Relief for Warner Bros: ITAT Rules Film Distribution Income Not ‘Royalty’ Under India-US DTAA [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) granted partial relief to Warner Bros Distributing Inc. in a case concerning the taxability of its film distribution income and interest on income tax refund.

Warner Bros Distributing Inc., a company based in the United States, entered into an agreement with Warner Bros Pictures (India) Pvt. Ltd. (WBPIPL) granting exclusive distribution rights for cinematographic films in India. The Assessing Officer (AO) treated the receipts from WBPIPL as business income and held that WBPIPL constituted a Dependent Agent Permanent Establishment (DAPE) of the assessee in India.

The AO attributed 65% of the gross revenue amounting to Rs. 34.78 crore as taxable business profits in India. The Dispute Resolution Panel (DRP) upheld the AO’s findings and, alternatively, treated the income as royalty under section 9(1)(vi) of the Income Tax Act.

On appeal, the assessee argued that its arrangement with WBPIPL was on a principal-to-principal basis and not as an agent. They further argued that WBPIPL was an independent entity conducting its own business and that all transactions were made at arm’s length, which had been accepted in earlier and subsequent transfer pricing assessments.

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The assessee also argued that distribution income from cinematographic films could not be treated as royalty under the Income Tax Act or the India-US Double Taxation Avoidance Agreement (DTAA).

The two-member bench comprising Vikram Singh Yadav (Accountant Member) and Sandeep Singh Karhail (Judicial Member) relied on its earlier decision in the assessee’s own case for assessment year 2006-07 and explained that payments for film distribution are specifically excluded from the definition of royalty under section 9(1)(vi) of the Act. Hence, it held that such income could not be taxed as royalty either under the Act or the DTAA.

The tribunal also held that the interest earned on income tax refund was not effectively connected with any permanent establishment in India and should be taxed at 15% as per Article 11(2) of the India-US DTAA, following the decisions in Bechtel International Inc. and Clough Engineering Ltd.

The tribunal allowed the appeal partly in favor of the assessee, deleting the addition made by the AO and directing taxation of the refund interest at the beneficial treaty rate.

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