IN THE INCOME TAX APPELLATE TRIBUNAL

G-BENCH, MUMBAI

BEFORE DR OK NARAYANAN AND SHRI RAJPAL YADAV

I.T.A. No.5066/Mum/2004

(Assessment year 2000-01)

Satellite Television Asian Region Ltd vs DCIT(International Taxation)-2(1)

C/o Star India Pvt Ltd Mumbai

Star House, 3rd Floor

Off Dr D.E. Moses Road

Mahalaxmi, Mumbai-11

(Appellant)                                                                             (Respondent)

Appellant by : Shri Dinesh Vyas                                     Respondent by : Shri GC Srivastava

O R D E RPer Dr OK Narayanan, AM

This appeal is filed by the assessee. The relevant assessment year is 2000-01. The appeal is

directed against the order of the Commissioner of Income-tax (Appeals)-XXXI at Mumbai passed

on 30th March, 2004 and arises out of the regular assessment completed u/s 143(3) of the Income-

tax Act, 1961. The assessment has been completed by the Deputy Director of Income-tax

(International Taxation)-II(1) at Mumbai.

2. The assessee company, M/s Satellite Television Asian Region Ltd (Hong Kong) (hereinafter

shortly referred to as “Star Ltd”) is a non-resident company incorporated in Hong Kong. The

assessee is a subsidiary company of M/s Star Television Ltd, a company incorporated in British

Virgin Islands.

3. The assessee company is carrying on the business of selling “Air Time” to various Indian

advertisers. The assessee company makes the sale of air time in India through its advertising sales

agent, M/s Star India Pvt Ltd (hereinafter referred to as “SIPL”), a company incorporated in

India. SIPL is marketing the advertisement time in India and collects the advertisement revenues.

The assessee company acquires the air time meant for advertisement from television channel

companies like Star Plus, Star Movies, Star World, Star News, Channel V, etc. These channel

companies are the Television Content Aggregators. The Television Content Aggregators /

channel companies earmark the air time to be allowed to advertisers in India which is sold to the

assessee company, which in turn, sells the air time to Indian advertisers through its selling agent

in India, M/s SIPL. This time slot involved in the above transactions from channel companies to

assessee company to advertising sales agents like SIPL is described as “Ad Airtime”, which

means air time earmarked for advertising. This sales content of air time is hereinafter referred to

as “Ad Airtime”.

4. The assessee company had granted the exclusive right to market, sell and distribute the

channels of the Star TV Network in India to M/s Indian Sky Broadcasting Ltd (ISKYB, for

short), a company incorporated in Hong Kong with its principal place of business in the United

Kingdom. The assessee allowed ISKYB to collect the subscription revenues in respect of the

channels of Star TV Network in its own right. ISKYB did not make nor was required to make any

payment to the assessee as consideration for those rights conferred on ISKYB. ISKYB was free

to carry on the business as per the said rights without the interference of the assessee company.

The said ISKYB, in turn, had executed another agreement with SIPL, granting the latter the right

to distribute the channels through the Cable Distribution System and collect the respective

subscription revenue, in its own right. Here also SIPL did not make nor was required to make any

payment to ISKYB by way of consideration for those rights. The cable subscription revenues

have been offered for taxation by SIPL as its income. At the same time, SIPL did not undertake

any activity in India in respect of the subscription business carried on behalf of ISKYB. The

contention of the assessee is that the agreement between ISKYB and SIPL is on a principal to

principal basis. The above arrangements were made effective from 01-12-1997. The assessee

company had also granted, prior to April 01, 1999, the rights for sale of Ad Airtime in India on

the channels of Star TV Network to M/s Satellite Television Asian Region Advertising sales BV

(SAS BV, for short), a company incorporated in Netherlands. M/s SAS BV also appointed SIPL

as its collecting agent in India in respect of the sale of Ad Airtime. The said agreement between

the assessee and M/s SAS BV expired with effect from 01-04-1999. SAS BV has been offering

its income for taxation on receipt basis in the light of the circular No.742 issued by Central Board

Direct Taxes. Accordingly, the advertisement revenues collected during the previous year

relevant to the assessment year 2000-01 and pertaining to the invoices raised by SAS BV prior to

April 01, 1999 has been offered for taxation in its return of income filed for the assessment year

2000-01.

5. The assessee company, in the above scenario filed its return of income for the impugned

assessment year 2000-01 on 30-03-2001, declaring a total income of Rs.26,25,87,600. The return

was initially processed u/s 143(1) through intimation dated 14-02-2002. Thereafter, the case was

selected for scrutiny assessment and the assessment was completed u/s 143(3) on a total income

of Rs.333,55,67,423. The assessment was completed on 28-03-2003. The assessing officer has

discussed the nature of business carried on by the assessee and the nature of relation of the

assessee with other inter related companies in detail along with a detailed examination of the

functional aspects of the assessee company in India. On the basis of the elaborate discussion, the

assessing officer has made certain additions as well as disallowances whereby he could determine

a taxable income of Rs. 333,55,67,423 as against a returned income of Rs.26,25,87,600.

6. One of the disallowances made by the assessing authority in the course of assessment

proceedings was a sum of Rs.160,40,10,000. This is the amount which was paid by the assessee

company to various channel companies (Television Content Aggregators) towards the cost of Ad

Airtime purchased from them. The assessing officer put a question across the board as to why the

assessee company did not deduct tax at source while making the payment of Rs.160,40,10,000 to

the channel companies by way of cost of Ad Airtime. As the detailed explanation offered by the

assessee company was not acceptable to the assessing authority, he came to a conclusion that the

assessee company was bound to make deduction of tax at source while making the payment of

Rs.160,40,10,000 to the channel companies. As the assessee has failed to do so, the assessing

officer invoked the provisions of section 40(a)(i) of the Act and disallowed the said payment in

computing the taxable income of the assessee company. In other words, the assessing officer

disallowed the said payment and added the same back to the income of the assessee company

under the provisions of section 40(a)(i) of the Act.

7. The text of the relevant law provided in section 40(a)(i), as edited for the purpose of this case,

reads as below:

Amounts not deductible.

40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not

be deducted in computing the income chargeable under the head “Profits and gains of business or

profession”,-

(a) in the case of any assessee-

(i) any interest (not being interest on a loan issued for public subscription before the 1 st day of

April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is

payable -

(A) Outside India; or

(B) In India to a Non Resident, not being a company or to a foreign company,on which tax is

deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction

has not been paid during the previous year, or in the subsequent year before the expiry of the time

prescribed under sub section (1) of section 200:

Provided that where in respect of any such sum tax has been deducted in any subsequent year or

has been deducted in the previous year, but paid in any subsequent year after the expiry of the

time prescribed under sub section (1) of section 200, such sum shall be allowed as a deduction in

computing the income of the previous year in which tax has been paid -------- :

8. In the light of the above provisions of law, the assessing officer concluded that the amount paid

by the assessee company to the channel companies towards the cost of air time purchased by it is

in the nature of “other sum chargeable under this Act”, on which the assessee was bound to

deduct tax at source; and, therefore, made the said disallowance and addition.

9. When the question was put across the table, the assessee company has filed a detailed reply in

a very exhaustive manner upholding its stand that the sum paid by the assessee company to

channel companies against the cost of airtime was not a sum chargeable to tax in India in the

hands of the channel companies and, therefore, the assessee company was under no statutory

obligation to deduct tax at source in the course of making those payments to the channel

companies. The detailed reply filed by the assessee has been substantially reproduced by the

assessing authority in the assessment order from pages 3 to 11. The explanations offered by the

assessee company are summarized below:

(i) The assessee had entered into agreements with various non resident channel companies for the

purchase of airtime on the channels of Star TV Network such as Star Television Entertainment

Ltd, Star Television Industries Ltd, Channel V Music, Channel Television Suppliers Ltd, etc.

Copies of the agreements executed between the assessee and the channel companies were

enclosed along with earlier submissions.

(ii) The obligation of the assessee u/s 195 of the Income-tax Act is dependent on whether the

recipient channel companies are liable to tax in India in respect of the payments received against

the cost of Ad Airtime procured by the assessee company. The liability to tax in India would arise

only when the income earned by the channel company is taxable in India. The proposition that the

income of channel companies is liable to tax in India is against the facts and law of the case for

the following reasons:

(a) The agreement between the assessee and channel companies were signed and executed outside

India. Accordingly the situs of the contracts for the purchase and sale of air time lie outside India.

As a result, the right to receive the payments and the right to enforce the performance of the

contract lie outside India;

(b) Under the Agreement with the channel companies, the assessee has purchased outright, the

world wide air time available on the channels of the Star TV Network and as a result of which

and in pursuance of the agreements, all the rights to the airtime have been transferred to the

assessee;

(c) Therefore, the transaction between the assessee and the channel companies can be compared

to an off-shore sale of goods by a non resident vendor to a non resident buyer.

(iii) The important parameters of the agreements are that the agreements of sale are executed

outside India, the title in the goods (air time) is transferred outside India, the consideration for

sale of goods, i.e. air time is received outside India, and he transaction is on a principal to

principal basis.

(iv) Section 5(2) of the Income-tax Act, 1961 enumerates the situations under which the income

of a non resident is taxable in India. Those situations or circumstances are such that the total

income of any previous year of a person, who is a non resident includes all income from whatever

source derived which is received or is deemed to be received in India in such year by or on behalf

of such person; or accrues or arises or is deemed to accrue or arise to him in India during such

year and, therefore, the question of taxability of the channel companies has to be considered in

the light of the criteria laid out in section 5(2) of the Income-tax Act, 1961.

(v) Section 9 of the Income-tax act, 1961 lays down the circumstances in which income can be

said to be deemed to accrue or arise in India. These circumstances are such that all income

accruing or arising, whether directly or indirectly through or from a business connection in India

or through or from any property in India or through or from any asset or source of income in

India or through the transfer of a capital asset situated in India.

(vi) The channel companies did not receive or deemed to receive in India any income so that

clause (a) of section 5(2) is not attracted.

(vii) The assessee did not have any business connection in India or any property in India or any

asset in India or any source of income in India and, therefore, the provisions of section 9(1) also

not attracted so as to implicate the channel companies under clause (b) of section 5(2).

10. Based on a series of judical pronouncements and circulars issued by the CBDT, the assessee

company submitted before the assessing authority, in short, its defence in the following manner:

(a) The revenues are not received in India;

(b) The revenues are not deemed to be received in India;

(c) The revenues did not accrue or arise in India;

(d) The revenues did not deem to accrue or arise in India.

11. The assessee submitted before the assessing authority that as the payments made by the

assessee, to the channel companies for purchase of air time are not chargeable to tax in India, the

assessee was not liable to withhold tax from the payments. Therefore, it was contended before the

assessing authority that the proposal to invoke the provisions of section 40(a)(i) was not called

for.

12. The detailed submissions and explanations offered by the assessee were in turn exhaustively

considered by the assessing authority in pages 12 to 44 of the assessment order. The assessing

office has gone through every agreement entered into by the assessee company with various

cannel companies individually and has considered the common features of those agreements. On

going through the details of various companies involved in this case and coming under the Star

TV Network, the assessing officer found that the directors of all the companies are common. He

also noticed that the relevant clauses of all the agreements are similar and analogous. On the basis

of the said detailed examination of the agreements, the assessing officer came to the following

findings:

(a) The channel companies own and operate satellite television channels featuring various

programmes, data and content. They are the Television Content Aggregators.

(b) Channel companies agreed to sell companies like assessee, the world wide advertising air time

of the channels on the terms and conditions set out in respective agreements.

(c) The substance of the agreements, “Ad Air Time” means the advertising time and programmes

sponsorship available on each of the channels through out the territory, which shall be upto a

maximum available time of 10 minutes per hour per channel.

(d) Channel companies sell to companies like assessee and companies like assessee agrees to

purchase the Ad Air Time on the terms and conditions set out in the agreements.

(e) The conditions of the sale, in general, are such that the sale company like assessee would meet

the requirements of all local laws, policies; regulations and respect the local custom standards and

practices, no false claim would be telecast or advertised, no illegal or unlawful activity would be

advertised, etc.

(f) The payments due to the channel companies shall be paid by the sales company like assessee

on the basis of a Minimum Guarantee Amount payable in 12 equal instalments, one month being

in arrears.

(g) The sales company like assessee did not acquire any right or interest whatever in the channel

companies privileges only for the reason of their acquisition of Ad Air Time from the channel

companies and the sales companies, like assessee shall not promote their own commercial interest

through the Ad Air Time except in such manner as provided and agreed upon between the parties.

(h) Channel companies and sales companies like assessee jointly will indemnify defend and hold

the other, harmless from any claims, costs, liabilities, judgments, expenses or damages arising out

of any breach of the agreement.

(i) The rights and privileges assigned to a party by virtue of the agreements, shall not be assigned

or transferred to anybody without the approval of the other party except for the freedom of the

sales companies, like assessee to appoint their own agents in respective countries for the direct

sale of Ad Air Time to advertisers, which is, of course, subject to the approval of the channel

companies.

13. The assessing officer has come to the following conclusions as a result of examination of the

situations explained in above paragraphs; such as -

(a) That the sale of Ad Airtime is subject to various conditions including the condition of

additional payment where the advertisement revenue increases more than 80% of the threshold

limit;

(b) That the channel companies being registered in Hong Kong and India not having a double

taxation agreement with Hong Kong, the liability of channel companies to be taxed needs to be

examined as per the provisions of Indian Income Tax Act.

(c) That the channel companies accrue or arise or deem to accrue or arise income in India as a

result of the activities carried on by them in India through the medium of agreements entered into

between the assessee company and, therefore, the argument of the assessee that the agreements

being executed and enforceable outside India does not take away the channel companies from the

ambit of taxation.

(d) That the contention of the assessee that there is outright purchase of Ad Air Time is not

correct for the reason that the agreements provided for Minimum Guarantee Amount to channel

companies and a further provision of sharing of additional revenue generated in India by way of

advertisements, which means the channel companies have a definite commercial interest in the

Ad Airtime managed by the assessee company in India even after the so-called outright sale of

the Ad Airtime.

(e) That the assessee does not have sole discretion in determining matters relating to the

advertising programmes, revenue and such other things which are subject to the approval of the

channel companies.

(f) That the Ad Airtime cannot be termed as a commodity as it is an intangible right which cannot

be transferred by way of delivery and, therefore, the arguments of the assessee attributable to the

physical features of a commodity to be sold or purchased did not apply to the present case.

(g) That though the assessee has contended that the agreements between the assessee and the

channel companies are on the basis of principal to principal, all companies are coming under

same management and all the operations are coordinated in Hong Kong and all these companies

are not functionally working independently and, therefore, the transactions should not be treated

as entered into on principal to principal basis.

(h) That the assessee’s claim that the consideration for Ad Airtime was received outside India is

not relevant in determining the taxability of channel companies in India.

(i) That the Ad Airtime is a time slot in between the programmes wherein the advertisements are

relayed by the channel companies and the programmes managed by the channel companies are

beamed into India and the telecast is also made in India and the predominant area in the footprint

of the satellite is India and, therefore, it is to be held that the channel companies are undertaking

business activities in India.

(j) That the above activities carried out by the channel companies in India provide for their

income which is essentially income earned out of India.

(k) That it is not necessary that the profit or gain should directly flow from the business

connection, but it is deemed to be the income of an assessee who may well be a non resident even

if it is arising indirectly through the business connection in the taxable territories of India.

14. The Assessing Authority finally concluded, therefore, that the payments made by the assessee

company to channel companies would be covered by the provisions of law contained in section

40(a)(i) of the Act and, therefore, the payment of Rs.160,40,10,000 could not be allowed as a

deduction in computing the taxable income of the assessee. Accordingly the amount was added to

the returned income of the assessee company.

15. Among other disputes, this issue was also taken by the assessee in appeal before the CIT(A).

The assessee company raised and reiterated the following grounds and contentions before the

CIT(A):

(i) That the relationship between the assessee and the various channel companies is on a principal

to principal basis which does not tantamount to a business connection in India;

(ii) That no portion of the revenue earned by the channel companies could be held as taxable in

India;

(iii) That the essence of the business relationship between the assessee and the channel companies

is evidenced by the express terms and conditions of the respective agreements for the sale of Ad

Airtime. As the agreement is a principal to principal contract, the agreement does not cast any

responsibility on the assessee to and on behalf of the channel companies. That therefore, the

transaction entered into between the assessee and the channel companies is that of a sale.

16. The assessee further argued before the CIT(A) as follows:

(i) The agreements between the assessee and the channel companies have been signed and

executed outside India;

(ii) Channel companies have sold their worldwide Ad Airtime to the assessee;

(iii) Assessee has the sole discretion to determine the terms and conditions of agreements with the

sponsors and parties, who ultimately consumed the Ad Airtime.

(iv) In consideration of the sale of Ad Airtime, the assessee would pay the channel companies a

fixed minimum guaranteed amount in addition to a specified percentage of the advertisement

revenues beyond the threshold amount and these payments are made outside India.

17. The CIT(A) considered the elaborate arguments advanced by the assessee relying on various

judicial pronouncements and held that the primary issue to be considered was whether the

transaction between the assessee and the channel companies could be considered to be that of a

sale on a principal to principal basis and if the answer is YES, whether any portion of the income

could still be brought to tax in India. He held that in either way, the question of deduction of tax

arises only if the income is taxable in the hands of the channel companies which would justify the

invoking of the provisions of law contained in section 40(a)(i). While adjudicating the above

issues, as framed by him, the CIT(A) considered all the contentions raised by the assessee and

arrived at the following conclusions:

(i) The relationship between the channel companies and the assessee was that of a principal and

agent prior to 01-04-1999 as manifestly agreed by the assessee itself in the respective agreements.

It is only after April, 1999 that the face value of the relationship between the assessee and channel

companies has been changed into a relationship of principal to principal. But in spite of that

superficial change, the nature of activities carried out by the assessee company prior to and post

after April, 1999 were practically the same. Earlier, the assessee was the exclusive worldwide

agent of the channel companies and now the assessee is characterised as the exclusive distributor

of the channel companies. In the arrangement for sale of Advertisement Airtime, even if

picturised as outright sale of Ad Airtime, the commercial interest of the channel companies still

continued in the sale of Ad Airtime made by the assessee as evident from the terms of payment

reflected in the agreements entered into between the assessee and the channel companies. The

revenue retained by the assessee company is effectively 25% of the collection which is nothing

but its remuneration / commission characterised as profit margin of the assessee company. But for

the formats of the contract and usage of expressions, the activities carried on by the assessee

remained the same before April, 1999 and thereafter and the relationship of the assessee company

with the channel companies also remained the same through out and, therefore, the contention of

the assessee that under the new dispensation, the assessee company and the channel companies

had a relation of principal to principal is against the facts of the case.

(ii) The TV signals are beamed to India by the channel companies and the programmes are

continuously shown through the TV channels and the sale of Advertisement Airtime is made with

reference to such activities in India, therefore, it has to be held that the channel companies do

have business connection in India. The CIT(A) has extensively relied on the decision of ITAT,

Delhi Bench in the case of Asia Satellite Tele Communications Ltd reported in 85 ITD 478 to

come to the above conclusion.

(iii) The relationship between SIPL and the channel companies as seen from the agreements is in

such a way that SIPL has been given the right to decide and specify the manner and way in which

STAR TV logo shall be allowed to use for promotion and advertisement of any product of the

advertiser. On the other hand, the agreement between the assessee and the channel companies

provides that the right to use such trademark exclusively belonged to the channel companies

alone. It is not understood that if SIPL is only working as agent of the assessee company and not

of the channel companies, then how SIPL could decide and specify the manner in which STAR

TV logo shall be allowed to be used for promotion and advertisement. The CIT(A) held that apart

from the legal aspects of the issue, on an examination of the real state of affairs between the

channel companies, SIPL and the assessee, the position emerging is that of a relationship between

channel companies and assessee, not as principal to principal, but in the status of agent of channel

companies.

(iv) The contention of the assessee that sale of Ad Airtime takes place outside India and,

therefore, no income accrues or arises in India, is not correct. Sale of Ad Airtime is, in fact,

taking place through SIPL in India, who enters into agreements with third party advertisers for

and on behalf of Star TV group of channel companies. The CIT(A), therefore, held that the

channel companies do have business connection in India and income could be deemed to accrue

or arise to them from operations in India and thus making the income taxable u/s 9(1)(i) of the

Income-tax Act, 1961.

18. As stated above, after examining the factors such as agency - principal relation between

assessee and channel companies, business connection in India, relationship between SIPL and

channel companies, operations in India in detail on pages 01 to 49 of his order, the CIT(A) came

to the view that the channel companies do have business connection in India and they are liable to

tax in India for the proportionate income attributable to Indian operations. Therefore, he held that

the assessee was bound to deduct tax at the time of payments made to channel companies and,

therefore, the assessing officer was right in invoking the provisions of section 40(a)(i) of the I.T.

Act.

19. After upholding the view of the assessing officer, the CIT(A) continued to examine the other

arguments raised by the assessee against applying the provisions of law contained in section 40(a)

(i) of the Act. One of the other grounds raised by the assessee company before the CIT(A) was

that the assessing officer has erred in applying the provisions of section 40(a)(i) to the entire

payments made to the channel companies instead of confining to that portion of the payments

which represented income in the hands of the channel companies and chargeable to tax in India. It

was argued before the CIT(A) that of the total payments made to the channel companies towards

the purchase of Ad Airtime only so much of the revenues that represented profits / income in the

hands of the channel companies would alone attract income-tax withholding and subsequently the

applicability of provisions of section 40(a)(i) of the Act. The assessee also argued that if the

channel companies are held eligible for the benefits of circular No.742 issued by the CBDT, then

only 10% of the payments need to be disallowed as the presumptive income as the said circular

No.742 has pegged the income at 10% of the gross payments. The CIT(A) did not accept the

above arguments of the assessee company, in the light of and relying on the decision of the

Supreme Court in the case of Transmission Corporation of AP & Ors vs CIT 239 ITR 587 where

the court has held as follows:

“The only thing which is required to be done is to file an application for determination by the

assessing officer that such sum would not be chargeable to tax in the case of the recipient or for

determination of the appropriate proportion of such sum so chargeable, or for grant of a

certificate authorising recipient to receive the amount without deduction of tax, or deduction of

income-tax at any lower rate. On such determination of tax at the appropriate rates could be

deducted at the source. If no such application filed, income-tax on such sum is to be deducted and

it is a statutory obligation of the person responsible for paying such sum to deduct tax their own

before making such payment.”

The CIT(A) pointed out that the assessee has not moved any application before the assessing

officer u/s 195(2) for determination of the appropriate portion of such sum so chargeable and in

the absence thereof, the assessee was obliged to deduct tax with reference to the whole of such

sum. Accordingly, the said argument was rejected.

20. Another argument raised by the assessee company was that the circular No.742 issued by the

Central Board of Direct Taxes should have been applied in the case wherein 90% of the gross

amount is to be treated as expenses and 10% alone is deemed to be the income and if income is

computed in the light of the said circular, the quantum of tax to be deducted at source, vis-à-vis

disallowance u/s 40(a)(i) of the Act would be drastically reduced. The assessee also argued that if

the assessee is treated as the agent of the channel companies, it should be held that the

advertisement revenues were collected on behalf of the principals, i.e. the channel companies, and

therefore, the advertisement revenues could not be held to be taxable in the hands of the assessee

and accordingly, the question of disallowance u/s 40(a)(i) of the Act does not arise.

21. The CIT(A) again relied on the decision of the Supreme Court in the case of Transmission

Corporation of AP & Ors (supra) in considering this argument and held that the proceedings of

deduction of tax at source are provisional and the final liability would be determined only on

regular assessment and, therefore, issuing any order u/s 197 by the department does not foreclose

the right of the assessing authority to examine the issue of taxability of a transaction in the

assessment proceedings. As the assessing authority has found at the assessment stage that the

payments made to channel companies are liable to tax in India he has rightly applied the

provisions of law contained in section 40(a)(i) of the Act. Regarding the applicability of circular

No.742 issued by the CBDT, the CIT(A) held that the circular deals with the taxation of foreign

telecasting companies whereas the assessee is not a telecasting company. Accordingly, the

CIT(A) rejected all the remaining contentions raised by the assessee company with reference to

the question of disallowance u/s 40(a)(i) of the Act. The relevant discussion made by the CIT(A)

on these grounds are reflected on pages 49 to 55 of his order.

21A. It is against the above decision of the CIT(A) in confirming the disallowance of

Rs.160,40,10,000 u/s 40(a)(i) that the assessee company has raised the following grounds before

us:

“Ground No.1

The learned Commissioner of Income-tax (Appeals) – XXXI [‘CIT(A)’] has erred in disallowing

the payment made by the Appellant to various non-resident television content aggregators

(‘channel companies’) in computing the income of the Appellant by applying the provisions of

Section 40(a)(i) of the Income-tax Act, 1961 (‘Act’) to the aforesaid payment.

The Appellant respectfully submits that the disallowance be deleted.

Ground No.2

The learned CIT(A) has erred in concluding that the Appellant is not a telecasting company and

failing to apply the provisions of Circular 742 issued by the Central Board of Direct Taxes.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.3

The learned CIT(A) has erred in holding that the channel companies have a business connection

in India as per the provisions of Section 9(1)(i) of the Act.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.4

The learned CIT(A) has erred in holding that the channel companies carried out operations in

India as per Explanation (a) to Section 9(1)(i) of the Act.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.5

The learned CIT(A) has erred in holding that the Appellant has not refuted, inter-alia, the

following findings of the learned Assessing Officer, which are erroneous and contrary to facts:

Predominant footprint of the satellite is only in India;

The decoders are provided to the cable operators either by the Appellant or by the

channel companies or their agents in India;

Star India Private Limited (‘SIPL’) is a direct subsidiary of the Appellant.

Majority of the business operations of the channel companies are in India.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.6

The learned CIT(A) has erred in holding the Appellant to be an agent of the channel companies.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.7

The learned CIT(A) has erred in holding SIPL to be an agent of the channel companies.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground 8

The learned CIT(A) has erred in holding that the channel companies are taxable in India.

The Appellant respectfully submits that the above finding is erroneous and should be set aside.

Ground No.9

The learned CIT(A) has erred in holding that the provisions of Section 40(a)(i) of the Act apply to

the payment made by the Appellant to the channel companies despite treating the Appellant as an

agent of the channel companies.

The Appellant respectfully submits that the above basis of assessment is erroneous and should be

set aside.

Ground No.10

The learned CIT(A) has erred in not applying the provisions of Section 40(a)(i) of the Act to only

that portion of the payment made to the channel companies that represents income that has been

considered to be chargeable to tax in India.

The Appellant prays that the disallowance be restricted accordingly.

Ground No.11

Without prejudice to Grounds 9 and 10 above, the learned CIT(A) has erred in holding that the

provisions of Section 40(a)(i) of the Act apply to the Appellant despite the entire sums received

by the appellant having been processed under Section 195 of the Act in accordance with the order

of the Income-tax Department itself issued under Section 197 of the Act.

The Appellant therefore prays the disallowance be deleted.

Ground No.12

Without prejudice to Grounds 1 to 11 above, the margin retained by the Appellant, as an agent,

from the activity of selling airtime is not taxable in India.”

22. Shri Dinesh Viyas, the learned senior counsel appearing for the assessee at the outset raised

two preliminary objections on legal grounds against the disallowance made by the assessing

authority u/s 40(a)(i) of the Act. The learned senior counsel stated that the legal objections raised

by him being so crucial, the merits of the grounds raised by the assessee in the grounds of appeal

may be considered only after dwelling upon the legal objections raised by him.

23. The first legal objection raised by the learned senior counsel is that of the territorial

jurisdiction in the context of section 195 of the Income-tax Act, 1961. The second objection is

that the disallowance u/s 40(a)(i) could be made by the assessing officer only after first

establishing the chargeability to tax of the amounts received by the channel companies, which has

not been done in the present case.

24. We will now consider the first legal objection of territorial jurisdiction, raised by the learned

senior counsel. The learned senior counsel has extensively argued on this point in the light of the

relevant provisions of the Income-tax Act as well as in the light of both Indian and English

judicial pronouncements. The relevant contentions of the learned senior counsel are summarised

as follows:

1. That the payments for bulk purchase of the Ad Airtime were made by the assessee

outside India; both the assessee as well as the channel companies are non residents; that

the relevant contracts have been executed outside India and in such circumstances, the

provisions of section 195 would not apply;

2. That under the Constitution of India, the legislature has the power to enact a law which

may extend beyond India (Extra Territorial applicability); That if the legislature wanted a

statute to apply outside India, it has been expressly provided in the respective statute. One

example is that of Territorial Waters, Continental Shelf, Exclusive Economic Zone and

Other Maritime Zones Act, 1976 (TW Act). The TW Act provides the legal framework

specifying the nature and scope of India’s rights and jurisdiction in relation to matters

concerning Maritime Zones and Maritime Boundaries and matters regarding the right to

exploit and protect the resources of Continental Shelf and Exclusive Maritime Zones.

3. Sub section 6 of section 6 and sub section 7 of section 7 of TW Act create a fiction by

which the Continental Shelf and Exclusive Zone are to be deemed to be part of India for

the purposes of such enactments, which are extended to those areas by the Central

Government by the notification in the Official Gazzette. In exercise of such powers, the

Central Government has extended the scope of Income-tax Act to the Continental Shelf

of India and the Exclusive Economic Zone of India (i.e. from 12 nautical miles to 200

nautical miles) in respect of assessees undertaking specific activities. This has been

provided in notification No. GS 304(E) dated March 31, 1983. The matters specified

therein are activities like drilling and extraction of mineral oils, providing of any services

and facilities for ships, aircrafts, etc.

4. Another example is that of Foreign Exchange Regulation Act, 1971 (FERA) where it has

been stated that it applies to all citizens of India outside India and to branches of agencies

outside India all companies or corporates, registered or incorporated in India. This theme

of extra territorial jurisdiction has been followed in the subsequent Foreign Exchange

Management Act, 1999 (FEMA) also. This is the position with Foreign Contribution

Regulation Act, 1976 (FCRA) also. Another example is the Information Technology Act,

2000 and yet another is the Indian Official Secret Act, 1923 as also the Indian Passport

Act.

5. In all the above enactments, the statute has specifically provided that certain operational

provisions of those enactments will apply to companies, persons and other entities

outside India for the purposes mentioned therein.

6. This specific expression of jurisdiction mentioned in the above enactments is in contrast

with the chargeability u/s 9(1)(i) of the Income-tax Act where although the chargeability

has been extended expressly by the Income-tax Act outside India, the machinery

provisions continued to be confined by the provisions of section 1(2) which apply only to

India. In view of the above, it would be reasonable to conclude that the machinery

provisions do not operate outside India.

7. Section 1(2) of the Income-tax Act provides that it extends to the whole of India. The

territorial operation of the Income-tax Act is confined to the whole of India and it does

not operate outside India.

8. The Bombay High Court in the case of McDermott International Inc.(No.1) vs UOI (173

ITR 155) has held that taxation of income derived by the assessee in the Continental

Shelf beyond the prescribed nautical miles before the issue of the notification mentioned

earlier was invalid. The above decision of the Bombay High Court reiterates the scope of

the provisions of the Income-tax Act beyond the territories of India, in the absence of an

express provision made therein.

9. If the statute does not provide for extra territorial applicability of the Income-tax Act, the

said position should be accepted as such and a casus omissus cannot be supplied by the

court except in case of clear necessity and with reason to confine within four corners of

the statute itself.

10. The Supreme Court in the case of Tarulata Shyam (Smt) vs CIT 108 ITR 345 has

observed that there is no scope for importing into the statute words which are not there.

Such importation would be not to construe, but to amend the statute. Even if there be a

casus omissus the defect can be remedied only by the legislation and not by judicial

interpretation. The same principle is reflected in the decisions of the Supreme Court in

the cases of Padmasundara Rao vs State of Tamil Nadu 255 ITR 147 and CIT vs National

Taj 121 ITR 535.

11. That section 4 of the Income-tax Act provides for the charge of income-tax in the hands

of a person in accordance with and subject to the provisions of the Income-tax Act and

section 5 provides for the scope of total income chargeable to tax. In the case of a non

resident, section 5(2) provides that the total income chargeable to tax will include income

which is received or deemed to be received in India or accrues or arises or is deemed to

accrue or arise in India. Section 9 provides for income to be deemed to accrue or arise in

India. The deeming provision, by a fiction treats income which does not in fact accrue or

arise in India, to be deemed to accrue or arise in India.

12. The most important distinction to be seen at this juncture is that the fiction created by

section 9 only deems income to accrue or arise in India and not deemed income to be

received in India.

13. In the present case, the payment has been made by the assessee company to the channel

companies entirely outside India and not even deemed to be “received in India”. The

transaction relates to the payment which takes place outside India which stands outside

the purview of section 195.

14. Section 1 of the Income-tax Act does not contain any provision stipulating the

applicability of the Income-tax Act beyond India. In fact section 1(2) specifically restricts

the applicability of the Income-tax Act only to India.

15. The Income-tax Appellate Tribunal, Mumbai has considered a similar case in Shrikumar

Poddar vs DCIT 65 ITD 48. In that case the Revenue had disallowed the interest paid by

the assessee u/s 58(1)(a)(ii) on the ground that tax thereon was not deducted. Section

58(1)(a)(ii) is similar to the provisions of section 40(a)(i) of the Income-tax Act, 1961. It

was agued on behalf of the assessee that the interest payable by the assessee to the non

resident was not taxable in the hands of the latter either u/s 5 or u/s 9. It was also argued

that the payment was not made in India and, therefore, the question of deduction of tax

u/s 195 did not arise. The above line of argument was accepted by the ITAT in the

following words:

Even otherwise, section 195 was not applicable as the payment was made outside India. The

assessee transferred the funds to his account in the SBI and from that account the payment was

made outside India. Therefore, if the payment was not made in India and the same was made out

of India, provisions of section 195 could not be applied to such a payment and consequently there

would be no liable to deduct tax by a non resident out of the payment made to a non resident

outside India. On all these counts, the assessee was not liable to deduct tax u/s 195 and

consequently the payment made to the non-resident could not be disallowed u/s 58(1)(a)(ii).”

The above decision being the decision of a coordinate bench, the present bench hearing this

appeal is bound to follow the said decision, that too, in the absence of any other contrary and

binding decision.

16. The scope of section 195 is well illustrated in page 1391 in the commentary ‘Kanga &

Palkhiwala’s Law & Practice of Income-tax’ Eighth Edition, as follows:

“This section does not apply to payments made outside India by one foreigner to another even if

that other has rendered services in India. A country does not recognize or enforce the revenue

laws of another country. Therefore, if a payer in a foreign country, bound to make the payment

under a contract governed by the laws of that land, were to seek to deduct Indian income-tax, the

payee would be entitled to object to the deduction on the ground that no deduction can be made in

that country, which is not authorized by the laws of that country or by the terms of the

agreement.”

17. Due recognition should be given to the fact that there could be situations where although

income is chargeable to tax in India, in the absence of machinery to deduct tax at source,

deductibility cannot be prescribed from the payments. In such situations, the law provides

that taxes shall be payable by the recipient of the income. This is clear from section 4(2)

and section 191 of the Income-tax Act. Section 4(2) provides that in respect of any

income chargeable under sub section (1), income-tax shall be deducted at the source or

paid in advance, where it is so deductible or payable under any provisions of this Act.

The words “where it is so deductible” clearly indicate that the requirement to deduct tax

at source does not mandatorily follow in every case where income is chargeable to tax

and the requirement of deduction of tax at source can apply only if taxes are deductible at

source in accordance with the provisions of section 195 of the Income-tax Act.

18. Section 191 provides that in the case of income in respect of which provision is not made

under this Chapter for deduction income-tax at the time of payment, and in any case,

where income has not been deducted in accordance with the provisions of this Chapter,

income-tax shall be payable by the assessee direct.

19. The aforesaid sections 4(2) and 191 make it clear that the law regarding the chargeability

of tax is different from the machinery provisions and, therefore, deductibility is

something very different from chargeability.

20. In the present case as section 195 does not apply against the assessee no disallowance

could be made u/s 40(a)(i) of the Act.

21. The statute should be read as a whole and one provision of the Act should be construed

with reference to other provisions in the same Act so as to make a consistent enactment

of the whole statute. The Court must ascertain the intention of the legislature by directing

its attention not merely to the clauses to be construed but to the entire statute. Reliance

was placed on the Supreme Court decision in the case of CIT vs Hindustan Bulk Carriers

259 ITR 449. Therefore, the provisions of law contained in section 1(2), section 4(2),

section 5, section 9, section, 191 and section 195 need to be read and construed in a

harmonious manner avoiding a head-on clash between the sections of the Act. Reliance

placed on Sultana Begum vs Prem Chand Jain AIR 1977 (SC) 1006.

22. To interpret section 195 as being applicable to a payment entirely made outside India by

one non resident to another non resident would mean an extra territorial extension of the

Income-tax Act which would run counter to the express provisions of section 1(2) of the

Act. Such an interpretation of section 195 would defeat the clear and express provisions

of section 4(2) and hence, should be avoided. Reliance placed on the commentaries of NS

Bindra and Maxwell.

23. In the course of argument, the learned departmental representative has placed reliance on

the UK decision in the case of Agassi vs Robinson (Inspector of Taxes) – (2004) Simon

Tax Cases 610 EWHC 487 (Ch). The above decision of a single judge of the Chancery

Division had already been reversed by a Three Member Bench of the Supreme Court of

Judicature, Court of Appeal (Civil Division) in Agassi vs Robinson (Inspector of Taxes)

and reported in Times Law Reports on November 27, 2004. The Court of Appeal has

held that section 555(2) of the Income and Corporation Taxes Act, 1988 which provides

for deduction of taxes should not be given extra territorial effect. In the same judgment,

the Court of Appeal has confirmed that chargeability of income and deductibility of tax

are independent of each other.

25. The contentions of the learned counsel on the second legal objection raised by him, that there

was no finding by the assessing officer on the chargeability to tax of the payments before

invoking the provisions of section 40(a)(i) are as follows:

1. That the payments made by the assessee to the channel companies are entitled for

deduction under the provisions of section 37 of the Income-tax Act and all the

requirements under that section have been fulfilled in this case. Section 40(a)(i) of the

Income-tax Act provides for disallowance in the hands of the payer of the sums

chargeable to tax in India in the hands of the recipient. The chargeability of such

payments to tax in India in the hands of the recipient has to be shown as a matter of

established fact and is a pre-condition / pre-requisite for invoking the provisions of

section 40(a)(i) of the I.T. Act. The chargeability referred to u/s 40(a)(i) is not a

hypothetical, theoretical or notional chargeability but chargeability established in an

assessment made on the recipient. Such established fact is the fundamental condition

precedent for the applicability of section 40(a)(i); the chargeability of the recipient cannot

be decided in an assessment proceedings of the payer and has necessarily to be decided in

the assessment of the recipient after providing him full opportunity of being heard.

2. While section 195 provides for a tentative deduction of tax when payment is made, the

disallowance u/s 40(a)(i) can be made only if all the conditions of section 40(a)(i)

including the establishment of the factum of chargeability is shown to have been fulfilled

and not merely on the ground that section 195 of the Act is applicable.

3. The Bombay High Court in the case of CIT vs Tata Engineering & Locomotive Co Ltd

245 ITR 823 PP 825 has held that the provision under section 195 is only for tentative

deduction of income-tax subject to regular assessment and the rights of the parties are not

in any manner adversely affected.

4. That it is not proper to expect a payer to prove / establish whether or not the recipient of

the amount is chargeable to tax in India. That could be decided only after hearing the

recipient. The onus from the payee to the payer to determine the chargeability to tax in

India cannot be shifted and the assessment proceedings of the payer cannot be used to

establish the taxability of the payee. Reference placed on the decisions of Supreme Court

in Padmasundara Rao (Decd) & Ors vs State of Tamil Nadu & Ors 255 ITR 147, K.

Govindan & Sons vs CIT 247 ITR 192, CWS (India) Ltd & Ors vs CIT 208 ITR 649 and

KP Verghese vs ITO, Ernakulam & Anr 131 ITR 597.

26. The learned senior counsel further contended that section 195 as well as section 40(a)(i) of the

Income-tax Act referred to ‘chargeability to tax in India of the recipient’. However, the term

“chargeable” as appearing in section 40(a)(i) has to be interpreted / understood with reference to

the context / setting in which it is used and does not necessarily have the same meaning as section

195 of the Act. He contended that a word or a term need not necessarily have the same meaning

under all the sections of the Income-tax Act and their meaning is governed by the context and

setting in which the word or term is used. Reliance placed on the decisions of Supreme Court in

AN Laxman Shenoy vs ITO, Ernakulam & Ors 34 ITR 275 and Varadarajan (K.L) vs CIT 98 ITR

182. The learned counsel also relied on the decision of the Privy Council in Seth Badridas Daga

and Another vs CIT 17 ITR 209. He submitted that the chargeability referred to in section 40(a)(i)

cannot be meant a hypothetical or notional chargeability but can only mean actual chargeability

which is established as a fact in the assessment proceedings of the recipient.

27. Shri G.C. Srivastava, the learned Chief Commissioner of Income-tax at Surat appeared for the

Revenue and argued the case in detail. The learned CCIT submitted that the legal objection raised

by the assessee on the ground of territorial jurisdiction in the context of section 195 is wholly

misconceived. He submitted that the reasons pointed out by the learned senior counsel are rather

logical than legal. The contentions of the learned CCIT on the issue of territorial jurisdiction are

summarized below:

1. The expression “whole of India” provided in section 1(2) of the Income-tax Act is to be

understood in contradistinction to certain parts of India and not in contradistinction to

‘inside India’ and ‘outside India’. The Income-tax Act applies to the whole of India and

the tax net is spread far and wide across India and if any entity whether resident or non

resident, by virtue of its residence or source of income falls into the tax net, then all the

provisions of the Income-tax Act shall apply. In this scheme of the law provided for

income taxation, there is no specific exclusion or immunity from the section which

stipulates deduction of tax at source.

2. Section 1(2) does not deal with extra territorial jurisdiction of the Income-tax Act. It

declares that the Income-tax Act is intra territorial through out India with all its text and

provisions. The said provision does not deal with extra territorial jurisdiction at all.

3. Extra territorial jurisdiction is provided by the Income-tax Act through other provisions

of the Act other than section 1(2).

4. The argument of the learned senior counsel that section 1(2) does not limit chargeability

of non resident to tax but limits collection of tax from him is wholly unsustainable in law

for the reason that the basic proposition and premise governing any scheme of collection

of tax is that charge of tax is not an academic issue but completely a practical and

pragmatic code; that if taxes are to be levied, it should be collected.

5. Deduction of tax at source is not provided for all sources of income but if provided, the

provisions of deductions would be attracted without any exception or exemption.

6. There is no conflict between the provisions of law contained in section 1(2) and section

195 as apprehended by the learned senior counsel. The most important point is that

section 1(2) is not restrictive in nature and, therefore, not in conflict with any provisions

of the Income-tax Act. This is very evident from the fact that the decisions relied upon by

the learned senior counsel do not mention anything about section 1(2) which proves that

there is no conflict between section 1(2) and section 195.

7. Section 195 does not extend the Income-tax Act to territories outside India. But if any

foreign entity falls into the tax net as defined in section 1(2), the entity is bound by all the

provisions of the Income-tax law.

8. Non resident entities desirous of earning chargeable income from India have to follow the

domestic taxation laws of India and if this basic principal is not accepted, the whole

concept of chargeability itself is defeated.

9. Section 195 is conducive with the chargeability of income to tax in India. The governing

force of section 195 is not the payment as such but the payment of income chargeable to

tax. The factum of payment is not the crucial thing but the income character embedded in

the payment is the crucial thing. Emphasis provided in section 195 is on chargeability and

not on payment.

10. The thrust given by the learned counsel on the harmonious construction of a statute

should not defeat the very purpose of law. The decision relied on by the learned senior

counsel in CIT vs Hindustan Bulk Carriers 259 ITR 449 applies only to a case where

there is head-on clash between two provisions whereas in the present case there is no

such clash between chargeability and deductibility.

11. Section 195 does not make any distinction between the payment within India and the

payment made outside India. It is very important to note that situs of payment or the

source of payment is not the relevant consideration in the implementation of section 195.

12. The learned CCIT further argued that constitutional validity of the provisions or the

competence of the parliament to legislature on extra territorial matters not being an issue,

the subject matter of the present appeal has to be examined only in the light of the

provisions of the Income-tax At, 1961. He has placed reliance on the decision of the

Supreme Court in Electronics Corporation of India Ltd vs CIT & Anr 183 ITR 43 where

the court has held:

“It is clearly envisaged under our constitutional scheme that Parliament in India may make laws

which operate extra- territorially. But unless there exists a nexus with something in India,

Parliament will have no competence to make the law. The provocation for the law must be found

within India itself. Such a law may have extra-territorial operation in order to subserve the object,

and that object must be related to something in India.”

The court has also held therein that as far as the principle of international law is concerned,

municipal courts can enforce to the degree permissible with the machinery available.

13. Section 1(2) cannot be read in isolation. Its extent and import have to be seen with

reference to the subject matter it seeks to regulate, that is taxation of income. Income is

taxed world wide under the Income-tax Act on twin basis; residence and source. Section

5 of Indian Income-tax Act, 1961 deals with taxation on the basis of source in sub

sections (1) and (2) respectively. Both residence or source or either of the two has to be

within the geographical limits of India which is the true intent of section 1(2).

14. The reliance placed by the learned counsel on other enactments to illustrate the scope of

extra territorial jurisdiction, like FERA, FEMA, Passport Act, etc. is not relevant as the

object of those enactments is different. The object is t regulate the conduct of Indian

citizens and their activities outside the territorial area of India. Therefore, the extent and

scope of the respective enactment have been provided in a wider expression whereas no

such wider expression is called for in the administration of the Income-tax Act.

15. The Act provides for an exhaustive and express machinery for the recovery and

collection of taxes in Chapter XVII. Sections 173, 195 and 192 lay down express

provisions for deduction of tax at source on payments made by non residents. Those

payments also include payments made outside India. No distinction has been made in the

law regarding payments made inside India and outside India. Section 195 makes no

exception either with regard to the residential status of the person or the situs of the

payment. Deduction is contemplated at the time of credit itself, i.e. even before the

payment. Either on crediting or on payment, the only condition to be looked into is

whether the income is chargeable to tax in India.

16. This position brings section 195 in harmony with section 1(2) r.w.s. 4(1), 4(2) and

section 5(2).

17. This free operation of section 195 has to be read along with section 40(a)(i). Section

40(a)(i) clearly speaks of ‘payment outside India for TDS under Chapter XVIIB. The

operational scope of section 195 is further illuminated by the specific provision contained

in section 40(a)(i).

18. The provisions not being ultra vires and they being express, there being no ambiguity, no

divergent view possible, there could be no conflict between the relevant sections as

argued by the learned senior counsel. Reliance placed on the decision of the Supreme

Court in the case of Padmasundara Rao (Decd) & Ors vs State of Tamil Nadu & Ors 255

ITR 147.

19. While enforcement of domestic laws cannot be contemplated in a foreign territory,

nonetheless, the law can be enforced by the courts of the enacting states to the degree that

is permissible with the machinery available to them.

28. The learned CCIT further explained that the difficulties that may arise in the administration of

section 195 is remedied in sub section (2) of that section. In the case of any payments made to a

non resident, section 195(2) provides that the assessee may move the assessing officer to decide

the rate at which tax is to be deducted or for that matter whether tax is to be deducted or not. If no

application u/s 195(2) is made by an assessee, deduction has to be made. Section 40(a)(i) is

consequential to such non deduction and, therefore, automatic. Any further enquiry regarding the

chargeability of income in the hands of the recipient is not called for. That is not proposed in the

scheme of law. The implication of section 195(2) has been considered by the Supreme Court in

the case of Transmission Corporation of A.P Ltd & Anr vs CIT 239 ITR 587 and ITAT,

Hyderabad Bench in Cheminor Drugs Ltd vs ITO 76 ITD 37.

29. The learned CCIT further stated that reliance placed by the learned senior counsel on the

decision of ITAT, Mumbai Bench in Shrikumar Poddar’s case 65 ITD 48 is not relevant to the

present case. The learned CCIT relied on the decision of ITAT Delhi Bench “B” in the case of

Babcock Power (Overseas Projects) Ltd vs ACIT 81 ITD 29. In the said case, the assessee was a

non resident company incorporated in United Kingdom, having a project office in India. It had

entered into a contract for setting up coal based thermal power plant in India. For execution of the

contract, the assessee engaged foreign technicians who were deputed to the Indian project office.

They were on the payroll of the UK office of the assessee and were paid salaries in foreign

currency in UK office which was credited directly to their bank accounts. The assessee did not

deduct the tax at source while paying the salaries to the persons on the ground that provisions of

section 192 were not applicable. On a reading of the provisions of section 192, 5(2) and section

9(1)(ii), the Tribunal held that if the salary was paid for the services rendered in India, such

payment becomes chargeable to tax in India under the head ‘salaries’ and consequently, the

provisions of section 192 become applicable. The fact that the employees as well as employer are

non resident, the fact that the payment was made outside India and the fact that contract of

employment was also out of India are not relevant for deciding the issue. What is relevant is the

place where the services were rendered. The learned CCIT further pointed out that the Delhi

Tribunal has referred to the decision of the Bombay Tribunal in the case of Shri Shrikumar

Poddar 65 ITD 48, while delivering the said judgment.

30. The learned CCIT further submitted that the factual matrix considered by the Tribunal in

Shrikumar Poddar’s case 65 ITD 48 is by and large different from the fats of the present case. He

submitted that an additional fact or a different fact could make a world of difference between the

conclusions to be arrived at in two cases. The language of the provisions of section 192 and 195

are identical and the Delhi Tribunal has categorically held that in a case of section 192, the situs

of payment is not relevant in deciding the applicability of the provisions relating to deduction of

tax at source.

31. The learned CCIT further relied on the decision of the Gujarat High Court in the case of CIT

vs Vijay Ship Breaking Corporation 261 ITR 113 where the court has held that section 195 is

applicable to even payments made outside India and, therefore, the said decision has clearly

disapproved the judgment of the Bombay Tribunal in the case of Srikumar Poddar vs ACIT 65

ITD 48. He submitted that one of the questions considered by the High Court in the above case

was whether the Tribunal was right in law and on facts in deleting the disallowance u/s 40(a)(i)

for the failure on the part of the assessee to deduct tax at source from usance interest paid to a non

resident u/s 195(1) of the Act. After considering the provisions of law contained in sections 4, 5,

9 and 195, the court found that the effect of the deeming fiction that the income by way of

interest payable by a person, who is resident would be that of income deemed to accrue or arise in

India will be treated to be arisen in India irrespective of its being paid anywhere outside India.

The court held that if it is permissible for a non resident receiving interest income from a resident

of India to contend that the amount has actually been disbursed outside India and, therefore, such

interest income does not accrue or arise in India, the provisions of section 9(1)(ii) would become

redundant. The court held that irrespective of the amount being paid to the non resident in the

country of his residence or elsewhere outside India, it is deemed to have accrued or arisen to him

in India. The learned CCIT submitted that in principle, this decision has overruled the decision of

the Tribunal in Srikumar Poddar’s case.

32. The learned CCIT continued his arguments on the second objection raised by the assessee that

the disallowance u/s 40(a)(i) was made by the assessing authority without first determining the

chargeability of the payments to tax in India, in the hands of the channel companies. The

elaborate arguments presented by the learned CCIT are summarized below:

1. The Income-tax Act contemplates different obligations, on the part of the payer and on

the part of the payee. These obligations are different in nature and initiate separate

proceedings with different consequences for the acts of commission / omission of the

parties. The obligations cast on the payer and the payee cannot be mixed up to make a

proposition by which it could be argued that section 40(a)(i) is otiose or inoperative.

2. The law has cast the onus u/s 195 on the person, who makes the payment. The person,

who makes the payment has to accord a satisfaction regarding the chargeability or

otherwise of the payments for compliance of section 195(1). This satisfaction need not to

be made in isolation. Section 195(2) provides for the person to move the assessing

authority for the appropriate direction.

3. The person, who makes the payment, without adhering to the above procedures laid

down, commits the default u/s 195, the consequence would follow automatically. The

consequences are not only the application of sections 201 and 201(1A) but section 40(a)

(i), as well.

4. The opportunity to be provided before completing the assessment in the context of

section 40(a)(i) is to be extended not to the payee, but to the person who makes the

payment.

33. The learned CCIT further contended that the opportunity extendable to the person, who makes

the payment, is limited to hearing him on his judgement and belief regarding the chargeability of

the payments to tax in India. The law does not suggest anything to say that the payee should also

be given an opportunity while doing the assessment of the payer. The learned senior counsel

appearing for the assessee has mentioned about certain practical difficulties that would be faced

by the payer, in circumstances where expenses are incurred by the assessee but the corresponding

expenses are disallowed on the ground of violation of section 195. The difficulties are not

insurmountable. The chargeability is not made in the hands of the payer; it is made in the hands

of the assessee and whenever the payer makes the deductions, corresponding credit is given

against the payments given to the payees and the balance alone need to be paid and there is no

pecuniary loss to the assessee whatsoever. Further, if the tax deducted at source has been paid in

any subsequent year, the deduction can be claimed in that subsequent year. If for any matter the

payments were not chargeable to tax in the hands of the payee, even then the assessee can take

recourse to section 154 to obtain the necessary remedies. The learned CCIT concluded that the

consequences flowing out of the non compliance of section 195 are final and the assessments to

be made on the payer and the payee are independent and different proceedings.

34. Shri Dinesh Vyas, the learned senior counsel appearing for the assessee, while replying to the

contentions of the learned CCIT, highlighted the following points:

1. That the charging provisions and machinery provisions like section 195 are completely

distinct provisions and chargeability to tax does not necessarily mean that section 195 of

the I.T. Act would apply automatically.

2. The question is not regarding the scope of the definition of the term “person”, which also

includes a non resident. The question is whether section 195 can be applied extra

territorially. The contention of the learned departmental representative that the Act has

used the appropriate words in different sections like 193, 194, etc. on deduction of tax at

source, does not bring out the real scheme of the law.

3. The reference made by the learned departmental representative to section 173 of the

Income-tax Act is erroneous.

4. The reliance placed by the learned departmental representative on the decision of the

Supreme Court in the case of Electronics Corporation of A.P. Ltd vs CIT 183 ITR 43 is

also not applicable to the facts of the present case because the question considered by the

Supreme Court in that case was entirely different. The question considered by the court

was whether the Indian legislature was competent to enact provisions of section 9(1)(vii)

having extra territorial operation whereas the issue in the present case is whether

provisions of section 195 of the Act being machinery provision, could be applied or not.

5. The reliance placed by the learned departmental representative on the ruling of the

Authority for Advance Ruling in P.No. 13 of 1995 228 ITR 487 is also not relevant as

advance rulings are judgment in personam and not in rem. He has also relied on the

decision of the ITAT, Mumbai Bench in the case of DCIT vs Boston Solid Group Pte Ltd

93 TTJ 293 where it has been held that the ruling of Authority for Advanced Ruling is

not binding on Income-tax Appellate Tribunal.

6. Even if some different judgments are available against the assessee directly or indirectly,

the favourable decision in Srikumar Poddar 65 ITD 48 need to be followed in the light of

the Supreme Court decision in the case of CIT vs Vegetable Products Ltd 88 ITR 192.

7. The reliance placed by the departmental representative on the Supreme Court decision in

Transmission Corporation of AP Ltd & Anr vs CIT 239 ITR 587 and the decision of

ITAT, Hyderabad in the case of Cheminor Drugs Ltd vs ITO 76 ITD 37 are also not

applicable in the present case because in both the said cases the question of extra

territorial jurisdiction was not at all the issue of dispute.

8. The decision relied on by the learned departmental representative in the case of Babcock

Power (Overseas) Project Ltd vs ACIT 81 ITD 29 is also not applicable as extra

territorial jurisdiction was not a subject matter in that case.

35. Shri Dinesh Vyas, the learned senior counsel alternatively submitted that if the Tribunal is not

to follow the decision of Bombay Tribunal in the case of Srikumar Poddar vs DCIT 65 ITD 48,

the legal objection may be placed before a Special Bench so that the clash between different

points of view could be settled and a proper adjudication of the appeal could be made.

36. Regarding the second legal objection raised by the assessee on the invoking of section 40(a)

(i) by the assessing officer without first determining the chargeability in the hands of the channel

companies, the reply of the learned senior counsel are as follows:

1. Even though section 195 deals with provisional collection of tax, the invoking of section

40(a)(i) is final whereby an eligible expenditure of the assessee is being disallowed. The

chargeability need to be first determined in the hands of the channel companies without

which the provisional nature of section 195 is not overcome and without overcoming the

provisional nature and coming to a definite finding of fact, a final disallowance u/s 40(a)

(i) cannot be made.

2. Assessee has no power or authority to explain about the taxability of the payments

received by the channel companies.

3. The disallowance made u/s 40(a)(i) is quite premature as it puts a final liability on the

assessee whereas the dispute of chargeability itself if disproved by the channel

companies, it may even defeat the very application of section 40(a)(i), whereby the

assessee is put to irreparable loss and injury.

4. The learned counsel also relied on the following decisions in support of his propositions

advanced in respect of the disallowance u/s 40(a)(i):

CIT vs Tata Engg & Locomotive Co Ltd - 245 ITR 823 (Bom)

AN Laxman Shenoy & Ors vs ITO & Ors - 34 ITR 275 (SC)

KL Varadarajan vs CIT – 98 ITR 182 (SC)

Tin Box Company vs CIT - 249 ITR 216 (SC)

Padmasundara Rao (Decd) & Anr vs State of Tamil Nadu & Ors

- 255 ITR 147 (SC)

37. The learned senior counsel finally concluded his arguments on the legal objections that

income-tax law does not provide extra territorial jurisdiction to apply section 195 in the present

case and that the decision of the coordinate bench in the case of Shrikumar Poddar vs DCIT 65

ITD 48 is binding on this Bench so long as the said decision is not either overruled or

disapproved and that the provisions of section 40(a)(i) have been applied by the assessing officer

without first ascertaining the chargeability of payments received by channel companies to tax in

their hands in India.

38. The learned senior counsel has further placed reliance on the following decisions:

CIT vs LG Ramamurthi & Others 110 ITR 453 (Mad)

Sayaji Iron & Engg Co vs CIT - 253 ITR 749 (Guj)

Agarwal Warehousing & Leasing Ltd - 257 ITR 235 (MP).

39. First we will examine the preliminary objection raised by the learned senior counsel regarding

the territorial jurisdiction in the application of the provisions of law contained in section 195. We

agree with the general propositions of law explained by the learned senior counsel on the issue of

sovereign jurisdiction. The sovereign jurisdiction of a country is confined to its own territorial

boundaries and not outside. This is what the principle embedded in “the doctrine of territorial

nexus”. The said doctrine applies not only to taxation laws but to all the laws enacted by a

particular state. There cannot be any doubt regarding the limitation of the sovereign power. Even

if it is the ultimate power within one’s own territories, it is non est beyond the territories. The writ

of one country will not move in another country unless bilateral agreements are entered into

between by the concerned states. This is because the writ of a state is ultimately to be executed by

the strength of the force available at its command. The strength of the force cannot be exercised

beyond one’s own territorial limits. So there is no dispute in fact regarding the basic tenets of the

“doctrine of territorial nexus”. The doctrine is reflected in Article 245 of the Constitution.

40. The thrust of the argument of the learned senior counsel is that the chargeability to tax in

India may even travel beyond the territorial limits because they are substantial provisions whereas

the deductibility cannot go beyond the territorial limits as the provisions of deductibility are

machinery provisions. This is the basic line of distinction emphasized by the learned senior

counsel in the whole scheme of his arguments. It is his fervent opinion that where the payer and

payee are non-residents and the payments are made abroad and the supporting contracts are

executed abroad, the writ of the Income-tax department to enforce the deduction of tax at source

cannot travel beyond the territories of India and, therefore, in the present case, the assessee was

never liable to deduct any tax from the payments made to channel companies.

41. On a close examination of the scheme of taxation, we are afraid that the line of distinction

drawn by the learned senior counsel is almost imaginary. The fundamental distinction between

substantial provisions of taxation law and machinery provisions of taxation law is reflected in the

interpretation of the provisions relating thereto. There cannot be a distinction between these two

as far as the final application of the provisions is concerned. This is because the substantial

provisions of chargeability and the machinery provisions of deductibility are having a navel

relationship of cause and effect with the result that one cannot survive without the other and they

are inseparable pillars of an integral tax code. If the collection machinery cannot be initiated in a

case even after chargeability is established, the substantial provisions of law governing the

chargeability themselves become redundant. If the collection machinery is not authorized by the

substantial provisions of chargeability, the collection process would be unlawful. They are, in

fact, two sides of the same coin.

42. This genetic character of the deductibility of tax at source is apparent and clear in the heading

given to Chapter XVII of the Income-tax Act as “Collection and Recovery of Tax”. The

“collection and recovery of tax” is the end result of the administration of the substantial

provisions of law governing the chargeability to tax. Deduction of tax at source is one of the

modes of collection / recovery of the tax prescribed by the statute. As known to all, there are

other modes for collection / recovery of tax other than deduction of tax at source. The deduction

of tax at source cannot be disassociated from the integral code of collection of recovery of tax

engrossed in the taxing statute.

43. The assessing officer assumes the jurisdiction to invoke the provisions of section 40(a)(i),

section 201(1) and section 201(1A) on the failure of the payer to conform to the provisions of

section 195. The liability that arises out of the breach of section 195 is cast on the payer alone.

The consequences provided in sections 40(a)(i), 201(1) and 201(1A) are to be borne by the payer

himself, if the liability cast under section 195 is not discharged. Therefore in the scheme of the

Act, it is to be seen that the provisions of law contained in section 40(a)(i), section 195, section

201(1) and section 201(1A) need to be read and understood simultaneously, harmoniously and in

togetherness.

44. The relevant portion of section 195 for the purpose of this case, as it stood for the assessment

year under appeal, is reproduced below:-

195 (1) Any person responsible for paying to a non- Other sums resident, not being a company, or

to a foreign company, any interest (not being interest on securities) or any other sum chargeable

under the provisions of this At (not being income chargeable under the head “Salaries” shall, at

the time of credit of such income to the account of the payee or at the time of payment thereof in

cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct

income-tax thereon at the rates in force:

xxxxxxxxxxxxxx”

45. The expression used in section 195 is “any person responsible for paying to a non-

resident…….”. The expression has qualified the character of the recipient / payee as “non-

resident”. But expression has not qualified, in any manner, the character of the payer. Payer

means any person responsible for paying. No other fetters are added to the above expression of

law. If the payment is made to a non resident whether it is in India or outside India or in any

manner, the person making the payment is liable for deducting the tax at source. This is the result

of the plain reading of law provided in section 195. As far as the taxing statutes are concerned,

the safest method of interpretation is the plain reading of the law.

46. The learned senior counsel in the course of argument has contended that the law does not

contemplate deduction of tax in all circumstances and this position is evident from the language

of section 191. Under the same Chapter of “Collection and Recovery of Taxes”, section 191

provides as below:

“In the case of income in respect of which provision is not made under this Chapter for deducting

income-tax at the time of payment, and in any case where income-tax has not been deducted in

accordance with the provisions of this Chapter, income-tax shall be payable by the assessee

direct.”

47. The above provision does not in any way dilute the rigours of the liability cast under section

195 on the person who makes the payment. A tax assessed is ultimately to be collected. There are

various modes prescribed in the Act to recover and collect such taxes. The law does not guarantee

that all such taxes shall be invariably collected / recovered in the manner in which provisions are

made. In such circumstances, the law has spread its net further in section 191 stating that in such

circumstances, the tax shall be paid by the payee direct.

48. In fact, section 191 is a safety valve provided by the law to protect and enforce the charge of

tax provided u/s 4(1). It does not mean that it has provided any slippery ground in the scheme of

collection / recovery of tax prescribed in the Income-tax Act, 1961. That provision does not go to

the defence of the assessee.

49. Another important limb of the argument advanced by the learned senior counsel is that the

chargeability and deductibility are different and independent and if the territorial authority is not

expressly declared, the provisions of deductibility may fail even at the cost of chargeability. We

think that there is no provocation to anticipate such a casuality in the administration of tax laws.

Section 195 does not command the assessing officer to extent his hands beyond the territorial

limits of India and enforce the deduction of tax at source in a foreign soil. The consequences of

the failure on the part of the payer to comply with the requirements of section 195, as already

stated earlier, are intelligently couched on the payer himself in section 40(a)(i), section 201(1)

and section 201(1A). The assessing officer is insisting the compliance of section 195 not from the

payee but from the payer, who is assessable to tax in India. When the assessing officer is dealing

with a person, even if he is a non-resident, but an assessee to income-tax in India, there will not

be any occasion for him to reach beyond the territorial limits of the country. All his actions are

based on the consequences prescribed in the Act which are invariably to be felt in India itself. It is

not possible to argue that since chargeability and deductibility are different, the non enforcement

of the provision relating to deductibility could defeat even the basic concept of chargeability. This

is an anti-thesis of the tax law itself.

50. The learned senior counsel has referred to the decision of the Court of Appeal in UK in

Agassi vs Robinson (Inspector of Taxes) as reported in Times Law Reports on November 27,

2004 to canvass the argument that the chargeability and deductibility are fundamentally different.

But we understand that the said decision make out only a proposition that chargeability and

deductibility are different in the functional and operational aspects.

51. As already stated, a plain reading of the provisions of section 195 provides that the person

making the payment and liable to deduct tax at source is “any person”. The principle of casus

omissus explained by the learned senior counsel in the light of Supreme Court decisions in

Tarulata Shyam (Smt) vs CIT 108 ITR 345, Padmasundara Rao (Decd) & Ors vs State of Tamil

Nadu & Ors 255 ITR 147 and CIT vs National Taj 121 ITR 535 has to be aptly considered at this

point. It is not necessary to provide any qualification for the expression where the expression

provided is unqualified.

52. There may be some circumstances that the demand raised by income-tax authorities in India

strictly in accordance with law against a foreign party in foreign soil could not be executed as the

machinery could not collect it for obvious reasons of territorial jurisdiction. That failure is a fait

accompli. This cannot be confused with the situation in the present case where the contention of

the assessee is that it was not responsible for deducting tax for the reason that all the ingredients

of the payments were made in a foreign country. A possible failure of the machinery to collect the

tax from a foreigner is not a defence for an assessee in India to plead exoneration from the

application of section 195.

53. It is very important to examine at this juncture, the decision of ITAT, Mumbai Bench “C” in

Shrikumar Poddar vs DCIT 65 ITD 48, relied on by the learned senior counsel. The senior

counsel has effectively relied on the last paragraph No.12 of the said Tribunal order which is

extracted below:

“12. Section 195, even otherwise, we find, is not applicable as the payment is made outside in

India. The assessee transferred the funds to his account in the State Bank of India and from that

account the payment is made outside. Therefore, if the payment is not made in India and the same

is made out of India, provisions of section 195 cannot be applied to such a payment and

consequently there would be no liability to deduct tax by a non resident out of India. On all these

counts, in our opinion, the assessee was not liable to deduct tax u/s 195 and consequently the

payment made to the non resident cannot be disallowed u/s 58(1)(ii) of the Act. We accordingly

hold that the order of the CIT u/s 263 is not in accordance with law. We accordingly vacate the

same and restore that of the Assessing Officer.”

54. The facts of the case relating to Shrikumar Poddar’s case were that the assessee, a non-

resident, raised loans from outside India and brought the money to India and utilized it in

purchasing shares/securities. For the assessment year 1987-88, he paid interest at Rs.6,82,140 and

claimed deduction of that amount against the capital gains on the sale of the shares purchased

from out of this borrowed money. The assessing officer only allowed deduction u/s 57(iii).

Invoking jurisdiction u/s 263, the Commissioner held that the interest was not allowable u/s 58(1)

(a)(ii) as no tax therefrom was deducted or paid and section 195 was applied to the case of the

assessee as he was engaged in the business of purchase and sale of shares / debentures.

55. While adjudicating the above case, the Tribunal examined the provisions of law contained in

section 5(2), section 9(1)(v), section 58(1)(a)(ii) and section 195. But the decision in the said case

has been arrived at by the Tribunal mainly on factual premises. The Tribunal found that the

interest which is chargeable u/s 9(1)(v) is that interest which is utilized in the business carried on

in India. It continued to observe that the borrowings made for the purchase of the shares was a

prima facie indication of the assessee indulging in the business venture. But the most important

observation of the Tribunal is that the assessee being a non-resident could not carry on and was

debarred to carry on any business in India without any approval of the Reserve Bank of India

under the provisions of law contained in sections 28 and 29 of the Foreign Exchange Regulation

Act, 1973. The Tribunal further observed that the assessee in that case had not obtained or being

granted any such approval and it was not the assessee’s line of business; no business either in

India or abroad was stated to have been carried on by the assessee for dealing in shares /

securities / debentures. The Tribunal held that the solitary transaction of two scrips in the

concerned year did not give an impression of any business venture undertaken by the assessee in

violation of the provisions of FERA. Ultimately the Tribunal held that section 9(1)(v) did not

make the interest payment chargeable to tax in India.

56. It is in the light of the above finding of fact with reference to the applicability of section 9(1)

(v) that the Tribunal has primarily come to the conclusion that the assessee in that case was not

bound to deduct the tax when the payments were made to the non resident. It is, thereafter as a

supporting proposition that the Tribunal has held “Even otherwise section 195 was not applicable

as the payment was made outside India”. This supporting observation of the Tribunal has to be

always read along with the primary finding of fact with reference to the applicability of section

9(1)(v). It is not possible, therefore, to come to a conclusion that the Tribunal in the case of

Shrikumar Poddar vs DCIT 65 ITD 48 has independently considered the aspect of territorial

jurisdiction of section 195 and has come to an independent conclusion that where the payments

were made outside India to a non-resident, the provision regarding the deductibility would not

apply.

57. As held by the Supreme Court in the case of UOI vs Dhanwanti Devi 6 SCC 44, a decision is

only an authority for what it actually decides and not for what may logically follow from it. It is

the rule deducible from the application of law to the fats and circumstances of the case which

constitutes its ratio decidendi. Therefore, the observation of the Tribunal in the last portion of its

order regarding the scope of section 195 of the Income-tax Act, 1961 is in the nature of obiter

dicta which, though may receive attention as being an opinion of importance, but no way binding

or laying down a general proposition of law.

58. We, therefore, are of the considered opinion that the decision of ITAT, Mumbai Bench “C” in

the case of Shrikumar Poddar vs DCIT 65 ITD 48 is not a source of precedence to decide the

matter raised in the present appeal before us.

59. The decision of ITAT, Mumbai Bench “C” in Shrikuma Poddar vs DCIT 65 ITD 48 was

delivered on 30th April, 1997 whereafter a recent judgment has been delivered by ITAT, Delhi

Bench “B” on 21 November, 2001 in the case of Babcock Power (Overseas) Projects Ltd s ACIT

81 ITD 29 (Del), which deals with the issue falling under the realm of sections 192 and 9(1)(ii).

In that case, the assessee was a non-resident company incorporated in UK with project office in

India. It had entered into a contract for setting up a coal based thermal power plant in India. For

execution of the contract, the assessee engaged foreign technicians, who were deputed to the

Indian project office. They were on the pay roll of the UK office of the assessee and were paid

salaries in foreign currency by UK office which were credited directly to their bank accounts.

These contracts of employment were approved by the Ministry of Mines for the purposes of

section 10(6). However, the assessee did not deduct the tax at source while paying the salaries to

these persons on the ground that the provisions of section 192 were not applicable.

60. While examining the applicability of section 192 in the above circumstances, the Tribunal

held that if the salary is paid for the services rendered in India, then such payment become

chargeable to tax in India as “salaries” and consequently the provisions of section 192 become

applicable. The Tribunal further held that the fact that the employees as well as the employer are

non residents, the fact that the payment is made outside India and the fact that contract of

employment is also extended out of India, are not relevant for deciding the issue. What is relevant

is the place where the services were rendered.

61. The above decision of ITAT, Delhi Bench “B” in the case of Babcock Power (Overseas)

Projects Ltd s ACIT 81 ITD 29 is a recent decision built on the same factual matrix of the present

case. Further, in the said decision, the Tribunal has considered the decision of the Bombay Bench

in the case of Shrikumar Poddar vs DCIT 65 ITD 48.

62. Even though the learned senior counsel has contended in the light of the Supreme Court

decision in CIT vs Vegetable Products Ltd 88 ITR 192 that the decision favourable to the

assessee should be applied in deciding a matter, we find that in the present case, the decision

relied on by the learned CCIT in Babcock Power (Overseas) Projects Ltd vs ACIT 81 ITD 29 is

more relevant for the purpose of our decision. This is because the decisions arrived at in these

two cases have not been made on the same plane of facts and circumstances. The legal

propositions considered in these decisions are also handled in a different order of precedence and

the decision of the recent Delhi Tribunal in the case of Babcock Power (Overseas) Projects Ltd s

ACIT 81 ITD 29 is directly speaking on the issue considered in the present appeal.

63. As argued by the learned CCIT, there is no conflict between the provisions of law contained

in section 1(2) and section 195. Section 1(2) is not restrictive in nature. At the same time, section

195 does not extend the Income-tax At to territories outside India. But if any foreign entity falls

into the tax net as defined in section 1(2), the entity is bound by all the provisions of the Income-

tax law, wherever applicable. Section 195 is compatible with the provisions f chargeability under

the Income-tax Act. The governing force of section 195 is not the payment as such, but the

payment of income chargeable to tax. The factum of payment is not the crucial thing but the

income character embedded in the payment is the crucial thing. It is to be seen that the emphasis

in section 195 is on chargeability and not on payment.

64. A plain reading of the law provided in section 195 makes it clear that the said section does not

make any distinction between payment within India and the payment outside India. The situs of

the payment or the source of the payment is not a relevant consideration while applying the

provisions of section 195.

65. Section 1(2) cannot be read in isolation. Its extent and import have to be seen with reference

to the subject matter it takes to regulate, i.e. the taxation of income. As pointed out by the learned

CCIT, income is taxed on twin basis; on the basis of residence and on the basis of source. Section

5 of the Indian Income-tax At, 1961 deals with taxation of the income on the basis of source in

sub sections (1) and (2) respectively. Both residence or source or either of the two has to be

within the geographical limits of India which is the true intent of section 1(2). We agree with the

argument of the learned CCIT in this regard.

66. Further as pointed out by the learned CCIT, the difficulties that may arise in the

administration of section 195 is remedied in sub section (2) of that section. Section 195 (2)

provides that the assessee may approach the assessing officer to decide upon the rate at which tax

is to be deducted or for that matter whether tax is to be deducted or not. The option given to the

assessee u/s 195(2) is part and parcel and subversive to section 195(1). Assessee cannot

unilaterally jump into a conclusion that the payments made by the assessee are not liable for

deduction u/s 195. If the assessee finds that tax is to be deducted, tax must be deducted and if

there is a doubt that tax need not be deducted, then the assessee should approach the assessing

officer as provided u/s 195(2). The theme of law is that the assessee cannot either choose or not to

choose the facility u/s 195(2) as it deems fit.

67. The responsibility cast u/s 195(1) and the option provided u/s 195(2) have been considered by

ITAT, Hyderabad Bench “A” in the case of Chemnor Drugs Ltd vs ITO in 76 ITD 37 in an

exhaustive manner. After considering the whole scheme of law, the Tribunal held as follows:

“Any person responsible for paying an amount to a non resident shall, at the time of crediting of

such income to the account of the payee or at the time of payment thereof in cash or by the issue

of a cheque or draft by any other mode, whichever is earlier, deduct income-tax thereon at the

rate in force. This is the general scheme of things provided in section 195. Sub section (1) of

section 195 makes it obligatory for every person in India to deduct tax at source at the rates

specified in the relevant Finance Act. The provisions of section 195(1) apply where the payment

is that of “any other sum chargeable under the provisions of this Act”, not being salary income or

interest on securities. The test for making deduction of income-tax is that the relevant payment

should be chargeable under the provisions of the Act. Where the payer considers that the whole of

the sums specified in sub section 195(1) would not be chargeable in the hands of the recipient, he

can make application to the assessing officer to determine the appropriate portion of the sum so

chargeable. Once the assessing officer determines such appropriate portion of the sums so

chargeable, the deduction of income-tax at source under sub section 195(1) is only to be made on

that portion of the sum which is to be determined. This is provided in sub section (2) of section

195. Likewise, sub section (3) of section 195 enables any non resident in receipt of such

payments to make an application to the assessing officer for a certificate entitling the non resident

to receive payments specified in section 195(1) without deduction of tax at

source……………………. The consultation provided under sub section (2) of section 195 is,

therefore, to be mandatorily followed by the person making the payment to the non resident;

otherwise he is liable to deduct tax at source under the provisions of sub section (1). It is thus

clear that the person making the payments to a non resident cannot take a unilateral decision that

the payments made by him are not sums chargeable to income-tax and, therefore, he could make

the payments without deduction of tax at source, without the concurrence of the assessing officer

as provided in sub section (2) of section 195 ……………. The provisions of section 195(2) are

not provisions of convenience which the assessee may use or may not use. If a person wants to

make payments to a non resident and those payments are not explicitly declared exempt by the

provisions of the Act, the person making the payment has to deduct tax at source as he can free

himself of the liability to deduct tax at source only if he gets the concurrence of the assessing

officer under sub section (2) of section 195.”

68. The view taken by the ITAT, Hyderabad Bench “A” in the case of Chemnor Drugs Ltd vs

ITO in 76 ITD 37 has been literally endorsed by the decision of the Supreme Court in the case of

Transmission Corporation of A.P Ltd & Anr vs CIT 239 ITR 587. The Apex Court has held

therein that if the assessee has made no application u/s 195(2), tax must be deducted u/s 195(1).

69. In the light of the decision of the Gujarat High Court in the case of CIT vs Vijay Ship

Breaking Corporation 261 ITR 133, there cannot a doubt on the proposition that section 195 is

applicable to payments made outside India.

70. In the fats and circumstances considered in detail in paragraphs above, we find that the legal

objection raised by the learned senior counsel on the question of territorial jurisdiction is not

sustainable. Therefore, the said objection is rejected.

71. Next we will consider the second limb of the legal objection raised by the senior counsel that

there was no finding by the assessing officer on the chargeability of tax of the payments before

invoking the provisions of section 40(a)(i). The argument of the learned senior counsel is that the

chargeability referred to in section 40(a)(i) is not a hypothetical, theoretical or notional

chargeability but chargeability established in an assessment made on the recipient and such an

established fact is the fundamental condition precedent for the applicability of section 40(a)(i) of

the Act.

72. We are afraid that if the above contention is taken to its logical conclusion, the very provision

of law contained in section 40(a)(i) would render otiose. There is no dispute regarding the

constitutionality of the provisions contained in section 40(a)(i). The law relating to the

consequence flowing out of the violation of provisions contained in section 195(1) and sub

section (2) thereto have been already dealt in the above paragraphs in the light of the decision of

ITAT, Hyderabad Bench “A” in the case of Chemnor Drugs Ltd vs ITO in 76 ITD 37 and the

decision of the Supreme Court in the case of Transmission Corporation of A.P. Ltd & Anr vs CIT

239 ITR 587 wherein it has been held that the consequence u/s 201(1) and 201(1A) are inherent

consequences of the said violation and if that legal proposition is legitimately extended, the

application of section 40(a)(i) is also one of the inherent consequences coming out of the

violation of section 195.

73. As rightly pointed out by the learned CCIT, the obligations cast on the payer and payee under

the provisions of the Income-tax Act are different in nature. This is very evident from the

statutory provisions contained in sections 195, 201(1), 201(1A) and 40(a)(i) where in all cases,

the liability and consequences are saddled on the payer, who is treated as the defaulter.

74. Therefore, in the facts and circumstances of the case we find that the second legal objection

also is equally unsustainable and, therefore, liable to be rejected.

75. We have considered the vires of the legal objections raised by the learned senior counsel at

the outset of the opening of the case. The legal objections have been considered in a detailed

manner as discussed in the above paragraphs. When the legal objections were raised for the first

time before the Tribunal at the time of hearing, the learned CCIT has raised a formal objection

against its admissibility. We would like to place on record the said formal objection of the

Revenue. But, at the same time, the learned CCIT was fair enough to admit in the court that the

objections raised by the learned senior counsel being pure questions of law, it is for the Tribunal

to decide whether to admit those objections or not. As we found that the objections raised by the

learned senior counsel are legal in nature, we admitted those objections and considered them in a

detailed manner. Finally we have come to a conclusion that those legal objections, are not

sustainable in law. Accordingly they have been rejected. Therefore, now we have to proceed to

consider and dispose of the grounds raised in this appeal on their merits.

76. Shri Dinesh Vyas, the learned senior counsel, while adventing on the merits of the issues

raised in this appeal, gave a brief narration of the salient features of the activities carried on by

the channel companies in the business realm in which the assessee is connected with. The learned

senior counsel stated that all the activities of the channel companies are carried outside India and

no part of the activities of the channel companies are carried out inside India. The content on the

channels is procured by the channel companies from a central content procurement company

outside India. This entity procures content from all over the world including India. The channel

companies do not enter into any contract with Indian Content Providers. The channels are up-

linked outside India. Thereafter the channels are down linked in India by the cable operators, but

on their own account. The entire Ad Airtime on the channels is sold by the channel companies to

the assessee and the sale is made outside India on a principal to principal basis. The channel

companies do not enter into any agreement with any Indian party for the sale of Ad Airtime in

India. The channel companies are incorporated outside India and they do not have any office or

agent or subsidiary in India. They do not have their men or material or machinery or combination

thereof used in India.

77. The learned senior counsel further explained that the assessee company after purchase of the

Ad Airtime from the channel companies undertakes various activities on its own account and at

its own right and the channel companies are not involved in any manner in respect of that

business of Ad Airtime carried on by the assessee. The business strategy, marketing and all other

operational features are determined by the assessee company only.

78. The learned senior counsel thereafter submitted that in the light of the facts of the case, it is

not possible to hold that the channel companies earned any income chargeable in their hands, in

India. The learned senior counsel submitted that this is because as the facts of the case speak,

channel companies do not have any business connection with India, the channel companies do not

carry out any operations in India and the assessee is not acting as an agent of the channel

companies.

79. The learned senior counsel after explaining the preamble to the merits of the case as above,

dealt with in detail the various elements which should be present to hold that the channel

companies had income chargeable to tax in their hands in India. This item-wise arguments made

by the learned senior counsel are summarized below:

(1) The channel companies do not have any business connection with India.

1. The business connection is a concept which can be viewed only from a bilateral angle.

Business connection pre-supposes existence of two elements. Business connection, as

contemplated by section 9 of the Income-tax Act, requires that there exists a real and

intimate connection with the business activity of the non resident in the taxable

territories. The channel companies do not have any business activities whatsoever in

India. Therefore, it cannot be held that the channel companies do have business

connection in India.

2. Reliance placed on the decision of the Karnataka High Court in the case of VDO

Tachometer Warke, West Germany vs CIT 117 ITR 804 wherein the court has examined

the provisions of section 9 to deal with the issue of business connection of the non-

residents in India. The court has held therein that in the case of a business, some

operations must have been carried on by the non resident in India. It follows that if no

operations are carried out in India, no income can be deemed to accrue or arise in India

even though there may be business connection in India.

3. Further reliance placed on the decision of the Madras High Court in the case of CIT vs

Fried Krupp Industries 128 ITR 27 where the court held that the term “business

connection” postulates a continuity of business relationship between the foreign and the

Indian entities. There is no question of continuity of business relation where a person

purchases machinery or good abroad and used them in India and earns profit. The part of

the foreigner has been played wholly abroad so that there is no connection as such with

any business in India.

4. The channels are up-linked from outside India and the channel companies are not

involved in any activity thereafter. The activity of down-linking are carried on by the

cable operators in India on their own account and as part of their business in India.

5. The Hon’ble Supreme Court in the case of Carborandum Co vs CIT 108 ITR 335 held

that even assuming, however, that there was any business connection between the earning

of the income in the shape of technical fee by the American company and the affairs of

the Indian company, yet, no part of the activity or portion could be said to have been

carried on by the American company in India and in the absence of such a sustainable

finding by the High court, the provisions of section 42, either of sub section (1) or sub

section (3) (corresponding provisions f the Income-tax Act, 1922), were not attracted at

all.

6. The Calcutta High Court n the case of Atlas Steel Co Ltd 164 ITR 401 has held that a

business connection contemplated under the Income-tax Act involves a relation between

business carried on by a non resident and some activity in the taxable territory which are

attributable directly or indirectly to the earnings, profits or gains of such business.

7. The Supreme Court in the case of CIT vs RD Agarwal & Co 56 ITR 20 has held that a

business connection involves a relation between a business carried on by a non resident

which yields profits and gains out of some activity in the taxable territories which

contributes directly or indirectly to the earning of those profits and gains. The court

further held that the expression “business connection” postulates a real and intimate

relation between a trading activity carried on outside the taxable territories and an activity

carried on within the taxable territories, the relation between the two contributing to the

earning of income by the non-resident.

8. The agreement for the sale of Ad Airtime between the assessee and the channel

companies is entered into and executed on a principal to principal basis entirely outside

India. Therefore, there cannot be any business connection with the channel companies in

India.

9. The CBDT in circular No.23 dated July 23, 1969 has stated that where a non-resident

parent company sells goods to its Indian subsidiary, the income from the transaction will

not be deemed to accrue or arise in India u/s 9, provided that – (a) the contracts to sell are

made outside India; (b) the sales are made on a principal to principal basis and at arm’s

length; and (c) the subsidiary does not act as an agent of the parent company. The mere

existence of a business connection arising out of the parent / subsidiary relationship will

not give rise to an assessment nor will the fact that the parent company may exercise

control over the affairs of the company.

10. The Bombay High Court in the case of CIT vs Gulf Oil (Great Britain) Ltd 108 ITR 847

had considered the case of a non-resident company which had a wholly owned subsidiary

in India. The products dealt with by the non-resident company were being sold by the

subsidiary in India. The court held that the contracts were made in UK and the contracts

were also executed outside India and once the goods were to be on the ship there was no

reservation of right of disposal of the goods by the non-resident and Indian company

effect the sale of the products on its own account in India and was taxed on the profits so

made by it on its turnover in India, the transaction between the non resident company and

the Indian subsidiary were on a principal to principal basis and the Indian subsidiary

could not be regarded as the agent of the non-resident company so as to attract the

provisions of “business connection”.

11. The conclusion of the lower authorities that the channel companies have business

connection in India is erroneous.

(2) Channel companies do not carry out any operations in India

1. The CIT(A) has erred in holding that the channel companies carried out operations in

India for the purposes of section 9(1)(i) read with Explanation 1(a) of the Income-tax

Act.

2. All the activities of the channel companies are carried outside India; the channel

companies do not have any office or establishment or manpower or material or

machinery or combination thereof in India; all the activities of the channel companies are

undertaken outside India including the procurement of content play out and scheduling of

channels, broadcasting operations, etc.; the channel companies have not entered into any

contract with Indian Content Providers; the channels are up-linked entirely outside India

and they are down-linked in India by the cable operators on their account.

3. The activities carried on by the assessee company in India are independent activities

carried on by the assessee on its own account and not in the capacity of any

representative or agent of the channel companies. As far as the sale of Ad Airtime in

India is concerned, the whole strategic, operational, functional decisions are taken by the

assessee company independently in its own account.

4. Explanation 1(a) to section 9(1)(i) of the Income-tax Act provides that in the case of a

business of which all the operations are not carried out in India, the income of the

business deemed under this clause to accrue or arise in India shall be only such part of the

income as is reasonably attributable to the operations carried out in India which make it

clear that if no operations are carried out by the channel companies in India, no income

can be attributed and taxed in India.

5. The Bombay High Court in the case of CIT vs Tata Chemicals Ltd 94 ITR 85 has held

that where every activity was done outside the taxable territory of India, it cannot be held

that the non-resident company had any operations in India.

6. The Supreme Court in the case of Carborandum Co vs CIT 108 ITR 335 has held that if

all the operations are not carried out in the absence of any activity or operation carried on

by the foreign company in India, the business connection does not become effective so as

to hold the foreign company taxable in India.

7. The Supreme Court in the case of CIT vs Toshuku Ltd 125 ITR 525 has held that if no

operations of business are carried out in the taxable territories, it follows that the income

accruing or arising abroad through or from any business connection in India, cannot be

deemed to accrue or arise in India.

8. The Karnataka High Court in the case of VDO Tachometer Warke, West Germany vs

CIT 117 ITR 804 has held that if no operations are carried out in India no income could

be deemed to accrue or arise in India even though there may be business connection in

India.

9. Reliance has also been placed on the following decisions:

CIT vs Dunlop Ltd (UK) – 201 ITR 534 (Cal)

Citizen Watch Co Ltd vs IAC – 148 ITR 774 (Kar)

CIT vs Good Year Tyre & Rubber Co – 184 ITR 369 (Del)

Imperial Chemical Industries Ltd vs IAC – 19 ITD 275 (Cal)

Asia Satellite Tele Communications Ltd vs DCIT – 85 ITD 478 (Del)

ITO vs Raj Television Networks Ltd (Mad)

(3) The assessee is not an agent of the channel companies.

1. The CIT(A) has erred in holding that the assessee is an agent of the channel companies.

The facts and circumstances of the case will demonstrate that the assessee is not acting as

the agent of the channel companies in India.

2. The agreement for the outright sale of Ad Airtime between the assessee and the channel

companies is executed on a principal to principal basis, outside India. This is evidenced

by the terms of the agreements and also by the conduct of the parties.

3. The consideration for the sale of Ad Airtime is paid by the assessee to the channel

companies by way of a minimum guarantee amount and also as a specified percentage of

the advertising revenues collected beyond a threshold limit.

4. The assessee thereafter sells the Ad Airtime either by itself or through its agent, in and

outside India. In India, the Ad Airtime is sold through its agent, M/s Star India Pvt Ltd

(SIPL).

5. The covenants reflected in clause (2) and its various sub clauses clearly indicate that the

channel companies have entered into an agreement for selling Ad Airtime to the assessee

on a principal to principal basis.

6. The condition for a person to constitute an agent of another is that the person must be

employed by the principal to act on his behalf and to represent him in dealings with third

persons. There is nothing in the agreement for the sale of Ad Airtime to hold that such a

relation exists between the assessee and the channel companies. Reference is made to

section 182 of the Indian Contract Act, 1872 and the commentary of Pollock & Mulla –

Indian Contract and Specific Relief Acts, Twelfth Edition at page 2062 and 2063.

7. As per clause (2) of the agreement for the sale of Ad Airtime, the assessee has the

discretion to – (a) determine the terms of the agreements with advertisers, programme

sponsors and other third parties; (b) enter into and barter sale of Ad Airtime; and (c)

decide with whom it shall enter into agreements with.

8. The agreement does not require or provide for the assessee to act under the direct or

indirect control or supervision of the channel companies. An important aspect for

existence of an agency relationship is that an agent is required to conduct the business

according to the direction of the principal. Such a binding is not incorporated in the sale

agreement.

9. The Supreme Court in the case of Bhopal Sugar Industries Ltd vs STO 40 STC 42 has

held as follows:

“Thus, the essence of the matter is that in a contract of sale, title to the property passes on to the

buyer on delivery of the goods for a price paid or promised. Once this happens, the buyer

becomes the owner of the property and the seller has no vestige of title left in the property. The

concept of a sell has, however, undergone a revolutionary change, having regard to the

complexities of the modern times and expanding needs of the society, which has made a

departure from the doctrine of laissez faire by including a transaction within the vault of a sale

even though the seller may by virtue of an agreement impose a number of restrictions on the

buyer, example, fixation of price, settlement of accounts, selling in a particular area or territory or

so on. These restrictions per se would not confer a contract of sale into one of agency because in

spite of these restrictions the transaction would still be a sale and subject to all the incidence of a

sale………………..”

10. The Supreme Court has observed in Shri Tirumala Venkateshwar Timber & Bamboo

Firm vs CTO 21 STC 312 that as a matter of law there is a distinction between a contract

of sale and a contract of agency by which the agent is authorized to sell or buy on behalf

of the principal and make over either the sale proceeds or the goods to the principal.

11. The Supreme Court has again held in the case of Gordon Woodroffe & Co (Mad) Ltd vs

Shaikh MA Majeed & Co AIR 1967 SC 181 that the essence of agency to sell is the

delivery of the goods to a person, who is to sell them not as his own property, but as the

property of the principal, who continues to be the owner of the goods and who is,

therefore, liable to account for the proceeds.

12. As the Ad Airtime in the present case passes from the channel companies to the assessee

outside India, the income of the channel companies does not accrue or arise in India.

Reliance has been placed on Seth Rushalal Mansingka (P) Ltd vs CIT 66 ITR 159 (SC)

and CG Krishnaswamy Naidu vs CIT 62 ITR 686 (Mad).

13. The revenue earned by a non-resident from sale of goods to a resident is not taxable in

India if the sale takes place outside India. He has placed reliance on the decisions of

Supreme Court in Mahavir Commercial Company Ltd vs CIT 86 ITR 417 and CIT vs

Mewar Textile Mills Ltd 91 ITR 542. He has also relied on the decision of the Bombay

High Court in the case of CIT vs Kirloskar Oil Engines Ltd 135 ITR 762.

14. The principles explained in the above judgments provided the consequence of sale of

goods by a non-resident to a resident where the non-resident does not earn any income in

India. The case of the assessee is even stronger as the sales by the non-resident channel

companies to the appellant which itself is also a non-resident foreign company.

Therefore, the payments made by it to the channel companies for the purchase of Ad

Airtime are not taxable in India.

80. Shri GC Srivastava, the learned CCIT, in return, contended that the channel companies do

earn taxable income within the territories of India by way of their telecasting activities. He

explained that the contentions of the assessee that the channel companies did not have any

business connection within India, no business operations carried out in India are not true in the

light of the activities carried on by the channel companies in association with the assessee and its

associates in India. The assessment under appeal is not of the channel companies but that of the

assessee, who had paid the amounts to the channel companies. Therefore, the issue of taxability

of income in the hands of the channel companies in India is to be examined only to the extent of

ascertaining whether the assessee was justified in its stand that the channel companies did not

have taxable income in India. The case of the channel companies fall u/s 9(1)(i) where the

essential ingredient to be satisfied is the business connection in India. The Explanation thereto is

not restrictive of the scope of deemed accrual u/s 9(1)(i), but is meant for providing the rule of

income attribution. Sub sections (2) and (3) illustrate special cases of business connection and in

no way purport to limit the general and exhaustive connotation of the expression “business

connection” in India. The learned CCIT has placed reliance on the Supreme Court decision in the

case of CIT vs RD Agarwal & Co 56 ITR 20 which has also been relied on by the learned senior

counsel, who appeared for the assessee. The learned CCIT submitted that a business connection

as elucidated in the above judgment involves a relation between a business carried on by a non

resident which yields profits and gains and some activity in the taxable territories which

contributes directly or indirectly to the earning of those profits and gains and this proposition is

squarely applicable to the activities carried on by the channel companies through the medium of

the assessee in India. The detailed contentions of the learned CCIT are summarized below:

(1) The channel companies do have business connection and source of income in India.

1. The expression “business connection” has not been defined in the Act and Rules. But

various judicial pronouncements have examined the true intent of the said expression and

have laid down the necessary ingredients of “business connection” for the purpose of

deeming of income in India. “Business connection” involves a business activity anywhere

but yielding income and some activity in the taxable territories of India which contribute

directly or indirectly to earning of such income in the hands of the non-resident. It is not

necessary that the entire business operation of the non-resident should be in the taxable

territory. What is required is a real and intimate relation. Section 9(1)(i) brings in the tax

net the income arising outside taxable territory and not the income arising in India. But

that income arising outside the taxable territory shall have a base relation of earning such

income in India. The Supreme Court has held in RD Agarwal & Co 56 ITR 20 that a

casual transaction will not lead to a business connection.

2. The expression “business connection” is to avoid to confine within a precise definition.

But it can be ascertained that the essence of business connection is the existence of a

close, real and intimate relationship and commonness of interest between the non-resident

company and the Indian entity.

3. Where there is control of management or finances or substantial holding of equity shares

or sharing of profits by the non resident company of the Indian person, the requirements

necessary for establishment of the business connection are fulfilled.

4. Purchases from non resident at assessee’s own risk are not good enough to hold that no

business connection existed for the non-resident in India.

5. The Bombay High Court has held in Ivans Medical Supplies Ltd 36 ITR 418 that where

the Indian entity earlier carried the business as authorized agents and later on of its own,

a business connection would exist if commission is paid for propaganda or advertisement

allowance is given.

6. In the light of the above principles, if the facts of the present case are examined, there is

no doubt that the channel companies have a business connection in India.

7. All major activities are in India including the revenue yielding activities. The sale stated

by the assessee is not a sale of goods outside India FOB. There is a close and intimate

connection between one activity and the other carried on by the channel companies as

well as by the assessee company.

8. There is control of management and substantial holding of equity shares on the assessee

and the channel companies as both are 100% subsidiaries of holding company. In the

light of the decision of the A.P. High Court in the case of GVK Industries Ltd 228 ITR

564, this makes out a clear case of business connection for the channel companies in

India.

9. As per the agreement, there is a sharing of profits between the channel companies and the

assessee at 80% to 20% which satisfies the test laid down by the Bombay High Court in

the case of Metro Goldwyn Mayer (India) Ltd 7 ITR 176 to substantiate a case of

business connection.

10. As seen above all the tests laid down by leading judgments in respect of the expression

“business connection” are fulfilled in the case of the assessee and, therefore, it has

necessarily to be held that the channel companies do have business connection in India.

(2) Channel companies do carry out operations in India

1. Channel companies are the owners and operators of the channels. The activities involved

in operating a channel center around the chain of an activity consisting of so many inter-

related modules.

2. The first of such module is preparation of programmes meant for telecasting.

Programmes may be prepared by channel companies themselves or may be acquired or

outsourced.

3. Creating network for viewers is the next step, which is carried out through the chain of

cable operators in every footprint of the channel telecast.

4. Telecasting and marketing of the programmes follow the earlier modules. It involves up-

linking the programmes to a satellite which may be owned, hired or taken on lease by the

channel companies. Thereafter down-loading has to be done through decoders provided

to the cable operators for which prescribed fee are levied.

5. The next step, as the main source of revenue, channel companies have to procure

advertisements from customers.

6. All the above activities are present in India out of which the channel companies along

with its associates earn the revenue.

7. The above scheme of the operations carried out by the channel companies through the

assessee company and its associates and agents are nothing but business operations

carried out in India in which channel companies do occupy the leading role.

8. The telecasting business being a continuous and flowing process, the entire activities are

carried out by the assessee through the help of agents, sub agents and other associates

concerns and subsidiaries.

(3) Assessee is the agent of the channel companies

1. Channel companies are the owners of the channels and channels are operated by channel

companies. They determine the content of every channel. Telecast of advertisement is the

responsibility of the channel companies.

2. Therefore, the performance of the contract relating to the sale of Airtime is done by the

channel companies and, therefore, it is not possible to hold that the agreements entered

into between the channel companies and the assessee are entered into in the status of

independent principals.

3. The essential ingredients of a sale are an agreement of sale, transfer of title in goods and a

price paid or to be paid. In the present case, there is no transfer of Air Time to the seller.

Even the 10 minutes prescribed for advertisement is not transferred to the assessee.

4. When the advertisements are booked and the contents of advertisements are obtained,

they emerge with the programmes telecasted by the channel companies. The assessee gets

only a right to include the contents of the advertisements procured by it. Apart from that

right, there is no transfer of any property from channel companies to assessee. The said

right is not greater than the right of the ultimate customer, who pays for the advertisement

telecast by channel companies.

5. The channel companies do not loose ownership of any right transferred to assessee

company. The position is clear when the difference between booking and sale is

considered. Assessee is doing booking of advertisements and nothing more. In such

circumstances, no property passes on to the assessee nor does any sale take place.

6. Booking of advertisement is only a service which cannot be sold as an asset or property.

The Airtime does not have any right of property at attached to it.

7. As per section 18 of Sale of Goods Act, no property in goods gets transferred to the buyer

until the goods are ascertained. In the present case, every time to be utilized for Airtime is

a future time, goods cannot be held as ascertained and, therefore, there could not be any

sale.

8. In an outright sale, the buyer does not have any obligation other than the payment of

consideration. But in the present case, the channel companies do possess all sorts of

interests, both commercial and financial in the advertisements telecast through the

assessee company.

9. It is not correct to argue that the nature of transaction between channel companies and the

assessee is that of principal to principal. The assessee is acting as the agent of the channel

companies, even though the terms of the agreements are modulated in such a manner and

the clauses of the agreements are so fine tuned to preach a theory of principal to principal

relation.

10. The agreements entered into between the channel companies and the assessee prior to

1999 was a clear case of agency. Assessee company was appointed as the exclusive

world wide agent of channel companies. It is only in the new agreement after 1999 that

the designation of the assessee company has been changed from that of an agent to the

principal. Even though the language used in the agreement repeatedly stated a case of

principal to principal relation, all the functions carried out by the assessee company

remained the same as it were prior to 1999. Except for the cosmetic changes brought into

the agreement, the functional relationship between the assessee and the channel

companies remained the same. Such a relation is necessary for the accomplishment of the

business activities carried on by the channel companies. The nature of the existing

relationship cannot be disturbed either by the channel companies or by the assessee. The

assessee is the de facto agent of the channel companies for all practical purposes.

11. M/s SIPL is designated as the agent of the assessee company. According to the assessee,

the Airtime procured from channel companies is marketed through M/s SIPL. But in fact

SIPL is the agent of channel companies. On the basis of the agreements entered into

between the assessee and SIPL, M/s SIPL is supposed to discharge a number of

obligations in favour of the channel companies. The channel companies do not make any

payment to M/s SIPL for obtaining such services. This is a clear ground to hold that even

though SIPL and channel companies are distanced in between by the assessee company,

M/s SIPL is functionaries as the agent of the channel companies.

12. In the circumstances, it is not possible to hold that the channel companies and the

assessee are operating as independent principals.

82. We heard both sides in detail on the above grounds relating to the merit of the case. At the

cost of repetition we state that the contention of the assessee is that the channel companies do not

earn any taxable income in India for which the reasons pin-pointed by the learned senior counsel

are that the channel companies do not have any business connection with India; that the channel

companies do not carry out any operations in India; and that the assessee is not an agent of the

channel companies. On the other hand, the case of the Revenue is that in the nature of the

telecasting activities carried on by the channel companies and in the light of the functional

relationship existing among the channel companies, the assessee and other associate concerns, it

is necessary to hold that the channel companies are having business connection with India for the

reason of their business operations being carried out in India and further that the relationship

existing between the channel companies and the assessee are nowhere near the relationship of

principal to principal.

83. As far as the present case is concerned, the ultimate business carried on right from the channel

companies to the advertisement procuring companies is the business of telecasting through

different brand channels through the medium of satellite and transponders, along with the

supporting network provided by the cable operators, operating within different footprints falling

under the telecasting network.

84. In this scenario and within the legal framework contemplated by the channel companies and

the assessee company, the question to be looked into is whether the channel companies do have

any income out of the above activities, arising or accruing in India. If we go to the substance of

the activities carried on by the assessee company, the three grounds raised by the assessee and

said to be determinative of the issue, can be dealt with, simultaneously. Therefore, all the issues

raised by the learned senior counsel and replied by the learned CCIT on merit, are considered

together for the purpose of arriving at our conclusion:

1. The essence of the argument advanced by the learned senior counsel is that channel

companies do make an outright sale of Ad Airtime to the assessee company, who in turn,

sell them to the ultimate customers through duly appointed agents. The case of the

assessee is that the transaction of outright sale is made between the channel companies

and the assessee on a principal to principal basis.

2. Ad Airtime is the telecasting time utilized for commercial advertisements for and on

behalf of the clients. The subject matter of “outright sale” contemplated by the assessee

in any way is “TIME”.

3. “Time” as a subject matter is not something like an ordinary commodity, merchandise,

property or asset. It is not goods in the ordinary parlance. In commercial sense, “time” is

paramount but at the same time difficult to define as saleable goods. “Time”, even if

conceived as goods, cannot be stocked or traded like other ordinary goods. There are

certain industries in which “time” is most important as a single element. A classic

example is that of a hotel industry. Even if a particular hotel is ready to offer a number of

appointed rooms for its guests, those rooms as a “trading commodity” cannot be stocked

beyond “time”. If a particular room could not be let out on a particular day, remained

unoccupied for that day, that loss of opportunity / income is felt for ever. The room-time

cannot be saved as a stock to be sold later. Whereas in the case of any other dealer who

stocks goods, the stock held by him could be sold if not today, but certainly some other

day. The commercial life of the room runs out along with passage of time. This is true

with almost all service industries.

4. It is difficult, therefore, to conceptualise the essence of “time” as a subject matter of

“outright sale”. By its very nature “time” is borne and exhausted instantaneously,

moment after moment. It cannot be delivered in advance. An outright sale is not complete

without the delivery of the goods contracted for. Channel companies cannot make any

“outright sale” of Ad Airtime to the assessee company, outside India. It is not, therefore,

possible to hold that the assessee company has taken delivery of “Ad Airtime” outside

India as a result of “outright sale” and in its turn, transferred to its agent for further down-

line sales to the ultimate sponsors / customers in India. Even if, for the convenience of

commercial expression one may use the term “sale of Ad Airtime”, it does not fall under

the legal concept of sale.

5. The business of telecasting is a continuous and non-stop process initiated by the channel

companies and ultimately enjoyed by the viewers. It is a long chain of process involving

engineering, technology, electronics, communication, art, literature, glamour, etc. It is an

incessant flow of events. Even if the channel companies treat the assessee company as a

principal for the sake of their argument, the assessee has to invariably act as the

functional agent of the channel companies while associating with the channel companies

in carrying on its business. This is because, the chain of activities involving the business

of telecasting cannot be divided and segregated into transferable modules from channel

companies to assessee company and from assessee company to other selling agents. The

business carried on by the channel companies is an indivisible and wholesome chain of

activities that it cannot be segregated and packed as independent modules. What is

possible is that all the players involved in this business can simultaneously take part in

the carrying on of the telecasting business which runs incessantly, as a procuring agent or

as a facilitator or as a booking agent or as an associate or as an outsourcer or like. The

assessee, as one of the players can reserve its right to use the “Ad Airtime” for the

advertisement procured by it from various clients. This right of the assessee is to be used

along with the process of telecasting itself. Channel companies are carrying on the

process of telecasting in a continuous manner in which a specified Airtime can be

reserved and used by the assessee company for the commercials. Still, it is a part of the

telecasting carried out by the channel companies.

6. The above discussion on the subject matter of the sale contemplated between channel

companies and the assessee leads us to state that “Ad Airtime” does not come under the

legal framework of “sale” as the telecasting activities carried on by the channel

companies are a sort of incessant flow of events in which the concerned players can take

part but cannot take away segment by segment by way of outright sale.

85. The most important outcome of the above discussion is the identification of the nature of

relation existed between channel companies and the assessee in the light of the agreements

entered into by them. As the subject matter of the agreements is the so-called “sale of Ad

Airtime”, an outright sale as argued by the assessee cannot be contemplated in the scheme of

things. Leave it apart that it is not a sale, there is not even a right to use which could be deemed

as a sale in the light of the constitutional amendment. In our opinion, the subject matter of

agreements entered into between the assessee and the channel companies on the subject of “Ad

Airtime is only a permissive right. The above mentioned permissive right conferred on the

assessee company through the agreements entered into with the channel companies is borne, used

and exhausted in Indian territories. There could be more than one countries other than India

coming under the footprint of the satellite telecast made by the channel companies, as a result of

which some programmes and advertisements telecast in India would be available in other

countries also where they fall under the footprint of satellite telecast. But the fact that other

countries also come under the very same telecasting network which applies to India as well is not

a reason to hold a view that the activities of telecasting are not done in India. The correct reading

of the situation is that the telecasting activities are operated not only in India but also in other

countries falling under the footprint of the satellite telecasting.

86. The channel companies even after “sale of Ad Airtime” have maintained their commercial

and financial interest in the activities carried on by the assessee company. The total revenue

collected by the assessee company does not go to its chest. The assessee company is bound to pay

a minimum guaranteed amount to the channel companies plus a portion of the revenue where it

exceeds the prescribed threshold limit. In effect, the revenue collected by the assessee company is

shared both by the assessee company and the channel companies. This arrangement of sharing the

revenue is a clear manifestation of the financial interest continued to be held by the channel

companies even after the “sale of Ad Airtime”. The channel companies do monitor all the

business and operational aspects of the assessee company relating to viewership, marketing and

other strategic aspects of the “Ad Airtime” business. This is the reflection of the commercial

interest still retained by the channel companies in the activities carried on by the assessee

companies in the activities carried on by the assessee company, even after the “sale of Ad

Airtime”. The telecast up-linked by channel companies outside India are down-linked by the

cable operators by using the decoders, in India. The flow of the telecasting begins with the up-

linking done by the channel companies outside India and terminates with down-linking done by

the cable operators in India and ultimately reaching to the screens of the viewers at large. In the

above scheme of operation what is the role of the assessee company? Does it purchase anything

out of that telecast offer? Do the channel companies sell and deliver anything to the assessee in

their process of telecasting? No. In fact, it is the direct connection between the channel companies

and the cable operators that is involved in the actual operation of the process of telecasting. The

cable operators stand in India. They down-link the programmes in India. The advertisements

procured by the assessee company also form part of the telecasting done by the channel

companies and simultaneously down-linked by the cable operators in India. In the above scheme

of things, the role of the assessee company is that of a procuring agent of advertisements for the

channel companies through the agreements of “Ad Airtime”. As already pointed out, the assessee

is having only a permissive right to use the time slot for telecasting the advertisements procured

by it and that telecasting of advertisement is finally delivered in India when the programmes are

down-linked by the cable operations in India. Therefore, the end result of the agreements entered

into by the assessee company and the channel companies with reference to “Ad Airtime” is

undoubtedly outcome in India and within its territories.

87. The telecast of advertisements made through the medium of the assessee company is an

integral part of the wholesome telecasting activity carried on by the channel companies. The off-

shoot of the above finding is that, it is not practically possible for the channel companies to make

the sale of any part or portion of the telecasting activities carried on by them. The advertisements

telecast through the channels owned by the channel companies are in an inseparable part of the

regular programmes telecast by them. The difference is that for the “Ad Airtime” exploited in the

telecasting schedule, the channel companies are earning their revenue. Therefore, as far as the

ultimate outcome of the channel companies by way of telecasting is concerned, the

advertisements procured through the medium of the assessee company as well as other

programme contents procured and telecast by the channel companies do form an inseparable flow

of telecast contents of the respective channels. In these circumstances, there cannot be an

occasion at all for the channel companies to pick out a particular “segment of time” christened as

“Ad Airtime” and make a sale of the same to the assessee company.

88. In the discussions made in paragraphs 84 to 87 above, we have considered the nature of

relationship existed between the assessee company and the channel companies in the scheme of

telecasting activities carried on by the channel companies. Even though the agreements entered

into between the assessee and the channel companies contemplate a relationship of principal to

principal, on an examination of the substance of the agreements and the nature of activities

carried on by the parties, we have come to a finding that the assessee is acting as a functional

agent of the channel companies. Therefore, the whole emphasis given by the assessee on the

principal to principal relationship said to be existing between the assessee company and the

channel companies is unacceptable and those contentions are in fact not relevant in deciding the

issue before us.

89. Another important argument of the assessee is that the channel companies do not have any

business connection with India. The basis of the said argument is that the “Ad Airtime” given by

the channel companies is a matter of outright sale concluded outside India. As already stated,

“time” is always a future commodity and there cannot be any advance delivery of time as in the

case of other goods. Therefore, there cannot be a contract executed between the channel

companies and the assessee company on the basis of delivery of goods. When the agreements are

executed by the assessee and the channel companies, “the sale of Ad Airtime”, contemplated by

the parties thereto, is only in a conceptual state. The sale in that conceptual state is converted into

an actual sale, when the delivery is made. When and where the delivery is made in the present

case? The “Ad Airtime” is inseparable from the total telecast schedule of the channel companies.

The delivery of the “Ad Airtime” is along with the telecast of the programmes scheduled by the

channel companies. The advertisements brought in by the assessee company are telecast along

with the programmes to be viewed by the viewers in India. So the delivery of “Ad Airtime” is

very much made in India and, therefore, it is to be stated that, “the sale is concluded in India”.

What is agreed and concluded outside India is the sale in a conceptual state and what is delivered

and executed in India is the actual sale. The sale of “Ad Airtime” is, therefore, made by the

channel companies within India, which is the source of revenue of the channel companies. The

circumstances explained above are an eloquent testimony to establish that the channel companies

do have business connection with India. In the light of this fundamental finding of fact of the

other contentions advanced by the assessee are either logical or technical or academic. It is not

possible to visualize a situation where all the programmes are delivered by the channel companies

in India but the advertisements alone are delivered outside India. Even though we have already

held that there is no sale of “Ad Airtime” as contemplated by the assessee, in the present

discussion we are using the terms “sale of Ad Airtime” only for the sake of convenient

expression.

90. The argument of the assessee company is that the telecast is ultimately delivered to the

viewers at large by the cable operators in India, operating on their own account and not by the

channel companies or the assessee company. This is not correct. The programmes and other

contents of the telecast made by different channels are delivered in their respective brand name

till it reached the ultimate viewer. The role of the cable operators is that of decoding the

transmission and facilitating the exhibition through their cable network. This is in fact a service

provided by the cable operators to the channel companies. It does not take away the authorship

and responsibility of the telecasted programmes and contents from the channel companies and put

on the cable operators. The channel companies themselves are delivering the programme contents

along with commercial advertisements to the viewers in India. It is only that the channel

companies are utilizing the services of various supporting agents like assessee, assessee’s agent,

cable operators, etc. The role of all the supporting agents are integrated in the mainstream of

telecasting activity carried on by the channel companies through the medium of satellite and

transponders. All the other technical and operational aspects of the business explained by the

assessee do not affect the legal character of the relationship of the parties inter se.

91. As argued by both the parties, there are a number of judicial pronouncements which have

examined the legal concept aspects of “business connection with India”, in the context of the

arising or accruing of income to a non-resident in India. The Karnataka High Court in the case of

VDO Tachometer Warke, West Germany vs CIT 117 ITR 804 has held that in order to establish a

case of business connection with India, it is necessary that the non-resident should carry on some

operations in India. The Madras High Court in the case of CIT vs Fried Krupp Industries 128 ITR

27 has held that the business connection postulates a continuity of a business relationship

between foreign and Indian entities. The Supreme Court has held in the case of Carborandum Co

vs CIT 108 ITR 335 that for the purpose of business connection with India, it is necessary that

some part of the activities need to be carried on by the non-resident in India. The Supreme Court

has held in the case of CIT vs RD Agarwal & Co 56 ITR 20 that the non-resident need to earn

some profit and gains out of some activities carried out in India. If we examine the nature of

operations carried out by the channel companies in their business of telecasting as explained in

the above paragraphs we do find that the ultimate delivery of programmes are made by the

channel companies in India and the outcome of all the agreements entered into between the

assessee and the channel companies and that of the cable operators are all finally culminating in

India. We have seen that the role of the channel companies in telecasting does not cease once the

programmes are up-linked outside India. We find that the role continues till the ultimate delivery

is made in India by way of the telecast being reflected in the screens of the ultimate viewers.

Therefore, in the light of the above judicial pronouncements we have to hold that the assessee is

having live, meaningful and continuing business relationship with India on account of their

operations carried out through various supporting agents and those operations being carried out in

India being the main source of income for those channel companies. In other words, the channel

companies do have a continuous business relation supported by continuous business operation in

India, which ultimately turn into an important source of revenue for the channel companies.

Therefore, we have to hold that the channel companies are having business connection with India.

92. We have seen that the relationship between the channel companies and the assessee company

cannot be treated that of a principal to principal. We have also seen that the channel companies

are having business connection with India. Now the question is whether the channel companies

are having any business operation in India or not?

93. The final delivery of the programmes telecast by the channel companies are made for the

ultimate viewers in India. When the delivery of the programmes is so important to the ultimate

viewer in India, it is to be seen that the services or the entertainment or whatever is provided by

the channel companies through their business of telecasting is materialized, crystallized, delivered

and enjoyed in India. This is nothing but an apparent business operation carried out by the

channel companies in India.

94. The fact that the channel companies having their base operation in Hong Kong or telecasting

through out the Asian region, India being only one of the footprint areas of the telecasting

network, and that the channel companies are not delivering anything special to India, are all

arguments of no relevance in examining the question of business connection with India and the

business operations carried out in India. The telecasting network may be spread over the skies of

the whole of Asia. But as far as the present case is concerned, we are concerned only with those

operations related to reflected in India as one of the footprint area falling under the telecasting

network. Other countries also may have a similar case; but that is not the point of discussion here.

The only test to be seen is whether such final delivery of goods or service coming out of the

telecasting business is made in India or not? If it is made in India as one of the footprints area

falling under the telecasting network, it is sufficient to conclude that the channel companies do

earn that much of income from India.

95. The Bombay High Court in the case of CIT vs Tata Chemicals Ltd 94 ITR 85 has held that

there cannot be any business operation for a non-resident in India if the entire activities are

carried outside India. This view has been declared by the Supreme Court in the case of

Carborandum Co vs CIT 108 ITR 335. The Supreme Court has also held in the case of CIT vs

Toshuku Ltd 125 ITR 525 that if no operations in India are carried out by non-resident, then there

cannot be a case of business operation in India. Something further, the Karnataka High Court has

held in VDO Tachometer Warke, West Germany vs CIT 117 ITR 804 that even if there is a

business connection with India, operations also need to be carried out in India so as to make the

non-resident liable for Indian taxation.

96. The nature of operations examined in the above paragraphs does not clash with any of the

principles laid down by the courts in the judicial pronouncements cited above. As already held in

paragraphs above, the channel companies are having substantial business connection with India;

so also they do carry on telecasting operations not from outside India alone, but extend on such

activities to India also till it reach the ultimate viewer. We, therefore, have to hold that along with

a substantial business connection with India, the channel companies are having their business

operations carried out in India in a continuing manner.

97. The Bombay High Court n CIT vs Ivans Medical Supplies Ltd 36 ITR 418 and A.P. High

Court in GVK Industries Ltd & Anr vs ITO & Anr228 ITR 564 have held that yielding of income

of non-resident coupled with some activities carried on in India make it liable for taxation of

India to the extent of income accrue or arise or deemed to accrue or arise in India. The above two

decisions support the arguments advanced by the learned CCIT. The telecasting operations

carried out by the channel companies in India are the sure source of revenue for them. They are

carrying out operations in India in the process of the telecasting carried out by them which results

in yielding of income for them. The above two findings make out a case of business connection

of the channel companies with India for the purpose of section 9(1)(i).

99. As far as the issues involved in this appeal are concerned, they are complex and sometimes

even abstract. Therefore, there is always scope for wide range of arguments, propositions and

comments. But as CP Scott put it “comment is free, but facts are sacred”. In the light of the

discussions made in the above paragraphs with reference to the business connection and business

operations, we come to the following findings:

I. The channel companies are having business connection with India; and they are having

continuous business operations in India and that the relationship between the assessee

company and the channel companies is not that of principal to principal.

II. The assessee company, the channel companies and other players in the field, other than

the cable operators in India are 100% subsidiaries of a mother holding company. The

players are not strangers. The subsidiaries are engaged in managing the various aspects of

the telecasting business carried out by the channel companies through their brand names,

but ultimately controlled by the mother holding company. The directors are common; the

business line is common; the business operations are intimately inter-connected; inter-

linked and inter-laced. Even though responsibilities are assigned to different subsidiaries,

the functions carried out by all the subsidiary companies are towards the commonness of

interest involved in carrying out the telecasting industriy as transnational business

corporations. It is, therefore, possible to hold a view that when the question of accruing or

arising of income to the channel companies or to one of the subsidiaries in a footprint

country falling under the telecasting network of the channel companies is concerned, the

propositions like principal to principal relationship, regimentation of activities, etc. are

almost irrelevant and theoretical in nature.

100. If the arguments advanced by the assessee company that there is no business connection for

the channel companies with India and that the channel companies do not have any place of

business or source of income in India are accepted, it would necessary to examine what is the

subject matter of contract between the assessee and the channel companies in respect of “Ad

Airtime”. Indian “Ad Airtime” is a source of income for the channel companies. The ultimate

telecast of the programmes is made in India. The ultimate delivery of the programme contents

through telecast to Indian viewers is the soul and substance of the agreements entered into

between the channel companies and the assessee company. Even though for the purpose of

engineering and technology, the telecasting is transmitted through the satellites situated in the

high sky, Indian space is a definite place of business. In the modern cyber age and particularly in

the business of communication and telecasting through satellite and transponders, a business

place or a permanent establishment does not mean a structure of bricks and mortar alone. It need

not be a market place of usual concept. The business connection, business activity, place of

business, permanent establishment and every such ingredient of a taxable relation between non-

residents and India are to be inferred from the nature of the business operations carried on by the

concerned parties. If an assessee purchase a ship from a foreign seller for which sale contract was

concluded outside India and payment was made outside India, and when the ship was brought to

India, it is a case where no one can say that the seller of the ship had any business connection

with India giving rise to any taxable income in India. If an assessee in India procures machineries

and equipments outside India and transports them to India and installs and carries on business in

India thereafter, it is not permissible to hold that the foreign seller had any business connection

with India. But the above mentioned common place analogy cannot be applied in the present

case. In the present case what is sold by the channel companies and bought by the assessee

company is “Ad Airtime” in India, i.e. in a commercial expression “Indian Time”. The

distinguishing feature of “time” is that it cannot be procured or stocked as such. It is born and

exhausted instantly. Therefore, the subject matter of agreements between the assessee and the

channel companies cannot be in any way agreements based on the delivery of goods abroad. The

“Ad Airtime” conceived in the agreements entered into between the assessee and the channel

companies is born and instantly exhausted in India. The situs of the sale, delivery, purchase and

consumption of the subject matter of “Ad Airtime” is in India. Therefore, the contention of the

assessee that the entire activities were carried out abroad is not found acceptable.

101. The “Ad Airtime” is not detachable from the flow of the total telecast time used by the

channel companies for Indian viewers. The advertisements are telecast as part of the regular

programmes of the channel companies. The advertisements form part of the mainstream of the

telecasting activities carried on by the channel companies. The sale, if any, of the “Ad Airtime” is

only a part of the sale of other programme contents. Sale is made as the “time” of the channel

companies. The “Ad Airtime” described in the present case is the telecasting time of the channel

companies in their brand names. As far as the ultimate customers and viewers in India are

concerned, these advertisements embedded in the telecasting contents are always identified with

the brand name of channel companies.

102. The ITAT, Delhi Bench “C” has considered a similar case like this in Asia Satellite Tele

Communications Co Ltd vs DCIT 85 ITD 478. In that case, the assessee was a non resident

company deriving income from lease of transponder capacity of its satellites. The assessing

officer observed that according to a contract entered into by the assessee with Star TV channels,

the assessee facilitated transmission and broadcasting of various programmes in India among

other countries and the revenue of the Star TV channels was mainly from the advertisements

procured from India. The assessing officer, therefore, held that the territory of commercial

exploitation of the channel companies was India and, therefore, it was liable to tax u/s 9(1)(i).

The contention of the assessee was that it was not liable to be taxed in India for the reason that no

agreement was entered into with any company resident in India for leasing of transponder

capacity of its satellites; satellites also not located in the orbital slot allotted to India. It was also

contended that the assessee did not exercise any control over the signals up-linked by it and had

no rights in the signals and as such no business connection in India. It was also submitted that the

assessee did not carry out any business operation in India and, therefore, no income could be said

to be deemed to accrue or arise in India. In first appeal, the CIT(A) held that the payments

received by the assessee company was in the nature of royalty and, therefore, provisions of law

contained in section 9(1)(vi) were more appropriate to be applied than the provisions of section

9(1)(i). In second appeal, the Tribunal held that the assessee was amplifying and relaying signals

in the footprint area after having been up-linked by the TV channels. The essence of the

agreement of the TV channels with the assessee was to relay their programmes in India. If India

was not in the footprint, then the entire exercise became futile. Responsibility of the assessee was

to make available programmes of the TV channels in India through transponder on its satellite. If

the assessee had only amplified the programmes and passed over to its customer outside India,

who, in turn, would have made arrangement for sending the same to cable operators for use in

India, it would have been the case of “no business connection of the assessee in India”. Since the

signals were provided by the assessee for direct use in India, it was certainly the case of the

assessee having business connection in India. The Tribunal observed that in that case it was not

merely the user of any goods sold by the TV channels in India, but a continuous process through

which the TV channels are showing their programmes in India by the medium of the assessee.

The Tribunal held, therefore, that the assessee had business connection in India. The Tribunal

further held that as far as the revenue of the TV channels from the advertisers and the cable

operators in India was concerned it was the relaying of programmes in India and hence

constituted a separate source of income which was earned in India. The Tribunal, therefore, held

that the channel companies had income accruing or arising in India. The said decision of the

Delhi Tribunal is applicable to the present case.

103. Conclusions are to be reached on the basis of the facts of the case and not on the basis of

agreements alone. If the real nature of activities carried on by the parties to the agreements do not

fit in the frame of the agreements entered into between the parties, those agreements could be

considered only in the light of the real nature of the activities and the terms of the agreements will

not have any preference over the actual affairs of the business. The agreements are entered into

between the parties as enforceable instruments in law but the terms enshrined in those agreements

may not be sufficient to come to proper conclusions. As Oliver Wendells Holmes put it “the life

of law is not logic but experience”. Therefore, after examining the various aspects of the case we

hold that the channel companies are earning taxable income in India and, therefore, the assessee

company was bound to deduct tax at source u/s 195 when payments were made to the channel

companies.

104. The learned senior counsel has raised an alternate contention that if the assessee company is

treated as an agent of the channel companies, advertisement revenues received by the assessee

cannot be assessed as the income of the assessee and only the amounts retained by the assessee

could be regarded as the revenue for the purpose of assessment. Reliance has been placed in

support of the above argument on the following decisions:

Ahmedabad Electricity Company Ltd vs CIT – 199 IR 351 (Bom)

CIT vs Arunachal Pradesh Forest Corpn Ltd vs CIT – 201 ITR 129 (Gau)

CIT vs Surat Cotton Spinning & Weaving Pvt Ltd 202 ITR 932 (Bom)

105. We considered the above alternate contention raised by the learned senior counsel. As seen

before, we have come to a finding that the channel companies do have business operations in

India resulting in a business connection. They are sufficient to hold that the channel companies

are bound by the taxable income earned in India. The assessee and the channel companies are

100% subsidiaries of a mother holding company. They are collectively engaged in the business of

telecasting through out the world and the business relations and business activities are inter-

connected and inter-laced. Therefore, the assessee company is working as a functional agent, as a

facilitator, as an associate and as a supporter of the channel companies. The essence of our

finding is that as far as the business carried on by the channel companies and the assessee is

concerned, the assessee company does not have an independent existence different from the

channel companies. Therefore, the above alternate argument of the assessee is liable to be

dismissed.

106. Another argument advanced by the learned senior counsel is regarding the applicability of

CBDT circular No.23 dated July 23, 1969. In the light of our findings that the operations and

business of the channel companies are very much carried out in India and the relationship

between the assessee and the channel companies is not that of principal to principal, the said

circular has no application in the present case.

107. Another important argument advanced by the learned senior counsel, though alternate in

nature is that the entire payments made to the channel companies could not be treated as their

income. Only a portion of the payments could be legitimately treated as the income of the channel

companies. Therefore, the amount of tax required to be deducted at source while making the

payments to the channel companies would be very less and correspondingly the quantum of

disallowance u/s 40(a)(i) would be reduced. In the present case, we are not dealing with the

assessments of the channel companies. We are examining the obligation of the assessee company

to deduct tax at source while making the payments to the non resident. It is by way of a

consequence that the taxability of the channel companies has been examined by us. But it is to be

seen that the obligation of the assessee company to deduct tax at source and the chargeability of

income to tax in the case of channel companies are entirely two different issues. The Supreme

Court in the case of Transmission Corporation of A.P. Ltd vs CIT 239 ITR 587 and Hyderabad

Bench of ITAT in Cheminor Drugs Ltd 76 ITD 37 have held that it is the duty of the assessee to

approach the assessing authority u/s 195(2) on matters regarding deduction or non deduction of

tax u/s 195(1). The quantum of deduction to be made by the assessee could be determined only in

a process initiated u/s 195(2). As the assessee has not used the facility provided u/s 195(2), which

is a legal obligation on its part, the contention regarding the quantum of deduction does not have

locus standi in the present appeal. Therefore the said contention fails.

108. Another argument, again alternate in nature made by the assessee is that the channel

companies are assessable in terms of circular No.742 issued by the CBDT and in that case, the

income of the channel companies would be computed on a presumptive basis and, therefore, the

quantum of the tax deductible would be much less. This contention is also liable to be dismissed

for the very same reasons explained in the above paragraphs.

109. We have considered all the arguments advanced by the assessee against the orders of the

lower authorities. This case involves myriad of facts and complex question of law as argued and

re-argued by both sides. All of them, except certain legal grounds have been considered by the

assessing authority and the CIT(A) in a very extensive manner. They have also discussed the

facts of the case in a detailed manner. The assessment order runs into 46 pages of small print and

the order of the CIT(A) runs into 58 pages. Therefore, we have not repeated many of the details

of the facts, arguments and case laws reflected in those orders, not to suffer from the defect of

inexactitude. Where such details are found wanting, reference may be made to the orders of the

lower authorities.

110. In result we find that the channel companies are liable for taxation India for that part of

income earned by them and as such, the assessee company was obliged to deduct tax u/s 195

while making payments to the channel companies against the purchase of “Ad Airtime”. In the

circumstances, the assessing officer is justified in disallowing those payments u/s 40(a)(i) of the

Income-tax Act, 1961.

111. An index by way of annexure is provided to this order for easy reference.

112. In result, this appeal filed by the assessee is dismissed.

113. This order has been pronounced on this 18th day of January, 2006.

Sd/-                                                                                     sd/-

(Rajpal Yadav)                                                         (Dr OK Narayanan)

Judicial Member                                                       Accountant Member

Mumbai, Dt: 18th January, 2006

pk/-

copy to:

1. the appellant

2. the respondent By order

3. the CIT

4. the CIT(A)

5. the DR, G-Bench

(True copy)                                                             Asstt.Registrar, ITAT, Mumbai Benches