In a landmark order, the Income-Tax Appellate Tribunal (ITAT) held that as broadcast companies are liable to pay tax in India for the income generated in the country, the Hong Kong-based STAR group has to pay tax on the advertisement revenue from its various channels.
According to ITAT, broadcast companies are liable for taxation in India and hence the STAR group company, Satellite Television Asian Region, was obliged to deduct tax under India's income-tax laws.
The order, pertaining to the assessment year FY01, disallows Rs 160 crore as deduction from computation of STAR's income. As the tax is levied at 40%, the order can be applied for subsequent assessment years. The STAR group's tax liability could be at Rs 250-300 crore, tax experts estimate.
“At present we are studying the order,” a STAR TV spokesman in India said. The case was argued by Dinesh Vyas for STAR and GC Srivastava for the department. It was one of the rare cases in which an officer of the rank of the chief commissioner presented the department's case before the Tribunal.
“This is an issue that requires serious consideration and clarification in a fast evolving technological era. It is high time that the government came out with clear-cut guidelines. Unfortunately, the taskforce set up for this purpose is carrying out its task at a very slow pace,” said TP Ostwal, senior chartered accountant.
“The decision clarifies the issue of taxability of airtime for advertisement purposes in the hands of channel companies based on the footprint of the satellite coverage," international tax consultant Jitendra Sanghvi said. ITAT struck down the argument of the STAR group that the sums paid by the Satellite Television Asian Region to broadcast companies against the cost of airtime were not a sum chargeable to tax in India in the hands of these companies.
The ITAT also dismissed the notion that there was no need to pay tax in India because both the appellant and the broadcast companies are non-residents. The ITAT also dismissed the argument that as the agreement was signed overseas, the company doesn't have to pay tax in India. One of the main grounds for the ITAT's order was there was no double taxation avoidance treaty between Hong Kong and India.
The Tribunal held that the ad airtime is a slot in between the programmes wherein advertisements are relayed by the broadcast companies and the programmes managed by the channel companies are beamed into India and the telecast is made in India and the predominant area in the footprint of the satellite is India and, therefore, it is to be held that the broadcast companies are undertaking business in India.
That the above activities carried out by the broadcast companies in India provide for their income which is essentially income earned out of India.
Also, 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.
The assessing authority finally concluded that the payments made by the assessee company to channel companies would be covered by the provisions of the law contained in Section 40(A)(I) of the Act and, therefore, the payment of Rs 160 crore 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.