1 December 2014 EY Tax Alert Delhi HC rules payment towards live telecast is not royalty Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This tax alert summarizes the recent ruling of the Delhi High Court (HC) in the case of Delhi Race Club 1 (Taxpayer) wherein the issue was whether payment for live telecast of horse races is covered within the purview of royalty as defined under the provisions of the Income Tax Law (ITL). The HC, after considering the provisions of the ITL and the Indian Copyright Law (ICL) ruled that payments for live telecast would not fall within the ambit of copyright for the reason that ICL has treated copyright and broadcasting right as distinct and separate rights, and copyright does not subsist within the ambit of broadcast. As the royalty definition under the ITL captures payments in the nature of copyright per se, and since no copyright subsists in live telecast, the payment thereof should not be taxable as royalty. 1 TS-713-HC-2014(DEL)
Background and facts The Taxpayer, an Indian entity, was engaged in the business of conducting horse races, and derived income from betting, commission, entry fee etc. The Taxpayer was also engaged in live telecast, at its premises, of horse races conducted by other clubs where anyone can bet on such races conducted by other clubs. The Taxpayer charged commission from persons who put bets on live telecast. The Taxpayer made payments to various third parties so as to enable live telecast of horse races across various centres in Delhi and did not withhold any taxes while making payment for live telecast to clubs etc. Under the ITL, any payment made by a resident in respect of royalty attracts withholding tax obligation on the payer. The ITL defines royalty in an exhaustive manner, and particularly includes payments for transfer of all or any rights in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television/ radio broadcasting. The term copyright has not been defined under the ITL, and the meaning thereof is drawn from the ICL, wherein copyright specifically includes rights in respect of literary, dramatic, musical, artistic work. Further, the ICL separately defines the term broadcasting to mean communication to the public by means of wireless diffusion and includes a rebroadcast. Thus, the terms, copyright, and broadcasting have been defined, and used distinctly under the ICL. The Tax Authority observed that the definition of royalty under the ITL is not restricted to copyright per se, for the reason that the terms copyright, literary, and artistic, have been separated by commas. Further, the disjunctive or is used after aforesaid terms, and before the term, scientific work. This indicates that the intention was to expand the royalty provision under the ITL beyond the term copyright as understood under the ICL. Thus, for tax purposes royalty includes transfer of all or any of the following rights: Any copyright irrespective of whether it relates to, i.e., literary, artistic, dramatic, and musical work; Any literary and artistic work irrespective of whether copyright subsists or not; Any scientific work including films and video tapes in respect of television/ radio broadcasting. Further, live telecast of an event is the outcome of scientific work which made the telecast possible at a distant place over television and thus, the payment for live telecast qualifies scientific work and hence royalty. As the Taxpayer failed to withhold tax, the deduction claimed thereof was disallowed. The First Appellate Authority accepted the Tax Authority s position on royalty. However, the Second Appellate Authority (viz. ITAT), following an earlier decision in Neo Sports Broadcast (P) Ltd 2 held that live telecast should not qualify as copyright, and therefore, falls outside the ambit of royalty. Aggrieved, the Tax Authority appealed before the HC. Before the HC, the Taxpayer contended that the payment for live telecast falls outside the ambit of royalty for the reason that right to broadcast is a special right, distinct and different from copyright. Further, in broadcast, except for labor, skill and capital, there is no underlying creativity. A sports event is a performance and not a work, and is not copyrightable. Reliance was placed on the proposed Direct Taxes Code Bill, 2010 (DTC) which specifically included copyright as well as live telecast within the fold of royalty. This clearly indicated that the present definition of royalty under the ITL does not include payments for live telecast. 2 [133 ITD 468]
HC s ruling A perusal of the definition of royalty under the ITL includes consideration for transfer of all or any rights in respect of copyright. The term copyright is followed by the words, literary, artistic, or scientific work. There is no dispute that copyright exists in literary and artistic work. As per the ICL, copyright also exists in other works like dramatic, musical work etc. If the intention was to include works like dramatic, musical etc., the said terms would have been specifically included in the ITL or the ITL would not have qualified the word, copyright, with the words, literary, and artistic since the said term encompasses in itself all the categories of work. Accordingly, it is appropriate to read the term in after the term copyright in the ITL. Therefore, the definition of royalty under the ITL encompasses transfer of all or any rights in respect of any copyright in literary, artistic, or scientific work. The term in is included only to make the definition of royalty workable and not to render the same meaningless. The issue which arises for consideration is whether payment for live telecast is included within the ambit of copyright under the ICL? Live television coverage of any event is a communication of visual images to the public and accordingly, falls within the definition of the word broadcast under the ICL and as per the ICL, copyright does not subsist within the ambit of broadcast. because both the terms have been defined in distinct manner. It is not the case where payment is made for rebroadcast (which is specifically included within the meaning of broadcast under the ICL). Reliance is placed on the decision in the case of ESPN Star Sports 3 wherein the HC, after analyzing the provisions of the ICL held 3 2012 2 RAF 430 (Delhi), that copyright, and broadcasting rights are distinct and separate rights. Reliance was also placed on certain foreign court rulings 4 in the case of wherein it was observed that a sports event is a performance and not a work and is therefore, not copyrightable. Accordingly, payment for live telecast/ broadcast would have no copyright, and therefore, falls outside the definition of royalty under the ITL. Comments This is a welcome ruling where the Delhi HC has distinguished between broadcasting of live matches and copyright, after considering the provisions under the ICL and ruled that no tax is required to be withheld under the ITL on such payments. Unless the broadcasting of live matches are recorded or stored after completion of live broadcast, it will not get covered under the term copyright as per the ICL. This decision lays down the distinction between copyright and broadcasting right. The HC, basis the ICL, makes an attempt in making a distinction between copyright to broadcasting right. In case of live telecast, the HC has ruled that in the absence of copyright involved therein, the payment does not fall within the ambit of royalty, for the reason that royalty captures payment for transfer of all or any rights in the copyright. It is pertinent to note that DTC specifically includes the live telecast of any event within the definition of 4 National Basket Ball Association and NBA Properties NIC v. Motorola INC 105 F3d 841 (1997)
royalty. However, taxpayers would be able to avail the beneficial provisions of respective tax treaties as most of them define royalty as a consideration for use or right to use copyright. As ruled by the HC, as the payment for live feed does not envisage any copyright, the payment should accordingly, fall outside the provision of royalty under the tax treaty.
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