Taxation of Foreign Telecasting & Hollywood Companies - Vishal Gada WIRC-ICAI, February 26, 2010 1
Foreign Telecasting Companies 2
Overview of Telecasting Co s operations Operations of Telecasting Co. include: acquisition of content sale of airtime to advertisers distribution of channel Principal streams of revenue advertising & subscription revenues Major items of Expenditure Content acquisition / production & Transponder / uplinking charges 3
Direct Tax Issues Issue 1 Taxability of Advertising Revenues Agency PE? Issue 2 - Taxability of Subscription Revenues Issue 3 Taxability of consideration for Live Feed Issue 4 Payments towards acquiring programs Issue 5 Taxability of Transponder charges 4
Issue 1 - Taxability of advertising revenues FTC has appointed ICo as an agent for marketing of advertisement ICo secures orders, enters into negotiations and concludes contracts with advertisers This is in line with the Downlinking Policy in India ICo collects ad revenues & remits it to FTC, net off commission ICo also exports content to FTC on a Principal-to-Principal basis ICo also acts as an agent for another telecasting company 5
Taxability of advertising revenues Expenditure Purchase of content Other general and administration expenses Net Profit Profit and Loss Account Rs. (in million) 900 150 50 1100 Income Commission income from FTC Ltd. Commission income from other telecasting companies Income from export of content to FTC Rs. (in million) 80 20 1000 1100 Whether I Co s activities would result in an Agency PE for FTC? 6
Issue 2 - Taxability of subscription revenues FTC has granted distribution rights for the channel to another affiliate ICo 1 ICo 1 distributes the channels to the MSOs and Cable operators, who in turn distribute it to viewers The encrypted signal uplinked by FTC is decrypted by MSOs / cable operators using decoders provided by ICo 1 As a consideration for distribution rights, the MSOs / cable operators pay subscription fees to ICo1 In turn, ICo 1 pays certain percentage of the subscription revenues to FTC Whether payment by ICo 1 could amount to Royalty in the hands of FTC? 7
Taxability of subscription revenues Earth station Cable operators 8
Taxability of subscription revenues Definition of royalty Provisions of Copyright Act Section 14 r.w.s 2(f) dealing with Copyright Section 37 r.w.s 2(dd) dealing with Broadcasting Rights Section 38 dealing with Performers Right Section 39A 9
Issue 3 - Taxability of consideration for Live Feed Foreign Telecasting Company Ltd. ( FTC ) Singapore based Company - has acquired exclusive right to telecast live matches of the Cricket League from the Singapore Company The right is acquired for 10 years to telecast the matches in India Whether payment by FTC towards Live Feed would amount to Royalty in the hands of Association? 10
Taxability of consideration for Live Feed Live feed Live Feed Stadium Cable operators Earth station of FTC Ltd. 11
Taxability of consideration for Live Feed Definition of royalty u/s 9(1)(vi) of the IT Act Whether payment towards transfer of any rights in respect of a patent, invention, model, design, secret formula, process or trademark or similar property? Whether payment towards consideration for transfer of any rights in respect of copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films? 12
Taxability of consideration for Live Feed Whether copyright to be understood in terms of copyright laws of India or Singapore? Provisions of Copyright Act, 1957 Section 14 defines copyright as the exclusive right to do or authorize the doing of specified acts in respect of a work Section 13 provides that copyright shall subsist in a work The term work is defined in Section 2(y) to mean: A literary, dramatic, musical or artistic work; A cinematograph film; or A sound recording 13
Issue 4 - Payment towards acquiring programs Outright Acquisition FTC Telecasts programs Own Production AND/OR Prepared By Content Provider Development as per directions of FTC Transfer of right for lump-sum consideration OR License arrangement License of specific rights Broadcast particular program for specified territory/period Lump-sum license fee or revenue sharing basis 14
General Industry Practice License Arrangement Consideration Non-resident (Owner / Licensor of content rights) Acquirer/user of content rights for exploitation in India License / sub-license for: Limited period Limited runs Limited geographical territory Exclusive Non-exclusive 15
License Arrangement - Direct Tax Implications Non-resident (Owner/Licensor of content rights) Acquirer/user of content rights for exploitation in India Royalty income Higher tax cost in absence of PAN Withholding tax obligations License / sub license of content rights regarded as Royalty attracting income-tax @ 10.5% Tax cost to the acquirer/user of rights @ 11.8% under net of tax arrangements In case the non resident does not have Permanent Account Number ( PAN ): Higher withholding @ 20% Higher tax cost on acquirer @ 25% under net of tax arrangements Structuring option Assignment of Rights 16
Payment for acquisition of rights by NR to NR whether arises in India? Taxability under the Act Royalty under section 9(1)(vi)(c) If utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India Taxability under the Tax Treaty Set Singapore Ruling (Mumbai Tribunal) May vary depending on the wordings of the Treaty 17
Payment for acquisition of rights by NR to NR whether arises in India? SET Singapore Ruling (Mumbai Tribunal) Set Satellite Singapore PE Right Payment Singapore India Global Cricket Corporation Facts GCC, a Singapore tax resident, granted SET Singapore rights to broadcast cricket matches in licensed territories, which included India Revenue Authorities held that payment by SET to GCC is Royalty, which arises in India and is hence, taxable in India Under the Singapore Tax treaty, royalties are deemed to arise in the country where the payer is resident. However, if the payer, whether a resident of Singapore or not, has h in India a PE in connection with which the liability to pay the royalties was incurred, and such royalties are borne by the PE,, then royalties shall be deemed to arise in India, i.e., where the PE is situated. 18
Payment for acquisition of rights by NR to NR whether arises in India? SET Singapore Ruling (Mumbai Tribunal) Royalties do not arise in India since the payer is not resident in India. For royalties to arise in India, an existence of an economic link between the liability for payment of royalties and PE is necessary. In the present case, the economic link is entirely with the payer s s head office in Singapore and therefore the payments are not incurred in connection with the payer s s PE in India. The PE in India was not involved with acquisition of broadcast rights, nor did the PE bear the cost of payments to GCC. The payer has also not recovered any amount from its PE and therefore the payments to GCC cannot be said to have been borne by the payer s s PE in India. The Tribunal held that the payer was not liable to withhold tax on the payments to GCC. 19
Payment towards acquiring programs Deductibility Outright Acquisition Practically, Telecasting companies treat it as revenue expenditure to be amortized over the period based on revenue generation potential of rights Conservative view - Can be classified as Intangible Assets covers payments for acquiring patents, copyrights etc. u/s 32 of the IT Act Eligible for depreciation allowance @25% - rate as per Rules 20
Payment towards acquiring programs Deductibility License Arrangement Is the expenditure capital or revenue? as rights are acquired for more than one year Revenue No benefit of enduring nature is derived; or If not revenue expenditure in the year in which it is incurred, then amortized over the period of license 21
Issue 5 - Taxability of Transponder charges Outer Space Satellite Transponder Signals downlinked by MSO / CO Transponder hire charges Uplinking of signal Broadcasting Co. Content, etc Uplinking hub 22
Taxability of Transponder / uplinking charges Whether satellite in geostationary orbit would constitute PE of Satellite Operator - fixed place PE? Whether payment is in the nature of Royalty or FTS? 23
Whether Satellite Operator has a PE? Asia Satellite Telecommunications Co. Ltd. (85 ITD 478) (Delhi Tribunal) Operator has a Business Connection in India Not taxable - No operations can be said to be carried out in India OECD Commentary 2010 paragraph 5.5 Cannot be considered to be part of the territory of the Contracting State Satellite s footprint cannot be considered to be at the disposal of the Operator India s position on OECD Commentary Source State contributes customer base and infrastructure for reception of telecast Footprint has a fixed location, value and can be used for commercial purposes Operator has a fixed place in the space in the jurisdiction of a source country 24
Whether payment is in the nature of Royalty or FTS? Definition of Royalty under IT Act Definition of FTS under IT Act OECD Commentary 2010 and India s position Whether such Royalty / FTS arises in India? If payment made by resident of India: Prima facie, Royalty / FTS would arise in India, except where it is payable in respect of property/ services utilised for the purpose of: Carrying on business outside India; or Earning any income from any source outside India If payment by non-resident: Royalty / FTS would arise in India if property/services are used by customer for : Carrying on business in India; or Earning income from any source in India 25
Key Judicial precedents Raj Television Network Ltd [ITA No 1827 & 1828(Mds)/1998 And ITA No 1503 (Mds)/99 & 200 (Mds)/2001] (Chennai Tribunal) Tax Years 1995-96 & 1996-97 Asia Satellite Telecommunications Co. Ltd. (85 ITD 478) (Delhi Tribunal) Tax Year 96-97 PanAmSat International Systems Inc (103 TTJ 861) (Delhi Tribunal) Sanskar Info TV Pvt. Ltd (2008-TIOL-305) (Mumbai Tribunal) ISRO Satellite Centre (2008-TIOL-17) (Authority for Advance Rulings) New Skies Satellites NV (2009-TIOL-641) (Delhi ITAT Special Bench) Recent Decision of the Delhi HC in the case of Asia Sat 26
Foreign Hollywood Companies 27
Business Model Hollywood companies produce films outside India and distribute them throughout the world, including India Generally, distribution through Indian branches, which constitutes a PE in India Grant exhibition / distribution rights for lump sum consideration or royalty based on ticket sales 28
Taxation aspects Erstwhile CBDT Agreement with MPA Warner Bros (FE) Inc. (282 ITR 90) Profit Attribution to a PE? Deductibility of expenditure HO deemed Royalty? Direct IPR licensing model Exclusion u/s 9(1)(vi) for consideration for the sale, distribution or exhibition of cinematographic firms 29
Thank You 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 endeavor 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. 2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 30