The Income Tax Appellate Tribunal (ITAT), New Delhi held that the revenue derived from the distribution of products cannot be taxed as ‘royalty’ as business income as it is already offered under Mutual Agreement Procedure (MAP).
The Appellant, Turner Broadcasting System Asia Pacific Inc. is a company incorporated under the laws of the USA and is a tax resident of the USA during the captioned assessment years. During the relevant assessment years, the Appellant derived advertisement and distribution revenue from the grant of exclusive rights to Turner International India Private Limited (TIIPL), an Indian Company, to sell advertising on the products and to distribute the products.
The Indian Company, TIIPL acted as an exclusive distributor of the products to the cable operators and other permitted systems on a ‘principal to principal basis’.
The ‘distribution agreement’ allowed TIIPL to distribute the products to various cable operators and ultimately to the consumers in India. The distribution revenue collected by TIIPL was to be shared between TBSAP and TIIPL (Indian Company).
However, in relation to TIIPL, the copyright in the content always remained with the Appellant, and at no point of time; same was transferred either to TIIPL or the sub-distributor, which is evident from Clause 5 of the Agreement concluded between the Appellant Company and TIIPL which clarifies that all copyrights and other proprietary rights in the products (channels) shall vest solely in the appellant company.
The AO in the current years treated the distribution revenue to be ‘Royalty’ as per section 9(1)(vi) of the Act and Article 12 of the DTAA between India and the USA and perusal of the distribution in sales agreement came to the conclusion that as per the terms of the agreement, in consideration for the rights license to TIIPL and TENA, TIIPL shall pay TENA a sum of 50% of the net revenue generated from the distribution and advertising sales on channels subject to the minimum guarantee set out under the “distribution fee” and “advertising sales fee” which is nothing but royalty both under the Income Tax Act and DTAA.
The two-member bench of B.R.R. Kumar and Amit Shukla observed that the appellant never granted any licenses to use any copyright, either to the distributor or to the cable operator albeit it has only granted right for purpose of selling advertisement on the product that are channels, etc. and distribution of such products in India.
The tribunal further said that the Indian company is carrying out the distribution and selling of the advertisement and it does not have any kind of right to edit, interpret, add the products distributed by it.
The tribunal held that the assessee company only granted commercial rights in the nature of ‘broadcast reproduction right’ to the TIIPL, which has been separately defined under section 37 of the Copyright Act and therefore, it cannot be held that revenue derived by the assessee for distribution of products is taxable as ‘royalty’ albeit it is a business income of the assessee.
“We hold that the distribution revenue earned by the appellant-assessee cannot be taxed as royalty albeit as a business income. Since the assessee has already offered income as business income in terms of the MAP, therefore, the income as declared by the assessee in accordance with the MAP and accepted by the Department in the earlier years has to be accepted,” the tribunal said.
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