Facts
B4U International Holdings Ltd. („taxpayer‟), a non-resident company, made payment to PanAmsat Limited, US for hire of transponder. The tax officer held that the payment of hire charges was in the nature of royalty and hence the taxpayer ought to have deducted tax at source. As the taxpayer failed to deduct tax at source, the amount was disallowed by the tax officer.
Similarly, the taxpayer also made payment to LMB (Mauritius) Ltd., a Mauritius based company, for obtaining broadcasting rights of films and music. These payments were also disallowed by the tax officer as tax was not deducted at source by the taxpayer.
On appeal, the Commissioner of Income-tax (Appeals) decided the matter against the taxpayer.
Issues before the Tribunal
Whether the payments for hiring charges for transponder and for obtaining the broadcasting rights were liable for disallowance on the ground that tax had not been deducted at source?
Observations and Ruling of the Tribunal
Hire charges for trasnponder
The payment for hiring of transponder cannot be regarded as royalty as held by the Delhi and Madras High Courts1.Facts
B4U International Holdings Ltd. („taxpayer‟), a non-resident company, made payment to PanAmsat Limited, US for hire of transponder. The tax officer held that the payment of hire charges was in the nature of royalty and hence the taxpayer ought to have deducted tax at source. As the taxpayer failed to deduct tax at source, the amount was disallowed by the tax officer.
Similarly, the taxpayer also made payment to LMB (Mauritius) Ltd., a Mauritius based company, for obtaining broadcasting rights of films and music. These payments were also disallowed by the tax officer as tax was not deducted at source by the taxpayer.
On appeal, the Commissioner of Income-tax (Appeals) decided the matter against the taxpayer.
Issues before the Tribunal
Whether the payments for hiring charges for transponder and for obtaining the broadcasting rights were liable for disallowance on the ground that tax had not been deducted at source?
Observations and Ruling of the Tribunal
Hire charges for trasnponder
The payment for hiring of transponder cannot be regarded as royalty as held by the Delhi and Madras High Courts1.
Mere rendering of service cannot be considered as „making available‟ technical services2; the payer must be enabled to perform services himself. Thus, the payments cannot be regarded as fees for technical services.
The Department‟s argument that the amendment by the Finance Act, 20123 changes the position of taxability will have no impact on the decision as there was no change in the tax treaty between India and the US.
Even otherwise, as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, provisions of deducting tax at source will not apply as held by the Supreme Court4.
The disallowance also cannot be made in view of the non-discrimination clause under the India-US tax treaty.
Payment for broadcasting rights
A sale of a programme (as contended by the taxpayer) or a payment for grant of broadcasting right (as contended by the Department) has to be judged based on the agreement between the parties. Perusal of the agreement demonstrates that LMB (Mauritius) Ltd. is the „seller‟ and the taxpayer is the „buyer‟.
The Supreme Court has held that telecasting rights fell in the category of articles of trade and commerce and hence within category of „merchandise‟ and the transfer of the said rights by way of lease fell within the meaning of „sale‟5.
The payments are towards sale of programmes and hence do not attract deduction of tax at source.
Further, it was a payment by a non-resident to another non-resident and in view of the non-discrimination clause, the payments cannot be disallowed.
Conclusion
The key takeaway from the decision of the Mumbai Tribunal is that the retrospective amendment made by the Finance Act, 2012 in the definition of royalties, which inter alia states that software payments will be regarded as royalties, may not be impacted on account of the provisions of the relevant tax treaty.
On a related note, the Tribunal has not referred to another retrospective amendment made by the Finance Act, 2012 which clarifies that tax is required to be deducted at source on payments by one non-resident to another.
Source: B4U International Holdings Ltd.v. DCIT (I.T.A.No. 3326/Mum/2006)(Mumabi Tribunal)dated 28th May 2012
B4U International Holdings Ltd. („taxpayer‟), a non-resident company, made payment to PanAmsat Limited, US for hire of transponder. The tax officer held that the payment of hire charges was in the nature of royalty and hence the taxpayer ought to have deducted tax at source. As the taxpayer failed to deduct tax at source, the amount was disallowed by the tax officer.
Similarly, the taxpayer also made payment to LMB (Mauritius) Ltd., a Mauritius based company, for obtaining broadcasting rights of films and music. These payments were also disallowed by the tax officer as tax was not deducted at source by the taxpayer.
On appeal, the Commissioner of Income-tax (Appeals) decided the matter against the taxpayer.
Issues before the Tribunal
Whether the payments for hiring charges for transponder and for obtaining the broadcasting rights were liable for disallowance on the ground that tax had not been deducted at source?
Observations and Ruling of the Tribunal
Hire charges for trasnponder
The payment for hiring of transponder cannot be regarded as royalty as held by the Delhi and Madras High Courts1.Facts
B4U International Holdings Ltd. („taxpayer‟), a non-resident company, made payment to PanAmsat Limited, US for hire of transponder. The tax officer held that the payment of hire charges was in the nature of royalty and hence the taxpayer ought to have deducted tax at source. As the taxpayer failed to deduct tax at source, the amount was disallowed by the tax officer.
Similarly, the taxpayer also made payment to LMB (Mauritius) Ltd., a Mauritius based company, for obtaining broadcasting rights of films and music. These payments were also disallowed by the tax officer as tax was not deducted at source by the taxpayer.
On appeal, the Commissioner of Income-tax (Appeals) decided the matter against the taxpayer.
Issues before the Tribunal
Whether the payments for hiring charges for transponder and for obtaining the broadcasting rights were liable for disallowance on the ground that tax had not been deducted at source?
Observations and Ruling of the Tribunal
Hire charges for trasnponder
The payment for hiring of transponder cannot be regarded as royalty as held by the Delhi and Madras High Courts1.
Mere rendering of service cannot be considered as „making available‟ technical services2; the payer must be enabled to perform services himself. Thus, the payments cannot be regarded as fees for technical services.
The Department‟s argument that the amendment by the Finance Act, 20123 changes the position of taxability will have no impact on the decision as there was no change in the tax treaty between India and the US.
Even otherwise, as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, provisions of deducting tax at source will not apply as held by the Supreme Court4.
The disallowance also cannot be made in view of the non-discrimination clause under the India-US tax treaty.
Payment for broadcasting rights
A sale of a programme (as contended by the taxpayer) or a payment for grant of broadcasting right (as contended by the Department) has to be judged based on the agreement between the parties. Perusal of the agreement demonstrates that LMB (Mauritius) Ltd. is the „seller‟ and the taxpayer is the „buyer‟.
The Supreme Court has held that telecasting rights fell in the category of articles of trade and commerce and hence within category of „merchandise‟ and the transfer of the said rights by way of lease fell within the meaning of „sale‟5.
The payments are towards sale of programmes and hence do not attract deduction of tax at source.
Further, it was a payment by a non-resident to another non-resident and in view of the non-discrimination clause, the payments cannot be disallowed.
Conclusion
The key takeaway from the decision of the Mumbai Tribunal is that the retrospective amendment made by the Finance Act, 2012 in the definition of royalties, which inter alia states that software payments will be regarded as royalties, may not be impacted on account of the provisions of the relevant tax treaty.
On a related note, the Tribunal has not referred to another retrospective amendment made by the Finance Act, 2012 which clarifies that tax is required to be deducted at source on payments by one non-resident to another.
Source: B4U International Holdings Ltd.v. DCIT (I.T.A.No. 3326/Mum/2006)(Mumabi Tribunal)dated 28th May 2012
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