© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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Royalty income is not taxable in India since there is no economic link between the payment of royalties and taxpayer’s permanent establishment in India

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Recently, the Bombay High Court in the case of Set Satellite (Singapore) Pte Ltd (the taxpayer) held that payment for grant of cricket telecast rights by the taxpayer is not taxable in India since there was no economic link between payment and taxpayer’s Permanent Establishment (PE) in India. The liability for the payment was incurred by the taxpayer in connection with its broadcasting operations in Singapore and it has no connection with the marketing activities carried out through its PE in India.

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Royalty income is not taxable in India since there is no economic link between the payment of royalties and taxpayer’s permanent establishment in India

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA Royalty income is not taxable in India since there is no economic link between the payment of royalties and taxpayer’s permanent establishment in India 5 May 2014 B Background Recently, the Bombay High Court (High Court) in the case of Set Satellite (Singapore) Pte Ltd 1 (the taxpayer) held that payment for grant of cricket telecast rights by the taxpayer is not taxable in India since there was no economic link between payment and taxpayer’s Permanent Establishment (PE) in India. The liability for the payment was incurred by the taxpayer in connection with its broadcasting operations in Singapore and it has no connection with the marketing activities carried out through its PE in India. Facts of the case  The taxpayer, a Singapore based company, engaged in the business of acquiring rights in television programmes, motion pictures and sports events and exhibiting the same on its television channels from Singapore. ________________ 1 DIT v. Set Satellite (Singapore) Pte Ltd (ITA No. 1676 of 2011) – Taxsutra.com  During the year under consideration, the taxpayer entered into an agreement with Global Cricket Corporation Private Limited (GCC), a Singapore based company. As per the terms of the agreement, the GCC granted rights to the taxpayer throughout the licence territory. The licence territory as defined in the agreement, inter alia, included Indian territory also.  In terms of the said agreement, the taxpayer made payment to GCC for acquisition of telecast rights without deduction of tax. Facts based on Tribunal’s order2  The Assessing Officer (AO) held that the payments made by the taxpayer to GCC were in ___________ 2 Set Satellite (Singapore) Pte. Ltd. v. ADIT [2010] 132 TTJ 459 (Mum)
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. the nature of 'royalty' as defined in Explanation 2 to Section 9(1)(vi) of Income-tax Act, 1961 (the Act). The AO raised demand under Section 201(1)/201(1A) of the Act for non-deduction of tax.  The Commissioner of Income-tax (Appeals) [CIT(A)] held that since there was no direct nexus with the activities of the PE of the taxpayer in India, the payment to GCC cannot be said to arise in India under Article 12(7) 3 of the India-Singapore tax treaty (tax treaty). Even if one assumed that the payment was in the nature of royalty, such a royalty does not arise in India having regard to the provisions of Article 12(7) of the treaty. Therefore, the payment for live feed rights does not constitute royalty.  The Income-tax Appellate Tribunal (the Tribunal) upheld the CIT(A)’s order. The Tribunal held that in addition to the existence of PE, for royalties to arise in India under Article 12(7) of the tax treaty, it is essential that liability to pay such royalties has been ‘incurred in connection with’ and is ‘borne by’ the PE of the payer in India. Since the payment was not in the nature of royalty, the taxpayer was not liable to deduct tax. High Court’s ruling  The liability for the payment was incurred by the taxpayer in connection with its broadcasting operations in Singapore and it has no connection with the marketing activities carried out through its PE in India.  There was no economic link between the payments made by the taxpayer. Even with regard to the PE of the taxpayer in India, the Tribunal's finding of fact is that the economic link is entirely with the taxpayer's head office in Singapore. Therefore, the payment to GCC cannot be said to have been incurred in connection with the taxpayer's PE in India.  The economic link has been traced from the nature of the agreement between the payer and the Singapore party. The liability to pay royalty has not been borne by the PE of the taxpayer in India.  The High Court affirmed the findings of the Tribunal and held that such issue cannot raise any substantial question of law. _______________ 3 Royalties and fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority, a statutory body or a resident of that State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.  Once it does not raise any substantial question of law, then, the appeal was liable to be dismissed. It was also dismissed because the view taken by the Tribunal in the given facts and circumstances cannot be said to be perverse or based on no material. Our comments The High Court in this decision inspite of having taxpayer’s PE in India, held that there was no economic link exists for the payments made by the taxpayer. Therefore, it has been held that the payment to Singapore Company cannot be said to have been incurred in connection with the taxpayer's PE in India. The High Court ruling lays down an important principle that royalty paid by a non-resident would be deemed to arise in India if it is ‘in connection’ with the PE of such non-resident in India and it is ‘borne by’ such PE. On the different note the Mumbai Tribunal in the case of Neo Sports Broadcasting Private Limited 4 held that mere act of allowing the taxpayer by foreign company to broadcast live matches for a defined consideration would not constitute a business connection in India. If the non-resident only allows resident to exploit certain right on commercial basis, it cannot be said that the non-resident has carried out any business activity in India. _______________ 4 ADIT v. Neo Sports Broadcasting Private Limited [2011] 133 ITD 468 (Mum)
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Unit No. 603 – 604, 6th Floor, Tower – 1, Godrej Waterside, Sector – V, Salt Lake, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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