ITAT Rules Distribution Revenue of Fox International Channels Not Taxable as ‘Royalty’ In India under DTAA

ITAT Rules Distribution Revenue of Fox International Channels Not Taxable as ‘Royalty’ In India under DTAA

Cites the judgment of the Bombay High Court and the tribunal’s own ruling in previous cases

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has delivered a verdict in favor of Fox International Channels US Inc (FIC) on taxation of distribution revenue in India.

The Coram of Rahul Chaudhary (Judicial Member) and S Rifaur Rahman (Accountant Member) ruled that the distribution revenue earned by FIC did not qualify as royalty income under Article 12 of the India-US Double Taxation Avoidance Agreement (DTAA).

The contention of the assessee (FIC) was that the Dispute Resolution Panel (DRP) and the Assessing Officer (AO) erred in classifying its distribution revenues as royalty income and taxed it.

US-based FIC is a non-resident foreign company that operates in the media industry, primarily broadcasting its channels across various countries, including the Indian subcontinent. It is eligible for 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 it as FIC's exclusive agent for distributing channels to subscribers in India, Nepal, and Bhutan. Later, for channel distribution, NGC entered into separate agreements with Star India Pvt. Ltd.

The AO concluded that the FIC’s 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 Rs.43,73,44,337 as royalty income and taxed it at a rate of 15 percent with applicable surcharges and education cess under Section 115A of the Income Tax Act.

The FIC challenged the AO's order, filing objections before the DRP, which upheld the additions but directed the exclusion of distribution revenue received from Sri Lanka and Bangladesh since those were received from outside India.

The tribunal referred to the CIT v. MSM Satellite (Singapore) Pte. Lte 2019 case, wherein the Bombay High Court 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 business income.

The high Court reasoned that the cable operator was not using or exploiting any copyright of the broadcaster; he was simply retransmitting the broadcaster's signals to its customers. The Court added that the payments were not covered by the definition of royalty in the India-Singapore DTAA and were not for the use of any copyright or industrial, commercial, or scientific equipment.

ITAT also cited the ESS Distribution (Mauritius) SNC et Compagnie v. DDIT (International Taxation) case, wherein the co-ordinate bench observed that subscription/distribution revenue received by the assessee from ESPN India towards the grant of distribution right would not amount to royalty as defined under Article 12 of the India-Mauritius DTAA.

The bench had explained that the assessee had not been conferred with any copyright, title rights, or any other proprietary, or ownership interest in the ESPN service. It was merely granted the right to distribute the service in India through sub-distributors/cable operators. The assessee was not allowed to alter, edit, dub, or otherwise modify the service. On a conjoint reading of Sections 14 and 37 of the Copyright Act, a holistic view was taken that broadcast reproduction rights were distinct and separate from the Copyright Act.

The tribunal thus upheld the grounds raised by FIC, emphasizing that the distribution revenue should not be considered royalty income.