In the Income Tax Appellate Tribunal

IN THE INCOME TAX APPELLATE TRIBUNAL

G-BENCH, MUMBAI

BEFORE DR OK NARAYANAN AND SHRI RAJPAL YADAV

I.T.A. No.5066/Mum/2004

(Assessment year 2000-01)

Satellite Television Asian Region Ltd vs DCIT(International Taxation)-2(1)

C/o Star India Pvt Ltd Mumbai

Star House, 3rd Floor

Off Dr D.E. Moses Road

Mahalaxmi, Mumbai-11

(Appellant) (Respondent)

Appellant by : Shri Dinesh Vyas Respondent by : Shri GC Srivastava

O R D E R

Per Dr OK Narayanan, AM

This appeal is filed by the assessee. The relevant assessment year is 2000-01. The appeal is directed against the order of the Commissioner of Income-tax (Appeals)-XXXI at Mumbai passed on 30th March, 2004 and arises out of the regular assessment completed u/s 143(3) of the Income-tax Act, 1961. The assessment has been completed by the Deputy Director of Income-tax (International Taxation)-II(1) at Mumbai.

2. The assessee company, M/s Satellite Television Asian Region Ltd (Hong Kong) (hereinafter shortly referred to as “Star Ltd”) is a non-resident company incorporated in Hong Kong. The assessee is a subsidiary company of M/s Star Television Ltd, a company incorporated in British Virgin Islands.

3. The assessee company is carrying on the business of selling “Air Time” to various Indian advertisers. The assessee company makes the sale of air time in India through its advertising sales agent, M/s Star India Pvt Ltd (hereinafter referred to as “SIPL”), a company incorporated in India. SIPL is marketing the advertisement time in India and collects the advertisement revenues. The assessee company acquires the air time meant for advertisement from television channel companies like Star Plus, Star Movies, Star World, Star News, Channel V, etc. These channel companies are the Television Content Aggregators. The Television Content Aggregators / channel companies earmark the air time to be allowed to advertisers in India which is sold to the assessee company, which in turn, sells the air time to Indian advertisers through its selling agent in India, M/s SIPL. This time slot involved in the above transactions from channel companies to assessee company to advertising sales agents like SIPL is described as “Ad Airtime”, which means air time earmarked for advertising. This sales content of air time is hereinafter referred to as “Ad Airtime”.

4. The assessee company had granted the exclusive right to market, sell and distribute the channels of the Star TV Network in India to M/s Indian Sky Broadcasting Ltd (ISKYB, for short), a company incorporated in Hong Kong with its principal place of business in the United Kingdom. The assessee allowed ISKYB to collect the subscription revenues in respect of the channels of Star TV Network in its own right. ISKYB did not make nor was required to make any payment to the assessee as consideration for those rights conferred on ISKYB. ISKYB was free to carry on the business as per the said rights without the interference of the assessee company. The said ISKYB, in turn, had executed another agreement with SIPL, granting the latter the right to distribute the channels through the Cable Distribution System and collect the respective subscription revenue, in its own right. Here also SIPL did not make nor was required to make any payment to ISKYB by way of consideration for those rights. The cable subscription revenues have been offered for taxation by SIPL as its income. At the same time, SIPL did not undertake any activity in India in respect of the subscription business carried on behalf of ISKYB. The contention of the assessee is that the agreement between ISKYB and SIPL is on a principal to principal basis. The above arrangements were made effective from 01-12-1997. The assessee company had also granted, prior to April 01, 1999, the rights for sale of Ad Airtime in India on the channels of Star TV Network to M/s Satellite Television Asian Region Advertising sales BV (SAS BV, for short), a company incorporated in Netherlands. M/s SAS BV also appointed SIPL as its collecting agent in India in respect of the sale of Ad Airtime. The said agreement between the assessee and M/s SAS BV expired with effect from 01-04-1999. SAS BV has been offering its income for taxation on receipt basis in the light of the circular No.742 issued by Central Board Direct Taxes. Accordingly, the advertisement revenues collected during the previous year relevant to the assessment year 2000-01 and pertaining to the invoices raised by SAS BV prior to April 01, 1999 has been offered for taxation in its return of income filed for the assessment year 2000-01.

5. The assessee company, in the above scenario filed its return of income for the impugned assessment year 2000-01 on 30-03-2001, declaring a total income of Rs.26,25,87,600. The return was initially processed u/s 143(1) through intimation dated 14-02-2002. Thereafter, the case was selected for scrutiny assessment and the assessment was completed u/s 143(3) on a total income of Rs.333,55,67,423. The assessment was completed on 28-03-2003. The assessing officer has discussed the nature of business carried on by the assessee and the nature of relation of the assessee with other inter related companies in detail along with a detailed examination of the functional aspects of the assessee company in India. On the basis of the elaborate discussion, the assessing officer has made certain additions as well as disallowances whereby he could determine a taxable income of Rs. 333,55,67,423 as against a returned income of Rs.26,25,87,600.

6. One of the disallowances made by the assessing authority in the course of assessment proceedings was a sum of Rs.160,40,10,000. This is the amount which was paid by the assessee company to various channel companies (Television Content Aggregators) towards the cost of Ad Airtime purchased from them. The assessing officer put a question across the board as to why the assessee company did not deduct tax at source while making the payment of Rs.160,40,10,000 to the channel companies by way of cost of Ad Airtime. As the detailed explanation offered by the assessee company was not acceptable to the assessing authority, he came to a conclusion that the assessee company was bound to make deduction of tax at source while making the payment of Rs.160,40,10,000 to the channel companies. As the assessee has failed to do so, the assessing officer invoked the provisions of section 40(a)(i) of the Act and disallowed the said payment in computing the taxable income of the assessee company. In other words, the assessing officer disallowed the said payment and added the same back to the income of the assessee company under the provisions of section 40(a)(i) of the Act.

7. The text of the relevant law provided in section 40(a)(i), as edited for the purpose of this case, reads as below:

Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-

(a) in the case of any assessee-

(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable -

(A) Outside India; or

(B) In India to a Non Resident, not being a company or to a foreign company,on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub section (1) of section 200:

Provided that where in respect of any such sum tax has been deducted in any subsequent year or has been deducted in the previous year, but paid in any subsequent year after the expiry of the time prescribed under sub section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which tax has been paid ------:

8. In the light of the above provisions of law, the assessing officer concluded that the amount paid by the assessee company to the channel companies towards the cost of air time purchased by it is in the nature of “other sum chargeable under this Act”, on which the assessee was bound to deduct tax at source; and, therefore, made the said disallowance and addition.

9. When the question was put across the table, the assessee company has filed a detailed reply in a very exhaustive manner upholding its stand that the sum paid by the assessee company to channel companies against the cost of airtime was not a sum chargeable to tax in India in the hands of the channel companies and, therefore, the assessee company was under no statutory obligation to deduct tax at source in the course of making those payments to the channel companies. The detailed reply filed by the assessee has been substantially reproduced by the assessing authority in the assessment order from pages 3 to 11. The explanations offered by the assessee company are summarized below:

(i) The assessee had entered into agreements with various non resident channel companies for the purchase of airtime on the channels of Star TV Network such as Star Television Entertainment Ltd, Star Television Industries Ltd, Channel V Music, Channel Television Suppliers Ltd, etc. Copies of the agreements executed between the assessee and the channel companies were enclosed along with earlier submissions.

(ii) The obligation of the assessee u/s 195 of the Income-tax Act is dependent on whether the recipient channel companies are liable to tax in India in respect of the payments received against the cost of Ad Airtime procured by the assessee company. The liability to tax in India would arise only when the income earned by the channel company is taxable in India. The proposition that the income of channel companies is liable to tax in India is against the facts and law of the case for the following reasons:

(a) The agreement between the assessee and channel companies were signed and executed outside India. Accordingly the situs of the contracts for the purchase and sale of air time lie outside India. As a result, the right to receive the payments and the right to enforce the performance of the contract lie outside India;

(b) Under the Agreement with the channel companies, the assessee has purchased outright, the world wide air time available on the channels of the Star TV Network and as a result of which and in pursuance of the agreements, all the rights to the airtime have been transferred to the assessee;

(c) Therefore, the transaction between the assessee and the channel companies can be compared to an off-shore sale of goods by a non resident vendor to a non resident buyer.

(iii) The important parameters of the agreements are that the agreements of sale are executed outside India, the title in the goods (air time) is transferred outside India, the consideration for sale of goods, i.e. air time is received outside India, and he transaction is on a principal to principal basis.

(iv) Section 5(2) of the Income-tax Act, 1961 enumerates the situations under which the income of a non resident is taxable in India. Those situations or circumstances are such that the total income of any previous year of a person, who is a non resident includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year and, therefore, the question of taxability of the channel companies has to be considered in the light of the criteria laid out in section 5(2) of the Income-tax Act, 1961.

(v) Section 9 of the Income-tax act, 1961 lays down the circumstances in which income can be said to be deemed to accrue or arise in India. These circumstances are such that all income accruing or arising, whether directly or indirectly through or from a business connection in India or through or from any property in India or through or from any asset or source of income in India or through the transfer of a capital asset situated in India.

(vi) The channel companies did not receive or deemed to receive in India any income so that clause (a) of section 5(2) is not attracted.

(vii) The assessee did not have any business connection in India or any property in India or any asset in India or any source of income in India and, therefore, the provisions of section 9(1) also not attracted so as to implicate the channel companies under clause (b) of section 5(2).

10. Based on a series of judical pronouncements and circulars issued by the CBDT, the assessee company submitted before the assessing authority, in short, its defence in the following manner:

(a) The revenues are not received in India;

(b) The revenues are not deemed to be received in India;

(c) The revenues did not accrue or arise in India;

(d) The revenues did not deem to accrue or arise in India.

11. The assessee submitted before the assessing authority that as the payments made by the assessee, to the channel companies for purchase of air time are not chargeable to tax in India, the assessee was not liable to withhold tax from the payments. Therefore, it was contended before the assessing authority that the proposal to invoke the provisions of section 40(a)(i) was not called for.

12. The detailed submissions and explanations offered by the assessee were in turn exhaustively considered by the assessing authority in pages 12 to 44 of the assessment order. The assessing office has gone through every agreement entered into by the assessee company with various cannel companies individually and has considered the common features of those agreements. On going through the details of various companies involved in this case and coming under the Star TV Network, the assessing officer found that the directors of all the companies are common. He also noticed that the relevant clauses of all the agreements are similar and analogous. On the basis of the said detailed examination of the agreements, the assessing officer came to the following findings:

(a) The channel companies own and operate satellite television channels featuring various programmes, data and content. They are the Television Content Aggregators.

(b) Channel companies agreed to sell companies like assessee, the world wide advertising air time of the channels on the terms and conditions set out in respective agreements.

(c) The substance of the agreements, “Ad Air Time” means the advertising time and programmes sponsorship available on each of the channels through out the territory, which shall be upto a maximum available time of 10 minutes per hour per channel.

(d) Channel companies sell to companies like assessee and companies like assessee agrees to purchase the Ad Air Time on the terms and conditions set out in the agreements.

(e) The conditions of the sale, in general, are such that the sale company like assessee would meet the requirements of all local laws, policies; regulations and respect the local custom standards and practices, no false claim would be telecast or advertised, no illegal or unlawful activity would be advertised, etc.

(f) The payments due to the channel companies shall be paid by the sales company like assessee on the basis of a Minimum Guarantee Amount payable in 12 equal instalments, one month being in arrears.

(g) The sales company like assessee did not acquire any right or interest whatever in the channel companies privileges only for the reason of their acquisition of Ad Air Time from the channel companies and the sales companies, like assessee shall not promote their own commercial interest through the Ad Air Time except in such manner as provided and agreed upon between the parties.

(h) Channel companies and sales companies like assessee jointly will indemnify defend and hold the other, harmless from any claims, costs, liabilities, judgments, expenses or damages arising out of any breach of the agreement.

(i) The rights and privileges assigned to a party by virtue of the agreements, shall not be assigned or transferred to anybody without the approval of the other party except for the freedom of the sales companies, like assessee to appoint their own agents in respective countries for the direct sale of Ad Air Time to advertisers, which is, of course, subject to the approval of the channel companies.

13. The assessing officer has come to the following conclusions as a result of examination of the situations explained in above paragraphs; such as -

(a) That the sale of Ad Airtime is subject to various conditions including the condition of additional payment where the advertisement revenue increases more than 80% of the threshold limit;

(b) That the channel companies being registered in Hong Kong and India not having a double taxation agreement with Hong Kong, the liability of channel companies to be taxed needs to be examined as per the provisions of Indian Income Tax Act.

(c) That the channel companies accrue or arise or deem to accrue or arise income in India as a result of the activities carried on by them in India through the medium of agreements entered into between the assessee company and, therefore, the argument of the assessee that the agreements being executed and enforceable outside India does not take away the channel companies from the ambit of taxation.