In ITA NO. 948/MUM/2023 -ITAT- ITAT (Mumbai) rules distribution revenue of Fox International Channels (US) Inc. not taxable as ‘royalty’ in India
Members S. Rifaur Rahman (Accountant) & Rahul Chaudhary (Judicial) [25-08-2023]

Read Order: Fox International Channels (US) Inc v. DCIT (Intl. Taxation)

Chahat Varma

New Delhi, October 4, 2023: The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has delivered a favourable verdict for Fox International Channels (US) Inc. (FIC), in a case pertaining to the taxation of distribution revenue in India. The Tribunal ruled that the distribution revenue earned by FIC did not qualify as royalty income under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).

The case revolved around the contention that the Dispute Resolution Panel (DRP) and the Assessing Officer (AO) had erred in classifying FIC's distribution revenues as royalty income, subject to taxation in India.

Briefly stated, FIC (assessee), a non-resident foreign company based in the United States, operates in the media industry, primarily broadcasting its channels across various countries, including the Indian subcontinent. FIC is eligible for the benefits of the India-USA DTAA. The company's Indian revenues are derived from two main sources: advertising and distribution. During the assessment proceedings, the AO noted that FIC had entered into a distribution representation agreement with NGC Network (India) Private Limited, appointing them as FIC's exclusive agent for distributing channels to subscribers in India, Nepal, and Bhutan. Subsequently, NGC India entered into separate agreements with Star India Pvt. Ltd. for channel distribution. The AO concluded that the transactions with Star India amounted to license fee payments and fell under the definition of royalty income as per Indian tax laws and Article 12 of the India-USA DTAA. Consequently, he treated the distribution receipts of INR 43,73,44,337 as royalty income and taxed it at a rate of 15% with applicable surcharges and education cess under Section 115A of the Income Tax Act. Challenging the AO's order, FIC filed objections before the DRP. The DRP upheld the additions made by the AO but directed the exclusion of distribution revenue received from Sri Lanka and Bangladesh since it was received outside India.

The two-member bench of S. Rifaur Rahman (Accountant) and Rahul Chaudhary (Judicial) referred to CIT v. MSM Satellite (Singapore) Pte. Lte. [LQ/BomHC/2019/1121], wherein the Bombay High had held that payments made by a cable operator to a foreign broadcaster for the right to distribute its channels in India were not royalty payments, but rather business income. The court reasoned that the cable operator was not using or exploiting any copyright of the broadcaster, but was simply retransmitting the broadcaster's signals to its customers. The court had also held that the payments were not covered by the definition of royalty in the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Court reasoned that the payments were not for the use of any copyright or industrial, commercial, or scientific equipment.

The bench also cited the case of ESS Distribution (Mauritius) SNC et Compagnie v. DDIT (International Taxation) [LQ/ITAT/2022/6964], wherein the Co-ordinate bench had observed that subscription/distribution revenue received by the assessee from ESPN India towards grant of distribution right would not amount to royalty as defined under Article 12 of the India-Mauritius Tax Treaty. The ITAT had reasoned that the assessee had not been conferred with any rights whatsoever with regard to copyright, title, or any other proprietary or ownership interest in the ESPN service. The assessee had merely been granted the right to distribute the ESPN service in India through sub-distributors/cable operators. The assessee was not allowed to alter, edit, dub, or otherwise modify the ESPN service. It was further held that on a conjoint reading of section 14 and 37 of the Copyright Act, a holistic view can be taken that broadcast reproduction right is distinct and separate from Copyright Act.

Consequently, the bench concluded that broadcasting reproduction rights were distinct from copyright under the Copyright Act.

Therefore, the Tribunal upheld the grounds raised by FIC, emphasizing that the distribution revenue should not be considered royalty income.