AAR H.C : Payment to a non-resident for production of programmes for purpose of broadcasting and telecasting shall not be treated as ‘Fees for Technical Service’

Authority For Advance Rulings (Income Tax), New Delhi

Endemol India (P.) Ltd., In Re

Section : 9, 194C, 195

Justice Dr. Arijit Pasayat, Chairman

And T.B.C. Rozara, Member

A.A.R. No. 1083 Of 2011

December 13, 2013

RULING

1. The applicant M/s Endemol India Private Limited (EIPL) is a resident company incorporated under the Companies Act, 1956. It is engaged in the business of providing and distributing television programmes. It mainly produces reality shows and has also ventured lately into soap operas. The company started its operation in 2006 with the non-fiction format show Bigg Boss (Big Brother) and has also other reality shows in India such as Fear Factor – Khatron Ke Khiladi etc.

2. During the financial year 2010-11 the applicant had produced the reality show ‘Wipe Out’ (‘the show’) which was aired by Viacom 18 Media Private Limited on Imagine TV. As per the format of the show the shooting was to take place outside India (primarily in Argentina). For the purpose of show the programme outside India the applicant has engaged Endemol Argentina SA (Endemol ARG) for providing line production services in Argentina and for that purpose an agreement in the form of DEAL MEMO for production services agreement was entered into. Endemol ARG is a company incorporated in Argentina and is a tax resident of Argentina. The applicant makes payment to Endemol ARG for the services rendered in Argentina.

3. Based on the facts and circumstances of the case, the applicant seeks ruling from the Authority for Advance Rulings on the following questions:—

“(1)Whether the payments made by the Applicant towards line production services provided by Endemol ARG in accordance with the agreement entered into with the Applicant is in the nature of Fees for Technical services (‘FTS’) within the meaning of the term in Explanation 2 to clause (vii) of section 9(1) of the Act?

(2) Whether the payments made by the Applicant to Endemol ARG in respect of provision of equipment and services are in the nature of ‘Royalty’ within the meaning of the term in Explanation 2 to clause (vi) of section 9(1) of the Act?

(3) If the answer to Question (1) or (2) is not in the affirmative, whether the payments made by the Applicant to Endemol ARG for availing the line production services under the terms of the Agreement would be charged to tax as per the provisions of section 9(1)(i) of the Act?

(4) Based on the above, would the receipts by Endemol ARG from the Applicant suffer withholding tax under section 195 of the Act, and at what rate?”

4. The application was admitted under section 245R(2) of the Income-tax Act, 1961 (in short the Act) and while admitting the application the Authority reserved for consideration the question whether the transaction is designed for avoidance of tax in India. The applicant was also directed to take out notice of the application alongwith the admission order and copy itself to Endemol ARG to file an affidavit confirming service of such notice on Endemol ARG. A No Objection Certificate from Endemol ARG was accordingly filed and placed on record.

5. Main submission of the applicant is that the payment made by the applicant to Endemol ARG for line production services under the terms of the agreement do not fall within the purview of “Fees for Technical Services (in short FTS) as per Explanation 2 to section 9(1)(vii) of the Act or royalty as per Explanation 2 to section 9(1)(vi) of the Act. It was contended that the services provided by Endemol ARG were administrative and logistical services and relate to the show of the programme by the applicant. The services are routine and normal services and they do not involve any professional and technical input/ex-party function provided to the applicant. Endemol ARG did not perform any function on behalf of the applicant and therefore the payment for the services is not covered under FTS definition in the Act. In its submission the applicant relies on the decision of the ITAT Mumbai in the case of Yash Raj Films (P.) Ltd. v. ITO (International Taxation) [2013] 140 ITD 625/[2012] 28 taxmann.com 247.

6. It was also submitted that the payments would be covered by the provisions of Section 194C of the Act (i.e. Contractual work) as the term ‘work’ inter alia includes broadcasting and telecasting including production of programs for such broadcasting or telecasting. Attention was invited to CBDT’s circular No.715 dated 8th August, 1995 which states that when payments are made to advertising agencies for production of programmes which are to be broadcasted / telecasted, the said payments would be subject to withholding tax under section 194C of the Act. It was contended that circular No.394 dated 14th Sept., 1984 of the CBDT provided clarification on the exemption of remuneration received for rendering services in connection with the show of cinematography by foreign film producer in India and as a corollary the services rendered by such non-resident outside India would also be not taxable under the Act.

7. According to the Revenue, however, the line production services provided by Endemol ARG are basically consulting and managerial in nature. There are also technical services which provided special effects, photography, camera operator and sound system. It was stated that Endemol ARG provided several technical personnel such as technical engineer, director, camera operator, technical maintenance chief, technical coordinator, director of photography, sound engineer etc. Thus the services rendered by Endemol ARG are squarely covered under the definition of “Fees of Technical Services” under Explanation 2 of Section 9(1)(vii) of the Act. It was also submitted that as the basic nature of the services provided are FTS the payments are covered by section 194J of the Act.

8. We have considered the rival contentions and submissions with facts available on records. The Revenue submitted that the applicant did not provide documentary evidence of nature of services, details of its services availed, personnel involved, etc which are necessary for determination of the actual nature of services provided by Endemol ARG in spite of being specifically asked to produce them for examination. It was stated that the invoice copy provided by the applicant does not fully illustrate the actual nature of services provided.

The agreement with Endemol ARG is for composite services and for a limited period of time. In connection with equipment facilities it is not that the applicant has separately engaged any equipment provider for the provision of such equipment (including for supply of local technical crew to operate the cameras and other equipment). The annexure to the agreement puts an obligation on Endemol ARG to have certain technical equipment in place and arrange for local crew to assist in the production of the programme. As per the agreement, the applicant has to pay the amount towards composite services (including provision of equipment) which is computed in the manner provided in the agreement. Details of the agreement do not support the argument made by the applicant that the services provided by Endemol ARG to the applicant are only administrative and logistical services for shooting the programme outside India. On perusal of annexure 1 to production services agreement of the applicant with Endemol ARG, it is found that the main provision of the services are technical crew, production crew and technical equipments. It appears that other services are ancillary necessary for the technical/production crew and the technical equipments only.

9. Explanation 2 to Section 9(1)(vii) of the Income-tax Act reads as under:

“For the purposes of this clause ‘fees for technical services’ means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the services undertaken by other personnel but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head ‘salaries’ “.

Apart from the Explanation mentioned above there is no other definition of the term ‘Fees for Technical Services’ in the Act, though various attempts were made at various forums in interpreting the said term.

10. Coming to the argument that the payments clearly fall under the definition of “work” as defined and clarified by CBDT under Explanation 2 to section 194C of the Act, we need to examine whether that definition of “work” under section 194C of the Act can be imported for the purpose of interpreting the term ‘Fees for Technical Services’ in section 9(1)(vii) of the Act. The issue is effect of the specific definition of ‘work’ in the Explanation to section 194C in the definition of ‘Fees for Technical Services’ in Explanation to section 9(1)(vii) of the Act. For the purpose of deduction of “Tax at source” in respect of ‘Fees for Technical Services’ there is a separate provision of section 194J in the Act. If the payment is held to be ‘Fees for Technical Services’ under section 9(1)(vii) of the Act, provision of section 197J will automatically apply for the purpose of tax deduction at source. However, if there is a specific provision for specific item of payment that provision will override the general provision. The Delhi High Court had an occasion to examine whether a any specific provision in section 194C overrides the general provision in section 194J of the Act, in the case of CIT v. Prasar Bharati (Broadcasting Corporation of India) [2007] 292 ITR 580/158 Taxman 470 (Delhi). The relevant portion of the judgment reads as under:—

“We observe that Explanation III, which was introduced simultaneously with section 194J, is very specific in its application to not only Broadcasting and Telecasting but also include ‘production of programmes for such broadcasting and telecasting’. If, on the same date, two provisions are introduced in the Act, one specific to the activity sought to be taxed and the other is more general terms, resort must be had to the specific provision which manifests the intention of the legislature. It is not, therefore, possible to accept the contention of the Revenue that programmes produced for television, including ‘commissioned programmes’, will fall outside the realm of section 194C Explanation-III of the Act.”

11. Provision of section 194C was substituted by the Finance (No.2) Act, 2009 with effect from 1.10.2009. In the new provision Explanation I, II & III were merged into consolidated Explanation for the purpose of the section. However, definition of ‘work’ is more or less the same except that item (e) is added in the new provision. It is stated in the Explanation- III of the provision as well as of the new provision that ‘work’ shall include broadcasting and telecasting including production of programmes for such broadcasting or telecasting.

In the case decision cited above, the Delhi High Court held that Broadcasting and Telecasting including production of programmes for such broadcasting and telecasting do not fall under the provision of section 194J as they are specifically covered by definition of work in section 194C of the Act. In the Circular issued by the CBDT No.715 dated 8th August, 1995 cited by (supra), it is clarified that tax deduction for advertising services (which includes charges of art work and other related job as well payments made to media) will have to be made under section 194C of the Act @ 1%.

The advertising agencies shall have to deduct tax at source @ 5% under section 194J of the Act while making payments to artists, actors, models etc. Further, if payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subject to tax deduction @ 2%. Even if the production of such programmes is for the purpose of preparing advertisement materials, not for immediate advertising the payments will be subject to TDS @ 2%. The circular makes clear the distinction between payments to artists, actors, models etc. and payments made for production of programmes for the purpose of broadcasting and telecasting. The payments for artists, actors, models are kept under the provision of section 194J and the payments for production of programmes for the purpose of broadcasting and telecasting are kept under the provision of section 194C. There is no denying of the fact that the payments made by the applicant to Endemol ARG are for production of programmes for the purpose of broadcasting and telecasting. The judgment of the Delhi High Court in the case of Prasar Bharati (Broadcasting Corpn. of India) (supra) and the circular of the CBDT mentioned above are clearly applicable in the present case. If a particular item is specifically characterized in a particular section of the Act it will override the provision in the general section. In this case the services rendered by the non-resident company namely production of programmes for telecasting has been specifically characterized as ‘work’ for the purpose of section 194C by Explanation to that section. In that case it will not be appropriate to treat the item i.e. services for production of programmes for telecasting as ‘Fees for Technical Services’ under the provision of section 9(1)(vii) of the Act.

The essence of the rule of harmonious construction is interalia as follows:—

(i) It is the duty of the Courts to avoid a head-on-clash between two sections of a statute and construe the provisions which appear to be in conflict with each other in such a manner as to harmonise them.

(ii) The provisions of one section of statute cannot be used to defeat the other provisions unless the Court, in spite of its efforts, finds it impossible to effect reconciliation between them.

(iii) All the provisions would be read together harmoniously so as to give effect to all provisions as a consistent whole rendering no part of the provision as surplus age.

(see Institute of Chartered Accountants of India v. Price Waterhouse [1977] 6 SCC 312).

Where there is in the same statute a specific provision and a general provision that in its most comprehensive sense, would include matters embraced in the former, the particular provision must be taken to affect only such cases within its general language as are not within the provisions of the particular provision. Where a general provision is expressed and the statute expresses also a particular expression incompatible with the general intention the particular intention is to be considered in the nature of an exception.

Again if the services are characterized as ‘contact work’ under section 194C of the Act, then the income received should be necessarily treated as business income. The non-resident company does not have PE in India. The services are rendered and utilized outside India and the payments for the services rendered is also received outside India. There is no business connection in India. In such circumstances the income of the non-resident company is not taxable in India.

12. The questions raised by the applicant are answered as follows:—

(1) The payments made by the applicant towards line production services provided by Endemol ARG in accordance with the agreement entered into by the applicant with Endemol ARG is not ‘fees for technical services’ as the services falls under ‘work contract’ as defined in Explanation to Section 194C of the IT Act.

(2) The question is not dealt with because of our answer to question No.1

(3) The payments made by the applicant to Endemol ARG for availing the line production services under the agreement is not chargeable to tax as per the provision of section 9(1)(i) of the IT Act.

(4) The receipts by Endemol ARG from the applicant will not suffer withholding of tax under section 195 of the Act as the income earned is not taxable in India.

[Citation : 361 ITR 361]