, without any transfer of proprietary rights.

The ITAT noted that the distribution rights granted were in the nature of 'Broadcast Reproduction Right' as defined under Section 37 of the Copyright Act, 1957, which is distinct from 'copyright' under Section 14 of the same Act.

Under the India-U.S. DTAA, payments received for the use of, or the right to use, any copyright are characterised as 'royalty'. Since there was no such transfer of copyright, the revenues could not be taxed as royalty under Article 12 of the DTAA.

The tribunal bench of Accountant Member Dr. B. R. R. Kumar and Judicial Member Yogesh Kumar U S noted that the Department had accepted the MAP and the taxation of these revenues as business income in earlier years. There was no justification for deviating from this consistent approach without any change in facts or law.

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Allowing the appeals, the tribunal deleted the additions made by the AO for both AY 2020-21 and 2021-22. The ruling reinforces the principle of consistency in tax assessments and adherence to international tax treaties.

It clarified that distribution revenues arising from granting distribution rights of television channels, without the transfer of copyrights, do not constitute 'royalty' under the Income Tax Act or the India-U.S. DTAA.

To Read the full text of the Order CLICK HERE

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