Against the order of the learned CIT(A) dt. 2nd July, 2004 which was emanated from the order under s. 201(1) and 201(1A) of the IT Act, 1961 dt. 19th Feb., 2004, passed by the Addl. Director of IT (International Taxation), Mumbai, Revenue is in appeal and the assessee has filed the cross-objection. The remaining appeals of the Revenue are against the orders of the learned CIT(A) whereby he has disposed of the appeals filed by the assessee against orders passed by the AO under s. 195 of the IT Act. Since the issues involved in all these appeals are common, the same have been heard together and are being disposed of by this single consolidated order for the sake of convenience.
2. The facts of the case are that the assessee is a Singapore based company engaged in the business of acquiring television programs, motion pictures and sports events and exhibiting the same on its television channels from Singapore. The assessee is a tax resident of Singapore in terms of art. 4 of the India-Singapore tax treaty.
3. The assessee had entered into an agreement on 25th Jan., 2002 with Global Cricket Corpn. Pte Ltd. (GCC) (also a tax resident of Singapore under the treaty). Under the agreement, GCC has granted 'rights' to the assessee throughout the licensed territory. The term 'rights' under Sch. I to the agreement has been defined as the right to transmit, broadcast, exhibit, perform, include in cable programs and/or otherwise distribute, make available to the public any moving visual or audio visual representations and/or images of matches, players or play in any event, the feed, the highlights, package and any recording and other material by means of any media. The term 'licensed territory' has been defined under Sch. I to the agreement as India, Pakistan, Srilanka, Bangladesh, Singapore and Malaysia.
4. The Addl. Director of IT initiated proceedings under s. 201 of the IT Act on the assessee for non-deduction of tax at source from payments made to GCC. During the course of s. 201 proceedings, the assessee made various written submissions before the Addl. Director of IT, the gist of which is summarized below :
1.The territorial jurisdiction of the IT Act, 1961 is restricted to the Indian territory and cannot be applied to a transaction carried out outside India.
2.When payment is made outside India by a non-resident to another non-resident, it is not covered by the provisions of s. 195.
3.The payment cannot be considered as royalty as defined under Expln. 2 to s. 9(1)(vi) of the Act.
4.The payment is also not in the nature of royalty as defined in art. 12(3) of Indo-Singapore treaty.
5.The income does not accrue in India as per art. 12(7) of the treaty.
6.The limitation clause under art. 24 of the treaty is not applicable to the case of the assessee.
5. Vide order under s. 201(1)/201(1A) of the IT Act dt. 19th Feb., 2004, the Addl. Director of IT held that the payments made by the assessee to GCC were in the nature of 'royalty' as defined in Expln. 2 to s. 9(1)(vi) of the IT Act, which were deemed, to arise in India and hence taxable in India. Accordingly, the Addl. Director of IT raised a demand of Rs. 32,94,06,000 under s. 201(1) and interest of Rs. 5,46,76,000 under s. 201(1A) of the IT Act on the assessee for non-deduction of tax at source from payments made to GCC.
6. Aggrieved by the order of Addl. Director of IT, assessee filed an appeal before the learned CIT(A). The learned CIT(A) in his order dt. 2nd July, 2004 inter alia discussed and decided the main issues in para No. 8.42 as under :
"I have considered the submissions of the appellant as well as the submissions made by the Addl. Director of IT. There are two aspects of the matter.
Whether payment for live cricket event rights constitutes royalty within the meaning of art. 12(3) of the tax treaty ? Assuming that the answer to the above is in the affirmative, whether such a royalty arises in India within the meaning of provisions of art. 12(7) of the tax treaty.
As is apparent, if my answer to the second issue viz., that the royalty does not arise in India is in the affirmative, my answer to question No. 1 would become redundant.
Accordingly; while I find substantial merit in the arguments canvassed by the appellant that the payment for live feed rights does not constitute royalty, I do not consider it necessary to decide on this issue. This is because I am in full agreement with the contention of the appellant that even if one assumed that the payment was in the nature of royalty, such a royalty does not arise in India having regard to the provisions of art. 12(7) of the treaty. I concur with the opinion of Mr. Phillip Baker on the subject and hold that unless there is a direct nexus with the activities of the PE and the incurring of the said expenditure, the royalty cannot be said to arise in India. Since there is no such nexus in this case, I hold that the payment to GCC cannot be said to arise in India with the meaning of art. 12(7) of the treaty."
7. The learned CIT(A) thus inter alia decided the main issue in favour of the assessee holding that even if it is assumed that the amount in question is in the nature of royalty, such royalty income does not arise in India in terms of art. 12(7) of the relevant DTAA and thus the same is not chargeable to tax in India. Accordingly he held that the assessee was not liable to deduct tax at source from the payment made to GCC. The learned CIT(A) thus partly allowed the appeal of the assessee by his impugned order against which the assessee and Department has filed these appeals before us.
8. The main issue which arises for our consideration in this case is the one raised by the Revenue in ground No. 3 which reads as under :
"Whether in the facts and in the circumstances of case and in law, the CIT(A) erred in holding that the royalty has not arisen in India having regard to the provisions of art. 12(7) of Indo-Singapore DTAA."
9. The learned Departmental Representative submitted the following arguments in support of the Revenue's case on this issue.
(i)The source of revenue for the assessee is from advertisement which are telecasted on the SET Satellite channel and paid for mainly by the persons in India. The other source of the revenue of the assessee is the subscription income collected from cable operators mainly in India.
(ii)GCC as a licensor granted 'rights' to the assessee as licensee throughout the licenced territory together with commentary in the authorized languages for a fee for a authorized number of exhibitions during the exhibition period. The definition of rights is exhaustive.
(iii)The assessee has also been given right to edit the feed i.e., reconfigure, recombine or repackage, to copy and store the feed on any storage device in any medium, to dub and subtitle the feed. The assessee is also given a guarantee that the licensor shall not make available live feed to any other person in any part of the licensed territory except as provided in the agreement in a limited way. It shows that the assessee has exclusive broadcasting rights for distribution in the licensed territory. The assessee has also been given non-exclusive right to use, logo of GCC.
(iv)Sale of airtime on its channel to Indian persons, collection of subscription from cable operators in India would amount to doing business in India.
(v)The assessee has a PE in India in the form of Set India who is doing the marketing activity of the assessee namely M/s Set Satellite Singapore.
(vi)There is a direct nexus between collection of advertisement revenue from the assessee from India and payment for acquisition of broadcasting rights of cricket matches.
(vii)The payments made by the assessee to GCC for transfer of telecasting rights are in the nature of royalty under Expln. 2; such payments are deemed to accrue or arise in India under s. 9(1)(vi)( c) of the Act.
10. The learned Departmental Representative also contended that the provisions of IT Act, 1961 are applicable to the transaction outside India if the same has any nexus in India. In this context, he raised the following points :
(a)The provisions of s. 195 are applicable even to a transaction made between two non-residents outside India.
(b)The telecasting rights received by the assessee from the GCC are in the nature of property similar to a patent, invention, model, design, trade mark etc. as mentioned in cl. (i) of Expln. 2 to s. 9(1)(vi).
(c)The rights to be transferred by the GCC to the assessee are also copyright rights as mentioned in cl. (v) of Expln. 2 to s. 9(1)(vi).
(d)The assessee is carrying on business in India and the payments made to the GCC were for the purpose of business carried out in India and also for making an earning from sources in India.
(e)The payments made by the assessee to the GCC are in the nature of royalty under s. 9(1)(vi) of the Act and therefore chargeable to tax in India.
(f)The GCC is not entitled to any benefit under Indo-Singapore treaty under the limitation clause (art. 24) as the payments have been received in Jersey and not in Singapore.
11. The learned Authorised Representative countered the arguments of the Departmental Representative stating that even if payments are assumed to be royalty under art. 12(3) of the treaty such royalty does not arise in India in view of the provisions of art. 12(7) of the treaty. The learned Authorised Representative dissected art. 12(7) of the treaty and explained that the first condition is that the payer should be a resident of India in order to come under art. 12(7) which has not been fulfilled in the instant case. As per the first limb of art. 12(7) of the treaty, royalties would arise in a Contracting State, only where the payer is a resident of that Contracting State. In this connection, the learned Authorised Representative relied on the opinion of Mr. Phillip Baker where he has opined that (even assuming the payments to be in the nature of royalties), the source of royalties under art. 12(7) of the treaty would be in Singapore, since such royalties are paid by the assessee, which is a resident of Singapore and therefore cannot be said to arise in India under art. 12(7) of the treaty.
12. Further as per the second limb of art. 12(7) of the treaty, where the payments are made by one non-resident to another non-resident, royalty would arise in India only if :
(i)The non-resident payer (i.e., the assessee) has a PE or fixed base in India
(ii)The liability to pay royalty is incurred 'in connection with' such PE or fixed base and
(iii)The royalty is 'borne' by such PE or fixed base.
13. Further in the assessment order for the asst. yr. 2001-02, the learned Addl. Director of IT has held that the assessee has an agency PE in India in the form of SET India. The assessee has submitted that the provisions of art. 12(7) are not attracted even if the assessee has only an agency PE because it does not have a physical presence in India. The learned counsel, for the assessee Shri Dastur brought out that under art. 12(7), the condition which needs to be satisfied is that the liability to pay royalty has been incurred 'in connection with' the payer's PE in India. For this he produced a chart with diagrams showing how the entire broadcasting business is being carried out. He pointed but that from the chart it could be easily understood that' the collection by way of advertisements and through negotiations with channel operators which are the source of revenue for SET India has no direct nexus between the activities of the payer's PE in India and the royalty payment. He further submitted that its broadcasting business is being carried out from Singapore and it does not carry out any such activity in India. The payment for the cricket rights is made only for the broadcasting operations of the assessee, which are carried out from Singapore. Further, the liability for the payment is incurred by the assessee in connection with its broadcasting operations in Singapore and has no connection with the marketing activities carried through its alleged PE in India.
14. The second aspect which requires consideration is that art. 12(7) requires that the royalty must be borne by the payer's PE in India. The assessee contended that in the present case, the financial burden of the payment for live cricket rights is borne by the head office of the assessee in Singapore and not by its alleged agency PE in India and therefore the payment cannot be treated as 'borne by' the assessee's PE in India. The wordings, viz., payments being 'incurred in connection with' and 'borne by' by a PE in the other Contracting State are also found in art. 11(5) of the OECD Model Convention relating to 'interest". The assessee has relied on para 26 of the OECD Commentary on art. 11 of the Model Convention, which deals with the place where interest can be said to arise. It has been stated in para 26 that interest-bearing loans should have an obvious economic link with the PE in the other Contracting State. Para 27 of the commentary further states that in the absence of an economic link between the interest-bearing loan and the PE, the Contracting State where such PE is situated cannot be regarded as the State where the interest arises.
15. The learned counsel for the assessee also produced the copy of OECD Commentary before us. He contended that the aforesaid analogy should equally apply in the present case with respect of art. 12(7) of the treaty, which also deals with the requirement of payments being "incurred in connection with" and "borne by" a PE in India. He further contended that since the payments to GCC do not have any economic link with the assessee's marketing/agency PE in India (i.e., SET India), the said payments cannot be said to arise in India under art. 12(7) of the treaty. The learned counsel for the assessee furnished the opinion of Mr. Phillip Baker at p. 70 of the paper book.
16. The learned counsel for the assessee submitted Klaus Vogel Commentary on Double Taxation Convention pointing out as follows :
"Generally liability is not recognized as pertaining to PE unless it is shown in the PE balance sheet."
The learned counsel also produced the balance sheet and Sch. XV to prove that the amount has not been paid by SET India (P.) Ltd. to GCC to acquire the broadcasting rights.
17. We heard both the parties. We find no infirmity in the order of the learned CIT(A). The payment made by the assessee to GCC cannot be said to arise in India under art. 12(7) of the treaty since the payer (i.e., assessee) is not a resident of India. As per the first limb of art. 12(7) of the treaty, royalties cannot arise in India, since the payer is not a resident of India. Such royalties under the first limb of art. 12(7) of the treaty arise in Singapore since the payer (i.e., the assessee) is a resident of Singapore. The second limb of art. 12(7) of the treaty deals with a scenario where the payments are made by a non-resident, where such non-resident has a PE in India. However, a mere existence of a PE in India cannot lead to a conclusion that royalties arise in India. In addition to the existence of PE, for royalties to arise in India under art. 12(7) of the treaty, it is essential that liability to pay such royalties has been "incurred in connection with" and is "borne by" the PE of the payer in India.
18. Based on an analogy from paras 26 and 27 of the OECD Commentary on art. 11, it is clearly evident that for royalties to arise in India, an existence of an economic link between the liability for payment of such royalties and PE is necessary. However, in the present case there us no economic link between the payment of royalties and the alleged PE of the assessee in India (i.e., SET India), the economic link is entirely with the assessee's head office in Singapore. Thus, the payments to GCC cannot be said to have been incurred "in connection" with the appellant's PE in India, (i.e., SET India). Further, the alleged PE in India (i.e., SET India) was also not involved in any way with the acquisition of the right to broadcast the cricket matches, nor did the PE bear the cost of payments to GCC. Thus the payments to GCC cannot be said to have been "borne by" the assessee's PE in India (i.e., SET India).
19. We find that the case law cited by the learned counsel for the assessee also support the assessee's case. In the cases of Stanley Keith Kinnett, In re [1999] 154 CTR (AAR) 193 : [1999] 238 ITR 155 (AAR) and CIT v. Elitos S.P.A. [2005] 196 CTR (All.) 638 : [2006] 280 ITR 495 (All.) in which it has been held that when the burden of payment is not borne by PE or fixed base, trade or business located in India, the amount is not taxable in India. Further on going through Sch. XV, we find that SET Satellite Singapore has not recovered any amount from the Indian PE, In the royalty to arise in India as envisaged under art. 12(7) of the treaty, the condition which reads as follows :
"Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a PE or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such PE or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the PE or fixed base is situated."
20. Firstly the payer is not a resident of India. Secondly the liability to pay such royalty has not been incurred in connection with and is not borne by the PE of the payer in India. Therefore there being no economic link between the payment of royalty and SET India hence the royalty does not arise in India having regard to the provisions of art. 12(7) of the treaty. Hence even if it is assumed that the payment for broadcasting cricket constitutes royalty, in our opinion such royalty does not arise in India within the meaning of provisions of art. 12(7) of the tax treaty and hence the second ground No. 3 raised by the Revenue is dismissed.
21. In view of our decision rendered above on the main issue, other grounds raised in Revenue's appeal and assessee's appeal have become only academic and we do not deem it expedient to adjudicate upon the same.
22. As regards the remaining appeals filed by the Revenue, the main issue involved therein is similar to the one which has already been decided by us in the foregoing portion of this order while disposing of the cross-appeals filed for asst. yr. 2003-04. Following the said decision, we dismiss all these appeals filed by the Revenue. Consequently, the cross-objections filed by the assessee have become infructuous and the same are accordingly dismissed.
23. In the result, the Revenue's appeals as well as the appeal of the assessee and cross-objections filed by the assessee are dismissed.