Delhi Tribunal rules fees earned on distribution of TV channels are neither taxable as royalty nor taxable as business income in the absence of permanent establishment (PE) in India

In case of ESS Distribution (Mauritius) SNC et Compagnie[1] , the Taxpayer, a Mauritius tax resident, was appointed by a Singapore sports channel company (Sing Co) to distribute and make available for sub-distribution, its sports channel in India via cable television system, satellite master antenna television systems and direct-to-home via satellite. The Taxpayer thereafter appointed an Indian company (ICo) for distribution of the sports channel through network of Indian cable operators. ICo shared 60% of its gross revenue with the Taxpayer as consideration for the right to distribute the sports channels in India. 

The tax authority argued that the ICo was an agent of the Taxpayer who was distributing sports channel subscription on behalf of the Taxpayer. Hence, the Taxpayer triggered dependent agent permanent establishment (PE) in India under India-Mauritius double taxation avoidance agreement (DTAA). Additionally, the tax authority also argued that the distribution fees received by the Taxpayer were for the right to communicate a cinematographic film to the public, which qualified a copyright under the Copyright Act. Hence, such payment was taxable as royalty. 

Accordingly, issues before the Delhi Tribunal were: 

• Whether distribution fees received by the Taxpayer from ICo was taxable as royalty under Income Tax Laws (ITL) as well as India-Mauritius DTAA? 
• Whether Taxpayer had PE in India under India-Mauritius DTAA? 

While analyzing the royalty issue, the Tribunal noted the following terms from the agreement between Sing Co and the Taxpayer: 

• Taxpayer was not conferred with any rights whatsoever with regard to copyright, title or any other proprietary or ownership interest in or to the sports channel. 
• All rights in the content of sports channel were expressly reserved by Sing Co. 
• The Taxpayer had to distribute the service of sports channel in its entirety, without any alteration, editing, dubbing, scrolling or ticker tape, substitution or any other modification, addition, deletion or any other variation whatsoever. 

Basis such terms, Tribunal stated that copyright over the programs of sports channel was with Sing Co and not parted in favor of the Taxpayer. Thus, when the Taxpayer itself did not have ownership over the copyright, it could not have transferred such right to any other party. Further, agreement between the Taxpayer and ICo is clear that the Taxpayer has only granted right to distribute sports channel to ICo Relying on the Mumbai Tribunal decision in case of Set India Pvt. Ltd.[2]  and Bombay High Court decision in case of MSM Satellite (Singapore) Pte. Ltd.[3] , Delhi Tribunal held that the Taxpayer has not granted the right to use copyright to ICo but has only granted broadcast reproduction right, which is a commercial right and not a copyright. Accordingly, the distribution fee received by the Taxpayer was not taxable as royalty under the ITL as well as India-Mauritius DTAA.

Thereafter, the Tribunal also analyzed PE issue. In this regard, the Tribunal noted the following factual aspects: 

• Distribution agreement between the Taxpayer and ICo clearly stated that the transaction is on a principal-to-principal basis.
• There is no privity of contract between the Taxpayer with the cable operators or end customers in India. ICo has entered into contracts with cable operators for distribution of the channels in India and only ICo is responsible for breach of contract with cable operators.
• The transaction between the Taxpayer and ICo is limited to conferring of the right to distribute the sports channels in India through cable operators. How ICo does such distribution activity is not the concern of the Taxpayer.

Basis these factors, the Delhi Tribunal concluded that ICo has its independent business and cannot be called as a dependent agent of the Taxpayer. Facts fail to demonstrate that ICo has authority to conclude contract on behalf the Taxpayer. Hence, ICo cannot be said to have dependent agent PE in India.

[1]  [TS-913-ITAT-2022(DEL)]
[2] ITA No.4372/Mum/2004
[3] [2019] 106 taxmann.com 353 (Bombay)